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Disclosures in the Balance Sheet

With a view to bring out more transparency in the balance sheets of the
banks, Reserve Bank of India has decided to introduce more disclosures in
the banks annual reports. As a result, banks now disclose in their balance
sheets, (a) percentage of shareholding of the Government of India in
nationalized banks. (b) percentage of net non-performing assets to net
advances (c) the amount of provision made towards NPAs (d) towards
depreciation in the value of investments and (e) provision made towards
income tax, (f) amount of sub-ordinated debt raised as Tier II Capital, (g)
interest income as percentage to working funds (h) non-interest income as
percentage to working funds (i) operating profit as percentage to working
funds (j) return on assets (k) business per employee (l) net profit per
employee etc.

FLEXIBLE BANK FINANCE


Since the Bank Finance is to bridge the gap between Current Assets and
Current Liabilities, this method is based fundamentally on the MPBF formula.
The assessment procedure in our Bank is for assessing the Working Capital
finance of Rs. 1.00 crore and above other than those class of accounts where
different methods have been prescribed.
Under the system, Fund Based Working Capital requirement will be assessed
as the difference between Working Capital Gap and Projected Net Working
Capital. Though the benchmark for Current Ratio will continue to be 1.33:1,
we may accept some deviation in the same provided the Current Ratio is not
less than 1.17:1. In Cases where the Current Ratio has deteriorated on
account of diversions taking place because of short term funds flow to Fixed
Assets, we may correct the position by giving a Term Loan to be repaid within
12 to 36 months provided the Debt Service Coverage Ratio, Debt Equity and
Security coverage are at acceptable levels.
Under this method, the assessment though akin to MPBF will be more
flexible. A more liberal approach would also be adopted in working out Current
Assets by including cash margin deposits for Letters of Credit and Guarantees
and treating Fixed Deposits with Banks and temporary investments like
Money Market Mutual Funds, Commercial Paper, Certificate of Deposit etc. as
Current Assets. The collection of data, analysis of financial statements etc.
will be generally as per the MPBF formula but the classification of current
assets and current liabilities will be more customer friendly.

The following details relating to Working Capital assessment and FBF will be
presented under the head Working Capital Assessment in lieu of MPBF
Calculation in the revised Credit Appraisal Format.
(Rs. in lacs)

Total Current Assets (TCA)


Other Current Liabilities
(Excluding Bank Borrowings)
Working Capital Gap
Net Working Capital (NWC)
(Actual/Projected)
Flexible Bank Finance (FBF)
NWC to TCA (%)
FBF to TCA (%)
S/Creditors to TCA (%)
Net Sales,
Inventories to Net Sales (days)
Inventories to Cost of Sales (days)
Receivables to Gross Sales (days)
S/Creditor to Purchases (days)

Previous

Current

Next

Year

Year

Year

CASH MANAGEMENT SERVICE (CMS)


PRODUCT CONCEPT:
CMS is fee based Banking product to Corporates as also other organistions
having requirement to collect cheques and instruments from several centres
and collate funds at a single business point. It can also be extended as a
payment service for Corporates through which their payments to upcountry
locations can be serviced efficiently through the system.
PRODUCT ATTRIBUTES
Collection of cheques / instruments from specified centres and remittance
to the main account of the Corporate.
Day O (transaction date) collections at any centre to be credited on Day 1
(next working day to Day 0).
ADVANTAGES TO CLIENTS
Enables management of their receivables and payments efficiently.
Ensures efficient cash flows by accelerating collections.
Eliminates idle floats and lowers the net cost of funds.
Aids in building predictability of cash inflows / outflows resulting in superior
cash flow / treasury management.
WHY CMS?
CMS is a product in heavy demand for clients with several collection
points.
Essential for Bank to have the product to retain existing Corporate clients
and also expand the client base.
CMS opens up a new avenue to generate fee based income.
CMS also opens up cross-selling opportunities.
KEY FACTORS FOR SUCCESS
Dedicated marketing effort.
A competitive pricing strategy.
Efficient IT systems.
Efficient courier service.
A consistent and focussed approach across the Bank for maintaining
operational efficiency.
Wide coverage to leverage existing branch network.
Banks ability to gear up to the new process capture additional information
and process it centrally.
ADVANTAGES TO THE BANK
The product will ensure retention of the Corporate clientele in our fold and
thereafter expansion of our Corporate Client base.
Our large network will facilitate wider coverage which will result in larger
volumes.
Over a period of time, the fee based income of the Bank will be boosted by
this product.

CAPITAL ADEQUACY NORMS


Meaning of Capital Adequacy:
Capital Adequacy means- a bank must maintain a minimum level of capital
which is equal to 8% of the Total Risk Weighted Assets of the Bank by 31 st
march 96, 9% by 31st March 2000. It is likely to be enhanced to 10% soon.
Capital Fund
It may consist of Tier I & Tier II capital.
Tier I capital (Core Capital)
It consists of paid up Capital and Free Reserves and Surplus.
Tier II capital (Supplementary Capital)
It may consist of, undisclosed reserves, revolution reserves, sub-ordinated
debts and cumulative perpetual preferential shares. It is also prescribed by
the RBI that ;

Tier II capital will be limited to maximum 100% of Tire I capital.


Sub-ordianted debts should be limited to 50% of Tier I Capital
Revaluation reserves should be considered at discount 55% for including
in Tier II capital.

A) Risk Weight for on the Balance sheet Assets:


Zero Risk Weight- Cash & RBI Balance, SLR Assets, Recapitalisation
Bonds, Advances to staff, advances against Bank's Term Deposits LIC
Policy. NSC etc and Advances guaranteed by the Government of India and
State Government.
2.5% Risk weighted : All investments in securities for market risk in
addition to the risk weights assigned towards credit risk.
20% Risk Weight- Bank balance & due from other banks and Advances
guaranteed by other banks.
50% Risk Weight- ECGC/DICGC/CGTSI guaranteed advances.
100% Risk Weight- Investment in other Securities, Investment in Equities,
Foreign Investment, all other Loans and Advances, Fixed Assets and other
Assets. In addition to 100% risk weight 2.5% additional risk weight for all
categories of investments in securities including Govt. Securities.

B) Risk Weight for of the Balance Sheet Items:


For such assets (Like LC& LG), we notionally convert them to fund based
facility by multiplying them with 'Credit conversion factor'. Then the

resultant product is multiplied by the risk weight assigned to relevant


counter party in the balance sheet to find out the Risk Adjusted value.
Credit conversion Factor:
20% for documentary credit .
50% for all guarantees other than financial and Bid Bond and,
100% for financial Guarantees, Acceptance, Endorsements,
Underwriting & Standby Commitments, undrawn committed Credit lines
and liability on account of partly paid shares.
Risk Weight
Zero when the govt. is obligant, 20% when other banks are obligant and
100% for all others.
Contracts and Derivatives (Forex contract/currency options /Currency
Futures /Crosses Currency Option)

Zero for Forex contracts with original maturity period of 14 days.


2% for Forex Contracts/Option/Futures for original maturity less than 1
year.
5% for those for period of one year and above but less than 2 years.
8% for 2 years and less than 3 years and,
8% + 3% per each additional year for contracts of 3 years and above.

Risk Weight
Zero when the Govt is obligant, 20% when the bank is obligant and 100% for
others.
Netting

Incase of advances backed by deposits/cash margin the net amount to be


taken into account.

Where provision for BDD is already made, the net, amount to be


considered.

In case of off the balance sheet items, the cash/deposit margin should be
deducted before applying credit conversion factor.

ASSET-LIABILITY MANAGEMENT
Asset-Liability Management is a recent phenomenon in India. The
implications of deregulation on the balance sheets of banks are multifacet.
For example, in 1998 99 , the average cost of deposits of Union Bank of
India was 8.17%, which came down marginally to 8.00% in 1999-2000.
Therefore, the fall in average cost of deposits was 0.17%. During the same
period, the yield on advances declined from 12.74% to 12.12%, a fall of
0.62%. Both the above phenomena were generally due to general fall in
interest rates in the economy. However, this also gives an insight that in a
falling interest rate scenario, fall in yield on advances could be steeper than
fall in costs of deposits. Why is it so? The reasons can be traced to
mismatches in the maturity and re-pricing profile of deposits and advances.
While deposits of the bank would generally re-priced over a period of time, the
advances would get re-priced frequently as most of the advances are floating
in nature, anchored to the PLR of the bank. Therefore, greater volatility in
interest rates poses challenges to a bank to manage its spread Net Interest
Income or Net Interest Margin and preserve its economic value, which can be
addressed only through a robust Assets Liability Management System.
Asset Liability Management involves planning, directing and controlling the
flow, mix, cost and yield of the consolidated funds of banks. Alternatively, ALM
is defined as the process of strategic positioning of balance sheet which
involves ensuring the linkages between asset side with liability side and
enhancing the linkages through off-balance sheet activities. The goals of
ALM can be articulated as follows :

Accurate determination of market risk.

Enhancement of long-term profitability for a given quantity of risk.

Appropriate structuring of hedging positions.

Raising total return.

Enhancing the Market Value of Equity (MVE).

Total Risk Management Approach


The two major risks in the balance sheet of a financial institution are market
and credit risks. These risks are currently managed and mitigated under a
parallel two track approach. In leading institutions, there are two separate
committees to address the issues of credit and market risks. While the credit
risk is managed by Credit Risk Committee, Asset Liability Committee
(ALCO) addresses the market risk. The credit risk triggered by market risk is
also managed by ALCO. The recent events of market risk triggered credit
risk calls for effective steps towards integration of both the Committees.

ALCO is one of the key components of ALM system in a bank, ALCO is


constituted by the Board of Directors and it is in overall command of the ALM
system in a bank. ALCO is also responsible for various functions like pricing of
assets and liabilities, funding, optimal deployment of resources, capital
planning , etc. Due to complexities of its tasks, ALCO is constituted by
drawing expertise from various business lines, like Treasury, Planning, Credit,
Economic Research, etc. Head of information technology is an invitee to the
committee to supplement the efforts of the ALCO to generate credible and
quality MIS.
The major objective of ALM in any institution is to manage and mitigate the
following types of market risk :
a. Liquidity risk
b. Interest rate risk
c. Foreign exchange rate risk
d. Equity price risk
a. Liquidity risk
There are two approaches for measuring liquidity risk namely stock
approach and flow approach. Stock approach is used for measuring liquidity
on the basis of certain ratios like loans to assets, loans to core deposits,
purchased funds to liquid assets, large liabilities minus temporary investments
to earning assets minus temporary investments, etc. However, these ratios do
not reflect true liquidity of institution in as much as some of the assets may not
be having adequate liquidity and securitisation has just made a beginning in
the Indian market. Therefore, the alternative approach i.e. the flow approach
is an effective tool in such a situation. Under this approach, various items of
assets and liabilities and off balance sheet items are placed under various
maturity bands like 1-14 days, 15-28 days, etc. A bank can fix prudential caps
on mismatches under each time band based on the maturity profile and mix of
its assets and liabilities. Liquidity can also be measured and managed by
assessing it on a dynamic basis. This requires projecting cash flows based on
behaviour of existing assets and liabilities as well as factoring the impact of
external factors like volatility in stock/money market conditions, macroeconomic factors, etc on the behaviour of future cash flows. The cash flows
arising out of off-balance sheet items are also factored in the dynamic liquidity
projection.
Interest rate risk
Interest rate risk has arisen in Indian market mainly due to de-regulation of
interest rates. Abolition of administered interest rates has given opportunity to
Indian banks to price their assets and liabilities in the most competitive
manner. At the same time, it has exposed them to various types of interest
rate risks like basis, yield curve, embedded option, price risks, etc. For

example, a bank financing a 10 year bond through 3 months deposit may face
the following risks :
1. Re-investment risk arising at the time of reinvestment of coupons from the
bond.
2. Interest rate risk, as the bank has to fund the investment by raising
deposits at the end of every three months. In case of rising interest rate
scenario, the funding cost will increase, affecting the margin adversely.
Similarly, when a bank funds floating rate assets like PLR linked cash credit
and demand loans through fixed rate liabilities like 3 years' deposits, it is
again exposed to interest rate risk. The margins are expected to decline in a
falling interest rate scenario.
The other risk faced by a bank in volatile interest rate scenarios is embedded
option risk. Embedded options are typically in built in both deposits and
advances. In a rising interest rate scenario, a customer can exercise, without
many penalties, the option of pre-mature withdrawal of his deposits. Similarly,
in a falling interest rate scenario pre-payment can take place in advance
accounts that are contracted on fixed rate basis. The options exercised by
customers-depositors and borrowers pose significant challenges to a bank in
managing its liquidity profile and Net Interest margin.
The other variants of interest rate risks are :

Gap or mismatch risk risk arising due to holding of assets and


liabilities of varying maturities.

Basis risk risks that the interest rate of different assets, liabilities and
off-balance sheet items may change in different magnitude.

Yield curves risk risks arising due to non-parallel movements in yield


curves.

Price risk risk arising due to distress sale of assets and distress
pricing of liabilities.

Reinvestment risk uncertainty with regard to interest rate of which


future cash flows could be re-invested is known as reinvestment risk.

Managing Interest rate risk


Interest rate risk should be managed by segmenting the balance sheet into
Trading Book and Banking Book. Assets in Trading book are held primarily for
generating profit on short-term movements in price/yield. Banking book
comprises assets and liabilities customer deposits, loans and advances,
SLR investments, Non-SLR investments, etc which are contracted basically
for maintaining relationship or for steady income and statutory obligations.

Generally assets and liabilities in the Banking Book are held till maturity. The
price risk is the primary concern for a bank in its Trading Book. The likely
changes in Net Interest Income (NII) or changes in the market value of equity
are the primary focus for Banking Book.
The following methodologies are adopted by a bank for managing interest rate
risk :

Marking to market on a daily basis and holding period clearly defined.


Price risk is measured by adopting internally developed Value at Risk
model or Basle's Committee on Banking Supervision's standardized
approach is followed.
The cut-loss limits and duration and composition of the portfolio
stipulated Banking Book.
In the short-term the earnings impact is quantified by Gap Analysis.
In the long-term, the market values of assets and liabilities and off
balance sheet positions are estimated with the help of Duration Gap
analysis.
Simulation analysis is performed to accommodate the dynamic
behaviour of balance sheet.

It is a general understanding in the banks that crystallization of credit risk i.e.


generation of Non Performing Assets is only the factor that is affecting the
profitability in view of provisioning implications. But, the mismatched assets
and liabilities, in a volatile interest rate scenario, could also trigger losses and
the severity of which could be far deeper than the effects of NPAs. To
conclude, the potential for profitability or losses due to mismatches is
significant. Thus, the magnitude of market risk should be clearly understood,
identified, measured, monitored and managed.

