RESEARCH PROJECT ON STRATEGIES FOR IMPROVING NON FUND BASED BANKING BUSINESS FROM SECTOR

INTRODUCTION
Abstract The fact that high level industrialization involved Merchant banking services strengthen the economic development of a country as they acts as sources of funds and information for corporations. Considering the way the Indian economy is growing, the role of merchant banking services in India is indispensable. These financial institutes also act as corporate advisory bodies to help corporations rightly get in various financial activities. The need of merchant banking services in India arises from is taking place in the country. Some of the PSBs have formed their fully owned subsidiaries for this purpose. Analysis of merchant banking business of some PSBs clearly indicates that the merchant banking activities of the banks are showing declining trend especially after 199394 due to depressed capital market conditions and subdued activity in primary market.

Introduction sector banks include loan syndication, consultancy and advisory services, capital issue management etc. The public sector banks have been marketing all the non fund based financial services either directly by starting merchant banking division or by indirectly floating their subsidiary companies or both. This paper emphasis on the analysis of non fund based financial services of public sector banks in India.

EXECUTIVE SUMMARY
Banking in India originated in the first decade of 18 century with The General Bank of India coming into existence in1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June1806.T h e R e s e r v e B a n k o f I n d i a f o r m a l l y t o o k on the responsibility of regulating the Indian b a n k i n g s e c t o r from1935. After India's independence 1947, the Reserve Bank was nationalized and given broader powers. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. The Modern Banking Functions are Fund based and Non-Fund based functions. These

functions of a bank are those in which banks extend various services to their customers or add their commitments to certain transactions u n d e r t a k e n b y their clients and charge their fees/ commissions for the services rendered by them / t h e i r commitments added to the transactions undertaken by the clients. The activities popularly known as Non-fund facilities provided by Banks. The major non-fund based facilities that are considered as a part of regular credit facilities are Letter of Credit a n d B a n k G u a r a n t e e . A s a part of their Non-fund based functions banks a l l o w L e t t e r o f C r e d i t a n d B a n k Guarantee facilities for their customers to meet their requirements. Thus, we conclude that the Letter of credit and Bank guarantee comes in a plethora of confusing forms NDGUISES. It is understood in different ways in different parts of the world. But, once the basics are understood, it is wonderfully adaptable and uniquely user friendly tool

. DESIGN OF STUDY
Objective Of Study
1. To understand the importance of banking sector. 2. To perceive the meaning of Non-fund based facility. 3. To visualize the significance of Letter of Credit and Bank Guarantee. 4. To link the role of letter of credit and Bank guarantee with development of the banks. 5. Readers can see the case study of Dena bank playing role of LC and BG.

Scope Of The Study

1. The readers can come to know the various types of Non-Fund based facilities by Banks. 2. To guide the importers and exporter while removing LC and BG. 3. One can come to know about types of LC and BG. 4. The readers can come to across the sample letter of credit and bank guarantee. 5. They can come to know the procedures of LC and BG.

Limitations Of The Study

1. The project study is restricted to banking sector used in India only.2. The conclusion made is based on a sample study and does not apply to all the individuals.3. All banks are not included.

Methodology 1. Primary data is collected from a sample size of 30 individuals. 2. Secondary data is collected by referring books relating to banking and basics of banking. Also referred to Dena Bank, magazines and internet.

Merchant Banking

Non-fund based financial services of the public sector banks are covered under merchant banking activities. Merchant banking services has been statutorily brought under the regulatory frame work of the Securities and Exchange Board of India (SEBI) under the SEBI Act 1992. No person can act as a merchant banker without obtaining a Certificate Financial Liberalization has highlighted competition among banks and

other financial institutions. As a result, public sector banks have not only diversified their fund based financial services, e.g. mutual funds, factoring, forfeiting etc. but also their non fund based financial services. This would help them to increase their help to spread their risk over variety of activities. The non fund based revenue while optimizing the use of funds and would financial services of the public of Registration from SEBI. According to SEBI, a merchant banker is a person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as a manager, consultant, advisor or rendering corporate advisory services in relation to such issue management. Considering the approach the Indian manage to buy is growing, the role of merchant banking services in India is indispensable. These financial institutes additionally act as corporate advisory bodies to great corporations righteously get endangered in assorted financial activities. The need of merchant banking services in India arises from the tall turn automation that is receiving place in the country. Hence there is need for learned professionals who can take caring of assorted finance-related needs of the modernized industrial sectors. These dilettante services have been additionally of great significance for the tiny as good as to middle sized enterprises to great them work smoothly. Most of the farming areas

still miss industrial enrichment as good as the categorical reasons for this embody miss of supports as good as information. The merchant banking services great the entrepreneurs to come up with industrial setups in these areas. Besides, the businessman banks great the entrepreneurs to try opportunities in the unfamiliar markets. The upon tip of contention highlights the ways businessman banks have been compelling industrial growth in India. The supervision in the nation plays the poignant role by arising manners as good as regulations for businessman banks so that entrepreneurs can have most out of these services.

Evolution of Merchant Banking The origin of merchant banking traced to Italy in the mid fifteenth and France during the seventeenth and eighteenth centuries. Cosimo De Medier, an Italian Merchant Bbanker established net work of operations beyond Italy with offices in London, Belgium and France. The Italian merchant banker introduced into England all the institutions and techniques connected with an organized money market. In France a merchant banker added banking business to his merchant

activities. In the United Kingdom merchant banks came into existence in the late eighteenth century. Merchant banks initially included acceptance houses, discount houses and issue houses. They used to finance sovereign government through grant of long term loan. Since the end of Second World War, commercial banks in Western Europe have been offering multiple services including merchant banking services. After the great crash of 1929 and depression, the investment banking was separated from commercial banking under the Glass-Steagall Banking Act-1933. Investment trusts were covered by Investment Company Act 1940.

Growth of Merchant Banking in India

Merchant Banking as a commercial activity took place in India through the management of Public Issues of Capital and Loan Syndication. It was originated in 1969 with the

setting up of the Merchant Banking Division of ANZ Grind lays Bank. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. The early and mid seventies witnessed a boom in the growth of merchant banking organizations in the country with various commercial banks, financial institutions, brokers firms entering into the field of merchant banking. In 1970 Citi bank set up its merchant banking division with the objectives of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. In pursuance to the recommendation of the Banking Commission-1972, Indian bank started merchant banking services. State Bank of India started the merchant banking division in 1972. The Foreign Exchange Regulation Act-1973 necessitated dilution of foreign equity of large number of foreign companies operating in India. As a result, large number of investors was created in capital market and merchant banking become attractive to banks and the firms of consultants In 1974 ICICI also initiated the merchant banking services The commercial banks that followed SBI were: Central Bank of India; Bank of India and Syndicate Bank in 1977; Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978; United Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in late 70s and early

80s. The financial institutions that followed ICICI in starting merchant banking activities are: IFCI (1986) and IDBI (1991). After mid seventies, there was a boom in the growth of merchant banking organization in the country. SBI, Canara Bank, Bank of Baroda and Punjab National Bank have floated wholly owned subsidiaries, namely, SBI Capital market Ltd; (SBICAP); Canbank Financial Services ltd.(CANFINA); Bank of Baroda Fiscal Services Ltd.(BOB Fiscal) and PNB Capital Services Ltd. Financial and technical Consultants and professionals also entered in merchant banking business. Currently, most of the foreign banks are offering these services. They have been active in the area of arranging and syndicating foreign currency loans and in attracting foreign investment in India. They have also been providing advisory services and other type of assistance to foreign companies desiring to set up joint ventures in India. 2. Regulating Framework of Merchant Banking: Merchant banking activities were regulated by SEBI, Ministry of Finance Guidelines Companies Act 1956 Stock Exchange Guidelines Securities Contact (regulation) Act 1956 Now merchant banking has been statutorily brought under the regulatory framework of the Securities and Exchange Board of India (SEBI) Act 1952. No person can act as a merchant banker without the obtaining a Certificate of

Registration from SEBI. Merchant banking activities are being organized and undertaken in several forms. Commercial banks both Indian and foreign and Development Finance Institutions(DFIs) have organized them through formation of Divisions; nationalized banks through forming subsidiary companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as a private limited companies or firms, partnership or proprietary concerns. Merchant bankers, irrespective of the form in which they are organized are governed by the Merchant Bankers Rules issued by the Ministry of Finance and Merchant Banking Regulation. The authorized activities of the merchant bankers included a) issue of management which consist of preparation of prospectus and other information relating to the issue, determining financing structure, tie up of financers and final allotment and/or refund of subscription; (b) corporate adviser services relating to the issue; (c) underwriting; (d) portfolio management services, and e) managers consultants or advisors in the issues. All merchant bankers are expected to perform with high standards of integrity and fairness in all their dealings. A Code of Conduct has been prescribed for merchant bankers by SEBI. Within this context the criteria for a Certificate of Registration take into account;

