Banking Briefs 2008

Banking Briefs 1 (For internal circulation only)
FOREWORD
Today, availability of information is not scarce; but what is often lacking is the
availability of right information at the right time and at the right place. This is
particularly an issue for today’s bankers who are so engrossed in their daily routine
that they find it difficult to find time to scan the environment around them.
‘Banking Briefs’, brought out by the State Bank Staff College, is an attempt to
address this issue.
‘Banking Briefs’ was first published in 1995. This is its tenth edition, which covers
a wide spectrum of topics in banking, economy, finance, law, institutions, IT, etc.
The topics included in the publication are contemporary and of relevance to
Banking Professionals. We in the College track the events that occur during a year
and try to present these, with their implications, in a comprehensive and lucid
way.
While a lot of efforts has gone into bringing out this edition, there could still be
gaps particularly from a reader’s point of view. Your feedback in the form annexed
would, therefore, be always welcome.
‘Banking Briefs’ is available on SBITimes. I extend my compliments to all Faculty
members and Research Officers who have contributed papers to this edition. I
appreciate the efforts put in by Shri M.R. Das, AGM (Economist) and Shri Kshitij
Mohan, Chief Manager (Research) for compiling the book. I compliment Shri S.T.
Rajasundaram, Shri K.B. Bakthavathsal and Shri L. Mahapatra, all Dy. General
Manager & Senior Faculty, for their active involvement in bringing out the book.
Our efforts will be amply rewarded if it is found useful by our colleagues.
I wish you an intellectually enriching reading.
State Bank Staff College,

Hyderabad P. BHASHYAM
December 20, 2007 Chief General Manager & Principal

BANKING
BRIEFS
A Compendium of Readings of Relevance to Bankers
JANUARY 2008
(Tenth Revised & Enlarged Edition)
Compiled by
M.R. Das Kshitij Mohan

AGM (Economist) Chief Manager (Research)
Satbir Singh C.S. Shaji

Chief Manager (Research) Deputy Manager (Research)
STATE BANK STAFF COLLEGE

DISTANCE LEARNING DEPARTMENT
HYDERABAD
(For Internal Circulation Only)

71 NEW TOPICS ADDED IN THIS EDITION
1. Vibrant SBI ..... 1
2. Transfer of Reserve Bank’s Share Holding in
State Bank of India to Government of India ..... 7
3. Personal Financial Planning: An Overview ..... 8
4. Credit Cards With Special Reference to
Consumer Protection ..... 12
5. Deposit Insurance in India ..... 14
6. Islamic Banking ..... 17
7. Implementation of Basel II: Present Status ..... 27
8. Scheme of Prompt Corrective Action ..... 31
9. Disclosure and Transparency in Banks’
Balance Sheets ..... 33
10. Compliance Function in Banks ..... 35
11. Revised Guidelines on Priority Sector Lending ..... 37
12. Micro, Small and Medium Enterprises ..... 38
13. Outsourcing ..... 40
14. Prevention of Money Laundering (PML) Act ..... 41
15. SARFAESI Act: An Update ..... 44
16. Technological Development in Indian Banks ..... 57
17. E-learning ..... 59
18. E-Purse ..... 62
19. Mobile Banking ..... 64
20. Biometrics Authentication Technology ..... 66
21. Payment Systems: An Update ..... 68
22. Centralized Funds Management System (CFMS) ..... 71
23. Technology-Based Solutions for Rural Banking Business ..... 73
24. Tech Terms in Vogue ..... 75
25. Reverse Mortgage ..... 78
26. Credit Derivatives: Risk Transfer Instrument ..... 86
27. Overheating of the Economy ..... 122
28. Rupee Appreciation ..... 123
29. Inclusive Growth ..... 125
30. Economic Survey 2006-07 ..... 128
31. Some Budget Concepts ..... 133
32. Union Budget 2007- 08 ..... 136
33. Railway Budget 2007-08 ..... 143
34. Mid-Term Review of Annual Policy for 2007-08 ..... 146

35. Special Economic Zones (SEZs) ..... 153
36. Legislative Amendments for Conduct of Monetary Policy ..... 155
37. Government Securities Act, 2006 ..... 156
38. Credit Information Companies (Regulation) Act, 2005 -
Rules and Regulations ..... 157
39. Investment in Indian Companies by FIIs/NRIs/PIOs ..... 159
40. Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 ..... 160
41. RTI Act: Implications for Banks ..... 162
42. Banking Codes and Standards Board of India:
Banks' Commitments to Customers ..... 168
43. Pension Fund Regulatory and Development Authority (PFRDA)..... 171
44. Money Market ..... 189
45. Government Securities Market ..... 192
46. Corporate Debt Market ..... 196
47. Foreign Exchange Market ..... 198
48. Non-Deliverable Forward Market ..... 201
49. Hedge Funds ..... 202
50. Private Equity ..... 205
51. Participatory Notes ..... 206
52. Carbon Credits and Emission Trading ..... 208
53. The Sub-prime Crisis ..... 226
54. Impact of Hike in Oil Price ..... 228
55. China’s Banking Sector ..... 230
56. External Sector: An Overview ..... 233
57. Management of Mounting Forex Reserves ..... 236
58. External Commercial Borrowings: The Current Status ..... 239
59. UCP 600: ICC’s New Rules on Letters of Credit ..... 246
60. SAARCFINANCE: Network of SAARC Country Central Banks ..... 249
61. Money Laundering Menace: An International Perspective ..... 250
62. Strokes ..... 255
63. Burnout ..... 257
64. Values and Ethics ..... 260
65. IT Governance ..... 278
66. Committee on Fuller Capital Account Convertibility ..... 311
67. Technical Group to Review the Legislations on Money Lending ..... 313
68. National Commission on Farmers ..... 314
69. National Development Council: Resolution on Agriculture ..... 316
70. Sadasivan Working Group on Reasonable
Service Charges by Banks to Customers ..... 318
71. Committee on Financial Sector Assessment ..... 319

CONTENTS
A. BANKING
I. STATE BANK OF INDIA

1. Vibrant SBI ..... 1
2. Transfer of Reserve Bank’s Share Holding in
State Bank of India to Government of India ..... 7
II. GENERAL
3. Personal Financial Planning: An Overview ..... 8
4. Credit Cards With Special Reference to
Consumer Protection ..... 12
5. Deposit Insurance in India ..... 14
6. Islamic Banking ..... 17
7. Banking Industry: Vision 2010 ..... 21
8. Retail Banking - Opportunities and Challenges ..... 23
III. POLICIES AND ACTS

9. Implementation of Basel II: Present Status ..... 27
10. Scheme of Prompt Corrective Action ..... 31
11. Disclosure and Transparency in Banks’
Balance Sheets ..... 33
12. Compliance Function in Banks ..... 35
13. Revised Guidelines on Priority Sector Lending ..... 37
14. Micro, Small and Medium Enterprises ..... 38
15. Outsourcing ..... 40
16. Prevention of Money Laundering (PML) Act ..... 41
17. SARFAESI Act: An Update ..... 44
18. Guidelines on Purchase/Sale of Non-Performing
Financial Assets ..... 47
19. Know Your Customer (KYC) Guidelines ..... 49
20. CAMELS Ratings for Banks ..... 52
21. Banking Ombudsman Scheme ..... 54
22. Road Map for Presence of Foreign Banks ..... 56

IV. TECHNOLOGY
23. Technological Development in Indian Banks ..... 57
24. E-learning ..... 59
25. E-Purse ..... 62
26. Mobile Banking ..... 64
27. Biometrics Authentication Technology ..... 66
28. Payment Systems: An Update ..... 68
29. Centralized Funds Management System (CFMS) ..... 71
30. Technology-Based Solutions for
Rural Banking Business ..... 73
31. Tech Terms in Vogue ..... 75
V. CREDIT AND DERIVATIVE PRODUCTS

32. Reverse Mortgage ..... 78
33. Credit Derivatives: Risk Transfer Instrument ..... 86
34. Infrastructure Financing ..... 88
35. Securitisation ..... 90
36. Factoring ..... 92
37. Forfaiting ..... 93
38. Commercial Paper ..... 94
39. Currency Swaps ..... 96
40. Currency Options ..... 97
41. Currency Futures ..... 98
42. Interest Rate Swaps ..... 99
VI. MANAGEMENT OF ASSETS AND LIABILITIES

43. Risk Based Supervision of Banks ..... 100
44. Risk Management Systems in Banks ..... 103
45. Asset-Liability Management ..... 105
46. Credit Risk Management ..... 107
47. Treasury Management in Banks ..... 110
48. Portfolio Management ..... 113
49. Operational Risk in Banks ..... 115
50. Essentials of Liquidity Risk Management ..... 117
51. Value at Risk (VaR) ..... 120

B. ECONOMY AND FINANCE
I. POLICIES AND ACTS
52. Overheating of the Economy ..... 122
53. Rupee Appreciation ..... 123
54. Inclusive Growth ..... 125
55. Economic Survey 2006-07 ..... 128
56. Some Budget Concepts ..... 133
57. Union Budget 2007- 08 ..... 136
58. Railway Budget 2007-08 ..... 143
59. Mid-Term Review of Annual Policy for 2007-08 ..... 146
60. Special Economic Zones (SEZs) ..... 153
61. Legislative Amendments for Conduct of Monetary Policy ..... 155
62. Government Securities Act, 2006 ..... 156
63. Credit Information Companies (Regulation) Act, 2005 -
Rules and Regulations ..... 157
64. Investment in Indian Companies by FIIs/NRIs/PIOs ..... 159
65. Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 ..... 160
66. RTI Act: Implications for Banks ..... 162
67. Micro Finance ..... 165
II. INSTITUTIONS
68. Banking Codes and Standards Board of India:
Banks' Commitments to Customers ..... 168
69. Pension Fund Regulatory and Development
Authority (PFRDA) ..... 171
70. Credit Information Bureau (India) Limited (CIBIL) ..... 172
71. SME Rating Agency of India Limited (SMERA) ..... 174
72. The Institute for Development and Research in
Banking Technology (IDRBT) ..... 175
73. Clearing Corporation of India Ltd. (CCIL) ..... 178
74. Asset Reconstruction Company (India) Limited ..... 180
75. Multi Commodity Exchange of India
(MCX, NCDEX, NMCIL) ..... 183
76. Non-Banking Finance Companies (NBFCs) ..... 185
III. FINANCIAL MARKETS

77. Money Market ..... 189
78. Government Securities Market ..... 192

79. Corporate Debt Market ..... 196
80. Foreign Exchange Market ..... 198
81. Non-Deliverable Forward Market ..... 201
82. Hedge Funds ..... 202
83. Private Equity ..... 205
84. Participatory Notes ..... 206
85. Carbon Credits and Emission Trading ..... 208
86. Exchange Traded Funds ..... 211
87. Gold Demat ..... 212
88. Book Building ..... 214
89. Buy Back ..... 215
90. Stock Index Futures ..... 217
91. Employees Stock Option Plans (ESOPS) ..... 219
92. Margin Trading ..... 221
93. Internet Trading ..... 222
94. Venture Capital in India: Growth and Challenges ..... 223
IV. EXTERNAL SECTOR

95. The Sub-prime Crisis ..... 226
96. Impact of Hike in Oil Price ..... 228
97. China’s Banking Sector ..... 230
98. External Sector: An Overview ..... 233
99. Management of Mounting Forex Reserves ..... 236
100. External Commercial Borrowings: The Current Status ..... 239
101. UCP 600: ICC’s New Rules on Letters of Credit ..... 246
102. SAARCFINANCE: Network of SAARC Country
Central Banks ..... 249
103. Money Laundering Menace: An International Perspective ..... 250
104. National Foreign Trade Policy 2004-09 ..... 252
C. MANAGEMENT
105. Strokes ..... 255
106. Burnout ..... 257
107. Values and Ethics ..... 260
108. Corporate Governance ..... 262
109. Balanced Score Card ..... 266

110. Transformational Leadership ..... 268
111. Learning Organization ..... 270
112. Intellectual Capital ..... 273
113. Knowledge Management ..... 275
114. IT Governance ..... 278
115. Assessment Centre ..... 279
116. Competency Mapping ..... 280
117. Organisation Culture ..... 282
118. Mentoring ..... 284
119. 360–Degree Technique ..... 286
120. Emotional Intelligence ..... 288
121. Stress Management ..... 290
122. Empowerment ..... 292
123. Service Quality Management ..... 293
124. Niche Market ..... 296
125. Six Sigma: For Quality ..... 297
126. Total Quality Management (TQM) ..... 299
127. Benchmarking ..... 301
128. ISO 9001 ..... 303
129. ISO 14000 ..... 304
130. Quality Circles ..... 305
131. Financial Engineering ..... 306
132. Economic Value Added (EVA) ..... 307
133. Market Value Added (MVA) ..... 308
134. Emerging Trends in Banking and Finance:
Role of New Generation Managers ..... 309
D. COMMITTEES
135. Committee on Fuller Capital Account Convertibility ..... 311
136. Technical Group to Review the Legislations on
Money Lending ..... 313
137. National Commission on Farmers ..... 314
138. National Development Council: Resolution
on Agriculture ..... 316
139. Sadasivan Working Group on Reasonable
Service Charges by Banks to Customers ..... 318
140. Committee on Financial Sector Assessment ..... 319
141. Narasimham Committee - I ..... 321
142. Narasimham Committee - II ..... 324

STATISTICAL PROFILE
Table 1: Consolidated Balance Sheet of Scheduled Commercial Banks ..... 327
Table 2: Important Financial Indicators of Scheduled Commercial Banks ..... 328
Table 3: Financial Performance of State Bank Group ..... 329
Table 4: Lending to the Sensitive Sector by Scheduled Commercial Banks ..... 330
Table 5: Cost of Funds and Return on Funds – Bank Group-wise ..... 330
Table 6: Capital Adequacy Ratio – Bank Group-wise ..... 331
Table 7: Computerisation in Public Sector Banks ..... 331
Table 8: Branches and ATMs of Scheduled Commercial Banks ..... 331
Table 9: Gross and Net NPAs of Scheduled Commercial Banks –
Bank Group-wise ..... 332
Table 10: Share Prices and Price/Earning Ratios of Bank Stocks at BSE ..... 333
Table 11: Share of Top Hundred Centres in Aggregate Deposits and
Gross Bank Credit ..... 334
Table 12: Overseas Operations of Indian Banks ..... 334
Table 13: List of Foreign Banks Operating in India – Country-wise ..... 335
Table 14: Return on Assets of Indian Banks vis-à-vis Select Countries ..... 336
Table 15: Ratio of Gross Non-performing Loans to Gross Advances
of Indian Banks ..... 337
Table 16: Capital Adequacy Ratio- Indian Banks vis-a-vis Select Countries ..... 338
Table 17: Distribution of Commercial Bank Branches in India –
Bank Group and Population Group-wise ..... 339
Table 18: Off-Balance Sheet Exposure of Scheduled
Commercial Banks in India ..... 340

BANKING
STATE BANK OF INDIA

VIBRANT SBI
The State Bank of India has been in the forefront of all areas of banking and has,
over the years, richly merited its status as the flagship of Indian banking.
In several fields, the Bank has pioneered innovative measures and contributed
significantly to the growth of the Indian economy, while improving its own
profitability over the years.
State Bank of India is the largest commercial Executives) for National Banking Group and
bank in India in terms of assets, deposits, Corporate Banking Group and Deputy
profits, branches and employees. At the end Managing Directors. New senior positions
of 2006-07 (April’06-March07), the Bank had recently created are i.e. Deputy Managing
total assets of Rs.5,66,565.23 crore (US Director & Group Executive (Rural & Agri.
$130.33 billion), total deposits of Rs.43,552.08 Business), Deputy Managing Director & Group
crore (US $100.19 billion) and recorded a Executive (Treasury & Markets), Deputy
net profit of Rs.4,541 crore (US $1.04 billion). Managing Director (Corporate Strategy & New
The Bank has a vast domestic network of 9,517 Business), Deputy Managing Director
branches and staff strength of 1,85,388. (Wholesale Banking Group), General Manager
(Corporate Communication & Change) and
The State Bank is the only Indian bank to rank General Manager (Super Circle Excellence), as
among the top 100 banks in the world and is part of new initiatives for focusing on market
also among the top 20 banks in Asia segments that need ongoing monitoring of the
according to The Banker (UK) annual survey. growth in business.
SBI is the sixth Indian company to feature in
the Fortune Global 500 companies. Capital and Shareholding Pattern
The State Bank Group, consisting of the SBI was the first public sector bank to access
Bank and its subsidiaries, has an the domestic capital market in 1994 to shore up
overwhelming presence in the Indian financial its capital base. In fiscal year 1994, the Bank
sector commanding a market share of about raised Rs.2,210 crore (US $644 million) through
one-fourth of deposits and loans of all the issuance of shares and Rs.1000 crore
scheduled commercial banks in the country. (US $291 million) through the issue of
Total assets of the State Bank Group as at end- unsecured redeemable subordinated floating
March 2007 were Rs.8,15,174 crore (US rate bonds. In October 1996, the Bank
$187.53 billion). The net profit of the Group successfully floated the first GDR issue by any
worked out to Rs.6,620 crore (US $1.52 commercial bank in the country and raised US
billion). The Group, through its various $369 million, including the greenshoe option. The
subsidiaries, provides a whole range of “World Equity” journal adjudged the SBI GDR
financial services which include life insurance, issue as the “Asian Equity Issue of the Year” for
merchant banking, mutual funds, credit card, its being a “well-planned, well–priced and well-
factoring, security trading and primary executed issue that continued to perform well
dealership in the money market. for the investors”.
Structure and Organisation SBI’s shares are listed for trading on all the
major Indian stock exchanges, viz., Mumbai
The Bank’s Top Management consists of the Stock Exchange and stock exchanges at New
Chairman, two Managing Directors (Group
Delhi, Kolkata, Chennai and Ahmedabad and at

the National Stock Exchange (NSE). The bonds Ltd. under SARFAESI Act, 2002 jointly
are listed only on the NSE. The Bank’s GDRs with seven other commercial banks. The
are listed on the London Stock Exchange. Bank has promoted a new technology
The total number of shareholders as on 31st company, C-Edge Technologies Ltd., as a joint
March 2007 was 5,26,782 with the following venture with Tata Consultancy Services Ltd.
ownership pattern:
Domestic Branch Network
Shareholders % of shares held
At the core of the Bank’s commercial banking
Reserve Bank of India 59.73 business is its nationwide network of 9,517
branches as on March 31, 2007, by far the largest
Non-residents (FIIs/OCBs/NRIs/GDRs) 19.83 branch network of any bank in India. The Bank’s
Financial Institutions including Insurance domestic branches represent approximately
Companies/Banks 5.28 14% of all bank branches in India. In addition
to Bank’s own branches and 4,820 branches
Mutual Funds/Government of seven associate banks, Bank has a network
Companies/UTI 6.92 of Regional Rural Banks (RRBs). The financial
year 2006-07 was a year of consolidation of
Domestic Companies/Trusts 2.28
RRBs. There was Bank-specific amalgamation
Others including Resident Individuals 5.96 of each State-level RRBs. Resultantly, Bank
has got 16 RRBs post-amalgamation with
In its biggest ever cash purchase, the a network of 2,334 branches spread over
Government of India in June 2007 acquired the 104 districts in the country. The aggregate
entire Reserve Bank of India (RBI) shareholding deposits and advances of the sponsored
in State Bank of India consisting of over 314 RRBs stood at Rs.12,990 crore and Rs.7,902
million equity shares at a total amount of over crore respectively as on 31st March 2007.
Rs.35500 crore.
National Banking Group (NBG)
Indian Associates and Subsidiaries
The Bank’s National Banking Group consists of
A network of eight Indian banking subsidiaries three business groups viz., Personal Banking,
of the Bank, comprising seven Associate Small & Medium Enterprises (SME) and
Banks and SBI Commercial and International Government Banking.
Bank Ltd. (SBICI), are engaged in the business
of commercial banking in the country. Branches Personal Banking Business Unit (PBBU)
of the seven Associates are located at various
The Bank accords high priority to personal
regions of the country while SBICI has its offices
banking in the retail banking segment. The
in Mumbai. The SBI Board has approved the
Bank’s Personal Banking Branches are well-
merger of one of the Associates, viz., State Bank
equipped with state-of-the-art technology and
of Saurashtra with the parent SBI.
offer a wide range of services to high net worth
The Bank has six domestic non-banking individuals covering the entire range of
subsidiaries providing various financial personal segment products. The Bank’s
services like merchant banking, funds retail banking activities are widespread and
management, factoring services, securities cover, among others, housing finance, auto
trading, credit cards and insurance. The Bank loans, consumer finance, education loan and
also has seven foreign subsidiaries/joint customer-group-specific products.
ventures/associates. The Bank is a co-promoter
SME Business Unit (SMEBU)
of Credit Information Bureau of India Ltd. And
Clearing Corporation of India Ltd. The Bank has SMEs include Small Scale Industries, Small
set up Asset Reconstruction Company (India) Business Finance and other entities

(Commercial & Institutional with annual rollout during the current year.
turnover of less than Rs.25 crore ). A separate
SMEBU was created in the Bank which started International Banking Group (IBG)
functioning in October 2004 to address, in a With the opening up of 5 new offices and
focused manner, the market dynamics/ takeover of a Bank in Indonesia during 2007, the
customer preferences of this segment. The Bank now has 83 offices in 32 countries
SME Business Unit is implementing various spanning all time zones. The Bank’s foreign
strategies to maintain the Bank’s leadership in offices include full-fledged branches at centres,
the SME financing. such as London, New York, Frankfurt, Paris,
Government Business Unit (GBU) Hong Kong, Tokyo, Cape Town, Chittagong
and Sydney. At Moscow, a full-fledged bank,
The Bank has created the Government Business namely, Commercial Bank of India LLC in a
Unit as a distinct Strategic Business Unit with 60:40 equity participation with Canara Bank
the objective of focusing exclusively on the has been established. For expanding NRI
business emanating from this segment. The business, the Bank has a strategic alliance
Bank launched SBI e-Tax, an online tax payment with RAK Bank, UAE. The Bank has offshore
facility. In addition, e-freight, a facility for banking units in India at SEEPZ, Mumbai
payment of railway freight has been extended and Kochi, Kerala. It also has representative
to large corporates on a pilot basis. offices, subsidiaries and other arrangements
Centralised Pension Processing Centres have for conducting business and servicing the
also been established at all 14 LHO Centres to international needs of the Bank’s foreign
provide excellent customer service to customers as well as conducting some retail
pensioners. banking.
Rural & Agri Business Group Corporate Banking Group
In 2006-07, a new business group, viz., Rural The Corporate Banking Group emerged in
and Agri Business Group, was created as response to the urgent need to provide top
strategic initiative for maximum exploitation corporate clients a wider and more
of the emerging rural banking opportunity and sophisticated product range, greater skills and
the Bank’s initiatives in agriculture cover, speedy delivery platforms. The Group
among others, financial inclusion, ATM linked consists of five Strategic Business Units
Kisan Credit Cards, contract farming and (SBUs), i.e., Corporate Accounts Group
agri clinics, financing farmers in Agricultural (CAG), Leasing Group, Project Finance
Export Zones, value chain financing, besides Group, Mid-Corporate Group and Stressed
focusing on development of infrastructure like Assets Management Group (SAMG).
warehouses and cold storage chains. Special
agricultural officers have been recruited to The Corporate Accounts Group is an
give a thrust to the Bank’s agricultural lending. exclusive unit for top corporates and is
SBI has been very active in Self Help Group characterised by relationship banking and a
(SHG) - Bank Credit Linkage Programme for delayered credit process for speedy decision
micro finance and has contributed to the making. A new group – Institutional Accounts
Group has been formed for focusing on Banks
economic upliftment, social transformation and
and Financial Institutions, providing them with
empowerment of women through extension of
the SHG movement. The Bank’s flagship various banking products/services and for
programme for financial inclusion, SBI Tiny, forming strategic alliances in the areas of
was introduced last year and pilots for the mutual interest. The CAG innovate products
SBI Tiny smart card project have been to suit customer requirements and provides
launched in 3 States with proposed nationwide a one-stop shop to clients. It has dedicated

delivery platforms at Mumbai, Delhi, Kolkata as to other banks. It aims to provide an
and Chennai. efficient system for realizing the proceeds
of clean and documentary collections drawn
The Project Finance SBU focuses on funding on overseas centres. The operations of GLS
core projects like power, telecom, roads, ports, in the area of export payments and other
airports, SEZ and others. It also handles non-
overseas collections have significantly
infrastructure projects with minimum project
improved the profitability of the Bank’s
costs of Rs.2 billion. forex operations and reduced dependence
The Leasing SBU offers all types of financial on foreign banks in the related business
leases tailored to suit the leasing process. The GLS offers correspondent banking
requirements of the Bank’s corporate products on matching terms with similar
customers. products of foreign banks.
The Mid-Corporate Group was created in July Technology Orientation

2004 with 7 MCG Regional Offices controlling The State Bank Group is fully computerized. The
28 branches with high concentration of Mid-
Bank is pursuing an aggressive IT policy as a
Corporate business. The mid-corporate
strategic initiative to meet the growing
business at all other branches at certain competition for business and market share,
identified centres was also brought under the achieve efficiency in internal operations,
control of MCG under the off-site model. The and meet customer expectations. With this
focus of the MCG was to increase market end in view, several initiatives were
share of the Bank in the emerging mid- undertaken, viz., ATM Project, where ATMs are
corporate segment through relationship now also enabled to pay utility bills and college
management and quicker credit processing.
fees, accept donations, etc. Further,
The Stressed Assets Management Group bilateral sharing of ATMs was extended to
(SAMG) was initially set up to take over all NPAs thirteen banks, covering 15,700 ATMs and an
with outstanding of Rs.5 crore and above, MOU has been signed with the Indian Railways
for ensuring focused efforts in resolution of for installing ATMs at 682 Railway Stations.
NPAs. Now the policy has been modified to Core Banking Solution (CBS) presently covers
bring all NPAs of Rs.1 crore and above under 72 million accounts, and more than 85% of
the purview of SAMG. the Bank’s business. Finacle Project for
Treasury and Core Banking Solution has been
Project Uptech implemented at 73 foreign offices in 22
countries, along with Internet Banking at all
Project Uptech is a unique initiative of the Bank
foreign offices. Further, Internet Banking has
designed to catalyze entrepreneurial thoughts
been implemented at 4,841 domestic
and action for technology up gradation/
branches, and used by retail banking customers
modernisation which is vital for the survival of
for utility bill payment and booking of Rail and Air
SMEs. Focused on the Small and Medium
tickets and transfer of funds between banks
Enterprises (SME) sector, projects are
through NEFT/RTGS. IT Policy and IS Security
undertaken in location specific and activity
Policy have been implemented after being
specific industry clusters. So far the Bank has
benchmarked against best global practices. The
taken up 30 projects for modernization under
Bank’s Central Data Centre and Disaster
Project Uptech.
Recovery Centres have been certified as
Global Link Services ISO/IEC 27001:2005 Compliant, which is the
new International Standard for Information
The Global Link Services (GLS) was set up Security Management Systems. SBI Connect,
in 1997 to provide international correspondent the Wide Area Networking (WAN) project of
banking services to the Bank’s branches as well

the Bank, is capable of carrying data, voice ensure integrated risk management for credit,
and video. At present, 5,794 branches of SBI and market and operational risks. A new Risk
4,995 branches of Associate Banks are being Management structure with new positions will
networked under the SBI Connect Project. enable the Bank to comply with the first
phase of implementation of Basel-II.
The Bank has provided helplines at all its 14
LHOs with toll free numbers to enable the The State Bank of India has been in the forefront
customers to have their grievances redressed of all areas of banking and has, over the years,
speedily, besides obtaining complete richly merited its status as the flagship of
information on the Bank’s products and Indian banking. In the recent Customer Loyalty
services. Survey 2006-07 conducted by Business World,
the Bank has been ranked number one in all
Risk Management & Internal Controls: the parameters of Customer Satisfaction,
Risk Governance Structure Service Orientation, Customer Care/Call Centre,
An independent Risk Governance structure, in Customer Loyalty and Home Loans. In 2006 the
line with international best practices, has been Bank won the AWAAZ Consumer Award for 2006
put in place in the Bank. This is in the as (i) the Most Preferred Bank and (ii) the Most
context of separation of duties/independence Preferred Housing Loan provider. In several
of risk measurement, monitoring and control fields, the Bank has pioneered innovative
functions of the Bank. An independent position measures and contributed significantly to the
of ‘Chief Risk Officer’ has been created and growth of the Indian economy, while improving
is currently headed by a Managing Director to its own profitability over the years.
STATE BANK OF INDIA (Source: SBI Website)

FINANCIAL HIGHLIGHTS-2002-2007 (Rs. in Billion)
FY2002 FY2003 FY2004 FY2005 FY 2006 FY2007
Deposits 2705.6 2961.24 3186.19 3670.48 3800.46 4355.21

Advances 1208.06 1377.58 1579.34 2023.74 2618.01 3373.36
Investments 1451.42 1723.48 1856.76 1970.98 1625.34 1491.49
Total Assets 3482.28 3758.76 4078.15 4598.83 4940.29 5665.65
Interest Income 298.10 310.87 304.60 324.28 359.80 394.91
Interest Expenses 207.29 211.09 192.74 184.83 203.90 234.37
Net Interest Income 90.81 99.78 111.86 139.45 155.89 160.54
Non-Interest Income 41.74 57.40 76.12 71.20 74.35 57.69
Total Operating Income 132.55 157.18 187.98 210.65 230.24 218.23
Staff Expenses 51.53 56.89 64.48 69.07 81.23 79.33
Overhead Expenses 20.58 22.53 27.97 31.67 36.02 38.91
Total Operating Expenses 72.11 79.42 92.45 100.74 117.25 118.24
Operating Profit 60.44 77.76 95.53 109.91 112.99 100.00
Total Provisions 36.14 46.70 58.72 66.86 68.93 54.59
Net Profit 24.30 31.06 36.81 43.05 44.07 45.41

KEY FINANCIAL INDICATORS
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007
ROA (%) 0.73 0.86 0.94 0.99 0.89 0.84

ROE (%) 15.97 18.05 18.19 18.10 15.47 14.24
EPS(Rs.) 46.20 59.00 69.94 81.79 83.73 86.29
BVS(Rs.) 289.00 327.00 384.00 450.00 525.00 606.00
Dividend Pay out Ratio (%) 12.98 14.40 15.73 15.29 16.72 16.22
Cost/Income Ratio (%) 54.40 50.53 49.18 47.83 58.70 54.18
Capital Adequacy Ratio (%) 13.35 13.50 13.53 12.45 11.88 12.34
Cost of Deposits (%) 7.60 7.11 6.02 5.11 4.77 4.79
Yield on Advances (%) 9.66 8.97 8.17 7.68 7.78 8.67
Yield on Resources Deployed (%) 10.06 9.53 8.62 7.94 7.10 6.88
Net Interest Margin (%) 2.91 2.95 3.04 3.39 3.40 3.31
Gross NPA Ratio (%) 11.95 9.33 7.75 5.96 3.61 2.92
Net NPA Ratio (%) 5.63 4.50 3.48 2.65 1.88 1.56
Provision Coverage (%) 56.00 54.00 57.00 57.00 49.00 47.00
SUMMARY OF BALANCE SHEET (Rs. in billion)
MARCH MARCH MARCH MARCH MARCH MARCH

2002 2003 2004 2005 2006 2007
CAPITAL & LIABILITIES

Capital 5.26 5.26 5.26 5.26 5.26 5.26
Reserves & Surplus 146.98 166.77 197.05 235.46 271.18 307.72
Deposits 2705.60 2961.23 3186.19 3670.48 3800.46 4355.21
Borrowings 93.24 93.04 134.31 191.84 306.41 397.03
Other Liabilities & Provisions 531.20 532.46 555.34 495.79 556.98 600.42
Total 3482.28 3758.76 4078.15 4598.83 4940.29 5665.65
ASSETS
Cash & balances with
Reserve Bank of India 218.73 127.38 190.41 168.10 216.53 290.76
Balances with banks and
money at call & short notice 430.58 324.43 245.25 225.12 229.07 228.92
Investments 1451.42 1723.48 1856.76 1970.98 1625.34 1491.49
Advances 1208.06 1377.58 1579.34 2023.74 2618.01 3373.36
Fixed Assets 24.15 23.89 26.45 26.98 27.53 28.19
Other Assets 149.34 182.01 179.94 183.91 223.81 252.92
Total 3482.28 3758.77 4078.15 4598.83 4940.29 5665.65
Contingent Liabilities 1022.13 1061.06 1118.92 1593.97 2288.51 3065.90
Bills for Collection 101.77 75.71 101.94 167.77 205.93 233.68
MARKET RELATED RATIOS
MAR 03 MAR 04 MAR 05 MAR 06 MAR 07
Market Price (Rs)(as on last day

of the year/quarter) 270 606 657 968 993
Price to Book Ratio (%) 0.83 1.58 1.44 1.84 1.64
Market Capitalization(Rs in Billion) 142.05 318.78 345.75 509.48 522.56
Earning Per Share( Rs) 59.00 69.94 81.79 83.73 86.29
P/E Ratio (%) 4.58 8.66 8.03 10.40 11.51

TRANSFER OF RESERVE BANK’S SHARE HOLDING IN
STATE BANK OF INDIA TO GOVERNMENT OF INDIA
An ordinance was promulgated on June 21, 2007 for certain amendments in the SBI
Act to enable the transfer of shares from RBI to Government.
Accordingly 31,43,39,200 shares of SBI which were held by the Reserve Bank were
sold on June 29, 2007 to Government of India at the rate of Rs.1,130.35 per share.
The total consideration of Rs.355,31,33,14,720 was received in cash from
Government.
As a result of the RBI's divestment, the majority ownership of SBI lies with the
Government of India.
The State Bank of India (SBI) was established an internal Group was set up by the Reserve
by an Act of Parliament passed on April 30, 1955 Bank in 2001 to finalise the modalities of transfer
on the basis of the recommendations made by of its investment in SBI, NABARD and NHB and
the Rural Credit Survey Committee, 1952 to the Group’s Report was forwarded to
bring the Imperial Bank of India under public Government for necessary action. Government
ownership and to entrust it with the responsibility announced in the Union Budget 2007-08 their
of spreading the banking facilities to the remote proposal for acquisition of Reserve Bank’s
regions of the country. Accordingly, the holdings in SBI and an amount of Rs.40,000
Committee recommended the formation of a crore was provided in the Budget. An ordinance
new bank, to be called State Bank of India by was promulgated on June 21, 2007 for certain
amalgamating the Imperial Bank of India with 10 amendments in the SBI Act to enable the transfer
major banks associated with the former princely of shares from Reserve Bank to Government.
states with a view to having effective state control. Accordingly 31,43,39,200 shares of SBI which
Even though the Survey Committee was in were held by the Reserve Bank were sold on
favour of majority ownership for the Government June 29, 2007 to Government of India at the rate
of India by issuing additional capital without of Rs.1,130.35 per share. The sale price was
disturbing the ownership of the existing share arrived at in accordance with the SEBI
capital, it was thought prudent that Reserve Bank (Substantial Acquisitions of Shares and Takeover
holds the majority of the shares. Accordingly, the Regulations, 1997) using National Stock
Reserve Bank held the majority of SBI’s shares. Exchange (NSE) prices for the 26 weeks
As at end-March 2007 the Reserve Bank’s stake preceding the date of public announcement. The
in the SBI was 31,43,39,200 equity shares of total consideration of Rs.355,31,33,14,720 was
Rs.10 (face value) per share aggregating to received in cash from Government. The Reserve
59.73 per cent of the SBI’s paid-up share capital. Bank booked a profit on sale of investment to
the extent of Rs.343,08,60,37,320. As a result
Based on the recommendations of the of the Reserve Bank’s divestment, the majority
Narasimham Committee II that the Reserve ownership of SBI lies with the Government of
Bank should not own the institutions it regulates, India.

BANKING
TECHNOLOGY

PERSONAL FINANCIAL PLANNING: AN OVERVIEW
Financial planning is a process of meeting your life’s goals, through prudent management
of finances.
Goals should be ‘SMART’ – Specific – Measurable – Achievable – Realistic – Time
bound.
Financial planning takes into account the comprehensive needs of the individual as well
as the family. It follows the “big picture” approach – to include savings, budgeting, goal
setting, debt management, apart from insurance, investment, retirement, tax and estate
planning.
“Plan your future before. That’s where planning process is to ensure that the right
you are going to spend the rest of your amount of money is available in the right hands
life.” —— Mark Twain at the right time in future to achieve one’s
financial goals.
‘If you can’t predict the future, at least
you can plan for it’ IMPORTANT ASPECTS OF FINANCIAL
PLANNING
WHAT IS PERSONAL FINANCIAL
PLANNING? Most of us spend more than half our lives
working and saving because money is crucial.
Personal Financial Planning is planning for the However, most of us spend almost no time
financial well-being of a person enabling him to planning to make that hard-earned money work
achieve his financial goals in life. It is a process more effectively for us. What are you saving for?
of identifying financial goals, evaluating existing
resources and designing financial strategies that Define Your Financial Goals
help achieve those goals. In short it is a process
of meeting your life’s goals, through prudent Financial goals refer to all goals and needs which
management of finances. have a monetary aspect to them.
The process helps a person work out These are best defined when the amount, the
purpose and the timeframe are clearly stated
Where he is today- Evaluate current Financial i.e in terms of how much money will be needed,
Health for what purpose and when.
What he may need in future- Define Financial Goals should be ‘SMART’ – Specific –
Goals in life Measurable – Achievable – Realistic – Time
bound:
How to meet those goals - Develop a Financial
plan to fund the gap between current resources Identify specific goals of what you want,
and future goals categorise them into long term and short term
goals and prioritise – given your financial and
THE FINANCIAL PLANNING PROCESS — life situation
OBJECTIVE
Quantify them into monetary terms- Attach a cost
Products by themselves are not as important to each goal and adjust it for inflation – a ‘big’
as what they can do for us in terms of making house, or a ‘comfortable’ retired life are vague
money available when needed. We all need and not well defined.
‘finance’ at different stages of our life for meeting
different goals like education / marriage of Are the goals achievable given what you have
children, purchase of house, building a corpus and want?
for retirement etc. The objective of the financial
Are the expectations realistic? – don’t expect Insurance Planning — First Protect and then
changes overnight! build:
Set a time frame for when the money is needed Insurance Planning is the foundation for the
to accomplish the goal financial plan edifice. Insurance will protect your
family’s current lifestyle from adverse events and
Evaluate your current situation expenses. The aim of financial planning is to help
Planning for your financial life begins with you/ your family realize future goals. A financial
evaluating your current financial health i.e plan can go awry due to occurrence of
assessing your overall financial profile. This can unforeseen events which will erode existing
be done through preparation of personal wealth and prevent further wealth accumulation.
financial statements like – Insure your life, health and assets adequately
as a hedge against various risks such as death,
a. Personal balance sheet, the financial illness, disability or damage / loss of property.
Polaroid, which helps in assessing your net Insurance needs change according to your life
worth and measuring your wealth. Assets stage, financial commitments and long term
[financial & physical assets] - Liabilities [High needs.
cost / low cost debt & short term / long term] =
Net Worth. Creating a personal balance sheet Investment Planning – is an important pillar in
will help in tracking your wealth through increase the structure of a financial plan. The Guiding
/ decrease in net worth over a period of time. Principles:
b. Income and Expense statement and cash When to invest? Start investing early to
flow statement, help you track your money i.e harness the power of compounding. Invest
where your money comes from (all sources) whenever you have the money, be it big or small
and where it goes (fixed / variable expenses). amounts, because it gives money more time to
They form the financial motion picture, helping grow. Those who invest small amounts early
you understand current spending patterns and and for long term often tend to do better than
in formulating a budget. Budgeting is a process those who delay until later in life - because every
of tracking, planning and controlling the inflow day that you are invested, is a day your money
and outflow of income. The most important is working harder for you.
reason for not knowing whether we have enough How to invest? Invest regularly. Timing the
even after working for years is that we do not market is risky. A more successful strategy is to
budget for the family. The Finance Minister has adopt the rupee cost averaging method where
an annual Budget, the Bank has one too, but you invest a fixed amount regularly, regardless
the most important budget - family budget is, of what direction the market is moving. This can
unfortunately, the most ignored aspect of our bring down the average cost of investments and
financial life. maximize returns.
Draw up a savings plan Where to invest? Diversify. Have a suitable
Investible surplus can be increased through asset allocation plan (right mix of investments)
systematic savings. Income - Expenditure = based on your risk tolerance, time horizon and
Savings. This equation cannot be left to chance. needs and goals.
So record all expenses, review spending and Match investment options to liquidity needs at
saving habits and make a savings plan. ‘Savings different points of time in the future, taking into
create wealth, not income’ account inflation and taxation.
Contingency Plan: Put aside money for Retirement planning is a key element in a
emergenciesDeploy some money in short- financial plan and is a process which runs
term investments that can be encashed on through different stages of our working life,
demand to help you tide over unforeseen needs accumulating funds which are required to build
and emergencies. a retirement corpus. This corpus is to be

planned and managed in such a way that it lasts should agree on how long the professional
throughout the retirement years. ‘We plan relationship should last and on how decisions
enough for a 30 day vacation but not enough for will be made.
a 30 year retirement’
2. Gathering client data, including goals.
Tax planning and Estate planning
The planner should ask for information about
Look for post tax yields. Tax free returns are your financial situation. You and the planner
better than taxable returns. ‘It is not what you should mutually define your personal and
make that matters but what you keep.’ financial goals, understand your time frame for
results and discuss, if relevant, how you feel
Make nominations, create a will so that your about risk. He should gather all the necessary
estate passes on to your intended beneficiaries documents at this stage.
as smoothly as possible.
3. Analyzing and evaluating your financial
Implement: status.
With the plan in place, along with strategies for The planner should analyze the information to
insurance, investment, retirement, tax and assess your current situation vis-a –vis your
estate planning, the next step is to implement future goals. Depending on what services you
the action plan to achieve financial goals. have asked for, this could include analyzing your
Monitor - the action plan. Review progress, assets, liabilities and cash flow, debt
reevaluate and revise your plan at periodic management, current insurance coverage,
intervals to ensure you are on course. investments or tax strategies.
Rebalance the asset allocation if need be. If the 4. Developing and presenting financial
future always went according to plan, financial planning recommendations and/or
planning would be a one-time exercise. But life alternatives.
throws a few curves now and then.
The planner should offer financial planning
THE PROFESSIONAL FINANCIAL PLANNER: recommendations that address your goals,
A person can do his own financial planning or based on the information you provide. The
take the help of professional financial planners. planner should go over the recommendations
In general, financial planners use a six –step with you to help you understand them so that
process, which involves gathering relevant you can make informed decisions. The planner
financial data, setting life goals, examining the should also listen to your concerns and revise
current financial status and formulating an action the recommendations as appropriate.
plan for meeting the goals given the current 5. Implementing the financial planning
situation and future plans, implementing and recommendations.
monitoring the plan.
You and the planner should agree on how the
The CFP Board of Standards (USA) has recommendations will be carried out. The
promoted the following six step process for planner may carry out the recommendations or
professional financial planners: serve as your “coach,” coordinating the whole
1. Establishing and defining the client- process with you and other professionals such
planner relationship. as attorneys or stockbrokers.
Financial planning is a two way interaction 6. Monitoring the financial planning

between client and planner. The planner should recommendations.
clearly explain or document the services to be You and the planner should agree on who will
provided and define both his and your monitor your progress towards your goals. If the
responsibilities. He should explain fully how he planner is in charge of the process, he should
will be paid and by whom. You and the planner report to you periodically to review your situation

and adjust the recommendations, if needed, as It provides direction and meaning to our financial
your life changes. decisions. It helps us understand how each
financial decision made affects other areas of
THE BENEFITS OF FINANCIAL PLANNING: our finances. By viewing each financial decision
Financial planning follows the “big picture” as part of a whole, you can consider its short
approach– to include savings, budgeting, goal and long-term effects on your life goals.
setting, debt management, apart from insurance, ‘Those who do not work for their own goals
investment, retirement, tax and estate planning. work for other’s goals’
It takes into account the comprehensive needs
of the individual as well as the family. “Money can’t buy happiness; lack of money
will certainly buy you misery”

CREDIT CARDS WITH SPECIAL REFERENCE TO
CONSUMER PROTECTION
Based on the recommendations of the Working Group on Regulatory Mechanism for
Cards set up by RBI, comprehensive guidelines on credit card operations of banks
were framed in November 2005 for implementation by the credit card issuing banks.
These guidelines were updated in July 2007 and inter alia, cover areas like
transparency in interest rates and other charges, wrongful billing, use of direct
marketing agents/direct selling agents and other agents, protection of customer rights,
redressal of grievances, etc.
Based on the recommendations of the Working explanation and, if necessary,

Group on Regulatory Mechanism for Cards set documentary evidence to the customer
up by RBI, comprehensive guidelines on credit within a maximum period of sixty days. The
card operations of banks were framed in credit card issuing bank may consider
November 2005 for implementation by the credit providing bills and statements of accounts
card issuing banks. These guidelines were online, with suitable security built for that
updated in July 2007 and inter alia, cover areas purpose.
like transparency in interest rates and other (iv) While outsourcing the various credit card
charges, wrongful billing, use of direct marketing operations banks have to take care that
agents (DMAs)/direct selling agents (DSAs) and the quality of the customer service and the
other agents, protection of customer rights, bank’s ability to manage credit, liquidity
redressal of grievances, etc. Banks were and operational risks is not compromised.
advised that credit card dues are in the nature In the choice of the service provider, banks
of non-priority sector personal loans and as have to be guided by the need to ensure
such banks are free to determine the rate of confidentiality of the customer’s records,
interest on credit card dues without reference respect customer privacy, and adhere to
to their BPLR and regardless of the size. fair practices in debt collection.
Customer’s rights in relation to credit card
operations primarily relate to personal privacy, (v) The Code of Conduct for Direct Sales
customer confidentiality and fair practices in debt Agents (DSAs) formulated by the Indian
collection. The areas of consumer protection Banks’ Association could be used by
taken care of in the guidelines are as under: banks in formulating their own codes for
the purpose. The bank should ensure that
(i) Banks should be transparent in fixing their the DSAs engaged by them for marketing
interest rate/service charge on credit card their credit card products scrupulously
dues and include the above in the adhere to the bank’s own Code of Conduct
‘Welcome Kit’ and the monthly statements. for credit card operations which should be
(ii) Banks should have a well documented displayed on the bank’s website and be
policy and a Fair Practices Code for credit available easily to any credit card holder.
card operations and should adopt the Fair (vi) Unsolicited cards should not be issued
Practices Code for credit card operations and unsolicited loans or other credit facility
of banks released by IBA. should not be offered.
(iii) The card issuing bank should ensure that (vii) The card issuing bank should not
wrong bills are not raised and issued to unilaterally upgrade credit cards and
customers. In case, a customer protests enhance credit limits. Prior consent of the
any bill, the bank should provide cardholder should invariably be taken

whenever there are any change/s in terms (x) Banks/their agents should not resort to
and conditions. intimidation or harassment of any kind,
either verbal or physical, against any
(viii) The card issuing bank should not reveal person in their debt collection efforts,
any information relating to customers to including acts intended to humiliate
any other person/organisation without publicly or intrude the privacy of the credit
obtaining their specific consent. In case card holders’ family members, referees
of providing information relating to credit and friends, making threatening and
history/repayment record of the card anonymous calls or making false and
holder to a credit information company misleading representations.
(specifically authorised by the Reserve
Bank), the bank may explicitly bring to the (xi) Generally, a time limit of sixty days may
notice of the customer that such be given to the customers for preferring
information is being provided in terms of their complaints/grievances. The card
the Credit Information Companies issuing bank should constitute grievance
(Regulation) Act, 2005. A similar prior redressal machinery within the bank. The
notice may be given to the cardholder name and contact number of designated
before reporting default status to the Credit grievance redressal officer of the bank
Information Bureau of India Ltd. (CIBIL) or should be mentioned on the credit card
any other credit information Company bills/displayed on the website. The bank
authorised by the Reserve Bank. should have a system of acknowledging
customers’ complaints for follow-up such
(ix) In the matter of recovery of dues, banks as complaint number/docket number even
should ensure that they, as also their if the complaints are received on phone.
agents, adhere to the extant instructions
on Fair Practice Code for lenders issued (xii) Option to approach of the Office of the
by the Reserve Bank as also IBA’s Code Banking Ombudsman for redressal of
for Collection of dues and repossession grievances relating to Credit Cards has
of security. In case banks have their own also been provided in the guidelines.
code for collection of dues it should, at the
minimum, incorporate all the terms of IBA’s (xiii) The Reserve Bank reserves the right to
Code. In particular, in regard to impose penalty on banks under the
appointment of third party agencies for provisions of the Banking Regulation Act,
debt collection, it is essential that such 1949 for violation of any of the credit card
agents refrain from action that could guidelines.
damage the integrity and reputation of the
bank and that they observe strict customer
confidentiality.