CORPORATE GOVERNANCE
For long, the Corporate Sector in India has been dominated by certain
families who cannot hold together after the demise of the heads of the
families. The investors in the equity capital of such companies tend to lose
because they are not running on professional basis. Consequently, Corporate
Governance is now being insisted so that the change at the top does not
affect the working of an enterprise.
Today, global concerns are expressed towards increasing long-term
shareholders' value. Since the shareholders are residual claimants, in a wellperforming capital/financial markets, what maximises shareholders' value
must necessarily maximise corporate value and best satisfy suppliers,
creditors, customers and public-all stakeholders, governance practices.
Corporate Governance includes well-defined systems & processes to protect
shareholders' interest. In short, Corporate Governance refers to the joint
responsibility imposed on the Board of Directors and management to protect
the rights / interest of shareholders & inhance shareholders' value.
Good Corporate Governance has the potential to shape the economy and the
capital market of a country. Empirical studies corroborate the fact that markets

react positively to well-managed companies, So with the adoption of good


governance practices, companies can take appropriate decisions for the
benefits of owners as well as shareholders & other stakeholders.
The increasing number of scams taking place in Indian Corporate Sector and
being exposed to internal & external competition due to economic
liberalisation have left no choice but to go for improving Corporate
Governance practices.
What is Corporate Governance ? A credible and professionally managed
Efficient Business System.
The need for Corporate Governance: When we globalise, need to follow
global standards (post liberalisation).
FDI in Secondary market.
Cadbury committee came up in UK for Corporate Governance.
Precursor before implementation in India.
CII Apex body Committee whether industry can evolve voluntary code of
conduct.
SEBI appointed Kumaramanagalam Birla Committee what is happening
internationally and how we can adopt. These recommendations were studied
and SEBI introduced clause 49 in listing agreement.
What is clause 49?
Modification in Listing, Transparency, More disclosures, Legal framework,
CLL code of conduct.
Purpose
Code of Best Practices
(Credibility, Transparency, Efficiency, Responsibility and Accountability) of
Management to Board, Board to Shareholders.
The ingredients :
Board of Directors, Audit Committee , Remuneration of Director, Board
procedures, Management, Shareholders, Report of Corporate Governance,
Compliance.
3 Dimensions of Corporate Governance
Quality of performance, Equity :Transparency, Social Responsibility :
Accountability, Quality of Performance, Management, Appointee of
Shareholders, to take care of shareholders interest, Make shareholders
happy.,Shareholders' delight (Happiness) Through Customers' delight
(Happiness)Through Employee delight.
Hence, Management-A Noble Profession spreads happiness.
Shareholder delight shareholder Value.
Shareholder Value Market Capitalisation.
Hence Management Responsibility Enhance Market Capitalisation.
What is Market Capitalisation?
Market Capitalisation depends on ROE (Return on Equity).
Growth business-Earnings.
Industry profile Growth prospects Perpetuality.
Quality of Management Competency, Transparency, Ethics.
Intangible Assets Brand Equity others.
Management a multi-dimensional task, challenging task.

Role of Management
Board of Directors obviously must ensure Management, which can
perform. Perform well when market is good. Perform well when market is
bad. Perform when the market is good or bad.
Relevant provisions of clause 49
Board of Directors.
Board procedures.
Management.
What is Equity?
Equity transparency objective. No privileged investor. No privileged
shareholders. Accurate transparent information. Single large holder can
call the shots .Widely dispersed shareholders Management can call the
shots. Need is to protect small shareholders' interest.. Independent non
Executive Director. Audit Committee. Compensation. Curbs on inside
trading. Timely, accurate and sufficient price sensitivity information.
Accounting Standards. Small shareholder Director. Critical factor-truly
independent Directors.
Social responsibility objectives
Good Corporate citizens compliance of various laws. Interest of
secondary shareholders depositors creditors, etc. How independent are
Independent Directors appointment procedure. Role of Institutional
Directors. Firewall between Fund Managers and Nominee Directors.
How do we differentiate between accountability of non-executive and
executive director ?
- Adequate compensation of non-executive director.
(By K .K. Nohria CMD, Crompton Greaves Ltd.)

CORPORATE GOVERNANCE IN
PUBLIC SECTOR BANKS
The Government ownership of a bank has a potential to alter the strategies
and objectives of the bank as well as the internal structure of the governance.
Consequently, the general principle of sound corporate governance is also
beneficial to Government owned banks.
To enhance corporate governance, it is of importance that banks are able to
articulate their corporate values, code of conduct and standards of
appropriate behaviour. The issues that emerge in promoting corporate
governance in the Indian banking system will include role and composition of
the Board, disclosure requirements, integrity of the accounting practices and
the control systems.
I will examine areas for major initiatives under two categories one relating to
some basic issues to be addressed for promoting corporate governance in
public sector banks and the other on resetting of the Board of Directors.
The Basic issues are :

Firstly, it is a pre-requisite to have strategic objectives, if sound


corporate governance practices are to be promoted in an organisation.
Arising from this, it is imperative that the Government as owners of the
public sector banks, which dominate the Indian Banking System, spellout strategic objectives while continuing Government ownership.

At the stage of nationalisation, the objective of promoting social


banking was well set out and has resulted in the success achieved
over the past three decades. Having achieved, a stable framework and
infrastructure for supporting social objective, it is perhaps, time to relook at the working arrangement. A fresh working arrangement needs
to be put in place to clearly demarcate the social and commercial role
of the banking, as the two will have to work on different reward and
recognition system in view of varying nature of risk and responsibility.
While, banks may continue to extend network support, lending to social
banking areas can be increasingly channelled through institutions like
KVIC, District Industries Centre as well as through NGOs. Government
sponsored schemes can be increasingly channelled through such
institutional mechanism, with bank funding the same through bonds.

Secondly, the extended ownership of banks arising from public


shareholding on dilution of Government's stake will need a framework
for constitution and functions of the Board. This will have to be built into
the scheme of dilution. It has to provide for adequate representation on
the Board and through AGM, an effective say in the areas concerning
the shareholders interest. This has to precede further public issues of
PSBs so as to find acceptance in the market and a better pricing too.

That said, I would now look into the issue of corporate governance through
restructuring the Board of Directors. The crucial issues in this area will be :

To ensure that optimal strength of the Board of Directors are available


at all times, through a process of retirement on rotation basis. Long
spells of truncated board, followed by over stretched tenure of full
Boards is not conducive for adopting best practices.

To create a database of professional directors at national level for


appointments to the banks board.

To redraw the composition of functional and non-executive directors on


the board. This will include delinking the role of Chairman of the board
and the CEO of the bank. Additional positions at the board level may
include functional heads of credit, treasury and technology areas.

To recast the committee of directors, to address more focused issues


on critical areas including :
-

Articulating corporate strategies.

Credit risk management practices.

Remuneration and recognition system.

Internal control and audit systems.

Approving documented policies and procedures on Asset and


Liability Management, Credit Risk Management, Technology and
Operational Risk Management.

At the functional level, the board will oversee the discharge of


management responsibilities and delegated powers through
appropriate reporting mechanism and practices and procedures, which
are duly approved by the Board.

Credit decisions will be controlled more through reporting on credit


concentrations and adherence to exposure norms, in place of
delegated powers for credit sanctions.

CAPITAL ACCOUNT CONVERTIBILITY


The Tarapore committee on capital account convertibility has recommended a
three-year timeframe for full convertibility by 1999-2000. The five-member
panel headed by former RBI Deputy Governor, S. S. Tarapore, presented its
report to RBI Governor in June 97. Highlighting the preconditions for
achieving a full float of the rupee, the committee called for: (I) A reduction of
the gross fiscal deficit to 3.5 per cent by 1999-2000, (II) An average mandated
inflation rate of 3-5 per cent, (III) total deregulation of interest rates by the end
of this fiscal itself, (IV) a reduction in the cash reserve ratio (CRR) of banks to
three per cent and (V) reduction of NPA to 5% by the year 2000.
If these signposts are not sighted along the way both the timetable and scope
of capital convertibility would have to be alerted.
The committee has recommended the phased liberalisation of capital inflows
and outflows.
The panel has recommended that in 2000, a stock taking of the progress on
the preconditions as well as the impact of the measures outlined in the report
should be undertaken. The timing and sequencing of convertibility measures
would be facilitated by the proposed changes in the legislative frame work
governing foreign exchange transactions as envisaged in the Foreign
Exchange Management Act (FEMA).
The most important precondition for convertibility, according to the committee,
is a stable macro-economy including sustainable fiscal deficit. It has
recommended a reduction in the centers gross fiscal deficit to GDP ratio from
a budgeted 4.5 per cent in 1997-98 to 4 per cent in 1998-99 and further to 3.5
per cent in 1999-2000 accompanied by a reduction in the states deficit as well
as a reduction in the quasi-fiscal deficit. Any slackening in the pace of fiscal

adjustment would render the task of opening up the capital account difficult
with accompanying dangers of slippages, rollbacks and reversals of capital
flows.
The Committee has warned that the practice of financing the amoritisation of
Government borrowings out of fresh borrowings is unsustainable and strongly
endorsed the Tenth Finance Commission recommendations for the institution
of a consolidated sinking fund for the public debt.

RISK INVOLVED IN BANKING BUSINESS


Banking is primarily a business of accepting and managing risk. Bank's main
role is intermediation between those having resources and those requiring
resources, investors do not want to accept the risk of default on the parts of
users. Therefore, Banks came into the scene and assured prompt repayment
of funds and accepted the risk of default. As a compensation, they earn
interest margin between what they pay to the investors and what they charge
from the borrowers.
Important Risks:
Credit Risk
The risk of erosion of value due to simple default or non- payment by the
borrower.
Strategic Business Risk
This is the risk that entire lines of business may succumb to competition or
obsolescence. e.g. C.P. is a 'substitute' product for large corporate loans. This
risk also occurs when a bank is not ready or able to compete in a newly
developing line of business. Late entry makes sometimes, difficult to achieve
competitive advantages.
Regulatory Risk
Banks are licensed to do business. This license may be revoked, which
renders significant capital investment worthless, e.g. Capital Adequacy
Requirement.
Operating Risk
When the systems simply do not function properly resulting in losses of funds.
In 1990s several investment banks lost significant sums due to trading errors,
which could not be detected i.e. system malfunction.
Commodity Risk
The value of stocks and bonds of various companies are subject to this risk.
Human Resource Risk
EX- Departure of an employee with specialised knowledge can bring certain
system to halt due to lack of proper incentive.
Legal Risk

The risks are difficult to be anticipated as they may be unrelated to prior


events.
Product Risk
When a financial services product may become obsolete or uncompetable
e.g. ATMs developed by banks and improved version brought out later by
manufacturers.
Interest Rate Risk
It can create a liquidity crisis.
Liquidity Risk
Inability to pay desired withdrawals due to asset liability mismatch.
Currency Risks
It is the risk of exchange rate volatility .
Settlement Risk
It is a particular form of default risk which involves bank's competitors.
Management of Risk

Intelligent lending decisions

Diversification

Third Party Guarantee

Derivative market through the use of swaps and forward contracts

STRATEGIES FOR SURVIVAL

Public Sector Banks should be given greater autonomy with respect to


recruitment and promotion of personnel and in determining organisational
structure.

To adopt more general approach for Asset Liability Management:


In respect of rate, yield, volume and maturity.

Concentration on management of credit risk.

While high level of NPA has come down volume still remains large.

Better management needed to equip & operate in deregulated


environment.

Expertise needed for developing necessary treasury management while


managing investment portfolio.

OTHER IMPORTANT AREAS

Customer Service.

Housekeeping
productivity.

through

upgradation

of

technology

for

increasing

Diversification of Business.

UNIVERSAL BANKING
Globalisation, liberalisation and deregulation of financial markets in many
developed and developing countries have resulted in increased
disintermediation and has made commercial banks vulnerable to interest rate
risk. Relaxing exchange controls, adopting uniform accounting practices in
regard to income recognition, asset classification and provisioning norms and
prescribing capital adequacy norms has further aggravated the position. Now
the developments in information technology and telecommunications are
allowing international pooling of financial resources thereby spreading the risk
across more than one market. As a result, there is severe strain on interest
spread and bottom line of banks.
Amidst all the above said development banks in the developed countries
started emphasising on new sources for non-interest income to arrest the
pressure on their bottom lines. The efforts of many foreign banks have yielded
good results as their income from non-fund based business to total income
has increased manifold. However, this process has led to diversification in
their existing activities. In many developed countries, besides traditional
activities like accepting deposits and making advances, the banks are now
undertaking the following activities

Financing fixed investments in industrial projects by way of making


loans and advances on a longer term;

Securitising debt;

Trading in financial instruments, foreign exchange and its derivatives;

Creating/financing venture capital funds;

Underwriting new debt and equity issues;

Providing corporate advisory services including advice on mergers and


acquisitions;

Making investment management and providing depository services;

Selling insurance products;

Holding equity of non-financial firms.

Undertakings so many activities by commercial banks in various countries has


changed the face of banking from "Omni-present banking facilities" to "Omnipotent banking" having multifarious functions and selling/marketing their new
products and many modern banking services. This development has brought
to the fore the concept of UNIVERSAL BANKING.

Universal banking means providing diverse kind of banking services by banks.


Under universal banking, world-over, commercial banking and investment
banking activities with both equity ad debt are integrated and these services
are provided by the same institution under one roof.
Benefits of Universal Banking System
1. Enables a bank to diversify its risk profile and also its income streams.
2. Offers national competitive advantage at the systemic level by reducing
capital cost.
3. The risk of bank's failure and therefore the cost thereof is reasonably
hedged when a bank is performing diversified activities.
4. Bank has the benefit of economies of scale and scope.
5. The customer is also benefited as he gets one stop banking facilities.
Demerits of Universal Banking System
i.

Under the universal banking system various financial services including


investment-banking facilities are provided under one roof. It is,
therefore, feared that the universal banking may pose the risk of
conflict of interest and may not provide sufficient protection to investors
because the bank has inside information on the industry/unit and
obviously it would like to protect its own interest.

ii.

Sometimes riding the enthusiasm the bank may start a new activity for
which expertise is not available with it. This may even result in failure of
the bank.

iii.

Universal banking results in greater economic efficiency in the form of


lower cost higher output and better product mix on the other side if one
universal bank collapses, it leads to a systemic financial risk.

iv.

The system of providing all services under one roof may prevent the
universal banks from developing the highly specialised expertise
needed to compete in today's financial markets.

v.

Under the universal Banking system, the organisational structures are


big and become overly bureaucratic, which may create problems in
attracting top quality employees.

Universal Banking In India


Banks in India are already practicing universal banking by providing a whole
range of financial services. Banks in India are resorting to "Financial
Conglomerates" route. Many public sector banks have set up subsidiaries for
providing various financial services.

The following financial services are already being offered by the commercial
banks through adopting the "Financial Conglomerate" route in India.
i.

The Commercial banks are active in providing project finance,


wholesale credit, retail credit, housing finance and mortgage credit.
Credit derivative products such as factoring, leasing and hire purchase
and number of non-fund based products like guarantees and letters of
credit are also being provided.

ii.

A good number of commercial banks have set up mutual funds through


their subsidiaries.

iii.

Credit card business is the recent innovation in the Indian commercial


banking.

iv.

Gold banking is another new product recently launched by a few


commercial banks.

v.

Most of the commercial banks are actively participating in the money


and capital markets.

vi.

Commercial banks are also providing advisory services through their


merchant-banking arm.

OFFSHORE BANKING

It refers to international banking business involving non-resident foreign


currency dominated assets and liabilities.

It refers to banking operations that cover only non-residents and do not


mix with domestic banking.

This banking is carried out in about 20 centres throughout the world


which offers following benefits :

Exemption from minimum reserve requirement.

Freedom from control on interest rates.

Low or non-existence of Tax & Levies.