 Professional competence personnel, their adequacy and quality and other infrastructure Capital adequacy; and Past track record experience, general reputation and fairness in all their transactions. Up to August 1997, the regulation of the SEBI Act provided for registration under four categories of merchant bankers: Category-I can act as an issue manager, advisor consultant, under writer and portfolio manager with minimum resources up to Rs five crores Category-II can act as an advisor, consultant, co-manager underwriter and portfolio manager with minimum resources up to Rs fifty lakhs Category-III can act as underwriter and portfolio manager with minimum resources up to Rs twenty five lakhs Category-IV can act only as an advisor or consultant to an issue with no minimum resources. All issues should be managed by at least by one authorized merchant bankers, functioning as the sole manager or lead manager. Every merchant banker is required under the regulation to abide by the code of conduct. Accordingly every merchant banker is required to act in an ethical manner, render high standard of service and exercise due diligence, not

to indulge in unfair practices, not to divulge confidential information about the client, endeavour to ensure that true and adequate information is provided to investors. Merchant banker is required to maintain and keep a copy of the balance sheet, a copy of auditors report and a statement of financial position and to furnish annually the final accounts and such other documents to SEBI as well as half yearly working results. Merchant banker is required to enter into agreement with a corporate body setting out their mutual rights, liabilities and obligations relating to such issue. A lead manager should furnish to SEBI a statement specifying disclosed responsibilities relating to issue. It is the duty of lead manager to verify the contents of a prospectus or letter of offer in respect of an issue and to submit to SEBI a due diligence certificate confirming that disclosures made in the draft prospectus are true, fair and adequate to enable the investor to make a well informed decision. The lead manager will continue to be associated with the issue till the subscribers have received the share or excess application money. Merchant banker either directly or indirectly prohibited from entering into any transaction in securities on the basis of unpublished price sensitive information. Merchant banker is required to inform SEBI within 15 days from the date of

entering such transactions. SEBI may ask merchant banker any time to disclose his Responsibilities of management of the issue Change in the information furnished Name of the companies whose issue he has managed Breach of capital adequacy, and His activities as a manger; consultant, underwrite to an issue. SEBI may inspect books of account, documents and records of merchant banker either by giving reasonable notice or without notice in the interest of investors. SEBI is empowered to suspend a registration of a merchant banker in case he furnishes wrong or false information; fails to resolve the complaints of investors etc. In case of deliberate manipulation of price rigging or concerning activities or deterioration in the financial position, the board may also cancel registration of the merchant banker. In the month of September 1997, SEBI abolished all categories of merchant bankers except Category-I. Category II, III and IV was allowed to continue till the end of their present term and after that they will have to apply for the category I license or status or take up some other activity. For example, they can register themselves for under taking activities like portfolio managers or under writes. Those merchant bankers who are undertaking activities like issue management, underwriting and portfolio management will

be required to get registered as portfolio managers while underwriting could be done without any additional registration. As a result of such scheme number of merchant bankers declined. Earlier there was no difference between merchant bankers and NBFCs. Both were permitted to undertake fund based and non-fund based activities. Merchant bankers are being supervised by the SEBI and the NBFCs are being supervised by RBI. As a result the role of merchant bankers and NBFCs got differentiated. Merchant bankers are supposed to undertake as per SEBI directives only non fund based activities and NBFCs are supposed to undertake only fund based activities. Merchant bankers no longer accept demands, do lending and bill discounting or carry out fund based activities other than those related exclusively to the capital market. The non fund activities which the merchant banker is supposed to undertake are: Issue Management Portfolio Management Corporate counseling Project Counseling Loan/lease Syndication Arranging foreign collaboration Arranging on acquisition and mergers Helping in placement activities

 Advising on capital structuring Merchant Banking Services in India ICICI Merchant Services ICICI Bank- India's largest private sector bank, and First Data, a global leader in electronic commerce and payment services, have formed a merchant acquiring alliance named ICICI Merchant Services which has acquired ICICI Bank's merchant acquiring portfolio. The venture brings together one of India's largest merchant portfolios, representing approximately 30 per cent of the current Indian acquiring market, and a leading acquirer and payment services provider with global expertise. Over time ICICI Merchant Services expects to deliver an enhanced suite of card acquiring services to existing and to new merchants. ICICI Bank is India's second largest bank with over 2,000 branches across the country. First Data, a KKR company, provides payment processing services for 5.3 million merchant locations globally and serves customers in 36 countries around the world. First Data's services include offering merchants the ability to view and interrogate their payment transactions securely via the internet while benefiting from loyalty, prepaid and market-leading e-commerce solutions based upon advanced processing technologies. About ICICI Bank ICICI Bank Ltd (NYSE:IBN) is India's largest private sector bank and the second largest bank in the country with

consolidated total assets of about US$ 102 billion as of September 30, 2009. The ICICI Group has leadership positions across the financial services sector, including insurance, securities brokerage, asset management and private equity.

About First Data

First Data, a KKR company, powers the global economy by making it easy, fast and secure for people and businesses to buy goods and services using virtually any form of electronic payment. Whether the choice of payment is a gift card, a credit or debit card or a check, First Data securely processes the transaction and harnesses the power of the data to deliver intelligence and insight for millions of merchant locations and thousands of card issuers in 36 countries.

PNB Merchant Banking Punjab National Bank-Indias one of the Leading Nationalized Bank established in 1895 serving over 3.5 crores customers through 4520 branches and 439 extension counters, is the largest amongst Nationalized Banks. The Bank has recently been ranked 21st among top 500 companies and 9th among top 50 brands by The Economic Times. All the Branches of the Bank have been computerized. The Bank has adopted a

concept of "Any Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 2511 offices have already been brought under its ambit. The Bank is registered with SEBI as Category I Merchant Banker for providing all the major Merchant Banking services. Its gamut of Merchant Banking services includes: Issue Management Services to act as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Project appraisal Corporate Advisory Services Underwriting of equity issues Banker to the Issue/Paying Banker Refund Banker Monitoring Agency Debenture Trustee Marketing of the issue through a strong network of QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of the major investor in the market having a treasury of 45000 crores. Its Software for handling the Refund Banker is one of the best systems in the industry. Its unique features provides online payment of the instrument by our 2470 branches in 733 centers, online status of paid instruments, cent per cent

reconciliation at any point of time etc. The Bank has an exclusive and specialized Capital Market Service Branch at New Delhi for providing Merchant Banking Services to the Corporate. Depository Services Bank offers Depository Services to its clients and has designated large network of branches to cater to their demit requirements through Depository Participant of NSDL and CDSL depositories. Bank also provides the Speed e facility to demat account holders to submit their delivery instructions through Internet. The Bank has recently launched online securities trading facility in strategic alliance with IDBI Capital Market Services Ltd. OBC Merchant Banking Division Oriental Bank of Commerce is registered with Securities and Exchange Board of India, as Category - 1 Merchant Banker since March 1, 1993. The Merchant Banking Activities are undertaken by its Merchant Banking Division housed in a separate premise at F-14, 4th Floor, Competent House, Connaught Place, New Delhi. The Merchant Banking Division is headed by a top Executive of the rank of General Manager with a dedicated team of officials having sufficient exposure and experience in this line. The Bank offers complete range of activities of category - 1 Merchant Banker as under:

 Managing of Public Issue of equity and debt. Handling Dividend/ Interest warrant issues of Corporate. Acting as Escrow Collecting Bank of Public Issues. Monitoring Agency work as per SEBI Guidelines. Advisory services for projects. Private placement of securities. Syndication of Rupee Term Loan. Corporate Advisory Services relating to Securities Market e.g. Takeovers, Acquisitions, Disinvestments. The Bank had made Initial Public Offer of 60 Million equity shares of Rs. 10/- each for cash at a premium of Rs. 50/- per share in October 1994. Further, the Bank had made Followon Public Offer of 58 Million Equity Shares of Rs. 10/- each for cash at a premium of Rs. 240/- per share aggregating Rs. 14500 Million in April 2005. As a result, the paid up equity share capital has gone up to Rs. 2505.397 Million and the Government of Indias stake in the share capital of the Bank has come down to 51.09 per cent from 66.48 per cent. The equity shares of the Bank are under compulsory dematerialization and 246.18 Million shares have been dematerialized as on 31st March 2010. The Bank has a large investor base of 1, 11,132 shareholders as on 31st March 2010. The broad shareholding pattern of the Bank as on 31st march 2010 is: Government of India at 51.09 per cent;

LIC, GIC and subsidiaries at 20.83 per cent; Domestic FIs, MFs and banks at 5.38 per cent; FIIs and NRIs at 15.19 per cent and Indian public and corporate at 7.51 per cent. The Merchant Banking Division deals with all types of shareholders complaints and grievances as well as other related enquiries in connection with transfer of shares issued by the Bank. M/s.MCS Limited, Delhi has been appointed the Share Transfer Agent of the Bank for the purpose of dealing with the Shareholders in various matters viz., updation of change of address, non-receipt of dividend warrant, share certificate etc. The shareholders may approach directly either this Division or the Share Transfer Agent for all types of services relating to equity shares of the Bank. CANARA Bank Merchant Division Canara Bank is also one of the leading Merchant Bankers in India, offering specialized services to Banks, PSUs, State owned Corporations, Local Statutory bodies and Corporate sector. It was SEBI registered Category I Merchant Banker to render Issue Management (Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate Research in World Economy. Advisory Services etc. It also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of exclusive Capital Market Service Branches and over 100 designated CBS Branches to handle collecting / Refund / Paying Banker assignments. It does undertake "project

appraisals" with linkage to resource raising plans from Capital Market / Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors. Its uniqueness is extending services under single window concept covering the following areas: Merchant Banking Commercial Banking Investments Bankers to Issue - Escrow Bankers Underwriting Loan Syndication As leading Merchant Bankers in India, it has associated with issues ranging from Rs.1 crores to Rs.1500 crores, involving various types of industries, banks, statutory bodies etc. and has an edge in handling Private Placement issues both retail and HNIs. 3.4.1Spectrum of Services Equity Issue (Public/Rights) Management Debt Issue Management Private Placements Project Appraisals Monitoring Agency Assignments IPO Funding Security Trustee Services Agriculture Consultancy Services Corporate Advisory Services

