Subject - Banking Operations - II

Class - M.B.A Semester - IV

 Banking Sector Reforms
• Since 1991, the Indian financial system has undergone radical
transformation.
• Reforms have altered the organizational structure, ownership pattern
and domain of operations of banks,  financial institutions and Non-
banking Financial Companies (NBFCs).
• The main thrust of reforms  in the financial sector was the creation of
efficient and stable financial institutions and markets.  
 Narasimham Committee Report on
Banking Sector Reforms
• The United Front Government appointed Narasimham committee
to review the progress of  reforms in the banking sector.
• The committee submitted its report to the then Finance Minister
on  April 23, 1998.
• The main objective of the Banking Sector Reforms Committee was
to establish a  strong, efficient and profitable banking system of the
global standard
 NARASIMHAM COMMITTEE REPORT ON
BANKING SECTOR REFORMS

Strengthening Systems and Structura Technologic

The Banking Asset Methods in l Issues al
Sector Quality Banks Upgradation
1)Strengthening the Banking System :-

(i) Capital adequacy requirements should take into consideration

market risks in addition to credit risks.  

(ii) Risk weight of a government guaranteed advance should be

the same as other advances.  

(iii) Minimum capital to risk assets ratio (CRAR) be increased

from the existing 8 per cent to  10 per cent. There should be
penal provisions for bank that do not maintain CRAR.  
(2) Asset Quality :-

The following recommendations have been made to improve asset

quality:  
• The ratio of non-performing assets to the total assets should be
reduced.  
• For evaluating the quality of assets portfolio, advanced covered
by Government guarantees, which have turned stick , be treated
as Non- performing Assets.  
3) Systems and Methods in Banks:-  
The committee made the following recommendations to improve
the systems and methods in  banks:  
• There should be an independent loan review mechanism
especially for large borrowed accounts and systems to identify
potential Non-performing Assets (NPA).  
• Banks and financial institutions should have a system of
recruiting skilled manpower from the open market.  
• Public sector banks should be given flexibility to determine
managerial remuneration levels taking into account market
trends.  
4) Structural Issues:-  

The following recommendations have been made regarding structural issues

of the banks:

1. With the convergence of activities between banks and Developmental

Financial Institution  DFI they should be converted to banks later
2. Banking system should be reconstituted:  

(a) 2 or 3 banks with an international evaluation should be established.  

(b) 8 or IO large banks should be established. These banks should take care of
the needs of  the large and medium sectors

(c) There should be a large number of local banks.  

 
5) Technological Up gradation:-
There should be rapid computerization of the banking. There

should be modernization and technology up gradation of the

banking operations.
 Banking Sector Reform Measures
(i)Deregulation of Interest Rates: In order to provide
operational flexibility and competitive  environment to the
banks, interest rates on deposits and loan advances of all
commercial banks  including urban co-operative banks have
been deregulated, Le. , controls and regulations of the RBI  on
interest rate has been abolished. Interest rate is allowed to be
determined independently by the  banks.
(ii) Reduction in Reserve Requirements: As per the recommendations of the
Narasimham Committee, reserve requirements of the commercial bank
have been drastically reduced in order to ease the availability of liquidity
for credit and to enhance the role of the market forces. High reservation
implies high cost of credit and less availability of bonds for borrowing.

(iii) Measures to Improve Competitive Efficiency in Banking Sector: For

improving the  competitive efficiency of the banking sector, all
nationalized commercial banks are allowed to raise  capital from equity
market. Operational autonomy was given to the banks. Private sector,
foreign banks and insurance companies were also allowed to enter into
the banking sector.  
(iv) Prudential Norms: Narasimham committee recommended for
introduction of prudential norms to measure the performance of the
banking sector. Accordingly, income recognition, assets  classification,
provision for bad debts, norms on connected lending, risk concentration,
etc., were  introduced. As per the RBI directives, all the commercial banks
are adopted uniform and sound  

(v) Transparency Measures: For transparency in banking operation, banks are

required to disclose their balance sheet with detailed information as per
the norms specified by the International Accounts Standard Committee.
(vi) Capital Adequacy Measures: M. Narasimham Committee
recommended for setting up  some new and higher norms for
capital adequacy, i.e., capital to risk weighted assets ratio. It
was  recommended that capital adequacy ratio should at least
be 10 per cent. All the public sector banks  were required to
attain this norm by 1996.  