Entry for large international banks is relatively easy.

License fees are generally low.

Close proximity to important loan outlet and deposit sources.

Ex : Bahrain is in offshore base for petro-dollars

MERCHANT BANKING
Merchant Bankers are financial intermediaries. They act as intermediaries in
the process of transfer of capital from those who own it to those who use it.
Merchant Banking is an agency, retained by a company to advise and assist
in capital structuring/restructuring and its mobilisation within the prescribed,
regulatory framework. Thus, the merchant banker's role can be institutional
loan syndications, institutional placements, advisory services, including
mergers/.acquisitions/alliance and primary markets.
In primary markets a merchant banker is one of the many important agencies
retained by the company to assist it in mobilisation of funds. However, there is
a critical difference that a merchant banker helps, selects and co-ordinates
the work of other agencies. In the process the merchant banker has to
shoulder the high responsibility of an elder brother and be indirectly
responsible for the acts of other agencies.
In Indian conditions, Merchant Banking is understood ordinarily as related
mainly to issue house activities. Issue house activities include counselling,
corporate clients who are in need of capital, capital structure, form of capital to
be raised, terms and conditions, under-writing, timing and preparation of
prospectus, publicity for grooming the issue etc.
It includes following range of services :

Project counselling and appraisal.


Counselling on capital restructuring.
Loans syndication.
Public issue management.
Underwriting of shares and debentures.
Acting as Banker to the issue.
Acting as Banker for the Refund orders/collection of call money.
Handling of interest and dividend warrants.
Counselling for NRIs.
Portfolio Management etc.

TREASURY MANAGEMENT
The domestic treasury management have three main objectives:
a. To maintain Statutory Ratios, namely CRR and SLR as stipulated by the
RBI from time to time.
b. To maximize yield on the funds deployed.
c. To manage the funds in such a way that the short term liabilities are
matched with the corresponding assets without any strain on the funds
management. .
The prime objective is to ensure that the Bank at all times adheres to the
statutory obligations of the Central Bank stipulated and modified from time to
time. Any default, apart from attracting severe penalties would also attach a
stigma of non-compliance of Statutory obligations and hence the Treasury
Department has to constantly vigilant on this front.
Since the yield earned on deployment of funds for complying with statutory
obligations would necessarily be low, it is for Treasury Department to look for
other better and remunerative avenues for deployment of residual funds. In
this respect, the non-SLR investments such as investment in equity shares of
corporates, debentures, bonds of public sector, units of UTI, commercial
papers and floating interest rate bonds etc. assumes lot of importance.
The liability management has assumed importance these days which aspect
was not given due importance earlier. The liability management includes
matching of liabilities with assets of corresponding maturities, rate of return
and investment risk. The constant comparison of these three aspects is a
must if any treasury department is to make most of the opportunities which
exists in the treasury operations.
The SLR component of any bank consists of mainly the following :
a.
b.
c.
d.

Central Govt. Loans.


Treasury Bills 14/91/182 and 364 days.
State Development Loans.
The bonds floated by State sponsored bodies such as State Development
Corp, State Electricity Board etc, as also securities floated by Municipal
corporations and other developmental agencies repayment of which and
payment of interest on which is guaranteed by State Govts /Central govt.
e. Bonds issued by All India financial Institutions which are specifically floated
as approved securities for the purpose of SLR.
f. Cash on hand, Balance with other Banks and the portion of CRR which is
in excess of he statutory requirement. CRR comprises of the balances of
the branches of the Bank maintained with the Reserve Bank of India at
various centres put together.
In today's context the emphasis has shifted from mere Maintenance of
CRR and SLR' to Management of CCR and SLR. Effective management
of the treasury has an important role to play in the profit management of
the Bank.

INTEGRATED TREASURY
Foreign Exchange and Money Market Operations
As the names indicate Foreign-Exchange Market (FX-MKT) operations
involve conversion of one currency into another, whereas Money Market (MMKT) operations involve only transacting in any particular currency.
In a free and competitive market place, the forces of arbitrage opportunism
ensure that :
1. A currency with higher rate of interest is at discount for forward delivery;
2. A currency with lower rate of interest is at discount for forward delivery;
3. Discount/Premium (forward exchange differential) is equal to net
accessible interest rate differential between the two currencies involved.
Under perfect market conditions, equilibrium will be attained only and if
forward exchange differentials between currencies are equal to their interest
rate differentials. Forward exchange differentials are commonly referred to as
FX-SWAP differences or SWAP points.
In as much as Indian foreign exchange markets as yet are not fully free nor
completely competitive, forward exchange differentials of various foreign
currencies against Indian Rupee are not necessarily equal to interest rate
difference between the relative currency and Indian Rupee. As a result of
gradual liberalisation of Indian markets since 1993, some co-relationship
between Fx forward differentials (SWAP points) and relative interest at
differential has since come to play, albeit, occasionally and in a very limited
segment.
Consequently, Indian FX and Domestic Money Markets are still not free from
arbitrage. There are occasions when interest rate differentials and forward
swap difference are not equal and such imperfect market conditions offer
scope for arbitrageurs to exploit the situation by Swapping foreign currency
into Indian Rupees or vice versa. The regulators, with a view to moving
towards perfect market conditions, have been gradually permitting market
participants(Authorised Dealers) to freely borrow/invest foreign currencies/in
overseas centres. However, presently as the extent of this freedom is limited
(15% of unimparied tier a capital of ADS), market is yet not arbitrage free.
Authorised Dealers, having simultaneous access to both Forex and Money
Markets can quickly seize arbitrage opportunities by their SWIFT and coordinated actions. As such it is of paramount importance that both forex and
M-MKT activities are undertaken in an integrated manner preferably under
single roof and under command of same authority.
Our Bank, by establishing Treasury Branch, has put in place, required
systems under which various market opportunities, including those arising on
account of imperfect co-relationship between FX-MKT and M-MKT can be
fully exploited for augmenting Bank's profits. However, while undertaking
these activities, it has to be ensured that RBI guidelines in this regard are
strictly adhered to. Furthermore Risk Management parameters of the Bank
are to be meticulously followed.

BRIDGE LOANS
Banks are permitted to sanction Bridge Loans to the companies for a period
not exceeding one year against expected equity flows/issues. Such loans
should be accommodated within the ceiling of 5% of incremental deposits of
the previous year prescribed for the bank's investments in ordinary
shares/convertible debentures of corporates including PSU shares, loans to
corporates for meeting promoters contribution and units of mutual fund
schemes, the corpus of which is not exclusively invested in corporate debt
instruments. RBI has also advised banks to formulate their own internal
guidelines with the approval of their Board of Directors for grant of such loans
and to exercise adequate caution and attention to security for such loans.
These loans are normally tied up with the underwriting commitments by other
Banks/Financial Institutions and thus considered secured and self liquidating,
though no tangible security is available to the bank, the control mechanism
adopted in his regard interalia includes the following aspects :
1. Public issue should have the approval of relevant authorities including
SEBI.
2. The extent of Bridge Loan is related to the specified percentage of the
amount actually called up each time.
3. The period of Bridge Loan is related to the time taken for completion of
various formalities related to public issue.
4. Such Bridge Loans are normally considered in AAA/AA rated accounts
with the Bank preferably where the lending Bank is Banker to the issue.
Exceptions to this rule can be made only in the case possessing high
merits. In case of consortium accounts, NOC from the leader to be
obtained.
5. For ensuring proper end use of the Bridge Loan, the disbursements are
made through a special account so that the funds do not get mixed up.
6. The utilisation of Bridge Loan is allowed for the purpose for which the
public issue has been floated. This is ensured by obtaining written
statement from the company as to how the amount of Bridge Loan is going
to be spent. Supporting documentary evidence is obtained wherever
considered necessary. Additionally, the Company may be asked to submit
a certificate from a reputed Chartered Accountant about the end use of
funds.
Bridge Loans to Government
Banks should not extend bridge loans/interim finance for activities, which are
required to be legitimately met out of Government resources/budgetary
allocations.

Bridge loans against receivables from Government


Banks should not extend bridge loans against amount receivable from
Central/State Governments, by way of subsidies, refunds, reimbursements,
capital contributions, etc., subject to the following exceptions :
a. Banks can contribute to finance subsidy receivable under the normal
retention Price Scheme, for periods upto 60 days, in the case of fertiliser
industry.
b. Banks can continue to grant finance to exporters against receivables from
Government such as Duty Drawback and IPRS, as per the existing
guidelines.
Banks may consider sanction of bridge loan/interim finance against
commitment made by a financial institutions and/or another bank only in
cases, where the lending institutions faces temporary liquidity constraint, and
subject to compliance with the following conditions ;
a. The bank extending bridge loan/interim finance must obtain prior approval
of the other bank and/or financial institution, which has sanctioned the
term loan;
b. The sanctioning bank must also obtain a commitment from the other bank
and/or financial institution that the latter would directly remit the amount of
term loan to it at the time of disbursement;
c.

Period of such bridge loan/interim finance should not exceed four months.
Under no circumstances, should banks allow extension of time for
repayment of bridge loan/interim finance,

d. Banks should ensure that bridge loan/interim finance sanctioned and


disbursed is utilised strictly for the purpose for which the term loan has
been sanctioned by the other bank and/or financial institution.

HEDGE FUNDS
What are hedge funds?
Hedge funds can be defined as eclectic investment pools organised as private
partnerships for wealthy individuals and institutions, and very often, for
offshore residents, primarily for tax and regulatory purposes whose managers
are paid on a fee-for-performance basis. Approximately, 15-25 per cent of
post-tax profit accrues to the hedge fund manager apart from the
management fee of 1 per cent of the assets, annually. Hedge fund managers
as partners, have their own capital invested in the funds they manage. This is
in sharp contrast to the mutual fund industry, where managers typically do not
have their own fund, invested. This has important implications for hedge fund
managers, as they tend to be oriented towards achieving the highest absolute
return without taking excessive risk.
Types of hedge funds:
Hedge funds can be classified into following broad categories:

Macro funds These take a view on the macro-economic policies of


select countries and attempt to profit from perceived discrepancies in
them.
Global funds These invest in emerging markets. Those dedicated to
specific regions in the world, invest in these regions, too. While they take
positions on directional moves in particular markets as the macro funds
do, they tend to be more bottom-up oriented in that they pick stocks in
individual markets they favour.
Long only funds These are traditional equity funds that use leverage
and charge incentive fees.
Market-neutral funds These funds attempt to reduce market risk by
taking offsetting long and short positions and invest in a wide variety of
instruments, including those that arbitrage stock and index futures, or
those that take positions on yield curves in bond markets.
Sector funds These have an industry focus that includes a wide set of
industries : health care, financial services, technology etc.
Short sale funds Short sale funds borrow securities they judge to be
'overvalued' from brokers and sell them in the market, hoping to buy them
back at a lower price when repaying the broker. These funds attract
investors wishing to hedge long-only portfolios, or those wishing to take a
position that the market is likely to decline.
Event-driven funds Their investment theme is to capitalise on events
that are seen as special situations. They encompass distressed securities
funds that focus on securities of companies in reorganisation or
bankruptcy, and risk arbitrage funds that take a position on the likelihood
of an announced merger or acquisition going through by simultaneously
buying stocks in a company being acquired and selling stocks in the
acquiring company.

Funds of funds These are hedge funds that allocate their portfolio of
investments, sometimes with leverage, among a number of Hedge Funds.

LETTERS OF CREDIT
LETTERS OF CREDIT also called Documentary credits are generally used
for facilitating international trade. However, its use for the domestic (local)
trade is also not unknown.
Simply put, Letter of Credit is an instrument for settling trade payments. It is
an arrangement for making payment against documents. To elaborate, L/C is
an undertaking by a bank on behalf of its customer to pay the value of goods
or services to its supplier against submission of specified documents/meeting
terms and conditions set out in the L/C.
PARTIES TO A LETTER OF CREDIT
OPENER is the one at whose request L/C is issued by a bank. Opener of L/C
is importer or buyer of goods/services.
ISSUING BANK is the Bank which issues L/C.
BENEFICIARY is the one in whose favour L/C is established. Beneficiary of
the L/C is the exporter/seller.
ADVISING BANK is the bank which advises the issuance of L/C to the
beneficiary. Advising bank verifies the authenticity of the L/C before advising
the beneficiary.
NEGOTIATING BANK is the bank which negotiates documents stipulated in
the L/C and is authorised to pay the value (if terms/conditions and documents
as set out in the L/C are complied with) to the beneficiary.
In addition to above, some times CONFIRMING BANK is also found in the
chain of L/C transactions. Confirming Bank is the one which adds its own
confirmation to pay the value. Confirming bank comes into the picture when
beneficiary is not comfortable with the opening bank , its creditworthiness or
country risk. In such cases, opening bank will arrange to get the L/C
confirmed through an acceptable bank to the beneficiary.
When opening bank is not maintaining an account with negotiating bank, it
has to reimburse the payment made by the negotiating bank, In such cases,
opening bank authorises the negotiating bank to claim the amount of
reimbursement from the bank with which opening bank maintains an account.
Such a bank (where an account is maintained by the opening bank) is called
"REIMBURSING BANK".
TYPES OF L/C:
Revocable L/C is a credit which can be amended or cancelled by the L/C
issuing bank without notice to the beneficiary.
Irrevocable L/C is a credit which cannot be amended or cancelled without the
consent of the parties to L/C. In terms of Article 6 of UCPDC 500, all L/Cs are
irrevocable unless specifically mentioned as revocable.

Payment credit is a sight credit, and on presentation of documents specified


in the L/C, value will be paid. In such credits, no bill of exchange or usance bill
is drawn.
Deferred payment credit is a credit under which designated bank makes
payments on due dates determined as per terms of L/C. Such L/C specifies
the maturity at which payment has to be made and how such maturity is
determined. No drafts/bills of exchanges are drawn under this L/C.
Acceptance credit is similar in nature to the deferred payment credit except
that under this credit, usance bills of exchange are drawn on specified bank or
drawee for a specific tenor. Designated bank will accept drafts and honour the
same on maturity.
Transferable L/C is a credit that can be transferred at the request of the
beneficiary to another beneficiary in whole or part. However, second
beneficiary cannot transfer it to 3 rd beneficiary. Such credit must mention that
it is transferable.
Back to back L/C is an L/C which is issued on the strength of another L/C.
This credit helps beneficiary to obtain another L/C favouring his supplier. This
L/C is like transferable L/C except that in case of transferable L/C, original L/C
is transferred to another beneficiary, in case of back-to-back L/C, a new L/C
is issued favouring second beneficiaries.
Red clause L/C which makes available finance at pre-shipment stage
enabling the beneficiary to procure
and process goods. Such
payment/finance at pre-shipment stage is authorised by the opening bank.
Since clause to this effect is printed in red ink in the L/C, it is called Red
Clause L/C.
Green Clause L/C is a L/C which contains a clause providing finance for
warehousing/storing of goods at the risk of the opening bank till the goods
covered under the credit is put on board.
Revolving credit is a credit under which value and validity of the L/C are
automatically reinstated on receiving advice from the issuing bank that
previous documents have been retired and paid for. Such credits maintain
maximum drawings under L/C.
Stand-by L/C is not strictly L/C, It is a substitution of letter of guarantee and
covers only financial commitment. Payment obligation arises only upon failure
of performance. Stand-by credit originated in USA and is now widely used in
many countries. Use of stand by credit in India is increasing in the light of
growing liberalisation/globalisation. Since obligation for payment arises out of
non-performance under stand-by credit, opening such credit requires extra
precaution.