DEPOSIT INSURANCE IN INDIA
DICGC was set up in 1962 to restore public confidence in the banking system in the
aftermath of successive bank failures in the ‘60s. In fact, India, as it happened, was
only the second country in the world after the US in 1933, to provide insurance cover
to bank deposits.
All commercial banks including branches of foreign banks functioning in India, local
area banks and regional rural banks are insured by DICGC.
Each depositor in a bank is insured up to a maximum of Rs.1,00,000/- for both principal
and interest amount held by him in the same right and same capacity.
Deposit insurance premium is borne entirely by the insured bank. The current premium
rate is Rs.0.10 per assessable deposit of Rs.100/-.
The deposit insurance scheme is compulsory and no bank can withdraw from it.
The concept of insuring deposits kept with banks which have amended the local Cooperative
received attention for the first time in the year Societies Act empowering RBI to order the
1948 after the banking crises in Bengal. The Registrar of Cooperative Societies of the State/
question came up for reconsideration in the year Union Territory to wind up a cooperative bank or
1949, but it was decided to hold it in abeyance to supersede its committee of management and
till RBI ensured adequate arrangements for requiring the Registrar not to take any action
inspection of banks. Subsequently, in the year regarding winding up, amalgamation or
1950, the Rural Banking Enquiry Committee also reconstruction of a co-operative bank without
supported the concept. Serious thought to the prior sanction in writing from RBI are covered
concept was, however, given by RBI and the under the Deposit Insurance Scheme. At
Central Government after the crash of the Palai present, all co-operative banks other than those
Central Bank Ltd., and the Laxmi Bank Ltd. in from the State of Meghalaya and the Union
1960. The Deposit Insurance Corporation (DIC) Territories of Chandigarh, Lakshadweep, and
Bill was introduced in the Parliament on August Dadra and Nagar Haveli are covered by DICGC.
21, 1961. After it was passed by the Parliament, Primary cooperative societies are not insured
the Bill got the assent of the President on by DICGC.
December 7, 1961 and the Deposit Insurance
Act, 1961 came into force on January 1, 1962. DICGC insures all deposits such as savings,
fixed, current, recurring, etc., deposits except
In July 1978, DIC assumed also the function of (i) Deposits of foreign Governments, (ii) Deposits
credit guarantee and hence was named Deposit of Central/State Governments, (iii) Inter-bank
Insurance Corporation & Credit Guarantee deposits, (iv) Deposits of the State Land
Corporation (DICGC). The Bank was a member Development Banks with the State co-operative
under the Credit Guarantee Scheme until it bank, (v) Any amount due on account of and
withdrew in early nineties. deposit received outside India and (vi) Any
amount, which has been specifically exempted
All commercial banks including branches of by the Corporation with the previous approval of
foreign banks functioning in India, local area RBI.
banks and regional rural banks are insured by
DICGC. All State, Central and Primary Each depositor in a bank is insured up to a
cooperative banks, also called urban cooperative maximum of Rs.1,00,000 (Rupees One Lakh)
banks, functioning in States/Union Territories for both principal and interest amount held by

him in the same right and same capacity as on the liquidator. If a bank is reconstructed or
the date of liquidation/cancellation of bank’s amalgamated/merged with another bank DICGC
licence or the date on which the scheme of pays the bank concerned, the difference between
amalgamation/merger/reconstruction comes the full amount of deposit or the limit of insurance
into force. The rule of same right and capacity cover in force at the time, whichever is less and
has been recently relaxed (w.e.f. April 26, 2007) the amount received by him under the
in the case of joint accounts. Earlier, DICGC reconstruction/amalgamation scheme within
used to settle the claims of all joint accounts in two months from the date of receipt of claim list
“the same capacity and the same right” up to from the transferee bank/Chief Executive Officer
Rs.1 lakh, for all combinations of the same set of the insured bank/transferee bank as the case
of depositors. This meant that joint accounts of may be.
“A” and “B” and “B” and “A” in the same bank
were treated as one account and the claims DICGC does not directly deal with the depositors
were settled for only up to Rs.1 lakh aggregating of failed banks. In the event of a bank’s
the balance in both accounts together. As per liquidation, the liquidator prepares depositor-
the revised policy the deposits held in two wise claim list and sends it to DICGC for scrutiny
separate joint accounts in combination of say, and payment. DICGC pays the money to the
“A” and “B” and “B” and “A”; will now be treated liquidator who is liable to pay to the depositors.
as two separate accounts, and each category In the case of amalgamation/merger of banks,
of the joint account will be eligible for a claim up the amount due to each depositor is paid to the
to Rs.1 lakh. transferee bank.
The deposits kept in different branches of a bank The deposit insurance scheme is compulsory
are aggregated for the purpose of insurance and no bank can withdraw from it. However, the
cover and a maximum amount up to Rs.1 lakh Corporation may cancel the registration of an
is paid. If the funds are deposited into separate insured bank if it fails to pay the premium for
banks they would then be separately insured. three consecutive periods. In the event of the
DICGC withdrawing its coverage from any bank
DICGC insures principal and interest up to a for default in the payment of premium the public
maximum amount of Rs.1 lakh. For example, if will be notified through newspapers. Registration
an individual had an account with a principal of an insured bank stands cancelled if the bank
amount of Rs.95,000 plus accrued interest of is prohibited from receiving fresh deposits; or
Rs.4,000, the total amount insured by DICGC its licence is cancelled or a licence is refused to
would be Rs.99,000. If, however, the principal it by RBI; or it is wound up either voluntarily or
amount in that account was Rs.1 lakh, the compulsorily; or it ceases to be a banking
accrued interest would not be insured, not company or a co-operative bank within the
because it was interest but because that was meaning of Section 36A(2) of the Banking
the amount over the insurance limit. Regulation Act, 1949; or it has transferred all its
deposit liabilities to any other institution; or it is
Banks have the right to set off their dues from
amalgamated with any other bank or a scheme
the amount of deposits. The deposit insurance
of compromise or arrangement or of
is available after netting of such dues.
reconstruction has been sanctioned by a
Deposit insurance premium is borne entirely by competent authority and the said scheme does
the insured bank. The current premium rate is not permit acceptance of fresh deposits. In the
Rs.0.10 per assessable deposit of Rs.100/-. event of the cancellation of registration of a bank,
deposits of the bank remain covered by the
If a bank goes into liquidation DICGC is liable to insurance till the date of the cancellation.
pay to each depositor through the liquidator, the
amount of his deposit up to Rs.1 lakh within two The Corporation has deposit insurance liability
months from the date of receipt of claim list from on liquidation, etc., of “Insured banks”, i.e., banks

which have been de-registered (a) on account emerged as the biggest challenge before the
of prohibition on receiving fresh deposits or (b) Indian banking sector today. The Narasimham
on cancellation of licence or it is found that Committee Report on the Banking Sector
licence cannot be granted. The liability of the Reforms (1998), while focussing on the
Corporation in these cases is limited to the structural issues recommended for revamping
extent of deposits as on the date of cancellation the deposit insurance system too. Following this,
of registration of bank as an insured bank. On RBI constituted in April 1999 an Advisory Group
liquidation, etc., of other de-registered banks, i.e., and a Working Group under Shri Jagdish Capoor,
banks which have been de-registered on other the then Deputy Governor of RBI to look into this
grounds such as non-payment of premium or issue. The Groups made various
their ceasing to be eligible co-operative banks recommendations on the basis of which the then
under section 2(gg) of the DICGC Act, 1961, the Finance Minister in his Budget Speech for the
Corporation will have no liability. year 2002-03 announced the setting up of a
Bank Deposits Insurance Corporation (BDIC) on
DICGC was set up in 1962 to restore public
the lines of the globally-acclaimed Federal
confidence in the banking system in the
Deposit Insurance Corporation (FDIC) model.
aftermath of successive bank failures in the ‘60s.
Therefore, with a view to closely studying the
In fact, India, as it happened, was only the
functioning of the FDIC system and evolving a
second country in the world after the US in 1933,
framework for adapting the US system in India
to provide insurance cover to bank deposits.
a joint team of the Ministry of Finance (Banking
DICGC has, over time, succeeded in increasing
Division), RBI and DICGC had visited the US in
public confidence in the banking system and
June 2002. The team had discussions with FDIC
promoted savings. Since 1991, several reforms
and other US banking regulatory and supervisory
have swept the financial sector in general and
agencies. The team submitted its report titled
banking sector in particular. To remain
Modelling Bank Deposits Insurance Corporation
continually safe and sound amidst fast changing
in January 2003 to the Union Government. The
and globally integrating environment has
Union Government is yet to take a view on that.

ISLAMIC BANKING
Islamic Banking does not involve payment and charging of interest.

It is based on profit and loss (PLS) sharing concept.
Services like remittances, foreign exchange transactions are provided on charge
basis.
Introduction concern of Muslim intellectuals. The story of

interest-free or Islamic banking begins here. In
Modern banking system was introduced into the
the following paragraphs we will trace this story
Muslim countries at a time when they were
to date and examine how far and how
politically and economically at a low ebb, in the
successfully their concerns have been
late 19th century. The main banks in the home
addressed.
countries of the imperial powers established
local branches in the capitals of the subject Interest-free banking as an idea
countries and they catered mainly to the import Interest-free banking seems to be of very recent
export requirements of the foreign businesses. origin. Proponents of Islamic Banking have
The banks were generally confined to the capital recognised the need for commercial banks and
cities and the local population remained largely the evil of interest in that enterprise, and have
untouched by the banking system. The local proposed a banking system based on the
trading community avoided the “foreign” banks concept of Mudarabha - profit and loss sharing.
both for nationalistic as well as religious reasons.
However, as time went on it became difficult to The coming into being of interest-free banks
engage in trade and other activities without The first private interest-free bank, the Dubai
making use of commercial banks. Even then Islamic Bank, was also set up in 1975 by a
many confined their involvement to transaction group of Muslim businessmen from several
activities such as current accounts and money countries. Two more private banks were founded
transfers. Borrowing from the banks and in 1977 under the name of Faisal Islamic Bank
depositing their savings with the bank were in Egypt and the Sudan. In the same year the
strictly avoided in order to keep away from dealing Kuwaiti government set up the Kuwait Finance
in interest which is prohibited by religion. House.
With the passage of time, however, and other However, small scale limited scope interest-free
socio-economic forces demanding more banks have been tried before.
involvement in national economic and financial
In the ten years since the establishment of the
activities, avoiding the interaction with the banks
first private commercial bank in Dubai, more
became impossible. Local banks were
than 50 interest-free banks have come into
established on the same lines as the interest-
being. Though nearly all of them are in Muslim
based foreign banks for want of another system
countries, there are some in Western Europe
and they began to expand within the country
as well: in Denmark, Luxembourg , Switzerland
bringing the banking system to more local
and the UK.
people. As countries became independent the
need to engage in banking activities became In most countries the interest-free banking have
unavoidable and urgent. Governments, been established through private initiative and
businesses and individuals began to transact were confined to that bank.
business with the banks, with or without liking it.
This state of affairs drew the attention and

Current practices various aspects of the project in varying degrees.
Generally speaking, all interest-free banks agree Profit and loss are shared in a pre-arranged
on the basic principles. However, individual fashion. This is not very different from the joint
banks differ in their application. These venture concept. The venture is an independent
differences are due to several reasons including legal entity and the bank may withdraw gradually
the laws of the country, objectives of the different after an initial period. b) Mudarabha where the
banks, individual bank’s circumstances and bank contributes the finance and the client
experiences, the need to interact with other provides the expertise, management and labour.
interest-based banks, etc. In the following Profits are shared by both the partners in a pre-
paragraphs, we will describe the salient features arranged proportion, but when a loss occurs the
common to all banks. total loss is borne by the bank. c) Financing on
the basis of an estimated rate of return. Under
All the Islamic banks have three kinds of deposit
accounts: current, savings and investment. this scheme, the bank estimates the expected
rate of return on the specific project it is asked
Current or demand deposit accounts are virtually to finance and provides financing on the
the same as in all conventional banks. Deposit understanding that at least that rate is payable
is guaranteed. to the bank. (Perhaps this rate is negotiable.) If
Savings deposit accounts operate in different the project ends up in a profit more than the
ways. In some banks, the depositors allow the estimated rate the excess goes to the client. If
banks to use their money but they obtain a the profit is less than the estimate the bank will
guarantee of getting the full amount back from accept the lower rate. In case a loss is suffered
the bank. Banks adopt several methods of the bank will take a share in it.
inducing their clients to deposit with them, but
Trade financing
no profit is promised. In others, savings
accounts are treated as investment accounts This is also done in several ways. The main ones
but with less stringent conditions as to are: a) Mark-up where the bank buys an item
withdrawals and minimum balance. Capital is for a client and the client agrees to repay the
not guaranteed but the banks take care to invest bank the price and an agreed profit later on.
money from such accounts in relatively risk-free b) Leasing where the bank buys an item for a
short-term projects. As such lower profit rates client and leases it to him for an agreed period
are expected and that too only on a portion of and at the end of that period the lessee pays the
the average minimum balance on the ground balance on the price agreed at the beginning an
that a high level of reserves needs to be kept at becomes the owner of the item. c) Hire-
all times to meet withdrawal demands. purchase where the bank buys an item for the
Investment deposits are accepted for a fixed or client and hires it to him for an agreed rent and
unlimited period of time and the investors agree period, and at the end of that period the client
in advance to share the profit (or loss) in a given automatically becomes the owner of the item.
proportion with the bank. Capital is not d) Sell-and-buy-back where a client sells one
guaranteed. of his properties to the bank for an agreed price
Modes of financing payable now on condition that he will buy the
property back after certain time for an agreed
Banks adopt several modes of acquiring assets price. e) Letters of credit where the bank
or financing projects. But they can be broadly
guarantees the import of an item using its own
categorised into three areas: investment, trade
funds for a client, on the basis of sharing the
and lending.
profit from the sale of this item or on a mark-up
Investment financing basis.
This is done in three main ways: a) Musharaka Lending
where a bank may join another entity to set up a
Main forms of Lending are:
joint venture, both parties participating in the
1. Loans with a service charge where the bank much. That leaves us with investment financing
lends money without interest but they cover their and trade financing. Islamic banks are expected
expenses by levying a service charge. This to engage in these activities only on a profit and
charge may be subject to a maximum set by loss sharing (PLS) basis. This is where the
the authorities. banks’ main income is to come from and this is
also from where the investment account holders
2) No-cost loans where each bank is expected
are expected to derive their profits from. And the
to set aside a part of their funds to grant no-cost
latter is supposed to be the incentive for people
loans to needy persons such as small farmers,
to deposit their money with the Islamic banks.
entrepreneurs, producers, etc. and to needy
And it is precisely in this PLS scheme that the
consumers.
main problems of the Islamic banks lie. Therefore
3) Overdrafts also are to be provided, subject we will look at this system more carefully in the
to a certain maximum, free of charge. following section.
Services Problems in implementing the PLS scheme
Other banking services such as money Several writers have attempted to show, with
transfers, bill collections, trade in foreign varying degrees of success, that Islamic
currencies at spot rate etc. where the bank’s Banking based on the concept of profit and loss
own money is not involved are provided on a sharing (PLS) is theoretically superior to
commission or charges basis. conventional banking from different angles. See,
Shortcomings in current practices for example, Khan and Mirakhor (1987).
However from the practical point of view things
In the previous section we listed the current do not seem that rosy. Our concern here is this
practices under three categories: deposits, latter aspect. In the over half-a-decade of full-
modes of financing (or acquiring assets) and scale experience in implementing the PLS
services. There seems to be no problems as scheme the problems have begun to show up.
far as banking services are concerned. Islamic If one goes by the experience of Pakistan as
banks are able to provide nearly all the services portrayed in the papers presented at the
that are available in the conventional banks. The conference held in Islamabad in 1992, the
only exception seems to be in the case of letters situation is very serious and no satisfactory
of credit where there is a possibility for interest remedy seems to emerge. In the following
involvement. However some solutions have paragraphs we will try to set down some of the
been found for this problem mainly by having major difficulties.
excess liquidity with the foreign bank. On the
deposit side, judging by the volume of deposits Suggestions
both in the countries where both systems are Banks too are enterprises; they cater to peoples’
available and in countries where law prohibits needs connected with money safe-keeping,
any dealing in interest, the non-payment of acquiring capital, transferring funds etc. The fact
interest on deposit accounts seems to be no that they existed for centuries and continue to
serious problem. Customers still seem to exist and prosper is proof that their methods are
deposit their money with interest-free banks. good and they fulfill the customers’ needs and
The main problem, both for the banks and for expectations. Conventional commercial banking
the customers, is in the area of financing. Bank system as it operates today is accepted in all
lending is still practised but that is limited to either countries except the Islamic world where it is
no-cost loans (mainly consumer loans) received with some reservation. The reservation
including overdrafts, or loans with service is on account of the fact that the banking
charges only. Both these types of loans bring operations involve dealing in interest which is
no income to the banks and therefore naturally prohibited in Islam. Conventional banks have
they are not that keen to engage in this activity ignored this concern on the part of their Muslim

clientele. Muslims patronised the conventional seekers of bank’s other services such as
banks out of necessity and, when another money transfer. Since services do not generally
entrepreneur the Islamic banker offered to involve dealing in interest Muslims have no
address their concern many Muslims turned to problem transacting such businesses with
him. The question is: has the new entrepreneur conventional banks; neither do Islamic banks
successfully met their concerns, needs and experience any problems in providing these
expectations? If not he may have to put up his services. Among the depositors there are current
shutters! account holders who too, similarly, have no
problems. It is the savings account holders and
Broadly speaking, banks have three types of
the borrowers who have reservations in dealing
different customers: depositors, borrowers and
with the conventional banks.

BANKING INDUSTRY: VISION 2010
The total assets of all scheduled commercial banks by end March 2010 is esti-
mated at Rs.40,90,000 crore.
Opening up of the financial sector from 2005, under WTO, would see a number of
global banks taking large stakes and control over banking entities in the country.
Some of the Indian banks may also emerge as global players.
S.C. Gupta committee appointed by IBA On the asset side, the pace of growth in both
observed the following in its report on Banking advances and investments is forecast to
Industry: Vision 2010. weaken.
Cost Control Consolidation
In the future, as domestic and international On the growing influence of globalisation on the
competition hots up, banks may have to shift their Indian banking industry, the financial sector would
focus to ‘cost’ which will be determined by be opened up for greater international
revenue minus profit. In others words, cost- competition under WTO. Opening up of the
control in tandem with efficient use of resources financial sector from 2005, under WTO, would
and increase in productivity will determine the see a number of global banks taking large stakes
winners and laggards in the future. and control over banking entities in the country.
Qualitative Growth Multi National Banks would bring with them
The growth of banking in the coming years is capital, technology, and management skills
likely to be more qualitative than quantitative, which would increase the competitive spirit in
according to the report. Based on the projections the system leading to greater efficiency.
made in the “India Vision 2020” prepared by the The pressure on banks to gear up to meet
Planning Commission and the Draft 10th Plan, stringent prudential capital adequacy norms
the report forecasts that the pace of expansion under Basel II and the various Free Trade
in the balance-sheets of banks is likely to Agreements that India is entering into with other
decelerate. countries, such as Singapore, will also impact
The total assets of all scheduled commercial globalisation of Indian banking.
banks by end March 2010 is estimated at Some of the Indian banks may also emerge as
Rs.40,90,000 crore. That will form about 65 per global players. As globalisation opens up
cent of GDP at current market prices as opportunities for Indian corporate entities to
compared to 67 per cent in 2002-03. expand their business overseas, banks in India
Banks assets are expected to grow at an annual wanting to increase their international presence
composite rate of growth of 13.4 per cent during could naturally be expected to follow these
the rest of the decade against 16.7 per cent corporate entities and other trade flows out of
between 1994-95 and 2002-03. India.
On the liability side, there is likely to be large Alongside, the growing pressure on capital
additions to capital base and reserves. As the structure of banks is expected to trigger a phase
reliance on borrowed funds increases, the pace of consolidation in the banking industry. In the
of deposit growth may slow down. past, mergers were initiated by regulators to
protect the interests of depositors of weak banks.
In recent years, there have been a number of service providers offering, say, bill payment
market-led mergers between private banks. services or supermarkets or retailers doing basic
This process is expected to gain momentum in lending operations. The conventional definition
the coming years. Mergers between public of banking might undergo changes.
sector banks or public sector banks and private Social Banking
banks could be the next logical development. All these developments need not mean banks
Consolidation could also take place through will neglect social banking. Rather than being
strategic alliances or partnerships covering seen as directed lending such lending would be
specific areas of business such as credit cards, business-driven. Rural market comprises 74 per
insurance, etc. cent of the population, 41 per cent of the middle-
Risk and Reward class, and 58 per cent of disposable income.
The ability to gauge the risks and take appropriate Going Rural would be the new mantra of banks.
position will be the key to successful banking in Consumer growth is taking place at a fast pace
the emerging scenario. Risk-takers will survive, in 17,000-odd villages each with a population of
effective risk mangers will prosper and risk- more than 5,000. Of these, more than 50 per
averse are likely to perish. cent are concentrated in just seven states. Small-
Risk management has to trickle down from the scale industries would remain important for
corporate office to branches. banks.
As audit and supervision shifts to a risk-based However, instead of the narrow definition of SSI
approach rather than transaction oriented, the based on the investment in fixed assets, the
risk awareness levels of line functionaries also focus may shift to small and medium enterprises
will have to increase. (SMEs) as a group. Changes could be expected
in the delivery channel for small borrowers,
The report also talks of the need for banks to
agriculturists and unorganised sectors also.
deal with issues relating to ‘reputational risk’ to
maintain a high degree of public confidence for Regulation
raising capital and other resources. The expected integration of various
Technology intermediaries in the financial system would
require a strong regulatory framework. It would
Technological developments would render flow
also require a number of legislative changes to
of information and data faster leading to faster
enable the banking system to remain
appraisal and decision-making. This would
contemporary and competitive. Underscoring
enable banks to make credit management more
that there would be an increased need for self-
effective, besides leading to an appreciable
regulation, development of best practices which
reduction in transaction cost.
would evolve better through self-regulation rather
To reduce investment costs in technology, banks
than based on regulatory prescriptions.
are likely to resort more and more to sharing
For instance, to enlist the confidence of the global
facilities such as ATM networks. Banks and
investors and international market players, the
financial institutions will join together to share
banks will have to adopt the best global practices
facilities in the areas of payment and settlement,
of financial accounting and reporting. It is
back-office processing, date warehousing, and
expected that banks would migrate to global
so on.
accounting standards smoothly, although it
The advent of new technologies could see the
would mean greater disclosure and tighter
emergence of new players doing financial
norms.
intermediation. For example, we could see utility

RETAIL BANKING: OPPORTUNITIES AND
CHALLENGES
Retail Banking constituted almost a quarter of ASCBs' gross bank credit as at the
end of Mar 2007.
Key Growth drivers of Retail Banking: Growth in Economy, more than 70% of
population below 35 years, technological growth and innovation, falling treasury
income, attractive interest rate and the willingness to borrow
Challenges: Customer retention, rising indebtedness, maintaining the uptime of
technology infrastructure, KYC and money laundering,
Across the globe, retail lending has been a Drivers of Retail Business in India
spectacular innovation in the commercial
banking sector in recent years. The growth of • First, economic prosperity and the
retail lending, especially, in emerging economics, consequent increase in purchasing power
is attributable to the rapid advances in has given a fillip to a consumer boom. During
information technology, the evolving the 10 years after 1992, India’s economy
macoreconomic environment, financial market grew at an average rate of 6.8 per cent and
reform, and several micro-level demand and continues to grow even higher - not many
supply side factors. countries in the world match this
performance. In the recent years, the annual
India too experienced a surge in retail banking. growth rate has been 8 to above 9%.
The retail loan market has decisively got
transformed from a sellers’ market to a buyers’ • Second, changing consumer demographics
market. indicate vast potential for growth in
consumption both qualitatively and
In recent past, retail lending has turned out to be quantitatively. India is one of the countries
a key profit driver for banks with retail portfolio having highest proportion (70%) of the
constituting 25.8 per cent of ASCBs' total credit population below 35 years of age (young
as at March-end 2007. The overall impairment population). The BRIC report of the Goldman-
of the retail loan portfolio worked out much less Sachs, which predicted a bright future of
then the Gross NPA ratio for the entire loan Brazil, Russia, India and China, mentioned
portfolio. Within the retail segment, the housing Indian demographic advantage as an
loans had the least gross asset impairment. In important positive factor for India.
fact, retailing make ample business sense in the
banking sector. • Third, technological factors played a major
role. Technological innovations relating to
While new generation private sector banks have increasing use of credit/debit cards, ATMs,
been able to create a niche in this regard, the direct debits and internet and phone banking
public sector banks have not lagged behind. have contributed to the growth of retail
Leveraging their vast branch network and banking in India.
outreach, public sector banks have aggressively
forayed to garner a larger slice of the retail pie. • Fourth, the Treasury income of the banks,
By international standards, however, there is still which had strengthened the bottom lines of
much scope for retail banking in India. After all, banks for the past few years, has been on
retail loans constitute less than 7% of GDP in the decline during the last two years. In such
India vis-a-vis about 35% for other Asian a scenario, retail business provides a good
economics - South Korea (55%), Taiwan (52%), vehicle of profit maximisation. Considering
Malaysia (33%) and Thailand (18%).
the fact that retail’s share in impaired assets cent in insurance and brokerage, and 125
is far lower than the overall bank loans and per cent in the consumer credit card market.
advances, retail loans have put Thus, banks need to emphasise retaining
comparatively less provisioning burden on customers and increasing market share.
banks apart from diversifying their income • Second, rising indebtedness could turn out
streams. to be a cause for concern in the future. India’s
position, of course, is not comparable to that
• Fifth, decline in interest rates has also
of the developed world where household debt
contributed to the growth of retail credit by as a proportion of disposable income is much
generating the demand for such credit. higher. Such a scenario creates high
Opportunities uncertainty. Exprersing concerns about the
high growth witnessed in the consumer credit
Retail banking has immense opportunities in a segments the Reserve Bank has, as a
growing economy like India. As the growth story temporary measure, put in place risk
gets unfolded in India, retail banking is going to containment measures and increased the
emerge as a major driver. A. T. Kearney, a global risk weight from 100 per cent to 125 percent
management consulting firm, recently identified in the case of consumer credit including
India as the “second most attractive retail personal loans and credit cards (Mid-term
destination” of 30 emergent markets. Review of Annual Policy, 2004-05).
The rise of the Indian middle class is an important • Third, information technology poses both
contributory factor in this regard. The percentage opportunities and challenges. Even with ATM
of middle to high income Indian households is machines and Internet Banking, many
expected to continue rising. The younger consumers still prefer the personal touch of
population wields increasing purchasing power their neighbourhood branch bank.
and as far as acquiring personal debt is Technology has made it possible to deliver
concerned, they are perhaps more comfortable services throughout the branch bank network,
than previous generations. Improving consumer providing instant updates to checking
purchasing power, coupled with more liberal accounts and rapid movement of money for
attitudes toward personal debt, is contributing stock transfers. However, this dependency
to growth in India’s retail banking segment. on the network has brought IT departments
additional responsibilities and challenges in
The combination of the above factors promises managing, maintaining and optimizing the
substantial growth in the retail sector. Due to performance of retail banking networks.
bundling of services and delivery channels, the Illustratively, ensuring that all bank products
areas of potential conflicts of interest tend to and services are available, at all times, and
increase in universal banks and financial across the entire organization is essential for
conglomerates. Some of the key policy issues today’s retails banks to generate revenues
relevant to the retail banking sector are and remain competitive. Besides, there are
responsible lending, access to finance, long- network management challenges, whereby
term savings, financial capability, consumer keeping these complex, distributed networks
protection, regulation and financial crime and applications operating properly in support
prevention. Let us look at some of the challenges. of business objectives becomes essential.
Challenges Specific challenges include ensuring that
account transaction applications run
• First, retention of customers is going to be a efficiently between the branch officers and
major challenge. According to a research by data centres.
Reichheld and Sasser in the Harvard
Business Review, 5 per cent increase in • Fourth, KYC issues and money laundering
customer retention can increase profitability risks in retail banking are also important.
by 35 per cent in banking business, 50 per Retail lending is often regarded as a low risk
area for money laundering because of the

preception of the sums involved. However, compliance to third parties who may not be
competition for clients may also lead to KYC regulated. A BIS Report on “Outsourcing in
procedures being waived in the bid for new Financial Services” developed some high-
business. Banks must also consider level principles. A basic requirement in this
seriously the type of identification documents context is that a regulated entity seeking to
they will accept and other processes to be outsource activities should have in place a
completed. comprehensive policy on outsourcing
including a comprehensive outsourcing risk
Way Forward management programme to address the
How do we see the future of retail banking? outsourced activities and the relationship
with the service provider.
• First, customer service should be the be-all
and end-all of retail banking. Conclusion
• Second, sharing of information about the There is a need of constaint innovation in retail
credit history of households is extremely banking. In bracing for tomorrow, a paradigm shift
important as far as retail banking is in bank financing through innovative producs and
concerned. Perhaps due to the confidential mechanisms involving constant upgradation and
nature of customers, banks have a traditional revalidation of the bank’s internal systems and
resistance to share credit information on the process is called for. Banks now need to use
client, not only with one another, but also retail as a growth trigger. This requires product
across sectors. Globally, Credit information development and differentiation, innovation and
Bureaus have, therefore, been set up to business process reengineering, micro-
function as a repository of credit information- planning, marketing, prudent pricing,
both current and historical data on existing customisation, technological upgradation, home/
and potential borrowers. The database electronic/mobile banking, cost reduction and
maintained by these institutions can be cross-selling.
accessed by the lending institutions. While retail banking offers phenomenal
• Third, outsourcing has become an important opportunities for growth, the challenges are
issue in the recent past. With the increasing equally daunting. How far the retail banking is
market orientation of the financial system and able to lead growth of the banking industry in
to cope with the competition as also to future would depend upon the capacity building
benefit from the technological innovations of the banks to meet the challenges and make
such as banking, the banks are making use of the opportunities profitably. However, the
increasing use of “outsourcing” as a means kind of technology used and the efficiency of
of both reducing costs and achieving better operations would provide the much needed
efficiency. While outsourcing does have competitive edge for success in retail banking
various cost advantages, it has the potential business. Furthermore, in all these, customers’
to transfer risk, management and interest is of paramount importance.

Retail Loan Portfolio of Banks
(Amount in Rs. crore)
Item Outstanding as at Percentage

end-March Variation
2006 2007 2005-06 2006-07
1 2 3 4 5
1. Housing Loans 1,79,060 2,24,481 33.4 25.4
2. Consumer Durables 4,469 7,296 17.3 63.3
3. Credit Card Receivables 12,434 18,317 47.9 47.3
4. Auto Loans 61,369 82,562 75.1 34.5
5. Other Personal Loans 1,18,351 1,55,204 39.1 31.1
Total Retail Loans (1+2+3+4+5) 3,75,683 4,87,860 40.9 29.9
(25.5) (25.8)
Total Loans and Advances of SCBs 14,73,723 18,93,775 31.0 28.5
Note: Figures within brackets represent percentage share in total loans and
advances.
Source: RBI Report on Trend and Progress of Banking in India, 2006-07.
Retail Business of SBI

(Rs. Crore)
Item O/s as at end-March % Change
2006 2007
Total Deposits (ex.Inter-bank) 3,15,540 3,67,511 16.5
Out of which
Retail Deposits 1,98,362 2,40,816 21.4
(62.9%) (65.5%)
Total NF Credit 1,53,040 1,95,534 27.8
Out of which
Retail Credit 85,320 1,03,047 20.8
(55.8%) (52.7%)
Note: Retail Sector includes SIB and Personal segment.
Figures in brackets give % to respective totals.
Source: SBI Annual Report, 2006-07.

BANKING
POLICIES AND ACTS

IMPLEMENTATION OF BASEL II: PRESENT STATUS
Basel II Framework offers a new set of international standards for establishing

minimum capital requirements for the banking organisations.
The Pillar 1 stipulates the minimum capital ratio.
The Pillar 2 of the framework deals with the ‘Supervisory Review Process’.
The Pillar 3 of the framework, Market Discipline, focuses on the effective public
disclosures to be made by the banks.
Foreign banks operating in India and Indian banks having operational presence
outside India should adopt the Revised Framework with effect from March 31, 2008.
All other commercial banks (excluding Local Area Banks and Regional Rural Banks)
are encouraged to migrate to the Revised Framework in alignment with them, but in
any case not later than March 31, 2009.
The Basel II Capital Standards: A Revised Framework”,
which was supplemented in November 2005 by
The attempts at harmonising the capital
an update of the Market Risk Amendment. This
adequacy standards internationally date back to
document, popularly known as “Basel II
1988, when the “Basle Committee on Banking
Framework”, offers a new set of international
Regulations and Supervisory Practices”, as it
standards for establishing minimum capital
was then named, released a capital adequacy
requirements for the banking organisations. It
framework, now known as Basel I. This initiative
capitalises on the modern risk management
set out the first internationally accepted
techniques and seeks to establish a more risk-
framework for measuring capital adequacy and
responsive linkage between the banks’
a minimum ratio to be achieved by the banks.
operations and their capital requirements. It also
This norm was widely adopted in over 100
provides a strong incentive to banks for
countries, and in India, it was implemented in
improving their risk management systems. The
1992. Over the years, however, the Basel I
risk sensitiveness is sought to be achieved
framework was found to have several limitations
through the now-familiar three mutually
such as its broad-brush approach to credit risk,
reinforcing Pillars.
its narrow coverage confined to only credit and
market risks, and non-recognition of credit risk The Pillar 1 stipulates the minimum capital ratio
mitigants, which encouraged capital arbitrage and requires allocation of regulatory capital not
through structured transactions. Moreover, the only for credit risk and market risk but
rapid advances in risk management, information additionally, for operational risk as well, which
technology, banking markets and products, and was not covered in the previous Accord. The
banks’ internal processes, during the last Pillar 1, unlike the previous Accord, provides a
decade, had far outpaced the simple approach menu of approaches, from the simplified to the
of Basel I to measuring capital. A need was, advanced ones, for determining the capital
therefore, felt to replace this Accord with a more charge for each of the three categories of risks.
risk-sensitive framework, which would address The credit risk mitigants used by the banks have
these shortcomings. been specifically recognised to provide
appropriate capital relief.
Accordingly, after a wide-ranging global
consultative process, the Basel Committee on The Pillar 2 of the framework deals with the
Banking Supervision (BCBS) released on June ‘Supervisory Review Process’ (SRP), and is
26, 2004 the document “International probably not that well understood as the other
Convergence of Capital Measurement and two Pillars. In fact, this is the element which
makes the revised framework very groups to address specific issues under Basel
comprehensive in its sweep by addressing the II and made its recommendations to RBI. Based
entire risk domain of the banks. It requires the on these inputs, in February, 2005, RBI issued
banks to develop an Internal Capital Adequacy the draft guidelines, for public comments, on
Assessment Process (ICAAP) which should implementation of Pillar 1 and Pillar 3
encompass their whole risk universe – by requirements of the Basel II framework. In the
addressing all those risks which are either not light of the feedback received from a wide
fully captured or not at all captured under the spectrum of banks and other stake holders, the
other two Pillars – and assign an appropriate draft guidelines were revised and again placed
amount of capital, internally, for all such risks, in public domain on March 20, 2007 for a second
commensurate with their risk profile and control round of consultations. Keeping in view the
environment. Under the Supervisory Review, the additional feedback received, the guidelines were
supervisors would conduct a detailed finalised and issued on April 27, 2007. As regards
examination of the ICAAP of the banks, and if the Pillar 2, the banks have been asked to put in
warranted, could prescribe a higher capital place the requisite Internal Capital Adequacy
requirement, over and above the minimum Assessment Process (ICAAP) with the approval
capital ratio envisaged in Pillar 1. of their Boards.
The Pillar 3 of the framework, Market Discipline, Even before the final guidelines were issued,
focuses on the effective public disclosures to RBI had asked the banks in May 2006 to begin
be made by the banks, and is a critical conducting parallel runs, as per the draft
complement to the other two Pillars. It guidelines, so as to familiarise them with the
recognises the fact that apart from the requirements of the new framework. During the
regulators, the banks are also monitored by the period of parallel run, the banks are required to
markets and that the discipline exerted by the compute, parallely, on an ongoing basis, their
markets can be as powerful as the sanctions capital adequacy ratio – both under Basel I
imposed by the regulator. It is premised on the norms, currently applicable, as well as the Basel
basic principle that the markets would be quite II guidelines to be applicable in future. This
responsive to the disclosures made and the analysis, along with several other prescribed
banks would be duly rewarded or penalised, in assessments, is to be placed before the Boards
tune with the nature of disclosures, by the market of the banks every quarter and is also transmitted
forces. to RBI. These reports received in the RBI
indicate that implementation of Basel II in the
Preparatory Measures for Basel II
banks is in the process of getting stabilised.
Implementation
Basel II: Implementation of the New Capital
Though the Indian banks became fully compliant
Adequacy Framework by Banks in India:
with Basel I Accord in March 2005, RBI had
Salient Features
initiated preparatory measures even prior to that.
In August 2004, soon after the new framework • Banks in India shall adopt the Standardised
was released by the BCBS, the banks were Approach for credit risk, and the Basic
advised to conduct a self-assessment of their Indicator Approach for operational risk for
risk management systems and to initiate computing their capital requirements under
remedial measures, as needed, keeping in view the Revised Framework. Banks shall
the requirements of the Basel II framework. continue to apply the Standardised Duration
Further, to secure a consultative and participative Approach for computing capital requirement
approach for a non-disruptive migration to Basel for market risk.
II, a Steering Committee was constituted in
• Foreign banks operating in India and Indian
October 2004, comprising senior officials from
banks having operational presence outside
14 select banks (a mix of public sector, private
India should adopt the Revised Framework
sector and foreign banks). It formed several sub-
with effect from March 31, 2008. All other counter party bank. Scheduled and other
commercial banks (excluding Local Area banks will receive a differential treatment.
Banks and Regional Rural Banks) are
• Claims on corporates will be risk weighted
encouraged to migrate to the Revised
as per the ratings awarded by the chosen
Framework in alignment with them, but in
rating agencies. Unrated claims on
any case not later than March 31, 2009.
corporates will attract a risk weight of 100
• Banks are required to maintain a minimum per cent. However, unrated claims above
capital to risk weighted assets ratio (CRAR) Rs.50 crore sanctioned/renewed on or after
of 9 per cent on an ongoing basis. However, April 1, 2008 will attract a higher risk weight
taking into account the relevant risk factor of 150 per cent; this threshold will be
and internal capital adequacy assessments lowered to Rs.10 crore with effect from April
of each bank, the Reserve Bank may 1, 2009.
prescribe a higher level of minimum capital
• Claims eligible for inclusion as regulatory
ratio to ensure that the capital held by a bank
retail portfolio, specified claims secured by
is commensurate with its overall risk profile.
mortgage of residential property, loans and
• Banks are required to maintain, at both solo advances to banks’ own staff meeting the
and consolidated level, a minimum Tier I ratio specified conditions, and consumption
of at least 6 per cent. Banks below this level loans up to Rs.1 lakh against gold and silver
must achieve this ratio on or before March ornaments shall attract a preferential risk
31, 2010. weight ranging between 20 per cent and 75
per cent.
• The minimum capital maintained by banks
on implementation of Basel II norms shall • Claims in respect of a few specified
be subject to a prudential floor computed categories such as venture capital funds,
with reference to the requirement as per commercial real estate, consumer credit
Basel I framework for credit and market including personal loans and credit card
risks. The floor has been fixed at 100 per receivables, capital market exposures, and
cent, 90 per cent and 80 per cent for the claims on non-deposit taking systemically
position as at end-March for the first three important NBFCs will attract risk weights of
years of implementation of the Revised 125 per cent or 150 per cent.
Framework.
• A portion of unutilised limits will attract capital
• Banks may use the credit ratings awarded charge.
by the following four credit rating agencies • A set of collaterals has been specified which
for assigning risk weights for credit risk for is eligible for asset netting. That is, reduction
capital adequacy purposes: Credit Analysis in capital adquacy requirements will be
and Research Ltd., CRISIL Ltd., Fitch India, available to the extent of such collateral held.
and ICRA Ltd. Banks are also allowed to use
the credit ratings of following three • Where the benefit of such collateral is taken
for asset netting, the value of the collaterals
international rating agencies: Fitch, Moody’s
will be subject a "Haircut" - that is the
and Standard & Poor’s.
market value will be reduced by a certain
• Claims on domestic sovereigns (Central and percentage given by RBI.
State Governments) will attract a zero risk
• If the exposure is in one currency and the
weight while those guaranteed by State
collateral is in another currency, the amount
Governments will attract 20 per cent risk of the exposure deemed to be protected will
weight. be reduced by the application of a haircut -
• Risk weights for claims on banks will be HFx. That is, the collateral availablility will
linked to the capital adequacy position of the be reduced to provide for currency
fluctuations.
• If the residual maturity of a collateral is less • A set of disclosure requirements has been
than that of the underlying exposure, then prescribed to encourage market discipline.
the collateral cannot be recognised in full
• Banks are required to obtain prior approval
and has to be calculated pro-rata to provide
of RBI to migrate to the advanced
for the maturity mismatch.
approaches such as the Internal Rating
• Capital requirements for operational risk Based Approach for credit risk and the
under the Basic Indicator Approach will be Standardised Approach or the Advanced
the average of a fixed percentage (now 15%) Measurement Approach for operational risk
of positive annual gross income of the for computing capital requirements. The pre-
previous three completed financial years. requisites and procedure for approaching
RBI for seeking such approval will be issued
in due course.

SCHEME OF PROMPT CORRECTIVE ACTION
RBI will initiate certain Structured Actions in respect of the banks which have hit the Trigger
Points in terms of CRAR, Net NPA and ROA.
RBI will initiate certain Structured Actions in • Bank will not increase its stake in
respect of the banks which have hit the Trigger subsidiaries
Points in terms of CRAR, Net NPA and ROA. • Bank will reduce its exposure to sensitive
RBI, at its discretion, will resort to additional sectors like capital market, real estate
actions (Discretionary Actions) as indicated or investment in non-SLR securities
under each of the Trigger Points. The Trigger
Points, as well as Structured and Discretionary • RBI will impose restrictions on the bank
on borrowings from inter-bank market
Actions are indicated below:
1. Trigger Points • Bank will revise its credit/investment
strategy and controls
CRAR
CRAR less than 6%, but equal or more than 3%
(i) CRAR less than 9%, but equal or more
than 6% Structured Actions
• All Structured actions as in earlier zone
(ii) CRAR less than 6%, but equal or more
than 3% • Discussion by RBI with the bank’s Board
(iii) CRAR less than 3% on corrective plan of action
• RBI will order recapitalisation
NPAs
(i) Net NPAs over 10% but less than 15% • Bank will not increase its stake in
subsidiaries
(ii) Net NPAs 15% and above
• Bank will revise its credit/investment
ROA below 0.25% strategy and controls
2. Structured and Discretionary Actions Discretionary Actions
CRAR less than 9%, but equal or more than • Bank/ Govt. to take steps to bring in new
6% Management / Board
Structured Actions • Bank will appoint consultants for
• Submission and implementation of business/organisational restructuring
capital restoration plan by the bank • Bank/Govt. to take steps to change
• Bank will restrict expansion of its risk- promoters / to change ownership
weighted assets • RBI/Govt. will take steps to merge the
• Bank will not enter into new lines of bank if it fails to submit / implement
business recapitalization plan or fails to
recapitalise pursuant to an order, within
• Bank will not access/renew costly
such period as RBI may stipulate
deposits and CDs
CRAR less than 3%
• Bank will reduce/skip dividend payments
Structured Actions
Discretionary Actions
• RBI will order recapitalisation

• RBI will observe the functioning of the • Discussion by RBI with the bank’s Board
bank more closely on corrective plan of action
• RBI/Govt. will take steps to merge/ • Bank will not enter into new lines of
amalgamate/liquidate the bank or business
impose moratorium on the bank if its
CRAR does not improve beyond 3%
within one year or within such extended • Bank will not increase its stake in
period as agreed to. subsidiaries
Actions based on Net NPAs ROA less than 0.25%
Net NPAs over 10% but less than 15% Structured Actions
Structured Actions • Bank will not access/renew costly

deposits and CDs
• Bank to undertake special drive to
reduce the stock of NPAs and contain • Bank will take steps to Increase fee-
generation of fresh NPAs based income
• Bank will review its loan policy • Bank will take steps to contain
administrative expenses
• Bank will take steps to upgrade credit
appraisal skills and systems • Bank will launch special drive to reduce
the stock of NPAs and contain
• Bank will strengthen follow-up of
generation of fresh NPAs
advances including loan review
mechanism for large loans • Bank will not enter into new lines of
business
• Bank will follow-up suit filed/decreed
debts effectively • Bank will reduce/skip dividend payments
• Bank will put in place proper credit-risk • RBI will impose restrictions on the bank
management polices/process/ on borrowings from inter-bank market
procedures /prudential limits Discretionary Actions
• Bank will reduce loan concentration - • Bank will not incur any capital
individual, group, sector, industry, etc. expenditure other than for technological
Discretionary Actions upgradation and for such emergent
replacements within Board approved
• Bank will not enter into new lines of
limits
business
• Bank will not expand its staff/fill up
vacancies
• Bank will not increase its stake in
3. Any other action
subsidiaries
Notwithstanding anything contained in the PCA
Net NPAs 15% and above
framework, RBI reserves the right to direct a
Structured Actions bank to take any other action or implement any
other direction, in the interest of the concerned
bank or in the interest of its depositors.

DISCLOSURE AND TRANSPARENCY IN BANKS'
BALANCE SHEETS
Disclosures and transparency in financial statements have become more important, as
banks’ activities have become more complex and dynamic.
In pursuance of the financial sector reforms introduced since 1991, the Reserve Bank
has initiated a number of measures for bringing about greater or full disclosure in the
published accounts of banks having regard to the need for disclosure, public accountability
of banks, maintenance of confidentiality between banker and customer and the requirement
of maintaining the reputation of creditworthiness of banks.
In the interest of full and complete disclosure, some very useful information is better
provided, or can only be provided, by way of notes to the financial statements.
Disclosures and transparency in financial number of measures for bringing about greater
statements have become more important, as or full disclosure in the published accounts of
banks’ activities have become more complex banks having regard to the need for disclosure,
and dynamic. Banks are special. Banks are public accountability of banks, maintenance of
financial intermediaries critical for mobilising confidentiality between banker and customer and
savings, deploying the same taking into account the requirement of maintaining the reputation of
safety of funds and decent return to the savers. creditworthiness of banks. The Formats of
Banks thus have fiduciary role and responsibility. Balance Sheet and Profit and Loss Accounts of
They are crucial for operation of the payment banks were amended in 1991 having regard to
system. The sustained, stable and continuing (i) the need for greater or full disclosure, (ii)
operations of banks depend on the public expansion of banking operations both area-wise
confidence in individual bank and the banking and sector-wise over the period and (iii) the need
system. Full disclosure of the financial position for improving the presentation of accounts. The
of banks and financial institutions is considered thrust of the amendment was to bring the true
essential for an objective assessment of the financial position of banks to pointed focus and
stability of the banking system. The level of to enable the user of financial statements to
transparency of the annual accounts of banks study and have a meaningful comparison of their
and financial institutions, has therefore, received positions. Banks were required to disclose the
considerable attention from international accounting policies regarding key area of
organisations, rating agencies and other market operations in one place along with Notes on
participants. Effective public disclosure Accounts in their Financial Statements for the
enhances market discipline. Market discipline Accounting Year.
and improved public scrutiny can provide strong
incentives to banks to conduct their business in In the interest of full and complete disclosure,
a safe, sound and efficient manner; to conform some very useful information is better provided,
to stated business objectives; and to maintain or can only be provided, by way of notes to the
sound risk management practices and internal financial statements. The use of notes and
controls. Market discipline which is achieved supplementary information provides the means
through better disclosures have been given due to explain and document certain items, which
importance under Basel II by recognising it as are either presented in the financial statement
one of its three Pillars. or otherwise affect the financial position and
performance of the reporting enterprise. RBI has
In pursuance of the financial sector reforms recognised the need for improving the disclosure
introduced since 1991, RBI has initiated a requirements prescribed for banks. Keeping in

view factors like computerisation and the level Details of ‘Provisions and Contingencies’;
of MIS in banks, development of the market, etc., provisions made during the year towards
it has been agreed that the level of transparency income-tax, standard asset, floating
needs to be brought on par with international best provisions, etc.
practices. In line with the above approach, the
Disclosures of business ratios such as
disclosure standards of banks have gradually
interest income as a percentage of working
been enhanced. In addition to the 16 detailed
schedules to their Balance Sheet, banks are funds; operating profit as a percentage to
required to furnish in the “Notes to Account” working funds; return on assets; business
details such as: (deposits plus advances) per employee,
and profit per employee;
Capital Adequacy Ratio; Tier I capital; Tier II
capital; Asset Liability Management - maturity
pattern of loans and advances; investment
Percentage of share holding of the securities; deposits; borrowings; and
Government of India in the nationalised foreign currency assets and liabilities;
banks;
Lending to sensitive sectors, which are
Amount of subordinated debt raised as sensitive to asset price fluctuations. These
Tier-II capital; should include advances to sectors such
as capital market, real estate, etc., and
The gross value of investments separately such other sectors to be defined as
on investments in India and outside India sensitive by RBI from time to time;
and the net value of investments in India
and outside India; Exposure to country risk;
Percentage of net NPAs to net advances; Details of single borrower/group borrower

limit exceeded by the bank;
Provisions made towards depreciation in
the value of investments and the movement Disclosures relating to repo transactions;
of such provisions; non-SLR investment portfolio; forward rate
agreement/interest rate swaps; exchange
Percentage of net NPAs to net advances.
traded interest rate derivatives; and risk
Provisions made towards NPAs and the
exposure in derivatives.
movement of such provisions;
Banks are required to comply with the disclosure
Details of loan assets subjected to norms stipulated under the various Accounting
restructuring; restructuring under CDR; Standards issued by the Institute of Chartered
details of financial assets sold to an SC/ Accountants of India.
RC for Asset Reconstruction; details of
nonperforming asset purchased/sold;

COMPLIANCE FUNCTION IN BANKS
Based on the recommendations of the Ghosh Committee, banks in India have already
put in place compliance processes.
A Working Group set up by RBI with participation from the banking industry to review
the present system of compliance machinery in banks recommended a number of
measures for strengthening the compliance function.
Based on the recommendations, guidelines on compliance function of the banks
were issued on April 20, 2007.
Compliance function in banks is perceived as integral part of governance, along with the internal
one of the key elements in their corporate control and risk management process. The
governance structure. Based on the guidelines are also intended to guide the bank-
recommendations of the Ghosh Committee, led financial conglomerates in managing their
banks in India have already put in place ‘group-wide compliance risk’. The salient
compliance processes. However, the processes features of the guidelines are as under:
and the organisational structures have not kept
• Each bank will put in place a formal compliance
pace with the increased complexities and
function and designate a compliance officer for
sophistication in the banking business. In a large
number of banks, the compliance function is yet its bank. It will be the responsibility of the bank’s
to reckon the ‘compliance risk’ and the compliance officer to assist the top management
reputational risk arising out of compliance in managing effectively the compliance risks
failures causing huge economic costs. The need faced by the bank.
for the management of the compliance risk by • A robust compliance system in a bank should
banks as one of the key facets of integrated risk include a well-documented compliance policy,
management or enterprise-wide risk outlining the philosophy of the bank, role and set-
management framework at banks was up of the compliance department, composition
recognised. Accordingly, the Annual Policy of its staff and their specific responsibilities. The
Statement for the year 2006-07 stressed the policy should be reviewed annually by the bank’s
need for strong compliance standards in banks. board. Depending on its branch network, size
A Working Group set up by the Reserve Bank and complexity of the business operations,
with participation from the banking industry to sophistication of products and services offered,
review the present system of compliance every bank should decide on the organisational
machinery in banks recommended a number structure and composition of its compliance unit.
of measures for strengthening the compliance The structure may, however, be laid down within
function. Based on the recommendations, the overall framework of these guidelines and
guidelines on compliance function of the banks should avoid all potential conflicts of interest.
were issued on April 20, 2007. The guidelines
sought to introduce certain principles, standards • The compliance department at the Head Office
and procedures relating to compliance function should play the central role in the area of
consistent with the high level paper on identifying the level of compliance risk in each
‘Compliance and the Compliance Function in business line, products and process and issue
Banks’ issued by the Basel Committee of instructions to operational functionaries and
Banking Supervision as also the operating formulate proposals to mitigate such risk. It
environment in India. The guidelines articulate should periodically circulate the instances of
RBI's view that the compliance function is an

compliance failures among staff along with the procedures and other documents such as
preventive instructions. compliance manuals, internal codes of conduct
and practice guidelines.
• The responsibilities of the compliance function
should be carried out under a compliance • Banks may choose to carry on business in
programme that sets out its planned activities. various jurisdictions for a variety of legitimate
The compliance programme should be risk- reasons. In such cases, it should be ensured
based and subject to oversight by the head of that they comply with the applicable laws and
compliance to ensure appropriate coverage regulations in all such jurisdictions and that the
across businesses and co-ordination among organisation and structure of the compliance
risk management functions. The compliance function and its responsibilities are consistent
function should advise and assist the senior with local legal and regulatory requirements. It
management on compliance laws, rules and is for local businesses to ensure that compliance
standards. It should also put up to the senior responsibilities specific to each jurisdiction are
management information on developments by carried out by individuals with the appropriate
establishing written guidance to staff on the local knowledge and expertise, with oversight
appropriate implementation of compliance laws, from the head of compliance in co-operation with
rules and standards through policies and the bank’s other risk management functions.