 Mergers and Acquisitions Buy Back Assignments Share Valuations Syndication ESOS Certification 4.3.2Issue Management Services Project Appraisal Capital structuring Preparation of offer document Tie Ups (placement) Formalities with SEBI / Stock Exchange / ROC, etc. Underwriting Promotion /Marketing of Issues Collecting Banker / Banker to an issue Post Issue Management Refund Bankers Debenture Trusteeship Registrar & Transfer Agency (our Subsidiary) Bank constantly update the list of Potential Investors Institutions, Provident, Pension and Gratuity Funds, High Net worth Individuals and others and continuously assess their investment appetites and help issuers in effective marketing of the products. 3.5 ASBA Facility An application supported by blocked amount (ASBA) is an initiative by SEBI to make the process of Subscription to

Capital Issues (Primary) more efficient. Under this system, the application money will remain in the account of the customer, till the allotment of shares. This facility has been provided to Savings Bank and Current Account holders who are eligible to apply as per SEBI guidelines, intending to invest in Capital issues (both Public and Rights issues). A Hold is created in the account of the customer to the extent of shares applied for and the same is released after the Allotment. The blocked amount is transferred to the issuer company to match the quantum of shares allotted. The following are the requirements for applying through the ASBA process by our Banks Account holder: Account holder/ Investor should be from the approved category eligible to apply as per SEBI guidelines. Should have a Savings or Current account with us. Should have a Demat account with a Depository Participant Should have a Permanent Account Number ( PAN ) Availability of sufficient balance in the account for creating a hold in the account to the extent of application money required/mentioned in the ASBA application. The following options are available to the ASBA investor: A maximum of 5 applications can be submitted from a single account. ASBA Application can be submitted at any of our six designated branches at present.

 Option available to the investor to revise the bid/cancel the bid within the bidding period. Amount will be released only after clearance from the Registrar/Stock Exchanges. SBIS Merchant Banking SBIs Merchant Banking Group is strongly positioned to offer perfect financial solutions to your business. SBI specialize in the arrangement of various forms of Foreign Currency Credits for Corporates and provide the resources, convenience and services to meet your needs by arranging through Foreign Currency credits: Commercial loans Syndicated loans Lines of Credit from Foreign Banks and Financial Institutions FCNR loans Loans from Export Credit Agencies Financing of Imports. SBI is internationally the most Preferred Bank by Export Credit Agencies for Guarantees in case of the Indian Clients or Projects. SBI being an Indian entity has no India exposure ceiling. Its primary focus is on Indian Clients. SBIs seasoned Team of professionals provides Insightful credit Information and helps Maximize the Value from the transaction. Products and Services: Arranging External Commercial Borrowings (ECB)

 Arranging and participating in international loan syndication Loans backed by Export Credit Agencies Foreign currency loans under the FCNR (B) scheme Import Finance for Indian Corporates On 1st July State Bank of India was constituted under the State Bank of India Act 1955, for the purpose of taking over the undertaking and business of the Imperial Bank of India. The Imperial Bank of India was founded in 1921 under the Imperial Bank of India Act 1920. The Bank transacts general banking business of every description including, foreign exchange, merchant banking and mutual funds. On September State Bank of India (Subsidiary Bank) Act was passed. On October State Bank of Hyderabad become the first subsidiary of SBI. During this period, State Bank of Jaipur, State Bank of Bikaner, State Bank of Indore, State Bank of Travancore, State Bank of Mysore, State Bank Patiala and State Bank of Saurashtra became subsidiaries of the bank. The Bhor State Bank Ltd was Amalgamated with the Bank bring the total number of minor State associated banks so amalgamated to five. A scheme for amalgamation of the Bank of Aundh Ltd., was also approved. On 20th August, the Unit Bank Ltd. Chennai

was taken over by the Bank. In October Branch in London become bankers to the Indian High Commission, therebytaking over a function till then performed by the office of RBI. Of the other business transacted by the Branch, an important aspect was medium term loans mostly to Indian shipping companies. On November 8th the Bank of Behar Ltd was amalgamated. In 1972 A merchant banking division was set up in the central office to cater to promotional needs of the corporate sector. During the year, company set up a data bank of sick units available for taken over by healthy units. With effect from 26th August, 1985 the Bank of Cochin Ltd with 108 branches was also amalgamated with the Bank. (i) All shares in the Capital of the Imperial Bank of India were vested in the RBI. The SBI was registered with an Authorized capital of Rs.20 crores, and an issued and paid up capital of Rs.562, 50,000 divided into 562,500 shares of Rs.100 each. (ii) Every person who on the 30th June, 1955, was registered as a holder of shares in the Imperial Bank of India was paid by the Reserve Bank of India. On 1st August a new subsidiary named SBI Capital Market was functioning independently, took up leasing business and certain other new services. 100, 00, 00 No. of shares issued at a prem. of Rs 160 per share. SBICAP, in their capacity as

Trustee and Manager of Mutual Fund, launched two scheme viz., Mangnum Monthly Income Scheme 1989 and Magnum Tax Service Scheme 1990. During the same period SBI in association with Morgan Stanley Asset Management Inc. of USA, launched the India Magnum Fund. In a significant move in 2001 the State Bank of India decided todistance itself from its subsidiaries - SBI Capital Markets, SBI Gilts, SBI AMC and State Bank of Credit and Commerce International. They will have the autonomy, independent chairmen and external executives at the senior managementlevel at market-related salaries. Bankers Views on PSBs Merchant Banking Following results were derived from the administration of the questionnaire on 150 bankers regarding merchant banking business of PSBs. Majority of the PSBs are rendering merchant banking services relating to management of capital issue. Some leading banks are also taking the assignment of merger and acquisition of undertaking. In response to the first question reported in Table1, administrative staff of PSBs of the sample was in favour of more offensive marketing strategies for merchant banking business in order to compete with other merchant banking organizations. The most of the innovative financial services of PSBs were started during the current decade, hence at nascent stage. World Bank also feels that the Indian Banking system still

remain a massively inefficient, state controlled system andnot competitive. Some questions were framed in the questionnaire to know the views of the administrative staff of PSBs regarding improvement of in the financial services of PSBs. The outcomes of the questions relating to the improvement of financial services of PSBs administered on 150 officials of various PSBs officers including office and head office of PNB has been discussed as the following paras. Second question reported in Table 1 is based on the suggestion of the World Bank to reduce the government stake to 33 per cent in PSBs. In response to the question 86 per cent of the respondents expressed their view in positive as they believe that it will automatically reduce the degree of unfair political interference in the functioning of PSBs whereas 10 per cent of the respondents gave their response in negative. Responses to third question regarding merger of PSBs revealed that 92 per cent of the PSBs officials of the sample strongly favoured the view of merger in order to grow quickly and reduce cost of operations etc. Only 8 per cent were not in favour of the merger. In response to the fourth question given in Table cent per cent of the PSBs officials covered by the sample were unanimously of the view that existing legal system is insufficient for tackling the financial services

of PSBs and favoured for reform in the legal system of financial services of PSBs. In response to question regarding frequent changes in the guidelines of regulatory authority, 56 per cent of the bankers covered in the sample responded in Yes as they believe that frequent changes in the guidelines create confusion and restrict growths of financial services of PSBs. On the other hand, 36 per cent of the samples were in favour of frequent changes giving the reason that financial services particularly innovative financial services are at the nascent stage for which such changes are necessary according to the requirements of time and circumstances. In response to question regarding multi regulatory authorities, 35 per cent of the administrative staff covered in the sample was of the view that present multi regulatory authorities system for various financial services of PSBs is appropriate where as 40 per cent of the officials against the multi regulatory authority. Acquiring retaining and developing a competent staff is one of the impotent factors behind the success of any organization. At present the personal of the PSBs is recruited and selected by the Banking Services recruitment board and promotion of the staff is based upon seniority cum performance. 92 per cent of the respondent was in favour of promotion based on performance by PSBs itself; 86 per cent of the respondents were in favour of promotion based upon

performance rather on seniority for efficient functioning of PSBs. On the other hand 14 per cent of the respondent favoured the existing promotion policy based on seniority cum performance as this does not leads to frustration of senior staff. Generally it has been found that the senior officials handling traditional financial services of PSBs is assigned the task of managing and marketing of innovative financial services of PSBs. The third question of the table is concerned with the practice. 78 per cent of respondent answered in Yes to the question. They believe that it is a matter of aptitude. A person doing well one work will also perform the other work well. Whereas 22 per cent of the respondents respond against the practice of giving reason that each service especially innovative financial services requires special skill, knowledge and experience and only attitude is not sufficient for marketing of innovative financial services. Furthermore, 80 per cent of the bankers expressed their view that each PSBs should enter into innovative financial services business but in the beginning starting may be done with one or two financial services. 16 per cent of the respondents were of the view that PSBs should venture into innovative financial services according to their weakness, strength and prevailing economic conditions. In response to the question regarding focus of marketing of financial

services in rural and semi urban areas 82 per cent of the bankers were of the view that these areas should be covered with more emphases while marketing of innovative financial services as these areas are not covered by the private and foreign banks.