EXPORT FINANCE

Export finance can be broadly classified in 2 categories :


1) Pre-shipment finance, and
2) Post-shipment finance.
Pre-Shipment Finance can be further divided into
1) Packing credit in rupees.
2) Packing credit in foreign currency (PCFC),
3) Advances against incentives receivable from govt.
4) Advances against duty draw-back.
Post-Shipment Finance can be in the form of
1) Purchase of discount of export documents under confirmed orders.
2) Negotiation/payment/acceptance of documents under L/C,
3) Advance against export bills sent on collection,
4) Advance against receivables from Govt.
5) Export bills rediscounted in foreign currency, We will discuss only a few of
the above facilities:
PRE-SHIPMENT FINANCE
Packing Credit in Rupees is a loan/advance or credit facility granted to an
exporter for procuring and processing raw materials, etc. This also includes
finance for transportation, warehousing and shipping. Such facility can be
granted to an exporter who has a confirmed export order or irrevocable L/C in
his name. Exporter enjoying `AA'/`AAA' rating can be granted "RUNNING
ACCOUNT" facility. Where "Running Account" facility has been granted',
requirement of prior lodgement of L/C is not insisted upon. However, L/C firm
orders should be produced in reasonable time, "Running Account" facility is
the one where that first debit is repaid by the first credit irrespective of the fact
that such credit may not pertain to the debit being set-off against.
Packing Credit should be repaid from the proceeds of the exports. In case it is
repaid from local resources, rate of interest, as applicable to domestic credit
(commercial rate), should be charged.

Packing credit being in the nature of working capital finance is for short period
only. These advances are granted for period not exceeding 180 days at
concessional rate. This period can be extended by another 90 days (total 270
days) without reference to RBI] for where delay is beyond the control of the
exporter. However, higher rate of interest will be charged for such extended
period.
Further, concession in rate of interests is available only if the export takes
place within reasonable time from availing of finance. Such period should not
exceed 360 days and in case it exceeds 360 days, banks should charge
commercial rate of interest from the date of granting finance. In case no
export takes place, banks are entitled to charge interest @ 2% above
commercial rate.
PCFC is packing credit denominated in foreign currency. This is done with a
view to avail of low rate of interest prevailing abroad which adds to the
competitiveness of an exporter, PCFC funds can be used for import of raw
material and processing and then reexporting or for usage in domestic
purposes. PCFC is liquidated by submitting export bills for collection or
negotiation.
POST-SHIPMENT FINANCE
Foreign Bills purchased or discounted : Increasingly, quite a lot of
international trade is taking place without the mechanism of L/C. Where
documents are tendered for purchase or discounting (not accompanied by
L/C), bank must ensure that the customer is of undoubted worth. Status
reports, both, on the exporter as well as the importers should be called for and
kept on record. Bank should also verify the kind of goods being exported while
purchasing/discounting the bills. If the goods are of special nature/made-toorder type, it becomes difficult to dispose of such goods in case the buyer
fails to pay for it.
Negotiation of Foreign Bills under L/C : is the most secured form of post
shipment finance. Bank negotiates bills complying with terms and conditions
of the L/C. Where it does so in pursuance of the mandate given by the issuing
bank, negotiating bank is assured of receiving reimbursement from issuing
bank. Bills should be realised within period, failing which it will attract
commercial rate of interest.

ECGC SERVICES
As exports involve cross border movement of goods and services, the
attendant risks are several. To mitigate these risks and to encourage bankers
to finance export trade on liberal terms, Government of India set up Export
Risk Insurance Corporation in July 1951. It was renamed as Export Credit &
Guarantee Corporation of India Ltd. (ECGC) in 1983.
ECGC provides Policies to exporters and Guarantees to banks covering
various risks involved.
Whole Turnover Packing Credit Guarantee (WTPCCG)
WTPCG is a contract between ECGC and Bank, whereby the Corporation
guarantees protection to Bank against losses sustained in the process of
granting pre-shipment finance to exporters.
The banks which undertake to obtain cover for packing credit advances
granted to its customers in all branches, ECGC issues Whole Turnover
Packing Credit Guarantee WTPCG).
Almost all the banks in India have taken the guarantee since then.
Salient features of WTPC
Risks covered
Insolvency of the exporter.
Protracted default of the exporter.
Guarantee coverage
Following is the extent of coverage :
Normal goods
75%
Hazardous goods
66.66%
SSE/SSI
90%
Small Scale Industries : Anticipated Annual Export Turnover not exceeding
Rs.25 lacs, irrespective of amount of local sales.
Small Scale Exporters : Anticipated Annual Turnover not exceeding Rs. 40
lacs w/w Export Turnover not to exceed Rs. 25 lacs.
Reporting of Limits
Whenever new limits are sanctioned or existing limits enhanced, reduced or
cancelled, they should be reported to the Corporation immediately but in any
case within 30 days.
Discretionary Limit
Every Guarantee mentions a limit (in terms of Rupees) upto which the bank
can allow packing credit advances to any of its exporter client without ECGC's
approval. This limit is called Discretionary Limit (DL). .
Monthly Declaration and payment of premium
All branches which have granted PC have to submit a monthly declaration to
ECGC along with the amount of premium payable on such declarations. The

amount of premium should be calculated at the rate of 7 paise per Rs. 100 per
month on the total average daily products.
Premium is recovered from the exporters immediately from CD/CC Account.
Filing of claim
The Bank should file a claim in respect of an advance within six months from
the date of Report of Default.
Renewal of Guarantee
The WTPCG issued to the bank expires on 30 th June every year and renewals
are made for a period of 12 months i.e. 1 st July to 30th June. IBD takes care of
the renewal.
WHOLETURNOVER POST SHIPMENT EXPORT CREDIT GUARANTEE
(WTPSG)
WTPSG was introduced in our Bank w.e.f. 1.4.1997. It covers post-shipment
finance granted to exporters by Banks in the form of purchase, discount and
negotiation of export bills. It also covers advance basis and covers entire
post-shipment advance granted by the Bank. In the case of our Bank,
WTPSG covers only purchase/discount of export bills and advance against
export bills sent on collection both drawn under contracts.
The salient features of the WTPSG are as under :
Risk covered:
- Insolvency of the exporter.
- Protracted default by the exporter to pay post shipment advance due to
the Bank.
- Buyers failure to pay/retire bill will not give rise to claim, unless our
exporter has failed to adjust the advance
Percentage of cover:
Exporter who is a Holder of Std. Policy

Exporter who is not a Holder of Std.Policy

SSE/SSI

90%

SSE/SSI

65%

Others

85%

Others

60%

Premium

Premium is payable on average amount outstanding calculated on a daily


product basis at the rate of 6 paise for Rs. 100 per month. Premium is to be
borne by the Bank. Presently, we are covering only Non-L/C export
transactions under WTPSG.
Report of Default
In respect of post-shipment advances, non liquidation of advances will be due
to non-payment by overseas buyer or due to problems in the importing
countries. However, the ROD has to be filed only if, in the opinion of the bank,
the post-shipment advances cannot be recovered from the exporter in normal
course. ROD has to be filed within 4 months from due date or extended due
date or one month from date of recall, whichever is earlier.

Claims
Claims should be filed by the branch within 6 months from the date of filing of
ROD with the nearest office of the ECGC which services the branch.

NON RESIDENT DEPOSIT ACCOUNTS


Non-Resident deposit accounts are governed by regulations contained in the
FEMA. An extract of relevant schemes/guidelines are as under :
Non-resident Ordinary Rupee (NRO) Account: can be opened by any
person resident outside India. These accounts can be opened in the form of
savings, current, recurring or fixed deposits. Proceeds of inward remittances
or permitted currency tendered by the account holder during his visit to India
or transfers from rupee accounts of non-resident banks are permitted modes
of credits into NRO account. Local payments, including payments for
investments are allowed from NRO accounts. Remittance of current income
net of applicable taxes is allowed.
Loans to account holders can be granted in rupees for personal
purposes/carrying on business subject to norms as applicable to resident
accounts. Such loans can be granted to third parties also.
NRO accounts can be held jointly with residents.
Non-Resident (Non-Repatriable) Rupee Deposit accounts: can be opened
by any person resident outside India. These accounts are opened in the form
of term deposits only for periods ranging from 6 months to 36 months. Banks
are free to determine rates of interest on deposits under this Scheme and on
advances against funds held in such deposits. Interest accrued on NRNR
deposits is repatriable. However, if the interest is reinvested, amount of
interest so reinvested will not be eligible for repatriation.
NRNR deposits can be opened in joint names with the resident.
Loans/ overdrafts can be granted to the account holders and third parties for
personal purposes/carrying on business against the security of NRNR
deposits.
Non-Resident (Special) Rupee Accounts: can be opened by NRI who
voluntarily undertake not to seek remittance of funds held in these accounts
as also income earned thereon. These accounts carry the same facilities and
restrictions as applicable to domestic accounts of residents regarding
repatriation of funds and income thereon. These accounts can be held in the
form of savings, current, recurring or fixed deposit. Such accounts can be held
jointly with residents. Operations in the account are allowed freely as in case
of domestic accounts.
A special application-cum-undertaking form has been devised by Reserve
Bank of India for opening these accounts.
Non-Resident (External) Rupee Accounts: can be opened by NRIs and
OCBs. Such accounts can be in the form of savings, current, recurring or fixed
deposit. Balances held in the account can be repatriated outside India. And
therefore, credits in the account are regulated as to the source. Proceeds of
inward remittances, cheques drawn on foreign bank/branches, travellers
cheques or foreign currency notes or transfer from other NRE/FCNR accounts

is permitted to be credited into NRE account. On the other hand, debits for
local disbursements are allowed. Wherever regulations permit, debits are
allowed for investment in shares/securities of an Indian company or for
purchase of immovable property in India.
Loans against the security of the funds held in the NRE account can be
granted to the account holder for personal purposes or for carrying on
business activity. Repayment of such loans will be made by means of either
appropriating the deposit or fresh inward remittance or out of the local rupee
resources in the NRO account of the borrower. Loans can also be granted for
direct investment on non-repatriation basis or for the purpose of acquisition of
flat/house for own residential use.
Banks can grant fund-based/non-fund based facility to resident
individuals/firms/companies against the collateral of FD held in NRE account.
however, for such loans, there should be no direct/indirect foreign exchange
consideration for the non-resident depositor agreeing to pledge his deposit.
Income from interest is exempt from Income Tax. Balances held in the NRE
accounts are exempt from Wealth Tax.
Foreign Currency (Non-Resident((B) Accounts: can be opened by all NRIs
and OCBs in currencies US Dollar, Pound Sterling and euro. These
accounts can be opened only as term deposit for maturities ranging from 12
months and up to 36 months. All debits and credits permitted in the NRE
accounts are permitted in FCNR (B) accounts also.
Since the deposit and interest thereon is denominated in foreign currency
only, the depositor is not exposed to exchange rate risk. However, Reserve
Bank of India does not provide exchange rate guarantee/cover to the banks.
Banks can lend resources mobilised under these accounts without any
interest rate stipulations made by Reserve Bank of India. That is to say, banks
can determine rates of interest on loans made out of FCNR (B) funds.
Resident Foreign Currency Accounts (RFC) can be opened by a person
resident in India out of foreign exchange received as pension/any other
superannuation benefits from his employer outside India or received as
gift/inheritance or acquired when he was resident outside India.
These accounts are maintained in foreign currencies only. These accounts are
free from all restrictions regarding utilisation or foreign currency balances
including restriction on investment in any form outside India.
Exchange Earners' Foreign Currency Accounts Scheme (EEFC): was
introduced in 1992 to enable exporters and other exchange earners to retain a
portion of their receipts in foreign exchange with an authorised dealer in India.
100% Export-Oriented Units or a unit in (a) Export Processing Zone or (b)
Software Technology Park or (c) Electronic Hardware Technology Park may
retain 70% and any other person resident in India may retain 50% of the
eligible inward remittances.
EEFC accounts can be held in the form of non interest bearing current
accounts only. No credit facility (funded or non-funded) can be made available
against the EEFC balances. EEFC funds can be used for payments outside
India in the nature of current account.
UNFIXED DEPOSIT SCHEME OF OUR BANK FOR NRIs

Withdrawal in multiples of units of Rs.5000/- alongwith interest without loss


of interest on continuing units.
Unit withdrawal will be treated as prematurely withdrawn.
Deposit together with interest is fully repatriable.
It is treated as NRE deposits.

NEW FINANCIAL SERVICES


Factoring
It refers to management of receivables of a company by the financial
intermediary for a fees. It may be with recourse or without recourse.
The services offered by a factor can be some or all of the following :
(i)

Administration of Sales Ledger of the client.

(ii)

Service to follow-up and collect the receivables.

(iii)

Purchasing receivable with recourse.

(iv)

Purchasing receivables without recourse.

Forfaiting
It refers to purchase of debt instruments, without recourse to the exporter. It
helps the exporters to concentrate on export front without bothering about the
collection of export bills.
EXIM bank has introduced a scheme of forfaiting from February 1992, under
which it arranges to get bills of exchange/promissory notes discounted by
overseas forfaiting agencies on without recourse basis.
Factoring Vs. Forfaiting
Factoring

Forfaiting

1. This is usually for credit transactions 1. This is for credit transaction of


of short term maturity.
usually longer maturity.
2. It may be with or without recourse.

2. It is always without recourse to


the exporter.

3. Cost of factoring is usually borne by 3. Cost is eventually borne by the


the seller.
overseas buyer.
4. Here
complete
sales
ledger 4. It is on case to case basis.
accounting/administration can be
handled by the factor.
Mutual Funds

A Mutual Fund is one which pools resources from several investors and
manages the same with an objective to maximise returns for these
investor members.

Unit Trust of India started the first mutual fund scheme in India. From 1987
Commercial Bank/Financial Institutions are permitted to float Mutual Funds
through their subsidiaries.

In 1991, the government of India permitted private sector to float mutual


fund.

Venture Capital

It refers to financing of opportunities based on technical innovations in


contrast to our conventional security based lending. In other wards it is
financing of new ideas and technologies, e.g. Financing projects based on
potentiality for untried projects promoted by a new promoter who is having
required technical background.

It is a high risk and high return business.

Main Venture Capital Companies :

1. TDICI Technology Development and Information Company of India


Limited.
2. RCTFC Risk Capital and Technology Finance Corporation Limited.
3. The Industrial Development Bank of Indias Venture Capital Fund.
4. Credit Capital Limited.
Securitization

It is a process by which an illiquid, non negotiable and high value financial


asset is converted into securities of small value which are tradable and
transferable.