REVISED GUIDELINES ON PRIORITY SECTOR LENDING
The revised guidelines on lending to the priority sector, effective April 30, 2007 seek
to enlarge the base of the priority sector lending.
The targets and sub-targets for the priority sector lending would henceforth be linked
to adjusted net bank credit (ANBC) (net bank credit plus investments made by banks
in non-SLR bonds held in HTM category) or credit equivalent amount of off-balance
sheet exposures (OBE), whichever is higher, as on March 31 of the previous
accounting year.
The outstanding FCNR (B) and NRNR deposits balances will no longer be deducted
for computation of ANBC for priority sector lending purposes.
The revised guidelines on lending to the priority equipment does not exceed the specified
sector, effective April 30, 2007 seek to enlarge amounts. The micro and small (service)
the base of the priority sector lending. The targets enterprises will include small road and water
and sub-targets for the priority sector lending transport operators, small business,
would henceforth be linked to adjusted net bank professional and self-employed persons, and
credit (ANBC) (net bank credit plus investments certain other service enterprises. Indirect finance
made by banks in non-SLR bonds held in HTM to small enterprises shall include finance to any
category) or credit equivalent amount of off- person providing inputs to or marketing the output
balance sheet exposures (OBE), whichever is of artisans, village and cottage industries,
higher, as on March 31 of the previous handlooms and to cooperatives of producers in
accounting year. The outstanding FCNR (B) and this sector.
NRNR deposits balances will no longer be
deducted for computation of ANBC for priority (iii) Retail Trade shall include retail traders/
sector lending purposes. The broad categories private retail traders dealing in essential
of the priority sector for all scheduled commodities (fair price shops), and consumer
commercial banks will be as under: co-operative stores.
(i) Agriculture (Direct and Indirect Finance): (iv) Micro Credit shall include provision of credit
Direct finance to agriculture shall include and other financial services and products of very
short-, medium- and long-term loans given for small amounts not exceeding Rs.50,000 per
agriculture and allied activities (such as dairy, borrower, either directly or indirectly through a
fishery, piggery, poultry, beekeeping) directly to SHG/JLG mechanism or to NBFC/MFI for on-
individual farmers, self-help groups (SHGs) or
lending up to Rs.50,000 per borrower.
joint liability groups (JLGs) of individual farmers
without limit and to others (such as corporates, (v) Education Loans shall include loans and
partnership firms and institutions) up to the advances granted to individuals (but not to
specified limits for taking up agriculture/allied institutions) up to Rs.10 lakh for studies in India
activities. Indirect finance to agriculture shall and Rs.20 lakh for studies abroad.
include loans given for specified entities in the
areas of agriculture and allied activities. (vi) Housing Loans shall include loans up to
Rs.20 lakh to individuals for purchase/
(ii) Small Enterprises (Direct and Indirect construction of one dwelling unit per family
Finance): Direct finance to small enterprises (excluding loans granted by banks to their own
shall include all loans given to micro and small employees) and loans given for repairs to the
enterprises, engaged in both manufacturing damaged dwelling units of families up to Rs.1
(production, processing or preservation of lakh in rural and semi-urban areas and up to
goods) and services activities, and whose Rs.2 lakh in urban and metropolitan areas.
investment in plant and machinery and

MICRO, SMALL AND MEDIUM ENTERPRISES
The micro and small & medium enterprises (MSMEs) constitute an important segment of
the Indian economy.
The process of economic liberalization and market reforms, while exposing the Indian
MSMEs to increasing levels of domestic and global competition, has also opened up
attractive possibilities of access to larger markets and of stronger and deeper linkages of
MSMEs with larger enterprises.
The performance of the MSME sector can be enhanced by addressing the issues which
can create an enabling environment for the MSMEs to flourish in the current highly
competitive and complex market conditions.
The micro and small & medium enterprises Enactment of the Micro, Small and Medium
(MSMEs) constitute an important segment of the Enterprises Development (MSMED) Act,
Indian economy, contributing around 39 percent 2006.
of the country’s manufacturing output and 34 per
cent of its exports in 2004-05. It provides Amendment to the Khadi and Village
employment to around 29.5 million people in the Industries Commission Act, 1956
rural and urban areas of the country. introducing several new features to facilitate
professionalism in the operations of the
The process of economic liberalization and Commission as well as field-level formal and
market reforms, while exposing the Indian structured consultations with all segments
MSMEs to increasing levels of domestic and of stakeholders. The new Commission has
global competition, has also opened up attractive been constituted.
possibilities of access to larger markets and of
stronger and deeper linkages of MSMEs with A Package for Promotion of Micro & Small
larger enterprises. Improved manufacturing and Medium Enterprises has been approved
techniques and management processes can be recently to address most of the concerns
sourced and adopted with greater ease. A in the areas such as credit, cluster-based
robust and vibrant MSME segment can derive development, infrastructure, technology and
the benefits of these new opportunities provided marketing. Capacity building of MSME
appropriate enabling policies are put in place and Associations and support to women
measures for capacity building in public private entrepreneurs are the other important
mode are also initiated. In this environment of features of this package.
competition and rapid technological changes, An empowered group of Ministers (EgoM)
the segment can then achieve higher sustained under the Chairmanship of the External
growth by enhancing its technological Affairs Minister has been set up to lay down
capabilities, improving its product and service a comprehensive policy for cluster-
quality to global standards and seeking ways of development and oversee its
innovation. implementation.
Initiatives and measures taken by the Under the Credit Guarantee Scheme, life
Government during the year to enable MSMEs insurance cover for chief promoters of units
enhance their competitive strength, address the provided guarantee cover by the Credit
challenges of competition and avail of the Guarantee Fund Trust for Small Industries
benefits of the global market include: (CGTSI) has been introduced. Further, the

one-time guarantee fee under the scheme gradual relaxation of the reservation policy over
has been reduced from 2.5 per cent to 1.5 time, and the number of items reserved for the
per cent with effect from April 1, 2006. small-scale sector was 239 on January 22,
2007.
After due consultation with the stakeholders,
180 items reserved for exclusive The performance of the MSME sector can be
manufacture in micro and small enterprises enhanced by addressing the issues which can
have been de-reserved on May 16, 2006 and create an enabling environment for the MSMEs
87 such items have been dereserved on to flourish in the current highly competitive and
January 22, 2007. complex market conditions. MSME development
typically requires cross – cutting strategies that
The logic of reserving items for domestic touch upon areas such as conducive policies,
production exclusively in the small scale sector, simplified legal and regulatory systems, good
particularly when such products can be freely governance norms, readily accessible and
imported from large-scale production units adequate finance from the institutions,
abroad and when such a policy prevents the supportive infrastructure, entrepreneur skill
‘small’ from growing and benefiting from the development, capacity building, etc. A conscious
economies of scale, has progressively come policy needs to be evolved as to what share of
under serious questioning. However, the the economy of the emerging markets should
question that needs to be addressed is whether be through MSMEs which require a certain
the reservation in the small scale sector is based amount of protection from the market forces.
on any objective policy parameter. The process The benefits of continued promotion of the
of reservation of items for production exclusively MSME sector with the apparently conflicting
by the small-scale sector started in 1967 and interests of the globalization process have to be
reached its peak in 1984. There has been a weighed and policies evolved accordingly.

OUTSOURCING
In the face of rapid technological developments, the reliance on outsourcing has

increased due to its various positive gains.
At the same time, there can be potential and significant threats arising out of
outsourcing. Outsourcing is not a trouble free solution; it is only that the nature and
types of problems change.
The Indian banking sector has been undergoing functional levels for outsourced projects -
radical transformation in view of the ongoing even up to 99.9 per cent, which may be
innovations, modernisation and large-scale difficult in the case of an internal solution.
adoption of newer technology. In the face of rapid
technological developments, the reliance on At the same time, there can be potential and
outsourcing has increased due to a variety of significant threats arising out of outsourcing.
factors. Outsourcing is not a trouble free solution; it is
only that the nature and types of problems
First, due to the fast pace of technological change. Outsourcing requires that the
advancements, IT infrastructure and in- necessary skills to outsource projects are first
house expertise get obliterated, unless available in-house. Such skill sets include
subjected to continuous upgradation. The
costs associated with regular upgradation management of the outsourcing process;
of infrastructure and skills in a highly managing vendors and, most often, multiple
dynamic environment tend to be high and vendors for the same processes/systems;
thus outsourcing, which provides for latest
technology based solutions, is a preferred managing the conflicting interests of
option. different vendors such as between a
hardware vendor and an application
Second, internal expertise can be inward software vendor using the same resources;
looking, with focus on established and
existing processes; outsourcing increases knowledge of trends and developments in
the scope for fresh reviews resulting in technology to keep pace with the
improved processes and services. requirements expected out of the vendors;
and
Finally, the benefit of experience from other
institutions is not generally available for capability to evaluate the charging pattern
internal experts; this is available for of vendors to ensure that the organisation
outsourced solutions. It is possible to fix high is not at the mercy of the vendor.
performance yardsticks/uptime and

PREVENTION OF MONEY LAUNDERING (PML) ACT
As the term implies, money laundering is a process of converting (or cleaning) dirty/
illegal money into clean/legal money.
This is done by using various channels to hide the source of income.
Under/Over invoicing, investment by offshore companies and trusts, large transactions
in cash, opening of benami accounts are some examples.
Money Laundering Act 2002 seeks to contain the menace.
Money laundering is called what it is because The next is the layering or agitation stage. The
that perfectly describes what takes place-illegal, object of this stage is to prevent the tracing of
or dirty money is put through a cycle of illegal proceeds by disrupting any paper trail that
transactions, or washed, so that it comes out at may have been started at the placement stage.
the other end as legal, or clean, money. In other Some methods used are under and over-
words, the source of illegally obtained funds is invoicing and investments by offshore
obscured through a succession of transfers and companies and trusts in the international
deals in order that those same funds can markets.
eventually be made to reappear as legitimate
income. The last stage of making, the dirty money clean
is generally referred to as integration and this
Common Factors occurs when placement and layering have been
successfully achieved. It is the means by which
There are four factors common to all money
the criminal enjoys the proceeds of his crimes.
laundering operations. To begin with, the true
To do this, the integration process achieves the
ownership and the real source of the money is
appearance of total legitimacy for the funds,
concealed. Next, the form it takes is changed.
thereby ensuring safety from enquiry as to their
The launderers change the form of the proceeds
true source. At the end of this stage, the money
in order to shrink the huge volume of cash
will appear to have been acquired utterly lawfully.
generated by the initial unlawful activity. Thirdly,
the trail left by the process is obscured so as to The facilitators of money laundering are often
make it difficult to follow the money from lawyers, accountants, financial advisors and
beginning to end. And finally, constant control is bankers.
maintained over the money.
Some Methods
Three Stages of the Process
As already stated, there is no one method of
The money laundering process can be divided laundering money. The British Banker ’s
into three stages. The placement stage is the Association has made an attempt to list out the
first introduction of dirty money into the most basic ways by which money may be
legitimate world. It is done, at the simplest level laundered. Some of the basic kinds of
by placing the illicit funds to purchase goods and suspicious transactions are:
services for the criminal. More sophisticated
placement involves using the banking and Frequent exchange of cash into other
financial system but this will involve disguise of currencies.
true depositor. ‘Smurfing’ is one way of Customers transferring large sums of
minimising the risk of getting caught and this money to or from overseas locations with
occurs when the sum to be laundered is broken instructions for payment in cash.
up into smaller amounts and introduced into the Large cash withdrawals from previously
legitimate system in this way. dormant or inactive account, or from an

account which has just received an necessary for controlling money laundering and
unexpected large credit from abroad. the like.
Use of letters of credit and other methods of Offence of money-laundering has been defined
trade finance to move money between in an exhaustive manner in the bill. Whoever
countries where such trade is not consistent acquires, owns, possesses or transfers any
with the usual business of the customer. proceeds of crime; or knowingly enters into any
Building up of large balances not consistent transaction which is related to proceeds of crime
with the known turnover of the business of either directly or indirectly; or conceals or aids
the customer, and subsequent transfer to in the concealment of the proceeds of crime will
accounts held overseas. be treated as committing the offence of money-
Frequent paying in of travellers cheques or laundering. Strict punishment for offence of
foreign currency drafts particularly if money-laundering has been proposed, viz.,
originating from overseas. rigorous imprisonment for a period of not less
than 3 years and not more than 7 years and fine
Any apparently unnecessary use of an up to Rs. 5 lakh. In certain cases even higher
intermediary in the transaction. rigorous punishment has been proposed.
Customers who deposit cash by means of
numerous credit slips so that the total of each Responsibilities of Banks
deposit is unremarkable but the total of all Banks have been advised to put in place a policy
the credits is significant. framework and to be fully compliant with the
Customers who seek to exchange large provisions of the Money Laundering Act to ensure
quantities of low denomination notes for that systems and procedures were put in place
those of higher denomination. and instructions had percolated to the operational
Customers who appear to have accounts levels. Banks have also been advised to appoint
with several banks within the same locality. a Principal officer and put in place a system of
internal reporting of suspicious transactions and
Large number of individuals making cash transactions of Rs.10 lakh and above.
payments into the same account without an
adequate explanation. Maintenance of records of transactions
How Banks Can Prevent It Banks should introduce a system of maintaining
proper record of transactions, as mentioned
In order to arrest money laundering, where banks below:
are mostly used in the process, it is imperative
that banks should know its customers, more (i) all cash transactions of the value of more
particularly those dealing with foreign exchange. than Rs.10 lakh or its equivalent in foreign
Banks should make reasonable efforts to currency;
determine the customer’s true identity and have
effective procedure for verifying the bonafides (ii) all series of cash transactions integrally
of new customers. connected to each other which have been
valued below Rs.10 lakh or its equivalent in
Government Initiative foreign currency where such series of
transactions have taken place within a month
The prevention of Money Laundering Act 2002 and the aggregate value of such transactions
has the following provisions: exceeds Rs.10 lakh;
The Bill aims at prevention and punishment of (iii) all cash transactions where forged or
offences relating to money laundering and counterfeit currency notes or bank notes
connected activities, confiscation of proceeds have been used as genuine and where any
of crime, disclosure of such transactions by forgery of a valuable security has taken
financial institutions, setting up agencies and place;
mechanisms for co-ordinating measures

(iv) all suspicious transactions whether or not during the course of business relationship, are
made in cash and by way of as mentioned properly preserved for at least ten years after
in the Rules. the business relationship is ended. The
identification records and transaction data
Information to be preserved should be made available to the competent
Banks are required to maintain the following authorities upon request.
information in respect of the following Reporting to Financial Intelligence Unit-India
transactions:
Banks are required to report information relating
(i) the nature of the transactions; to cash and suspicious transactions to the
(ii) the amount of the transaction and the Financial Intelligence Unit-India, Government of
currency in which it was denominated; India. The banks should ensure electronic filing
of Cash Transaction Report (CTR). The
(iii) the date on which the transaction was Suspicious Transaction Report (STR) should be
conducted; and furnished within 7 days of arriving at a conclusion
that any transaction, whether cash or non-cash,
(iv) the parties to the transaction.
or a series of transactions integrally connected
Maintenance and preservation of records are of suspicious nature. Banks may not put any
restrictions on operations in the accounts where
Banks should take appropriate steps to evolve an STR has been made and ensure that there
a system for proper maintenance and is no tipping off to the customer at any level.
preservation of account information in a manner
that allows data to be retrieved easily and quickly An indicative list of suspicious activities:
whenever required or when requested by the
1) Transactions involving large amount of
competent authorities. Further, banks should
cash.
maintain for at least ten years from the date of
cessation of transaction between the bank and 2) Transactions which do not have any
the client, all necessary records of transactions, economic sense.
both domestic or international, which will permit 3) Activities not consistent with the customer's
reconstruction of individual transactions business.
(including the amounts and types of currency 4) Attempts to avoid reporting/record keeping
involved if any) so as to provide, if necessary, requirements.
evidence for prosecution of persons involved in 5) Unusual activities.
criminal activity.
6) Customer who provides insufficient or
Banks should ensure that records pertaining to suspicious information.
the identification of the customer and his address 7) Certain suspicious funds transfer activities.
(e.g., copies of documents like passports, 8) Certain bank employees arousing
identity cards, driving licences, PAN and utility suspicion.
bills) obtained while opening the account and

SARFAESI ACT: AN UPDATE
Enacted in 2002, the Act is intended to strengthen Banks and FIs to recover NPAs
faster.
The Act empowers banks and FIs to seize changed assets without Court’s intervention
and sell them off.
The Act does not cover loans up to Rs.1 lakh, security interest created on Agricultural
lands and where the amount due is less than 20% of the principal and interest.
The Act was amended in 2004 to relax certain provisions in the interest of borrowers.
One of the problems faced by the banking become NPAs. But the option of approaching
industry in India is Non-Performing Assets the DRT, in case the banks or financial
(NPAs). The high level of NPAs has led to lower institutions do not recover the dues by
interest income and loan loss provisioning themselves will always remain open.
requirements which reduced the profitability of
the banks. Besides, the recycling of funds is Salient Features of the Act
restricted, thus leading to serious asset liability 1. In case borrower of an NPA account fails to
mismatches. The supply of credit to potential pay the dues of the bank within 60 days from
borrowers has been blocked which is having a the date of the notice sent by the bank, the
harmful effect on capital formation and bank can exercise any of the following rights
hampering economic activities of the country. under sub-section 13(4) to recover his
So the NPA problem is an issue of public debate secured debt.
and of national priority.
(a) Take possession of the secured assets
Background of the Act of the borrower and transfer the same by
way of lease, assignment or sale for
In 1993, Recovery of Debts Due to Banks and
releasing the dues without intervention of
Financial Institutions Act was enacted with a
the DRT/Court.
view to recover huge amount of NPAs at a faster
pace than through the Civil Courts. The Debt (b) Takeover the management of the
Recovery Tribunals (DRTs) were set up under borrower's concern.
this Act and the banking institutions filed cases (c) Appoint any person as a Manager to
against the borrowers in these tribunals. But this manage the secured assets.
Act could not live upto its high expectations. So,
the banking sector wanted to recover their NPAs (d) Send notice to a third person who has
on their own without taking the lengthy judicial acquired the assets from the borrower
route. This led to the enactment of The without the consent of the bank to pay
Securitization and Reconstruction of Financial the dues of the bank which are related to
Assets and Enforcement of Security Interest Act, the assets acquired by him. Such a
2002 (SARFAESI Act). payment is a valid discharge to the said
borrower.
Purpose of the Act
2. In case NPA account is a consor tium
This Act empowers banks and financial account or under multiple finance, the right
institutions (FIs) to seize the assets charged to to enforce securities can be exercised by
banks without intervention of the courts and sell the Banks/ FIs, only when secured creditors
them off to realize their loans, which have representing not less than three-fourth in

value on the amount outstanding are (f) Security created in any aircraft under the
agreeable as laid down in sub-section 13(9). Aircraft Act, 1934.
3. After acquiring the possession of the assets (g) Security created in a vessel under
charged to the bank and selling the same Merchant Shipping Act.
and appropriation of sale proceeds towards
the dues of the bank, then the bank can (h) Any rights of unpaid seller under Section
47 of the Sale of Goods Act, 1930.
approach DRT for recovering the balance
amount, if any, from the borrower/guarantor (i) Any proper ties exempted from
as laid down in sub-section 13(10). attachment under Section 60 of CPC.
4. If the bank feels that there can be resistance 7. This Act has permitted establishment of
for acquiring the assets charged to the bank asset reconstruction companies which will
from the borrower, in such cases the bank purchase the NPA accounts from the banks
can approach the concerned Chief at a discounted price. They will also take
Metropolitan Magistrate or the District over the assets charged to the bank for the
Magistrate by filing a written request for particular account for necessary recovery
taking possession of the said assets. On action through reconstruction of the assets
receipt of such a request, the said magistrate or otherwise.
shall take necessary steps to take
possession of the assets and other related 8. Under section 17, any person including the
documents and same would be handed over borrower may approach DRT by filing an
to the bank (Section 14). appeal before the DRT within 45 days from
the date on which steps have been taken by
5. After issuance of 60 days notice by the bank the bank. But such an appeal shall not be
to the borrower, the borrower shall not deal entertained by the DRT unless a specified
with the assets which are charged to the amount of the outstanding dues of the bank
bank. However, dealing with the said assets is deposited in the DRT. The right to appeal
in the ordinary course of business of the before DRAT (Debts Recovery Appellate
borrower is permitted. Tribunal) within 30 days is given under
6. The provisions of the Act are not applicable Section 18 to any person aggrieved by the
to the following transactions: order of DRT. The Act ousts the jurisdiction
of the Civil Courts and declares that no
(a) Any security interest created for injunction shall be granted in respect of any
repayment of financial assets not exercise of rights conferred by this Act.
exceeding Rs.1 lakh.
After the publication of this Act, several
(b) Any security interest created over borrowers filed writ petitions in the Supreme
agricultural lands. Court of India, challenging the validity of the
Act. In the landmark case of Mardia
(c) Any case in which the amount due is less
Chemicals Ltd. & Others vs. Union of India
than 20 per cent of the principal amount
& Others (2004) 120 Comp. Cas 373 (SC),
and interest therein.
the Supreme Court has upheld the validity
(d) Pledge of movable assets within the of the Act.
meaning of section 172 of the Indian
Some of the salient features of the judgement
Contract Act, 1872.
are:
(e) Any conditional sale, hire purchase or
(a) The Court directed that the banks should
lease, or any other contract, in which no
evolve appropriate internal mechanism to
security interest has been created.
thoroughly resolve the contentions raised

by the borrower. The bank should apply sale of secured assets by banks at a value
its mind to the objections and enough to cover their dues would be
communicate its reasons to the borrower. adequate for them, but it may be unfair to the
This will be an act of fairness on the part other stakeholders.
of the bank.
SERFAESI (Amendment) Ordinance - 2004
(b) The Court held that banks and financial
In the light of the Supreme Court judgement in
institutions have been provided with
the Mardia Chemicals vs. ICICI Bank Ltd., the
guidelines by RBI laying down the terms,
conditions and circumstances in which Government promulgated the Ordinance to
the debt is to be classified as non- amend certain sections of the Act, which has
performing assets. Hence, there is no been passed by Parliament in December, 2004.
arbitrary powers vested in the bank. Highlights of the changes are as under:
(c) The Court has held that under Section (a) Amendment in Section 13: On receipt of the
17(2), the provision for deposit of dues notice if the borrower makes any
before appeal is bad which will render the representation or raises any objection, the
remedy illusory. It is also unreasonable secured creditor shall consider such
and violative of Article 14 of the representation or objection and shall
Constitution. communicate within one week of receipt of
(d) Section 34 of the Act lays down that Civil such representation to the borrower.
Courts have no jurisdiction to entertain (b) Amendment in Section 17: The borrower
any suit in respect of any matter which may make an application to the DRT if the
DRT or DRAT (Debts Recover y secured creditor has not accepted his
Appellate Tribunal) is empowerned to deal representation or objection.
with. The Court has upheld the validity
of this provision. Any application made by the borrower shall
be dealt with by DRT, as expeditiously as
Accordingly, the Supreme Court upheld possible and to be disposed of within 60 days
the whole of the Act excluding Section from the date of such application. If the
17 (2). application is not disposed of by DRT within
Limitations of the Act the period of 4 months, any party to the
applicant may make an application to the
1. In case of enforcement of claim in DRAT for directing the DRT for expeditious
consortium advances the creditors can disposal of the application.
enforce only on the consent of the other
creditors having minimum 75 per cent share (c) Amendment in Section 18: No appeal shall
be entertained by DRAT unless the borrower
in the loan whereas enforcement of claim
has deposited with it 50 per cent of the amount
through DRT/Civil Court can be initiated by
a single creditor by impleading the other of debt due from him, as claimed by the
creditors as respondents in the case. secured creditor or determined by the DRT,
whichever is less. DRAT may reduce the
2. In case of sale of seized assets, the seller amount upto 25 per cent of the debt.
and the beneficiary will be the same. The

GUIDELINES ON PURCHASE/SALE OF
NON-PERFORMING FINANCIAL ASSETS
NPAs may be purchased/sold only on cash basis.

Valuation procedure to ensure that the economic value of financial assets is reasonably
estimated based on the estimated cash flows arising out of repayments and recovery
prospects.
Delegation of powers of various functionaries for taking decision on the purchase/
sale of the financial assets to be defined.
The guidelines are applicable to banks, FIs and ii. The estimated cash flows are normally
NBFCs purchasing/selling non-performing expected to be realised within a period of
financial assets, from/to other banks/FIs/NBFCs three years. Ten per cent of the estimated
(excluding securitisation companies/ cash flows are to be realised in the first year
reconstruction companies). and not less than 5% of the estimated cash
flows should be realized in each subsequent
Financial assets, including assets under half year.
multiple/consortium banking arrangements,
would be eligible for purchase/sale in terms of iii. A bank may purchase/sell non-performing
these guidelines if it is a non-performing asset/ financial assets from/to other banks only on
non performing investment in the books of the ‘without recourse’ basis.
selling bank.
iv. Each bank will make its own assessment of
Procedure for Purchase/Sale of Non- the value offered by the purchasing bank for
Performing Financial Assets, including the financial asset and decide whether to
Valuation and Pricing Aspects accept or reject the offer.
i. A bank which is purchasing/ selling non- v. A non-performing asset in the books of a
performing financial assets should ensure bank shall be eligible for sale to other banks
that the purchase/ sale is conducted in only if it has remained a non-performing
accordance with a policy approved by the asset for at least two years in the books of
Board. The Board shall lay down policies and the selling bank.
guidelines covering, inter alia,
vi. Banks shall sell non-performing financial
a) Non performing financial assets that may assets to other banks only on cash basis.
be purchased/sold;
vii. A non-performing financial asset should be
b) Norms and procedure for purchase/sale
held by the purchasing bank in its books at
of such financial assets;
least for a period of 15 months before it is
c) Valuation procedure to be followed to sold to other banks. Banks should not sell
ensure that the economic value of such assets back to the bank, which had
financial assets is reasonably estimated sold the NPFA.
based on the estimated cash flows
arising out of repayments and recovery viii. Banks are also permitted to sell/buy
prospects; homogeneous pool within retail non-
performing financial assets, on a portfolio
d) Delegation of powers of various basis provided each of the non-performing
functionaries for taking decision on the financial assets of the pool has remained as
purchase/sale of the financial assets, etc. non-performing financial asset for at least
e) Accounting policy 2 years in the books of the selling bank. The

pool of assets would be treated as a single ii) If the sale is at a price below the net book
asset in the books of the purchasing bank. value (NBV) (i.e., book value less provisions
held), the shortfall should be debited to the
ix. The selling bank shall pursue the staff profit and loss account of that year.
accountability aspects as per the existing
iii) If the sale is for a value higher than the NBV,
instructions in respect of the non-performing
the excess provision shall not be reversed
assets sold to other banks.
but will be utilised to meet the shortfall/loss
Prudential Norms for Banks for the on account of sale of other non-performing
Purchase/Sale transactions financial assets.
(A) Asset classification norms Books of purchasing bank

(i) The non-performing financial asset The asset shall attract provisioning requirement
purchased, may be classified as ‘standard’ appropriate to its asset classification status in
in the books of the purchasing bank for a the books of the purchasing bank.
period of 90 days from the date of purchase. (C) Accounting of recoveries
Thereafter, the asset classification status of Any recovery in respect of a non-performing
the financial asset purchased, shall be asset purchased from other banks should first
determined by the record of recovery in the be adjusted against its acquisition cost.
books of the purchasing bank with reference Recoveries in excess of the acquisition cost can
to cash flows estimated while purchasing the be recognised as profit.
asset which should be in compliance with
requirements in Para 5 (iii). (D) Capital adequacy
For the purpose of capital adequacy, banks
(ii) The asset classification status of an existing
should assign 100% risk weights to the non-
exposure (other than purchased financial
performing financial assets purchased from
asset) to the same obligor in the books of
other banks. In case the non-performing asset
the purchasing bank will continue to be
purchased is an investment, then it would attract
governed by the record of recovery of that
capital charge for market risks also. For NBFCs
exposure and hence may be different.
the relevant instructions on capital adequacy
(iii) Where the purchase/sale does not satisfy would be applicable.
any of the prudential requirements
(E) Exposure norms
prescribed in these guidelines the asset
classification status of the financial asset in The purchasing bank will reckon exposure on
the books of the purchasing bank at the time the obligor of the specific financial asset. Hence
of purchase shall be the same as in the these banks should ensure compliance with the
books of the selling bank. Thereafter, the prudential credit exposure ceilings (both single
asset classification status will continue to be and group) after reckoning the exposures to the
determined with reference to the date of NPA obligors arising on account of the purchase. For
in the selling bank. NBFCs the relevant instructions on exposure
norms would be applicable.
(iv) Any restructure/reschedule/rephase of the
repayment schedule or the estimated cash Disclosure Requirements
flow of the non-performing financial asset by Banks which purchase non-performing financial
the purchasing bank shall render the assets from other banks shall be required to
account as a non-performing asset. make disclosures in the Notes on Accounts to
their Balance sheets on details of non-performing
(B) Provisioning norms financial assets purchased and details of non-
Books of selling bank performing financial assets sold.
The purchasing bank shall also furnish all
i) When a bank sells its non-performing relevant reports to RBI, CIBIL, etc., in respect
financial assets to other banks, the same of the non-performing financial assets
will be removed from its books on transfer. purchased by it.

KNOW YOUR CUSTOMER (KYC) GUIDELINES
Issued by RBI in August 2002 to protect banks against financial frauds and money
laundering
Objective: To properly identify individuals/corporates; to monitor high-value
transactions and transactions of suspicious nature; and establish procedure for due
diligence and reporting of such transactions.
Key provisions: Open account with proper identification and address verification,
monitor cash transactions above Rs.10 lakh; route all remittances above
Rs.50,000/- through account (and not cash); watch transactions of suspicious nature.
The Governors of supervising bodies of G 10 Objectives

countries, at a meeting held in Basel, Switzerland
To establish procedures to verify the bonafide
evolved a set of principles to effectively curb
identification of individuals/corporates
money laundering so that banks can protect
opening an account.
themselves against it.
To establish processes and procedures to
Besides money laundering, financial frauds are
monitor high value transactions and
committed with frightening regularity using a
transactions of suspicious nature in
variety of means and more often banks end up
accounts
losing heavily in the process.
To establish systems for conducting due
‘Know Your Customer’ Standards
diligence and reporting of such transactions.
The objective of KYC guidelines is to prevent
KYC Policy
banks from being used, intentionally or
unintentionally, by criminal elements for money (i) “Know Your Customer” (KYC) procedure
laundering activities. KYC procedures also should be the key principle for identification
enable banks to know/understand their of an individual/corporate opening an
customers and their financial dealings better account. The customer identification should
which in turn help them manage their risks entail verification through an introductory
prudently. KYC, the principal means of identifying reference from an existing account holder/a
the customer, is the platform on which banking person known to the bank or on the basis of
system operates to control financial frauds, documents provided by the customer.
identify money laundering and suspicious
activities, and for scrutiny and monitoring of large (ii) The Board of Directors of the banks should
value transactions. The guidelines are also have in place adequate policies that establish
applicable to foreign currency accounts/ procedures to verify the bonafide identification
transactions. of individual/corporates opening an account.
The Board should also have in place policies
Banks should frame their KYC policies that establish processes and procedures to
incorporating the following four key elements: monitor transactions of suspicious nature in
accounts and have systems of conducting
i. Customer Acceptance Policy;
due diligence and reporting of such
ii. Customer Identification Procedures; transactions.
iii. Monitoring of Transactions; and 1. “Know Your Customer” Procedures for

Existing Customers
iv. Risk management. Banks are expected to have adopted due
diligence and appropriate KYC norms at the time

of opening of accounts in respect of existing exceeds Rupees Fifty thousand (Rs.50,000)
customers in terms of extant instructions. or total transactions in the account exceeds
However, in case of any omission, the requisite Rupees Two lakh (Rs.2,00,000), no further
KYC procedures for customer identification transactions will be permitted until the full
should be got completed at the earliest. KYC procedure is completed. In order not to
inconvenience the customer, the bank must
2. Ceiling and Monitoring of Cash
notify the customer when the balance
Transactions
reaches Rupees Fifty thousand (Rs.50,000)
The banks are required to keep a close watch or the total transactions in a year reaches
of cash withdrawals and deposits for Rs.10 Rupees Two lakh (Rs.2,00,000) that
lakh and above in deposit, cash credit or appropriate documents for conducting the
overdraft accounts and keep record of details KYC must be submitted otherwise the
of these large cash transactions in a operations in the account will be stopped
separate register. when the total balance in all the accounts
taken together exceeds Rupees Fifty
Issuance of travellers cheques, demand thousand (Rs.50,000) or the total
drafts and telegraphic transfers for transactions in the accounts exceeds
Rs.50,000 and above only by debit to Rupees Two lakh (Rs.2,00,000) in a year.
customers’ accounts or against cheques and
not against cash. The applicants for these 3. Transactions of Suspicious Nature and
transactions for amount exceeding Reporting
Rs.50,000 should affix their PAN on the
Branches of banks are required to report all cash
application forms.
transactions of Rs.10 lakh and above as well as
Repayment of deposits of Rs.20,000 and transactions of suspicious nature with full details
above should be through the accounts or in fortnightly statements to their controlling
crossed DD/cheques. offices. Besides, controlling offices are also
required to appraise their Head Offices regarding
In case of foreign organizations, among other transactions of suspicious nature.
documents, a certificate to the effect that the
organization is registered with the GOI to The guidelines apart from laying emphasis on
adhere to Foreign Contributions Regulation record keeping, training of staff and management
Act (FCRA, 1976) has to be obtained at the for strict adherence to KYC norms also stipulates
time of opening of accounts. banks to lay down a policy for adherence to the
above requirements comprising:
RBI have now further simplified KYC
procedure for opening small accounts. a. Internal Control Systems
Branches need to seek only a photograph of
b. Terrorism Finance
the account holder and self-certification of
address. Balances in these accounts at any c. Internal Audit/Inspection
time will be limited to Rs.50,000 and total
transactions to Rs.2,00,000 in a year. As and d. Identification and Reporting of Suspicious
when the balances or total transactions Transactions
exceed these limits, branches should treat e. Adherence to Foreign Contribution
them like regular accounts and follow the Regulation Act (FCRA), 1976
normal procedure of KYC.
4. Threshold Limit
While opening accounts as described above,
the customer should be made aware that if At the time of opening the account based on
at any point of time, the balances in all his/ customer ’s profile, a threshold limit of
her accounts with the bank (taken together) transactions is to be determined. As it is
proposed to report all the transactions of Rs.10 Controllers should periodically monitor the
lakh and above to the controlling authorities, implementation levels of KYC norms.
under no circumstances, the threshold limit
should exceed the limit of Rs.10 lakh. The 7. Conclusion
threshold limit should be 25% of the annual The KYC guidelines impose greater responsibility
income in case of individuals and one months on different functionaries in the bank. Money
turnover in the case of business enterprise. laundering done through bank would not only
affect its image but also the officials who were
5. Record Keeping
used as instruments in the process. Properly
All financial records, which have been reported followed, KYC guidelines would provide sufficient
to the controlling authorities under suspicious protection to banks against financial frauds and
transactions list, should be retained for at least money laundering. However, we need to ensure
10 years after the date of transaction. adherence to KYC guidelines without
inconveniencing the customer and by convincing
6. Internal Control System them that these are well intended in their long-
Ensure to train all the staff of KYC norms term interests.
Strengthening the internal audit system

CAMELS RATINGS FOR BANKS
Recommended by Padmanabhan Committee.

Deals with supervision of banks by RBI.
Banks to be classified into two: One, that needs annual supervision; other, on a larger
time scale.
Classification based on key parameters: Capital adequacy, Asset quality,
Management, Earnings performance, Liquidity and Systems (For foreign banks it is
CACS- second “C” stands for Compliance with regulatory guidelines).
Ratings on a scale of A to E .
During the normal course of conducting its discriminating as between banks, based on
business, banks assume risks — notably credit defined parameters of soundness — financial,
and liquidity risks. If the risks are controlled managerial and operational (related mainly to risk
properly, banks create economic value by management and internal control systems)
attracting savings to finance investment. In cases systems. It was recommended that intervals
of mismanagement and misallocation of their between examinations in respect of banks
resources, banks fail. III effects of bank failures without known or reported problems be widened,
are rapidly transferred through the entire financial while the weaker banks may be subjected to
system of the economy. frequent examinations by lessening the intervals
between two examinations.
At present, banks are subjected to Annual
Financial Inspections (AFI) by RBI with main For evaluation and rating of Indian banks, the
accent on the assessment of the bank’s financial committee suggested six key parameters, viz.,
position and senior officials of the RBI’s Capital Adequacy, Asset Quality, Management,
Department of Supervision (DoS) to look into the Earnings performance, Liquidity and Systems
non-financial aspects, i.e., management and (CAMELS — Acronym). This is on the lines of
systems. rating model (CAMEL) employed by the
Supervisory Authorities in U.S.A. Considering
The system of inspection of banks by RBI was growing supervisory concerns on the need for
reviewed in 1991 by a Working Group chaired adequate systems of risk management and
by Shri S. Padmanabhan, former Chairman of operational controls in banks operating in India,
Indian Overseas Bank. The Padmanabhan especially with the increase of market risk in bank
committee suggested that banks be placed in portfolios, an additional parameter of “systems”
the following two categories, for the purpose of was added to the CAMEL in India.
examination, depending on the known and
reported condition of the banks in financial, With regard to foreign banks operating in India
operational and management and compliance the committee considered that some parameters
terms: like management, earnings, liquidity are not of
much significance and are clearly of lesser
1) those that need to be examined on an annual concern in regard to branch operations from the
cycle and viewpoint of a host country supervision and
2) those that may be examined on a wider time excluded these factors for the evaluation
scale say within two years from the date of purpose. On the other hand, keeping in mind the
last examination. serious aberrations that surfaced in the
operations of some foreign banks in the recent
In other words, the committee suggested that past, the committee, recommended to include
supervisory examinations should be “compliance (Regulatory compliance)” factor for

inclusion for evaluation. Therefore, for foreign Composite Ratings
banks operating in India the factors for
examination would be: Once the component ratings are determined, a
composite (CAMELS or CACS) rating is
1) Capital Adequacy 2) Asset Quality 3) assigned as a summary and is used by the
Compliance and 4) Systems (CACS-Acronym). supervisors as the prime indicator of bank
condition. Composite rating is not determined
Component Ratings by calculating an average of the separate
Each of the six components in CAMELS (for components but rather based on an independent
Indian banks) or four components in CACS (for judgement of the overall condition of the bank.
foreign banks operating in India) are assigned a Composite ratings are assigned on a scale of A
rating on a scale of 1 to 5 in order of to E. Composite rating of A indicates that an
performance. institution is of least supervisory concern while
composite rating of E indicates an institution to
be a most supervisory concern.

BANKING OMBUDSMAN SCHEME
Scheme effective from June 1995 and amended in 2006.

Covers scheduled commercial banks, RRBs and co-operative banks.
Deals with: Deficiiency in banking services, delayed collection of cheques, non-issue
of drafts, interest rate disputes, failure to honour LC/guarantee commitments, delay
in disposal of loan application
It promotes settlement through conciliation
The scheme, which came into effect from June ii) non-acceptance, without sufficient cause, of
14, 1995 and amended in 2006 provides the small denomination notes tendered for any
public, a system of redressal of grievances purpose.
against banks and to approach Banking iii) non-issue of drafts to customers and others
Ombudsman for grievances against a bank and non-adherence to prescribed working
which are not resolved within a period of two hours.
months provided their complaints pertain to any
of the matters specified in the scheme. The iv) failure to honour guarantee/letter of credit
Scheme sought to establish a system of commitments by banks.
expeditious and inexpensive resolution of v) complaints pertaining to operations in SB/
customer complaints. The Scheme is in CA/NRI accounts and interest rates.
operation since 1995, and was revised during vi) non-observance of RBI instructions
the year 2006. The Scheme is being executed regarding time schedule for disposal of loan
by Banking Ombudsmen appointed by RBI at applications.
15 centres covering the entire country. The
scheme covers all scheduled commercial vii) Delays, non-credits to parties' accounts,
banks, Regional Rural Banks and all Scheduled non-payment of deposit.
Primary Co-operative Banks having a place of viii) Credit card operations.
business in India whether incorporated in India
Procedure for Redressal
or outside India. The scheme is not a
substitution for Consumer Protection Act but an The complaint has to be in writing duly signed
additional grievance settlement mechanism by the complainant or his authorised
available to the banks’ consumers. representative containing name and address of
the complainant and name and address of the
Powers of the Banking Ombudsman
bank against which the complaint is made. It
Banking Ombudsmen have been authorized to should also contain facts giving rise to the
look into complaints concerning (a) deficiency complaint supported by documents where
in banking or other service (b) sanction of loans necessary. Finally, it should also mention about
and advances as they relate to non-observance the relief sought from the Ombudsman.
of RBI directives on interest rates, delay in
Settlement of Complaints by Agreement
sanction or non-observance of prescribed time
schedule for disposal of loan applications or non- Banking Ombudsman will send a copy of the
observance of any other directions or complaint to the branch or office of the bank
instructions of RBI. named in the complaint under advice to nodal
His authority also includes matters referring to officer and endeavour to promote a settlement
all complaints concerning, of the complaint by Agreement between the
Complainant and the bank through conciliation
i) non-payment/inordinate delay in the payment or mediation.
or collection of cheques.

For the purpose of promoting a settlement, the compliance to the BO. BO may grant another
Banking Ombudsman may follow procedure 15 days time to comply with the Award and
which he may consider just and proper and he submission of compliance.
shall not be bound by any rules of evidence.
BO may reject a claim at any stage if after
Award by Banking Ombudsman consideration of the complaint and evidence
produced before him the BO is of the opinion
If a complaint is not settled by agreement within that the proceedings are not appropriate for
a period of one month from the date of receipt adjudication of complaint. The decision of BO
of the complaint or such further period as BO is final and binding on all parties.
may allow the parties, he may, after affording
the parties a reasonable opportunity to present Appeal before the Appellate Authority (AA)
their case, pass an Award or reject the
complaint. Any person agrieved by the Award may, within
45 days of the date of receipt of the Award, prefer
A copy of Award will be sent to the complainant an appeal against the AA (Deputy Governor in
and the bank. The Award shall not be binding on charge of the department of Banking
the bank unless complainant furnishes letter of Ombudsman at RBI). AA may, if he is satisfied,
acceptance to the bank withing 15 days from allow a further period not exceeding 30 days.
the date of receipt of the copy of Award.
Appeal may be filed by the bank only with the
BO may grant another 15 days time to the previous sanction of the Chairman or in his
complainant for submitting letter of acceptance absence, the Managing Director of the Executive
and thereafter the Award shll lapse and be of no Director or the Chief Executive Officer or any
effect. other Officer of equal rank.
The bank within one month from the date of The order of the AA shall have the same effect
receipt of letter of acceptance will intimate as the Award passed by BO.

ROAD MAP FOR PRESENCE OF FOREIGN BANKS
The first phase of the policy is for the period March 2005 to March 2009.
Foreign banks can establish Wholly Owned Subsidiary with minimum capital of
Rs. 300 crore
Wholly owned subsidiaries will be given preference for branch expansion in under-
banked areas
Foreign banks with the permission of RBI can acquire those banks which qualify for
restructuring.
Second phase of the policy will commence from April 2009 based on experience
gained.
Under the road map, during the first phase identified by the Reserve Bank for restructuring.
between March 2005 and March 2009, foreign The Reserve Bank would consider permitting
banks satisfying the eligibility criteria prescribed such acquisition if it is satisfied that such
by RBI will be permitted to establish presence investment by the foreign bank concerned will
by way of setting up a wholly owned banking be in the long term interest of all the stakeholders
subsidiary (WOS) or converting the existing in the investee bank. Where such acquisition is
branches into a WOS, which should have a by a foreign bank having presence in India., a
minimum capital of Rs.300 crore and sound maximum period of six months will be given for
corporate governance. The WOS will be treated conforming to the ‘one form of presence’
on par with the existing branches of foreign banks concept.
for branch expansion with flexibility to go beyond
The second phase will commence in April 2009
the existing WTO Commitments of 12 branches
after a review of the experience gained and after
in a year and preference for branch expansion
due consultation with all the stakeholders in the
in under banked areas. RBI would also prescribe
banking sector. Extension of national treatment
market access and national treatment limitation
to WOS, dilution of stake and permitting
consistent with WTO commitments as also
mergers / acquisitions of any private sector
other appropriate limitations consistent with
banks in India by a foreign bank would be
international practices and the country’s
considered., subject to the overal investment
requirements. Permission for acquisition of
limit of 74 per cent.
shareholding in India of private sector banks by
eligible foreign banks will be limited to banks

BANKING
TECHNOLOGY

TECHNOLOGICAL DEVELOPMENTS IN INDIAN BANKS
Technological developments have vastly altered the banking landscape in India

The cumulative proportion of branches of various providing ‘core banking solutions’
(CBS) has increased rapidly to 44.4%
The total number of ATMs installed by the Banks were 27,088 at end-March 2007
The volume of electronic transactions increased by 32.9 per cent during
2006-07
Technological developments have vastly sector banks including SBI was as under:
altered the banking landscape in India with
significant improvement in processes and
procedures leading to higher productivity, rapid (%)
product development through alternative delivery
2006 2007
channels, and reduction in the transaction cost.
In particular, the technology is being leveraged
increasingly to expand the banking outreach, Branches under CBS 28.9 44.4
especially in the rural areas .
Branches fully computerized
The process of computerisation, which was other than CBS 48.5 41.2
the starting point of all technological initiatives
has reached a stage of maturity. The cumulative Total 77.5 85.6
amount spent during September 1999 to March
2007 aggregated to Rs.12,826 crore
Source: RBI Report on Trend and Progress of Banking
The cumulative proportion of branches providing in India, 2006-07
‘core banking solutions’ (CBS) increased rapidly
The total number of ATMs installed by the Banks
to 44.4% at end-March 2007 from 28.9% at end
were 27,088 at end-March 2007 as compared
of March 2006. All seven Associate Banks of
with 20,267 at end-March 2006.
State Bank of India and Corporation Bank have
fully implemented the core banking solutions. ATMs installed by foreign banks and new private
Additionally, eight more public sector banks, sector banks were more than three times the
viz., State Bank of India, Andhra Bank, Bank number of their branches. The ATM to branch
of Baroda, Bank of India, Bank of ratio was much lower for public sector (32.9 %)
Maharashtra, Punjab National Bank and Vijaya and old private sector banks (34.9%) . It was
Bank have achieved full computerization 47.5% for SBI. ATMs in the case of two
although implementation of CBS is still under public sector banks (Corporation Bank and
progress. Allahabad bank, Canara Bank, Central IDBI Ltd.) were more than the number of their
Bank of India, Dena Bank, Indian Bank have branches. At individual bank level, the number
computerized 70% to 90% of their branches. of ATMs exceeded branches in respect
UCO Bank with 37.2%, Union Bank of India of all new private sector banks except Yes
(42.7%), United Bank of India (28.2%) and Bank Ltd. Of all the ATMs installed in the country
Punjab and Sind Bank ( 10.1%) have lagged at end-March 2007, new private sector banks
behind. The overall computerization in public had the largest share in off- site ATMs.

ATMs (As on 31st March 2007)
Total Number of Total Number of ATMs as % of Offsite ATMs as

Branches ATMs branches % of Total ATMs
SBI @ 9270 4407 47.5 48.1

SBI Group 14030 6441 45.9 43.3
Nationalised Banks 35636 9888 27.7 27.4
Old Pvt Sector Banks 4606 1607 34.9 31.3
New Pvt Sector Banks 2497 8192 328.10 61.5
Foreign Banks 273 960 351.6 74.1
Total 57042 27088 47.5 42.3
@ Not included in Total as also included in figures of SBI Group
Source: RBI Report on Trend and Progress of Banking in India, 2006-07
Reflecting the increased application of technology, the use of electronic payments, both retail and
card-based, has increased in recent years. The volume of electronic transactions increased
by 32.9 per cent during 2006-07 as compared with 24.5 per cent in the previous year. In terms
of value, the growth was as high as 61.0 per cent as compared with 34.6 per cent.
Volume of Transactions Value of Transactions

(in ‘000) (Rs. crore)
2005-06 2006-07 Growth % 2005-06 2006-07 Growth %
ECS- Credit 44216 69019 56.10 32324 83273 157.60

ECS-Debit 35958 75202 109.1 12986 25441 95.90
EFT/NEFT 3067 4776 55.70 61288 77446 26.40
Credit Cards 156086 169536 8.60 33886 41361 22.10
Debit Cards 45686 60177 31.70 5897 8172 38.60
Total 285013 378710 32.90 146381 235693 61.00
Source: RBI Report on Trend and Progress of Banking in India, 2006-07

E-LEARNING
E-learning is a broad term generally used to refer to the use of technology in learning
in a much broader sense than the computer-based training or computer aided
instruction.
Developments in internet and multimedia technologies are the basic enabler of E-
learning.
The success of e-Learning depends on three important aspects: availability of
infrastructure, technology and support for sustainability.
E-learning initiative in State Bank of India.
Electronic learning or E-learning is a general Many higher education courses now offer on-
term used to refer to computer-enhanced line classes. Many technologies can be, and are,
learning. It is used interchangeably in so many used in e-Learning, including: screencasts, web-
contexts. In many respects, it is commonly based teaching materials, MP3 Players with
associated with the field of advanced learning multimedia capabilities, educational animation,
technology (ALT), which deals with both the computer aided assessment, discussion
technologies and associated methodologies in boards, learning management software,
learning using computers, networks and/or simulations, virtual classrooms Most E-learning
multimedia technologies. situations use combination of the above
techniques.
E-learning is a broad term. It is generally used
to refer to the use of technology in learning in a The advantages of E-learning are that the
much broader sense than the computer-based receiver can access it from anywhere, anytime
training or computer aided instruction. It is also and at his convenience. It is independent of
broader than the terms on-line learning or online distance.
education which generally refer to purely web-
based learning. E-learning is naturally suited to The success of e-Learning depends on three
distance learning and flexible learning, but can important aspects: availability of infrastructure,
also be used in conjunction with face-to-face technology and support for sustainability.
teaching, commonly called ‘blended learning’. • e-Infrastructure
E-Learning also refers to educational web sites – Connectivity
such as those offering learning scenarios, – Resources Availability
worksheets and interactive exercises for – Empowerment of e-Skills
children. The term is also used extensively in
the business sector where it generally refers to • Technology
cost-effective online training. – Content Development, Standards
– Interoperable Learning Systems
The worldwide E-learning industry is estimated
to be worth over 40 billion US dollars according • Sustainability
to conservative estimates. Developments in – Quality Assurance Systems
internet and multimedia technologies are the – Large number and varied training
basic enabler of E-learning, with content, programmes
technologies and services being identified as the
three key sectors of the E-learning industry.