DESIGN OF THE STUDY

NON-FUND BASED FACILITIES

The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three broad categories as under:

Letters of credit Guarantees Co-acceptance of-bills/deferred payment guarantees.

Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits. Facilities for co-acceptance of bills/deferred payment guarantees are generally required for acquiring plant and machinery and may, technically be taken as a substitute for term loan which would require detailed appraisal of the borrower's needs and financial position in the same manner as in case of any other term loan proposal. The co-acceptance limits may also be sanctioned under IDBI's Bill Rediscounting Scheme which has been discussed in detail.

RBI GUIDEUNES ON NON-FUND BASED FACIUTIES

Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund based credit facilities. Some of the important points to be kept in view in this regard are discussed below:

Letters of Credit

Bank should normally open letters of credit for their own

customers who enjoy credit facilities with them Customers maintaining current account only and not enjoying any credit limits should not be granted L/C facilities except in cases where no other credit facility is needed by the customer. The request of such customer for sanctioning and opening of letter of credit should be properly scrutinised to establish the genuine need of the customer. The customer may be, required to submit a complete loan proposal Including financial statements to satisfy the bank about his, needs and also his financial resources, to mire the bills drawn under Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such customer should invariably make a reference to the, existing banker of the customer. In all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the bills drawn under L/C as per the financial arrangement already finalised.

Guarantees

The conditions relating to obligant being a customer of the

bank enjoying credit facilities as discussed in case of letters of credit

are equally applicable for guarantees also. In fact, guarantee facilities also cannot be sanctioned in isolation. Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and the bank is required to make the payment in terms of guarantee. Performance guarantee will be issued by the banks only on behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary experience and means to perform the obligations under the contract and is not likely to commit any default. As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years. Banks should not normally issue guarantees on behalf of those customer's who enjoy credit facilities with other banks.

Co-acceptance of Bills

1.

Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal of customer's requirement is completed and the bank is fully satisfied about the genuineness of the need of the customer. Further customers who enjoy other limits with the bank should be extended such limits.

2.

Only genuine trade bills shall be co-accepted and the banks should ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers. The valuation of goods as mentioned in the accompanying invoice should be verified to see that there is no overvaluation of stocks.

3. 4.

The banks shall not extend their co-acceptance to house bills/ accommodation bills drawn by group concerns on one another. Before discounting/purchasing bills co-accepted by other banks for Rs.2 lakh and above from a single party, the bank should obtain written confirmation of the concerned controlling office of the accepting bank.

5.

When the value of total bills discounted/purchased (which have been co-accpeted by other banks) exceed Rs.20 lakh for a single borrower/ group of borrowers prior approval of the Head Office of the co-accepting bank shall be obtained by the discounting bank in writing.

6.

Banks are precluded from co-accepting bills drawn under Buyer's Line of Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarly banks should not co-accept bills drawn by NBFCs. Further, banks should not extend co-acceptance on behalf of their buyers/constituents under the SIDBI scheme.

7.

However, banks may co-accept bills drawn, under Seller's Line of Credit schemes for Bill Discounting operated by the financial institutions like IDBI, SIDBI, PFC etc. without any limit

subject to buyer's capacity to pay and the compliance with exposure norms applicable to the borrower. 8. Where banks open L/C and also co-accept bills drawn under such L/C, the discounting banks, before discounting such co-accepted bills, must ascertain the reason for co-acceptance of bills and satisfy themselves about the genuineness of the transaction. 9. Co-acceptance facilities will normally not be sanctioned to customers enjoying credit limit with other banks. Operational aspects of IDBI bills rediscounting scheme have already been discussed and similar procedure shall be adopted while allowing co acceptance facilities which are not covered under the scheme. Important operational aspects in respect of letter of credit facilities and issuance of guarantees will be discussed in this chapter.

LETTER OF CREDIT

Letter of credit is, a method of settlement of payment of a trade transaction and is widely used to finance purchase of machinery and raw material etc. It contains a written undertaking given by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfilment of all the terms and conditions incorporated therein. All letters of credit in India relating to the foreign trade i.e., export and import letters of

credit are subject to provisions of 'Uniform Customs & Practice for Documentary Credits' (UCPDC). The latest revision of these provisions effective from 1st January, 1994 has been issued by International Chamber of Commerce as its publication No. 500 of 1994. These provisions neither have the status of law or automatic application but parties to a letter of credit bind themselves to these provisions by specifically agreeing to do so. These provisions have almost universal application and help to arrive at unambiguous interpretation of various terms used in letters of credit and also set the obligations, responsibilities and rights of various parties to a letter of credit. Inland letters of credit may also be issued subject to the provisions of UCPDC and it is, therefore, important that customers should be fully aware of these provisions and shall also understand complete L/C mechanism as these transactions will find increasing use in the coming days. Complete text of UCPDC is not being reproduced. However, important articles have been given as extracts wherever necessary. An attempt has been made to explain the L/C mechanism in full as there are some inherent risks and wrong notions while dealing with these transactions.

Definition of a Letter of Credit

Article 2 of UCPDC defines a letter of credit as under:

The expressions "documentary credit(s) and standby letter(s) of credit used herein (hereinafter referred to as "credit(s)" means any arrangement, however, named or described whereby a bank (the issuing bank), acting at the request and on the instructions of a customer (the applicant of the credit) or on its own behalf. (i) is to make a payment to or to the order of a third party (the "beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the beneficiary, or (ii) authorises another bank to effect such payment, or to accept and or (iii) authorises another bank to negotiate against stipulated document(s), provided that the terms and conditions of the credit are complied with. For the above purpose the branches of a bank in different countries are considered another bank. Letter of credit is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request and in accordance with the instructions of buyer (applicant) to effect payment of a stated amount within a prescribed time limit and against stipulated documents provided all the terms and conditions of the credit are complied with". Letters of credit thus offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing bank for pay such bills of exchange (Draft(s)),

payment instead of relying on the ability and willingness of the buyer to pay. He is further assured of payment being received on due date enabling him to have proper financial planning. The only condition being attached is submission of stipulated documents and compliance with the terms and conditions of credit. The buyer on the other hand will be obliged to pay only after receipt of documents of title to goods to his satisfaction. Letter of credit is an independent document in itself as provided vide article 3 of UCPDC which states that: "Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit." This article is very important and has a direct bearing on the relationship of the opener with bank. Many disputes have arisen due to the reference of sale contract in the letter of credit. The letter of credit is issued in accordance with the instructions of the applicant who should provide complete and precise instructions to the bank to avoid any dispute later. The undertaking of a bank to pay, accept and pay drafts or negotiate and/or to fulfil any other obligations under the credit is not subject to claims or defences by the Applicant resulting from his relationship with the issuing Bank or the Beneficiary. Another very important provision which is very vital to letter of credit operations is regarding disputes emanating from the quality/quantity of goods covered under a letter of credit. Article 4 of UCPDC states:

"In credit operations all parties concerned deal with documents, and not with cods, services and/or other performances to which the documents may relate. An important point which emerges from the above article is that any dispute regarding the quality/quantity of the goods may have to be settled outside the terms of letter of credit. Letter of credit thus provides no protection on this account and the applicant must specify submission of necessary weight certificate/quality analysis certificates etc. as considered necessary to satisfy himself regarding the goods on the basis of these documents alone.

Parties to a Letter of Credit

1.

Applicant/Opener. It is generally the buyer of the goods who gets the letter of credit issued by his banker in favour of the seller. The person on whose behalf and under whose instructions the letter of credit is issued is known as applicant/ opener of the credit.

2. credit. 3. 4.

Opening bank/issuing bank. The bank issuing the letter of Beneficiary. The seller of goods in whose favour the letter of Advising Bank. Notification regarding issuing of letter of credit may be directly sent to the beneficiary by the opening bank. It is, however, customary to advise the letter of credit through sane other bank operating at the place/country of seller. The bank which advises the letter of credit to the beneficiary is known as advising bank.

credit is issued.

5.

Confirming Bank. A letter of credit substitutes the credit worthiness of the buyer with that of the issuing bank. It may sometimes happen especially in import trade that the issuing bank itself is not widely known in the exporter's country and exporter is not prepared to rely on the L/C opened by that bank. In such cases the opening bank may request other bank usually in the country of exporter to add its confirmation which amounts to an additional undertaking being given by that bank to the beneficiary. The bank adding its confirmation is known as confirming bank. The confirming bank has the same liabilities towards the beneficiary as that of opening bank.

6.