Parties to Securitisation-

There are three parties to a transaction of Asset Securitistion:


1. The Lending Institution (also called originator, who offers credit assets for
securitisation.
2. The Trust (also called Special Purpose Vehicle which buys the assets and
issues securities.) Banks can discharge this role.
3. The Investors (who buys the securities)
Custodial Services
a) To provide agency services to customers for safe custody, collection of
dividends/interest, bonus and other related functions related to shares and
Debentures for a fee.
b) Organisation offering Custodial Services : City Bank, Hongkong Bank,
Standard Chartered Bank, State Bank of India, Bank of Baroda, and Stock
Holding Corporation of India. Many other Banks and Financial Institutions
are in the process of forming subsidiaries for starting custodial services.
Corporate Advisory Services
c) These services are being rendered by banks to highly demanding
corporate clients.
d) Some Banks have extended computer terminals, to their corporate clients
so that important Banking services can be done from their office itself.
e) Highly qualified staff are needed to attend varied needs of corporate
clients like GDR/ADR, Euroloans and new methods of risk management

like, Swap, Option, Future etc.


Leasing
f) Leasing can be defined as a transaction in which the owner of the Asset
(called LESSOR) gives the same to another party (Called LESSEE) for
his use for a specified period of time in consideration of payment of lease
rentals.
Types of Lease :
Financial lease :

Which is also capital lease or full pay-out lease. This


type of lease is used as a method of financing capital
expenditure.

Operating Lease:

It is basically a short term lease. The period is very


small as compared to the life of assets and the lease is
usually cancelable.

Leveraged leave:

When a leasing company borrows money from


bank/financiers to buy a particular equipment with the
purpose to lease it out. It is known as a leveraged
lease.

Hire Purchase
It means an agreement under which goods are let on hire and under which
the hirer has option to purchase the same.
Hire purchase involves delivery of possession of the goods to the hirer and on
payment of last installment. The property passes on the hirer.
Loan Syndication
This refers to a loan arranged by a Bank for a borrower who is likely to be a
large company, a local authority or Govt. Department.
Parties to a syndicated debts are :
1. Borrower 2. Lead Manager or Syndicator 3. Participating Bank
4. Agent Bank and 5.Guarantor.
Consortium financing
Where the entire credit needs of a borrowing unit is financed by a group of
banks by forming a consortium.
It is a concept to promote collective application of banking resources.
Syndication Vs. Consortium Lending
1. Both the systems provide for dispersal of risk amongst creditors.
2. In syndication the borrower can get a competitive price by asking for bid
from different banks.
3. Syndicated Credit is to be paid by during a fixed period which is not in
case of consortium lending.

NEW FINANCIAL INSTRUMENTS


Money Market
It may be defined as a centre in which financial institutions congregate for
the purpose of dealing impersonally in monetary assets. In a wider
spectrum, a money market can be defined as a market for short term
money and financial assets that are near substitute for money.
Short Term means generally a period less than one year.

Near Substitute to money means a financial assets which can be quickly


converted into money with minimum transactional cost.
Call Money Market
It is basically inter bank market centralised primarily in Mumbai but with submarket in Delhi, Calcutta, Madras and Ahmedabad. The participants of this
market are commercial and co-operative banks, who can borrow and lend
funds.
Call Money

on overnight basis
Notice Money

upto maximum 14 days


Repos
g) It is re-purchase agreement (REPOS) or ready forward or buy back.
h) It includes the acquisition of funds through a sale of agreed securities with
a simultaneous commitment to purchase the same on a pre-determined
fixed period, generally 14 days at a specified price.
i) Bank use Repos deal for adjusting SLR/CRR positions
(i.e. in case of SLR surplus and CRR deficit) simultaneously.
Term Money Market
j) DFIs borrow from this market for a maturity period of 3 to 6 months. Within
the limits stipulated by RBI for each institution.
k) Interest rates are market driven and the market is pre-dominantly
90 days market.
l) As per IBA ground rules, lenders can not pre-maturely recall these funds
and as such this instrument is not liquid.
Treasury Bills
The treasury bills are short term promissory notes issued by Govt. of India at
a discount for 91 days to 364 days.
Commercial Bills
Commercial bill is an instrument drawn by a seller of goods, on a buyer of
goods. Under new bill market scheme, the commercial banks can rediscount
with approved institutions, the bills which were originally discounted by them,
provided that the bills should have arisen out of genuine commercial trade
transactions.
Inter-Banks Participation Certificate
The IBPCs are short-term instruments to even out the short term liquidity
within the banking system.

The IBPCs are issued by any commercial bank and subscribed by any
commercial bank.
Global Depositor Receipts
It is Dollar denominated instrument traded on a stock exchange in Europe or
U.S. or both.
It represent certain numbers of underlying shares.
The shares are issued by a company to an intermediary called depository,
who subsequently issues GDRs. The physical possession of such shares is
with another intermediary called custodian who is the agent of the depository.
Money Market Mutual Funds
Eligibility
: It can be set-up by scheduled commercial banks,
public sector financial institutions and mutual funds.
Eligibility for Subscription :
Individuals, Corporate, NRIs on nonrepatriation basis and others.
Lock-in-Period
:
15 days
Reserve requirement
:
Nil
for Banks
Stamp duty
:
Exempted
Regulatory Authority
:
RBI for Private Sector RBI & SEBI.
Certificate of Deposit (CD)
It is a document of title to a term deposit. All Commercial Banks excluding
RRB are authorised to issue CDs in form of usance promissory notes which
are transferable by endorsement and delivery. CDs can be issued to
individuals ,corporations, companies, trusts, associations & can be issued to
NRIs also but on non-repatriable basis.
Period
:
Minimum 15 Days, maximum 1 year.
Amount
:
Minimum Rs. 5 lacs and in multiple of
Rs. 1 lacs.
Ceiling on Issue
:
Banks can now issue any amount of CD.
Lock-in Period
:
14 days from the date of issue.
Reserve Requirement
:
Like other deposits
Stamping
:
As applicable to usance PN.
m) No loan can be granted against CD.
n) DFHI provides secondary market for CD.
o) On due date pay order should be prepared an exchanged with the
certificate when presented for payment of maturity value.
Commercial Paper (CP)
CPs are unsecured, usance promissory Notes transferable by endorsement
and delivery.
Eligibility : Companies satisfying following eligibility criteria can alone
issue CPs
Tangible Net worth - Minimum Rs. 4 Crores.

Fund based W.C


facility enjoyed
Credit Rating

- Minimum Rs. 4 Crores or higher.

-Minimum Credit Rating P2 from CRISL


A2 from ICRA, PR2 from CARE D2 from Fitch India
Account Status
Standard Asset
Current Ratio
1.33:1
Period of C.P
- Three months to less than 1 year
Maximum Amount of Issue a)For a company having MPBF of Rs. 20 Cr.
and above 100% of their C/C limit.
b)For company having MPBF of Rs. 10 cr
and above but less than Rs. 20 CR 75%
of C/C Limit.
Minimum Amount
- Rs. 5 lacs and multiples of thereof.
Maturity
- A minimum of 15 days and a maximum upto one
year.
Limits and Amount
CP can be issued as a stand alone product.
Banks and Fis will have the flexibility to fix working
capital limits duly taking into account the resource
patterns of companies financing including CPs.
Issuing & Paying Agent - Only a scheduled bank can act as an IPA.
Investment in CP
- CP may be held by individuals, banks, corporates,
unincorporated bodies, NRIs and FIIs.
Mode of Issuance
- CP can be issued as a promissory note or in a
dematerialised form, Underwriting, not permitted.
Dematerialised Holding
Banks, Financial Institutions (FIs), PDs and
Satellite Dealers (SDs) are now permitted to make
fresh investments and hold CP only in
dematerialised form, effective June 30, 2001
Derivative Usance Promissory Note (DUPN)
In order to avoid physical delivery of bills to the rediscounting institutions, RBI
has permitted banks to generate DUPNs, on the strength of commercial bills
held by them. DUPNs, are exempted from payment of advalorem stamp duty.
Banks get these DUPNs rediscounted with DFHI the DFHI in turn sells these
DUPNs to other investors interested in such investment.
Discount and Finance House of India (DFHL)
The main share holders of this institution are RBI, Public Sector Banks,
and Financial Institutions.
The main objective of DFHI is to develop an active Secondary Market for
the money market instrument. It purchases and sells Treasury Bills, CDs
and CPs. It rediscounts commercial bills.
It borrows and lends call money on behalf of banks.

CREDIT RATING
Credit rating indicating, in a summarized form, through symbol or letter the
relative safety of timely payment of interest and principal of the debt
instrument of a borrowing company.
Credit Rating Agencies in India:
Presently there are five rating agencies in India i.e. CRISIL, ICRA, CARE, UTI
Credit Rating and DCR India Ltd.
CRISIL (Credit Rating Information Services of India Ltd.) :
Promoted by ICICI, UTI and other financial institutions and banks.
CRISII's Rating Symbols and their meanings :
Debentures : AAA Highest safety, AA-High safety, A-Adequate safety, BBBModerate safety, BB-Inadequate safety, B-High Risk, C-Default
Fixed
Deposits
:
FAAAHighest
Safety;
FA-Adequate safety, FC-High Risk; FD-Default.

FAA-High

Safety;

Commercial Papers : P1-Highest safety, P2-High Safety, P3-Adequate


safety, P4 Inadequate safety, P5-Default.
Note : CRISIL utilises + (plus) or (minus) signs for reflecting comparative
standing within the category.
ICRA (Investment Information and Credit Rating Agency of India Ltd.):
Promoted by IFCI, UTI and other financial institutions and banks.
ICRA's Rating Symbols and their meanings :
Debentures & preference shares (Long Term Debts) : LAAA-Highest
Safety; LAA-High Safety; LA-Adequate safety, LBBB-Moderate safety; LBBInadequate safety; LB-Risk prone, LC-Substantial risk; LD-default.
CARE (Credit Analysis & Research Ltd.) :
Promoted by IDBI
UTI Credit Rating Ltd. :
Promoted by UTI
FITCH RATINGS INDIA Pvt. Ltd :
A foreign company permitted by RBI to rate commercial papers.

CREDIT MONITORING ARRANGEMENT (CMA)


The Reserve Bank of India introduced the Credit Authorisation Scheme in
1975, to exercise control over bank credit, to ensure proper appraisal of
needs and utilisation of credit in accordance with the national policies and
priorities and that the big borrowers did not pre-empt scarce resources. Banks
were required to obtain prior approval of Reserve Bank of India under Credit
Authorization Scheme CAS) for credit proposals beyond certain specified
limits.
The System of Credit Monitoring Arrangement (CMA) was introduced in
October 1988, consequent to the withdrawal of the Credit Authorisation
Scheme (CAS). Under CMA banks were required to report to RBI credit
facilities sanctioned to large borrowers, i.e. those enjoying term loans
(including Deferred Payment Guarantees) of Rs. 5 crore or above and
working capital limits of Rs. 10 crore or above from the banking system
alongwith the relevant data in the prescribed CMA forms for post sanction
scrutiny.
The objective of reporting under the CMA was to ensure (i) compliance with
the norms relating to lending discipline laid down by RBI so that need-based
credit is sanctioned and preemption of bank credit to large borrowers does not
take place and (ii) to observe if any deviation has taken place from the
guidelines related to consortium lending.
Reporting Credit Sanctions to Reserve Bank of India
The earlier system of reporting under CMA has been discontinued. In order to
have a data base in relation to the flow of bank credit to borrowers in various
industries, banks are required to report new limits additions and reductions to
RBI, in respect of borrowers availing of working capital credit or term loan
(including deferred payment guarantee) limit of Rs. 10 crore or above from the
banking system, on a fortnightly basis.
In respect of borrowers availing of working capital credit or term loan
(including deferred payment guarantee) limit of Rs. 1 crore or above but less
than Rs. 10 crore from the banking system, banks are required to report net
additional credit limits sanctioned, on a monthly basis with industry-wise break
up.

BANKER'S RATIOS
Solvency Ratio

= Total Tangible Assets/Total Outside Liabilities


- Where this ratio is more than one, the unit is solvent

Current Ratio

= Current Assets/Current Liabilities


It means short term solvency of the concern
The ideal Current Ratio 2:1
Tandon Committee prescribed a minimum current ratio
of 1.33:1 under second method of lending.
If the current ratio is less than 1, the unit may be sick
or leading towards sickness.

Quick Ratio

= Current Assets Inventory


Current Liabilities Bank Borrowing
It measures the liquidity position of the concern.
Ideal quick ratio is 1:1

Capital Gearing
Ratio

Fixed Charge Bearing Long Term Funds.


Total Long Term Funds.
It is also known as financial leverage ratio.
A high geared unit can not afford to borrow more.

Debit-Equity
Ratio

Long Term Debts


Tangible Networth.
Higher the ratio, more is the borrowed fund and less
protection to the creditors.
For SSI units this ratio should not exceed 2:1 and for
medium and large units it should not exceed 1.5:1

Gross Profit
Ratio

Gross Profit x 100


Net Sales.
Higher the Gross profit ratio means efficiency in
production.

Operating Profit
Ratio

Operating Profit x 100


Net Sales.
Higher the margin indicates operational efficiency.

Net Profit Ratio

= Gross Profit x 100


Net Sales.
It measures overall profitability.
It may go up due to non-business income.

Return on Net
Worth

= Net Profit after Tax x 100


Tangible Net worth .

It indicates the overall efficiency of the management in


utilising the total fund available for running the
business.
It is very suitable ratio for inter-firm comparison.
Return on
Investment

= Profit before Interest and Tax


Total Tangible Assets.
It determines profitability of assets.

Inventory
Turnover Ratio

= Cost of Sales (cost of goods sold)


Average Inventory.
It indicates the number of times, the inventory is
rotated during the relevant accounting period.
A higher turnover compared to past year indicates
better management of inventory.

Debtors Turnover
Ratio

= Sales
Trade Debtors
It is measured in number, days of month and also
known as Debtors Velocity.
Higher period indicates inefficiency in receivable
management

Creditors
Turnover Ratio

= Purchases
Total Creditors
It is also expressed in number or days or month.
It is also known as creditors velocity.
It is calculated for determining the ability of the firm to
obtain market credit.

Debt-Service
Coverage Ratio

= Net Profit After Tax + Depreciation +Interest on Term


Loan
Annual Installment of Term Loan + Interest on Term
Loan.
The ideal ratio 2:1, however for SSI units or units
located in backward areas minimum DSCR of 1.5:1 is
acceptable.
It is calculated to determine the ability of the firm to
service its debt obligations.

BREAK EVEN POINT


BEP is the amount of sales at which an unit makes no profit or no loss. An unit
can make profit only if its level of sales is above the break even point.
Calculation of BEP
It can be expressed in three ways :
- BEP in Units

= Fixed Cost/Contribution per unit.

- BEP in Rs.

= BEP in Units x Sales Price/Units.

- BEP in Terms
Capacity Utilisation

of = Fixed Cost x Project capacity utilisation at optimum


sales level.
Total Contribution.

Contribution

= - Sales price/Unit Variable cost/Unit

MARGIN OF SAFETY:
Margin of Safety = Actual Sale BEP (Sales)
-

It is the measure of cushion available in the given level of sale. More


the margin of safety, stronger is the unit. Where the margin of safety is
low, the possibility of the unit coming to loss is quite high and banks
avoid financing such units.

USES OF BREAK-EVEN POINT ANALYSIS:


-

To study viability of project (Projects having BEP above 75% of


capacity utilisation should not be accepted for finance).

To decide the optimum product mix. (Products with higher contribution


should be chosen).,

To decide the required level of production in order to attend a desired


level of profit.

CASH- BREAK EVEN POINT


-

It is the point of Sale at which the unit does not incur cash loss or cash
profit. While calculating costs (for calculating this DEP) non cash
expenses like Depreciation are not taken into account.