The Learning tools are: E-learning initiative in State Bank of India
• Learning Management Systems
To touch all employees on a continuous
– A Learning Management System (or
basis to avoid Knowledge/skills
LMS) is a software package that
obsolescence.
enables the management and delivery
of online content to learners First attempt was made in 2003 using LMS
from ORACLE with 1000 concurrent user
• Learning and Content Management licence.
Systems Not so successful at that time due to low
– An LCMS provides tools for authoring penetration of computer/ Internet, few e-
content as well as virtual spaces for courses etc. Only 6 e-Courses were
learner interaction (such as discussion available at that time.
forums and live chat rooms)
A Committee was setup for studying the
• Content Management Systems Bank’s initiative on E-learning and
– CMS facilitates the organization, control, recommend initiatives.
and publication of a large body of Based on the recommendations of the
documents and other content, such as Committee the present initiative was
images and multimedia resources. launched on the 28 th September, 2007.
Important initiatives are :
Implementation of E-Learning in the Bank
o Learning Management Software as a
part of Human Resources Management
State Bank of India has undertaken to
Software package obtained from SAP.
development of e-courses for the following
It will help us in recording achievements
reasons:
of the employees and implement
Reward and Recognition schemes.
Providing widespread availability and
accessibility to information and knowledge o An Asst General Manager (E-leaning)
Development of appropriate courses for has been posted at the College to drive
aligning training to business strategy and coordinate the Bank’s E-learning
Putting in place a suitable model for initiative.
promoting a learning organization o It was decided that all Functional
Moving towards creating a virtual campus (Knowledge/ skill based) inputs would
for the State Bank Group be disseminated through E-learning.
Migrate functional programmes to E-
learning to free SBLCS/ATIs for high-end o E-courses are available both on Internet
programmes and Intranet.
o More than 50 e-Courses have been
E-learning project would help develop a reservoir developed so far in-house by the Apex
of knowledge within the organisation. Initially it Training Institutions.
would supplement the existing training system
o DGMs and Heads of various disciplines
but eventually most knowledge and skill based
at the SBSC/SBA/SBIICM and SBIRD
training would be imparted through this medium.
are in-charge of development of e-
More importantly for a Bank of our size with more
courses. They have been designated as
than 2 lacs employees , the e-courses will be
Course Directors. The Course
available at the door-step of the employee to be
Directors nominate a Faculty as
accessed as per his need , convenience. This
Subject Matter Expert (SME) for each
will go a long way in extending training facilities
course who develops the courses in
to each employee.

technical collaboration with outside o E-courses would also be procured off-
vendor (s) hired by the Bank. the-shelf, to address needs of all the
categories of employees/Roles.
o 28 members of Faculty from various
Apex Training Institutes and SBLCs o Bank is in the process devising a
have been trained as e-Faculty and scheme for completing e-courses and
given exposure to various concepts and passing online tests.
tools related to E-Learning so that more
effective contents can be developed

E-PURSE
An e -purse is a stored value or prepaid product in which a record of the funds or

value is stored on an electronic device.
E-purse uses both smart card and computer networks.
In Europe and America one can load up to 200 US Dollar or Euro onto the chip and
pay the exact amount at approximately millions of vending machines.
Future of e-purse in India.
The Committee on Payment and Settlement continues to grow around the world. In the US,
System (CPSS) defines electronic money as, gift cards were sold in their millions over the
‘monetary value as represented by a claim on holiday period and account for more than 8% of
the issuer which is: (i) stored on an electronic retail transaction value. One can load up to 200
device; (ii) issued on receipt of funds of an US Dollar or Euro onto the chip and pay the
amount not less in value than the monetary value exact amount due conveniently at approximately
issued; and (iii) accepted as means of payment millions of vending machines as well as on the
by undertakings other than the issuer’. This Internet
definition includes both prepaid cards
(sometimes called electronic purse) and prepaid The growth in ‘open’ prepaid cards (ie, cards
software products that use computer networks that can be spent on the Visa, MasterCard and
(sometimes called digital cash). An electronic Discover networks) is also substantial with
purse or e -purse is a stored value or prepaid around $3.5 billion loaded last year. Visa USA
estimate the pre-paid market at around $2 trillion,
product in which a record of the funds or value
spread across consumer (eg, gift cards),
is stored on an electronic device which is in
the consumer’s possession and is available business (payroll cards) and government (eg,
to the consumer for multipurpose use. The benefit cards)
loading of value onto the device is akin to the E-purse has gone through an electronic cycle.
withdrawal of cash from an ATM. Most of the e- Banks tried to introduce the e-purse and it did
purses relate to use of reloadable cards. not work. They then thought that there was no
Banks in Europe and America gave the market for pre-paid cards for small transactions.
Meanwhile, other people (who understood
electronic purse a try in the 1990s, but largely
marketing and brand) launched pre-paid cards
abandoned their efforts when the products failed
to gain any real traction in the marketplace. Many and turned them into a successful product. Now
companies Mondex, VisaCash, GeldKarte and banks are going back into the business.
Danmont tried but then abandoned. Clearly, In India, quite a few banks have started issuing
banks thought, people did not want pre-paid or prepaid cards. Now a number of non-banks
stored-value payment cards for low value in collaboration with banks/without collaboration
transactions. But new technology means that of banks are issuing both, limited or
the e-purse is back again with more potential multipurpose prepaid cards. Broad categories
for success. Pre-paid cards are being used for under which cards have been issued by banks
paying for public transport, parking, postal in India are- co -branded pre -paid travel card/
stamps, public phones, laundromats, gaming foreign travel cards, co - branded pre -paid
centres, eateries The majority of digital mobile annuity cards, co -branded pre -paid payroll
phones are pre-paid. The gift card market cards, etc. These cards, apart from being used

at ATMs, can also be used at point of sale (POS) cards simplify life for end-users, often replacing
terminals for making payments. The payment up to three other cards for payment and other
could also be made for transactions done on transactions. Thus, there can be a single
internet. Slowly, but steadily, usage of these card which can function as an identity card, as
mode of payment is on an increase. The a driving licence, as a health card and also for
money is loaded on cards by transfer of balances other funds related purposes. Because these
from bank accounts through ATMs or in some cards deliver such highly personalised
cases through the telephone or internet, on applications, their perceived value among end-
receipt of equivalent monetary value. These can users is much higher and helps to build stronger
be used for making payment for purchases than average customer loyalty.
which are generally of low value.
With Indian banking having embraced IT in a
E-purse uses the smart card technology. A large way, the potential for usage of multi-
smart card is a card which is similar to a application smart cards is high. Smart-card-
credit/debit ATM card. The distinguishing feature based electronic purse systems, in which value
lies in the presence of a chip in the card which is stored on the card chip and not in an externally
can store information. Unlike in the case of recorded account so that machines accepting
magnetic- stripe based cards, the stored the card need no network connectivity. Thus,
information in the chip could either be permanent the multi-application cards are beneficial for
in nature, or may be subject to change. For issuers as well, especially because they provide
instance, the passwords can be changed at any the prospect to create unique marketing
frequency by the cardholder. Because of its opportunities. They are particularly suitable
additional feature, smart cards find usage not for financial inclusion in remote parts of the
only for financial transaction processing but in a country. For the banks introducing smart cards,
number of other areas as well. another quantifiable benefit is the ability to
forecast a reduction in fraud.
One of the greatest advantages of the smart card
technology is its ability to consolidate multiple
applications in a single, dynamic card. These

MOBILE BANKING
The term ‘mobile banking’ or M-banking in the contemporary context denotes banking
transactions done through mobile phones by way of SMS.
Account related queries, real-time transaction alerts and investment services are
currently possible through M-banking and the scope is widening day by day.
M-banking is being used very successfully for micro payments in countries like
Philippines, Africa, etc., and now increasingly looked upon as a tool for financial
inclusion rather than mere convenience enhancer.
The term ‘mobile banking’ or M-banking in the used for micro payments in countries like
contemporary context denotes banking Philippines. It caters to millions of rural people
transactions done through mobile phones by who otherwise have no access to conventional
way of SMS. These transactions, when enabled financial institutions like banks. Bankers think
by the bank and the mobile phone service them as not bankable because of negligibly low
provider, can give the customer the convenience levels of balances in their account and in turn
of virtual 24x7, anywhere banking in respect of the rural poor either feel intimidated by the
specific sets of transactions. This specific set banking procedures or feel inconvenient to keep
includes balance checking, mini-statement, their meagre savings with banks. M-banking
stop-payment, cheque book requests, bill steps in to address such major gaps neglected
payments and funds transfer from one account by the banks but critical to rural poor and a pre-
to another (domestic and international). Another paid connection becomes anytime money for
set of services keeps the customer updated in them. Using their mobile they can lend or borrow
real-time about the transactions taking place in money from one another and receive domestic
his account like debit and credit over specified and international remittances in real time. In
limit, balance, bouncing of cheques, etc. M- some of the African countries bankers are
banking scope is widening day by day and experiencing exponential growth in M-banking
mutual fund investments, insurance customers compared to the growth in internet-
investments, real time stock quotes and banking customers. In many Latin American
customised price alerts are also have become countries hardly 10% of the beneficiaries of
a part of it. international remittances have a bank account,
at present they depend on agencies like
Mobile internet enhances the scope and ease Western Union who charge upto 15% and
of M-banking. However it is more of an extended require the recipient to travel to such offices. M-
form of internet-banking rather than the kind of banking will save them the trip and bring down
M-banking discussed above. the cost of remittance.
M-banking provides a low-cost delivery channel M-banking in future will enable customers to
for banking services and hence currently banks make payments at the point of sale like using a
are offering mobile banking free of charge. conventional credit or debit card but in much
Emerging Trends more faster and safer, contactless payment
mode. Service providers like Obopay have in
With the explosive growth in mobile phone effect converted the mobile phone into a wallet.
subscription, the mobile phone owners have
already outnumbered bank account holders in Challenges
many developing countries. M-banking is now Security of financial transaction is the biggest
increasingly looked upon as a tool for financial challenge in M-banking.
inclusion rather than mere convenience
enhancer. M-banking is very successfully being Physical security of the hand set, the strength
of the software application and secure
transmission of data are of vital importance. various types of mobile phones and banks’
Another major challenge in mobile banking is computer networks is now available and can
ironically the technology itself. Many protocols address the kind of technology challenge
like HTML (Hyper Text Mark-up Language), XML narrated above.
(Extensible Mark-up Language), WAP (Wireless
Another issue is new types of disputes that the
Application Protocol) are used by different mobile
banks and service providers will be facing.
operators. Interoperability of banks’ software
Problems due to inadvertent errors from
with various protocols used by the mobile
customers’ side, non-completion of transaction
operators is necessary for providing M-banking.
at either end due to technological or
However, there is a set of software solutions
geographical reasons, etc., can give rise to
called ‘middleware’ which can mediate between
complicated disputes.

BIOMETRICS AUTHENTICATION TECHNOLOGY
Biometrics technology is solution to the problem of increasing frauds through

impersonation.
It can be easily used to bring rural masses in the fold of technology enabled banking
channels.
There are a number of biometric technologies, but those suitable for specific requirements
should be adopted.
In USA, there are nearly 1,300 ATMs per million however, has the advantage of being a familiar
people. In Mexico, this figure is about 200. The concept worldwide.
highest density of ATMs is in South Korea, where
In the retail payments arena, biometric
it is about 1,600 ATMs per million. At 55 ATMs
technology has already made its way in the form
per million, China’s tally is almost double that of
of self service devices including Automated
India with only 28 ATMs per million people.
Teller Machines (ATMs) and Point of Sale (POS)
Despite rapid growth, India has a long way to go
machines. Some of the new generation POS
compared to other markets. For example, China
terminals are biometric enabled with smart card
has about 80,000 ATMs, and the US, more than
readers, allowing thumb-print based
4,00,000 ATMs.
authentication. Some Indian banks have started
To reach the rural masses, banks are going all implementing biometric applications in retail
out in providing a user-friendly banking branch applications for officer authentication.
experience. ATMs with biometric devices are the However, in India most of such initiatives are still
latest solution in the ongoing effort to offer in the trial run phase.
banking services to the rural masses.
Across the globe efforts are on to enable
Credit and debit card fraud is a major problem payments through kiosks based on fingerprints.
within the UK, going up to £74.6 million ATM enhancements with biometric support
withdrawn from Automated Teller Machines in envisaged by vendors eliminate the need for PIN
2004. Top Japanese financial institutions are entry, and authenticate customer transactions
using fingerprint scanning in addition to PIN code by thumb-impressions. A simplified menu on
to ensure safer banking. ATMs coupled with possible audio guidance in
local language enable easy use for rural
Banks are also trying biometric enabled masses. So far bank ATMs are dependent on
technologies in their micro finance initiatives. PIN verification. The biometric technology
Establishing the identity of a depositor through enabled methods of identification are not
biometrics makes it possible for illiterate or dependent on password.
barely literate folks to become part of the banking
user community. With an increasing need for Benefits of Biometrics Authentication
security, in view of incidences of password theft, Technology
etc., a need is felt for a technology that can
• Provides strong authentication, biometric
create a unique identification for each individual.
features of an individual is always different
Its use is no more limited to identification by
from the rest of the world population.
police, investigating agencies. In view of the
rapidly increasing applications, the scope of • Can be used instead of a PIN, which has
various biometrics techniques is increasing, be problems of impersonation, difficulty in use
it identification via face, voice, retina, iris, by semi-literate and illiterate, with increased
fingerprint, hand geometry, face, odour, retinal use of password based technology
pattern, or a behavioural trait like voice pattern, remembering passwords is difficult for many
handwriting or acoustic sign. Fingerprinting, literate people also.
• Hidden costs of ATM card management like the hand is placed upon a sensory pad, which
card personalization, delivery, management, reads the ridges of the epidermis for use as the
re-issuance, PIN generation, helpdesk. features. However, it has been observed that
over a period of time, especially in case of
• Ideal for rural masses all over the world. labourers, the finger prints undergo a change.
How It Works DNA fingerprinting: DNA fingerprinting involves
With ATMs supported by biometric solutions, comparison of the DNA makeup of an individual.
banks having a presence across the country can Gait recognition: Gait is based on identifying an
leverage this technology. ATMs are so prevalent individual by the way he/she walks.
and today so many people use ATMs that it
becomes easy to use biometrics as a Face recognition: This is the most popular
replacement for an ATM PIN. The typical ATM modern form of biometric identification. In this
has two input devices (a card reader and technique identification is carried out based on
keypad) and four output devices (display screen, the facial features.
cash dispenser, receipt printer, and speaker).
There is also a communication mechanism that Voice recognition: Automated voice recognition
links the ATM directly to an ATM host network. uses the features of a person’s voice. However,
The ATM functions much like a PC, it comes this technique is highly vulnerable to noise.
with an operating system and application Adverse Features of the Biometric
software for the user interface and Techniques
communications. To identify account holders
ATMs use magnetic strip cards and personal Digital Spoofing: if a biometric identification chip
identification numbers or smart cards with contained information related to a subject’s
fingerprint validation. ATM forwards information finger relief, then the perpetrator could create a
read from the client’s card and the client’s model of the relief for his hand and then
request to a host processor, which routes the impersonate the subject where the use of only
request to the concerned financial institution. If that fingerprint is needed.
the cardholder is requesting cash, the host
Physical Spoofing: Physical spoofing is the
processor signals for an electronic funds
process of modifying any biometric data on a
transfer from the customer’s bank account to
real document, to match that of the imposing
the host processor’s account. Once the funds
individual. As the false biometric data verifies the
have been transferred, the ATM receives an
imposter’s identity, he can pass through the
approval code authorizing it to dispense cash.
various security systems unhindered.
Biometric Authentication Techniques
Privacy: Some people regard having biometric
Biometrics is statistical study of biological data being kept on them as a violation of personal
phenomena. Some of the techniques used are: privacy. In techniques such as odour
recognition, it becomes quite apparent as an
Iris recognition: It works on a high resolution invasion of a person’s privacy. For the population
picture of a subject’s eye and comparing it to a to accept biometric systems, the features used
data set. The blood vessels in an Iris have need to be very carefully selected to minimise
complete uniqueness across the population, as any antagonistic effects.
they are determined randomly during gestation.
Cost: Biometric systems are quite expensive.
Finger-print recognition: The epidermis of
fingers and palms are unique to an individual,

PAYMENT SYSTEMS: AN UPDATE
The main thrust of RBI and BPSS is on electronification of the payment systems.
ECS is now available at all bank branches at 67 centres.
30,000 branches of various banks are providing remittance through NEFT/RTGS.
NFS comprises of 27 banks and 16891 ATMs.
Smooth functioning of the payment and was manual. Thus, on completing the setting
settlement systems is a pre-requisite for stability up of MICR Cheque Processing Centres
of the financial system. Any malfunctioning of (CPCs) at the 59 identified centres, RBI felt
the system could seriously impair the flow of the need to computerise the settlement
goods and services and financial assets in the operations at the clearing houses where the
economy. This could have serious implications setting up of a MICR CPC was not a viable
for financial stability and the transmission option due to lower volumes. A plan was drawn
mechanism of monetary policy. for computerisation of the clearing operations
using the Magnetic Media Based Clearing
Board for regulation and supervision of Payment System (MMBCS). In Phase I (clearing house
and Settlement Systems (BPSS) is the apex with more than 25 banks) - 41 clearing house
body for giving policy direction in the area of were identified and computerised. During Phase
payment and settlement systems. The main II (clearing houses with 15 or more member
thrust of the BPSS was on electronification of banks), 180 clearing houses were identified
the payment systems by way of encouragement for computerisation. Of these, 176 clearing
and information dissemination. houses were computerised. In addition, another
The Reserve Bank has also taken keen interest 313 clearing houses were also computerised
in developing robust payment and settlement even though they had less than 15 member
systems, both retail and large value. The banks. The MMBCS provides for clearing and
Reserve Bank has taken a number of measures settlement based on the MICR code information.
for improving efficiency of both large value and MICR code information system has been in
retail payments systems. operation for more than 15 years. It covers
presentation clearing, return clearing, high
The payment systems comprise paper-based value/high value return clearings and inter-
clearing and electronic clearing systems, viz., bank clearing, but does not cover inter- city
national electronic funds transfer (NEFT), clearing. The system was initially implemented
electronic clearing service (ECS), card at the four MICR CPCs operated by the Reserve
payments, e-payment, internet and mobile Bank. The same was subsequently
payments. The broad structure and features are implemented at all the clearing houses managed
as under: by the Reserve Bank. The member banks
present their claims in the form of an electronic
Paper-based Clearing - Extension of MICR
file which gets processed on the computer. As a
and Implementation of Magnetic Media
result, the settlement figures are arrived at within
Based Clearing System (MMBCS)
15 minutes compared to 3 or 4 hours under the
The paper-based cheque is still the manual system.
predominant mode of payment. The volume
Cheque Truncation System (CTS)
of transactions settled through this mode makes
it imperative that the system operates smoothly. The cheque truncation system (CTS) was also
The standardization of cheque in MICR format taken up to improve efficiency of the paper-
has been achieved. However, at quite a large based payment system. On operationalisation
number of clearing houses, the processing of the CTS, the paper instruments would not
travel beyond the presenting bank. Banks would 3.00 p.m. and 4.00 p.m.) and 3 settlements
take a business decision at the point of truncating (9.30 a.m., 10.30 a.m. and 12.00 noon) on
the cheque – branch level or service branch or Saturdays. The increase in the number of
gateway level. A pilot project for cheque settlements of the NEFT system, which is a
truncation has been set up to cover the National deferred net settlement, has made it close to a
Capital Region of Delhi. RBI has suggested that real time system. There are now 74 banks
smaller banks, which may find it unviable to offering the facility at over 30,000 branches.
set up this infrastructure, could come together RTGS/NEFT is now available on
and utilise the services of service bureaus set www.onlinesbi.com.
up for providing this service. A few large banks
would set up service bureaus for smaller banks The large value payment systems comprise the
for this purpose. RTGS which includes Government securities
clearing and forex clearing. The RTGS was
Electronic Clearing Service operationalised in March 2004. At present, 100
participants (banks), primary dealers and the
Electronic clearing service (ECS) is a retail Reserve Bank are members of the RTGS
payment system that can be used to make bulk system. The RTGS system facilitates customer
payments/receipts of a similar nature, transactions, apart from inter- bank funds
especially where each individual payment is of transfer
a repetitive nature and of relatively small amount.
It has two variants - one for direct credit and the From January 2007, the system has been made
other for direct debit. Under ECS (credit) a purely high value system and transactions
one entity/company makes payments from its above Rs.1 lakh only can now be put through
bank account to a number of recipients by direct this system. Integration of the RTGS with the
credit to their bank accounts. The direct credit integrated accounting system (IAS) and
facility enables companies and Government centralised funds management system (CFMS)
departments to make large volumes of payments has facilitated better funds management by
such as salary and pension. With the ECS banks and seamless transfer of funds across
(debit), the organisations such as utility their accounts with the Reserve Bank. Integration
companies (electricity and telecom) and of the RTGS- IAS with the securities settlement
insurance companies collect their bills, system (SSS) has facilitated automatic intra-day
insurance premia and equated monthly liquidity (IDL) availability based on the eligibility
instalment payments of loans directly from conditions.
the bank account of their customers. ECS is
now available at all bank branches at 67 The RTGS has the facility of multilateral net
centres. settlement batch (MNSB) mode of settlement,
which has been implemented for the settlements
NEFT/RTGS at Mumbai covering cheque clearing settlements
(including high value clearing), ECS and EFT/
In order to broad-base the facilities of NEFT. The Clearing Corporation of India Limited
electronic funds transfer to centers where (CCIL) settlement is also being done in RTGS.
the Reserve Bank does not have its offices The reach and utilisation of the RTGS is on the
and to implement public key Infrastructure (PKI) rise. At present, 32,768 branches are providing
- based security system, a variant of the EFT this facility to their customers.
called the national electronic fund transfer (NEFT)
system was introduced in November 2005. e-payment: Internet and Mobile Payment
The NEFT system has become a critical
payment system for retail electronic payments The rapid growth of e-commerce and the use of
after the (Real time gross settlement (RTGS) the internet have led to the development of new
was made a system for large value payments. payment mechanisms capable of exploiting
The settlement of NEFT takes place on a ‘net’ the internet’s unique potential for speed and
basis; there are 6 settlements on week days convenience. Similarly, the broader usage of
(9.30 a.m., 10.30 a.m., 12.00 noon, 1.00 p.m., mobile phones has encouraged banks and

non- banks to develop new payment services comprises of 27 banks including ICICI Bank,
for their customers. Internet payments and HDFC Bank, Axis Bank, Bank of Baroda and
mobile payments are defined by the channel Punjab National Bank. SBI and Associate Banks
through which the payment instruction is entered are not part of NFS. NFS covers 16,891 ATMs
into the payment system. at present. This will facilitate ATM connectivity
among banks across the country. The switch
CFMS aims to integrate ATM switches of all banks in
The Reserve Bank has implemented the the country and simplify interbank transactions.
Centralised Funds Management System The CCIL has been designated as the settlement
(CFMS) which enables banks to transfer agency for all transactions routed through the
funds across their accounts with the various NFS. The net settlement obligations of individual
offices of the Reserve Bank. At present, the members are sent to CCIL by IDRBT. This file
system of funds transfer is available at is submitted to the Reserve Bank by CCIL for
eleven centres – Ahmedabad, Bangalore, settlement.
Chandigarh, Chennai, Guwahati, Hyderabad, The Payment and Settlement Systems Bill has
Kolkata, Mumbai, Nagpur, New Delhi and Patna. been cleared by the Cabinet. Once the Bill is
We have carried complete details on CFMS in enacted as an Act, the Reserve Bank would
a separate article. be empowered to regulate and supervise all
payment and settlement systems in the
National Financial Switch country. The Act will also provide legal
recognition to multilateral netting and settlement
National financial switch (NFS) was established
finality, which are the basic tenets of the
by the Institute for Development and Research
deferred net settlement (DNS) systems – the
in Banking Technology (IDRBT) to facilitate
mode of settlement of all payment systems in
apex level connectivity among all banks’ ATM
the country.
switches. NFS was set up in 2004 and

CENTRALISED FUNDS MANAGEMENT SYSTEM
(CFMS)
CFMS is managed by RBI.
Helps banks in managing their funds with RBI.
Centralised Funds Management System Each entity, which maintains a current account
(CFMS) is set up, operated and maintained by with RBI and is a member of INFINET, will be
RBI to enable operations on current accounts eligible for membership to the CFMS.
maintained at various offices of the bank,
The following of facilities shall be available
through standard message formats in a secure
through CFMS:
manner. CFMS gives a global view of the
balances to the entities maintaining account with Enquiries relating to the operation of its
RBI to query/transfer funds in its account at the current account/s maintained with any of the
various Deposit Accounts Departments (DADs) DADs
of RBI. Using CFMS, banks maintaining Funds transfers between accounts of the
accounts with RBI at its various offices are in a same account holder at different DADs.
position to know their balances at each location.
All communication will be duly authenticated on
The CFMS comprises two components: the basis of security infrastructure requirements
Centralised Funds Enquiry System (CFES) and as may be decided by RBI from time to time
Centralised Funds Transfer System (CFTS). and would incorporate features such as PKI and
These have been made available through the digital signatures.
following sub-systems :
All funds transfer messages received by the
i) Apex Level Server (ALS) central system for debiting of any current
ii) Local Funds Management System (LFMS) account should be digitally signed by the
authorised signatories only. If the users operating
iii) Bank Level Funds Management System
on current accounts are those who have been
(BLFMS)
otherwise authorised to operate on the current
iv) Local Banks Funds Management System accounts while opening the current account or
(LBFMS) subsequently, then no separate authorization is
ALS is the software which resides in the required for CFMS. RBI has no responsibility, in
mainframe computer systems currently housed so far the authority of the individual originating
in Mumbai, while the LFMS is the software the transaction, with regards to the messages
component which functions from the server received by the central system. The account
systems at the Regional Offices of RBI where holders will ensure that the messages
the Deposit Accounts Department is existent. emanating from their LFMS are orignated only
The BLFMS is the software provided by RBI to by authorized personnel.
the members of the CFMS and would be used Each message would be identified by a unique
by the Treasury Department/Central Accounts identifier which shall form the basis for its
Department, while the LBFMS is the software tracking at a future point of time. The CFMS
component which would be given by RBI to the would provide for Confirmation Numbers which
CFMS members for accessing the facilities at would be used for processing of the contents. If
each local DAD. any message is received twice, then the
Time stamps, affixed by the ALS on the message with the communication number
transactions and events, will be deemed to be which has been received in the first would be
the applicable time stamp in all cases and in all processed and the subsequent message would
matters. not be processed.

Every message, received by the CFMS from the in the CFMS/BLFMS/LBFMS link being logically
BLFMS/LBFMS/LFMS, will be acknowledged by severed after a control message is sent,
the CFMS, after subjecting the message to a indicating the reason for the link severance. The
set of security, format and operational reasons, among others, include:
validations. A positive CFMS acknowledgement
Failure of signature authentication;
will be sent updating the flag at the BLFMS/
LBFMS originating the message indicating that Receipt of a message with the same
the message has been accepted for further Confirmation Number;
processing. A rejected CFMS acknowledgement Receipt of a message with a sequence
will be sent by changing the status to ‘R’ for number, which is not the same as the next
messages which fail the tests. In case the expected sequence number; and
message cannot be accepted for further
processing, an appropriate reason code Receipt of a message with a sequence
indicating the reason for the failure of number, which is the same as in the case
acceptance by the CFMS will be specified in the of a previously received message, but with
acknowledgement. A positive CFMS a different message content.
acknowledgement does not, in any manner, On the successful completion of a transaction,
indicate that the transaction has been processed. the status of completion would be reported by
The message will not be taken up automatically the CFMS to the originator of the message,
for further processing, unless the further through the member’s BLFMS/LBFMS.
authentications/validations/controls are passed
for the respective message.
A negative CFMS acknowledgement, which
indicates a potential security breach, may result

TECHNOLOGY-BASED SOLUTIONS FOR RURAL
BANKING BUSINESS
Banks are using technology-based solutions for increasing financial inclusion.
Banks are appointing business correspondents (BCs) for wider reach.
SBI has also announced a scheme for Financial Inclusion by extension of Banking
Services through Business Facilitators and Business Correspondents model.
Banks are providing financial services in the rural areas through low cost and simple
IT based solutions.
Banks are using technology-based solutions for extending financial services. It has been
increasing financial inclusion. Credit delivery in observed that bio-metric identification for KYC
rural areas has often been expensive with large purposes is emerging as the most popular
number of small loan accounts to be serviced. method. Transactions in the accounts such
Information Technology (IT) enabled methods as cash deposits and withdrawals can be
are being looked into as the best alternative carried out by customers at ATMs / BCs
for rural credit delivery that can increase the without having to go to the bank branch. The
reach and reduce cost of delivery. customers are issued hard copy of transaction
details facilitated by a tiny printer.
In the Annual Policy for the year 2007-08, RBI
urged banks to scale up IT initiatives for Several models have emerged in the last couple
financial inclusion while ensuring that solutions of years to enable technology driven rural reach
are highly secure, amenable to audit, and by banks. Nearly all of them converge on the
follow widely accepted open standards following essential components; i) a customer
with a multi application smart card ii)
RBI’s permission to banks to appoint business business correspondent with a simputer/hand
correspondents (BCs) has opened possibilities held terminal/mobile phone enabling banking
of wider reach which were not available earlier. services, iii) a central processor unit, i v) a
The use of appropriate technology by the BCs centralised card management for each of the
has the potential of reducing operational above systems.
costs and building up a powerful management
information system (MIS). The use of An IT enabled model for banking outreach
technology combined with an effective use of is basically implemented as under:
BCs has the potential of creating a banking
Information regarding potential customer is
outpost in every village.
collected by business facilitators and
The technology application model is premised passed on to the bank in a prescribed
on providing financial services in the rural areas format.
through the BC model using low cost and simple
Banks carry out KYC scrutiny and arrange
IT based solutions. A central system, which
for opening a savings bank account for
could be a shared, provides for economies of
the customer, after relevant information is
scale and consequential cost benefits. A field
captured, such as his photograph,
system which enables access to the central
fingerprints and signature (optional). This
computer by the BCs are essential
information is encrypted in the smart card.
components of the model. BCs use hand held
computer devices which connect to remote While handing over the card to the
servers using fixed line connectivity or mobile customer, the BC activates the card for
technology. Finger print method is being widely the customer by fingerprint identification.
used for uniquely identifying customers for
At the time of activation, the balance The technology seamlessly integrates into
available in the bank account is recorded on core banking solutions of the banks
the smart card. concerned and supports various types of
deposits and loan accounts.
A customer can withdraw and deposit
money using his smart card at the terminal Each hand held model can be used to service
of the BC. Every time a transaction is 500 to 1000 accounts by a BC; the device when
made, a print out is provided to the seen in the context of its servicing capabilities
customer. Transactions cannot be and range is very cost effective. Such models
undertaken unless a biometric verification have already been adopted by some private
of the cardholder is done. sector and public sector banks.
Banking transactions are freed from branch State Bank of India has also adopted the business
timings and can be done at the ATM or correspondent model. Bank has announced a
whenever the BC is available with a capture scheme for Financial Inclusion by extension of
device. Banks are installing Biometric ATMs Banking Services through Business Facilitators
to facilitate transactions through finger print and Business Correspondents model. Selection
identification in rural areas of Business Correspondents will be done at the
Circle level while selection of Business
If a BC does not have requisite money Facilitators will be done at the Region level. They
to pay the customer, a print out will can undertake activities like opening of deposit
be given to him stating that no cash is accounts, collection and payment of small value
available at the customer’s end. This deposits and withdrawals (not exceeding
information will be passed on to the bank Rs.10,000/- in each case), disbursal of small
through the central processor to facilitate value loans (not exceeding Rs.10,000/-) after
immediate replenishment of cash. obtaining prescribed documents, recovery of
Incidentally, this also acts as a check to principal / collection of interest, furnishing of mini
prevent business correspondents from account statements and account information,
denying service to customers. selling insurance / mutual fund products /
The terminal with the BC is operated pension products / any other third party product,
with a rechargeable battery and not receipt and delivery of small value remittances /
dependant on steady supply of electricity. other payment instruments (not exceeding
Rs.10,000/-), payment / receipt in respect of e-
An added facility that can be enabled is that governance activities, railway ticketing and any
the customer can use the smart card as other service on behalf of the Bank.
a debit card at merchant establishments.
A central processor unit integrates village
level terminals and identified merchant
establishments with the bank.

TECH TERMS IN VOGUE
Phishing is a security scam that trick users into divulging important information.
GPRS is a wireless communication service that enables continuous connection to

the Internet for mobile phone and computer users.
Bluetooth is a small, cheap radio chip designed to replace cables by taking the
information normally carried by the cables.
Freeware is copyrighted computer software which is made available for use free of
charge for an unlimited time.
Middleware serves to “glue together” or mediate between two separate and often
already existing programs.
e-mail messages look even more legitimate, the
Phising
scam artists may place a link in them that
Phishing is a notorious security scam that uses appears to go to the legitimate Web site , but it
e-mail and pop-ups to trick users into divulging actually takes one to a phony scam site or
important information. Onlinesbi.com warns that possibly a pop-up window that looks exactly like
“Phishing is a common form of Internet piracy. the official site.
It is deployed to steal users personal and
These copycat sites are also called “spoofed”
confidential information like bank account
Web sites. Once one is at one of these spoofed
numbers, net banking passwords, credit card
sites, one might unwittingly send personal
numbers, personal identity details etc. Later the
information to the con artists.
perpetrators may use the information for
siphoning money from the victim’s account or Reputed organizations do not ask for
run up bills on victim’s credit cards. In the worst passwords, login names, PAN numbers and
case one could also become the victim of identity other personal information through e-mail. If one
theft. A few customers of some other Indian receives an e-mail from any organisation asking
banks have been affected by the attempt of one to update credit card / other personal
phishing in early 2006". information, one should not respond to this
phishing scam.
The fraud works this way: Scam artists deliver
a hyperlink by email or launch a fake pop-up Latest e-mail software with spam and anti-
window. To make the pop-up window look more phishing capabilities like Outlook 2003, Windows
convincing, it may be displayed over a window Live Hotmail or others help identify and warn
one trusts. Users who follow this link are taken about suspicious e-mails. Microsoft Phishing
to a Web site that looks similar to the original Filter using Internet Explorer 7 or Windows Live
site. This page captures their account Toolbar filter also protect from Web fraud and
information. The fraudulent site also sets a the risks of personal data theft by warning or
cookie on the victim’s computer, which prevents blocking from reported phishing Web sites.
the phishing attack from being displayed on any
subsequent visits. GPRS
Such e-mail messages or pop-ups often include General Packet Radio Services (GPRS) is a
official-looking logos from real organizations and packet-based wireless communication service
other identifying information taken directly from that promises data rates from 56 up to 114 Kbps
legitimate Web sites. To make these phishing and continuous connection to the Internet for

mobile phone and computer users. The higher uniting devices through Bluetooth.That was the
data rates allow users to take part in video original idea, but the originators of the original
conferences and interact with multimedia Web idea soon realised that a lot more was possible.
sites and similar applications using mobile If one can transmit information between a
handheld devices as well as notebook computer and a printer, why not transmit data
computers. GPRS is based on Global System from a mobile phone to a printer, or even a printer
for Mobile (GSM) communication and to a printer?. The low cost of a Bluetooth chip
complements existing services such circuit- and its low power consumption, means one
switched cellular phone connections and the could literally place one anywhere.
Short Message Service (SMS).
The utility in Bluetooth is soaring, lots of new
GPRS packet-based services cost users less ideas. Many are practical and feasible e.g.:
than circuit-switched services since Bluetooth chips in freight containers to identify
communication channels are being used on a cargo when a lorry drives into a storage depot,
shared-use, as-packets-are-on-needed basis or a headset that communicates with a mobile
rather than dedicated to only one user at a time. phone in pocket, or even in the other room. Other
It is also easier to make applications available ideas not so feasible are also being explored:
to mobile users because the faster data rate Refrigerator communicating with Bluetooth-
means that middleware currently needed to enabled computer, informing it that food supply
adapt applications to the slower speed of is low, and to inform the retailer or the owner
wireless systems are no longer needed. As over the internet.
GPRS has become more widely available, along
with other 2.5G and 3G services, mobile users Freeware
of virtual private networks (VPNs) have been Freeware is copyrighted computer software
able to access the private network continuously which is made available for use free of charge
over wireless rather than through a rooted dial- for an unlimited time. It could be noted that
up connection although free software is sometimes used a
GPRS also complements Bluetooth, a standard synonym for freeware, it is not the same as free
for replacing wired connections between devices software. Free software is software that can
with wireless radio connections. GPRS is an be used studied and modified without restriction
essential feature for unleashing the power of and which can be copied and redistributed in
mobile banking. M-banking customers without modified or unmodified form either without
GPRS can subscribe only to sms based restriction or with restrictions only to ensure that
services. further recipients can also do these things.
Authors of freeware share the software, but also
BlueTooth want to retain control of any future development
of the software. The term freeware was coined
Conceived initially by Ericsson, before being by Andrew Fluegelam when he wanted to sell a
adopted by a myriad of other companies, communications programme named PC-Talk
Bluetooth is a small , cheap radio chip to be that he had created but which did not wish to
plugged into computers, printers, mobile use traditional methods of distribution because
phones, etc. A Bluetooth chip is designed to of their cost. The only criterion for being classified
replace cables by taking the information normally as “ freeware” is that the software must be made
carried by the cable, and transmitting it at a available for an unlimited time at no cost. The
special frequency to a receiver Bluetooth chip, software license may impose one or more other
which will then give the information received to restrictions on the type of use including personal
the computer or the phone. The Bluetooth name use, individual use, non profit use, non
originally came from, a Danish King, Harald commercial use, academic use, commercial
Blåtand (translated as Bluetooth in English), use or any combination of these. For instance,
who lived in the latter part of the 10th century. the license may “free for personal , non
Harald Blåtand united and controlled Denmark commercial use” Everything created with the
and Norway- hence the inspiration on the name-

freeware programs can be distributed at no cost. multiple applications to create a larger
Eg of freewares are free spyware detectors etc. application, usually over a network.
Middle ware Middleware services provide a more functional
set of application programming interface to allow
Middleware is a general term for any an application to
programming that serves to “glue together” or
mediate between two separate and often already Locate transparently across the network
existing programmes. A common application of thus providing interaction with another
middleware is to allow programmes written for service or application
access to a particular database to access other
databases. Be independent from network services
Typically middleware programmes provide Be reliable and available always

messaging services so that different IBM and BEA are the most important vendors in
applications can communicate. The systematic the middleware software.
tying together of disparate applications, often
through the use of middleware is known as Middle ware addresses one of the major
enterprise application integration. Middleware is challenges in mobile banking. It acts as the
a relatively a new addition to the computing mediator between various protocols like HTML,
landscape. It gained popularity in 1980s as a XML, WAP, etc., used by various mobile
solution to the problem of how to link applications operators and various software platforms used
to older legacy systems, although the term has by various banks.
been in use since 1968. It also facilitated
distributed processing- the connection of

BANKING
CREDIT AND DERIVATIVE
PRODUCTS

REVERSE MORTGAGE
Reverse Mortgage (RM) is a new bank product that allows senior citizens to earn
income, like pension, on a residential property.
This product is well-suited for senior citizens who are rather poor in retirement
planning.
RM is not only known for social cause but also for commercial gains.
Considering the growing number of senior citizens in the country, the product has lot
of business potential.
Background o The lender makes periodic payments

(including lump sum payments) to the
A new financial product is just launched in India
borrower, i.e., the payment stream is
that allows senior citizens to make a residential
“reversed”, as compared to a conventional
property earn for them while they continue to
mortgage.
live. That is possible through a reverse mortgage
(RM) whereby a bank or housing finance o The loan is not required to be serviced, i.e.,
company provides a fixed sum to the owner of payment of instalment or interest, as long
the housing property for certain period. as the borrower is alive and in occupation
Appreciating a need for such product, the Union of the property.
Budget – 2007-08, under ’Social Sector’,
o The loan will be repaid on the death of the
mentions about RM for the first time which
borrower and the spouse (usually a co-
serves as an old age pension for a substantial
obligant) or on permanent movement
portion of population of India consisting of senior
through sale of property.
citizens who are rather poor in retirement
planning. With changing demographic profile and o After adjusting the principal amount of the
increasing life expectancy, the RM becomes loan and accumulated interest, surplus will
more relevant. Further, urbanization, coupled go the estate of the deceased.
with increasing nuclear families on one hand, o The loan can be prepaid together with
and the changing psychology of the senior accumulated interest at any point in time
citizens to be less dependent on children at least without any prepayment charges.
economically, has created demand for the RM
product. Hence, National Housing Bank (NHB) o Maximum period of loan – 15 years.
has taken initiative to popularize the RM product ♦ Borrower does not require an income to
and provide refinance to banks and housing qualify for reverse mortgage loan
finance companies. The RM product has a lot
♦ Loan amount depends on:
of business potential. This provides old age
security to persons who are ‘house-rich and - Borrower’s age
cash–poor'.
- Value of borrower’s House Property
Features of the Scheme
- Prevailing interest rates of lending
• Reverse Mortgage is a mortgage loan for institutions
Senior Citizens (over 62 years) who today,
♦ Loan amount to the assessed value of the
generally, are not eligible for any form of
house is determined as per actuarial
mortgage loan.
calculation. It will be reassessed in periodic
• In a Reverse Mortgage intervals of say, five years.

♦ Property has to be unencumbered and ♦ Payment received from a Reverse Mortgage
mortgageable. is considered as ‘loan’ and not ‘income’ from
tax angle in many countries.
♦ Flexibility to the borrower in availing the loan,
i.e., loan will be disbursed in periodic ♦ Reverse Mortgage can be a partial substitute
instalments or lump sum or as a line of credit for a Social Security Scheme for Home
to be drawn in times of need. However, the Owning Senior Citizens. This will be
aggregate cannot exceed the total amount particularly useful to Senior Citizens who
of loan assessed. Loan amount can be have no/unwilling family to support them.
used by the borrower for renovating/ Difference between Conventional Mortgage
repairing house, as also for personal uses. (CM) and Reverse Mortgage(RM)
♦ Borrower will remain owner of property In CM, a borrower receives a lump sum payment
throughout the period of the loan. and repays over a period of time. But in RM, the
payment stream is reversed, i.e., the lender
♦ Borrower will be responsible for paying
lends in instalments and recovers in lump sum.
property tax, house insurance premium, etc.
Further, in CM, a person is to mortgage his/her
♦ Loan shall become due and payable only house to the bank or housing finance company.
when the last surviving borrower dies, sells But in RM, the bank or housing finance company
the home, or permanently moves out of the does evaluation and on that basis, pays EMI
home. regularly to the individual till his/her death. Upon
the death (or as per contract), the house
♦ In cases where the borrower lives longer
becomes the property of the bank or housing
than 15 years, the maximum period of the
finance company. Lastly, the CM is meant for all
loan, payments will not be made by the whereas the RM is specially designed for senior
lender. However, the borrower can continue citizens who are less dependent on their children
to occupy. at least economically.
♦ NHB seeks to refinance banks/HFCs to Conclusion
extend reverse mortgage loan to senior
The RM product is in great demand due to its
citizens. NHB also seeks to guarantee to
unique features. Banks, housing finance
the senior citizen borrowers, the obligations
companies, regulator and government have an
of banks/HFCs to make regular payments
important role to play to make this a grand
over the period. NHB, as a RBI subsidiary, success. It calls for openness on the part of the
may be expected to provide comfort to credit institutions to be more senior citizens
senior citizens, who are mortgaging their friendly. In order to attract the attention of the
houses upfront to receive payments over large number of senior citizens, a wide publicity
time. is called for. Initially, there is likely to be some
Benefits reluctance on the part of senior citizens to join
the scheme, since it is new to India. Hence,
♦ Enables senior/elderly citizens owning a education to this segment is very much felt.
house but having inadequate income to Officers in credit institutions have also to undergo
meet their needs. training to observe due diligence in regard to NHB
♦ Enables senior citizens to meet unexpected guidelines. To cover the risk under the scheme,
lump sum expenditure needs such as suitable arrangements have to be made. More
renovation/repairs to house, hospitalization, importantly, these organisations have to be more
etc. sympathetic towards senior citizens who are
more sensitive due to the advanced age. The
♦ Borrower owns and occupies the home till regulator, NHB, should be more vigilant to check
demise or change in residence. Even after unhealthy developments, if any. Thus, it should
demise, the spouse can continue to stay be a collective effort to make this unique product
until demise. If spouse is co-borrower, he/ more customer friendly, economically viable and
she will continue to receive payment (up to risk free. Towards this end, we have yet to go a
15 years from grant of loan). long way.

SBI's Reverse Mortgage Scheme
SBI launched its Reverse Mortgage Loan Scheme for the welfare of senior citizens of India with
effect from 12th October 2007. The scheme is as under:
S.No. Parameter Details

(1) Objective of To provide a source of additional income for senior
the scheme citizens of India who own self-acquired and self-
occupied house property in India.
(2) Eligibility
a. No. of borrowers Single or jointly with spouse in case of a living spouse.
b. Age of first borrower Above 60 years
c. No. of surviving Should not be more than one. Borrowers will have to
spouses on the date of give an undertaking that they will not remarry during
sanction of loan the currency of the loan. If the borrowers choose to
remarry, the loan will be foreclosed.
d. Age of spouse Above 58 years
e. Residence • Borrower should be staying at self-acquired and

self owned house /flat against which loan is being
raised, as his permanent primary residence.
• Mobile/Telephone/Credit Card bills/ Certificate from
the Housing Society where the borrower is staying/
Affidavit made before the Executive Magistrate
may be accepted as proof of residence.
• Borrowers will be required to inform the Bank when
they cease to use this residence as their
permanent residence.
Borrowers should have a clear and transferable title in
f. Title of the Property
their names. Title verification and search report for a
period of 30 years will be required to be obtained from
the Bank’s empanelled advocate at borrowers’ cost.
Case – Title in single name and loan availed jointly

g. Title of the property
with spouse.
and number of
borrowers
Title holder should make a Registered Will in favour of
the other spouse. The Will should confirm that this is
the last Will and that it supercedes all earlier Wills, if
any. The borrower to undertake that no fresh Will shall
be made during the currency of the loan.
The property should be free from any encumbrances.

h. Encumbrances
However in case of property purchased by availing
Home Loan from SBI and mortgaged to SBI, it will be
considered for RML, subject to closure of the Home
Loan account out of the proceeds of RML.

Residual Life Should be at least 20 years in case of single borrower
of property and 25 years in case of spouse being below 60 years
of age.
Certificate from empanelled engineer/architect will be
required to be obtained for this purpose, in addition to
valuation of property.
Security The RML shall be secured by way of equitable

mortgage of residential property.
Tenor Age of the younger of the borrowers

between 58 and upto 68 years : 15 years
Age of the younger of the borrowers
above 68 years : 10 years
OR till death of the borrower(s), whichever is earlier.
Disbursement By credit to an SB account in the joint names of the

borrowers operated by E or S.
Periodicity of 1. Monthly/quarterly payments

availing loan 2. Lumpsum payment
Quantum of loan The loan amount would be 90% of the value of property.
Loan amount would include interest till maturity. The
loan installments payable to the borrower(s) would be
as under for a loan amount of Rs.1 lac (at interest rate
of 10.75% p.a.):
Loan Tenor 10 11 12 13 14 15
(years)
Monthly 468 399 343 297 258 225
instalments
(Rs.)
Quarterly 1,423 1,215 1,045 905 787 687
instalments
(Rs.)
Lumpsum 36,022 32,525 29,368 26,517 23,944 21,619
payment
(Rs.)
The maximum loan amount is proposed to be kept at
Rs.1 crore (monthly payment Rs.22,500/- for 15 years)
and minimum Rs.3 lakh (monthly payment Rs.675/-
for 15 years).
Example of arriving at the monthly instalments:
Property value: Rs.10 lakh
Qualifying loan amount
(90% of property value): Rs.9 lakh
Tenor: 15 years
Monthly instalment : Rs. 225 x 9 = Rs.2,025/-

(8) Purpose of Loan Supplementing income, any personal expenses, house
repairs, etc. Loan amount should not be used for
speculative, trading and business purposes.
(9) Repayment/Settlement
• The loan shall become due and payable only when
the last surviving borrower dies or opts to sell the
home, or permanently moves out of the home to
an institution or to relatives. Typically, a “permanent
move” may generally mean that neither the
borrower nor any other co-borrower has lived in
the house continuously for one year or do not intend
to live continuously. Bank may obtain such
documentary evidence as may be deemed
appropriate for the purpose.
• Settlement of loan along with accumulated interest
is to be met by the proceeds received out of sale
of residential property or prepayment by borrowers
and his next of kin.
• The borrower(s) or his/her/their legal heirs/estate
shall be provided with the first right to settle the
loan along with accumulated interest, without sale
of property.
• A reasonable amount of time, say up to 6 months,
may be provided when RML repayment is
triggered, for house to be sold.
• The balance surplus (if any), remaining after
settlement of the loan with accrued interest and
expenses, shall be passed on to the borrower or
the estate of the borrower/legal heirs.
• Borrowers will be required to submit annual life
certificates in the month of November every year.
This certificate will also include clauses regarding
marital status, and permanent residence of the
borrowers, in addition to the balance confirmation
as on 31st October of that year.
• List of legal heirs will be obtained at the time of
sanction of loan. With a view to avoiding disputes
at the time of settlement of loan amount by legal
heirs, specific instructions about inheritance of the
property and payment of balance amount, if any,
of the sale proceeds after settling the Bank’s dues,
will be required to be part of the borrowers’ Will.
(10) Foreclosure The loan shall be liable for foreclosure due to

occurrence of the following events of default.

o If the borrower(s) has/have not stayed in the

property for a continuous period of one year
o If the borrower(s) fail(s) to pay property taxes or
maintain and repair the residential property or fail(s)
to keep the home insured, the Bank reserves the
right to insist on repayment of loan by bringing the
residential property to sale and utilizing the sale
proceeds to meet the outstanding balance of
principal and interest.
o If borrower(s) declare himself/herself/themselves
bankrupt.
o If the residential property so mortgaged to the Bank
is donated or abandoned by the borrower(s).
o If the borrower(s) effect changes in the residential
property that affect the security of the loan for the
lender. For example: renting out part or all of the
house by creating a tenancy right; adding a new
owner to the house’s title; changing the house’s
zoning classification; or creating further
encumbrance on the property either by way of
taking out new debt against the residential property
or alienating the interest by way of a gift or will.
o Due to perpetration of fraud or misrepresentation
by the borrower(s).
o If the government under statutory provisions, seeks
to acquire the residential property for public use.
o If the government condemns the residential
property (for example, for health or safety reasons).
o Any other event such as re-marriage of the
borrower(s), etc., which shall have an adverse
impact on the loan settlement prospects.
o Borrowers do not accept the revised terms on
revaluation of property and interest reset at the end
of every 5 years from sanction.
o Any violation of the terms and conditions of RML.
• The borrower(s) will have option to prepay the loan

(11) Pre-payment of loan at any time during the loan tenor.
• There will be no prepayment penalty.
• After the initial valuation to determine the loan

(12) Valuation/Revaluation amount, subsequent revaluations will be done at
of property and option intervals of 5 years.
for the Bank to adjust • The Bank shall have the option to revise the periodic/
payments

lump-sum amount every 5 years along with

revaluation. In the scenario of fall in property
prices, the Bank may decide to revise the amount
at any time earlier than 5 years. At every stage of
revision, it should be ensured that the Loan to
Value ratio does not exceed 90% at maturity.
• If the Borrower does not accept the revised terms,
no further payments will be effected by the Bank.
Interest at the rate agreed before the review will
continue to accrue on the outstanding amount of
the loan. The accumulated principal and interest
shall become due and payable as mentioned in
clauses 9 and 10.
(13) Interest Rate Public - 10.75% p.a. (Fixed) subject to reset every 5
years.
SBI Pensioners -Concessional interest rate of 1%
below the card rate applicable to public.
(14) Processing fee 0.50% of the loan amount, minimum Rs.500/- and
maximum of Rs.10,000/-
(15) Right of Rescission As a customer-friendly gesture and in keeping with

international best practices, after the documents have
been executed and loan transaction finalized,
borrowers will have right of rescission up to seven
days to cancel the transaction. If the loan amount has
been disbursed, the entire loan amount will need to
be repaid by the borrower within this period. However,
interest for the period may be waived. Processing fee
shall not be refunded in such cases.
(16) Insurance and • The house property will be insured by the borrower
maintenance of at his cost against fire, earthquake and other
house property calamities.
• The borrower shall ensure to pay all taxes,
charges, etc.
• Bank reserves the right to pay insurance premium,
taxes, charges, etc. by reducing the loan amount
to that extent.
• The borrower shall maintain the property in good
condition.
(17) Operational issues:
a Type of facility Non-renewable Overdraft without ledger folio charges.