Negotiating Bank. The bank who negotiates the documents drawn under letter of credit and makes payment to beneficiary.

The function of advising bank, confirming bank and negotiating bank may be undertaken by a single bank only.
Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to machine/other capital goods and raw material etc., and also sale transactions relating to its products. The customer may, therefore, find himself on either side of a L/C transaction at different times depending upon his position at that particular moment. He may be an applicant for a letter of credit for his purchases while be the beneficiary under other letter of credit for his sale transaction. It is, therefore, necessary that complete L/C mechanism covering the liabilities and rights & both the applicant and the beneficiary are understood for maximum advantage.

The complete mechanism of a letter of credit may be divided in three parts as under: 1. Issuing of Credit. Letter of credit is always issued by the buyer's bank (issuing bank) at the request and on behalf and in accordance with the instructions of the applicant. The letter of credit may either be advised directly or through some other bank. The advising bank is responsible for transmission of credit and verifying the authenticity of signature of issuing bank and is under no commitment to pay the seller. The advising bank may also be required to add confirmation and in that case will assume all the liabilities of issuing bank in relation to the beneficiary as stated already. Refer to diagram given below for complete process of issuance of credit. Sale contract
Buyer Applicant Seller Beneficiary

(1) (2) (4)

Buyers Bank Advising Bank

Issuance of Letter of credit (3)

Issuing Bank

Confirming Bank

2. Negotiation of Documents by beneficiary. On receipt of letter of credit, the beneficiary shall arrange to supply the goods as per the terms of L/C and draw necessary documents as required under L/C. The documents will then be presented to the negotiating bank for payment/acceptance as the case may be. The negotiating bank will make the payment to the beneficiary and obtain reimbursement from the opening bank in terms of credit. The entire process of negotiation is diagrammatically represented as under: Supply of goods (5)
Buyer Applicant Seller Beneficiary

(2) (4)
Documents (8) Buyers Bank Advising/Confirming

Issuing Bank

Negotiating

(3) Reimbursement (9)

3. Settlement of Bills Drawn under Letter of Credit by the opener. The last step involved in letter of credit mechanism is retirement of documents received under L/C by the opener, On receipt of documents drawn under L/C, the opening bank is required to closely examine the documents to ensure compliance of the terms and conditions of credit and present the same to the opener

for his scrutiny. The opener should then make payment to the opening bank and take delivery of documents so that delivery of goods can be obtained by him. This aspect of L/C transaction is represented as under:

Delivery of Goods Goods (12)

Seller Buyer

Beneficiary

Applicant

(5) (1)

(11) Payment

(2)

(10)

(7)

(4)

(6)

Advising/Confirmi ng Buyers Bank

(8)

Negotiating Bank Issuing Bank

(3) (9)

Types of Letters of Credit

The 'Letters of Credit' may be divided in two broad categories as under:

Revocable letter of credit. This may be amended or

cancelled without prior warning or notification to the beneficiary. Such letter of credit will not offer any protection and should not be accepted as beneficiary of credit.

Irrevocable letter of credit. This cannot be amended or

cancelled without the agreement of all parties thereto. This type of letter of credit is mainly in use and offers complete protection to the seller against subsequent development against his interest. It may, however, be mentioned here that every letter of credit must clearly indicate whether it is revocable or irrevocable. In the absence of such indication the credit shall be deemed to be irrevocable. The beneficiary, on receipt of credit, must therefore, examine that the letter of credit is not indicated as revocable. The letter of credit may provide drawing of documents either on D.P. basis in which case the documents will be delivered against payment or on D.A. basis in which case the documents will be delivered against acceptance. The letter of credit may also call either for demand documents which are required to be paid on presentation or usance documents the payment of which will be required to be made after an agreed period of usance. All these will be required to be

settled at the time of finalising the sale contract and clear instructions to the bank in this regard will have to be given at the time of opening of the letter of credit. There are a few special types of credits in vogue offering a degree of' convenience in operations. Brief details of these credits are given below:

Revolving Letter of Credit. The concept of revolving letter of credit is best illustrated by the following example: Let us presume that goods of the total value of Rs.60 lacs are required to be purchased over a period of one year and requirement of those goods at a time is proximately Rs.10 lacs. If the terms of payment are under L/C the buyer may have two options as under: (i) To open an L/C for Rs.60 lacs valid for 1 year and permit part

shipment, or (ii)To open letters of credit for Rs.10 lacs each on six different occasions. Option (i) not only requires very high limits from the bank but will result in high cost of operations by way of commission charges. Option (ii) involves a lot inconvenience as the L/C will be required to be opened six times. To obviate such difficulties, a revolving L/C can be opened under which the amount of L/C is renewed/reinstated after the original L/C amount has been utilised. Thus a revolving L/C for Rs.10 lacs valid for one year may be opened the above example. After negotiation and

settlement of bills drawn under this C, the L/C amount may again be reinstated by the bank. The amount reinstated such a manner will again become available for negotiation. Transferable Letter of Credit. A transferable letter of credit is one that a be transferred by the original (first) beneficiary to one or more second benefiaries. It is normally used when the first beneficiary does not supply the merchandise himself but is a middleman and thus wishes to transfer part or all of his rights and obligations to actual suppliers as second beneficiaries. The letter of credit is transferable only if it is specifically stated as transferable'. In case the credit is silent about it, the L/C will be deemed to be transferable. Further the L/C can be transferred only once which in other words means that 2nd beneficiary cannot transfer it to any other person. Under a transferable letter of credit the second beneficiary assumes the same rights and obligations as that of the original beneficiary. The transfer of credit is, however, not to be confused with the right of assignment of benefits to which the beneficiary may become entitled under a letter of credit. The beneficiary is having right to assign the proceeds to which may be or may become entitled under the provisions of applicable law even case of non-transferable credits.

These transferable credits are very much in vogue in export trade. The important points to be noted while dealing with transferable credits are stated low: (i) The L/C should clearly indicate that it is transferable. In the absence of such indication the L/C would be deemed to be not transferable. (ii) The Ist beneficiary under a transferable L/C has a right to transfer in part or whole to other parties (2nd beneficiaries). For this purpose he has to request the advising bank to issue an advice of transfer to the 2nd beneficiary(ies). The charges of the bank for effecting transfer are payable by the first beneficiary unless otherwise stated. (iii) The advice of transfer issued by the bank along with copy of the original credit will be taken as a complete letter of credit for almost all practical purposes.

Back to Back letter of Credit. A letter of credit which is backed by other letter of credit is termed as 'back to back' credit and is also used when middleman is involved in a sale transaction. Such transaction offers additional security of the letter of credit to the bank issuing back to back L/C. However, for successful completion of the entire transaction it must be ensured that back to back L/C is opened on the worse terms as compared to the terms under; the original letter of credit.

Red Clause Letter of Credit. All letters of credit as discussed above provide a sort of guarantee of payment against documents which are drawn strictly in terms of subject letter of credit. In other words the benefit of L/C accrues only when shipment of goods is completed. Red Clause Letter of Credit goes a step further and authorises the advising bank to grant an advance to the beneficiary at the pre-shipment stage itself. The advance by the advising bank shall be recovered at the time of negotiation of documents under that L/C. In case, however, no shipment is effected by the beneficiary and he fails to present documents under L/C, the bank making advance under red-clause letter of credit will claim reimbursement of advance made from the issuing bank.

PRECAUTION

Important

points/precautions

which

must

be

noted

by

the

openers/beneficiaries at various stages of operations under a letter of credit are now discussed hereunder:

At the Time of Opening of a Letter of Credit

Letter of credit offers almost complete protection to the

seller but the buyer is put to many disadvantages and has to make payments against documents only. Before agreeing to open a letter of credit in favour of the seller, the opener must be satisfied with the creditworthiness and general reputation of the seller. Entire success of an L/C transaction depends on proper conduct of the seller. Confidential report on the seller must be obtained at the time of first transaction with him. Letter of credit also does not offer any protection for the quality/ quantity of goods supplied under the L/C. It would, therefore, be necessary to know the nature of goods and specify submission of quality reports/inspection reports from an independent agency to ensure receipt of goods of proper quality This is particularly important in case of import of chemicals and such other goods. The opener has to submit an L/C application to the opening bank. The instructions contained in the L/C application is the mandate for the issuing bank and letter of credit will be issued in

accordance with this application. It is, therefore, necessary that complete and precise information must be given in the L/C application form specifying therein the description, unlit rate and quantity of the goods covered under IX and details of documents required in absolute clear and unambiguous terms. The reference to underlying sale contract must be avoided as far as possible. The L/C bank. After the L/C has been issued by the bank, a copy thereof must be obtained immediately. The L/C must be scrutinised to ensure that it has been properly issued and is in conformity with L/C application. Discrepancy, if any, must be brought to the notice of opening bank immediately. At the time of Receipt of L/C and Negotiation of Documents On receipt of L/C from the opening/advising bank, the application must nevertheless contain all the required/information based on which L/C could be opened by the

beneficiary must ensure that the letter of credit is advised without any superimposed clause. Sometimes an unauthenticated message may be received and advised by the bank which may not be acted upon unless authenticity of the message (L/C) is confirmed by the advising bank. The L/C must state on the face of if that it is irrevocable and must have been issued by a bank of repute. If the issuing bank is not widely known, confirmation from a local bank may be insisted upon before acting on such a Credit.