 
 Changing Role of Banks in India
• The role of banks in India has changed a lot since economic reforms of 1991. These
changes came due to LPG, i.e. liberalization, privatization and globalization policy
being followed by GOI.
• Since then most traditional and outdated concepts, practices, procedures and
methods of banking have changed significantly.
• Today, banks in India have become more customer-focused and service-oriented
than they were before 1991.
• They now also give a lot of importance to their rural customers. They are even
willing ready to help them and serve regularly the banking needs of country-side
India.
1. Better Customer Service
• Before 1991, the overall service of banks in India was very poor. There
were very long queues (lines) to receive payment for cheques and to
deposit money.
• In those days, some bank staffs were very rude to their customers.

• However, all this changed remarkably after Indian economic reforms of

1991.
• Banks in India have now become very customer and service focus. Their
service has become quick, efficient and customer-friendly.
• This positive change is mostly due to rising competition from new
private banks and initiation of Ombudsman Scheme by RBI.
2. Mobile Banking
• Under mobile banking service, customers can easily carry out major
banking transactions by simply using their cell phones or mobiles.

• Here, first a customer needs to activate this service by contacting his bank.
Generally, bank officer asks the customer to fill a simple form to register
(authorize) his mobile number.

• After registration, this service is activated, and the customer is provided

with a username and password.

• Using secret credentials and registered phone, customer can now

comfortably and securely, find his bank balance, transfer money from his
account to another, ask for a cheque book, stop payment of a cheque, etc.
3. Bank on Wheels
• The 'Bank on Wheels' scheme was introduced in the North-East
Region of India.
• Under this scheme, banking services are made accessible to
people staying in the far-flung (remote) areas of India.
• This scheme is a generous attempt to serve banking needs of
rural India.
4. Portfolio Management
• In portfolio management, banks do all the investments work of
their clients.
• Banks invest their clients' money in shares, debentures, fixed
deposits, etc.
• They first enter a contract with their clients and charge them a
fee for this service.
• Then they have the full power to invest or disinvest their clients'
money. However, they have to give safety and profit to their
clients.
5. Issue of Electro-Magnetic Cards
• Banks in India have already started issuing Electro-Magnetic
Cards to their customers.
• These cards help to carry out cash-less transactions, make an
online purchase, avail ATM facility, book a railway ticket, etc.
• Banks issue many types of electro-magnetic cards, which are as
follows:
• Credit cards, Debit cards, Charge cards, Smart cards, Kisan credit
cards. 
6. Universal Banking
• In India, the concept of universal banking has gained recognition
after year 2000.
• The customers can get all banking and non-banking services
under one roof. Universal bank is like a super store.
• It offers a wide range of services, including banking and other
financial services like insurance, merchant banking, etc.
7. Automated Teller Machine (ATM)
• There are many advantages of ATM. As a
result, many banks have opened up ATM
centers to offer convenience to their
customers.
• Now banks are operating ATM centers
not only in their branches but also at
public places like airports, railway
stations, hotels, etc.
• Some banks have joined together and
agreed upon to set up common ATM
centers all over India.
8. Internet Banking
• Internet banking is also called as an E-banking or net banking.
Here, the customer can do banking transactions through the
medium of the internet or world wide web (WWW).
• The customer need not visit the bank's branch.