No cheque book/debit card will be linked to this
account.

b Income Recognition The loan will be treated as standard asset as long as

and Asset repayment does not become due as per the prevailing
Classification norms. Interest applied will be booked as income as
long as the loan remains a standard asset.
c Discretionary powers Same as for Home Loan sanction.

for loan sanction
d Classification in Looking at the nature of the utilization of the loan, these

performance loans may be treated as Personal Loans against
reports mortgage of immoveable properties.
e Loans to be made All branches.

available at
f CIS Product code 50 33
g CBS Product code 60 50 20 11

CREDIT DERIVATIVES:RISK TRANSFER INSTRUMENTS
As the term indicates, it is a financial contract derived from the performance of
underlying securities.
It is a hedging mechanism.
It helps in risk management.
Swaps, options and notes are some of the methods in derivative trade.
Credit derivatives are instruments traded on the (iii) credit linked notes
financial markets by means of which the credit
risk inherent in loans, bonds or other risk assets The easiest and the most traditional form of a
or market risk positions are transferred to third credit derivative is a guarantee. Financial
parties acting as so-called protection sellers. guarantees have existed for thousands of years.
The original credit relationships of the so-called However, the present day concept of credit
protection buyers – say a bank which has made derivatives has travelled much farther than a
a loan or a financial organization that has not simple bank guarantee. The credit derivatives
made the loan but wants to buy the credit currently being available in the market can be
derivative to make a profit by trading in it – that broadly classified into the following:
is to say the parties transferring the credit risk - (i) Total Return Swap
are neither changed nor newly established by
this process. Thus credit derivatives can be In the case of a total return swap, the protection
defined as arrangements that allow one party buyer swaps the returns on a reference asset
(protection buyer or originator) to transfer (e.g., a bond) and increases in its value
credit risk of a reference asset, which it may or periodically with the protection seller in
may not own, to one or more other parties (the exchange for payment of a variable or fixed
protection sellers). reference interest and compensation of losses
in the value of the reference asset.
Credit derivatives differ from other traditional
forms of credit risk transfer, such as guarantees Thus, the protection seller assumes from the
or providing collateral security, in that these, as protection buyer the overall market risk as well
derivatives, are normally as the credit risk from the reference asset for
the term of the transaction.
concluded under standardised master
agreements, Total-rate-of-return swaps have a “total-return
purchaser” who pays a periodic fee to the “total-
subject to an ongoing market valuation, return seller” in return for the total net payments
subject to special risk controlling and of some underlying asset. In this case if the
management. underlying asset increases in value the “total-
return purchaser” receives this higher return but
An additional difference is that the drawing on if the underlying asset depreciates then the
the credit derivative does not directly constitute “total-return purchaser” pays the value of this
a claim on the debtor of the underlying position decrease to the “total-return seller”. In the case
for the protection seller. of a default or some other credit event of the
underlying asset the total-rate-of-return swap
Types of Credit Derivatives:
usually terminates.
Basically, three types of products can be
As the name implies, a total return swap is a
distinguished, depending on the kind of risk
swap of the total return out of a credit asset
transferred by the credit derivative:
against a contracted prefixed return. The total
(i) total return swaps return out of a credit asset can be affected by
various factors, some of which may be quite
(ii) credit default swaps

extraneous to the asset in question, such as (iii) Credit Linked Notes
interest rate movements, exchange rate
fluctuations, etc. Nevertheless, the protection Credit linked notes are a securitized form of
seller here guarantees a prefixed return to the credit derivatives. The technology of
originator, who, in turn, agrees to pass on the securitisation here has been borrowed from the
entire collections from the credit asset to the catastrophe bonds or risk securitization
protection seller. That is to say, the protection instruments. Here, the protection buyer issues
buyer swaps the total return from a credit asset notes. The investor who buys the notes has to
for a predetermined, prefixed return. suffer either a delay in repayment or has to
forego interest, if a specified credit event, say,
(ii) Credit Default Swap default or bankruptcy, takes place. This device
also transfers merely the credit risk and not
Default swaps simply transfer the credit risk of other risks involved with the credit asset.
an asset from one party to another. The holder
of an asset, say a bond, would pay a periodic The note is to be redeemed at par value on
fee to the “risk buyer” and in return would receive maturity only if a pre-defined credit event does
some agreed upon payment in the case of some not occur. If the credit event occurs, the credit-
credit event, a default, bankruptcy, credit linked note is redeemed within a fixed period of
downgrade, etc., and receives in return a one- time, less a compensation amounting, for
off option premium or, if appropriate, an instance, to the difference between the par value
annualised premium in the case of longer and the recovery value of the reference asset.
maturities.
The credit-linked note constitutes in this respect
Credit default swap is a refined form of a a combination of a bond and a credit default
traditional financial guarantee, with the swap. However, in contrast to the credit default
difference that a credit swap need not be limited and the total return swap, the protection seller
to compensation upon an actual default but makes his payment for the loan in advance. On
might even cover events such as downgrading, the part of the protection buyer, the collection of
apprehended default, etc. Credit default swap the proceeds from the issue of the credit-linked
covers only the credit risk inherent in the asset, note has the effect of a cash-collateralization of
while risks on account of other factors such as the original credit risk.
interest rate movements remain with the
originator. Banks and other financial institutions can use
credit derivatives to optimize the employment
of their capital by diversifying their portfolio-wide
credit risk.

INFRASTRUCTURE FINANCING
Infrastructure financing implies lending to sectors such as power and transportation.

India needs more than Rs.14,50,000 crore of infrastructure financing.
Rakesh Mohan Committee recommended measures for commercialization of infrastructure
projects.
Concession options: BOT, BOLT, BOOT, BOO, BOOS
Structure options: non-recourse, limited recourse, escrow, cash flow, subordinated debt
and take-out finance.
Need for efficient infrastructure services are a specified period called the Concession
increasingly recognised as a sine qua non of Period.
high and sustainable economic growth. So far,
Build: Set up the facility and infrastructure,
the provision of infrastructure services in India
staff the development center, and establish
is largely in the Government sector. Budgetary
knowledge transfer
allocation has been the principal source of
financing capacity additions in infrastructure. As Operate: Manage the offshore organization:
budgetary resources to support capacity Programme Management, Development,
additions have become scarce, development QA, maintenance, enhancements, and
and financing of infrastructure was opened up product support
to private/foreign participation. The Expert Group Transfer: Register a new offshore subsidiary
on the Commercialisation of Infrastructure for the customer, transfer assets, and
Projects (Chairman: Dr. Rakesh Mohan), handover operations
submitted its report in June 1996.
ii) BOLT - Build, Operate, Lease and
The Concession Approach Transfer: Here the private investor builds by
In the concession approach, the concessionaire taking the project on lease and after the lease
builds the project and is thereafter granted a period, transfers it back to the government.
franchise period during which the costs and iii) BOO - Build, Own and Operate: Here the
returns can be recovered. private sponsor builds, owns and operates
The projects may be executed on principles of the infrastructure facility for the entire life of
Build-Own-Operate-Transfer (BOOT), Build- the project.
Operate-Transfer (BOT), Build-Own-Lease-and- The other variants are:
Transfer (BOLT) and Build-Own-Operate-Share-
and-Transfer (BOOST) and other variants. The iv) BOOT - Build, Own, Operate and
projects could typically be promoted by Transfer
consortiums comprising private and public v) BOOS - Build, Own, Operate and Sell:
sector companies, financial institutions and This is better from the viewpoint of risk
multinationals. reduction as well as equitable distribution of
The brief explanations of various modes of risks.
financing are: vi) BOOST - Build-Own-Operate-Share-and
i. BOT- Build, Operate and Transfer: This Transfer
is one of the methods adopted for attracting Structured Financing Option
private sector funds for infrastructure
development and is known as build-operate- Structured Financing Option (SFO) generally
transfer agreement. Here, the private assumes two forms: (a) Non-recourse financing
investor builds, operates and transfers the and (b) limited recourse financing.
facility back to the government at the end of

i) Non-recourse financing: Under this option, Cash Flow Financing
the debt instrument is secured by the cash- In cash-flow financing, the lenders estimate the
flows generated by the project or the cash flows of a project over its lifetime to see
collateral value of the specified assets what kind of debt burdens it can support and at
financed by the instrument. In the event of what rates. Then, the amount of debt, financing
default on the structured instrument, the debt rate and the manner of repayments can be
holders’ recourse would be limited to the tailored to fit the cash flows of the project. This
underlying assets only and would not extend helps both the lender and the project promoter.
to general reserves and assets of the Escrow Mechanism
company. Panvel (Mumbai) By-Pass is the
first example of SFO in India. The escrow mechanism is suitable, for example,
for independent power projects (IPP) which are
ii) Limited Recourse Financing: Under this built by private parites out of private funds and
variant, in addition to project assets, the electricity supplied to state electricity boards
parent company attaches other assets/ (SEBs). Essentially, it ensures that out of the
revenue-streams for servicing the instrument revenues of the SEB, the debt obligations of the
to improve its creditworthiness. Thus financing institutions will be paid first. This is
lenders have limited recourse to the assets done by having some identified revenues being
of a company sponsoring the project. passed through a separate account called the
Take-out Financing escrow account to which the lenders also have
a right to appropriate the funds in case the SEB
Take-out financing structure is essentially a defaults in making payments. This gives added
mechanism designed to enable banks to avoid comfort to the lender and allows the IPP to raise
asset liability maturity mismatches that may financial assistance.
arise out of extending long term loans to Subordinated Debt Financing
infrastructure projects. Under the arrangements
banks financing the infrastructure projects will Institutions have also funded infrastructure
have an arrangement with IDFC or any other projects through quasi-equity instruments or
financial institution for transfering to the latter the subordinated debt which may have flexible
outstandings in their books on a pre-determined maturity and payment terms. Though these
basis. loans will be more expensive than secured debt,
they will provide comfort to the other lenders and
Government and Bank Participation ensure that a project starts up.
Another way out could be the government Infrastructure projects, being long gestation
issuing long-dated bonds at subsidised rates to projects with considerable risks, require
fund infrastructure. The government may innovative financial solutions to tackle them.
consider classifying these securities as Bankability
approved securities for the statutory liquidity ratio
Some of the main concerns which lenders wish
(SLR) purposes. Banks have been permitted to
to see adequately catered for are: project
issue guarantees to loans provided by other
completion, assured cash flows, security, step-
banks and lending institutions to infrastructure
in rights, termination payments, experience and
projects subject to certain conditions. Under the
technology. In a nutshell, for a project to be
revised norms, a bank would be permitted to bankable it must be financially viable, structured
issue a guarantee in favour of loans extended so that risk is distributed on an appropriate basis
by other banks or financial institutions, provided and the documentation provides mechanisms
it also takes a funding share in the project. to make the risk distribution work.
Further, the amount allowed for guarantee by
the bank should not exceed twice the funding
share assumed by it.

SECURITISATION
Securitisation is the process of creating tradable securities backed by future cash

inflows and selling these securities in the market.
It helps in raising immediate funds against anticipated inflows.
It helps the issuer to reduce its exposure in the intended asset, which is sold
Securitisation Act provides legal framework to securitisation
Securitisation means “to convert (an asset, Securitisation works well if the securitised asset
specially a loan) into marketable securities, (say, the pool of car loans) is homogenous (the
typically for the purpose of raising cash”, same kind) with regard to credit risk (how sound
according to the Concise Oxford Dictionary. the borrower is) and maturity. Ideally, there
should be historical data on the portfolio’s
Securitisation is a process by which the forecast
performance and that of the issuing company
future income (the money that is due to come
with regard to credit quality and repayment
in) of an entity is transformed and sold as debt
speed.
instruments, such as bonds, with a fixed rate of
return. Securitisation allows the company to get How is it Beneficial to the Issuer?
cash upfront which can be put to productive use
in the business. Securitisation is done by 1. The issuer can raise funds of longer
suitably ‘repackaging’ the cash flows or the free maturities than he would have been able to
cash generated by the firm that’s issuing these through the conventional routes such as
bonds. The assets securitized will go out of the bonds.
books of the financial organisation once they are 2. The process of securitisation allows raising
securitized and the risk from its books are funds against future cash flows.Usually
removed. funds are raised against existing assets.
Securitisation has emerged globally as an 3. A conventional loan results in deterioration
important technique of debt financing. Over the of the Debt : Equity ratio. Securitisation
last 20 years, securitisation has become one of results in improvement of the Debt : Equity
the largest sources of debt financing in the US ratio as the assets are taken out of the
and is enjoying very strong growth across issuer's books.
Europe and Asia. In India, securitisation
transactions have been taking place for some What are the Components of a Securitisation
time now. However, the participation of the banks Transaction?
and financial institutions in the securitisation
activity, but for a few major players, is very The entities involved in the securitisation
minimal. This activity is however, picking up. transaction are the originator or the sellers (the
entities raising funds), the issuer (special
The SARFAESI Act provides the legal basis for purpose vehicle which issues the securities),
securitisation. the servicer (which manages the portfolio on
behalf of the special purpose vehicle and
What can be Securitised? ensures timely payments), the trustee and the
All assets that generate funds over time can be credit rating agency.
securitised. Repayments under car loans, credit Other entities involved are credit enhancement
card dues, airline ticket sales, total collections providers and the investors.
from roads or bridges, and sales of petroleum
based products from oil refineries are examples.

What is the Role of Each of These Players? Indian Context
The originator is the party which has a pool of It is a relatively recent phenomenon even in the
assets which it can offer for securitisation and international market and is fraught with risks,
is in need of immediate cash. which revolve around the definition,
ascertainability and quantifiability of securitisable
The Special Purpose Vehicle (SPV) is the entity cash flows. Such risks may not be well
that will own the assets once they are understood by investors. The need therefore to
securitised. Usually, this is in the form of a trust. develop the requisite competence in analysis of
It is necessary that the assets should be held such risks cannot be overemphasized.
by the SPV as this would ensure that the
investors’ interest is secure even if the originator Repayment to investors out of future sales could
goes bankrupt. erode the current assets hypothecated to
working capital bankers or the capacity of the
The servicer is an entity that will manage the originators to service term loans/meet other
asset portfolio and ensure that payments are pressing obligations.
made in time.
However, a huge potential exists for
The credit enhancer can be any party which securitisation in India. Many foreign and private
provides a reassurance to the investors that it banks have securitised there home loan / auto
will pay in the event of a default. This could take loan profolios. The process of securitisation
the form of a bank guarantee also. frees up capital, particularly in the context of
implementation of Basel II recommendations in
India.

FACTORING
Factoring involves purchase of receivables of the company for payment of cash.
In effect, the Company, which sells its goods on credit, gets cash payment immediately
from a third party called ‘ factor’.
Factoring includes other functions such as account maintenance, collection of debt
and risk assumption.
The term ‘factor’ has its origin in the Latin word value to the seller and the balance is retained as
‘Facere’ meaning ‘to make or do’, i.e., to get things margin.
done. The International Institute for the Unification On the due date, the buyer (customer) makes
of Private Law in 1988 defined “Factoring means payment to the factor who settles the account
an arrangement between a Factor and his Client and releases the margin retained by him — after
which includes at least two of the following recovery of all other charges/out of pocket
services to be provided by the Factor: (1) expenses.
Finance, (2) Maintenance of Accounts, (3)
Collection of Debts and (4) Protection against Factoring is generally used for short-term
Credit Risks”. receivables of below 90 days.
Factoring has also been defined “as a continuous A factor is thus another financial intermediary
relationship between a financial institution (the between the seller and the buyer; but unlike a
factor) and a business concern selling goods bank, the unique selling proposition of a factor
and/or providing service (the client) to a trade lies in its strength in handling and collecting
customer (customer) on an open account basis, receivables — in a more efficient, effective and
whereby the factor purchases the client’s book purposive manner.
debts (accounts receivables) with or without Benefits
recourse to the client — thereby controlling the 1) Normally, margin on book debts is high.
credit extended to the customer and also Under factoring, such margins could get
undertaking to administer the sales ledgers reduced and availability of funds will
relevant to the transaction”. increase.
Factoring refers to management of receivables 2) Beneficial to client operating in buyer’s
of a company by a financial intermediary (factor) market.
for a fee. The need for factoring arose on account 3) Advantageous to SSI and medium scale
of the inordinate delays faced by suppliers for units - delayed payments by large scale
realising their bills from their customers. industries can be got over and cash flow will
Factoring could be with or without recourse to improve.
the supplier, on whose behalf this service is
undertaken. While with recourse factoring is like 4) Clients can concentrate on production and
our usual bill discounting facility where the money selling activities.
is recovered on the return of the bill, in without 5) Time and cost of collection of debts are
recourse factoring the factor takes the risk of reduced.
non-payment of bills. Factoring business is SBI has a subsidiary viz., SBI Factors and
characterised by low margin and high risk. Commercial Services Ltd., which was
A factoring transaction takes place along the incorporated in February, 1991. It is jointly
following lines: promoted by SBI, State Bank of Indore, State
Bank of Saurashtra, SIDBI and Union Bank of
Upon a sale taking place, the seller (client) India. For the period ended March d a business
forwards invoices on buyer (customer) to factor. turnover of Rs.1601.13 crores. As at March 2005,
The Factor sends copy of invoice and notice of the number of clientele had increased to 341 and
assignment to buyer (customer) and makes a the company had registered a profit( before tax
prepayment of say, 75 to 80 percent of invoice and provisions) at Rs.9.63 crores.
FORFAITING
Forfaiting, similar to factoring, involves discounting of export receivables of medium-

term and long-term.
Unlike factoring, in forfaiting, the forfaiting agency has no recourse to the seller in
case of payment default by the buyer.
It helps in upfront realization of credit sale, perhaps, at a discount.
The term forfaiting has been drawn from French obtain a firm quote from the forfaiting agency.
language and means “give up our right”. It is a 6. Exim Bank obtains the firm quote and
mechanism of financing of exports by conveys the terms and conditions of the
discounting export receivables evidenced by bills forfaiting agency and asks for exporter’s
of exchange or promissory note, without acceptance.
recourse to the seller (exporter), on a fixed rate
basis (discount) upto 100 per cent of the 7. Contract is finalised with the forfaiting
contract value. agency.
8. Exporter ships the goods/sends the bills of
Simply put, forfaiting is the non-recourse
exchange.
discounting of export receivables. In a forfaiting
transaction, the exporter surrenders, without 9. The overseas buyer accepts the bills of
recourse to him, his rights to claim for payment exchange and sends it to exporter.
on goods delivered to an importer, in return for 10. Exporter endorses the avalised bills/
immediate cash payment from a forfaiter. As a Promissory Notes in favour of the forfaiting
result, an exporter in India can convert a credit agency without recourse to him.
sale into a cash sale, with no recourse to him or 11. The forfaiting agency effects the payment of
to his banker. It helps the exporters to the discounted value.
concentrate on the export front without bothering
12. On maturity of the Bill of Exchange/
about collection of export bills.
Promissory Note, the forfaiting agency
In a forfaiting transaction, Bills of exchange or presents the instruments to the aval
Promissory Notes backed by co-acceptance (or (Importer’s bank) for payment.
‘avalisation) from the buyer’s bank are endorsed
by the exporter, without recourse, in favour of The discount fee, documentation fee, and any
the forfaiting agency in exchange for discounted other costs levied by a forfaiter must be passed
cash proceeds. on to the overseas buyer. Commitment fee
should also be passed on to the overseas buyer
The operating mechanism for an Indian Exporter to the extent possible.
in a forfaiting transaction, is as follows.
1. Indian exporter initiates negotiation with the Forfaiting was introduced in India by EXIM Bank
foreign importer. in 1994.
2. Exporter approaches Exim Bank to obtain One would think that a large emerging economy
indicative quote from a forfaiting agency. like India would hold sizeable potential for
3. Exim Bank obtains indicative quotes of forfaiting and factoring – and it does – but that
discount, commitment fees and potential has not yet been realised. Lack of
documentation fees, if any, and awareness, unwillingness on the part of
communicates these to the exporter. exporters to pay for risk, reluctance on the part
4. Exporter finalises the contract with the of the banks to promote forfaiting (as it obviates
foreign buyer. the need for postshipment credit) are some of
the reasons why this method of realisation of
5. Exim Bank is informed of the final contract
export proceeds has not picked up in India.
and the exporter requests the Exim Bank to

COMMERCIAL PAPER
CP is an instrument issued by companies to borrow short-term finance from the market.

It can be issued for period ranging from 7 days to one year.
It is transferable by endorsement and delivery.
Generally blue chip companies are major players.
It is an unsecured, short-term debt instrument A company is eligible to issue commercial paper

issued by a corporation, typically for the financing if it satisfies the following conditions:
of accounts receivables, inventories
and meeting short-term liabilities. The The Tangible Net Worth of the company, as
debt is usually issued at a discount, reflecting per the latest audited balance sheet, is not
prevailing market interest rates. less than Rs.4 crore. (TNW is the aggregate
of Capital & Free Reserves less intangible
It has emerged as a popular instrument for assets, if any).
financing working capital requirements of
corporate borrowers of commercial banks. The company has been sanctioned working
Commercial Paper (CP) is an unsecured capital limit by commercial banks/financial
money market instrument issued in the form of institutions.
a promissory note. This instrument was The borrowal account of the company is
introduced in India in 1990 so as to enable the classified as a ‘Standard Asset’ by the
highly rated corporate borrowers of commercial financing banks/institutions.
banks to diversify their sources of short-term
borrowings. Besides, it was an additional The issuing company has to obtain beforehand
instrument for investment provided to the the specified minimum credit rating for issuance
investing community. of CP from credit rating agencies identified by
RBI. At present, these agencies include CRISIL,
Commercial paper issued by corporates was ICRA, CARE and the FITCH Ratings India Pvt.
initially marketed as a privately placed Ltd. The prescription for minimum credit rating
instrument. Subsequently, the instrument is P-2 in the case of CRISIL or such equivalent
received a wider connotation from the point of rating by other agencies. Besides, these ratings
view of both the issuers as well as the investors. should be the current ones and not due for
The CP market is largely controlled by FIMMDA review. The credit rating agencies also specify
(Fixed Income Money Market and Derivatives the size of the CP proposed to be issued.
Association of India) which has also laid down
standard procedures in this regard in CPs may be issued in denominations of Rs.5
consonance with the standard best practices lakh or in multiples. Thus, the amount invested
and the RBI guidelines. by a single investor should not be less than Rs.5
lakh (face value).
One of the main reasons for the growing
popularity of CP as an instrument of financing CPs can be issued for maturities between a
working capital requirements is that the rate of minimum of 7 days and a maximum upto one
interest underlying a CP transaction is year from the date of issue. The maturity date
substantially lower than the interest charged by of the CP should not go beyond the date up to
commercial banks against fund based working which the credit rating of the issuer is valid.
capital limits provided by them. The difference
is substantial and many of the large corporates CPs are now issued only in the dematerialized
with a good credit rating take advantage of this form. Further, the maximum period for
situation. subscription to an issue of CP is two weeks from

the date of opening of the issue. CPs may be The effective FBWC credit limit available to the
issued on a single date or in part on different borrowing company is reduced correspondingly.
dates. CPs issued on different dates but This ensures that even after redemption of CP,
pertaining to the same issue should have the there is no increase in the overall short-term
same date of maturity. borrowing facilities provided to the company. The
amount of CP issued by a company can be
Before issuing CP, it is necessary for a company adjusted either against the cash credit or the
to appoint a scheduled commercial bank to act loan component or both the components taken
as an Issuing and Paying Agent (IPA) for the together.
issue. The commercial bank then makes its own
assessment about the FBWC requirements of CP may now also be issued as a stand-alone
the company and the extent to which the CP product. While acting as IPA, a commercial bank
issue is linked with the credit limit provided by may provide for CP without necessarily carving
the bank. After the agreement is reached out the CP limit from the FBWC limit. However,
between the bank and the issuing company, the it is necessary that extra caution is exercised in
potential investors are given a copy of the IPA such cases and the facility should be made
certificate. An initial investor in CP pays the available to the corporate borrowers with the
discounted value of the amount of CP highest credit ratings awarded.
subscribed by him. In a dematerialised
environment, the issuing company then makes When the CP limit is carved out of the FBWC
arrangements for crediting the CP to the limit provided by a lending bank, restoration of
investor’s account with a depository (this is the credit limit after redemption of the CP is
equivalent to issue of a physical certificate by usually a routine affair. This exercise should not
the company). be considered as an enhancement of the limit.
When a commercial bank agrees to act as an A credit analyst should view the unredeemed
IPA, it is making a promise to redeem the portion of the CP against which a limit has
amounts covered under the CP issued by the already been carved out, as a contingent liability
company. In view of this, lending banks generally in the financial statements of the issuing
carve an amount equal to the CP size out of the company. This is similar to a situation where an
FBWC credit limit, so that the segregated limit LC or DPG has been issued on behalf of the
can be utilised at the time of redemption of CPs. company but the bills against these have not
reached the company for payment.

CURRENCY SWAPS
Currency swap is the exchange of one currency for the other.

It is used as a hedging mechanism to guard against adverse currency fluctuations.
It is used to convert a loan in one currency to another currency to reduce the cost of
borrowings.
It helps in efficient management of currency exposure and cash flows.
A currency swap is a foreign exchange contingent obligation and the currency swap
agreement between two parties to exchange a becomes an off-balance sheet transaction.
given amount of one currency for another and,
after a specified period of time, to give back the Advantages
original amounts swapped. - Indirect access to a market, via a swap, can
There are two main applications of a currency be cheaper than the direct borrowing route
swap. These are: where no borrowing advantage is avail-able.
- fully locking-in or hedging a future stream of - Efficient management of currency exposure

cash-flows denominated in a currency other and cash flows
than the currency used for accounting - Facility to restructure debt capital to align with
purposes. An example might be where a UK prevailing market views/conditions.
company receives a fixed return in Swiss
franc, semi annually, and wishes to remove - Flexibility allows the swap to accommodate
all future foreign exchange exposure by any desired structure.
locking-in the current exchange rate for the
life of the income stream. - Market depth and liquidity facilities swap
reversals.
- a well-known US company would like to raise
funds in the UK, but would suffer adverse - Off-balance sheet financing/lack of publicity.
borrowing terms as it is little known in Disadvantages
Europe. The US company therefore borrows
US dollars domestically, where it enjoys Possible capital adequacy requirements to be
favourable borrowing conditions, and then imposed in the near future. Unknown extent of
currency swaps US$ into Sterling at a saving counterpart’s liability to other swaps with regard
versus direct access to the UK financial to default possibilities.Legal and administrative
markets. costs.
Currency swaps are often combined with interest With recent global volatility of exchange rates,
rate swaps. For example, one company would Currency Swaps usually generate a larger
seek to swap a cash flow for their fixed rate debt exposure than interest rate movements.
denominated in US dollars for a floating-rate debt
denominated in Euro. This is especially common Conclusion
in Europe where companies "shop" for the As with interest rate swaps, rapid growth in
cheapest debt regardless of its denomination volumes of CSs - one of the cornerstones of
and then seek to exchange it for the debt in global banking, has particularly contributed to
desired currency. deregulation of international markets. It has
As each sale of a currency is contingent upon helped in greater use of foreign exchange in
the purchase of another currency, it is a short- and long-term asset liability management.

CURRENCY OPTIONS
Currency option means the option to buy or sell a specific quantity of currency at an
agreed rate.
The party to the contract pays a premium upfront for the purpose.
It is better than forward contract since the decision to buy or sell is optional
Banks in India can write options.
A foreign exchange (or currency) option gives then buy or sell the required currency in the spot
the buyer the right, but not the obligation, to buy market at this better rate, allowing the option to
or sell a specific quantity of a currency at an lapse.
agreed rate, and for a specified period. The Currency options might be a suitable method of
option buyer pays the seller a premium for the hedging a currency exposure for the option
privilege of being able to buy or sell the currency buyer who can (i) lock in a worst possible
at a fixed price without actually being committed exchange rate to avoid the risk of an adverse
to do so. rate movement and at the same time (ii) benefit
In the options market from any favourable rate movement by choosing
not to exercise the option and instead buying or
- The option buyer becomes the HOLDER and selling the currency at the spot rate on expiry.
the option seller is called the WRITER.
Cross currency options were introduced in
- A CALL gives the holder the right to buy a 1993, but did not become popular because:
specified quantity of a currency at an agreed Most customers had only rupee dollar
rate over a given period. exposure
- A PUT gives the holder the right to sell a Option contracts are not available for small
specified quantity of a currency at an agreed amounts
rate over a given period. The upfront premium can be quite
- The PREMIUM is the price paid for the option substantial
by the buyer of an option to the seller (the
option writer). It is usually paid up-front. The FC-Rupee options were introduced on the 7th
amount of the premium for an option will July 2003.
depend on the option writer’s perception of The guidelines for selling options in our Bank
the risk of making a loss and a higher are:
premium is charged when the risk seems Minimum credit rating in respect of
greater. Corporate Customers is SB 3
- The EXPIRY DATE is the final date on which Customer maintaining an account for the
the option may be exercised. last two years
- A EUROPEAN option can be exercised only Conduct of the account should have been
on the expiry date whereas an AMERICAN satisfactory
option can be exercised on any date before For customers below this rating specific
and including the expiry date (These terms approval of the Board would have to be
have no geographical connotation). sought
The limits for the options will be assessed
If currency options are bought to hedge a separtely and not in conjunction with
currency exposure, the buyer must feel that the appraisal of normal credit facilities.
risk reduction justifies the premium cost and that Exposures calculated on the basis of credit
an option is preferable despite its cost compared conversion factor methodology
to other alternatives, such as the (zero-cost) The scheme of delegation of powers for
forward exchange contract. The advantage of sanctioning these limits will be the same as
an option over a forward contract lies in the for forward contracts
choice of not exercising the option if the spot Corporates should undertake these
exchange rate moves in the holder’s favour transactions to hedge their own balance
before the exercise date. The option holder could sheet exposures.
CURRENCY FUTURES
Currency future is a contract to buy or sell a standard quantity of one currency in

exchange for the other. It is an exchange traded forward contract.
The rate of exchange and the future date of delivery are agreed at the time of contract.
It is a hedging as well as a speculative mechanism.
A currency future is a contract for the sale or date, the buyer of the future will benefit. If the
purchase of a standard quantity of one currency market price falls, the seller of the future will gain.
in exchange for another currency at a specified
rate of exchange, and for delivery at a specified Although currency futures can be held until
future time. They are bought and sold on a delivery date, when the currencies are
futures exchange, the largest being the exchanged, futures positions are normally
International Monetary Market division (IMM) of unwound before delivery.
the Chicago Mercantile Exchange (CME), and A buyer of a future can unwind his position
can be used to hedge currency exposures. by selling a future for the same delivery date,
taking a cash gain or loss on the difference
Most currency futures are for a major currency between the buying and selling price.
against the US dollar. On the CME, there are Similarly, a seller of a future can unwind the
futures contracts in Sterling, Australian dollars, position by purchasing a future for the same
Canadian dollars, Deutsche Marks, Yen, Swiss delivery date, taking a cash gain or loss on
franc and French francs. the difference between the selling and buying
price.
A buyer of a sterling future is contracting to buy
sterling in exchange for dollars. The seller of a Futures can be used for hedging currency
sterling future is contracting to sell sterling in exposures, as an alternative to a forward
exchange for dollars. When a futures contract contract. Such hedging usually involves the
is bought and sold, the price is the agreed purchase or sale of futures to cover a future
exchange rate. For example, when X buys a currency transaction and unwinding the futures
March sterling future from Y at $ 1.75000, this position when the transaction occurs and buying
rate is both the agreed rate for the exchange of or selling the currency at the spot rate.
sterling into dollars in March and also an
expression of the current market price of the Currency Futures are not available in Indian
futures contract. If the market price market at present. RBI is likely to introduce this
subsequently goes up before the March delivery product in the near future.

INTEREST RATE SWAPS
Swap is simply an exchange of one for the other.

Interest rate swap involves the exchange of interest rates between two parties.
A simple example would be moving over to floating rate of interest in the place of
fixed rate of interest (and vice versa) during the currency of the loan.
This is done to align debt exposure with prevailing market conditions.
Definition designed to reduce interest expense on

high-interest debt; Zero-coupon swaps for
An interest rate swap is the transfer, contractually
tax purposes;
agreed, between two counterparties of their
respective interest rate obligations. The ‘fixed to floating’ or ‘vanilla’ swap still remains
the most commonly transacted of the interest
Interest rate swaps are commonly used as a
rate swap product range because of its simplicity
means of converting fixed-rate to floating rate
and flexibility.
debt and vice versa. The swap involves no
exchange of principal, but restructures the RBI has allowed the market to evolve the
interest rate flows of existing assets and benchmark rate for Forward Rate Agreements
liabilities. (FRAs) and Interest Rate Swaps (IRS). Banks,
primary dealers and FIs are free to adopt any
Interest rate swaps can be used by hedgers to domestic money or debt market rate for FRAs
manage their fixed or floating assets and and IRS provided the computing of the rate is
liabilities. They can also be used by speculators objective, transparent and mutually acceptable
to replicate unfunded bond exposures to profit to counterparties.
from changes in interest rates. As such, interest
rate swaps are very popular and highly liquid The RBI guidelines does not lay down any
instruments. restriction on the minimum or maximum size of
the “notional principal” amounts of FRAs and IRS.
The following are the advantages/disadvantages The guidelines stipulate separate capital
of interest rates swaps. adequacy norms for banks/FIs and PDs.
Advantages Second, the adjusted value shall be multiplied
Indirect access to a market, via a swap, can be by the risk weightage allotted to the counterparty.
cheaper than the direct borrowing route where For banks/FIs, the risk weightage is 20 per cent
no borrowing advantage is avail-able. Efficient and for all others (except Governments) it is 100
management of interest-rate exposure and cash per cent.
flows, facility to re-structure debt capital to align In case of banks and FIs, the exposure on FRAs/
with prevailing market views/conditions, ability IRS together with other credit exposures should
to overcome balance sheet restrictions are be within single/group borrower/counterparty
some of the advantages. limits prescribed by RBI. While dealing with
corporates, banks, FIs and PDs should exercise
Disadvantages
due diligence to ensure that the corporates are
Possible capital adequacy requirements, undertaking FRAs/IRS only for hedging their own
unknown extent of counterparty’s liability to other balance sheet exposures.
swaps with regard to default possibilities and RBI believes the financial players should not
legal and administrative costs. overextend themselves and there is need to put
Swap Applications a limit on open swap positions. Banks will have
to place various components of assets, liabilities
Interest rate swaps have been adapted and
and off-balance sheet positions (including FRAs,
applied in a number of ways including
IRS) in different time buckets and fix prudential
Commercial Paper; Expensive debt swaps limits on individual gaps.
BANKING
MANAGEMENT OF
ASSETS & LIABILITIES

RISK BASED SUPERVISION OF BANKS
Objectives: Optimise utilization of supervisory resources and minimise impact of
crisis situation in the financial system.
Key elements: Risk profiling of banks; supervisory cycle; Monitorable Action Plan;
Enforcement process; and role of external auditors.
Risk profiling of banks will be done for Business risks and Control risks.
Business risks are eight: Capital, credit, market, earnings, liquidity, business
strategy and environment, operational and group risks.
Control risks are four: Internal control, organisation, management and Compliance
risk.
The overall risk of bank will be assessed as low, moderate, fair or high.
Banks with lower risks will have longer supervisory cycle and lesser supervisory
intervention.
Background Current Approach
With globalisation and liberalization, the stability Supervisory process is applied uniformly to
of the financial system has become the central all supervised institutions
challenge to bank regulators and supervisors all
over the world. In the last decade, Indian banking It is essentially on-site inspection driven (i.e
scene has witnessed progressive deregulation, direct inspection of bank branches by RBI)
institution of prudential norm and an emulation supplemented by off-site monitoring.
of international supervisory best practices. Over The on-site inspections are conducted to a
a period of time RBI has consistently tightened large extent with reference to audited
the exposure and prudential norms of banks and balance sheet dates.
enhanced the disclosure standards in phases
in order to strengthen the efficiency of its Supervisory follow-up commences with the
supervisory processes. The growing diversities detailed findings of annual financial
and complexities in banking business, the spate inspection.
of product innovation, the “Contagion effects”
that a crisis can spread to the entire financial The process of inspection is based on
systems are causing pressures on supervisory CAMELS/CALCS (Capital adequacy, asset
resources and calls for further streamlining of quality, management aspects, earnings,
supervisory processes. liquidity and systems; and control)
Risk Based Supervision announced is an RBS - The New Approach

initiative in the direction of strengthening the The objectives of RBS are two-fold:
supervisory processes of banks by RBI. Put
simply, RBS is the approach to the supervision Optimise utilization of supervisory
of banks by RBI based on their risk exposures. resources (i.e., the time, manpower and
Pricewaterhouse Coopers (PwC), London was efficiency of RBI’s supervision) and
engaged by RBI for introduction of RBS. The
current move of RBS approach represents a Minimise impact of crisis situation in the
further stage in the regulation and supervision financial system.
of banks in the light of earlier Padmanabhan and RBS process essentially involves continuous
Narasimham Committee reports. monitoring and evaluation of the risk profiles of

the supervised institutions (i.e., banks) in relation banking institution. Risk profiling is the backbone
to their business strategy and exposures. This of RBS system.
assessment will be based on construction of a
“Risk Matrix” for each institution. The efficiency RBI has identified two classes of risks namely
of the RBS would clearly depend on banks’ Business risk and Control risk. Business risks
are those risks that are considered inherent in
preparedness in certain critical areas such as
the activities undertaken by a bank irrespective
quality and reliability of data, soundness of
systems and technology, appropriateness of risk of whether the controls are in place or not. The
control mechanism, supporting human assessment areas of Business risk are eight in
resources and organizational back-up. number and they are : Capital, Credit risk, Market
risk, Earnings, Liquidity risk, Business strategy
Advantages of RBS Approach over the and environment risk, operational risk and Group
Present CAMELS Approach risk. Control risks arise out of inadequacy in the
control system, absence of controls or possibility
Effective use of supervisory resources of failures/breakdowns in the existing control
Systemic improvement process. The assessment areas of Control risks
are four in number and are: Internal control risks,
Cushion against risks Organisation risk, Management risk and
Compliance risk.
Flexibility of timing the on-site inspections
Banks have to make an assessment of the risk
Reduction of vulnerabilities by varying against all the 12 areas (8 under Business and
inspection cycles 4 under control risk) by means of identifying
positive and negative factors. Besides assessing
Focused attention on weak banks
the risk, banks also are expected to assess the
Improvement in quality of internal audit direction of the risk based on past trend and
current judgment. Finally, banks have to
Focused follow up determine whether the overall level of risk is low,
moderate, fair or high and the direction of risk is
Major Elements of RBS Approach
increasing, decreasing or stable.
1. Risk profiling of banks
Assessment Area: Credit Risk
2. Supervisory cycle
MAJOR COMPONENT Positive factors
3. Supervisory programme
Negative factors
4. Inspection process
COMPOSITION OF CREDIT PORTFOLIO
5. Review, evaluation and follow-up
Credit concentration
6. Monitorable Action Plan (MAP)
7. Supervisory organisation Credit quality
8. Enforcement process and incentive Other credit risks - Off-balance sheet items,
framework country risk, trading book Adequacy of
provisions
9. Role of external auditors in banking
supervision Direction of Risk
10. Change Management implications
RBI, for the purpose of risk profiling, besides
Risk Profiling of Banks: Risk Profile is a using CAMEL rating, would draw upon a range
document, which would contain various kinds of sources of information such as off-site
of financial and non-financial risks faced by a surveillance and monitoring (OSMOS), market

intelligence reports, ad-hoc data from external RBS to serve attainment of RBS objectives. The
and internal auditors, information from other incentive is longer supervisory cycle and lesser
domestic and overseas supervisors, on-site supervisory intervention. The disincentives are
findings, sanctions applied etc. The formal more frequent supervisory examination and
assessment of the risk profile of each bank would higher supervisory intervention including
be done on a regular basis. directions, sanctions and penalties.
Supervisory Cycle: The supervisory process Role of External Auditors in Banking

would commence with the preparation of the Supervision: RBI would look forward to make
bank risk profile and on the data from other more use of external auditors as a supervisory
sources. The supervisory cycle would normally tool by widening the range of tasks and activities,
be 12 months and may be shorter or longer which external auditors perform at present. This,
depending upon whether the bank is of low or it would arrange on entering into dialogue with
high-risk. the Institute of Chartered Accountants of India
and the bank management.
Supervisory Programme: The supervisory
Change Management Implications: In order
programme would be tailor-made to suit
to ensure a smooth change over to RBS banks
individual banks depending upon their risk profile
should have clearly defined standards of
and would focus on high-risk areas.
corporate governance and documented policies
Inspection process: The inspection procedure in place. Some of the organizational issues and
would focus on identified high-risk areas to preparations that banks have to make are given
evaluate the effectiveness of the bank’s below:
mechanism in capturing, measuring, monitoring
and controlling various risks. The transaction Setting up of risk management architecture
testing would also be done though the extent Adoption of Risk focused internal audit
would vary depending on the need.
Strengthening of Management Information
Review, Evaluation and Follow-up: The
System and Information Technology
evaluation, review and follow-up would attempt
to ensure whether supervisory programme has Addressing HRD issues such as
indeed been completed and whether it has reorientation of staff, skill formation and
improved the risk profile of the bank concerned. placements in appropriate positions,
creation of dedicated risk management
Monitorable Action Plan (MAP): In the MAP,
team.
RBI would set out the improvements required in
the areas identified during the current on-site and Setting up of compliance unit headed by a
off-site supervisory process. Key individuals at Chief Compliance Officer of the rank of not
the bank would be made accountable for each less than a General Manager who will be
of the action points. Besides, RBI would consider accountable for timeliness and accuracy of
imposing sanctions and penalties on banks for compliance
not meeting the MAP.
Conclusion
Supervisory Organisation: Under RBS, there
would be a focal point of contacts for all banks Adoption of RBS would enable banks to be ready
at the Central office of RBI and its Regional for implementation of the Second Capital Accord
Offices. of Basel Committee on Banking Supervision. As
mentioned earlier, banks have to undertake
Enforcement Process and Incentive suitable change initiatives to ensure smooth
Framework: A system of incentives and transition to RBS.
disincentives has been contemplated under the

RISK MANAGEMENT SYSTEMS IN BANKS
Risk is the potential loss of an asset due to different factors.

Risk management is concerned with identification, measurement and control of risks.
Risks in banks comprise balance sheet risks, transaction risks; and operating and
liquidity risks
Risk is inherent and absolutely unavoidable in (ii) PRICE RISKS which include the risks of loss
banking. Risk is the potential loss an asset or a due to change in value of Assets and
portfolio is likely to suffer due to a variety of Liabilities. The factors contributing to price
reasons. As a financial intermediary, bank risks are:
assumes or restructures risks for its clients. A
simple example for this would be acceptance of (a) Market Liquidity Risk: This is the risk of
deposits. A more sophisticated example is an lack of liquidity of an instrument or asset
interest rate swap. A bank while operating on or the loss one is likely to incur while
behalf of the customers as well as on its own liquidating the assets in the market due
behalf, has to face various types of risks to the fluctuations in prices.
associated with those transactions. Prudent
(b) Issuer Risk: The financial strength and
banking lies in identifying, assessing and
standing of the institution/sovereign that
minimising these risks. In a competitive market
has issued the instrument can affect price
environment, a bank’s rate of return will be
as well as realisability. The risk involved
greatly influenced by its risk management skills.
with the instruments issued by corporate
Risks in Banking bodies would be an ideal example in this
context.
Risks in banking are many. These risks can be
broadly classified into three categories. They are: (c) Instruments Risks: The nature of
instrument creates risks for the investor.
(I) Balance sheet risks. With many hybrid instruments in the
market, and with fluctuation in market
(II) Transaction risks, and
conditions, the prices of various
(III) Operating and Liquidity risks. instruments may react differently from
one another.
The Balance Sheet Risks generally arise out of
the mismatch between the currency, maturity (d) Changes in commodity prices, interest
and interest rate structure of assets and rates and exchange rates may affect the
liquidities resulting in, realisable value or yield of many assets
when transactions take place.
1) Interest Rate mismatch risk
The Operating and Liquidity Risk encompasses
2) Liquidity Risk, and two types of risks, viz.,
3) Foreign Exchange Risk, (i) Risk of loss due to technical failure to
execute or settle a transaction, and
The Transaction Risks essentially involve two
types of risks. They are: (ii) Risk of loss due to adverse changes in the
cash flows of transactions.
(i) CREDIT RISK which is the risk of loss on
lending/investment, etc., due to counter party
default.

RISK MANAGEMENT: OBJECTIVES steps, viz., Risk identification, Risk
measurement and Risk control.
The objectives of risk management for any
organisation can be summarised as under: RISK CONTROL
a) Survival of the organisation, After identification and assessment of risk
factors, the next step involved is risk control. The
b) Efficiency in Operations, major alternatives available in risk control are:
c) Identifying and achieving acceptable i) Avoid the exposure
levels of worry,
ii) Reduce the impact by reducing
d) Earnings stability, frequency of severity
e) Uninterrupted operations, iii) Avoid concentration in risky area
f) Continued growth, and iv) Transfer the risk to another party
g) Preservation of reputation. v) Employ risk management instruments
Risk Management: Components to cover the risks.
Risk management may be defined as the Good risk management is good banking. And
process of identifying and controlling risk. It is good banking is essential for profitable survival
also described at times as the responsibility of of the institution. A professional approach to
the management to identify, measure, monitor identification, measurement and control of risk
and control various items of risks associated with will safeguard the interests of the banking
bank’s position and transaction. The process of institution in the long run.
risk management has three clearly identifiable

ASSET - LIABILITY MANAGEMENT
It involves management of bank’s assets and liabilities.

It essentially focuses on managing risks caused by changes in liquidity, interest rates
and fluctuations in foreign currency rates.
Success of ALM depends on availability of information, existence of sound policies
and risk management system.
In liberalised financial markets, banks’ assets Asset-Liability Management Structure involves

and liabilities variations are considerably management of Assets and Liabilities. The
influenced by interest rate and exchange rate financial management structure consists of
volatility. The competitive environment in the managing balance sheet on the one side and
banking system due to removal of various income and expenditure on the other.
barriers in their operations has added pressure
The banking industry, to compete in a free
to the importance of financial management.
market conditions, has to give utmost priority
Banks have to manage not only credit risk but a
for managing and minimising risks inherent in
variety of other financial risks including interest
banking operations. Across the world, it was
rate, exchange rate, liquidity, settlement, and
observed that failure of risk management and
transfer risks to maximise profit and minimise
control systems were significant factors for bank
risks. The complexity of financial risks requires
failures. The success of asset liability
that a strong and dedicated risk management
management depends on the effective existence
system is put in place covering: (1) assets,
of (1) Information and Policies, and (2) Risk
liabilities and off-balance sheet risks, (2)
Management System.
information and scientific risk management
techniques and (3) dedicated asset-liability 1. Information and Policies
managers or committee (ALCO). Asset-Liability
management as a means of risk management The primary objective of ALM is to ensure that
technique is an important function in a bank. It there are asset-liability managers and an asset-
primarily focuses on how various functions of liability committee (ALCO) that manages the
the bank are adequately co-ordinated, essentially bank’s balance sheet in such a manner as to
covering planning, directing, and controlling of minimise volatility in its earnings, liquidity, and
the levels, changes and mixes of the various equity to changes in market conditions as
balance sheet accounts. manifested in such results as stable net interest
margins, optimal earnings, adequate liquidity,
In Asset-Liability management (ALM), a bank is and effective control of financial risks. To reach
strategically concerned with management of these objectives, the information base in a bank
market risk consisting of (a) interest rate risk, has to be strong and sound. The information
(b) foreign exchange risk, (c) equity price risk required for ALM are (1) historical, current and
and (d) commodity price risk. Also ALM function projected data on the bank’s assets-liability
covers liquidity management and capital portfolios, including any projected additions,
planning. Broadly, the ALM objectives are to maturities, and repricing; (2) interest rates and
control the volatility of net interest income and yields of its current and projected portfolios; (3)
net economic value of a bank. In order to achieve market limitations on the banks’ ability to adjust
these results, the asset-liability managers or its product prices; and (4) changes in the bank’s
ALCO must be guided by policies that balance sheet caused by customers’ decisions
specifically address the bank’s overall asset- to prepay their loans, wihdraw their deposits
liability management goals and risk limits, and before maturity, and transfer their business to
by information that relates directly to its asset-
liability positions.

other banks that relates directly to its asset- discounted value or the present value of all
liability position. cash flows (e.g., principal and interest) can
be recovered by an asset holder including
2. Risk Management System that of bank’s depositor. The concept can
In view of the increasing market risks in banking be used for all assets, liabilities and off-
operations, banks should be able to accurately balance sheet items. Another concept which
measure and adequately control market risk. is also used is the Value at Risk (VaR) model.
Banks should have in place a well-structured VaR estimates the maximum potential loss
risk management system. A risk management in a position over a given holding period for a
process that includes measuring risks, given confidence level.
controlling risks ad monitoring risks will help Policy Issues
banks to attain these goals.
Strengthening of information technology in
a) Measuring Risk commercial banks would be an important
Due to difficulty in measuring interest rate prerequisite to implement effectively ALM
risks and also the controversies present in system in banks. The database of banks has to
the understanding of the concept, cover all operations of branches for a detailed
measurement of interest rate risks assumes analysis of assets and liabilities and for
greater importance in the ALM function. It has forecasting a comprehensive projection of
been observed that banks’ risk exposure liquidity conditions under various scenarios. The
depends upon volatility of interest rates and software packages used must be well tested
asset prices in the financial market, the and have extensive computing power to analyse
banks’ maturity/gaps, the duration and the massive amount of Asset/Liability data under
interest rate elasticity of its assets and alternative interest rate scenarios.
liabilities and the ability of the management It is well understood that every financial
to measure and control the exposure. In the transaction or commitment has implications for
management of banks’ assets and liabilities, a bank’s liquidity. A proper liquidity management
interest risk management lays the foundation would help the management in formulating
for a good ALM. business strategy. A schedule of liquidity reviews
b) Risk Analysis and Management with depth should be provided for. These reviews
provide the opportunity to re-examine and refine
Interest rate risk can be analysed in the a bank’s liquidity policies and practices in the
following four methods: light of a bank’s liquidity experience and
developments in its business. For banks with
1. Gap analysis
an international presence, the treatment of
2. Duration analysis assets and liabilities in multiple currencies adds
yet another layer of complexity. In the event of a
3. Value at Risk (VaR) disturbance, a bank may not always be able to
mobilise domestic liquidity to meet foreign
4. Simulation
currency funding requirements. Hence, better
Gap analysis is the most important basic liquidity management becomes an important
technique used in analysing interest rate concern when banks undertake business in
risk. It measures the difference between a multi currency transactions.
bank’s assets and liabilities and off-balance
The ALCO at SBI is engaged in evolving optimal
sheet positions which will be repriced or will
asset/liability structure for the Bank on an on-
mature within a predetermined period. (Gap
going basis with a view to containing
is the difference between rate-sensitive
mismatches, optimizing profits and ensuring risk
assets minus rate sensitive liabilities) The
management. The Bank is using ‘Risk Manager’
duration analysis estimates the average
module to strengthen the processes of Risk
amount of time required before the
Management.

CREDIT RISK MANAGEMENT
Credit Risk is the foremost of all risks in terms of importance.