The L/C must be scrutinised to ensure that the terms

indicated are in conformity with the underlying sale contract. It does not contain any ambiguous clauses and documents required therein can be completed. If it has some conditions which cannot be compiled with, the matter should immediately be taken up with opener for amendment of L/C. Shipment of goods before ensuring that all the terms and conditions can be complied with may be risky as no protection will be offered under L/C. Necessary arrangement for shipment/despatch of goods shall be made after acceptance of L/C. The shipment and despatch must be made as per the terms of L/C and well within the period prescribed under L/C. After shipment of goods necessary documents must he prepared. Extreme care must be taken to prepare the documents as the payment will be dependent upon the acceptance of those documents under the L/C. Even a minor mistake in spelling or punctuation may prove to be enough ground for rejecting the documents. It is necessary that complete knowledge of all the Articles of UCPDC relating to documents must be obtained at the time of preparation of documents. The documents, complete in all respects, should then be presented to the bank for negotiation. The negotiating bank must be requested to closely examine the documents and indicate the discrepancies, if any. Efforts should then be made to remove those discrepancies and documents free of all discrepancies only must be negotiated.

There may sometimes be some discrepancies which cannot be

rectified and two options are now available as under:

(a)

(a)

Get confirmation/authority of

opening bank to negotiate discrepant documents, or (b) (b) Get the documents negotiated under reserve after giving suitable indemnity bond to the negotiating bank. The option (a) is more advantageous as it will ensure final

payment at the, time of negotiation itself. The option (b) may be exercised only in exceptional circumstances as 'negotiation under reserve' does not offer any guarantee as to acceptance of documents under L/C. The final authority of acceptance of documents lies with the opening bank only who has to be given reasonable time for scrutinising the documents. Documents under L/C are negotiated by banks in India with recourse and if the documents are subsequently rejected by opening bank due to any reasons the negotiating bank will recover the amount of the beneficiary. It is, therefore, necessary that documents are always drawn strictly in conformity with the terms of L/C. On receipt of advice of rejection of documents the negotiating bank must be instructed to initiate necessary steps to safeguard the interest of the beneficiary in light of various provisions of UCPDC.

On Receipt of Documents under L/C

The negotiating bank will transmit the documents to the opening bank after negotiation and obtain reimbursement in terms of the L/C. The opening bank will be given a reasonable time to scrutinise the documents and decide whether the documents are drawn in accordance with the terms of credit and are acceptable or to reject the documents. Reasonable time has since been specified by Article 13(b) of UCPDC and it is not to exceed seven banking days following the day of receipt of the documents. In case documents are rejected by the opening bank, it must give due notice of such rejection to the negotiating bank by fastest means and also place the documents at the disposal of the negotiating bank. The receipt of documents will also be advised by the opening bank to the applicant. Applicant must independently scrutinise the documents

received under L/C and ensure that the documents can be accepted. In case any discrepancy is noted in the documents which is not acceptable, the documents must be rejected and an immediate notice should be given to the opening bank for such rejection. The opening bank may be instructed to take up the matter with negotiating bank suitably. Notice of rejection must invariably be given to the opening bank in writing.

The documents if acceptable, must be taken upon due date

for which necessary financial arrangement shall be made in advance.

GUARANTEES
A contract of guarantee can be defined as a contract to perform the promise, or discharge the liability of a third person in case of his default. The contract of guarantee has three principal parties as under: (1)Principal debtor whose default the guarantee is given. (2) Principal creditor the person to whom the guarantee is given for due fulfilment of contract by principal debtor. creditor is also sometimes referred beneficiary. (3) Guarantor or Surety the person who gives the guarantee. Bank provides guarantee facilities to its customers who may require these facilities for various purpose. The guarantees may broadly be divided in two categories as under : to as Principal -the person who has to perform or discharge the liability and for

Financial guarantees

Guarantees obligations to the

to discharge financial customers.

Performance guarantees Guarantees for due performance of a

contract customers. by

The RBI guidelines for sanctioning guarantee facilities have already been discussed earlier in this chapter. Reserve Bank lays a great emphasis on banks to make prompt payment to the beneficiaries in terms of guarantees issued by them as and when such guarantees are invoked. Other important points/ precautions in respect of availing of these facilities from banks are discussed hereunder: As a rule, banks should avoid giving unsecured guarantees in large amounts and for medium and long term period. They should avoid undue concentration of such unsecured guarantee commitments to particular groups of customer and/or trades. Unsecured guarantees on account of any individual constituent should be limited to a reasonable proportion of the bank's total unsecured guarantees. Guarantees on behalf of individual should also bear a reasonable proportion to constituent's equity. In exceptional cases, banks may give deferred payment guarantees on an unsecured basis for modest amounts to first class customers who have

entered

into deferred policy.

payment But such

arrangements in unsecured

consonance with should be

Government

guarantees

accommodated within the limits indicated above. Guarantees executed on behalf of any individual constituent, or a When any bank reaches a stage where it is likely to exceed the group of constituents, should be subject to prescribed exposure norms. norm, it should not undertake any further commitment on account of guarantees. Suitable arrangements may be made to keep a watch from time to time about the outstanding guarantees of the bank so as to ensure that it does not exceed the norm. It is essential to realise that guarantees contain inherent risks and that it would not be in the bank's interest or in the public interest generally to encourage parties to over-extend their commitments and embark upon enterprises solely relying on the easy availability of guarantee facilities. The guarantees are issued by the banks against counter

guarantees given to the banks by the customer. The banks may also require a cash margin and/or other securities as per sanction. Indian Banks Association has prescribed a standard guarantee form which is generally issued by the banks. Guarantees may be issued in serially numbered security forms. Where guarantees are issued in favour of Government Departments banks may adopt Model Form of Bank Guarantee Bond (as per

Annexure 2 of Circular No. DBOD.DIR. BC. 16/13.03.00/2003-2004 dt.22 8.2003). Further, as advised by the Government of India, any alterations/additions to the clauses of this bond, if considered necessary. Shall not be one-sided but shall be made in agreement with the guaranteeing bank. After the period of guarantee has expired efforts should be made to arrange return of the guarantee by the beneficiary to the bank. Banks are not allowed to execute guarantes covering inter-company deposits/ loans accepted by NBFC/firms from other. NBFC/firms. Banks may issue guarantees favouring the financial institutions or other banks or lending agencies for the loans extended by the latter, on fulfilment of prescribed conditions. However, in regard to rehabilitation of sick/weak industrial units, in exceptional cases, where banks are unable to participate in rehabilitation packages due to temporary liquidity constraints, such banks may extend guarantees in favour of the banks which take up their additional share. These guarantees will remain in existence till such time the banks providing additional finance against guarantees are re-compensated. Guarantees can be issued favouring HUDCO/ State Housing Boards and similar bodies/organisations for the loans granted to private borrowers who are unable to offer clear and marketable title to property. However, banks must satisfy

themselves regarding the capacity of the borrowers to adequately service such loans. Banks may issue guarantees on behalf of their clients in favour of Development Agencies/Boards (like IREDA, NHB etc.) for obtaining soft loans/other forms of development assistance. Banks have discretion to issue guarantees favouring other lending agencies, in respect of infrastructure projects alone provided the guarantor bank also takes a funding share in the project to the extent of at least 5% of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project.

Working Capital
What Does Working Capital Mean?

A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Positive working capital means that the company is able to pay off its shortterm liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

Investopedia explains Working Capital If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

FUNDING OPTIONS
This section provides broad description about different funding facilities provided from different banks with a list of Nationalize and Private Banks. For the specific requirement details, it is suggested to go to the site of each bank. Fund based Bank Facilities Term Loans: Term loan is an installment credit repayable over a period of time in monthly/quarterly/half yearly/yearly installments. Term loan is generally granted for creation of fixed assets required for long-term use by the unit. Term loans are further classified in three categories depending upon the period of repayment as under:

Short term repayable in less than 3 years. Medium term loans repayable in a period ranging from 3 years to 7 years. Long term loans repayable in a period over 7 years.

Cash Credit Facility: a major part of working capital requirement of any unit would consist of maintenance of inventory of raw materials, semi finished goods, finished goods, stores and spares etc. In trading concern the requirement of funds will be to maintain adequate stocks in trade. Finance against such inventories by banks is generally granted in the shape of cash credit facility where drawings will be permitted against stocks of goods. It is a running account facility where deposits and withdrawals are permitted. Cash credit facility is of two types (depending upon the type of charge on goods taken as security by bank). (i) Cash credit - pledge: when the possession of the goods is with the bank and drawings in the account are linked with actual movement of goods from/to the possession of the bank. The physical control of the goods is exercised by the bank. (ii) cash credit- hypothecation: when the possession of the goods remains with the borrower and a floating charge over the stocks is created in favors of the bank. The borrower has complete control over the goods and the drawings in the account are permitted on the basis of stock statements submitted by the borrower.