RBI GUIDELINES FOR ALLOCATION OF


BANK CREDIT
Priority Sector Advances Minimum 40% of total advances.
Agriculture (Direct & Indirect) 18% of Total Advances.
Indirect Agricultural Advances will be taken under agriculture advance
maximum to the extent of 25% of total agricultural lending of 18%.
CD Ratio of Rural & Semi-Urban branches should be minimum 60%.
Advance to weaker sections should be minimum 10% advances
outstanding at the end of the previous year.
Minimum 2/3rd of DRI advances should be given by Rural and SemiUrband branches.
40% of DRI advances to SC/St.
40% of Total SSI Credit for smaller units.
Export Credit should be minimum 10% of Total Advances.
In case of non-achievement of agricultural advance target Schedule
Commercial Banks will have to contribute subject to maximum of 1.5% of
net towards Rural Infrastructure Development Fund of NABARD at
interest of 0.5% point above the maximum permissible rate on term
deposit.
Consortium of banks with SBI as leader will lend Rs.1000 Crores to KVIC
which will be guaranteed by the Government and the interest rate will be
1.5% below prime lending rate of five major banks in the consortium.
Priority sector target for foreign banks at least 32% of their Net Bank
Credit.
In case of foreign banks Export Credit will be considered as priority sector
advance.
Their export credit and SSI advance in each case should be at least 10%
of Net Bank Credit.
In case of shortfall, the foreign banks will have to make it good by placing
the amount as one year deposit will SIDBI which will carry interest @
10%.
Scheduled Commercial Banks are required to Allocate 3% of their
incremental deposit of the previous year towards housing finance.
2% of the net credit should be given to women beneficiary & raise it to 5%
over the next 5 years.

VARIOUS SEGMENTS OF PRIORITY SECTOR


Agriculture
Direct and Indirect
Small Scale Industries
a) Direct SSI, Ancillary Units, Village & Cottage Industries, Tiny Industries &
SSSBEs.
b) Indirect finance to SSI.
Small Road Transport Operators
Those owning not more than 6 vehicles including one vehicle to be financed.
Retail Trade
a) Dealers in essential commodities (Fare price shops).
b) Consumer Cooperative Stores &
c) Other private retail traders with Credit limit not exceeding Rs.5 lacs.
Small Business
Whose original cost price of equipments does not exceed Rs.10 lacs and
Working Capital Finance does not exceed Rs.5 lacs.
Professional & Self Employed Persons
Professionals having total credit limit not exceeding Rs.5 lacs out of which
Working Capital Finance not exceeding Rs.1 lac . In case of doctors setting
up practices in Rural & Semi-Urbans areas ceiling fixed is Rs.10 lacs with
sub-ceiling of Rs.2 lacs (including one vehicle finance).
Housing
a) Direct finance upto Rs.5 lacs (Rs. 10 lacs in Urban and Metros) for
construction/purchase of houses to individuals and loan upto Rs.50,000 for
repair of houses for individual.
b) Indirect finance given to Govt. agencies for construction of houses or
rehabilitation of slum dwellers where loan component per individual does not
exceed Rs.5 lacs.
Education
Loan granted to a student for Higher studies.
Consumption loan
To weaker sections upto prescribed limit.
Self Help Group
Refinance provided by the sponsoring banks to RRBs
50% of such refinance to be treated as indirect Agricultural finance while 40%
as advance to weaker sections.
Term Finance/Line of Credit provided to State Industrial Development
Corporations and State Financial Corporations
To the extent granted for SSI units will be treated as priority sector (only fresh
disbursement made after 9.11.94 and the outstanding in them will be taken
into consideration for this purpose).
Weaker Sections
Small/Marginal Farmers, Landless labourers, Tenant Farmers & Share
Croppers. SC/ST beneficiaries. DRI beneficiaries.
Beneficiaries under IRDP, SUME, PMI UPEP, SJSRY, SGSY,
Advances made under SLRS Scheme.
Advance made to SELF-HELP GROUP.
Artisans, Village and Cottage Industries - Credit Limit upto Rs.25,000.

Eligible PMRY account.


.

KAPUR PANEL : SPECIAL SSI FUND

The S.L. Kapur Committee on the working of credit delivery system for small
scale industries (SSI) has recommended that SSIs should be granted no
objection of collateral securities for loans up to Rs. 2 lakh, the setting up of a
collateral reserve fund to provide support to first generation of entrepreneurs
who find it difficult to furnish collateral securities or third party guarantees and
the setting up of Small Industries Infrastructure Development Fund for
developing industrial areas in and around metropolitan areas and a change in
the definition of sick SSIs.
The committee has also suggested special treatment to smaller among small
industries, the removal of procedural difficulties in the path of SSI advances,
sorting out of issues relating to mortgage of land, including removal of stamp
duty and permitting equitable mortgages, and special access to low-cost
funds to Small Industries Development Bank of India (SIDBI) for refinancing
SSI loans.
The committee has also called for statutory powers to state-level interinstitutional committees, setting up of a separate guarantee organisation and
opening of additional 1,000 specialised branches.
The committee has called for 20 per cent additional ad hoc limits to SSIs from
banks and setting up of a reconstruction fund with initiative and initial corpus
from the government and the RBI to enable branch managers to provide, if
necessary, initial corpus money for such additional facilities, earmarking at
least 40, per cent of SIDBI resources of the tiny sector, close cooperation
between SFCs and public sector banks for jointly providing term loans and
working capital limits to SSIs. It has also called on NABARD to set up a fund
similar to the National Equity Fund.
The panel has also suggested that SIDBI should set up a few software
venture capital funds immediately.
The group has also suggested that some recommendation made by the Khan
Committee regarding restructuring of weaker SFCs may be taken up for
prompt decisions by the government. SIDBI should be helped through
provision of funds to take up a plan for financial restructuring of these bodies.
State governments, because of their poor financial position, may not be able
to fund the restructuring of SFCs. State governments share should either be
substituted and provided by SIDBI or by the government.

CREDIT GUARANTEE FUND TRUST SCHEME FOR


SMALL INDUSTRIES
Title

Credit Guarantee Fund (Scheme) for Small Industries (CGFSI)


2000
Nodal
Credit Guarantee Fund Trust for Small Industries set up by the
Agency
GOI & SIDBI
Effective
Credit facilities extended by the lending institutions w.e.f. June 1,
date
2000.
Extent of
Credit to a single eligible borrower not exceeding Rs.25 lacs
Loan
(interest charged not more than 3% over PLR) by way of Term
coverage
Loan and/or fund based working capital facilities on or after
entering into an agreement with the Trust to the manufacturing SSI
units including I.T. and Software Industries without any collateral
security and/or third party guarantee.
The provisions of the scheme shall be applicable to or in relation
to all credit facilities eligible for guarantee under the scheme.
Guarantee 75% of the defaulted principal amount in respect of Term Loan
Cover
and/or outstanding fund based working capital inclusive of interest
(when account becomes NPA or as on date of filing suit whichever
is earlier), subject to maximum of Rs.18.75 lac per borrower.
Lock
in 24 months from either the date of last disbursement or the date of
period
payment of guarantee fee, whichever is later.
Coverage
Repayment Period of Term Loan or for a period of 5 years where
Tenure
working capital facilities alone are extended.
Guarantee A one time Guarantee Fee @ 2.5% of the credit facility sanctioned
Fee
(comprising Term Loan and/or fund based working capital facility
such as CC, OD, bills purchased or discounted etc.) shall be paid
upfront to the Trust, provided that the lending institution applies for
a guarantee cover within a period of 90 days from the date of first
disbursement. The amount equivalent to the guarantee fee and/or
the service fee may be recovered by the financing institution at its
discretion from the eligible borrowers.
Service fee The annual service fee @ 1% per annum on the outstanding
amount to the debit of the borrower's account covered under the
scheme as on March 31 of each year.
Recoveries The lending institution recovers money subsequent to the recovery
proceedings initiated by it, the same shall be deposited by the
lending institution with the Trust after adjusting towards the cost
incurred by it for recovery of the amount (within 30 days failing
which penal interest @ 4% OBR shall be charged from 31 st day).
Invocation The aggregate credit extended by all the lending institution does
not exceed Rs.25 lacs. Lock in period 24 months. Classified as
NPA. Loan facility has been recalled and recovery proceedings
have been initiated under due process of law. Obtention of prior
permission of the Trust before entering into any compromise or
agreement with the borrower or any other party which may have
effect on discharge of assets.

SELF HELP GROUPS (SHGs)


A Self Help Group is a homogeneous affinity group of micro entrepreneurs
voluntarily formed to save whatever amount they can conveniently save out of
their earnings and mutually agree to contribute to a common fund of the group
from which small loans are given to the members for meeting their productive
and emergent credit needs at such rate of interest, period of loan and other
terms which the group may decide.
Objectives

To evolve supplementary strategy for meeting the credit


needs of the poor by combining flexibility, sensitivity and
responsiveness of the informal credit system with the
strength of technical and administrative capabilities and
financial resources of the formal credit institutions;
To build up mutual trust and confidence between the
bankers and the rural poor.
To encourage banking activity both on thrift as well as
credit side in a segment of the population that the formal
financial institutions usually find difficult to cover.

Characteristics
of a SHG

The membership of a Group may be generally 10 to 20.


However, under SGSY Scheme, a group of 5 persons
can be formed for the purpose of Minor irrigation and in
the case of disabled persons.
The Group should devise a code of conduct bylaws to
bind themselves.
Internal saving mobilised by its members is the core of
SHG.
The Group to decide the amount to be saved, its
periodicity and the purposes for which loan can be given
to members.
The Group decides the rate of interest
paid/charged on savings/credit to members.

to

be

The Group should maintain simple basic records such


as Minute Book, Membership Register, saving and
Credit Registers.
The Group to open a Savings Bank Account with the

bank.
Organising
SHG

Selection
Criteria
linkage

SHGs may be organised in clusters of blocks or districts


either by reputed voluntary agencies/NGOs and/or at the
initiative of Branch Managers of Commercial Banks, Cooperatives and Regional Rural Banks.
The group should have been in active existence for
for
alteast a period of six months.
The group should have successfully undertaken savings
and credit operations from its own resources.
Democratic working of the group wherein all members
feel that they have a say should be evident.
The group should maintain proper accounts/records.
The Branch Manager should be convinced that the
group has not come into existence only for the sake of
participation in the project and availing benefits
thereunder.
The SHG members should preferably have homogenous
background and interest.
The interest of the NGO or the self-help promoting
institutions (SHPI) concerned, if any, in the group should
be evident and the agency should help the SHG by way
of training and other support for skill upgradation and
proper functioning.

LINKAGE
Programme

Bank will provide credit in bulk directly to the group only,


which may be informal or formal. The group in turn would
undertake lending to members. The bank may also finance
groups through voluntary agencies (NGOs) who have
promoted the Self Help Groups.

Extent of Loan

The proportion of savings to the loan could vary from 1:1 to


1:4 depending on the assessment of the SHG by the Bank.

Security

Inter Se Agreement by all members.


Articles of Agreement by authorised members.

Repayment

Loans from the Bank to SHGs could be repaid normally in


regular monthly instalments or as determined at the time of
loaning based on local conditions activities undertaken by

members etc.
Loans from SHGs to members, could be repaid
inappropriate instalements which may be daily, weekly or
market days fortnightly, monthly etc.

BANKING OMBUDSMAN SCHEME


The object of the Scheme is to enable resolution of complaints relating to
provision of banking services and to facilitate the satisfaction, or settlement of
such complaints.
The Reserve Bank is authorised appoint one or more persons to be known as
Banking Ombudsman to carry out the functions entrusted to him by or under
the scheme.
PROCEDURE FOR REDRESSAL OF GRIEVANCE
COMPLAINT
1. Any person who has a grievance against a bank, may himself or
through an authorised representative make a complaint in writing to the
Banking Ombudsman within whose jurisdiction the branch or office of
the bank complained against is located.
2. No complaint to the Banking Ombudsman shall lie unless
a. The complainant had before making a complaint to the Banking
Ombudsman made a written representation to the bank named in the
complaint and either the bank had rejected the complaint or the
complainant had not received any reply within a period of two months
after the bank concerned received his representation or the
complainant is not satisfied with the reply given to him by the bank.
b. The complaints made not later than one year after the bank had
rejected the representation or sent its final reply on the representation
of the complainant.
c. The complaint is not in respect of the some subject matter, which was
settled through the office of the Banking Ombudsman in any previous
proceedings whether received from the same complainant or any one
or more of the parties concerned with the subject matter.
d. The complaint is not the same subject matter, for which any
proceedings before any court, tribunal or arbitrator or any other forum
is pending or a decree or Award or order of dismissal has already been
passed by any such court, tribunal, arbitrator or forum.
e. The complaint is not frivolous or vexatious in nature.
SETTLEMENT OF COMPLAINT BY AGREEMENT
1. As soon as it may be practicable so to do the Banking Ombudsman
shall cause a notice of the receipt of any complaint along with a copy of
the complaint to the branch or office of the bank named in the
complaint and endeavour to promote a settlement of the complaint by
agreement between the complainant and the bank named in the
complaint through conciliation or mediation.

2. For the purpose of promoting a settlement of the complaint, the


Banking Ombudsman may follow such procedure as he may consider
appropriate and he shall not be bound by any legal rule of evidence.
RECOMMENDATION FOR SETTLEMENT
If a complaint is not settled by agreement within a period of one month from
the date of receipt of the complaint or such further period as he may consider
necessary, the Banking Ombudsman may make a recommendation by
reference to what is, in his opinion, fair in all the circumstances. Copies of the
recommendation shall be sent to the complainant and the bank concerned.
The recommendation by the Banking Ombudsman shall be open to
acceptance by the complainant only if he accepts all terms of the
recommendation in full and final settlement of his claim against the bank
and he shall, if he accepts the recommendation, within two weeks from the
date of receipt of the recommendation sends his acceptance in writing
stating clearly that he is prepared to accept a settlement in terms of the
recommendation in full and final settlement of his complaint.
The bank shall, if the recommendation is acceptable to it, comply with the
terms of the recommendation immediately on receipt of acceptance of the
terms by the complainant and inform the Banking Ombudsman of the
settlement in terms of his recommendation. If the recommendation is not
acceptable to the bank, it shall inform the Banking Ombudsman within a
period of two weeks.
AWARD BY THE BANKING OMBUDSMAN
1. Where the complaint is not settled by agreement or recommendation
as provided in clause 18 or 19 as the case may be, within a period of
two months from the date of receipt of the complaint or such extended
date as may be considered necessary by him, the Banking
Ombudsman shall inform the parties of his intention to pass an Award.
2. It shall be open to the parties to submit any further representations or
evidence in support of their case within a period of 15 days from the
date of notice referred to in sub- clause (1).
3. The Banking Ombudsman shall pass an Award after affording the
parties reasonable opportunity to present their case. He shall be
guided by the evidence placed before him by the parties, the principles
of banking law and practice, directions, instructions and guidelines
issued by the Reserve Bank from time to time and such other factors
which in his opinion are necessary in the interest of justice.
4. An Award shall be in writing and shall state the direction/s, if any, to the
bank for specific performance of its obligations and the amount
awarded to the complainant by way of compensation for the loss
suffered by him along with a summary of the reasons for making the
award, provided that the Banking Ombudsman shall not award any
compensation in excess of that which is necessary to cover the loss
suffered by the complainant as a direct consequence of the
commission or omission of the bank, or for an amount exceeding
rupees ten lakhs, whichever is lower.
5. A copy of the award shall be sent to the complainant and the bank
named in the complaint.