Major Credit Risks include risk of exposure, risk of default by the borrower, risk of
deterioration in the standing of the borrower.
Credit risk is managed through use of covenants, collateralisation, managing
concentration and capital allocation in relation to risk and risk-return optimization
Credit risk models, stress testing, use of derivatives and securitisation help in
managing credit risk.
Lack of appropriate lending discipline and measurement, enumerated as under :

inadequate systems of control generally result
Credit risk for traded instruments raises a
in setback to banks. Banks have also suffered
number of conceptual and practical difficulties:
from poor transaction management, incomplete
(a) What is the value subject to loss, or
credit information, poor documentation and gross
exposure, in future periods? (b) Does the
inadequacy in pricing risks.
current price embed already the credit risk,
For banks, credit risk is the foremost of all the since the market prices normally anticipate
risks, in terms of importance. Default risk, a major future events and to what extent ? (c) Will it be
source of loss, is the risk that customers fail to easy to sell these instruments when signs of
comply with their obligation to service debt. deterioration get stronger? and (d) Will the bank
Default triggers a total or partial loss of any hold these instruments longer than under normal
amount lent to a counter party. conditions?
Decline in the credit standing of an obligor of the Modelling default probability directly with credit
issuer of a bond or stock, is also a type of credit risk models remains a major challenge.
risk. Such deterioration does not imply default,
Another challenge of credit risk measurement
but the probability of default increases. In the
is capturing portfolio effects. Due to scarcity of
market, a deterioration of the credit standing of a
data, quantifying the diversification effects
borrower does materialize into a loss because it
poses a great challenge.
triggers an upward move of the required market
yield to compensate the higher risk and triggers Managing Credit Risk
a value decline. Use of Covenants as a Pre-emptive Device
The major credit risks are exposure, likelihood The banks may use covenants effectively as a
of default, or a deterioration of the credit standing, pre-emptive device before credit standing
and the recoveries under default. Scarcity of data deteriorates or losses occur. The rationale
makes the assessment of these components a behind use of convenants is an under :
challenge. Ratings are traditional measure of
credit quality of the debts. Because ratings are They help to protect the banks fromany
ordinal measures of credit risk, they are not significant deterioration in the risk profile of the
sufficient to value credit risk. Portfolio models borrower transactions without prior agreement.
show that portfolio risk varies across banks
They allow banks to do restructuring of the loans
depending on the number of borrowers, the
in such instances.
discrepancies in size between exposures and
the extent of diversification among types of Covenants make it costlier for the borrower to
borrowers, industries and countries. default, because he loses the value of continuing
operations.
There are various challenges of credit risk

Covenants are incentives against moral hazard, keys for tracing back the overall risk to its
since they restrict borrowers from taking sources. The capital allocation system allows
additional risk that would increase bank's risk. us to break down and aggregate risk
contributions according to any criteria as long
Collateralization in Credit Risk Mitigation as individual transaction risk contributions are
A prudent collateralization practice can be available. The capital allocation system provides
effectively used to mitigate credit risk. Collaterals the risk contributions for individual facilities for
also act as an incentive for the borrower to fulfill both credit risk and market risk.
debt obligations effectively. Collaterals may be The goal of risk-based pricing is to ensure a
in the form of real assets, securities, goods, minimum target return on capital, in line with
receivables and margin borrowing – the value shareholders' requirements. A hurdle rate
of the collaterals vis-a-vis the loan amount, serves as a benchmark for risk-based pricing
would depend upon the creditworthiness of the and for calculating creation or destruction of
borrower and the level of risk associated with value.
the credit facility.
Risk Return Optimization
In case the borrower fails to perform the debt
obligations, the original credit risk turns into a Risk return optimization shows how to trade-off
recovery risk plus an asset value risk, which risk across exposures to enhance the overall
could be: (a) accessibility risk (difficulty to por tfolio return. There is a potential for
effectively seize the collateral), (b) integrity risk enhancement because income is proportional
(the risk of damage to the collateral), (c) legal to size while risk is not. Portfolio optimization
risk (risk of disputes arising from various laws under global funding constraint means:
in connection with asset seizure), and (d)
valuation risk (the liquidation value of a collateral • reducing risk, at a constant return, and
depends on the existence of secondary market
• increasing revenue, at the same time.
and the price volatility of such a market). These
aspects need to be examined while deciding on Indian banks need to use models as these
the nature and extent of the collaterals. provide valuable insights for restructuring and
expanding, or contracting, some portfolio
Managing Concentrations
segments or individual exposures. In fact,
Credit concentrations (as per Basel Committee) without such models there is no way to compare
can be grouped into two categories: (a) various 'what if' scenarios and rank them in
conventional credit concentrations which include terms of their risk-return profiles.
concentrations of credits to single borrowers or
Further, Indian banks need to develop their own
counter par ties, a group of connected
exper tise and put sustained effor ts for
counterparties and sector or industries, and (b)
developing internal models, through focused
concentrations based on common or correlated
approach, evidenced by internal research and
risk factors to reflect subtler or more situation -
developmental activities. This would help Indian
specific factors can only be uncovered through
banks to be Basel II compliant, in the very near
analysis. Overlooking the dangers in such
future.
situations results in susceptibility to
concentration risk. Effective Use of Credit Risk Models
Capital Allocation and Risk Contributions Credit risk events, defaults and migrations result
in changes in value of credit facilities. The Indian
The risk management framework of the Indian
banks need to make effective use of various
banks needs to lay emphasis on prudent capital
credit risk models, depending on the size of
allocation system. Risk contributions are the
portfolio.
foundation of the capital allocation system and
of the risk-adjusted performance measurement Progression Towards Stress Testing
system. Capital allocation defines meaningful
Stress tests make risks more transparent by
estimating the potential losses on a portfolio in • arbitraging the cost of funding in the market
abnormal markets. They complement the internal with funding on-balance sheet.
models and management systems used by
banks globally for capital allocation decisions. • off-loading credit risk to free capital for new
Simply speaking, stress testing is a way to operations, and
produce alternative scenarios using sensitivity
• to modify the risk-return profile of the loan
analysis.
portfolio.
The New Basel Capital Accord uses more
The issue, when off-loading risks, is whether
quantitative approaches – methods where
freeing up capital in this way is economically
assumptions can be empirically evaluated.
acceptable. The solution lies in finding out
Stress testing should be able to link dramatic
whether this makes the risk-return profile of the
changes in the economic environment to the
banking portfolio more efficient (higher return for
bank's portfolio. There are, however, issues
the same risk or lower risk for the same return).
such as data availability, portfolio diversity and
standardization of model inputs and outputs, Analyzing the economics of the securitization
which need to be addressed. transaction requires reviewing all costs and
benefits resulting from the specific values of each
Effective Use of Derivatives
of the various parameters at the time of
Derivatives help to customize the term structure securitization.
of credit risk, independent of the underlying
Conclusion
assets, bonds or loans. Credit derivatives allow
better utilization of the current credit capacity, The increasingly complex and competitive
even though there are no cash deals meeting banking warrants sophisticated models for credit
eligibility and maturity criteria. risk management. It is important to put in place
an agile and dynamic Credit Risk Management
Securitization in Credit Risk Management
System, which addresses the challenges of
The motivation for banks in securitization lies in contemporary banking scenario and strengthens
the following potential benefits: them in their progression towards meeting global
benchmarks.

TREASURY MANAGEMENT IN BANKS
Treasury Management is concerned with efficient allocation of the bank’s resources.

Some of its role includes optimizing balance sheet size, ensuring liquidity and matching
the maturity profile of assets and liabilities.
Treasury management includes risk management and advising clients on risk
exposures.
Treasury Management in banks involves an maturity profile of existing assets and liabilities
effective internal and external interface. It over which superimposed is the impact of
performs a myriad of functions ranging from transactions that are planned for the future.
balance sheet management, liquidity
Effective liquidity management requires careful
management, reserves and investment, funds
attention to balance sheet growth and structure.
management, management of capital adequacy
A balance sheet that is growing rapidly needs
to transfer pricing, risk management, trading
careful scrutiny to determine whether the
activities and offering hedge products. It has to
liquidity of the bank is being adversely affected.
work on arriving at an optimal size of the balance
Very often banks put up excessive assets in the
sheet, interface with various liability and asset
form of cash credit lendings or investment in
groups internally, give correct pricing signals
securities without having matching source of
keeping in mind the liquidity profile of the bank.
funds of similar tenors. This mismatch in the
On the external front, it has to provide active
maturities of assets and liabilities results in the
trading support to the market, make two way
bank being subjected to liquidity risk, because
prices, add to the liquidity and continuously strive
the bank starts depending chronically and
to provide the customers with value added
excessively on the most easily accessible
solutions to their specific financial needs.
source of funds i.e. the inter-bank call money
Balance Sheet Management market. Thus, the bank ends up funding long -
term assets through overnight borrowings on an
The ongoing reforms have provided the banks ongoing basis.
freedom to price most of their assets and
liabilities within a broad band specified by RBI. Funds Management
This implies that the balance sheet
Funds management by the treasury involves
management should be a dynamic and
providing a balanced and well-diversified liability
proactive process. It requires continuous
base to fund the various assets in the balance
monitoring, analysis of market changes and
sheet of the bank. Quality of well-diversified
controls. Demand and supply forces have to be
assets and optimal return are very critical for
reckoned to determine the optimal balance sheet
any bank. Similarly diversified liabilities imply
size and its growth rate.
raising funds from a variety of sources, using a
Liquidity Management variety of instruments and for a variety of tenors.
Consumer deposits are often the most stable
Liquidity essentially means the ability to meet source of funds for a bank. At the other end of
all contractual obligations as and when they the spectrum are the funds obtained from the
arise, as well as the ability to satisfy funds inter-bank money market which are very short-
requirement to meet new business term in tenor and volatile with regard to rate and
opportunities. Liquidity planning involves an availability. Banks, therefore, have to decide on
analysis of all major cash flows that arise in the an optimal mix of funds from various sources,
bank as a result of asset and liability transactions to ensure that there is no excessive dependence
and projecting these cash flows over the future. on any single category. It is also advisable that
Liquidity analysis involves an analysis of the
the maturity profile of assets conforms broadly deployed in the form of statutory reserves,
to that of the liabilities, so that there is no large management of these reserves is a very
structural mismatch in the balance sheet that important factor in the overall profitability of the
can lead to liquidity problems. bank. Banks should ideally take into account both
liquidity as well as yield considerations. Even
Capital Adequacy though the longer maturity securities offer the
The treasury also has the responsibility for higher yields, they are also the most susceptible
setting targets for balance sheet size and key to fall in price due to changes in the yield curve.
ratios, in consultation with all business groups. On the other hand, short-dated securities have
Asset and liability levels need to be monitored low price risk but they also give lower returns.
and managed periodically to iron out any Therefore choice of an appropriate mix of
structural imbalances. The ALCO (Asset and maturity patterns in the SLR portfolio is a very
Liability Committee) should meet at regular important objective of the treasury manager.
intervals for this aspect of strategic business Along with this, the market risk of the portfolio
planning. The size of the balance sheet has now as well as its price sensitivity to interest rate
acquired great importance for a bank, in the light changes need to be quantified and periodically
of capital adequacy guidelines. A bank cannot monitored by means of analytical tools such as
afford to be driven just by volume goals which duration analysis.
aim at a certain percentage growth in credit and Customer Needs
deposits year after year. This is because balance
sheet growth will mean the requirement of With the growing liberalisation and the opening
additional capital in accordance with BIS up of the economy to international financial
guidelines. Therefore, the focus has now to shift markets and investors, the treasury
to the quality of assets, with return on assets departments of various banks would have to
being a key criterion for measuring the efficiency function in a multi-product, multi-currency
of deployment of funds. environment and cater to the multiple needs of
its customers. There will be pressure on the
Transfer Pricing treasury to offer various rupee based and cross-
Treasury has to ensure that the funds of the currency hedge products to their clients who
bank are deployed in the most appropriate have foreign currency exposures on their
manner without sacrificing either yield or liquidity. balance sheets. In fact, the recent changes in
This is done very effectively through the means the regulations would, over a period of time,
of a transfer pricing mechanism administered ensure the convergence of local currency and
by the treasury, which can provide correct signal foreign currency yield curves and enable the
to various business groups as to their future clients to manage their foreign currency assets
asset and liability strategy. Benchmarking of and liabilities in a more profitable manner through
rates provides a ready reference for business the use of foreign exchange derivatives both in
groups about the correct business strategy to the area of currency and interest rates. While
adopt given the balance sheet structure of the these products provide the client with the much
bank as well as the conditions prevailing in the desired interest savings, these are not without
money markets and the treasury’s forecast inherent risk. It is imperative for the banks to
about expected rate movements in the future. clearly define and explain these risks to their
The treasury is ideally placed for this function corporate clients and to help them effectively
since it has an idea of the bank’s overall funding manage these risks keeping in mind the dynamic
needs as well as direct access to the external nature of the foreign exchange markets. This
markets. brings us to an important aspect of treasury, i.e.,
risk management.
Reserve Management & Investments
Risk Management
In the Indian banking sector, almost half the asset
base of a bank consists of statutory reserves. One of the major responsibilities of a successful
Since such a large proportion of funds is treasury is to manage the risks arising out of

the financial transactions entered into by the management is inevitably acquiring a greater
treasury. The two most important risks which it degree of complexity and sophistication. The
has to manage are liquidity risk and price risk in success of any treasury thus depends a great
addition to counterparty risk and issuer risk. deal on strong risk management, independent
These risks should be evaluated by an back-office operations and first rate technology.
independent risk manager and the reports These become all the more important as
highlighting the limits, their usage and excesses, profitability and commercial viability become key
if any, should be generated by an independent criteria for assessing performance. And, it is
system, monitored and managed by technology these very fundamentals that make a successful
and operations. treasury that can sustain efficient allocation of
internal resources on one hand and accelerate
Conclusion the globalisation of our financial markets on the
In conclusion, it is worth reiterating that in today’s other.
fast changing market environment, treasury

PORTFOLIO MANAGEMENT
It is management of the clients’ fund in accordance with their needs based on

mutual agreement for a fee.
It helps to tap the funds of high net worth individuals who expect the banks to
multiply their wealth.
There are two types of portfolio managers - Discretionary and Non-discretionary.
Discretionary managers exercise their discretion in investment.
Portfolio Managers are to be registered with SEBI. As per SEBI directive, the
minimum fund per client is Rs.5 lakh.
Portfolio Management is one of the emerging Registration of Portfolio Managers

opportunities for tapping the business of High
Portfolio Managers are registered by SEBI as
Net worth Individuals (HNIs). Many banks in India
per the guidelines framed by it. SEBI has
are offering Portfolio Management services as
mandated certain capital requirements and other
a high-end product. The service besides offering
infrastructure availability for eligibility. For
opportunities for fee-based income helps to
example, the minimum capital requirement is
retain loyalty of high net worth customers
Rs.50 lakh. The applicant should be a body
through specialized services. No longer,
corporate with the Principal officer having
customers park their money in the bank for safe-
qualifications in finance, accounting or general
keeping. HNIs expect banks to increase their
management.
wealth and those banks, which have got the
professional expertise in this business, are Obligations and Responsibilities of Portfolio
highly sought after. In such a market, there is a Managers
need for the functionaries of our bank to develop
expertise in this area. The readers besides • The minimum amount required for Portfolio
reading books on Portfolio Management can Management per client as stipulated by SEBI
enroll in courses offered by professional is Rs.5 lakh.
institutions in India on Certified Portfolio
Managers (CPM). • There should be mutual agreement between
the client and the PM regarding their mutual
What is Portfolio Management rights and obligations.
It is the management of the funds of each client The agreement between the client and the
in accordance with the needs of the client. The Portfolio Managers should contain the following:
client entrusts certain sum of money to the
Portfolio Manager (PM) who manages the fund • The investment objectives and the services
in accordance with the mutual agreement to be provided
between the client and the PM.
• Areas of investment and restrictions, if any,
Kinds of Portfolio Managers imposed by the client with regard to the
investment in a particular company or
Portfolio Managers are of two types, namely, industry
Discretionary and Non-discretionary Portfolio
Managers. Discretionary PMs will independently • Type of instruments and proportion of
manage the funds in accordance with the needs exposure
of the client, while Non- discretionary PMs shall
manage the funds in accordance with the • Tenure of portfolio investments
directions of the client.

• Terms for early withdrawal of funds or General Responsibilities of Portfolio
securities by the clients Manager
• Attendant risks involved in the management Portfolio Managers have to discharge the
of the portfolio following responsibilities:
• Period of the contract and provision of early • The portfolio manager shall not accept from
termination, if any the client, funds or securities worth less than
Rs.5 lakh.
• Amount to be invested subject to the
restrictions provided under these regulations • The portfolio manager shall act in a fiduciary
capacity with regard to the client’s funds.
• Procedure of settling client’s account
including form of repayment on maturity or • The portfolio manager shall keep the funds
early termination of contract of all clients in a separate account to be
maintained by it in a Scheduled Commercial
• Fees payable to the portfolio manager Bank.
• The quantum and manner of fees payable • The portfolio manager shall transact in
by the client for each activity for which securities within the limitation placed by the
service is rendered by the portfolio manager client himself with regard to dealing in
directly or indirectly (where such service is securities under the provisions of the
outsourced) Reserve Bank of India Act, 1934 (2 of 1934);
• Custody of securities; • The portfolio manager shall not derive any
direct or indirect benefit out of the client’s
• In case of a discretionary portfolio manager funds or securities.
a condition that the liability of a client shall
not exceed his investment with the portfolio • The portfolio manager shall not borrow funds
manager; or securities on behalf of the client.
• The terms of accounts and audit and • The portfolio manager shall not lend
furnishing of the reports to the clients as per securities held on behalf of clients to a third
the provisions of these regulations; and person except as provided under these
regulations.
• Other terms of portfolio investment subject
to these regulations. • The portfolio manager shall ensure proper
and timely handling of complaints from his
clients and take appropriate action
immediately.

OPERATIONAL RISK IN BANKS
Operational Risk is the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
Some forms of Operational Risk: Control Risk, Process Risk, Legal Risk, Reputation
Risk.
Basel II has made banks to focus on Operational Risk due to its potential to cause
liquidation of banks
The Basel committee defines operational risk or an outsider is to be categorized under the
as the risk of loss resulting from inadequate or head operational risk. Basel committee has
failed internal processes, people and systems already advised the banks to make provision for
or from external events. Since the original Basel operational risk in the balance sheet from March
Accord on capital adequacy of 1988, the banking 2007.
world has undergone a series of important Types of Operational Risk
changes. For the purpose of operational risk,
there are two key elements. The first is the shift Operational risks can be broadly divided into
by some banks away from traditional banking operational strategic risk and operational failure
towards a more trading-oriented environment. risk. Strategic risk includes political, taxation,
This has meant that new types of operational regulation, government and competition. It
risks have emerged, and the likelihood of per tains to the prevailing environmental
extensive losses has increased. The second conditions. The latter arises out of the failure
major change is the increasing concentration of related to people, process and technology with
processing risk in some banks. This is caused operational failure risk. Operational risk can arise
partly by outsourcing some functions outside the before, during and after a transaction is
bank, and partly by economies of scale created processed. Risk exists before a potential
by new technology. These two key transaction is designed. A firm is exposed to
developments may mean that banks may be several risks during the processing of the
more vulnerable to sudden, extreme losses than transaction. First, the sales person may not fully
before. Several recent well-known cases, where disclose the various pros and cons of the
banks have experienced large operational transaction to the potential client. He may
losses - including Barings in 1995 and Sumitomo persuade a client to enter into an agreement
in 1996 - attest to this. which is totally inappropriate for him (client). This
is called people risk. Second the sales person
What is Operational Risk may depend on sophisticated models to price
the transaction, which creates what is commonly
When a loan is granted, there is reasonable called model risk. It is due to the inherent defect
probability that the borrower may fail to pay in in the model. Once a transaction is negotiated
time or may not pay at all. The loan may become and a ticket is written, several errors may happen
bad due to lack of proper assessment of the afterwards. For example, an error may result in
credit proposal also. In these two cases the risk delayed settlement giving rise to heavy penalty.
can be called credit risk. However, if the credit It may be mis-classified in the risk reports,
officer has exceeded his authority in sanctioning understating the exposure. In turn it may lead to
the loan or the credit officer is bribed to sanction some other sets of transaction which otherwise
the loan and subsequently the loan becomes would not have been performed. These are
bad, then the risk involved is called operational some of the examples of process risk. If any of
risk. A computer breakdown involving huge loss the systems are outsourced then the risk that
to the bank can be ascribed to operational risk. arises out of it is called external dependency risk.
Any financial loss that may occur to the bank
due to the fraudulent activity of its staff member

Broad Classification of Operational Risk weighted assets can have impact on the
business.
(a) Control Risk: Any unexpected loss which
arises due to lack of an appropriate control. (k) Business Capacity: If the existing IT
Is bifurcated into inherent risk and control intrastructure cannot support a growing
risk. Inherent risk is associated with the business, the risks of major system failure
specific type of business. For example, are high.
derivative trading process is understood by
only a few key people. (l) Project Risk : Project failure including delay
in execution is one of biggest causes of risk
(b) Process Risk: This is the risk that occurs
in most firms.
due to the business process being inefficient
causes unexpected losses. (m) Security: The firm's assets need to be
(c) Reputation Risk: This is the risk of an secured from both external and internal theft.
unexpected loss in share price or revenue (n) Supplier Management Risk: If the business
due to the impact of the reputation of the firm. is exposed to the performance of third
(d) Human Resources Risk: The organization parties, then the firm is exposed to this type
has a major role in selection of the right type of risk.
of people, developing them and retaining
(o) Natural Catastrophe Risk: Past history is
them. The hiring procedure and the
analyzed to assess such type of risk.
termination procedure should be foolproof to
Operational risk manager should see
ensure that the firm does not face any
whether the firm is likely to be affected by
unexpected loss.
flood, earthquake or any other natural
(e) Legal Risk: The risk of suffering legal claims disaster.
due to product liability or employee action.
(p) Man-made Catastrophe Risks: If the firm
The risk that a legal opinion on a matter turns
is situated near defence installation, prison,
out to be incorrect in a court of law.
airport or nuclear plant, then this type of risk
(f) Takeover Risk : It is highly strategic but can is expected. It also includes possible terrorist
be controlled by making it uneconomical for threat to such types of establishments.
a predator to take over the firm. This could
(q) Technology Issues in Banks: Due to
be done by attaching the golden parachute
increasing dependency on technology, the
clause to the director's contract. It means
chances of IT related operational risks have
that the severance payment to the director
increased. The type of controls required in a
should be at a high price, which makes the
computerized environment is different from
acquirer to think twice before taking the
that of the manual system.
plunge.
Conclusion
(g) Marketing Risk: The product may fail due
to wrong marketing strategy. The benefit Operational risk is an old problem with a curcial
claimed about the product is misrepresented new significance. Globalization, increasing
in the marketing material. reliance on technology, use of exotic financial
products and a more stringent regulatory
(h) Technology Risk: The risk that may arise
environment mean that the opportunities for - and
due to various new developments that may
consequences of - operational risk have
take place in the technology front by making
proliferated. The future will be determined by the
the older technology redundant.
extent to which banks allocate capital to market,
(i) Tax Changes: If tax changes are made, credit and business strategic risks. Now there
particularly with retrospective effect, they is increasing focus on operational risk aspect
may make the business unprofitable. as this may cause liquidation of some banks if
timely action is not taken.
(j) Regulatory Changes: A change in
percentage of charge in terms of risk

ESSENTIALS OF LIQUIDITY RISK MANAGEMENT
Liquidity Risk is the risk of loss resulting from lack of sufficient funds to meet immediate
financial need or obligation.
Liquidity Risk may cause inability to raise funds at normal cost.
Shortage of funds in the market, difficulty to sell the assets are the other forms of
liquidity risk.
Banks should effectively manage liquidity gaps and develop contingency funding.
Best practices in liquidity management would include strategic direction,
measurement and monitoring.
Liquidity risk refers to multiple dimensions such 'gaps' or liquidity mismatches, capture the
as (a) inability to raise funds at normal cost, (b) liquidity position of a bank.
market liquidity risk, and (c) asset liquidity risk.
The Market liquidity risk arises out of illiquidity Ten Essentials of Liquidity Risk Management
in the market while asset liquidity risk is caused
Liquidity risk, resulting from size and maturity
by inability to sell the asset immediately. Funding
mismatches of assets and liabilities, makes
risk depends on how risky the market perceives
banks vulnerable to market liquidity risk. Liquid
the issuer and its funding policy. The cost of
assets protect banks from market tensions
funding is a critical profitability driver. The cost
because they are an alternative source of funds
of the funds depends on the bank's credit
for facing the near-term obligations. Controlling
standing. In addition, the rating drives the ability
liquidity risk implies spreading over time
to do business with other banks/financial
amounts of funding, avoiding unexpected market
institutions and to attract investors. The liquidity
funding and maintaining a cushion of liquid short-
risk of the market relates to liquidity crunches
term assets, so that selling them provides
because of lack of volume. In such a scenario,
liquidity without incurring losses. The present
the prices become highly volatile, sometimes
day market scenario necessitates that Indian
embedding high discounts from par, when
banks keep in view the following 10 essentials
counter parties are unwilling to trade. Market
of liquidity risk management:
liquidity risk materializes as an impaired ability
to raise money at a reasonable cost. Asset 1. Liquidity gaps generate funding
liquidity risk results from the lack of liquidity requirements, or investments of excess
related to the nature of assets rather than to the funds, in the future. Such financial
market liquidity. In fluctuating market liquidity, transactions occur in the future as interest
holding a pool of liquid assets acts as a cushion rates not yet known, unless hedging them
to meet short-term obligations. today. Liquidity gaps generate interest rate
risk because of the uncertainty in interest
When a bank gets into trouble, massive
revenues or costs generated by these
withdrawals of funds by depositors and closing
transactions.
of credit-lines by institutions results in brutal
liquidity crisis, ending up in bankruptcy of bank. 2. Cash matching is a basic concept of liquidity
risk, implying thereby that the time profiles
There are challenges to liquidity risk
of amortization of assets and liabilities are
measurement. The practices rely on empirical
identical. The nature of interest applicable
and continuous observations of market liquidity.
and maturities also match, i.e., fixed rates
Liquidity risk models appear too theoretical to
with fixed rates and floating rates revised
permit instrumental applications. The time profiles
periodically with floating rates revised at the
of projected uses and sources of funds, and their

same dates using the same reference rate. of off-balance sheet items needs to be
With cash matching, liquidity gaps are equal statistically analysed. Incorporating this into
to zero. calculations of future funding requirements
enhances the accuracy of funding
In general, deposits do not match loans, as
projections.
these results from customers' behaviour.
However, it is feasible to structure the 9. Selection of funding source must integrate
financial debt in order to replicate the assets' with the bank's interest rate sensitivity, risk
time profile. appetite, profit planning, diversification and
capital management objectives.
3. The cost of liquidity for banks often refers to
another concept: the cost of maintaining the 10. A rating services view on the bank's liquidity
liquidity ratio at a minimum level. The liquidity position needs to be taken periodically and
ratio is the ratio of short-term assets to short- deficiencies corrected in early stages.
term liabilities, and it should be above one.
Best Practices in Liquidity Management
When a bank initiates a set of transactions
such as borrowing short and lending long, The Indian banks vary widely in their funding
needs and their appetite for risk. The following
the liquidity ratio deteriorates because the
strategies are essential for the banks to manage
short-term liabilities increase without a
matching increase in short-term assets. their liquidity risk effectively:
4. Excessive funding concentrations severely (a) Strategic Direction: The bank management
reduce the bank's ability to survive a liquidity must articulate the overall strategic direction
crisis. Banks need to take advantage of of the bank's funding strategy by determining
good economic times to diversify their what mix of assets and liabilities will be
funding requirements. utilized to maintain liquidity. This strategy
should address the inherent liquidity risks
5. Banks need to develop a contingency funding which are generated by the bank's core
plan, adequacy of projected funding sources businesses.
and development of common contingency
(b) Integration: The bank's asset and liability
scenarios.
management policy should clearly define the
6. Banks need to progress towards stress role of liquid assets along with setting clear
testing their funding plans, using various targets and limits. Liquidity management
interest rate shocks and adverse economic should be integrated into the day-to-day
and competitive scenarios to ascertain their decision-making process of core business-
impact on both the funding portfolio and line managers.
market access.
(c) Measurement Systems: The bank
7. Communication lines between treasury management needs a set of metrics with
functioning and operational units need to be position limits and benchmarks to quickly
significantly enhanced. Reporting systems ascertain the bank's true liquidity position,
need to be more effective. ascertain trends as they develop and provide
the basis for projecting possible scenarios
ALCO (Asset - Liability Committee) of the
rapidly and accurately. The models may be
banks must have appropriate risk
based on:
management policies and procedures, active
MIS repor ting, limits and oversight Cash capital: This model has a general limit,
programmes. which is frequently expressed in terms of a
management set limit on the percentage of
8. A historical funding pattern of various types
the discounted value of the bank's asets to

total short-term funding; this general limit is assuring management that naturally
then broken down more finely with sub-limits occurring contingent liabilities will not strain
set on different types of short-term funding. the funding process.
Liquidity barometers: This model calculates (g) Funds Management: The funding sources
the length of time a bank can survive by could be deposits, capital and purchased
liquidating its balance sheet using just two funds. The various factors that must be
assumptions - that the bank continues to considered in funding source selection
operate under normal operating conditions include integration with the bank's interest
or that the bank has suffered a complete loss rate sensitivity, risk appetite, profit planning,
of access to the money market. diversification and capital management
objectives.
(d) Monitoring: Banks must be able to track and
evaluate their current and anticipated liquidity (h) Contingency Liquidity Plan Preparation:
position and capacity. A monitoring system Banks should have a formal contingency
must be developed, consisting of guidelines, plan of policies and procedures to use as a
limits, and trend development, that enables blueprint in the event the bank is unable to
management to monitor and confirm that fund some or all of its activities in a timely
compliance is within the approved funding manner and at a reasonable cost.
targets and if not, to pinpoint the variances.
Conclusion
(e) Balance Sheet Evaluation: Both the bank's
balance sheet and market access trends The Indian banking system has to respond to
should be periodically evaluated for the new needs of the liberalized financial
emerging patterns that could adversely affect environment. Each bank will have to graduate
liquidity, and as the banks are becoming to the complexities of changing risk profile in
banking business. A comprehensive
more reliant on credit sensitive funding, it is
contingency funding plan can provide a useful
vital that the bank be perceived by third party
funding sources as being both profitable and framework for meeting both temporary and long-
managed in a safe and sound manner. range liquidity disruptions. A good plan should
emphasize a reliable but flexible administrative
(f) Off-Balance Sheet Management Practices: structure, realistic action plans, ongoing
It is considered a best practice to periodically communications at all levels, and a set of metrics
supplement with statistical analysis of backed by adequate management information
historical funding patterns of various types systems. Availability of timely MIS reports for
of off-balance sheet items. It enhances the rapid decision making is inevitable for periodic
accuracy of future funding projections - testing of contingency plans.

VALUE AT RISK (VaR)
The assets of the bank are subjected to expected, unexpected and stress loss. Banks
cover expected loss through hedging while stress loss rarely occurs.
VaR is the measure (amount) of unexpected loss by the bank.
Normally VaR is measured for a specific time duration at a given level of
confidence
VaR ( 99%, 1 Week)= Rs.1,00,000 implies that the unexpected loss will be a
maximum of Rs.1 lakh in a duration of 1 week; and the chance of it exceeding
Rs.1 lac can happen only in 1% of the occasion (100-99)
Some methods of measurement: Correlation Aggregation, Historical Simulation
and Monte Carlo Simulation
The phrase, value at risk, is of fairly recent origin accumulated over one week, that is not
and the science behind it owes largely to the exceeded in more than one percent of all time.
excellent developments in IT. When several For measuring VaR one relies on a model of
assets of fluctuating value, such as securities random changes in the prices of underlying
shares, financial derivatives, loan portfolios, instruments - interest rate changes, changes in
foreign currency positions, and so on, are dealt foreign exchange rates, etc. - and a model for
with in an organisation, an awareness of the computing sensitivity of derivatives prices
risks of the basket of assets is relevant for relative to the prices of underlying instruments.
decision-making as well as in correcting any In all these, one has to remember that ‘A VaR
over-exposure. measure is merely a benchmark for relative
judgments, such as the risk of one portfolio
What is Value at Risk?
relative to another, etc. Even if accurate,
On the myriad balance-sheet risks that banks comparisons such as these are specific to a
face today credit and interest rate risks mostly time horizon and the confidence level with which
account for their business risks. These and other VaR is chosen.
risks expose a bank’s business to certain
It is usually known as potential loss amount or
potential losses. These losses are of three types
the estimated potential for loss-making for a set
viz., expected, unexpected and stress loss. The
of assets in an organisation. It is the measure
expected loss is always insurable by the myriad
of risk to be applied to all the products/assets in
hedges and therefore, forms part of banks’ cost
the portfolio. The distribution of profits and losses
of operation. There is the unexpected loss under
of a portfolio, resulting from fluctuation in a
adverse conditions which cannot be predicted.
market for a day is calculated and the value at
It is this unexpected loss that is defined as value
risk is the expression of the worst loss at a
at risk (VaR). Then there is also a third type of
confidence level of percentage (usually above
loss the bank may be prepared to face under
95 per cent) as may be decided in an
extreme conditions which occur rarely but
organisation. It is normally computed using a
possibly. It is called stress loss.
global database of Market Factor Volatility and
Value at Risk Correlations or from any other reliable source.
Value at risk technically is defined as the “Loss The first is the identification of market factor,
amount, accumulated over a certain period that which is any price or rate used directly to value
is not exceeded in more than a certain financial instrument. Market factors include
percentage of all time”. For example, ‘VaR (99 interest and foreign exchange rates fixed income
percent, 1 week) is equal to the loss amount,

bonds, equity and commodity prices, and all their Easy Historical Simulation
implied volatility.
This technique applies the historical price
Against one unit of change for each of these movements directly. Depending on the products
market factors, as relevant to the total portfolio and the system in vogue, 100 or more trading
of the individual organisation accounting for risk days’ data is used. In the historical simulation
at value, factor sensitivity limits are also fixed approach, the hypothetical profit and loss
depending on the policy of risk-bearing capacity portfolio of current positions is estimated for
assessed by a conscious decision making every day in the data sample. The correlation
process. As the next step, the factor sensitivity among the exposures and the volatility are
is calculated for the positions taken for various implicit in the historical price movements. From
assets in the portfolio and the defeasance factor the P&L values series so arrived at, the biggest
worked out (again, based on historical volatility). gain and the worst loss limits are determined to
The value at risk is obtained by multiplying factor fix values for the desired percentage in a day in
sensitivity by the defeasance factor. the historical sample of 100 days. While it is
normally 100 days for simulations, there are
VaR is evidently a probability of occurrence always interesting debates and much depends
expressed mathematically and quantified in on the particular product and the market.
rupees for the total portfolio of trading assets at
Monte-Carlo Simulation
a given time. It will vary in magnitude depending
on the methodology. This is the most popular method. It is used for
blind-landing and hence has applicability even
Probability Methods in the case of rocket firing. The advantage of
There are three broad approaches asset using this technique is that the distribution is not
managers use. assumed to be following a set pattern (such as
the bell-shaped normal distribution or the pattern
Correlated aggregation: Also known as the of past 100 days), as in the previous two cases.
variance and covariance method, it provides a
Monto-Carlo can deal with any pattern of market
first hand estimation where there has been no
movements be they humps or kinks or tails.
previous study of estimate of VaR. This is
Hence its higher efficacy. Once the particular
effective when there is a ‘normal' distribution
distribution is identified, the simulation can take
function; and applies the standard deviation
care of the scientific treatment. The method is
estimates. But even definite price-based non-
flexible and has the best of the techniques
option products too do not have normal
narrated earlier.
distribution functions thus limiting the
technique’s applicability despite its simplicity. For instance, Monte-Carlo simulation does not
have the problems of covariance analysis for
The observed behaviour of market variables options, as it deviates from the co-variance
normally begin in the following patterns: approach and tends towards the historical
Greater frequency of small changes occurring approach when it comes to question of patterns.
within a standard deviation of the mean: Management Tool
Lower frequency of changes that are quite Management accounting is a tool and VaR is a
manifest between the two standard deviations sharper one in the kit. It can be a guide for
of the mean: decision-making and provide a figurative insight
into risk. Nonetheless, taking decisions based
Greater frequency of changes that measure on VaR calculations would be similar to getting
more than the two standard deviations from the into a pond of water on knowing the average
mean that elude road-rolling and averaging depth. A constant vigil on market movements
assumptions in respect of market movements. and a good grasp of market sentiment is vital
This is also known as the ‘fat tail’ phenomenon for efficient decision-making in financial
in technical analysis. derivatives and other assets and portfolios.

ECONOMY & FINANCE
POLICIES AND ACTS

OVERHEATING OF THE ECONOMY
An overheating economy is one which is growing rapidly and its productive capacity
cannot keep up with the resulting demand pressures.
The emergence of inflationary pressures is usually seen as the first indication of
overheating.
An overheating economy is one which is growing domestic inflation is now increasingly influenced
rapidly and its productive capacity cannot keep by global demand-supply imbalances in addition
up with the resulting demand pressures. The to domestic demand-supply imbalances.
emergence of inflationary pressures is usually
These concepts and issues are further
seen as the first indication of overheating. In this
complicated for a developing economy like India
context, policy makers keenly analyse the
on account of the existence of large
behaviour of the output gap, i.e., the excess of
unemployment/underemployment of resources
current output over potential or full capacity
and the absence of a clear assessment of
output. If the monetary authority senses that
potential output. The concept of overheating is,
there is unutilized capacity, the increase in
therefore, less of a guide for monetary policy in
demand generated by growth can be
countries such as India than in advanced
accommodated without inflationary pressures
economies. Furthermore, it is difficult to pass a
and, therefore, the need to act against
clear judgement of potential output in an
overheating may not arise. On the other hand, if
economy that is undergoing structural
demand runs ahead of full capacity, there will
transformation.
be a case for tightening of monetary policy with
a view to slowing down the economy and Monetary management has to also look at
heading off overheating. imbalances that could be transitional. The
challenge before the central bank is to manage
Although the concept of overheating is
the transition to a higher growth path, in the
straightforward, its implementation has a
presence of some structural rigidities, in such a
number of problems. Globally, there is some
way that actual inflation and inflation expectations
evidence of a blurring of the relationship between
are contained and do not become mutually
output gaps and inflation. Moreover, the size and
reinforcing. If supply responses are less than
direction of an economy’s potential output is
elastic, they could show up as excess demand,
becoming increasingly difficult to diagnose. In
causing inflationary pressures and raising
particular, globalisation has expanded the supply
inflation expectations. Against this backdrop,
potential of various economies, especially
managing structural change while keeping
emerging economies. In the recent period, it
inflation low without dampening the growth
appears that the current positive supply shock
momentum would be the quintessential
has made the concept of potential output fuzzier
challenge to monetary policy in India in the period
than in the past. In view of the growing
ahead.
globalisation, there is some evidence that

RUPEE APPRECIATION
Rupee has appreciated steadily for the first time

Traditionally an appreciating currency is considered to reflect soundness of the economy
This has both positive and negative implications for different sectors.
The rupee has appreciated 13 per cent against Even if exports grow 20% this year, the
the dollar since January, rising 10 per cent since appreciation of the currency is expected to result
April 2007. The appreciation has been consistent in Rs.53,000 crore or $13 billion loss. Information
during last one year. The rise further continues Technology and exporters of meat, spices and
with the present Rupee level at Rs 39/- vis- a- textiles followed by leather and gems & jewellery
vis. US Dollar. are worst affected. However, the concerns that
appreciating rupee could impact exports and
eventually the foreign exchange reserves does
not hold much ground in today’s context, as our
economies globalised to a large extent and
foreign investment is flowing in. These fears are
based on a deficit mindset of the 1960s when
the foreign exchange reserves became a major
concern leading to such slogans as ‘Export or
Perish’.
Rupee appreciation has rendered 11,000 people
employed in textiles and garment industry
jobless during March-June 2007. Impact of
Rupee appreciation on employment in IT and
Negative Impact BPO companies is visible in the form of their
various measures to cut costs viz., increase
Exports and imports together account for around
the working hours of their employees. There
35 per cent of GDP and they have a multiplier
are attempts to avoid immediate layoff and fresh
impact on the economy. Rupee movement
recruitments have been stopped.
impact on FDI (around 2 per cent of GDP) and
FII (around 2 per cent) and on the real economy Consistent dollar remittances for investment into
is mainly felt through the effect on interest rates. the Indian stock markets by FIIs is one of the
Apart from agriculture, the entire economy is main reasons for increase in dollar supply, and
sensitive to the exchange rate, some sectors this supply has not been sucked fully by imports
more and others less. About 45-50 per cent of demand or RBI, hence the Rupee appreciation.
the economy is directly hit by appreciation. The However FIIs who are pouring money into Indian
situation is more harmful for exporters as 73% financial markets are also facing the brunt of
of Indian exporters do billing in US Dollar only. If rupee appreciation. Take the case of a FII which
for an order of Rs.100, an exporter has availed entered the Indian financial markets at a dollar
a loan Rs.90 from a bank, with the rupee rate of 44. The real return, if it were to liquidate
appreciating 13 per cent, the rupee receivable its investments today, is much lower compared
against the order is Rs.87. According to an to a good return in Rupee terms. For instance,
estimate 1% change in rupee will hit the a FII which invested in Indian assets say $1000
operating margins of IT companies in FY 08 by US at a rate of Rs.43.50, assuming that after a
30-50 basis points. year his assets have appreciated by 10% to
Rs.47,850.00, but at the same time the dollar

has depreciated to Rs 40.50; now the value of the country had an external debt of $142.65 billion
his assets would be Rs. 44,850.00, instead of dollar so a 10% appreciation in dollar means the
Rs.47,850.00, so the net gain to the investor is external debt is reduced to $128.38 billion.
a humble 3.10% over a year.
Generally the appreciating Rupee is considered
Positive Impact to be a reflection of strong fundamentals of Indian
economy, higher returns and expectations.
Impact of appreciating Rupee on imports is However, Rupee has depreciated against Euro
exactly reverse, i.e. good. As per an estimate and GBP, so it is not be prudent to say that the
for every 1 Rupee appreciation the input cost of rise in rupee is purely based on growth in
crude dips by 2%. economy, it is also because of short-term
The rising rupee has helped the government to recession in US.
curb inflation, as the input cost of imported crude But important issue is how to manage an
and electronic items lowered. Rising Rupee appreciating rupee rather than stopping or
along with unchanged domestic petroleum deliberately depreciating it.The way our
prices since February has contributed to economy is growing we can expect substantial
bringing down inflation to a five-year low. FII and FDI flows along with trade and other
Another beneficiary of rising rupee is the invisible receipts. It may not be easy for the RBI
borrowers who have borrowed from international to continue with the practice of buying large
banks. The companies like Tata steel, Mcdowell, amounts of dollars as that would only
to name a few, for their take-over plans of Corus exacerbate inflationary pressures.
and Whyte & Mackay. As on December 2006

INCLUSIVE GROWTH
Inclusive growth is a term wider than financial inclusion.

Financial exclusion signifies the lack of access by certain segments of society to
formal banking system.
The consequences of financial exclusion are large-scale unemployment, naxalism
and terrorism.
Financial input is not the sole vector for growth. It must have linkages with other real
sectors for inclusive growth.
Financial exclusion signifies the lack of access costs are high, security situation prevailing in
by certain segments of society to appropriate, some parts of rural India is adverse, there is lack
low-cost, fair and safe financial products and of adequate collateral for loans and there are
services from mainstream providers. In India, human resources constraints in terms of lack
48% of Indian households (62% in rural India) of proper orientation. The demand side
do not avail financial services from the formal constraints are lack of awareness of banking
sector. The data is skewed across the states – facilities, high transaction cost at client level due
ranging from 25% in South India to 75% in North to expenses such as travel costs, wage losses,
East India. Financial exclusion is a incidental expenses, non-availability of ideal
comprehensive yardstick for measuring the products, hassles related to documentation and
extent to which sections of the society are easy availability of timely and doorstep services
outside the mainstream and excluded from from informal sources.
participation in the country’s economy. While 10-
15% households even in USA, 8-10% in UK, and The consequences of financial exclusion are
7-10% in France do not have access to bank large-scale unemployment, increase in
accounts, the extent of exclusion is obviously incidence of Naxalism, terrorist activities and
higher in India. The urban perception is that we social tension. The system encourages
have a plethora of banks and branches. After moneylenders and informal lending sources to
give credit at exorbitant rates, leading to a debt
nationalisation of banks in 1969, the numbers
trap and suicides committed by the poor and
of bank branches have increased 9 times from
8,187 in 1969 to 71,781 in 2007. However, the the disadvantaged.
population per bank branch is still around 15,000. It was for the above reasons that RBI flagged
Although, the literacy rate is 65%, out of every the issue of financial inclusion in its Annual
100 persons only 33 have savings bank Policy Statement 2005-06. RBI had suggested
accounts and only 34 have demand deposit some ways and means for financial inclusion.
accounts. Only 1.5 crore SME units have It has advised banks to make available a basic
received financial assistance from the formal banking “no frills” account either with zero
sector. balance or with very low minimum balance as
well as charges that would make such accounts
According to the report of the Internal Group set
up by RBI, there are both supply side and accessible to vast sections of the population.
demand side reasons for financial exclusion. KYC procedure for opening accounts has been
Supply side perceptions are that the poor are simplified for those persons who intend to keep
‘unbankable’. Deposit and loan tickets are small, balances not exceeding Rs.50,000/- in all their
distances are too long for servicing and accounts. RBI has also advised banks to
introduce General Credit Card in rural and semi-
supporting the small accounts, transaction

urban centres. These cards operate like ordinary commercial banks are not bullish who look to
credit cards and there is no linkage to the only large loans for their portfolio. MFI employees
purpose and end-use of funds. are groomed to work with the poor at close
proximity and to help them in forming and
Though the above-mentioned measures can
promoting SHGs. Ms. Benavides explained that
encourage the banking habit and increase the
a partnership of MFIs with commercial banks
number of bank accounts and credit cards, the
can translate into a profitable venture for both.
transformation at the ‘bottom of the pyramid’ can
WWB is working with various commercial
be brought about only through micro-credit. The
banks. They have partnered a commercial bank
concept of micro credit was revolutionised by
in Columbia and adapted their entire product
Grameen Bank in Bangladesh. Grameen Bank
range for micro financing to cross sell the
provides credit to the poorest of the poor in rural
products to the poor and the SHGs. Similarly in
Bangladesh, without any collateral. At Grameen
Mexico, WWB has partnered a Mexican
Bank, credit is a cost effective weapon to fight
commercial bank in developing products and
poverty and it serves as a catalyst in the overall
financing SMEs in a big way.
development of the socio-economic conditions
of the poor who had been kept outside the Dr Y.V. Reddy, Governor, RBI recently
banking orbit on the ground that they are poor mentioned that in the coming days financial
and hence not bankable. Professor Muhammad inclusion would be a business need for Indian
Yunus, the founder of ‘Grameen Bank’ and its banks. Lately, deposit mobilisation is the biggest
Managing Director, reasoned that if financial challenge to Indian commercial banks and
resources can be made available to poor people deposits from only small depositors are stable.
on terms and conditions that are appropriate and Furthermore, with large corporates going in for
reasonable, “these millions of small people with IPOs and external commercial borrowings and
their millions of small pursuits can add up to the retail sector slowing down, banks need to
create the biggest development wonder”. For his target SMEs and the urban and rural poor for
pioneering work, Prof. Yunus was honoured with lending. Experts estimate that the combined
the Noble Peace Prize in 2006. In India, many appetite of the urban and rural poor for credit
commercial banks are lending directly to the stands at Rs. 2,00,000 crore, against which a
poor and the SHGs. RBI has recently issued meagre sum of Rs.10,000 crore is flowing
guidelines to banks enabling them to use the through the banking system. Critics contend that
services of Non–Government Organizations the problem with the formal banking system has
(NGOs)/Self Help Groups (SHGs) and Micro been its inability to reach out to the really poor
Finance Institutions (MFIs) as intermediaries in and needy and making the right amount of credit
providing financial and banking services through available to them. MFIs are emerging as lead
the use of the Business Facilitator. MFIs provide business generators for the banks; but they are
micro finance services to the rural poor through largely dependent on banks with a large deposit
SHGs. They organize SHGs, bring people base for funds. Venture capitalists have evinced
together, explain the concept to them, coordinate interest with SKS, an Andhra- based MFI, raising
the group, help them to maintain accounts and $ 11.5 million from Sequoia Capital and other
link them to the banks. During Bankers’ venture funds. But such instances are still the
Conference 2006, Ms Mercedes Benavides, exception. According to Vikram Akula, founder
Manager, Women’s World Bank (WWB) of SKS, “Most of the MFIs will become front ends
explained the need for intermediation by MFI’s. for banks originating and servicing loans, like
WWB is basically a MFI with a network of 23 DSAs, with banks funding the loans and keeping
affiliates, many of which are working in them on their balance sheets”. The partnership
partnership with notable commercial banks. can be a win-win proposition for both the MFIs
She explained that the average loan size in micro and commercial banks.
credit is USD $500 - $1000 for which large

A common criticism against MFIs is that they In India 27.09% of the rural population and
charge exorbitant interest rates, as high as 25%. 23.62% of the urban population live below the
However, Shri Vijay Mahajan, CEO, Basix, a poverty line. MFIs and inclusive growth could be
leading MFI, explains, “The cost of funds for the answer to our 60-year-old ‘Garibi Hatao’
MFIs is 11% and bad debts is 1%. The delivery slogan. A word of caution, financial input is not
cost is 10% to 11% as the average loan of an the sole vector for growth. It must have linkages
MFI is Rs.6000/- and is repaid in upto 50 weekly with other real sectors, viz., inputs (raw
instalments which are collected by the MFI staff material), infrastructure (electricity, roads,
from the door step or work place of the borrower. irrigation, transport), skilled and enterprising
Therefore, the operating cost as a percentage human resources and market. Fifty six million
of small amounts of each instalment is high.” loans were disbursed under the IRDP scheme,
Thus the profit for an MFI is only 1-2 % which is of which 95% turned bad due to lack of linkages
necessary to maintain capital adequacy with with other sectors. Khadi industry is unviable in
RBI. The Union Finance Minister, Shri P. spite of huge subsidies because there is no ready
Chidambaram, mentioned during the BANCON market for it. Vidarbha farmers are not able to
2006 that interest rate on lending through MFIs break even due to the small size of their
would be in the range of 20-25%. Even Ms. agricultural land holding that does not facilitate
Benavides mentioned that internationally the modern farming. Financial inclusion is just a
cost of lending through MFI is 20-25%. The subset of economic inclusion. For financial
average rate charged by money lenders is 36%, inclusion to translate into inclusive growth
i.e. one-and-a-half time higher than MFIs, and economic inclusion is a necessary pre-condition.
moneylenders do not accept repayment in
instalments.