2. Post shipment credit the bills purchase/discount facility granted to exporters is grouped as post shipment advance.

Non-Fund based Bank Facilities

Credit facilities, which do not involve actual deployment of funds by banks but help the obligations to obtain certain facilities from third parties, are termed as non-fund based facilities Overdraft Facility: Overdrawing permitted by the bank in current account is termed as an overdraft facility. Overdraft may be permitted without any security as 'clean overdraft' for temporary periods to enable the borrower to tide over some emergent financial difficulty. 'Secured overdraft' facility is against fixed deposits, NSC, and other securities. Bills Finance: This facility is against bills of sales raised or book debts. Export Finance: Banks grant export credit on very liberal terms to meet all the financial requirements of exporters. The bank credit for exports can broadly be divided in two groups as under:

1. to

Pre

Shipment

advances/packing goods meant

credit for

advances: and

Financial assistance sanctioned to exporters to enable them manufacture/procure exports arrange for their eventual shipment to foreign countries is termed as pre shipment credit. . These facilities include issuance of letter of credit, issuance of guarantees, which can be performance guarantee/financial guarantee.

National Level Financial Institutions State Financial Corporations Offering Specialized SSI Schemes Venture Capital Organizations Other Banks Offering Financial Assistance

5. Problems and Prospects of PSBs Depression in merchant banking services of PSBs. In PSBs largely the officials handling the traditional financial services have been engaged in the merchant banking activities whereas banking services requires expert Analysis of merchant banking business of some PSBs including PNB and its subsidiary PNB CAP reveals that there is decline in the volume of PSBs merchant banking business. During early nineties there was a boom in the merchant banking business

of PSBs but the boom could not survive for longer period and it converted into depression. It has been largely due to subdued capital market conditions as merchant banking activities has direct positive correlation with stock exchange index. Frequent changes in the guidelines also have been affecting the growth of PSBs merchant banking business. Limited range of merchant banking activities handed by PSBs and inferior quality of the services in compassion to lending private sector merchant bankers and foreign merchant bankers is also responsible for the services requiring specially skill, knowledge and training. Reforms are a continuous process; the progress made so far provides a good basis for merchant banking services. SEBI has formulated comprehensive guidelines for the growth of merchant banking activities. Many new entrepreneurs have been emerging which need assistance and expert advice of merchant bankers. PSBs have to develop the necessary skill and equip themselves to compete in the area of merchant banking. Product development is one of the weak areas of the PSBs. No attempt has been made to introduce non fund based products. This has to be tackled if the banks are to survive in a competitive environment. finance-related needs of the advanced industrial sectors. These specialist services are also of great importance for the small and medium sized enterprises to help them operate

smoothly. Most of the rural areas still lack industrial advancement and the main reasons for this include lack of funds and information. The merchant banking services help the entrepreneurs to come up with industrial setups in these areas. Besides, the merchant banks help the entrepreneurs to explore the joint venture opportunities in the foreign markets. Competition due to financial liberalization has compelled PSBs to diversify their non fund based activities e.g. lead managing co managing, underwriting advising loan syndicating capital issue management trusteeship etc. Non funded based financial services marketed by PSBs comes under purview of merchant banking which is governed by Merchant Bankers Regulation issued by SEBI of December 22, 1992. The regulation of the SEBI Act provided for registration of merchant bankers with SEBI for doing merchant banking. Most of the PSBs including PNB have been doing merchant banking business. Some of the PSBs have formed their fully owned subsidiaries for this purpose. The activities being undertaken by most of the banks are lead managing comanaging, underwriting as a banker to issue etc. PNB was actively involved in merchant baking business such as underwriting, banker to issues, and payment of dividend/interest refund as and agent and trustee of debenture holders. PNB incorporated PNB capital Service Ltd

as its wholly owned subsidiary. The company is registered with SEBI as merchant banker of category I and debenture trustee. Analysis of merchant banking business of some PSBs clearly indicates that the merchant banking activities of the banks are showing declining trend especially after 1993-94 due to depressed capital market conditions and subdued activity in primary market.

Fund Based) Services (FB

Working Capital Finance

We offer pre-shipment as well as post-shipment). Fee based facilities include letters of credit and bank guarantees. Working Capital facilities are provided to finance the day-to-day business requirements. Funding requirements are structured to finance procurement of raw materials/stores and payment towards manufacturing costs and other overheads. Sales are financed against sundry debtors/ receivables. The Bank offers a combination of operative cash credit and working capital demand loan to meet the domestic working capital requirements of our clients.

Short Term Finance working capital facilities - both fund-based and fee-based. Fund-based working capital products include cash credit, overdraft, bill discounting, short-term loans, export financing ( The Bank offers short-term loans for a period ranging from 3 months to 12 months to sound corporate for meeting their specific short-term working capital requirements. The funds are provided with interest rates either linked to our BPLR or at a fixed rate with varying repayment patterns. Bill Discounting This product enables corporate to fund their operating cycle right from the stage of procurement to sale. Bill Financing is extended by IndusInd Bank to its clients at competitive rates. Letter of credit backed bill discounting and clean bill discounting are the convenient mode of financing for domestic trade transactions. BOE could be broadly classified into Demand and Usance bills and are further classified into clean and documentary bills Export Finance As an important incentive to the exporters community for boosting exports, financial assistance in Rupees is extended to exporters on priority basis on relatively liberal terms. Such

finance is provided both at pre-shipment stage (as working capital finance) and at post-shipment stage (to bridge the time lag between the shipment of goods and the realisation of proceeds). Interest charged on export credit is exempted from the purview of interest tax.
Term Lending We offer term loans to both Industrial as well as Infrastructure sectors promoted by strong business houses. These loans are for a period of 3-5 years with a moratorium period. Interest rates could be fixed or floating linked to the bank's BPLR. Buyers Credit / Suppliers Credit

This facility provides total flexibility to corporates to utilise the line (sanctioned limit) of credit. The terms of the line of credit are either predetermined or negotiated at the time of availment. This facility is used as and when the client has a requirement

Advertised on 9-5-11. Application deadline on 8-7-11.

HDFC Bank Ltd was promoted in the year 1994 by the premier housing finance company of the country, HDFC Ltd. The Bank commenced operations as a Scheduled Commercial Bank in January 1995. Today the Bank has a nationwide network of over 1725 branches and 4232 ATMs spread over 779 towns and cities across India The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange (NYSE) and the Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange. The Bank has been bestowed with numerous awards and accolades from top national and international agencies & magazines. HDFC Bank comprises of a dynamic and enthusiastic team determined to accomplish the vision of becoming a Worldclass Indian bank.

Our business philosophy is based on our four core values Customer Focus, Operational Excellence, Product Leadership and People. We believe that the ultimate identity and success of our bank will reside in the exceptional quality of our people and their extraordinary efforts. We are committed to hiring, developing, motivating and retaining the best people in the industry The Banks objective is to build sound business franchises across distinct businesses so as to be a preferred provider of banking services for target retail and wholesale customer segments. We are committed to healthy growth in profitability while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance.

Relationship Manager - Corporate Banking

Responsibilities:

The candidate would require to handle a set of large corporate both existing and targets for business (fund based, non fund based, trade flows, payments and collections and retail cross sell products). This shall carry both income as well as volume targets. He/She shall be responsible for preparation of credit reports and quarterly review for all relationships where

limits are being sanctioned. Shall co ordinate with internal Credit team for approval.

Shall be responsible for handling and getting pre and post sanction documentation and statements for internal housekeeping and ensuring KYC, end use monitoring and other regulatory requirements. Shall be the one point of contact for the company (across various departments) and shall liase with other divisions of the Bank for achieving the above objectives.

Requirements:

Candidate must possess at least a Master in Business Admin/Post Graduate Diploma in Business Administration/Post Graduate Program in Management in Finance/Accountancy/Banking, Marketing or equivalent. Required skill(s): fund based, non fund based, trade flows. At least 2 year(s) of working experience in the related field is required for this position. Preferably Managers specializing in Banking/Financial Services or equivalent. Job role in Corporate Banking or equivalent. 2 Full-Time positions available.

Preferably having a qualification of CA / MBA / CFA Candidates working with other private sector banks / foreign banks. Minimum 3-4 years of banking experience of which 2 years should be preferably in Corporate Banking division.

Analysis of Non-Fund Based Financial Services: Some Insights From India

Merchant banking services strengthen the economic development of a country as they acts as sources of funds and information for corporations. Considering the way the Indian economy is growing, the role of merchant banking services in India is indispensable. These

financial institutes also act as corporate advisory bodies to help corporations rightly get involved in various financial activities. The need of merchant banking services in India arises from the fact that high level industrialization is taking place in the country. Some of the PSBs have formed their fully owned subsidiaries for this purpose. Analysis of merchant banking business of some PSBs clearly indicates that the merchant banking activities of the banks are showing declining trend especially after 1993-94 due to depressed capital market conditions and subdued activity in primary market.