• Through this facility, the customer can easily inquiry about bank
balance, transfer funds, request for a cheque book, etc. Most
large banks offer this service to their tech-savvy customers.
9. Encouragement to Bank Amalgamation
• Failure of banks is well-protected with the facility of amalgamation. So
depositors need not worry about their deposits. When weaker banks are
absorbed by stronger banks, it is called amalgamation of banks.

10. Encouragement to Personal Loans

• Today, the purchasing power of Indian consumers has increased dramatically
because banks give them easy personal loans.
• Generally, interest charged by the banks on such loans is very high.

• Interest is calculated on reducing balance. Large banks offer loans up to a huge

amount like one crore.
• Some banks even organize Loan Mela (Fair) where a loan is sanctioned on the
spot to deserving candidates after they submit proper documents.
11. Marketing of Mutual Funds
• A mutual fund collects money from many investors and invests the money in
shares, bonds, short-term money market instruments, gold assets; etc.
• Mutual funds earn income by interest and dividend or both from its
investments. It pays a dividend to subscribers.
• The rate of dividend fluctuates with the income on mutual fund investments.
Now banks have started selling these funds in their own names.
• These funds are not insured like other bank deposits. There are different types
of funds such as open-ended funds, closed-ended funds, growth funds,
balanced funds, income funds, etc.
12. Social Banking
• The government uses the banking system to alleviate poverty and
unemployment. Many social development programmes are
initiated by the banks from time to time.
• The success of these programmes depends on financial support
provided by the banks.
• Banks supply a lot of finance to farmers, artisans, scheduled
castes (SC) and scheduled tribe (ST) families, unemployed youth
and people living below the poverty line (BPL).
 Banking Laws (Amendment) Act
 Passed by Parliament in Dec 2012

 Some highlights
Depositor Education and Awareness
Voting rights
Fund
26% from existing 10% in private sector Primary cooperative societies to be
banks licenced by RBI
10% from existing 1% in public sector
Preference shares
banks
Prior approval for voting rights/ shareholding Naionalised banks can issue bonus
more than 5% shares
Joint inspections of associates with
Power to RBI to supersede entire board of banks
sectoral regulator
Power to call for information from associate and
group companies
 Hypothecation
Defined in SARFAESI, 2002 (Sec  Precautions

2(n)) – Periodic stock statements

– Charge upon moveable property
– Registration of charge
– Existing/ future
– Notice of charge
– Without delivery – possession
– Insurance of property
with borrower

Drawbacks
– Risk of fraud- multiple charges
on same property
– Erosion of security value
 Lien
General Lien
– Creditor’s right to retain property of debtor
– Possession in ordinary course of business
– Limited to possession of property – not to sell

Banker’s lien
– General lien+ right to sell
– Applicable to negotiable instruments and credit
balances
– Not applicable to safe deposit, for sale
 Power of Attorney
• Types

– General v/s special

• Registration of power of attorney

• Precautions

– Scope of powers

– Agent acting within the scope of powers

– Confirmation of validity
 SARFAESI Act, 2002
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002
– Coverage
– Securitisation and reconstruction of financial assets
– Enforcement of security interest without court intervention
– Central Registry
 SARFAESI - Coverage
Effective since June 21, 2002

Retrospective coverage

Applicable to whole of India including J&K

Also covers notified Housing Finance Companies

Sec 31

 Lien and pledge

 Aircrafts, shipping vessels

 Conditional sale, hire purchase, contract where no security interest created

 Financial asset<=Rs.1 lakh

 Agricultural land

 Amount due<20% of the Principal +Interest

 SARFAESI – Securitisation/
Reconstruction Companies
Registration with RBI
– Guidelines issued by DNBS
– Minimum owned fund of Rs100 crore/ 15% of financial assets to be
acquired – whichever is lower