ECONOMIC SURVEY 2006-07
GDP to grow 9.2%, touch Rs 28,44,000 crore in 2006-07

Inflation at 6.7% on February 3 a matter of concern
Govt’s top priority: Growth without high inflation
Risks: volatile oil prices, delays in WTO talks
Risks: Global macroeconomic imbalances
Priorities: Making growth inclusive
Priorities: Fiscal prudence, high investment
Priorities: Improving govt intervention in critical areas such as education and health
Priorities: Subsidies to be targeted
Agriculture to grow 2.7%, share in GDP dips to 18.5%
Industry to grow at 10%, share in GDP up to 26.4%
Services to grow at 11.2%, share in GDP rises to 55.1%
10th plan average GDP growth at 7.6% vs targeted 8%
Average inflation in 52 weeks ending Feb 3 at 5%
Food items, wheat, pulses, sugar driving inflation
In industry, mining, gas and power issues of concern
Current account deficit at $11.7 billion in H-1 of FY07
Exports up 36.3% to $89.5 bn in April-Dec 2006-07
Capital flows strong, FDI up 98.4% in Apr-Sept 2006-07
FIIs sellers in H-1, but likely to be positive in H-2
Core sector growth 8.3% vs 5.5% in Apr-Dec 2006-07
Infrastructure to require $320 bn in 11th plan
Public sector to fund 60 per cent of infrastructure
Fiscal deficit budgeted at 3.8 pc in 2006-07
Tax-GDP ratio rises to 11.2% FY07 vs 10.3% in FY06
Personal income tax mop up rose 30.3% in Apr-Dec FY07
Share of direct taxes in total revenues grows to 47.6%
Stock markets buoyant, market cap rises to 91% of GDP
Rs 161,769 crore raised from IPOs in 2006
Mutual funds raise Rs 104,950 cr in 2006, up four-fold
Corporate tax collections up 55.2% in Apr-Dec FY07
Tourism earnings cross $6.6 bn in 2006
Gross domestic savings rate up at 32.4% in 2005-06
Gross domestic investment rate at 33.8% in 2005-06
Gross fixed capital formation rises to 28.1% in 2005-06
Savings of private corporates rise sharply at 8.1%
High savings rate to continue
Saving-investment gap turns negative at 1.3%
Govt to miss 2007 target of elementary education to all
Employment rate grows to 2.5% in 1999-2005
Decline in organised sector jobs
Unemployment rate up to 3.1% in 2004-05
Poverty down at 22% in 2004-05 vs 26.1% in 1999-2000

Macroeconomic Overview and 10.9% in 2005-06. The momentum has
been maintained with a growth of 11.1% in
Indian economy, Asia’s fourth largest, is
2006-07.
estimated to grow at 9.2% in FY’07, its
fastest pace in 18 years; this follows 9.0% After an annual average of 3.0% in the first
in FY’06. five years of the new millennium starting
2001-02, growth of agriculture at only 2.7%
Entrenchment of the higher growth trends,
in 2006-07, on a base of 6% growth in the
particularly in manufacturing, has boosted
previous year, is a cause of concern. Low
sentiments, both within the country and
investment, imbalance in fertilizer use, low
abroad.
seeds replacement rate, a distorted
Overall macroeconomic fundamentals are incentive system and low postharvest value
robust, particularly with tangible progress addition continued to be a drag on the
towards fiscal consolidation and a strong sector’s performance.
balance of payments position. With an
With more than half the population directly
upsurge in investment, the outlook is
depending on this sector, low agricultural
distinctly upbeat.
growth has serious implications for the
Services contributed as much as 68.6% of ‘inclusiveness’ of growth.
the overall average growth in GDP in the
Inflation
last five years between 2002-03 and 2006-
07. Practically, the entire residual With a shortfall in domestic production vis-
contribution came from industry. As a à-vis domestic demand and hardening of
result, in 2006-07, while the share of international prices, prices of primary
agriculture in GDP declined to 18.5%, the commodities, mainly food, have been on the
share of industry and services improved to rise in 2006-07 so far. Wheat, pulses, edible
26.4% and 55.1%, respectively. oils, fruits and vegetables, and condiments
and spices have been the major contributors
A notable feature of the current growth
to the higher inflation rate of primary articles.
phase is the sharp rise in the rate of
investment in the economy. The rate of Inflation: As much as 39.4% of the overall
Gross Domestic Capital Formation (GDCF) inflation in WPI on February 3, 2007 came
for 2005-06 was 33.8% (31.5 in 2004-05). from the primary group of commodities.
This sharp increase in the investment rate Including manufactured products such as
has sustained the industrial performance sugar and edible oils, food articles
and reinforces the outlook for growth. contributed as much as 27.2% to overall
inflation of 6.7% on February 3, 2007.
Services sector growth has continued to be
broad-based. Among the three sub-sectors Starting with a rate of 3.98%, the inflation
of services, ‘trade, hotels, transport and rate in 2006-07 has been on a general
communication services’ has continued to upward trend with intermittent decreases.
boost the sector by growing at double-digit However, average inflation in the 52 weeks
rates for the fourth successive year. ending on February 3, 2007 remained at 5%.
Impressive progress in information A spurt in inflation like in the current year
technology (IT) and IT-enabled services, has been observed in the recent past in
both rail and road traffic, and fast addition 1997-98, 2000-01, 2003-04 and 2004-05.
to existing stock of telephone connections,
Money and Banking Sector
particularly mobiles, played a key role in
such growth. Inflation, with its roots in supply-side factors,
was accompanied by buoyant growth of
Growth in financial services (comprising
money and credit in 2005-06 and 2006-07
banking, insurance, real estate and
so far. While GDP growth accelerated from
business services), after dipping to 5.6% in
7.5 per cent to 9.0 per cent between 2004-
2003-04 bounced back to 8.7% in 2004-05
05 and 2005-06, the corresponding

acceleration in growth of broad money (M3) 2006, the RBI announced more measures
was from 12.3% to 17.0%. Year-on-year, M3 to stem inflationary expectations and also
grew by 21.1% on January 19, 2007. to contain the credit off-take at the desired
Industrial resurgence and upswing in growth rate of 20%.
investment was reflected in, and sustained Since deposits are growing at a lower rate
by, growth of gross bank credit (as per data than credit, the higher repo rate signaled to
covering 90% of credit by scheduled the banks the higher price of
commercial banks), for example, to industry accommodation they would have to pay in
(medium and large) at 31.6% and for case of credit overextension.
housing loans at 38% in 2005-06. It was also
External Sector
observed in year-on-year growth of gross
bank credit at 32.0% in September 2006, In the balance of payments, in 2005- 06 and
albeit marginally down from 37.1% in 2005- in the first half of 2006-07, capital flows
06. more than made up for the current account
deficits of US$9.2 billion and US$11.7 billion,
Reconciling the twin needs of facilitating
respectively, and resulted in reserve
credit for growth on the one hand and
accretion.
containing liquidity to tame inflation on the
other remained a challenge. The current account deficit reflected the
large and growing trade deficit in the last
RBI put a restraint on the rapid growth of
two years. Exports grew fast, but imports
personal loans, capital market exposures,
grew even faster, reflecting in part the
residential housing beyond Rs. 20 lakh and
ongoing investment boom and the high
commercial real estate loans by more than
international petroleum price.
doubling the provisioning requirements for
standard advances under these categories In 2005-06, imports (in US dollar terms and
from 0.40% to 1.0% in April 2006. customs basis) had grown by 33.8%. In the
Simultaneously, it increased the risk weight first nine months of the current year, imports
on exposures to commercial real estate grew by 36.3%. While petroleum imports
from 125% to 150%. continued to grow rapidly, non-oil import
growth decelerated to a moderate 18.7% in
Liquidity conditions remained fairly
the first nine months of the current year,
comfortable up to early September 2006 with
primarily because of high bullion prices
the unwinding of the Central Government
leading to a decline in import of gold and
surplus balances with the RBI and continued
silver in the first few months of the year. The
intervention in the foreign exchange market
non-POL trade balance, after remaining in
to maintain orderly conditions. During 2006-
surplus till 2003-04, has turned negative
07, up to September 8, 2006, RBI had not
since 2004-05.
received any bid for repo under LAF and the
continuous flow of funds under reverse-repo India’s exports (in US dollar terms) have
indicated a comfortable liquidity position. been growing at a high rate of more than
20% since 2002-03. During 2005-06, with
There was some tightness with the onset
growth of 23.4%, India’s exports crossed the
of the festival season and due to high credit
US$100 billion mark.
expansion and outflows on account of
advance tax payment. From mid- During 2006-07, after a slow start, exports
September through October, 2006, while gained momentum to grow by an estimated
RBI had to provide accommodation to some 36.3% in the first nine months to reach
banks through repo facility, with reverse repo US$89.5 billion. Buoyancy of exports was
operations simultaneously, in net terms, RBI driven by the resurgence in the
absorbed liquidity from the system. manufacturing sector and sustained
demand from major trading partners.
With year-on-year inflation stubbornly above
5% from early-August 2006, on October 31,

Overall, the external environment remained Infrastructure
supportive with the invisible account
Investment requirements for infrastructure
remaining strong and stable capital flows
during the Eleventh Five Year plan are
seamlessly financing the moderate levels
estimated to be around US$ 320 billion.
of current account deficit caused primarily
While nearly 60% of these resources would
by the rise in international oil prices. The
come from the public sector, the balance
current account deficit remained moderate
would need to come either from the private
at 1.1 per cent of GDP in 2005-06.
sector and/or through public-private
Capital flows into India remained strong. partnership (PPP).
Foreign investment, as a proportion of
The ability of Government and the public
capital flows, has remained in the range of
sector to invest additional resources for
39.1% to 79.3% in the last four years ending
developing the much-needed infrastructure
in 2005-06.
critically depends on the creation of fiscal
There was strong growth in foreign direct space. The notification of the Fiscal
investment (FDI) flows (net), with three Responsibility and Budget Management Act
quarters of such flows in the form of equity. (FRBMA) 2003, with effect from July 5, 2004,
The growth rate was 27.4% in 2005-06 the culmination of the policy resolve to place
followed by 98.4% in April-September 2006. the process of fiscal consolidation in an
This was even after gross outflows under institutional framework, has yielded rich
FDI with domestic corporate entities dividends in terms of creating such fiscal
seeking a global presence to harness scale, space.
technology and market access advantages
Fiscal Deficit
through acquisitions overseas.
Fiscal deficit declined to 4.1% of GDP in
Capital Market
2005-06 and was budgeted at 3.8% of GDP
The positive sentiments were manifest also in 2006-07.
in most indicators such as resource
Budgeted Fiscal deficit of the States has
mobilized through the primary market.
declined to less than the mandated 3% two
Aggregate mobilization, especially through
years ahead of schedule, and only a
private placements and Initial Public
marginal revenue deficit remains to be
Offerings (IPOs), grew by 30.5% cent to Rs.
eliminated.
161,769 crore in 2006 with about 6 IPOs
every month. The resumption of the fiscal consolidation
process in 2006-07, without compromising
Net mobilisation of resources by mutual
the National Common Minimum
funds increased by more than four-fold from
Programme (NCMP) objectives, indicates
Rs.25,454 crore in 2005 to Rs.1,04,950
the commitment towards meeting the
crore in 2006. The sharp rise in mobilisation
FRBMA targets.
by mutual funds was due to buoyant inflows
under both income/debt oriented schemes The tax-GDP ratio of the Centre has steadily
and growth/equity oriented schemes. risen from 8.8% in 2002-03 to 10.3% in 2005-
06 and was budgeted at 11.2% in 2006-07.
The upbeat mood of the capital markets,
reflecting the improved growth prospects of After growing by 20.3% and 22.7%,
the economy, was partly also a result of respectively in 2005-06, corporate income
steady progress made on the infrastructure tax and personal income tax have grown by
front. Overall index of six core industries — 55.2% and 30.3%, respectively in April-
electricity, coal, steel, crude oil, petroleum December 2006 over April-December 2005.
refinery products, and cement, with a weight Buoyant growth in direct taxes revenue has
of 27% in IIP - registered a growth of 8.3% helped take its share in total revenue to
in April-December 2006 compared to 5.5% 47.6% in 2006-07 (BE). In the reduction of
in April-December 2005. revenue and fiscal deficits, buoyant revenue

growth has been complemented by a India, given the country’s enormous natural,
discernible shift in the composition of human and technological resources, is well
expenditure. recognised.
Issues and Priorities Fourth, concerns have been expressed
about whether the country is growing
The economy appears to have decidedly
beyond its growth potential thereby straining
‘taken off’ and moved from a phase of
its labour force and capital stock, and hence
moderate growth to a new phase of high
engendering inflationary instabilities.
growth.
Fifth, infrastructure, that constrained for
Achieving the necessary escape velocity to
years the growth performance of the
move from tepid growth into a sustained
economy, appears to be improving. There
high-growth trajectory requires careful
are signs of tangible progress in areas such
consideration of two issues and three
as power, roads, ports, and airports.
priorities. The two issues are: the
Following the road shows abroad for
sustainability of high growth with moderate
attracting global financial capital, the setting
inflation; and the inclusive nature of such
up of a US $ 5 billion fund to finance Indian
high growth. The three priorities are: rising
infrastructure on February 15, 2007 by four
to the challenge of maintaining and
major financial institutions (Citigroup,
managing high growth; bolstering the twin
Balckstone, Infrastructure Development and
pillars of growth, namely fiscal prudence
Finance Corporation and India Infrastructure
and high investment; and improving the
Finance Company), is an encouraging
effectiveness of Government intervention in
development.
critical areas such as education, health and
support for the needy. The second issue is about the nature of this
high growth in terms of inclusiveness.
On the first issue of sustainability of high
Putting more people in productive and
growth without running into high inflation,
sustainable jobs lies at the heart of inclusive
various indicators suggest that the current
growth. But such success, primarily, will
growth phase is sustainable.
depend on the success in achieving and
First, higher growth together with the maintaining high growth. There cannot be
demographic dividend (from a growing inclusive growth without growth itself.
proportion of the population in the working
Unemployment has gone up not because
age group) is likely to lead to a rise in the
of high growth, but because growth was not
savings rate to finance more and more
high enough. It is important to avoid the
investment.
misconception that inclusive growth, by
Second, efficiency improvements in the necessity, will have to be low growth.
economy since 1999-2000 reinforce the
Inflation in recent times has been triggered
confidence in the high-growth phase.
by the rapid rise in the prices of primary
Third, it is not only the sustained increase articles all over the world. In India, prices of
in savings and investment, availability of essential food items have come under
labour at reasonable wage rates, and pressure.
efficiency increases, but also the opening
The second priority is bolstering the twin
up of new avenues in services, beyond the
pillars of high growth, namely, fiscal
already well-known IT and ITES, that bolster
prudence and high investment.
confidence in the new high-growth phase.
For example, in a remarkable transition, the The third priority is improving the
tourism industry has displayed buoyant effectiveness of Government intervention
double-digit annual growth rates in each of in critical areas especially in the social
the last three years. Tourism contributes sector.
over 10% of global GDP and its potential in

SOME BUDGET CONCEPTS
The Annual Financial Statement shows the receipts and payments of Government
under the three parts in which Government accounts are kept: (i) Consolidated Fund,
(ii) Contingency Fund and (iii) Public Account.
Government Budget comprises (i) Revenue Budget; and (ii) Capital Budget.
All public expenditure is classified into (a) Non-plan expenditure and (b) Plan
expenditure.
Revenue deficit is the excess of revenue expenditure over revenue receipts.
Gross fiscal deficit is the excess of total expenditure (including loans, net of changes
in recoveries) over revenue receipts (including external grants) and non-debt capital
receipts.
Under Article 112 of the Constitution, a statement The corpus of the Fund authorised by the
of estimated receipts and expenditure of the Parliament, at present, is Rs.500 crore.
Government of India has to be laid before the Public Account
Parliament in respect of every financial year
which runs from 1st April to 31st March. This Besides the normal receipts and expenditure of
statement titled “Annual Financial Statement” is Government which relate to the Consolidated
the main Budget document. The Annual Financial Fund, certain other transactions enter
Statement shows the receipts and payments of Government accounts, in respect of which
Government under the three parts in which Government acts more as a banker, for example,
Government accounts are kept: (i) Consolidated transactions relating to provident funds, small
Fund, (ii) Contingency Fund and (iii) Public savings collections, other deposits, etc. The
Account. moneys thus received are kept in the Public
Account and the connected disbursements are
Consolidated Fund also made therefrom. Generally speaking, Public
All revenues received by Government, loans Account funds do not belong to the Government
raised by it, and also its receipts from recoveries and have to be paid back some time or the other
of loans granted by it, form the Consolidated to the persons and authorities who deposited
Fund. All expenditure of Government is incurred them. Parliamentary authorisation for payments
from the Consolidated Fund and no amount can from the Public Account is, therefore, not
be withdrawn from the Fund without required.
authorisation from the Parliament.
Revenue vs. Capital Budget
Contingency Fund
Occasions may arise when the Government Under the Constitution, Budget has to distinguish
may have to meet urgent unforeseen expenditure expenditure on revenue account from other
pending authorisation from the Parliament. The expenditure. Government Budget, therefore,
Contingency Fund is an imprest placed at the comprises (i) Revenue Budget; and (ii) Capital
disposal of the President to incur such Budget.
expenditure. Parliamentary approval for such
Revenue Budget consists of the revenue
expenditure and for withdrawal of an equivalent
receipts of Government (tax revenues and other
amount from the Consolidated Fund is
revenues) and the expenditure met from these
subsequently obtained and the amount spent
revenues. Tax revenues comprise proceeds of
from Contingency Fund is recouped to the Fund.
taxes and other duties levied by the Union. The

estimates of revenue receipts shown in the payments, pensionary charges and statutory
Annual Financial Statement take into account the transfers to State and Union Territory
effect of the taxation proposals made in the Governments. A part of the expenditure relates
Finance Bill. Other receipts of the Government to essential functions of the State, e.g., Defence,
mainly consist of interest and dividend on internal security, external affairs and revenue
investments made by the Government, fees, and collection.
other receipts for services rendered by the
Government. Revenue expenditure is for the Non-plan expenditure is further divided into
normal running of the Government departments revenue expenditure and capital expenditure.
and various services, interest charges on debt Revenue expenditure is financed out of revenue
incurred by Government, subsidies, etc. Broadly receipts, both tax revenue and non-tax revenue.
speaking, expenditure which does not result in Following are included under revenue
creation of assets is treated as revenue expenditure: interest payments, defence
expenditure. All grants given to State revenue expenditure, major subsidies (food,
Governments and other parties are also treated fertilizers and export promotion), other
as revenue expenditure even though some of subsidies, debt relief to farmers, postal deficit,
the grants may be for creation of assets. police, pensions, other general services (organs
of state, tax collection, external affairs, etc.),
Capital Budget consists of capital receipts and social services (education, health, broadcasting,
payments. The main items of capital receipts etc.), economic services (agriculture, industry,
are loans raised by the Government from public power, transport, communications, science and
which are called Market Loans, borrowings by technology, etc.) and grants to states and UTs
Government from Reserve Bank and other and grants to foreign governments.
parties through sale of Treasury Bills, loans
received from foreign Governments and bodies Capital non-Plan expenditure includes such
and recoveries of loans granted by Central items as: Defence capital expenditure, loans to
Government to State and Union Territory public enterprises, loans to states and union
Governments and other parties. Capital territories and loans to foreign governments.
payments consist of capital expenditure on Plan Expenditure
acquisition of assets like land, buildings,
machinery, equipment, as also investments in The second major item of Central Government
shares, etc., and loans and advances granted expenditure is Plan Expenditure which is
by Central Government to State and Union composed of:
Territory Governments, Government companies,
(a) Central Plans such as agriculture, rural
Corporations and other parties. Capital Budget
development, irrigation and flood control, energy,
also incorporates transactions in the Public
industry & minerals, transport and
Account.
communications, science and technology and
Plan Expenditure vs. Non-Plan Expenditure environment, social services and others and
The Central Government adopted a new (b) Central assistance for Plans of the States
classification of public expenditure from 1987- and UTs.
88 Budget. Under this new classification, all
Outcome Budget
public expenditure is classified into (a) Non-plan
expenditure and (b) Plan expenditure. With effect from Financial Year 2007-08, the
Performance Budget and the Outcome Budget
Non-Plan Expenditure
hitherto presented to Parliament separately by
Non-Plan expenditure is a generic term, which Ministries/Departments, are merged and
is used to cover all expenditure of Government presented as a single document titled “Outcome
not included in the Plan. It may either be revenue Budget” by each Ministry/Department in respect
expenditure or capital expenditure. Part of the of all Demands/Appropriations controlled by
expenditure is obligatory in nature, e.g., interest them, except those exempted from this

requirement. Outcome Budget broadly indicates of the financial year pending completion of
physical dimensions of the financial budget of a procedure for the voting of the Demands. The
Ministry/Department, indicating actual physical purpose of the ‘Vote on Account’ is to keep
performance in the preceding year (2005-2006), Government functioning, pending voting of ‘final
performance in the first nine months (up to supply’. The Vote on Account is obtained from
December) of the current year (2006-2007) and Parliament through an Appropriation (Vote on
the targeted performance during the next year Account) Bill.
(2007-2008).
Deficit Definitions
Outcome Budget contains a brief introductory
note on the organization and function of the 1. Revenue deficit is the excess of revenue
Ministry/Department, list of major programmes/ expenditure over revenue receipts.
schemes implemented by the Ministry/ 2. Net RBI credit to the Central Government is
Department, its mandate, goal and policy the sum of increase in the Reserve Bank’s
framework, budget estimates, scheme-wise holdings of i )Treasury Bills, ii) Government
analysis of physical performance and linkage of India dated securities, iii) rupee coins and
between financial outlays and outcome, review iv) Ways and Means Advances from the
covering overall trends in expenditure vis-a-vis Reserve Bank to the Centre (since April 1,
budget estimates in recent years, review of 1997) adjusted for Centre’s cash balances
performance of statutory and autonomous with the Reserve Bank.
bodies under the administrative control of the
Ministry/Department, reform measures, targets 3. Gross fiscal deficit is the excess of total
and achievements and plan for future expenditure (including loans, net of changes
refinements. in recoveries) over revenue receipts
(including external grants) and non-debt
As far as feasible, coverage of women and SC/ capital receipts.
ST beneficiaries under various developmental
schemes and schemes for the benefit of North 4. Net fiscal deficit is the difference between
Eastern Region are also separately indicated. gross fiscal deficit and net lending.
Vote on Account 5. Gross primary deficit is the difference

between gross fiscal deficit and interest
The whole process beginning with the payments.
presentation of the Budget and ending with
discussions and voting on the Demands for 6. Net primary deficit denotes net fiscal deficit
Grants requires sufficiently long time. The Lok minus net interest payments.
Sabha is, therefore, empowered by the
Constitution to make any grant in advance in
respect of the estimated expenditure for a part

UNION BUDGET 2007- 08
Consistently high GDP growth 9.2% in FY ’07 (9.0% in FY’06) fastest in 18 yrs.
Industry (10%) & Services (11.2%) clock double digit growth. However, agricultural
growth at 2.3% is below the 10th Plan target of 4%.
Inflation a major concern.
Investment rate: 33.8% in FY’06 up from 31.5% in FY’05.
FDI inflows more than doubled to US $.12.5 bn and outpaced portfolio investment of
$6.8bn during April-Jan FY’07.
Budget focus: inflation control, inclusive growth, infrastructure development.
Sector Measure Impact
Agriculture & Farm credit target of Rs.2,25,000 Banks to step up agricultural lending
Rural Develop- crore for 2007-08 and addition of 50
ment lakh new farmers to the banking
system
The two-percent interest subvention Subvention continued for public

scheme for short-term crop loans sector banks. Now extended to
will continue in 2007-08 with a RRBs and co-operative banks.
provision of Rs.1,677 cr for that
purpose
Special plan over three years for 31 Banks can meet the financial
distresses districts in four states requirements of farmers who
involving Rs.16,979 cr. Water- acquire irrigation facilities under the
related schemes and plan to provide scheme, will also help banks to
subsidiary income to farmers reduce NPAs.
through induction of high-yielding
milch animals and related activities.
Integrated oilseeds, oil palm, pulses Opens up opportunities to finance

and maize development programme seed production and expand
to be expanded agricultural lending.
Special purpose tea fund launched Opportunities for lending for these
for re-plantation and rejuvenation of crops.
tea, to be followed by similar
measure for coffee, rubber, spices,
cashew and coconut
Finance for rural infrastructure. To
RIDF increased by Rs.2,000cr to help banks meet shortfall in priority
Rs.12,000cr sector lending.
Accelerated Irrigation Benefit As area under irrigation goes up
Programme (AIBP) revamped to there will be increased productivity

complete more irrigation projects in and better prospects for bank
time. finance
Rs.100 crore allocated for the new These initiatives will help build
Rainfed Area Development additional irrigation facilities and
Programme. World Bank has signed help productivity and therefore
a loan agreement with Tamil Nadu effectiveness of bank credit in the
for Rs.2,182 cr to restore 5,763 water long run. Will promote balanced
bodies having command area of 4 regional growth.
lakh hectares. Similar agreements
with AP, Karnataka, Orissa and West
Bengal are in the pipeline
100% subsidy to be provided to These initiatives will help build

small and marginal farmers and 50% additional irrigation facilities and
subsidy to other farmers for ground help productivity and therefore
water re-charge “dug-wells’ in critical effectiveness of bank credit in the
blocks identified by Central Ground long run.
Water Board.
The Indian Council of Agricultural This aims at ending stagnation in

Research (ICAR) may set up a farm yields and giving an R & D
teaching cum demonstration model push to productivity, which is a
of water harvesting in each of 32 positive for bank lending.
selected State Agricultural
Universities and ICAR institutes to
train 100 trainers and 1000 farmers
each in good water management
practices.
A new programme to replicate the Extension services in agriculture will

Training & Visit (T&V) programme. get re-vamped and this should help
end the stagnation in this sector.
Agriculture Technology Management Banks can recruit specialists or
Agency (ATMA) that is now in place redeploy staff for extension work.
in 262 districts will be extended to
another 300 districts in 2007-08
Agricultural crop insurance scheme Risks for farmers as well as for

to be extended banks will be reduced
Infrastructure 7 more Ultra Mega Power Projects Opportunity for bank financing.
under process and at least two to be
awarded by July 2007
Allocation for National Highway Government guarantee will help
Development Programme up attract finance for the project from
Rs.12,600 cr (last year Rs.9,955cr) private investors and banks.
Work on Golden Quadrilateral almost Increases availability of long-term
complete funds for infrastructure.
Mutual Funds to launch infrastructure It is a welcome move to utilize funds
funds in a better way. It would also result
in some additional business for
Part of forex reserves to be used for banks.
infrastructure funding – under
examination
PPP and viability gap funding:
revolving fund with corpus of Rs 100
cr to be set up. Shelf of bankable
projects.
Innovative financing for infrastructure
by borrowing from NSS Funds
SMEs Excise exemption limit for SSI units The measure will help upscale SSI
increased to Rs.1.5 cr from Rs.1 cr units and make them more
competitive. Increase in scope for
Surcharge eliminated for small firms bank finance.
with a turnover of Rs.1 cr or less
Education, Allocation for education enhanced by Demand for education loans is likely
Health & Social 34.2% to go up.
Sector
2 lakh more teachers & 5 lakh more
classrooms
Means-cum-merit scholarship: Besides deposits this may also

Rs.750 cr corpus to be placed with increase the work-load in the
SBI branches Increased allocation for
education as well as Rs.750 cr
Creation of 1 lakh jobs for physically corpus will give scope for lending for
challenged. education.
Healthcare allocation increased by

21.9%
Rural landless households to be

brought under safety net by providing
insurance
Industry Reduction in peak rates of duty from Reduction in peak import duty and
12.5% to 10% for non agricultural further duty cut on select products.
products inputs such as steel, coking Help inflation control by reducing
coal, chemicals, man-made fibres, costs, industries to benefit.
gems & jewellery, edible oils.
New Industrial Policy for Northeastern Scope for increased lending in

region industry to these regions
J&K to continue getting tax benefits

for industry

Textiles Allocation for textile parks increased Industry to attract fresh investment.
to Rs.425 cr (last year Rs 189cr)
Textile Upgradation Fund (TUF) This will open up avenues for bank
raised to Rs.911cr (Rs.535cr) finance as more units are likely to
TUF to be continued during XIth five come up.
year plan
100-150 new handloom clusters to Banks to focus on identified areas

be developed for financing.
Health insurance scheme for

weavers enhanced to ancillary
industries
Steel Imposition of export duty on iron oreThe availability of iron-ore for

domestic steel makers is expected
to increase and government will also
earn revenues as about 70 million
tonnes of iron ore is exported
annually
Cement Dual excise duty on cement, excise Prices likely to go up by at least
duty hiked for selling 50-kg bags at Rs.10 per bag with immediate effect.
Rs190 or more Housing may cost more.
Oil & Diesel Reduction in excise duties on petrol The measures would have a positive
and diesel to 6% from 8% impact on headline inflation and help
control prices.
Edible Oil Lower custom duties on edible oils, The measures would have a positive
crude and refined edible oils to be impact on headline inflation and help
exempt from additional CV duty of control prices.
4%, reduction in duty on sunflower oil,
both crude and refined by 15
percentage points
Coir A fund is proposed to be set up with Modernisation in this industry will get
a provision of Rs.22.5 cr a fillip; scope for further lending
Biotech & Reduction in duty from 7.5% to 5% Boost for the biotech and pharma
Pharma on specified machinery in industry and increased R&D will lead
pharmaceutical and biotech industry to further scope for bank lending
Pass-through status to venture

capital funds in pharmaceutical and
biotech sectors
IT & ITes It and BPO sector had so far enjoyed It is a mixed bag for the industry but
benefits of sunrise industry but have new ventures are likely to benefit and

now to pay 11.22% of adjusted net domestic market will expand as

profits as minimum alternative tax Government increases IT spending
Nanotechnology and information Scope for bank finance.

technology to benefit through venture
capital funds. IT industry will also
benefit indirectly as there is
emphasis on e-governance
Tourism Tourism industry to get allocation of Scope for increased lending to

Rs.520 cr for tourist infrastructure hotels in these regions
(Rs.423 cr)
Tax holiday for 2,3 and 4 star hotels

in and around Delhi
Defence allocation increased by Banks can meet the financial

Defence
Rs.7,000 cr to Rs.96,000 cr requirements of units catering to the
needs of defence.
Housing Reverse mortgage scheme for The impact of this new scheme is
senior citizens by NHB. likely to be positive for home loan
and mortgage markets. Banks can
come out with new products for this
group.
Creation of housing mortgage Help banks recover dues as it

companies. provides protection to lenders. Will
help housing finance companies to
offer higher mortgage loans or lower
down payments.
Banking & Rs.40,000 cr provided for transfer of The transaction will be deficit neutral
Financial SBI shares for the government
Sector
DRI scheme limit raised from The impact is expected to be
Rs.6,500 to Rs.15,000 and housing negligible as the amount is not very
limit from Rs.5,000 to Rs.20,000 per significant to affect credit growth or
beneficiary liquidity. Weaker sections to benefit.
RRBs to expand aggressively, open Revival of weak RRBs and

branches in 80 uncovered districts. extension of branches is expected
Recapitalisation of weak RRBs to increase finance to rural sector
RRBs to accept deposits from NRIs More competition for NRI deposits
SARFAESI extended to loans although the impact is not likely to
advanced by RRBs be felt by PSBs or foreign banks at
this stage
PAN to be sole identification for all Provide ease, convenience and
capital market transactions. Self safety of transactions.

Regulatory Organisations (SROs)
for different market participants.
Mutual Funds to launch Bond markets are likely to get a

infrastructure funds boost
Overseas investments allowed to Financial services are likely to

individuals via MFs become more streamlined with
these amendments
Micro Financial Sector
(Development and Regulation) Bill Hitherto unbanked areas/persons
and comrehensive bill to amend will now access financial services
insurance laws to be introduced in
Budget session
Financial Inclusion Fund and Increase in BCTT limit and

Financial Inclusion Technology Fund exemption to Central and State Govt
to be established with Nabard with will reduce the burden on our
corpus of Rs.500 cr each branches.
Banking cash transactions tax Bank deposits are likely to become

exemption limit increased to more attractive vis-à-vis mutual
Rs.50,000 from Rs.25,000 funds.
Increase in dividend distribution tax Increased liquidity in the market.

from 12.5% to 15% and to 25% for
money market mutual funds and
liquid mutual funds.
Allows short-selling by institutional Relief for banks and depositors.

investors.
Increase in TDS exemption limit on Banks may shift to own premises to

bank deposits from Rs.5,000 to cut costs.
Rs.10,000.
Service tax extended to lease rentals Increase in medical insurance

coverage. Banks can bundle
Increase in tax deduction for insurance with liability products.
insurance from Rs.10,000 to
Rs.15,000 (Rs.20,000 for senior
citizens). Increase in health
insurance schemes for senior Help companies unlock part of their
citizens by insurance companies. holding in group companies. Will
improve liquidity without diluting their
Exchangeable bonds in group shareholding in the parent company.
companies.

Tax proposals Increase in basic exemption limit of Surplus available with the people is
Rs.10,000 for personal income tax likely to be used for buying
Personal & consumer goods or for savings;
Corporate Tax Either way it opens up opportunity
for banks for more business.
1% additional education cess (for Likely to be passed on and put

secondary and higher education) pressure on prices.
levied on income tax, corporation tax,
excise duties, customs duties and
service tax. The government
currently has a 2% cess for primary
education.
CENVAT rate untouched at 16%. Tax Higher tax burden on IT companies.

base widened by extending MAT to
software technology parks, export-
oriented units.
Fringe Benefit Tax (FBT) on Employee Increase in tax outgo for employer.
Service Tax Stock Options (ESOPs).
Service tax left unchanged at 12%. Increase in tax outgo on account of

Service tax extended to new services rented premises.
including renting of immovable
property for use in commerce/
business.
Fiscal Deficit Lower fiscal deficit 3.3% in FY08 Buoyant tax collections on the back
against 3.7% in FY07; revenue defi- of a confidently growing economy
cit in the same period 1.5% and 2% have enabled the FM to reduce the
respectively. fiscal deficit and revenue deficit fur-
ther. Budget on course to achieve
FRBM targets. With revenue defi-
cit under check, government could
now increase capital spending,
which is a positive for sustaining
growth in the medium term.

RAILWAY BUDGET 2007-08
The Indian rail network spans over 63,000 kms and carries 14 million passengers
and 1.5 million tonnes of freight everyday.
The proposed annual outlay on railways is Rs 31,000 cr (around 1% of GDP), 32%
increase over the previous year. This is the largest annual plan for railways so far.
56% of the plan outlay will be sourced from internal sources (Rs17,320 crore), which
is 61% more than last year.
Estimated profit of Rs.20,000 crore as against Rs.14,700 crore for the year 2006-
07.
Freight revenues up 17%, passenger revenues increase 14% in April-Dec. 2006.
Passenger fares to be slashed across the board: Fare reduction in all upper classes
and no raise in second class fares
Tickets to be sold at petrol pumps, ATM centres etc.
Smart rail travel cards to be introduced.
Number of berths to be increased from 72 to 84 in sleeper coaches.
Three-storey container trains planned
Among measures to benefit the travelling public: wooden seats are to be replaced by
cushioned ones in ordinary class passenger trains from next fiscal.
Unreserved compartments in new trains to be increased from four to six to help ordinary
passengers.
50% fare concession offered for UPSC and other official examinees.
To make compartments user-friendly, changes in the design of compartments are to
be made to help the physically-disabled.
Separate coach for vendors, milkmen and petty traders in the passenger trains.
Ticket bookings and hotel bookings can be done through railway call centres to be
set up.
Six thousand automatic ticket vending machines to be set up in next two years.
Work on Dedicated Freight Corridor to begin in 2007/08.
New telephone number for railway inquiry to be 139 across India.
Railways to start 32 new trains, 8 Garib Raths this year
Railways to observe 2007-08 as Year of Cleanliness.
Mumbai Urban Transport Project to be speeded up to help suburban commuters. A
sum of Rs 5,000 crore to be allocated during the next Five-Year Plan for the purpose.
Feasibility study to be conducted for ultra-high speed trains with speed up to 250-
300 km per hour.
Railways to set up 300 new model stations, some stations to have CCTVs and all
TTEs to be provided palm tops.
More lower berths to be earmarked for women and senior citizens.
Railways to introduce 800 new wagons; 20,000 km of high-density network to be
laid; new trains for cement transportation.

Railway’s New Projects and by 6% on iron ore and lime stone. This
measure is a positive for the economy as it
New Lines:
will help contain costs and control inflation.
The target for construction of new lines in
In particular, oil companies stand to benefit
2007-08 has been fixed at 500 km. The
as the freight cut will lead to a fall in costs
sections include:
and margins will improve. The Indian Oil
1. Puntamba-Shirdi Corporation (which has a 50% market share
2. Mahoba-Khajuraho and freight bill of Rs.750 crore), is expected
to save around Rs.400 million a year from
3. Qazigund-Kakapore and Budgam- the cut in railway freight.
Baramulla
Fiscal Deficit
4. Jaggyapet-Malachervu
Expected increase in profit to Railways will
5. Kottur-Harpanhalli have positive impact on fiscal deficit of the
Gauge Conversion Union Government.
During 2007-08, a target of completion Industry
gauge conversion of about 1,800 km has The plan to upgrade 20,000 kms of high
been fixed. density rail line network is expected to lead
Joint Venture with Kerala Government to increased demand for around 11,000 new
wagons.
At present, Railways have a limited capacity
to manufacture passenger coaches. In view Container traffic is expected to go up
of the expected increase in demand, substantially to 100 million tones by 2012.
Railways have proposed to set up a joint Industries engaged in supplying equipment
venture company with Steel Industries to the Railways will benefit as the Budget
Kerala Ltd, Aleppey, a public sector has planned to increase investment for
undertaking of the Government of Kerala. manufacture of wagons.
Setting up of Wagon, Bogie Complex at Increased investment in container traffic by
Dalmianagar running more trains will help improved
To manufacture higher axle load wagons, availability of goods in the market and keep
production of new technology bogies, costs down.
couplers, draft gears, would be necessary, Cut in freight rate will have positive impact
for which an industrial complex will be on industry bottomlines.
developed at Dalmianagar.
Railways’ plan to upgrade 20,000 km high
Implication for the Economy and Banking density rail line network will facilitate coal
Inflation linkages to ultra mega power projects. We
believe that this will have a positive impact
The Railway Budget is aimed at tackling rising
on steel and power sector.
headline inflation in the economy♣. We expect
the measures announced in the Railway Budget With increased internal accruals, capex
will help contain inflation. spending by railways is likely to get a fillip.
The Minister has planned to invest
There is no increase in passenger fare. On
substantial sum on dedicated freight
the contrary, the Railway Budget has
corridors over the next five years. In addition,
actually announced a cut in passenger fare
pre-feasibility studies will be taken up for the
across the board which is a welcome step
construction of four high-speed passenger
and will have a positive impact on inflation.
corridors, with trains running at 300-350 km/
The Budget has refrained from hiking freight hr
rates. In fact, freight rates for transportation
of diesel/petrol have been reduced by 5%

Banking Sector Implications for SBI
Control of inflation and fiscal deficit will help The Bank has already an agreement with
contain rising interest rates. Selling of the Railways for setting up 200-300 ATMs
Railway tickets through ATMs opens up at railways stations. This could be
business opportunities for banks. increased in view of the additional ATMs
proposed in the Budget.
Banks can form JVs with railways
introducing smart rail travel cards. Circles may be asked to assess fund and
non-fund based requirements at centres
Introduction of three-storey container trains,
where new projects have been proposed.
separate coaches for vendors, milkmen and
traders offer scope for additional business. New products to tap business from the
proposed three-storey container trains,
Banks can tap the Railways’ increased
separate coaches for vendors, milkmen and
demand for funds for the Dedicated Freight
traders, etc. may be considered.
Corridor. Scope for increasing related fee
business. Scope for increasing visibility through ads
and hoardings in the 300 new model stations
Funding requirement for the proposed ultra
to be set up.
high speed trains, Mumbai Urban Transport
Project can be explored. Dedicated freight corridor, ultra high speed
trains and Mumbai urban transport project
Scope for booking additional government
offer scope for increasing infrastructure
business
lending.

MID-TERM REVIEW OF ANNUAL POLICY FOR 2007-08
Bank Policy rates like Repo, Reverse Repo, and Bank Rate unchanged at 7.75%,
6%, and 6% respectively
Increase in the CRR by 50 basis points from 7.0% to 7.5% with effect from the fortnight
beginning November 10, 2007
Working Group to be constituted for preparing a road-map for migration to CBS by
RRBs.
RRBs and State/Central Cooperative Banks to disclose their CRAR as on March 31,
2008 in their balance sheets.
A road-map to be evolved for achieving the desired level of CRAR by these banks.
Financial assistance to RRBs for implementing information and communication
technology based solutions.
GDP growth forecast retained at 8.5 per cent during 2007-08, assuming no further
escalation in international crude prices and barring domestic or external shocks
Inflation to be contained close to 5.0 per cent during 2007-08 while resolving to
condition expectations in the range of 4.0-4.5 per cent, with a medium-term objective
of inflation at around 3.0 per cent.
Moderating net capital flows so that money supply is not persistently out of alignment
with indicative projection of 17.0-17.5 per cent.
Dr. Y. Venugopal Reddy, Governor, presented the US $ 72.1 per barrel in July-September,
Mid-term Review of Annual Policy for the Year 2007.
2007-08 on October 30, 2007 in a meeting with
• The Y-o-Y CPI inflation for industrial workers
Chief Executives of major commercial banks.
showed a sharp increase to 7.3 per cent in
The Mid-term Review consists of two parts: Part
August 2007 as against 6.3 per cent a year
I Mid-term Review of the Annual Statement on
ago.
Monetary Policy for the Year 2007-08; and Part II
Mid-term Review of the Annual Statement on • The Y-o-Y growth in money supply (M3) was
Developmental and Regulatory Policies for the higher at 21.8 per cent on October 12, 2007
Year 2007-08. than 18.9 per cent a year ago.
Domestic Developments • The Y-o-Y growth in aggregate deposits at
Rs.5,69,061 crore (24.9 per cent) was
• Real GDP growth during the first quarter of
higher than that of Rs.3,88,528 crore (20.4
2007-08 is placed at 9.3 per cent as against
per cent) a year ago.
9.6 per cent in the corresponding quarter a
year ago. • Total credit exhibited a Y-o-Y growth of
Rs.3,81,333 crore (23.3 per cent) as on
• The year-on-year (Y-o-Y) wholesale price
October 12, 2007 on top of an increase of
index (WPI) inflation eased from its peak of
Rs.3,66,463 crore (28.8 per cent) a year
6.4 per cent on April 7, 2006 to 3.1 per cent
ago.
by October 13, 2007.
• The Y-o-Y growth in total resource flow from
• The average price of the Indian ‘basket’ of
scheduled commercial banks (SCBs) to the
international crude has increased to US $
commercial sector was 22.1 per cent, over
80.0 per barrel as on October 23, 2007 from

and above the growth of 28.0 per cent a year • Merchandise exports rose by 18.2 per cent
ago. in US dollar terms during April-August 2007
as compared with 27.1 per cent in the
• Banks’ holdings of Government and other
corresponding period of the previous year
approved securities increased to 30.0 per
while import growth was higher at 31.0 per
cent of their net demand and time liabilities
cent as compared with 20.6 per cent in the
(NDTL) as on October 12, 2007 from 28.0
previous year.
per cent at end-March 2007.
• Non-oil imports rose by 44.3 per cent (10.9
• The overhang of liquidity under the LAF, MSS
per cent a year ago); oil imports, however,
and the Central Governments’ cash
slowed down to 6.0 per cent (44.5 per cent),
balances taken together increased to
mainly on account of moderation in the price
Rs.2,22,582 crore by October 24, 2007 from
of the Indian basket of crude oil by 0.5 per
Rs.85,770 crore at end-March 2007.
cent during April-August 2007.
• The Government of India, in consultation
• India’s foreign exchange reserves increased
with the Reserve Bank, revised the ceiling
by US $ 62.0 billion during 2007-08 and
under MSS for the year 2007-08 from
stood at US $ 261.1 billion on October 19,
Rs.1,10,000 crore to Rs.1,50,000 crore on
2007.
August 8, 2007 and further to Rs.2,00,000
crore on October 4, 2007. • The rupee appreciated by 10.3 per cent
against the US dollar, by 2.4 per cent against
• During the second quarter of 2007-08,
the euro, by 5.4 per cent against the pound
financial markets remained generally stable
sterling and 7.1 per cent against the
with conditions of abundant liquidity and
Japanese yen during the current financial
interest rates moderated in almost all
year up to October 26, 2007.
segments of the financial system.
Global Developments
• During April–October 2007, public sector
banks (PSBs) decreased their deposit rates, • The downside risks to the global economic
particularly at the upper end of the range for outlook have increased from a few months
various maturities, by 25-60 basis points. ago, accentuated by the recent financial
market turmoil, firm inflationary pressures
• During April-October 2007, the benchmark
and high and volatile crude prices.
prime lending rates (BPLRs) of private
sector banks moved from a range of 12.50- • According to the IMF’s World Economic
17.25 per cent to 13.00-16.50 per cent. Outlook (WEO) released in October 2007,
the forecast for global real GDP growth on
• The range of BPLRs for PSBs and foreign
a purchasing power parity basis has been
banks, however, remained unchanged at
retained at 5.2 per cent for 2007 as in the
12.50-13.50 per cent and 10.00-15.50 per
July 2007 update, down from 5.4 per cent in
cent, respectively, during this period.
2006, but forecast for 2008 has been revised
• The BSE Sensex increased from 13,072 at down to 4.8 per cent in October from 5.2
end-March 2007 to 19,243 on October 26, per cent in the July 2007 update.
2007.
• In the US, real GDP growth had risen to 3.8
• The gross market borrowings of the Central per cent in the second quarter of 2007 as
Government through dated securities at compared with 2.4 per cent a year ago - The
Rs.1,27,060 crore (Rs.1,17,548 crore a year IMF’s October 2007 WEO expects the US
ago) during 2007-08 so far (up to October economy to grow at 1.9 per cent in 2007
26) constituted 67.3 per cent of the budget and 2008 as against 2.9 per cent in 2006.
estimates (BE) while net market borrowings
• There was a sudden fall in credit market
at Rs.75,387 crore (Rs.65,951 crore a year
confidence in late July brought on by the
ago) constituted 68.7 per cent of the BE.
spread of risks from exposure to the US sub-
External Sector prime mortgages with credit crunch

spreading into corporate bond markets and circumstances, pass through to domestic
equity markets. inflation.
• The European Central Bank and the US • The US Federal Reserve has been the most
Federal Reserve, which have intervened aggressive in terms of easing monetary
since August 9 by providing liquidity to the policy, with a higher than expected rate cut,
inter-bank market, were joined by central reflecting the concerns over impact of
banks in Canada, Japan, Australia, Norway housing issues on consumption and, hence,
and Switzerland. growth.
• Bank of England has provided liquidity • The most important issue for India is the
support to a mortgage lending bank, while possible impact of global financial market
giving a blanket guarantee to depositors on developments and policy responses by
the safety of their deposits. central banks in major economies.
• Several central banks have cut policy rates • The immediate task for public policy in India,
during the third quarter of 2007 after financial therefore, is to manage the possible financial
markets were significantly affected by contagion which is in an incipient stage with
turbulence, such as the US Federal highly uncertain prospects of being resolved
Reserve, the Banco Central do Brasil, Bank soon.
Indonesia (BI) and the Bank of Thailand.
• On the domestic front, aggregate demand
• The central banks that have tightened their conditions have remained firm and on the
policy rates include the European Central uptrend.
Bank; the Bank of England; the Bank of
• Key monetary aggregates, i.e., reserve
Japan; the Bank of Canada; the Reserve
money and money supply have been
Bank of Australia; the Reserve Bank of New
running well above initial projections,
Zealand; the People’s Bank of China; the
reflecting the impact of higher than expected
Bank of Korea; the Banco de Mexico; and
deposit growth and the exogenous
the Banco Central de Chile.
expansionary effects of capital inflows as
• A few central banks in Asia have used well as the drawdown of fiscal cash
supplementary measures for tightening, balances.
besides increasing key policy rates. The only
• The incomplete pass-through of international
central bank that has kept policy rates
prices of crude, metals, food and
steady is the Bank Negara Malaysia.
commodities in general to consumer prices
Overall Assessment is indicative of suppressed inflation which
carries destabilising potential into the future.
• Some positive elements in the global
economy are (i) the global economy is • The policy responses in the form of active
strong and resilient; (ii) EMEs, by and large, liquidity management operations to
have a better macro-environment than modulate expansionary monetary and
before; (iii) globally, corporate balance sheets financial conditions were reflected in a
are strong and less leveraged than in the generally orderly evolution of market liquidity.
past; (iv) large financial intermediaries are
• Since late July, global financial markets have
perhaps adequately capitalised to absorb the
experienced unusual volatility, strained
shocks of credit infirmities; and (v) the
liquidity and heightened risk aversion.
inflation environment has been, on the whole,
benign. • While the trigger was the rising default rates
on sub-prime mortgages in the US, the
• The global environment is fraught with
source of the problem was significant mis-
uncertainties with international crude prices
pricing of risks in the financial system.
at new highs, having breached the level of
US $ 90 per barrel while elevated food and • Easy monetary policy, globalisation of
metal prices would, in current liquidity flows, wide-spread use of highly

complex structured debt instruments and • To reinforce the emphasis on price stability
inadequacy of banking supervision in coping and well-anchored inflation expectations
with financial innovations also contributed to while ensuring a monetary and interest rate
the severity of the crisis. environment that supports export and
investment demand in the economy so as
• At the current juncture and looking ahead,
to enable continuation of the growth
on the domestic front, the biggest challenge
momentum.
for monetary policy is the management of
capital flows and the attendant implications • To re-emphasise credit quality and orderly
for liquidity and overall stability. conditions in financial markets for securing
macroeconomic and, in particular, financial
• Yet another challenge is the rapid escalation
stability while simultaneously pursuing
in asset prices, particularly equity and real
greater credit penetration and financial
estate, which are significantly driven by
inclusion.
capital flows.
• To respond swiftly with all possible
• Over the next twelve to eighteen months,
measures as appropriate to the evolving
risks to inflation and inflation expectations
global and domestic situation impinging on
would also continue to demand priority in
inflation expectations, financial stability and
policy monitoring.
the growth momentum.
Stance of Monetary Policy
• To be in readiness to take recourse to all
• Real GDP growth in 2007-08 is placed at possible options for maintaining stability and
8.5 per cent for policy purposes, as set out the growth momentum in the economy in
in the Annual Policy Statement of April 2007 view of the unusual heightened global
and reiterated in the First Quarter Review. uncertainties, and the unconventional policy
• Policy endeavour would be to contain responses to the developments in financial
inflation close to 5.0 per cent in 2007-08 and markets.
the resolve, going forward, would be to Monetary Measures
condition expectations in the range of 4.0-
• The Bank Rate has been kept unchanged
4.5 per cent so that an inflation rate of 3.0
at 6.0 per cent.
per cent becomes a medium-term objective.
• The repo rate under the LAF is kept
• Moderating the expansionary effects of net
unchanged at 7.75 per cent.
capital flows is warranted so that money
supply is not persistently out of alignment • The reverse repo rate under the LAF is kept
with the indicative projections. unchanged at 6.0 per cent.
• The Reserve Bank will continue with its • The Reserve Bank has the flexibility to
policy of active demand management of conduct repo/reverse repo auctions at a
liquidity through appropriate use of the CRR fixed rate or at variable rates as
stipulations and open market operations circumstances warrant.
(OMO) including the MSS and the LAF, using
• The Reserve Bank retains the option to
all the policy instruments at its disposal
conduct overnight or longer term repo/
flexibly, as and when the situation warrants.
reverse repo under the LAF depending on
• Barring the emergence of any adverse and market conditions and other relevant
unexpected developments in various factors. The Reserve Bank will continue to
sectors of the economy and keeping in view use this flexibility including the right to accept
the current assessment of the economy or reject tender(s) under the LAF, wholly or
including the outlook for inflation, the overall partially, if deemed fit, so as to make efficient
stance of monetary policy in the period use of the LAF in daily liquidity management.
ahead will broadly continue to be:

• CRR increased by 50 basis points to 7.5 of 50 per cent of their inventory volume as
per cent effective fortnight beginning at the end of the previous quarter by using
November 10, 2007. overseas over-the-counter (OTC)/
exchange traded derivatives up to a
Developmental and Regulatory Policies
maximum of one year forward.
Financial Markets
• Importers and exporters having foreign
• Non-Competitive Bidding Scheme in the currency exposures to be allowed to write
Auctions of State Development Loans covered call and put options in both foreign
(SDLs) to be operationalised by March 31, currency/ rupee and cross currency and
2008. receive premia.
• Re-issuance of SDLs in the second half of • Authorised Dealers (ADs) to be permitted
2007-08. to run cross currency options books,
• The facility of new issuance structure for subject to the Reserve Bank’s approval.
floating rate bonds (FRBs) is being built into • ADs to be permitted to offer American
the new Negotiated Dealing System (NDS) options as well.
auction system being developed by the
Credit Delivery
Clearing Corporation of India Limited (CCIL).
• Internal Working Group to be constituted to
• The Reserve Bank is committed for
examine the recommendations of the
permitting market repos in corporate bonds,
Committee on Agricultural Indebtedness
once the corporate debt markets develop and
(Chairman: Dr. R. Radhakrishna) relevant
the Reserve Bank is assured of availability
to the banking system in general and the
of fair prices, and an efficient and safe
Reserve Bank, in particular.
settlement system based on delivery versus
payment (DvP) III and Straight Through • Working Group to be constituted with
Processing (STP) is in place. representatives from the Reserve Bank, the
NABARD, sponsor banks and RRBs for
• Covering of ‘Short-sale’ and ‘When Issued’
preparing a road-map for migration to core
transactions to be permitted outside the
banking solutions (CBS) by RRBs.
Negotiated Dealing System – Order
Matching (NDS-OM) system. • RRBs and State/Central Cooperative Banks
should disclose the level of CRAR as on
• Systemically important non-deposit taking
March 31, 2008 in their balance sheets. A
NBFCs (NBFC-ND-SI) to be considered as
road-map may be evolved for achieving the
‘qualified entities’ for accessing the NDS-OM
desired level of CRAR by these banks.
using the Constituents’ Subsidiary General
Ledger (CSGL) route. • Working Group to be constituted to study
the recommendations of Sengupta
• The facility of permitting all exporters to earn
Committee report on ‘Conditions of Work
interest on their Exchange Earners’ Foreign
and Promotion of Livelihood in the
Currency (EEFC) accounts to the extent of
Unorganised Sector’ relevant to the financial
outstanding balances of US $ 1 million per
system and suggest an appropriate action
exporter is extended up to October 31, 2008
plan for implementation of acceptable
and banks are free to determine the rate of
recommendations.
interest.
• High Level Committee to be constituted to
• Reinstatement of the eligible limits under the
review the Lead Bank Scheme.
past performance route for hedging facility
provided that supporting underlying • Proposed to prepare a concept paper on
documents are produced during the term of financial literacy-cum-counseling entres
the hedge undertaken. detailing the future course of action.
• Oil companies to be permitted to hedge their • Financial assistance to RRBs for
foreign exchange exposures to the extent implementing information and

communication technology (ICT) based where IT support could be provided by the
solutions, including installation of solar Reserve Bank to UCBs.
power generating devices for powering ICT
• The Committee on Financial Sector
equipment in remote and under-served
Assessment (CFSA) (Chairman: Dr.
areas.
Rakesh Mohan; Co-Chairman: Dr. D.
Prudential Measures Subbarao) submitted an interim report
delineating its approach and reviewing the
• Final guidelines on Credit Default Swaps
progress of work to the Finance Minister and
would be issued by end-November 2007.
Governor, Reserve Bank of India in July
• Banks are urged to follow prescribed specific 2007. The CFSA is expected to complete
considerations while engaging recovery the assessment by March 2008 and lay out
agents. Abusive practices followed by banks’ a road-map for further reforms in a medium-
recovery agents would invite serious term perspective.
supervisory disapproval.
Indian Economic Outlook: 2007-08
• Constitution of a working group to lay down
Real Economy
the road-map for adoption of a suitable
framework for cross-border supervision and Real GDP growth originating in agriculture and
supervisory cooperation with overseas allied activities has risen above trend in the first
regulators, consistent with the framework quarter of 2007-08 and is poised to maintain this
envisaged in the Basel Committee on performance over the rest of the year on the back
Banking Supervision (BCBS). of a favourable south-west monsoon and
improvement in sown acreage. Recent
• In order to enhance the effectiveness of the
developments indicate some slackening of
banking supervisory system, the process of
momentum in the industrial and services
consolidated supervision to be integrated
sectors. Moreover, global uncertainties may have
with the financial conglomerate monitoring
some moderating influence on the performance
mechanism for bank-led conglomerates.
of manufacturing as well as services. Overall,
• It is proposed to cover, besides general these sectors are expected to sustain the
market risk, specific risk, especially the momentum of growth. Accordingly, real GDP
credit risk arising out of deficient growth in 2007-08 is placed at 8.5 per cent,
documentation or settlement risk, under the assuming no further escalation in international
supervisory process. crude prices and barring domestic or external
Institutional Developments shocks.
• Banks are urged to ensure that adequate Inflation

disaster recovery systems are put in place The gains achieved in reining in inflation in the
to fully comply with the requirements. first quarter of 2007-08 have been extended into
• Banks are urged to draw up time-bound the second quarter and currently headline
action plans for implementation of CBS inflation appears to be emerging out of a
across all their branches. prolonged trough. At this juncture, however, rising
and volatile international crude prices and the
• An action plan to be drawn up for heightened levels of food prices pose risks to
implementation of National Electronic the inflation outlook. In view of the persisting high
Clearing Service (NECS) using the existing levels of the price of the Indian crude basket,
infrastructure of National Electronic Funds some pass-through to domestic petroleum
Transfer (NEFT) system with centralised product prices appears reasonable. A key issue
clearing and settlement at Mumbai. going forward in this regard is the timing of the
• Working group to be constituted comprising pass-through in the context of the expected path
representatives of the Reserve Bank, State of headline inflation. The policy resolve going
Governments and the Urban Cooperative forward should be to consolidate the success in
Banks (UCBs) to examine the various areas lowering inflation on an enduring basis so that

an environment of stability prevails to nurture cent. Fiscal spending and exchange market
and protect the transition to higher growth. There interventions have mainly driven this acceleration
are indications that the public’s perceptions on as reflected in sizeable reserve money growth.
inflation are increasingly converging with the Deposit growth has been running ahead of the
policy preference for price stability. Accordingly, projection of Rs.4,90,000 crore for 2007-08 as
in view of the lagged and cumulative effects of a whole. Non-food credit (inclusive of non-SLR
monetary policy on aggregate demand and investments) has decelerated and is currently
assuming that supply management would be close to the projection of 24.0-25.0 per cent given
conducive, capital flows would be managed in the Annual Policy Statement. However,
actively and in the absence of shocks emanating moderating the expansionary effects of net
in the domestic or global economy, the policy capital flows is warranted so that money supply
endeavour would be to contain inflation close to is not persistently out of alignment with the
5.0 per cent in 2007-08. In recognition of India’s indicative projections set out in the Annual Policy
evolving integration with the global economy and Statement.
societal preferences in this regard, the resolve,
The Reserve Bank will continue with its policy of
going forward, would be to condition expectations
active demand management of liquidity through
in the range of 4.0-4.5 per cent so that an inflation
appropriate use of the CRR stipulations and open
rate of around 3.0 per cent becomes a medium-
market operations (OMO) including the MSS and
term objective consistent with India’s broader
the LAF, using all the policy instruments at its
integration into the global economy.
disposal flexibly, as and when the situation
Monetary Conditions warrants.
Money supply has so far been expanding well
above the indicative trajectory of 17.0 -17.5 per