Types of Deposit Schemes

(Non-Resident Ordinary Account (NRO A/c)Particulars Who can open an account NRIs or OCBs

(Foreign Currency Non-Resident Account (FCNR A/c) NRIs or OCBs Any person resident outside India

Non-Resident External Rupee Account (NRE A/c)

(Individuals/entities of Bangadesh/ Pakistan nationality /ownership require approval of RBI)

(Individuals/entities of Bangadesh/ Pakistan (Individuals/entities of nationality /ownership Bangadesh/ Pakistan require approval of RBI) nationality /ownership require approval of RBI) In the names of two or more non-resident individuals Permitted Indian Rupees Repatriable May be held jointly with residents Permitted Indian Rupees Not repatriable except for the following in the account:1. Current income and interest Upto US$ 1 million per calendar year for any bonafide purposes out of NRO balances/ sales proceeds of assets

Joint account

In the names of two or more nonresident individuals Permitted Pound Sterling, US Dollar, Jap. Yen, or Euro. Repatriable

Nomination Currency in which account denominated Repatriability

2.

Type of Account

Term Deposits only

Savings, Current, Recurring, Fixed Deposit No restriction Subject to cap: LIBOR/SWAP+ 100 basis points

Savings, Current, Recurring, Fixed Deposit No restriction Banks are free to determine interest rates.

Period for fixed deposits Rate of Interest

For terms not less than 1 year and more than 3 years Subject to cap: LIBOR - 250 basis points

LOANS & OVERDRAFTS a. IN INDIA

Permitted(i)

to the Account

Permitted Permitted Permitted

holder
(ii) to third partiesPermitted Permitted

b) OUTSIDE INDIA (i) to the Account holder (ii) to third parties b. FOREIGN CURRENCY LOANS IN INDIA Not Permitted(i) Permitted Permitted Permitted Permitted Not Permitted Not Permitted

to the Account holder

(ii) to third partiesNot

Permitted Not Permitted Not Permitted Not Permitted

Permitted
PURPOSE OF LOAN a. IN INDIA i)Personal purposes or for carrying on business activities. * ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms/ companies iii) Acquisition of flat/ house in India for his own residential use Fund based and/or non-fund based Fund based and/or non- Personal requirement and facilities for personal purposes or for fund based facilities for / or business purpose* carrying on business activities . * personal purposes or for carrying on business activities . *

Personal requirement and /or business purpose. *(i) to the

Account holder
In India (ii) to third partyi)Personal

purposes or for carrying on business activities ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms/ companies iii) Acquisition of flat/ house in India for his own residential use
b) OUTSIDE INDIA Not permittedTo

the Account Fund based and/or non-fund based facilities for bonafide purposes. holder and to third party Fund based and/or nonfund based facilities for bonafide purposes. * The loans cannot be utilized for the purpose of relending, or carrying on agriculture or plantation activities or for investment in real estate business.

Features of various foreign currency deposit schemes available to Resident Indians

Particulars Resident Foreign Currency Resident Foreign Currency Exchange Earners Foreign Account (RFC Account) (Domestic ) Account Currency Account(EEFC (RFC(D) Account) Account) Any person resident in India. Resident Individuals Any person resident in India A 100% Export Oriented Unit or a unit in (a) Export processing zone or (b) Sortware technology park or (c)Electronic hardware technology park may credit upto 100% and any other person resident may credit upto 50% of their foreign exchange earnings. (d) Professional like scientists, professors of Indian Universities, economists, lawyers, doctors, artists, architects, engineers, consultants, Cost/ Chartered Accountants, Directors of Boards of overseas companies etc. who render services in their individual capacities outside India, may credit upto 100% of their earnings.

Who can open an account

Sources of Funds

1.

2.

3.

Foreign exchange Foreign exchange acquired : received as pension/ superannuation 1. while on a visit /other benefits from abroad employer abroad 2. from any person on Reaslisation of visit to India or assets held abroad honorarium or gift or for services or Foreign exchange settlement of any acquired as gift or lawful obligation inheritance from 3. by way of person who was honorarium or gift NRI while on a visit abroad 4. representing unspent foreign exchange acquired during travel abroad 5. as gift from a close relative 6. by way of earning through export of goods/services or as royalty honorarium or by any other lawful means. 7. representing the disinvestment proceeds received by the resident a/c holder on conversion of shares held by him to

ADRs/GDRs under the sponsored ADR/GDR scheme approved by the FIPB of Govt. of India. Joint account of two or more residents Joint account with NRI Types of account Not permitted Not permitted Savings Current Fixed Deposit Like any resident accounts banks may fix the period The banks are free to determine interest rates. No restrictions, including investments overseas Foreign currency loans permitted Not permitted Not permitted Current Account Not permitted Not permitted Current Account

Period for fixed deposits Rate of interest End Use

N.A. No interest is payable For permissible current and capital account transactions Not permitted

N.A. No interest is payable. For bonafide purposes as per Notification No. FEMA 10/2000-RB dt. 3.5.2000 Not permitted

LOANS & OVERDRAFTS In India

RBI moots non-fund-based activities to boost profitability

Banks

need

to

make

concerted

efforts

to

improve

profitability by diversifying their businesses, especially into non-fund-based activities," the RBI report said. MUMBAI, March 31 THE Reserve Bank of India has advised commercial banks to undertake more non-fund-based activities to improve their profitability. According to the central bank, profitability of banks in India is still low as compared to several developing countries.Banks need to make concerted efforts to improve their profitability by diversifying their businesses, especially into non-fund-based activities," the RBI said in its Report on Currency and Finance 2001-02 released on Monday. The RBI has expressed concern about the large amount of "loss assets" which ideally should be written off, still constitutes 10 per cent of the gross NPAs, mainly because these assets are under litigation. Though there is improvement in the banks' asset quality, the level of NPAs still appears high by international standards. Therefore, a major challenge for banks is to bring down the NPAs, the report said.

Asset impairment (ratio of gross NPAs to gross advances) in respect of 100 per cent government-owned banks was much higher in comparison with PSBs that divested their equity and old private sector banks. The net NPAs of partially government-owned PSBs as at end-March 2002 stood lower than those of old private sector banks. New pvt banks outperform others: According to the RBI report, new private sector banks have outperformed their public sector and old private sector contemporaries when compared on a set of financial parameters for the period 1995-96 to 2001. However, for 2001-02, the data relating to new private sector banks reflect the impact of mergers and are therefore, not strictly comparable with those of the earlier years. Based on an examination of the relationship between ownership and efficiency in banks (public and private), the report reveals that old private sector banks performed better than partially government-owned PSBs, which in turn performed better than the wholly owned government PSBs during the period 1995-96 to 2001-02. The profitability of public sector banks (PSBs), which divested their holding early in the reform process, and old private sector banks, was higher than those of fully

government-owned PSBs, during the period 1995-96 to 2001-02. According to the report, the profitability on an average of both old private sector banks and the government-owned banks, which divested their equity, was more or less at the same level during this period. The sharp rise in profits across most bank groups during 2001-02 was on account of capital gains on government securities resulting from softening of interest rates and the containment in operating expenses. Hundred per cent government-owned banks had higher ratio of operating expenses to total assets in comparison with those of public sector banks (PSBs), which have divested their equity as well as old private sector banks. While the ratio for 100 per cent government-owned PSBs was higher than the industry level, the ratio in respect of both old private sector banks and those banks that divested their equity was lower than the industry.

CONCLUSION

Capital adequacy ratio (CAR), on an average, was lower in fully government owned PSBs than those PSBs that divested their equity as well as old private sector banks. However, the report points out, that the CAR of fully government owned banks, which on an average, was roughly half as compared with old private banks and PSBs with reduced government ownership, improved significantly over the last few years. Merchant banking services strengthen the economic

development of a country as they acts as sources of funds and information for corporations. Considering the way the Indian economy is growing, the role of merchant banking services in India is indispensable. These financial institutes also act as corporate advisory bodies to help corporations rightly get involved in various financial activities. The need of merchant banking services in India arises from the fact that high level industrialization is taking place in the country. There is need for skilled professionals who can take care of various finance-related needs of the advanced industrial sectors. These specialist services are also of great importance for the small and medium sized enterprises to help them operate smoothly. Most of the rural areas still lack industrial advancement and the main reasons for this include lack of funds and information. The merchant banking services help the entrepreneurs to come up with industrial setups in these

areas. Besides, the merchant banks help the entrepreneurs to explore the joint venture opportunities in the foreign markets. Competition due to financial liberalization has compelled PSBs to diversify their non fund based activities e.g. lead managing co managing, underwriting advising loan syndicating capital issue management trusteeship etc. Non funded based financial services marketed by PSBs comes under purview of merchant banking which is governed by Merchant Bankers Regulation issued by SEBI of December 22, 1992. The regulation of the SEBI Act provided for registration of merchant bankers with SEBI for doing merchant banking. Most of the PSBs including PNB have been doing merchant banking business. Some of the PSBs have formed their fully owned subsidiaries for this purpose. The activities being undertaken by most of the banks are lead managing comanaging, underwriting as a banker to issue etc. PNB was actively involved in merchant baking business such as underwriting, banker to issues, and payment of dividend/interest refund as and agent and trustee of debenture holders. PNB incorporated PNB capital Service Ltd as its wholly owned subsidiary. The company is registered with SEBI as merchant banker of category I and debenture trustee. Analysis of merchant banking business of some PSBs clearly indicates that the merchant banking activities of the

banks are showing declining trend especially after 1993-94 due to depressed capital market conditions and subdued activity in primary market.