Acquisition of financial assets

– Scheme wise
– Funded by investors – QIBs
– Issuance of Security Receipts
– Managed by trust
 SARFAESI – Enforcement of security
interest
No need for court intervention
– Overriding effect over provisions of Transfer of property Act
– Notice mandatory
• 60 days notice
• Details of amount payable and secured asset intended to be enforced
• Borrower prohibited from transferring assets

– Can appeal to DRT – deposit of 50% of the amount due

Can seek help of District Magistrate/ Chief Metropolitan

Magistrate
 SARFAESI – Enforcement of security
interest
Recourse available to lender
– Possession of secured asset
– Management of secured asset
– Appoint person as manager of secured assets
– Require from any person who has acquired the secured asset
from the borrower to pay the amount due to the extent of the
secured asset
Appropriation of proceeds
– Expenses->Dues->Balance to debtor
– If winding up – dues of workman have pari passu charge
Consortium accounts – multiple secured creditors
– Creditors representing ¾ of outstanding dues have to agree
Recent amendment- bank may purchase at auction [13(5A)]
 SARFAESI – Enforcement of security
interest
Safeguards
– Inventory of property taken into possession
– Take care of property as owner of ordinary prudence – insure if
necessary
– Expedite sale if subject to speedy decay
– Possession notice
• affixation at outer door/ conspicuous place
• Publication in 2 leading newspapers including one vernacular
– Auction
• 30 days notice – publication in 2 leading newspapers incl. vernacular
• Valuation to fix reserve price
– Appeal to DRT - Compensation
• Within 45 days of measures being initiated
• 50% to be deposited- DRT may reduce to 25%
 SARFAESI - CERSAI
Sec 25 Company promoted by Government &
PSU banks
Maintains registry of
– Securitisation of financial assets
– Reconstruction of financial assets
– Creation of security interests
Registration additional – not substitute for
existing requirements
Records available for search
Minimisation of frauds due to multiple borrowing
on same security
 Overview of charges
Creation of a right in favour of the creditors
Nature of security Types of security Kind of Charge Defined in Act

Immoveable Land and building Mortgage Sec 58, Transfer of Property

property Act
Actionable claims Book debts, term deposit Assignment Sec 130, Transfer of Property
(i.e. unsecured receipts, etc. Act
debts)
Moveable property/ Plant & machinery, stocks, Pledge/ Pledge-Sec 172 Indian
goods vehicles, etc. hypothecation/ Contract Act
lien Hypothecation – Sec 2(n)
SARFAESI
Paper securities Shares, debentures, MF, Lien Sec 170 and 171Indian
bonds Contract Act
Personal guarantee Promoters & 3rd party Personal liability Sec 126 Indian Contract Act
guarantees
 Kinds of charges – Fixed v/s Floating
 Fixed charge
– created on properties such as land and buildings, plant and machinery

– Identity does not change

– Credit consent required for disposal

– Debtor retains ownership and possession

 Floating charge
– Created on assets that undergo change

– Security allowed to be used in ordinary course of business unless charge crystallises

 Kinds of charges
Pari Passu charge First charge
Several creditors- typically in consortium accounts First right over the proceeds
Equal priority

Exclusive charge Second charge

To one creditor Rights subject to those of first charge holder
No intervention of other creditors
 Money Remittance Services
• Demand Draft / Banker’s Cheque / Pay Order

• National Electronic Funds Transfer (NEFT):National Electronic Funds Transfer (NEFT) is a nation-wide

system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch

to any individual, firm or corporate having an account with any other bank branch in the country.

• Real Time Gross Settlement (RTGS): RTGS transfers are instantaneous unlike National Electronic Funds

Transfer (NEFT) where the transfers are batched together and effected at hourly intervals.

• Society for Worldwide Interbank Financial Telecommunications (SWIFT): SWIFT is solely a carrier of

messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store

financial information on an on-going basis. As a data carrier, SWIFT transports messages between two

financial institutions. This activity involves the secure exchange of proprietary data while ensuring its

confidentiality and integrity.SWIFT, which has its headquarters in Belgium, has developed an 8-alphabet

Bank Identifier Code (BIC). The BIC helps identify the bank
 BASEL Framework
• Bank for International Settlements (BIS)

• Established on 17 May 1930, the BIS is the world's oldest international financial

organization. It has its head office in Basel, Switzerland.