6. An Award shall not be binding on a bank against which it is passed


unless the complainant furnishes to it, within a period of one month
from the date of the Award, a letter of acceptance of the award in full
and final settlement of his claim in the matter. Within fifteen days from
the date of receipt by it, of the acceptance in writing of the Award by
the complainant the bank shall comply with the Award and intimate the
compliance to the Banking Ombudsman.

DEBT RECOVERY TRIBUNAL


'The Recovery of Debts due to banks and Financial Institution ACT 1993"
came in force w.e.f. 24.6.93 forspeedy recovery of debts as recommended by
Narasismham Committee.
This Act is applicable only in respect of debts with outstanding of Rs. 10 lacs
and more. The Central Govt. has established DRTs at 4 metros, Hyderabad,
Bangalore, Ahmedabad, Jabalpur, Guahati, Jaipur and Patna and other
important centres. No court will have authority to hear the cases which fall
within the jurisdiction of the tribunal. All existing pending cases which come
within the jurisdiction of the Tribunal will also stand transferred after
establishment of the Tribunal. All existing pending cases which come within
the jurisdiction of the Tribunal will also stand transferred after establishment of
the Tribunal.
The Tribunal is expected to dispose of the application within 6 months of its
receipts.
WHO CAN AVAIL THE SERVICES:
All banking companies and corresponding new banks as defined in section 5
of the Banking Regulation Act 1949. SBI and its associates, RRBs and public
financial institutions within the meaning of Section 4-A of the Companies Act
1956 shall, benefit by the special provisions of the Act. The Central Govt. is
empowered to make additions to this list, by issuing a notification in the official
Gazette.
PROCEDURE/RULES FOR FILING OF APPLICATION IN DRT
a.

Application should be presented to the Registrar of DRT under


whose jurisdiction the bank or FI is covered.

b.

Application in a set of four should be submitted in the


prescribed form in a paper book form.

c.

Application should be accompanied with application fee of


Rs.12000 for debt claim of Rs.10 lac and Rs.12000 + Rs.1000
for every Rs.1 lac in excess of Rs.10 lac subject to amaximum
fee of Rs.1,50,000.

d.

Application should provide details of debt due and


circumstances under which it became due, all documents to be
relied up, index of documents.

APPEALS:
The order passed by the Tribunal will be appealable to the Appellate Tribunal
but no appeal shall be entertained by the Appellate Tribunal unless the
appellant deposits 75% of the amount of debt due from him as determined by
the Tribunal. The Appellate Authority may, for reasons to be recorded in
writing, waive or reduce the amount of such deposit.

CORPORATE DEBT RESTRUCTURING


The Reserve Bank of India has finalized a corporate debt restructuring (CDR)
schemes based on the extensive discussions the Government of India and
the Bank had with banks and financial institutions. The CDR scheme is to be
implemented by all commercial banks, excluding regional rural banks (RRBs)
and local area banks (LABs).
CDR will be a non-statutory, voluntary system based on debtor-creditor
agreement and inter-creditor agreement. It will be applicable to only standard
and sub-standard accounts. The objective of the scheme is to ensure a timely
and transparent mechanism for restructuring of corporate debts of viable
corporate entities affected by internal or external factors. Such entities should
be outside the purview of Board for industrial and Financial Restructuring
(BIFR), Debt Recovery Tribunal (DRT) and other legal proceedings. The
scheme
would
be
applicable
only
to
multiple
banking
accounts/syndicates/consortium accounts with outstanding exposure of Rs.20
crore and above with the banks and financial institutions.
All standard and sub-standard accounts subjected to the CDR process would
continue to be eligible for fresh financing of funding requirements by the
lenders as per their normal policy parameters and eligibility criteria.
There would be no requirement of the account / company being sick, nonperforming assets (NPA) or being in default for a specified period before
reference to the CDR Group. However, potentially viable cases of NPAs will
get priority. In no case, the requests of any corporate indulging in willful
default or misfeasance will be considered for restructuring under CDR.
STRUCTURAL FRAMEWORK
The CDR scheme will have a three-tier structure consisting of CDR Standing
Forum, CDR Empowered Group and CDR Cell. The viability and rehabilitation
potential of the corporate would be examined by the CDR empowered group
constituted to consider individual cases of corporate debt restructuring.
This group will also approve the restructuring package. The banks
representatives in the empowered group should be senior level executives
with authorisations from their boards to make commitments on behalf of the
banks towards debt restructuring.
The standing forum will lay down policies and guidelines and guide and
monitor the progress of CDR. The standing form will be assisted by a CDR
core group in conducting the meetings and taking decisions relating to policy.
Individual cases of CDR will be decided by a CDR empowered group. This

group would be mandated to look into each case of debt restructuring,


examine the viability and rehabilitation potential of the company and approve
the restructuring package within a specified time frame of 90 days or at best
180 days of reference to the empowered group . The CDR standing forum
and the CDR empowered group will be assisted by a CDR standing forum and
the CDR empowered group will be assisted by a CDR cell in all their
functions. The CDR cell will make the initial scrutiny of the proposals received
from borrowers / lenders by calling for proposed rehabilitation plan and other
information and put up the matter before the CDR empowered group within
one moth to decide whether rehabilitation is prima facie feasible if so, the
CDR cell will proceed to prepare detailed rehabilitation plan with the help of
lenders and, if necessary, experts to be engaged from outside. If not feasible,
the lenders may start recovery of dues. The scheme has also detailed
accounting treatment of accounts restructured under CDR.

If such security interest is registered under the central computerised


registry in the event of default, secured creditors would have a right to take
possession of the securities after giving notice of 90 days and sell the
securities for recovery of the loan.

Provision has been made for appointing a receiver after taking possession
of the securities pending their sale.

If there is any resistance from the borrower in handing over possession,


the secured creditor can approach the Chief Magistrate for assistance in
taking possession.

Any appeal against the action of the bank/financial institution in taking


possession of securities can be filed before the Debt Recovery Tribunal
after the sale of securities. In other words, the borrowers cannot object to
conversion of securities by sale into money.

Since the bill seeks to give drastic powers to the banks and financial
institutions, it also provides for the rights of the borrowers. It provides that
the borrowers should get a copy of the security agreement and periodical
statements of accounts with rates of interest charged.

Except in case of English mortgage, under the provisions of the Transfer of


Property Act, mortgagees do not have power to sell the mortgaged
property without the intervention of court. The draft law recognises all
kinds of mortgages, including mortgage by deposit of title deeds, as a
security interest. It provides for registration of notice of such mortgage with
the central computerised registry. By virtue of these provisions, banks and
financial institutions would have power to take possession of mortgaged
properties and sell them after following the procedure prescribed by the
proposed law.

A provision has also been made for the purpose of registration of existing
security interests under the proposed law within a period of six months.

The bill has suggested that the new computerised central registry system
should be operated concurrently with existing registration systems under

the Registration Act, Companies Act, Motor Vehicles Act, Merchant


Shipping Act, etc.

BOARD FOR FINANCIAL SUPERVISION (BFS)

The BFC has been set up by RBI. The Governor RBI is the Chairman and one
the Dy. Governors of the RBI is full-time Vice-Chairman. The Board is assisted
by the Department of Supervision (DOS) of RBI.
The main function of the Board is to strengthen, supervision and surveillance
over the financial system which includes banks, FIs, NBFIs and Para Banking
Financial Institutions. The supervision will be both on site (ie. inspection) and
off-site (i.e. calling for reports and returns) to supervise and monitor the
financial system. For off site supervision, RBI has introduced 7 types of DSB
(Department of Supervision for Banks) return i.e.:
DSB Return NO 1 on Assets, Liabilities, Capital & Reserves and off Balance
Sheet exposures DSB II: Regarding "Capital Adequacy". DSB III: Quarterly
operating Result Statement; DSB-IV: Return on Asset Quality; DSB-V: Report
of Large Credits of the bank and top ten credit exposures; DSB- VI: Report on
Connected Lending and DSB Return- VII: Report on " Ownership and control".

RECOMMENDATIONS OF VARIOUS COMMITTEES


ON FINANCIAL SYSTEM
1. All India Rural Credit Review Committee (Under the Chairmanship of
Mr, Venkatappaiah)
Recommended for:
Setting up of SFDA &MFAL. These agencies were set up in the year
1969-70. In course of time these agencies were merged and renamed
as DRDA.
Social control over Commercial Banks in 1968.
2. National Credit Councils
(Under the Chairmanship of Prof. D.R. Gadgil, 1967)
Recommended for:
The adoption of "area approach" for development of credit and banking in
the country on the basis of local conditions.
3. A committee of bankers under the Chairmanship of Shri F. K. F Nariman
Appointed by RBI. Recommended for lead bank Scheme towards the end
of 1969.
4. National commission on Agriculture (1971)
Recommended of Formation of Farmers' Service Society.
5. Study (Bawa) Team (1971)
Appointed by the Govt. of India, recommended for Formation of LAMPS
in tribal areas, for providing under a single roof all types of credit including
social obligation and consumer requisite
6. Working Group under the Chairmanship of Dr. K.S. Krishnaswami,
the then Deputy Governor of RBI (1980)
Defined 'Weaker Section' under the priority sector.
Suggest for sub-target for Weaker section and
Mobilisation for implementation of 20 Point programmes.

7. Working Group under the Chairmanship of Shri Amitab Ghosh, the


then Deputy Governor, Reserve Bank of India (1983)
Recommended for:
Modification in the definition of priority sectors and composition of
Weaker Section.
Banks should aim at increasing the "Weaker Section". Advance not
less than 25% of total priority sector.
40% Target for Priority Sector total Bank Credit by March, 1985.
16% direct Agricultural advance to Total Credit.
8. Committee to Review Arrangements for Institutional Credit for
Agriculture & Rural Development (CRAFI CARD) (1979
(Under the Chairmanship of Mr. B. Sivaraman)
Recommended for :
Establishment of NABARD as an apex institution for rural credit.
9. Standing Committee on Agricultural Loans through Commercial Bank
(CALCOB) (1979)
Recommended for :
Various measures to improve the recovery performance of
Commercial banks.
10. R.G. Saraiva Committee (1972)
Recommended for :
Creation of Rural Banks to satisfy rural credit needs. This was not
accepted by the Government of India in toto .
11. Working Group under the Chairmanship of Shri M. Narsimhan (1975)
Recommended for :
Setting up of RRBs. Based on the recommendation the Government
of India promulgated the RRB ordinance on 26.9.75 which was
replaced by RRB Act 1976. The first set of 6 RRBs were set up on
2.10.75.
12. Dahejia Committee (1968)
Recommended that :
The Banking system should resort to financing on the basis of a total
study of the borrower's operation rather than security consideration.
13. Tandon Committee (1974)
Recommendation given by the Committee can be grouped into four
categories.
i) Norms for holding inventory & receivable :
Now substantially charged by Reserve Bank of India.
ii) Methods of lending :
Out of the three methods, RBI accepted only two.
First Method of Lending :
As per Method I, the borrower is required to bring minimum NWC to the
extent of 25% of Working Capital Gap. The balance will be MPBF.
Second Method of lending :
Under this method the borrower should bring minimum NWC to the extent
of 25% of the Total Current Assets and the balance will be MPBF.

The applicability of different methods of lending has under gone


substantial change after vaz committee recommendation.
i) Style of Credit :
Bifurcation of Cash Credit Limit &
Bill Finance.
ii) Follow up & Control :
Annual Review of accounts of borrowers enjoying fund based Working
Capital Limit of Rs. 10 lacs and above.
Quarterly Budgeting System through quarterly operating statement.
(Now replaced by QIS)
14) Chore Committee (1979)
Appointed by RBI to have review of the Cash Credit System of lending in
all respects, whose recommendations are as under :
i)Norms for inventory & receivables :
ii)As per Tandon Committee.
Method of lending :
All new units availing FBWCL of Rs.10 lacs and above and existing units
enjoying FBWCL of Rs. 50 lacs and above to brought under IInd method
of lending (This guideline has since changed).
Working Capital Term Loan for financing shortfall in NWC due to shifting
to IInd method.
ii) Style of Credit :
Recommended for continuation of the 3 major styles viz-Cash Credit,
Demand Loan and Bill Finance.
There should be a separate limit for peak and non-peak level
requirement.
iii) Bill Culture :
Advocated strongly in favour of Bill system of financing.
Introduction of DRAWEE BILL System of financing.
Minimum Drawee Bill limit should be 50% of the limit sanctioned for Raw
materials in case of borrowers enjoying FBWCL of Rs.50 lacs and above
(RBI guidelines 25% Drawee Bill finance for all CMA Acs).
15. Nayak Committee (1992)
(Under the Chairmanship of Shri P.R. Nayak)
Recommended :
i) A new method for assessment of Working Capital for SSI Units
On the basis of minimum 25% of the out put value of the projected turn
over (for the Credit Limits now upto Rs.1 crore from the Banking
System).
ii) Single Window Scheme for SSI upto Term Loans of Rs.20 lacs and
Working Capital of Rs.10 lacs.
iii) Annual Budget for SSI at Bank and branch level.
iv)
More emphasis on finance to Vill. & Cott. Industries, Artisans, Tiny
& SSSBE
v) New Definition for sick SSI Units.
16) I.T. Vaz Committee(1993)
Recommendations :
Henceforth the banks would decide the maximum levels of holding of
each item of inventory & receivables for build-up of current assets that

could be supported by bank finance. While exercising such judgement,


banks should take into account the production/processing cycle of that
industry, seasonality in availability of raw materials as well as seasonality
in the sale of finished products.
However, RBI would continue to advise banks the overall levels of
inventory for their guideline, which may be used by banks as broad
indicators.
Maintaining inventory and receivables as per norms will be applicable
only to borrowing units with aggregate fund based credit limits of Rupees
One crore and above from the banking system.
For units availing working capital limits of Rs.1 crore and above. Second
method of lending will be applicable.
First Method lending will be applicable only for Sick /Weak units under
rehabilitation.
Agencies marketing exclusively the products of SSI units (provided the
agency settles the dues of the SSI suppliers within a maximum period of
thirty days).
For Units availing Working Capital limits less than rupees one crore and
SSI Units upto Rs. 4 crore, bank should finance working capital limits
minimum to the extent of 20% of their Projected Annual Turn Over.
17)RASHID JILANI COMMITTEE : Suggested alternate method of lending for
Working Capital in place of Cash Credit. Demand loan system be
introduced for delivery of Bank credit to be known as Working Capital
Demand Loan (WCDL).
Cut off Points :
In case of Cash Credit. Demand loan system be introduced for delivery of
Bank credit to be known as Working Capital Demand Loan (WCDL).
Cut off Points :
i) Borrower availing MPBF of Rs. 20 crores and above, minimum 80%
Demand Loan and Maximum 20% Cash Credit.
ii) Borrowers availing MPBF of Rs. 10 crores and above, and less than
Rs. 20 crores also, minimum 80% Demand loan and Maximum 20%
Cash Credit.
iii) For borrower availing MPBF less then Rs. 10 crores, Demand Loan
may be granted if the borrowers agree.
Repayment of Demand Loan :
For Seasonal Industries minimum six months and for other industries
minimum one year repayable by way of a BULLET or BALOON
method.
18. Laximinarayan Committee (1974)
Suggested rules for consortium finance. But the guidelines failed to
discipline the banks.
19. Madhavan Committee (1982)

20.
21.

22.
23.

24.

Recommended :
Single window concept under consortium lending.
Nine model documents as now suggested by RBI including Joint Deed of
Hypothecation & Inter se Agreement.
J.V. Setty Committee
Recommended that, Banks in India may be allowed to provide loan on
SYNDICATION BASIS as an alternate to consortium lending.
R. Tiwari Committee (1984)
Recommended
Measures to deal with the sickness of the Industrial Companies.
Formation of SICA 1985
Formation of BIFR & AAIFR
Definition of SICK Industrial Units
G. Sunderam Committee
Committee on structure of Export Credit.
Sodhani Committee (1995)
Recommended
Liberlisation of Foreign Exchange Business.
Exports be allowed to retain 100% of Forex earning.
Foreign Exchange clearing house to be set up.
Banks be allowed to lend & borrow Short Term Nostro funds.
Companies be allowed to book forward contract without formal document
etc.
First Narsimhan Committee (1991)
Recommended
Restructuring of the banking and financial system.
Prudential Accounting Norms.
Setting up of Debt Recovery Tribunal.
Reduction in Reserve Requirements.
Deregulation of interest rates.
Capital Adequacy Norms.
Re-defining the priority sector and reduction of target.
Setting up of SEBI.
Closure of CCI office.
Opening up of Capital Market for foreign portfolio investment.
Computerisation.

25. Rangarajan Committee


Recommended for Computerisation in the banking Industry.
26. Vagul Committee (1987)
Recommended
To provide equilibrium in the short term money market
Freeing Inter Bank Interest Rates
Introduction of Commercial Papers, Factoring, IBPC etc.
27. Kalyan Sundaram Committee (1988)
Recommended Factoring services in India, its modalities & legislative
provisions.

28. Sukhmoy Chakraborty Committee (1985)


Recommended for
Revision in yield on securities.
Price competition between Banks.
Removal of ceiling in the call money market.
29. S.S. Dave Committee (Study Group on Mutual Funds)
Recommended for
Specialised Fund Management Companies.
Close & Open ended funds and their functions.
30. G.S. Patel Committee (1986) (On Organisation and Management of
Stock Exchange)
Rationalisation of Rates.
Listing requirements.
Code of conduct.
Creation of Customer's Protection Fund.
Insurance cover for brokers.
Uniform model for stock exchanges.
31. Pharwani Committee (1991)
Recommended for setting up of National Stock Exchange (NSE).
32. Working Group of Financial Companies (Dr. A.C. Shah, 1992)
Recommended compulsory of registration of all deposits taking
companies.
Capital Adequacy of 8% and other parameter for liquidity, operations &
exposures.
33. Committee on PSU Disinvestment (C. Rangarajan 1992)
Recommendations :
Upto 49% disinvestment in industries be reserved for PSUs.
Preferential offers to employees.
Disinvestment should be spread over number of years.
Method for valuation of PSU.
34. Committee on Fiscal Reforms (Raja J. Chelliah) (1992)
Recommendations :
Focus on uniform corporate tax.
Personal tax to be made wider to include fringe benefits.
Withdrawal of Govt's power to grant customs and excise exemptions.
Taxation should be made income elastic instead of being source of
additional revenue.
Tax authorities should not have quasi Judicial powers.
Various tax reforms.
35 Committee on Industrial Sickness and Corporate Restructuring
(Dr. Omkar Ghosh 1993)
Recommendations :
Setting up of 5 fast track winding up Tribunals in four metros and
Bangalore to reduce delay in winding up.
Introduction of Summary proceedings.

Revamping of BIFR and more power to BIFR.


Removal of State Govt's approval for winding up of units.
FERA should be excluded from SICA etc.
36. Dr. P.D. Ojha Committee on Service Area Approach (1988)
Recommended for service area approach for rural lending.
37. Talwar Committee on Customer Service (1976)
Recommended 176 parameters on customer service.
38. Goiporia Committee on Customer Service
Recommended 97 parameters for improving customer service in Banks
out of which 89 recommendations have already been implemented.
39. Ghosh Committee on Prevention of Frauds in Banks
Recommendations :
Concurrent audit of large/very large branches by external auditors.
Annual internal audit.
Stock inspection without any periodicity.
Bank employees should divulge the details of their accounts in other
branches and banks.
40. NAV Committee (1996) on Mutual Fund
Recommendations :
Close-ended schemes should be listed within 6 months.
Funds should be allowed to re-issue the re-purchase units.
Schemes for investment in money market.
Prohibition on use of lotteries, gifts, early bird incentives to unit holders
etc.
41. Nadkarni Committee Recommendations on Assessment of
Cost of Projects
All financial institutions have agreed to implement the recommendations of
the committee which are related to cost overrun of the projects. The
Committee suggested that while assessing the project cost, possible
escalation in cost on account of inflation during the implementation period
should be provided for.
42. Study Group of IRDP (Mehta Committee)
Recommendations.
On identification of beneficiaries.
Full project cost should be disbursed as loan and the amount the
subsidy should be kept as fixed deposit in the name of borrower to be
adjusted towards last installment.
Preparation of family credit plan for 500 families/Block/year.
Loan should be given for purchase of land also.
Quantum of investment of be revised by NABARD.
Working capital assistance to beneficiaries.
Provision of Training support.
Development of infrastructure.
Institutional support.
Appointment of recovery officer by the State Govt. exclusively of Bank
recovery etc.
43. Shere Committee (1996) (Ms. K.S. Shere, Principal Legal Advisor,

RBI (for operation of Electronic Fund Transfer System in Banks)


Recommendations :
Transfer of funds to any point of the country within 24 hours.
EFTPOS & other card based payments to be introduced.
Banks, Financial Institutions, Govt. & other Institutions approved by RBI to
be admitted as direct participants of EFT system.
Electronic Fund Transfer to be restricted to rupee transactions only.
Nodal agency to administer and operate EFT system.
Part of RBI Act, Bankers' Book of Evidence Act, Negotiable Instruments
Act and Securities (Contract Regulations) Act. should be amended and a
fresh legislation should be drafted.
The Second Narasimham Committee
After 7 years of financial sector reforms, structure, operations and
performance of the commercial banks have improved considerably. With a
view to assess the performance and to chalk out further course of actions, a
committee was set up under the chairmanship of Shri. M. Narasimham in
December, 1997 which is known as the Narasimham Committee on Banking
Sector Reforms. The terms of reference include review of progress in reforms
in the banking sector over the past six years, charting of a programme of
banking sector reforms required to make the Indian banking system more
robust and internationally competitive and framing of detailed
recommendations in regards to banking policy covering institutional,
supervisory, legislative and technological dimensions and the Committee
submitted its recommendation in April, 1998.
In consultation with the Government of India, the Reserve Bank of India has
finalised its views on a large number of specific recommendations, which are
within its purview.
Recommendations and Decisions Taken (Till October 98)
1)
5 per cent weight for market risk for Government/approved securities:
To be implemented in phases: 2.5 per cent risk weight by the year ending
March 31, 2000. Balance of 2.5 per cent will be announced later. An
additional risk weight of 20 per cent is proposed for securities of government
undertakings which do not form part of the approved market borrowing
programme with effect from the financial year 2000-2001. This will be
implemented in the case of outstanding stock of such securities as on March
31, 2000, in two phases at the rate of 10 per cent each in 2001-2002 and
2002-2003.
2)
The risk weight for Government guaranteed advances to be the same as
for other advances:
Risk weight will be assigned for government guaranteed advances
sanctioned from April 1, 1999 as under:
Against the guarantee of the:
a)
Central Government
0 per cent
b)
State Government
0 per cent
c)
Governments who remain defaulters as on March 20 per cent
31, 2000
d)
Governments who continue to be defaulters after 100 per cent
March 31, 2001
3)
Foreign exchange open position limit to carry 100 per cent risk weight:

4)

5)

6)

7)

8)

9)

10)

To be implemented from the current financial year ending March 31, 1999.
A minimum target of 9 per cent CRAR to be achieved in the year 2000
and 10 per cent by 2002:
Banks should achieve a minimum CRAR of 9 per cent as on March 31, 2000.
Decision about further enhancement of CRAR will be announced later.
An asset be classified as doubtful if it is in the sub standard category
for 18 months in the first instance and eventually for 12 months and
loss if it has been so identified but not written off:
An asset will be treated as doubtful, if it has remained in sub standard
category for 18 months instead of 24 months, by march 31, 2001.
Banks may make provisions therefore, in two phases as under:
As on March 31, 2001: provisioning of not less than 50 per cent on the assets
which have become doubtful on account of the new norms, i.e., reduction of
the period from 24 months to 18 months.
As on March 31, 2002: Balance 50 per cent of the provisions should be made
in addition to the provisions needed as on March 31, 2002. The proposal to
introduce the norm of 12 months will be announced later.
The Government guaranteed advances which have turned sticky to be
classified as NPAs:
The Government guaranteed advances which have turned sticky are to be
classified as NPAs as per the existing prudential norms with effect from April
1, 2000.
Income recognition, asset classification and provisioning norms should
apply to Government guaranteed advances in the same manner as for
any other advances.
Provisions on these advances should be made over a period of 4 years as
detailed below:
Existing/old Government guaranteed advances which would become NPA on
account of asset classification norms are to be fully provided for during the
next four years from the year ending March 1999 to march 2002 minimum of
25 per cent, each year.
A general provision of 1 per cent on standard assets be introduced:
To start with, banks should make a general provision to a minimum of 0.25
per cent for the year ending March 31,2000. The decision to raise further the
provisioning requirement on standard assets would be announced in due
course.
Banks and Financial Institutions should avoid the practice of evergreening:
The Reserve Bank reiterates that banks and Financial institutions should
adhere to the prudential norms on asset classification, provisioning, etc., and
avoid the practice of ever-greening.
Any effort at financial restructuring must go in hand with operational
restructuring. With the cleaning up of the balance sheet, simultaneous
steps to be taken to prevent/limit reemergence of new NPAs:
The banks are advised to take effective steps for reduction of NPAs and also
put in place risk management systems and practices to prevent reemergence
of fresh NPAs.
To enable banks in difficulties to issue bonds for Tier II capital,
Government will need to guarantee these instruments which would then

11)

12)

13)

14)

make them eligible for SLR investment:


Public Sector Banks are encouraged to raise their Tier II capital. Government
guarantee to these instruments does not seem appropriate.
There is a need for disclosure in a phased manner of the maturity
pattern of asset and liabilities, foreign currency assets and liabilities,
movements in provision account and NPAs:
Banks have already been advised to put in place a formal Asset-Liability
Management (ALM) system with effect from April 1, 1999. Instructions on
further disclosures will be issued in due course.
Concentration ratios need to be indicated in respect of banks exposure
to any particular industrial sector as also to sectors sensitive to asset
price fluctuations such as stock market and real estate. These exposure
norms need to be carefully monitored:
Banks are advised to strictly comply with instructions which are already in
place.
Banks should bring out revised operational manuals and update them
regularly:
Arrangements should be put in place for regular updating. Compliance has to
be reported to RBI by April 30, 1999.
There is need to institute an independent loan review mechanism
especially for large borrowal accounts and to identify potential NPAs:
Banks should ensure a loan review mechanism for larger advances soon
after it is sanctioned and continuously monitor the weaknesses developing in
the accounts for initiating corrective measures in time.

Pannir Selvam committee


The committee on NPAs appointed by the government to look into the
issues of non-performing assets of public sector banks has recommended
that banks look at the three fold method of arresting fresh inflows of NPAs,
reducing existing NPAs and bringing about a culture of doing away with
non-performing assets.
Credit appraisal and credit monitoring are the two main tactics for arresting
the growth of NPAs. For this, banks should establish a credit risk
evaluation system, upgrade their existing systems, set up a centralised
database, and ensure quicker, tougher, but flexible appraisals and
decisions by bank officials.
Review machinery should be strengthened and a quarterly monitoring
system should be put in place for detection of early warning signals of
timely remedial measures, which will prevent a loan from turning bad.
Even standard assets should be monitored on a quarterly basis, the
committee has recommended. Risk rating systems should be developed to
cover newer risks and the system should be in tune with prevalent
scenario.
Existing NPAs should be taken seriously and banks should set up recovery
cells and task forces to deal with them. Branches having sizeable NPAs
should be identified and skilled and trained personnel should be placed

there. Periodic meetings should be convened with NPA borrowers to


ascertain the reasons for default and the true financial position, according
to the Pannir Selvam committee.
Doubtful and loss assets should be reviewed periodically to explore
possibilities for a quick write-off in cases where they are fully provided for.
Incentive schemes for employees and interest discounts for prompt
repayments should be adopted by banks.
Verma Committee
The RBI had set up the Working Group under the Chairmanship of
Shri M.S. Verma, former Chairman of State Bank of India and presently
Honorary Advisor to the RBI to suggest measures for revival of weak
public sector banks. The Working Group submitted its report on October 3,
1999. Major recommendations of the Working Group are:
Identification of Weak Banks: The Group has recommended the use of
seven parameters to identify a bank's weakness or strength in conjunction
with two criteria (first, where accumulated losses and net NPA exceeds the
net worth of the Bank, second, one whose operating profit less income on
recapitalisation bonds has been negative for three consecutive years)
suggested by the Narsimham Committee (1998). These seven parameters
are: (1) capital adequacy ratio, (ii) coverage ratio, (iii) return on assets, (iv)
net interest margin, (v) ratio of operating profit to average working funds,
(vi) ratio of cost to income, (vii) ratio of staff cost to net interest income
plus all other income. All the public sector banks were evaluated on the
above seven parameters keeping the median as the threshold in five of the
parameters. For capital adequacy the threshold was 8% and in repect of
the coverage ratio it was kept at 0.50%. Accordingly, the Group classified
the public sector banks in five categories:
1.
2.
3.
4.
5.

Weak banks.
Banks under strong distress.
Banks with non compliance of three or four Parameters.
Banks with non compliance of one or two parameters.
Banks which have met all parameters.

Three banks were classified under the category of weak banks, viz., UCO
Bank, Indian Bank and United Bank of India. Bank of India is under
category 3 on the basis of its performance during 1998-99.
Causes of Weakness: The weaknesses relate to three areas: Operational
failures mainly relate to high level and fresh generation of NPAs, slow
decision making with regard to fresh sanction of advances and compromise
proposals resulting in loss of fund-based income and fee income, declining
market share in key areas of operations, limited product line and revenue
stream, absence of cost control and effective MIS and costing exercise, weak
internal control and housekeeping, inadequate risk management systems,
poor customer service, low level of technology and non competitive rates.
Human Resources issues mainly relate to overstaffing, low productivity and
age profile, low levels of motivation. Management issues relate to lack of

succession planning, short tenures and frequent changes in top management


and inadequate support from the Board of Directors.
Restructuring Programme: The Group has developed a four-dimensional
comprehensive restructuring programme for three weak banks covering
operational restructuring, organisational restructuring, financial restructuring
and systemic restructuring.

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