• BIS fosters co-operation among central banks and other agencies in pursuit of monetary and

financial stability. It fulfills this mandate by acting as:

• A forum to promote discussion and policy analysis among central banks and within the

international financial community

• A centre for economic and monetary research

• A prime counterparty for central banks in their financial transactions

• Agent or trustee in connection with international financial operations

• Every two months, the BIS hosts in Basel, meetings of Governors and senior officials

of member central banks. The meetings provide an opportunity for participants to

discuss the world economy and financial markets, and to exchange views on topical

issues of central bank interest or concern.

• BIS also organizes frequent meetings of experts on monetary and financial stability

issues, as well as on more technical issues such as legal matters, reserve

management, IT systems, internal audit and technical cooperation.

• BIS is a hub for sharing statistical information among central banks. It publishes

statistics on global banking, securities, foreign exchange and derivatives markets.

• Through seminars and workshops organized by its Financial Stability Institute (FSI),

the BIS disseminates knowledge among its various stake-holders

 What is Currency Swaps
A currency swap (or a cross currency swap) is a foreign exchange derivative between two

institutions to exchange the principal and/or interest payments of a loan in one currency for

equivalent amounts, in net present value terms, in another currency.

There are three different ways in which currency swaps can exchange loans:

The simplest currency swap structure is to exchange only the principal with
the counterparty at a specified point in the future at a rate agreed now. Such an
agreement performs a function equivalent to a forward or futures contract. The cost of
finding a counterparty (either directly or through an intermediary), and drawing up an
agreement with them, makes swaps more expensive than alternative derivatives (and
thus rarely used) as a method to fix shorter term forward exchange rates. However, for
a longer term future, commonly up to 10 years, where spreads are wider for alternative
derivatives, principal-only currency swaps are often used as a cost-effective way to fix
forward rates. This type of currency swap is also known as an FX-swap.

Another currency swap structure is to combine the exchange of loan principal, as above,
with an interest rate swap. In such a swap, interest cash flows are not netted before
they are paid to the counterparty (as they would be in a vanilla interest rate swap)
because they are denominated in different currencies. As each party effectively borrows
on the other's behalf, this type of swap is also known as a back-to-back loan.

Last here, but certainly not least important, is to swap only interest payment cash flows
on loans of the same size and term. Again, as this is a currency swap, the exchanged
cash flows are in different denominations and so are not netted. An example of such a
swap is the exchange of fixed-rate US dollar interest payments for floating-rate interest
payments in Euro. This type of swap is also known as a cross-currency interest rate
swap, or cross currency swap.
 INTERNATIONAL FINANCIAL
INSTITUTIONS:
International financial institutions (IFIs) are financial institutions that have been

established by more than one country, and hence are subjects of international laws.

Their owners or shareholders are generally national governments, although other

international institutions and other organizations occasionally figure as shareholders. The

most prominent IFIs are creations of multiple nations, although some bilateral financial

institutions exist and are technically IFIs. Many of these are multilateral development

banks (MDB).
 WHAT ARE INTERNATIONAL
FINANCIAL INSTITUTIONS (IFI’S)?
World Bank Group (WBG):

 International Bank for Reconstruction and Development (IBRD)

 International Development Association (IDA)

 International Finance Corporation (IFC)

 Multilateral Investment Guarantee Agency (MIGA)

 International Centre for Settlement of Investment Disputes (ICSID)

International Monetary Fund (IMF)

Regional development banks, such as:

 African Development Bank (AFDB)

 Asian Development Bank (ADB)

Manav Agarwal
manavs87@gmail.com
9823962733