SPECIAL ECONOMIC ZONES (SEZs)
Special Economic Zones (SEZs) denote geographical areas which enjoy special privileges
as compared with non-SEZ areas in the country.
The policy was introduced in April 2000 to provide internationally competitive and hassle-
free environment for exports.
During 2006-07, the total exports form SEZs were Rs.34,787 crore, i.e., 52.3% rise over
those in the previous year.
Special Economic Zones (SEZs) denote can be extended for another three years if half
geographical areas which enjoy special of the profit is reinvested in the corporation.
privileges as compared with non-SEZ areas in Besides income tax benefit, units in SEZ shall
the country. The main motivating force for setting be exempted from a host of the other taxes and
up SEZs came from the Ministry of Commerce duties like customs duty, excise duty, service
with a view to boosting exports by attracting both tax, Value Added Tax (VAT) and dividend tax.
Indian and foreign corporates to undertake For SEZs, the Government will acquire vast
investment in these areas. Earlier Export tracts of land and provide it to the corporations
Processing Zones are now also being converted or developers. A basic condition is that 25% of
into SEZs. the area of SEZ must be used for export related
Objectives of Setting Up SEZs activities and the remaining 75% of the area can
be used for economic and social infrastructure.
The main argument to establish SEZs is to
All the benefits and concessions of SEZ can be
promote exports by concentrating resources in
availed of for the whole area.
some pockets (designated as SEZs). The policy
was introduced in April 2000 to provide The list of authorized operations include roads,
internationally competitive and hassle-free housing apartments, convention centres,
environment for exports. The units may be set cafeterias and restaurants, airconditioning,
up to manufacture goods or render services. The telecom and other communication facilities and
unit in the SEZ area has to be a net foreign recreational facilities.
exchange earner, but no conditionality has been Sector-specific SEZs will be allowed to have
imposed to export a specified proportion of the additional operations including hotels, schools
output. and educational and technical institutes. Multi-
SEZs can be set up in the public sector, private product SEZs will also be allowed to have ports,
sector or joint sector or even by state airports and golf courses.
governments in collaboration with any corporate. Sector-specific developers of SEZs will be
Special Privileges for SEZs allowed to have 7,500 houses, hotels with a total
of 100 rooms, a 25-bed hospital and schools
SEZs are duty-free enclaves of development and
and other educational institutions and a multiplex
are deemed as foreign territories for purpose of
up to 52,000 sq. metres. Multi-product SEZs will
trade, duties and tariffs. The policy offers several
be allowed to build 25,000 houses, a 250-room
fiscal and regulatory incentives to developers of
hotel and a hospital with 100 beds and multiplex
the SEZs as well as to the units within these
of 2,00,000 sq. metres.
zones.
For sector-specific SEZs, the applicant’s net
Corporations in SEZ will not have to pay any
worth has to be a minimum of Rs.250 crore,
income tax on their profits for the first 5 years
while the minimum investment criterion is
and only 50% of the tax for two years thereafter.
Rs.250 crore. To qualify for developing a multi-
The concession of paying only 50% of the tax
product SEZ, the net worth has to be at least accelerate the development of these regions.
Rs.250 crore and minimum investment in the The policy helped to attract foreign-funded
project Rs.1,000 crore. For applying for IT SEZs, enterprise to invest over $30 billion in China and
net worth of applicant has to be Rs.100 crore. over 5,000 domestic enterprises from all over
the country to invest about 20 billion Yuan in SEZ
SEZs would be exempt form the application of
regions. As a result, six pillar industries took firm
labour laws so that they can attract
roots in China. These are: automobiles and
entrepreneurs to set up industrial units. Thus,
spare parts and components, microelectronics
Labour Commissioners will have no jurisdiction
and computers, household electrical appliances,
to inspect SEZs, even implement safety and
bio-medicines and optical, mechanical and
environmental norms in these units. All industrial
electrical products.
units and other establishments in SEZ shall be
declared “Pubic Utility Service” in which any Present State of SEZs and Future
strike shall be illegal. This implies that SEZs will Programmes
not comply with the provisions of the Industrial
At present, India has 19 SEZs. The Government
Disputes Act, 1947. They will, however, have the
has notified a total 154 SEZs as on October 3,
freedom to employ contract labour to any extent.
2007. The Government stated that the cap on
The Contract Labour (Regulation & Abolition) Act
the number of SEZs had been lifted, new
is also proposed to be amended to include
approvals have to wait till 75 zones take off
certain peripheral activities.
ground.
SEZ Policy Motivated by Chinese
During 2006-07, the total exports form SEZs
Experience
were Rs.34,787 crore, i.e., 52.3% rise over those
China established in 1980 SEZs in 14 coastal in the previous year.
cities. The main purpose was to provide a dual
Lured by the heavy incentives, large number
role for SEZs to act as “Windows” in developing
industrial houses and developers - Indian as well
the foreign-oriented economy, thus, generating
and foreign - are pushing their applications to
foreign exchange by boosting exports and
the state governments to approve new
importing advanced technologies. Consequently,
proposals, but the sharp apprehensions and the
SEZs became “radiators” in accelerating
critique of SEZ policy have forced the
economic development. In these zones, to
government to do some rethinking on the issue,
attract foreign investment, customs duties and
though Mr. Kamal Nath, Minister of Commerce
income tax were eliminated. This helped China
is very keen to promote development via SEZ
to improve the coastal regions and thus
route.

LEGISLATIVE AMENDMENTS FOR CONDUCT OF
MONETARY POLICY
The amendments to the Reserve Bank of India Act, 1934 and the Banking Regulation
Act, 1949 have provided RBI greater manoeuvrability in monetary management.
RBI now has the flexibility to change the reserve requirements for scheduled banks
depending on the evolving macroeconomic and monetary conditions.
The Reserve Bank of India (Amendment) Act, Ordinance, 2007 which came into effect on
2006 was passed in June 2006. The amendment January 23, 2007) was notified in the gazette on
to the Act, inter alia, removed the ceiling as well March 28, 2007. Consequent upon the
as the floor of the CRR prescribed for scheduled amendment to Section 24 of the Banking
banks. RBI has, thus, been provided with the Regulation Act, 1949, the floor rate of 25 per cent
discretion to decide the percentage of scheduled for the statutory liquidity ratio (SLR) has been
banks’ demand and time liabilities to be removed and RBI has also been empowered to
maintained as CRR without any ceiling or floor. determine the SLR-eligible assets. The
Furthermore, consequent to the amendment, no amendments to the Reserve Bank of India Act,
interest will be paid on the CRR balances so as 1934 and the Banking Regulation Act, 1949 have
to enhance the efficacy of the CRR, as payment provided the RBI greater manoeuvrability in
of interest attenuates its effectiveness as an monetary management as it now has the
instrument of monetary policy. The amendment flexibility to change the reserve requirements for
Act also provides RBI with the statutory backing scheduled banks depending on the evolving
for regulating the money market and trading of macroeconomic and monetary conditions.
over-the-counter derivatives.
The Banking Regulation (Amendment) Act, 2007
(replacing the Banking Regulation (Amendment)

GOVERNMENT SECURITIES ACT, 2006
The legal framework relating to issuance and servicing of Government securities

was provided by the Public Debt Act, 1944.
The Government Securities Act, 2006 was enacted, which seeks to replace the Public
Debt Act, 1944 and repeal the Indian Securities Act, 1920.
Management of Government debt involves The Act proposes to consolidate and amend the
issuance and servicing of Government law relating to issue and management of
securities. The servicing of Government debt Government securities by RBI. The Act, inter alia,
requires timely payment of interest and principal provides for (i) definition of terms such as ‘bond
to the holders of Government securities and ledger account’, ‘constituent subsidiary ledger
settlement of claims in the event of death of the account’ and ‘Government security’; (ii)
holder. The issue of Government securities and recognition of title to Government security of
their servicing is attended to by RBI through the deceased sole holder or joint holders; (iii)
Public Debt Offices, the branches of State Bank nomination by holders of Government securities;
of India/Associate Banks and the district (iv) acceptance of micro films, facsimile copies
treasuries/sub-treasuries. of documents, magnetic tapes and computer
printouts as documents of evidence; (v)
The legal framework relating to issuance and suspension of the holders of subsidiary general
servicing of Government securities was provided ledger account from trading with the facility of
by the Public Debt Act, 1944. In view of the sharp that account in the event of misuse of the said
increase in the volume of the public debt and facility; (vi) stripping of a Government security
other changes in the external environment, separately for interest and principal; (vii) creation
some of the provisions of the Act and the Rules of pledge, hypothecation or lien in respect of
framed thereunder were found to be onerous, Government securities. The Act also empowers
and, at times, impeded further development of RBI to call for information, cause inspection and
the debt market. Accordingly, the Government issue directions as well as to make regulations
Securities Act, 2006 was enacted, which seeks with the prior approval of the Central Government
to replace the Public Debt Act, 1944 and repeal for carrying out the purposes of the Act.
the Indian Securities Act, 1920.
The Government Securities Act came into force
from December 1, 2007.

CREDIT INFORMATION COMPANIES (REGULATION)
ACT, 2005: RULES AND REGULATIONS
The Credit Information Companies (Regulation) Act, 2005 was passed in Parliament in
May 2005. The rules and regulations for the implementation of the Act were notified on
December 14, 2006.
The Act was enacted with a view to strengthening the legal mechanism and enabling the
credit information companies to collect, process and share credit information on the
borrowers of banks and financial institutions.
The Act also covers, inter alia, responsibilities of credit information companies, rights and
obligations of the member credit institutions and safeguarding of privacy rights.
The Credit Information Companies (Regulation) necessary steps for maintaining an

Act, 2005 was passed in Parliament in May 2005. accurate, complete and updated data; and
The rules and regulations for the implementation (d) transmitting data through secure
of the Act were notified on December 14, 2006. medium. Further, the credit institution or the
The Act was enacted with a view to strengthening credit information company should ensure
the legal mechanism and enabling the credit that the credit information is accurate and
information companies to collect, process and complete with reference to the date on which
share credit information on the borrowers of such information is furnished or disclosed
banks and financial institutions. The Act also to the credit information company or the
covers, inter alia, responsibilities of credit specified user as the case may be.
information companies, rights and obligations of
the member credit institutions and safeguarding (iii) In order to prevent unauthorised access,
of privacy rights. The salient features of Credit every credit information company, credit
Information Companies Rules and Regulations institution and specified user should adopt
are presented below: policy and procedures to:
I. Salient features of Credit Information (a) secure confidentiality of data;

Companies Rules (b) allow access to only to authorised
(i) A credit information company whose managers or employees on a need to know
application for certificate of registration has basis;
been rejected or whose certificate of (c) ensure control access to the data at
registration has been cancelled, can terminals, network by means of physical
approach the appellate authority designated barriers including biometric access control
by the Central Government for the purpose. and logical barriers by way of passwords;
(ii) Every credit institution and the credit (d) ensure that the passwords are changed
information company should formulate regularly and frequently;
appropriate policy and procedure, duly
approved by its board of directors, (e) ensure that the best practices in relation to
specifying therein the steps and security deletion and disposal of data especially the
safeguards with regard to (a) collecting, disposal of records or discs off-site or by
processing and collating of data relating to external contractors are followed;
the borrower; (b) steps for security and
(f) ensure protection against unauthorized
protection of data and the credit information
modification or deletion of data;
maintained at their end; (c) appropriate and

(g) ensure maintenance of log of all accesses processed and shall be protected against
to data, all unsuccessful attempts and all loss, unauthorised access, use,
incidents involving a proven or suspected modification or disclosure.
breach of security
(b) Access to and modification of credit
(h) protection against pilferage of information information: Every credit information
while passing through the public and private company upon request from a person shall
networks. disclose to him, his own credit information
report, subject to satisfactory identification.
II. Salient features of Credit Information
Further, every credit information company,
Companies Regulations
credit institution and specified user shall
(i) The Regulations indicate which companies take prompt action in relation to updating of
can obtain credit information as specified credit information with proper coordination
users (insurance company, cellular/phone amongst them within prescribed time limit.
company, credit rating agency, stock broker,
(c) Data use limitation: Obligation to disclose
trading member, SEBI, IRDA, among
by the specified user to a borrower or client
others) in addition to those provided under
as the case may be within thirty days in
section 2(l) of the Act.
case credit is denied to him.
(ii) Every application by a company for grant of
(d) Length of preservation of credit information:
certificate of registration for continuing/
Credit information shall be preserved for a
commencing business of credit information
minimum period of seven years.
should be made in ‘Form A’ to RBI. On
carrying out scrutiny of the application, RBI (v) Regulations provide for the principles and
may grant ‘in-principle approval’ to such procedures relating to personal credit
applicant company and provide time to the information in respect of manner and
company, not exceeding three months, for purpose of collection of personal data,
fulfilling the conditions included therein and solicitation of personal data, accountability
may grant the certificate of registration to in transferring data to third party, redressal
the company thereafter. of grievances of individuals and length and
preservation of personal data, among
(iii) The regulations provide for the form of
others.
business in which credit information
companies can engage (providing Data (vi) Maximum fee leviable by a credit information
Management Services to members, company is as under:
collection/dissemination of information on
• Rs.15 lakh – Membership fee for credit
investments made by members in
institution and credit information company;
securities, fraud, money laundering, etc.) in
addition to those provided under section • Rs.50,000 and Rs.15 lakh – annual fee for
14(l) of the Act. credit institution and credit information
(iv) The privacy principles formulated to guide company, respectively.
the credit Information companies, credit • Rs.100 for providing an individual his own
institutions and specified users include the credit report.
following:
• Rs.500 and Rs.5,000 for providing credit
(a) Care in collection of credit information: The report on individual and non-individuals,
credit information shall be properly and respectively to specified users.
accurately recorded, collected and

INVESTMENT IN INDIAN COMPANIES
BY FIIs/NRIs/PIOs
FIIs can invest in a company up to 24% of its paid up capital
NRIs and PIOs can invest in a company up to 10% of its paid up capital.
RBI monitors these ceilings.
Foreign Institutional Investors (FIIs), Non- up value of each series of convertible

Resident Indians (NRIs), and Persons of Indian debentures issued by the company.
Origin (PIOs) are allowed to invest in the primary Monitoring Foreign Investments
and secondary capital markets in India through
the portfolio investment scheme (PIS). Under RBI monitors the ceilings on FII/NRI/PIO
this scheme, FIIs/NRIs can acquire shares/ investments in Indian companies on a daily
debentures of Indian companies through the basis. For effective monitoring of foreign
stock exchanges in India. investment ceiling limits, RBI has fixed cut-off
points that are two percentage points lower than
The ceiling for overall investment for FIIs is 24 the actual ceilings. The cut-off point, for instance,
per cent of the paid-up capital of the Indian is fixed at 8 per cent for companies in which
company and 10 percent for NRIs/PIOs. The NRIs/PIOs can invest up to 10 per cent of the
limit is 20 per cent of the paid-up capital in the company’s paid-up capital. The cut-off limit for
case of public sector banks, including the State companies with 24 per cent ceiling is 22 per cent
Bank of India. and for companies with 30 per cent ceiling, is
The ceiling of 24 per cent for FII investment can 28 per cent and so on. Similarly, the cut-off limit
be raised up to sectoral cap/statutory ceiling, for public sector banks (including State Bank of
subject to the approval of the board and the India) is 18 per cent.
general body of the company passing a special Once the aggregate net purchases of equity
resolution to that effect. And the ceiling of 10 per shares of the company by FIIs/NRIs/PIOs reach
cent for NRIs/PIOs can be raised to 24 per cent the cut-off point, which is 2% below the overall
subject to the approval of the general body of limit, RBI cautions all designated bank branches
the company passing a resolution to that effect. so as not to purchase any more equity shares
The ceiling for FIIs is independent of the ceiling of the respective company on behalf of FIIs/NRIs/
of 10/24 per cent for NRIs/PIOs. PIOs without prior approval of RBI. The link
The equity shares and convertible debentures offices are then required to intimate the Reserve
of the companies within the prescribed Bank about the total number and value of equity
ceilings are available for purchase under PIS shares/convertible debentures of the company
subject to: they propose to buy on behalf of FIIs/NRIs/PIOs.
On receipt of such proposals, RBI gives
i) the total purchase of all NRIs/PIOs both, on clearances on a first-come-first served basis till
repatriation and non-repatriation basis, such investments in companies reach 10 / 24 /
being within an overall ceiling limit of (a) 24 30 / 40/ 49 per cent limit or the sectoral caps/
per cent of the company’s total paid-up statutory ceilings as applicable. On reaching the
equity capital and (b) 24 per cent of the total aggregate ceiling limit, RBI advises all
paid up value of each series of convertible designated bank branches to stop purchases
debenture and on behalf of their FIIs/NRIs/PIOs clients. The
ii) the investment made on repatriation basis Reserve Bank also informs the general public
by any single NRI/PIO in the equity shares about the caution and the stop purchase in these
and convertible debentures not exceeding companies through a press release.
five per cent of the paid-up equity capital of
the company or five per cent of the total paid

MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT (MSMED) ACT, 2006
The MSMED Act, 2006 classifies enterprises broadly into (i) manufacturing
enterprises; and (ii) service enterprises. These broad categories are further classified
into micro enterprises, small enterprises and medium enterprises, depending upon
the level of investment in plant and machinery and equipment as the case may be.
The existing provisions of the Interest on Delayed Payment Act, 1998 to small scale
and ancillary industrial undertakings have been strengthened under the MSMED Act.
The Act also provides for constitution of a National Board for Micro, Small and Medium
Enterprises under the chairmanship of the Union Minister for MSME, with wide
representation of stakeholders.
At present, a small scale industrial unit is defined ‘Industrial Enterprises’, enterprises engaged
as an undertaking in which investment in plant in providing or rendering of services such as
and machinery, does not exceed Rs.1 crore, small road and water transport operators, small
except in respect of certain specified items under business, professional & self employed
hosiery, hand tools, drugs and pharmaceuticals, persons, etc., are ‘Service Enterprises’
stationery items and sports goods, where this
These enterprises are further classified as
investment limit has been enhanced to Rs.5
Micro, Small and Medium Enterprises (MSMEs)
crore.
on the basis of original investment in plant and
The Government of India has enacted the Micro, machinery in respect of Industrial Enterprises
Small and Medium Enterprises Development (original cost excluding land and building and the
(MSMED) Act, 2006 on June 26, 2006 which items specified by the Ministry of Small Scale
was notified on October 2, 2006. Consistent with Industries vide its notification No.S.O.1722(E)
the notification of the Micro, Small and Medium dated October 5, 2006) and investment in
Enterprises Development (MSMED) Act 2006, equipments in respect of Service Enterprises
the definition of small scale industry and micro (original cost excluding land and building and
and small enterprises engaged in providing or furniture, fittings and other items not directly
rendering of services for the purpose of priority related to the service rendered or as may be
sector lending has been modified. Some of the notified under the MSMED Act, 2006).
important provisions of the Act are as under:
Detailed classification is as under:
a) Definition of Micro, Small and Medium
Enterprises a) Industrial Enterprises:
b) Delayed payment to Micro and Small i) A micro enterprise, where the investment
Enterprises in plant and machinery does not exceed
c) Filing of memorandum of Small and Medium Rs.25 lakh.
Enterprises
ii) A small enterprise, where the investment
Definition of Micro, Small and Medium in plant and machinery is more than Rs.25
Enterprises lakh does not exceed Rs.5 crore or
iii) A medium enterprise, where the where
Under the act two categories of enterprises have
the investment in plant & machinery is more
been defined namely: Industrial Enterprises and
than Rs.5 core but does not exceed Rs.10
Service Enterprises. While enterprises engaged
crore;
in the manufacture or production, processing or
preservation of goods are classified as b) Service Enterprises

i) A micro enterprise, where the investment compound interest with monthly rests to the
in equipment does not exceed Rs.10 lakh supplier on the amount from the appointed day
or, on the date agreed on, at three times of the
ii) A small enterprise, where the investment
Bank Rate notified by RBI.
in equipment is more than Rs.10 lakh but
does not exceed Rs.2 crore; or iii) For any goods supplied or services
rendered by the supplier, the buyer shall be liable
iii) A medium enterprise, where the to pay the interest as advised at (ii) above.
investment in equipment is more than Rs.2 iv) In case of dispute with regard to any amount
crore but does not exceed Rs.5 core) due, a reference shall be made to the Micro and
This classification is summarized in the table Small Enterprise Facilitation Council, constituted
by the respective State Government.
given below:
Memorandum of Small and Medium
Classification Original Investment in plant and Enterprises
machinery /equipments
Unlike the past where all industries were required
Industrial Service to get themselves registered with the District
Enterprises Enterprises Industries Centre, the units now have been given
discretion under this Act to file/not file a
Micro Up to Rs. 25 Up to Rs 10 ‘Memorandum of small and medium enterprises’
lakh lakh on the prescribed format to the DIC. Rules
regarding filing of memorandum are as under:
Small More than More than
Rs.25 lakh Rs. 10 lakh i) Any person who intends to establish a micro
& up to & up to or small enterprise (both industrial and service)
Rs. 5 crore Rs. 2 crore. or a medium enterprise in service sector only
has been given discretion to file a ‘Memorandum
Medium More than More than of small and medium enterprises’. However, a
Rs 5 crore & Rs. 2 crore & medium enterprise engaged in the manufacture
up to Up to or production of goods is mandated to file the
Rs 10 crore Rs. 5 crore. memorandum of MSME.
ii) An Industry established before the
Arising out of this, all such industrial units with
commencement of this Act and having
original investment in plant and machinery upto
investment in plant and machinery of more than
Rs 5 crore some of which are presently
Rs.1 crore but not exceeding Rs.10 crore is also
classified under C&I (Mfg.) segment will have to required to file memorandum within one hundred
be classified as SSI units and segment code and eighty days from the commencement of this
allotted accordingly. Act (2nd October 2006)
Delayed Payment to Micro and Small Bank’s lending to micro and small enterprises
Enterprises sector including all advances granted to units in
The existing provisions of the Interest on Delayed the KVI sector, (irrespective of the size of
Payment Act, 1998 to Small Scale and Ancillary operations, location and amount of original
Industrial Undertakings, have been strengthened investment in plant and machinery in the case
under the MSMED act as under: of KVI units) will be included for the purpose of
i) The buyer to make payment on or before reckoning under the Priority Sector.
the date agreed on between him and the supplier Compilation of Separate Data for Each
in writing or, in case of no agreement before the Category of Enterprises
appointed day. The agreement between seller Based on the above definition, the banks are
and buyer shall not exceed more than 45 days. required to compile data separately for each
ii) The buyer fails to make payment of the category of enterprise in a prescribed format
amount to the supplier. He shall liable to pay from the quarter ended March 31, 2007.

RTI ACT: IMPLICATIONS FOR BANKS
Right to Information Act 2005 (RTI Act 2005) was enacted recognizing that access to
information is the crucial foundation of democracy.
Various provisions under the Act.
RTI as applicable to Banks.
Impact of RTI
Mahatma Gandhi said, “The real Swaraj will or records, taking certified samples of material.
come not by acquisition of authority by few; but Where such information is stored in computers
by the acquisition of capacity by all to resist it would include information in the form of
authority when abused.” The British Raj enacted diskettes, floppies, tapes, video cassettes or in
the Officials Secrets Act in 1923 mainly as a any other electronic mode or through printouts.
defence mechanism against the rising tide of Under the Act it is obligatory on the part of all
nationalism. No citizen in those days had any public authorities to maintain all their records duly
access to official information. In recent years, catalogued and indexed in a manner and form
there has been an ever-growing global trend which facilitates easy access to records. The
towards recognition of the right to information. Public Authority should also publish, within 120
The Government of India has enacted the Right days from the enactment of the Act, the
to Information Act 2005 (RTI Act 2005) particulars of facilities available to citizens for
recognizing that access to information is the obtaining information, including the names,
crucial foundation of democracy. designations and other particulars of the Public
The RTI Act 2005 provides for setting out a Information Officers. Every public authority
practical regime of right to information under the needs to designate Central Public Information
control of ‘public authorities’, in order to promote Officers (CPIO) for each administrative unit and
transparency and accountability in the working a Central Assistant Public Information Officer
of every public authority. The Act came into effect (CAPIO) at each sub-divisional or sub- district
on the 12th October 2005, extending to whole level to receive the applications for information
of India except the State of Jammu and Kashmir. under the Act. State Bank of India has designated
‘Public Authority’ includes a body or institution Branch Heads at all the branches, Chief Manager
constituted under the Constitution or any other (OAD) at Zonal Offices, Asst General Manager
law by the Parliament/State legislature. It (OAD) at Local Head Offices and AGM (RTI) at
includes any body owned, controlled and the Corporate Centre as the CAPIO. General
substantially financed directly and indirectly by Managers of the respective networks has been
funds provided by the appropriate Government. designated as the CPIO for branches and Zonal
Hence, State Bank of India constituted under the Offices. The General Manager (OL &CS) is the
Act of Parliament and all Public Sector Banks CPIO for all the Corporate Centre
owned and controlled by the Government are establishments. Chief General Manager
‘public authorities’ within the meaning of the Act. (Banking Operations) is the appellate authority
The ‘right to information’ means the access to for the whole Bank. As mandated under the RTI
information which is held by or under the control Act, the above information has also been
of any public authority. It includes the right to uploaded on the Bank’s website www.sbi.co.in.
inspection of work, documents, records, taking Any Indian citizen, who desires to obtain any
notes, extracts or certified copies of documents information under this Act, shall make a request
in writing or through electronic means in English, representing the cost of providing the information
Hindi or in any official language of the area in together with the calculations made to arrive at
which the application is being made to the CPIO the amount has to be conveyed to the applicant.
or CAPIO. Every application must be The period intervening between the despatch of
accompanied with fee as stipulated under the the said intimation and payment of fees shall be
Act. In case the applicant is illiterate the CPIO excluded for the purpose of calculating the period
or CAPIO shall render all reasonable assistance of 30 days reckoned for replying to the query. In
to the person in reducing his oral request to the case of SBI the CPIO decides on additional
writing. The applicant making the request for fee the same has to be deposited in the same
information shall not be required to give any branch.
reason for requesting the information or any
other personal details except what may be The Act exempts certain information from
disclosure. They include information which
necessary for contacting him. The CPIO and
would affect the security, sovereignty and
CAPIO have to provide the information or reject
the request assigning one of the reasons integrity of the country, information which has
specified in the Act, within 30 days of the receipt been expressly forbidden to be published by
of the request. In case the information sought court of law, information of commercial
for concerns the life or liberty of a person, the confidence, trade secrets, or intellectual
same has to be provided within 48 hours of the property - the disclosure of which would harm
receipt of the request. Failure to provide the competitive position of a third party,
information including records of deliberations of
information within the specified period would be
Council of Ministers. A request for information
deemed as refusal to provide information.
may be rejected on the ground that furnishing
As per Bank’s guidelines, a person seeking the information would involve an infringement of
information under the RTI Act should submit an copyright subsisting in a person other than the
application accompanied with a fee of Rs 10/- State. However, any information which cannot
by way of demand draft or Bankers cheque be denied to the Parliament or a State
favouring SBI either at the nearest Branch Head Legislature shall not be denied to any person.
(CAPIO) or the General Manager of the network
Under RTI Act, the cut-off date for seeking
(CPIO). The fee of Rs 10./- can also be paid in
information on an event is 20 years. It implies
cash and receipted counterfoil must be enclosed
with the application. An applicant from below that an applicant can seek information on any
poverty line need not pay any fee. No formal event that occurred upto 20 years before the date
format for submitting an application has been on which the request is made.
prescribed under the Act. However, an The Government of India has set up an
application for seeking information should autonomous body under the Act called Central
contain details necessary for contacting the Information Commission to oversee its
applicant, viz name, postal address, telephone implementation. The Commission has been
/ fax etc. The CAPIO would verify the application vested with powers to receive and enquire into
received at the branch, brand it with receiving complaints from any person who has been
stamp and give an acknowledgement to the refused access to any information/ has not been
applicant and enter it in a special register. given a response to a request within the
Thereafter, immediately, he has to send it to the stipulated time in the Act. Complaint can also
concerned CPIO directly through courier under be preferred in case the applicant believes that
advice to his Controller. he has been given incomplete, misleading or
false information or he is required to pay an
The CPIO has the option of requesting for
amount of fee which he or she considers
additional fee from the person seeking
information. The details of additional fees unreasonable.

RTI has already caught the headlines and the Commissioner M M Ansari said “We see that
imagination of all sections of the society. RTI our limited resources are being devoted to
Act helped a rickshaw puller, Masloom, in attending to frivolous applications, which
Madhubani, Bihar to get a house allotted under constitute to more than 50 per cent of our
Indira Awas Yojana without paying the bribe of workload. A large number of people are simply
Rs 5000/- demanded by the official concerned. misusing the RTI.” Maintaining records for 20
A daily wage labourer, Nannu, got a ration card years is entailing mammoth expenses to Public
without paying a bribe of Rs 500/- . It has also Authorities. Hopefully, RTI would influence
triggered filing of numerous frivolous applications policies for a better society.
under the RTI Act. Former Information

MICRO FINANCE
A microfinance institution (MFI) is a financial intermediary, which provides very small

amounts to rural, semi-urban and urban poor.
Its objective is to raise the income and standard of living of poor.
SHG has emerged as one of the successful instruments in Micro financing.
During the year 2006-07, 6,86,408 new SHGs were credit linked with banks taking
the cumulative number of SHGs credit linked to 29,24,973 as on 31 March 2007.
Since inception of the micro-finance (MF) programme, it has enabled an estimated
409.5 lakh poor households to gain access to MF from the formal banking system.
According to the Asian Development Bank, one these are high-profile NGOs getting vast funds
of the biggest donors for micro-finance, the from the imperialist countries.
provision of financial services, such as
Following the emergence of NGO sector in the
deposits, loans, payment services, money
country and their endeavour to provide micro-
transfers & insurance to the poor and low-
credit and support to micro-entrepreneurs,
income households and their micro-enter-prises
several agencies and departments of the
are broadly called ‘micro-financing’. The term
Central and State Government like NABARD,
micro-finance came into greater currency since
SIDBI, HUDCO, HDFC, Ministry of Agriculture/
the early 1990s and has largely supplanted the
HRD/Rural Development started using NGOs
term ‘micro-credit’.
for reaching out credit and other welfare services
A microfinance institution (MFI) is a financial to the rural, particularly women.
intermediary, which provides credit to the rural
In fact, there is a diversity of approaches to
populace. MFIs most often are NGOs, but can
microfinance involving banks, NGOs and co-
also be some other bodies like the panchayats,
operatives. In each of these models, the group
anganwadi teachers, etc. This MFI then sets up
usually assumes joint liability for loans taken by
Self-help Groups (SHGs) which comprise about
its members. SHGs of 15-20 members, for
20 people (mostly women) who deposit (save)
instance, may rotate their savings as internal
a certain amount each week/month. Then the
loans within the group as well as access loans
MFI puts in an equal amount (or upto four times
from the MFI or from a bank. The group usually
the amount) and the loan is given to individual
has weekly, fortnightly or monthly meetings, in
members of the SHGs. The loans are given
which the members deposit a regular savings
individually but the liability is the collective
amount and make any loan repayments. In these
responsibility of the SHG. In turn, the MFIs are
meetings, a definite sum of Rs.10, Rs.20, etc.,
re-financed by commercial banks.
is deposited by each member and these
The origin of SHGs can be traced to 1976, when deposits are used for internal loans. After being
Professor Mohammud Yunus of Bangladesh satisfied about savings and repayments, banks
started women’s group in Bangladesh. This give loans to the groups
group later developed into the Bangladesh
Microfinance has come a long way from linking
Grameen Bank. In India, the pioneer in this field
a few SHGs in the early 90s to launching of the
was Self Employed Women’s Association
NABARD’s SHG–bank linkage programme.
(SEWA). Although it started as a trade union for
women in the unorganised sector almost 40 The Corporate Interest
years ago, today it boasts of running the first Of late, the big corporate sector and the
women’s bank in the country. In southern India, multinational firms are exhibiting an increasing
organisations like Pradan, Myrada, Asseefa and interest in microfinance. The impressive roll-call
Malar have entered this rural credit system. All of corporates in funding SHGs, directly or by

partnerships, and supporting NGOs, includes, banking system. NABARD continued to
ICICI, Citibank, ABN Amro, Hindustan Lever Ltd. emphasise scaling-up of the SHG-bank linkage
(Stree-Shakti project), ITC (e-chaupal), Mahindra programme in 13 priority States, which have
& Mahindra (Subha Labh), Tata Group (Kisan large population of the rural poor. The cumulative
Sansar), HDFC, Max New Life Insurance, etc. number of SHGs credit linked in these States
MNCs are getting interested in SHGs as increased from 10.05 lakh during 2005-06 to
consumers of their products. They are doing 13.75 lakh during 2006-07 constituting 54 per
marketing surveys through SHGs. In 2001, cent of the number of SHGs credit linked across
FMCG major, Hindustan Lever Ltd. (HLL) the country during the year. The regional spread
launched ‘Project Shakti’, a rural direct to home of the programme reveals that the share of non-
distributor model, which utilizes networks of southern regions improved significantly from 29
women from SHGs as rural direct-to-home per cent as on 31 March 2001 to 48 per cent as
distributors. on 31 March 2007.
With the objective of ensuring greater financial A grant assistance of Rs.1,403.96 lakh was
inclusion and increasing the outreach of the sanctioned to promote 59,662 SHGs to 8 co-
banking sector, RBI has enabled banks to use operative banks, 1 RRB, 352 NGOs and 23 IRVs
the services of Non-Governmental during the year, taking the cumulative sanction
Organisations/ Self Help Groups (NGOs/ SHGs), to Rs.4,749.96 lakh for the promotion of 3.09
Micro Finance Institutions (MFIs) and other Civil lakh groups. An amount of Rs.1,980.77 lakh was
Society Organisations (CSOs) as released and 1,52,928 SHGs were credit linked
intermediaries in providing financial and banking as on 31 March 2007.
services through the use of Business Facilitator
and Correspondent models for providing Under NABARD’s capacity building programmes
facilitation services like identification of for its partner institutions, 70 exposure/field visits
borrowers and fitment of activities, collection and to SHGs and institutions pioneering in MF for
preliminary processing of loan applications 1,864 bank/NGO officials, 682 training and
including verification of primary information/data, awareness programmes for 23,964 participants
creating awareness about savings and other from banks and NGOs, 155 sensitisation
products and education and advice on managing programmes covering 6,395 government
money and debt counselling, processing and officials and elected members of PRIs were
submission of applications to banks, promotion arranged during the year. NABARD also
and nurturing Self Help Groups/Joint Liability extended support for conducting 3,494
Groups, post-sanction monitoring, monitoring awareness creation and capacity building
and handholding of Self Help Groups/Joint programmes covering 2,01,854 SHG members.
Liability Groups/Credit Groups/others; and
follow-up for recovery. To motivate and assist members of matured
SHGs to take up income generating activities
The programme of linking self-help groups on a sustainable basis, NABARD continued to
(SHGs) with the banking system continues to promote micro-enterprise development by SHG
be the major micro-finance programme in the members. Under the Micro-Enterprise
country and is being implemented by Development Programme (MEDP), 297 such
commercial banks, RRBs and co-operative programmes covering 7,579 SHG members
banks. were conducted during the year. The pilot project
Performance launched during 2005-06 for developing micro-
entreprises in partnership with Marketing and
During the year 2006-07, 6,86,408 new SHGs Research Team (MART), is being implemented
were credit linked with banks taking the in nine districts across nine States involving 14
cumulative number of SHGs credit linked to NGOs as ‘micro-enterprise promotion agency
29,24,973 as on 31 March 2007. Since inception (MEPA)’. During the year, MEPAs completed
of the micro-finance (MF) programme, it has detailed surveys of the project districts and
enabled an estimated 409.5 lakh poor identified existing opportunities and demand/
households to gain access to MF from the formal supply patterns for farm/non-farm activities in

consultation with SHG members that could be During 2006-07, three agencies were sanctioned
taken up for sustainable income generation in total capital support of Rs.3 crore.
the project area. Action plan finalised by each
MEPA on the basis of the survey findings, is NABARD continued to implement the pilot
being implemented. projects launched during the earlier years. Based
on its experience and in response to the Union
To facilitate matured SHGs to meet their credit Budget (2006-07) announcement for financing
requirements of production and investments in of tenant farmers by banks, NABARD formulated
agriculture and allied activities and to enable the scheme for financing Joint Liability Groups
them to diversify their income generating (JLGs) of such farmers. NABARD designed a
activities, NABARD introduced a new line of pilot project for collaboration with Post Offices
refinance for scheduled commercial banks, for financing SHGs which is under
RRBs and co-operative banks. Under the implementation in five districts of Tamil Nadu.
scheme, cent per cent refinance is provided to As on 31 March 2007, 530 SHGs have opened
banks under ARF for financing term loan and saving bank accounts, of which 46 have been
cash credit limits sanctioned by them to SHGs. credit linked by the participating post offices. A
pilot project for proving a social security system
To support the MF programme, NABARD for SHG members was also sanctioned for
selectively extends Revolving Fund Assistance implementation in two villages covering 500 poor
(RFA) to MFIs for on-lending to SHGs. During households from Betul district of Madhya
the year, RFA of Rs.1 crore was sanctioned Pradesh and is being implemented through an
taking the aggregate support to Rs.27.98 crore NGO for Awareness of Integrated Social Security
as on 31 March 2007 for 31 agencies. In addition, (OASIS) with a grant assistance of Rs.8 lakh.
to enable rating of MFIs and empowering them
to intermediate between the lending banks and During the year, Rs.11.18 crore was utilised from
the clients, NABARD provides financial the Micro-Finance Development and Equity Fund
assistance to commercial banks and RRBs to (MFDEF) for MF related activities. The Micro
avail the services of credit rating agencies for Financial Sector (Development and Regulation)
the purpose. The Bank also introduced a Bill 2007 was introduced in the Lok Sabha on 20
scheme to provide capital/equity support to MFIs March 2007.
during 2006-07 to enable them to leverage
capital/equity for accessing funds from banks, SBI and Micro Credit
providing financial services at an affordable cost Cumulatively, the Bank has credit linked 7.68 lakh
to the poor, and achieve sustainability in their SHGs and disbursed loans to the extent of
credit operations over a period of 3 to 5 years. Rs.3,468 crore as at end-March 2007.

ECONOMY & FINANCE
INSTITUTIONS

BANKING CODES AND STANDARDS BOARD OF INDIA:
BANK’S COMMITMENTS TO CUSTOMERS
Eleven Commercial Banks (six Public Sector Banks, three Private Sector Banks and two
Foreign Banks) have joined RBI to set up the Banking Codes and Standards Board of
India (BCSBI) which was registered on 18.2.2006 in Mumbai as a society under the
Societies Registration Act.
The Code is subject to review within a period of three years. The review will be undertaken
in a transparent manner.
Eleven Commercial Banks (six Public Sector by branches or subsidiaries across the counter,
Banks, three Private Sector Banks and two over the phone, by post, through interactive
Foreign Banks) have joined RBI to set up the electronic devices, on the internet or by any other
Banking Codes and Standards Board of India method.
(BCSBI) which was registered on 18.2.2006 in
Mumbai as a society under the Societies Key Commitments to Customers by Banks
Registration Act. In order to become members To act fairly and reasonably in all dealings
of the board, the banks would be required to sign with the customers by the banks;
an agreement expressing their commitment to
abide by the codes laid down by the board. State To help customers to understand how
Bank of India is a member of BCSBI. financial products and services work;
This is a Voluntary Code which sets minimum To help customers to use their account or
standards of banking practices for banks to services by providing regular appropriate
follow when they deal with the customers. It updates and keeping them informed about
provides protection to customers and explains changes in interest rates, charges or terms
how banks are expected to deal with customers and conditions;
in their day to day operations.
To deal quickly and sympathetically with
Objectives of the Code them when things go wrong;
The Code has been developed to: To treat all personal information as private
and confidential other than in the following
promote good and fair banking practices by circumstances:
setting minimum standards in dealing with
customers; a. if bank has to give information by law,
increase transparency so that the customer b. if there is a duty towards the public to
can have a better understanding of what reveal the information,
she/he can reasonably expect of the banks’
c. if bank’s interests require to give the
services;
information (e.g., to prevent fraud) but
encourage market forces, through bank will not use this as a reason for
competition, to achieve higher operating giving information about customer or his
standards; accounts (including name and address)
to anyone else, including other
promote a fair and cordial relationship companies, group companies, for
between customer and bank; marketing purposes,
foster confidence in the banking system. d. if customer asks bank to reveal
Application of the Code: The Code is information, or if permission is given to
applicable to all the products and services the bank by the customer,
offered by the banks, whether they are provided
e. If banks are asked to give a banker’s In case customer does not adhere to
reference about a customer, banks will repayment schedule, a defined process in
need written permission before they can accordance with the laws of the land will be
give it; followed for recovery of dues. All the
members of the staff or any person
f. Bank will explain to customer the extent authorized to represent the bank will follow
of his rights under the existing legal the guidelines set out for the purpose,
framework for accessing the personal
records that bank holds about him; A copy of the security policy will be made
available on request as per the provision of
g. Bank will not use personal information law,
for marketing purposes by anyone
unless customer specifically authorizes Complaint and grievances redressal
bank to do so. mechanism of the bank will be made
available to the customer,
To provide a copy of the Code to the
customer; Bank will display on website and by way of
notice board to its branches explaining that
To adopt and practise a non-discrimination it is covered by the Banking Ombudsman
Policy irrespective of age, race, gender, Scheme 2006. Copy will be made available
marital status, religion or disability. on request at a nominal charge,
A Few Other Important Features of the Code Bank will ensure that salient features of
Information on interest rates, common fees Banking Ombudsman Scheme 2006 are
and charges will be made available to displayed at its notice board and website,
customers through notices in branches, Bank will explain the implications of the
phone, help lines, website, designated staff, different types/styles of accounts as also
help-desk or referring to the service guide/ the nomination facilities at the time of
Tariff schedule, opening of accounts,
Any changes in interest rates, charges and Due diligence as required under “Know Your
fees will be notified one month prior to the Customer (KYC)” guidelines will be followed,
revised charges being levied/become
effective, Bank will exchange soiled/mutilated notes
and/or small coins at notified branches as
Bank will make sure that all advertising and per RBI directives and will also display
promotional material is clear and not notice regarding norms for furnishing PAN,
misleading,
For any branch closure/shifting, the bank will
In the event of receipt of any complaint from give notice to the customer three months
customer that bank’s representative/ courier ahead if no other bank exists in the area and
or Direct Selling Agent has engaged in any two months if there exists any bank,
improper conduct or acted in violation of this
Code, bank will take appropriate steps to The simplified procedure will be followed for
investigate and to handle the complaint and settlement of accounts of deceased
to make good the loss, account holders and bank will endeavour to
settle the claims within a period not
Bank will tell the customer when it passes exceeding 15 days from the date of receipt
the account details to credit reference of the claim subject to production of proof
agencies and will provide a copy of such of death of the depositor and suitable
information given to the credit rating identification claims to the bank’s
agencies or provide leaflets to the customer satisfaction,
that explain how credit referencing works,

In case the bank offers the services of To protect accounts of customer, the bank
locker, the complete rules and regulations will initiate secure and reliable banking and
will be made available to the customer who payment systems that customer can trust,
is hiring the service,
Do’s and don’ts regarding the security of
When customer buys or sells foreign cheques, PINs, passbook and internet
exchange, information on the services, banking will be informed to the customer to
details of the exchange rate and other prevent fraud and to protect the accounts
charges which apply to foreign exchange of the customer,
will be provided. If this is not possible, bank
will tell how these are worked out, The norms regarding canceling payments
will be made available to customer,
The norms for transfer of money abroad will
be made known to customer, In case customer acts fraudulently, she/he
is responsible for all losses on her/his
Bank will have a compensation policy in account. If customer acts without
case of delay in remittance procedures reasonable care and this causes losses,
within India, customer may be responsible for them,
Before lending to the customer, bank will Unless customer has acted fraudulently or
assess her/his repayment capacity. Bank without reasonable care, customer liability
will communicate in writing the reason(s) for the misuse of her/his card will be limited
for rejection of loan proposal where the to the amount stipulated in the terms and
amount of loan applied for does not exceed conditions governing the issue of card,
Rs.2 lakh,
Customer is liable for misuse on account
Bank will keep the guarantor informed of any of loss of his PIN or compromise of
material adverse change(s) in the financial password or of other secured information
position of the borrower for whom the until the time that bank has been notified and
customer stands as a guarantor, taken steps to prevent misuse,
If a customer using credit card does not Customer can contact BCSBI and IBA for
recognize a transaction that appears on card any clarification and branches will make
statement, bank will give more details if card available a copy of the Code to the customer
holder asks for it. In case the bank does not on request.
accept contention of card holder, it will
provide the evidence that card holder had The Code is subject to review within a period of
authorized the transaction in question, three years. The review will be undertaken in a
transparent manner.

Pension Fund Regulatory and Development Authority
(PFRDA)
PFRDA was established by the Government of India on 23rd August 2003.
PFRDA is the prudential regulator for the New Pension Scheme (NPS), which is a
defined contribution pension system to be launched after the PFRDA Bill, 2005, is
passed by Parliament.
PFRDA was established by the Government of Penal provisions are proposed in the form of
India on 23 rd August 2003. PFRDA is the imprisonment, fines and penalties on those
prudential regulator for the New Pension entities which do not abide by the provisions of
Scheme (NPS), which is a defined contribution the law and the rules and regulations framed.
pension system to be launched after the PFRDA An effective grievances’ redressal system will
Bill, 2005, is passed by Parliament. also be set up to redress the complaints of
contributors to the New Pension System. There
NPS will be available on a voluntary basis to all
will be a provision for an appellate authority to
persons including self employed professionals
challenge the decisions of the PFRDA.
and others in the unorganised sector. Nineteen
State Governments have also issued Pending passage of the PFRDA Bill in
notifications to opt for the defined contribution Parliament, a conference of Chief Ministers of
pension system for future State Government the various State and Union Territory
employees who will join the services of these Governments was held in January 2007 at New
Governments. For Central Government Delhi. As part of the action taken on the decisions
employees joining service on or after January at the conference, the Government of India has
1, 2004, the new pension scheme is requested PFRDA to appoint, from the public
compulsory. sector, Central Recordkeeping Agency and Fund
Managers to manage the pension funds of
Pension reform is a major initiative undertaken
Government employees under the NPS.
by the Government to provide income security
after retirement. The proposed pension law and PFRDA has already identified, through a
rules and regulations to be framed thereunder process of competitive bidding, National
will provide strength and stability to the new Securities Depository Limited (NSDL) to function
pension system. The development of the as the CRA in respect of Government
pension sector is one of the main tasks of employees. Similarly, three public sector entities
PFRDA. Multiple strategies will be adopted to namely, Life Insurance Corporation of India, State
promote and maximize savings of subscribers Bank of India and UTI Asset Management
in the long run. The strategies would include Company Private Limited have been identified
public awareness and education, facilitating as sponsors of pension funds.
deposits through neighborhood bank/post
It is expected that the NPS architecture,
offices, electronic connectivity to access their
including the CRA, Fund Managers, NPS Trust
accounts through Internet, instill confidence in
and Trustee Bank will be operational in respect
the minds of the subscribers by laying down
of Government employees by the beginning of
prudent norms to be followed by the various
next year. Despite restrictions regarding choice
intermediaries. Due diligence will be exercised
of intermediaries and investment options, etc.,
to ensure that the Pension Fund Managers,
this NPS architecture is likely to be quite similar
Central Record Keeping agency and other
to that envisaged under the PFRDA Bill so that
players in the pension sector have the
when the time comes it would not be difficult to
experience, capability, reach, capital adequacy
scale it up. This will mark an important milestone
and other relevant qualifications to manage the
in the development of a sustainable and efficient
scheme in a fit and proper manner.
voluntary defined contribution pension system
in India.
CREDIT INFORMATION BUREAU (INDIA) LIMITED
(CIBIL)
CIBIL collects, collates and disseminates credit information pertaining to both
commercial and consumer borrowers.
Banks, Financial Institutions, Non Banking Financial Companies, Housing Finance
Companies and Credit Card Companies use CIBIL’s services.
Genesis: Rapid industrialization, expanding economy, growing aspirations,
increased incomes, improved lifestyles, availability of high quality products and
services leading to rapid credit off-take.
CIBIL is a composite Credit Bureau, which caters to both commercial and consumer
segments
Credit Bureaus facilitate increased lending is based on the Principle of Reciprocity, which
opportunities for credit grantors while allowing means that only Members who have submitted
easier access to credit for borrowers. The all their credit data, may access Credit
existence of credit bureaus in developed Information Reports from CIBIL. The relationship
countries has facilitated increased market between CIBIL and its Members is that of close
penetration of credit (to more than 66% as a interdependence. Co-operative banks, which
percentage of GDP as compared to 3% for India) are currently not under CIBIL’s purview, would
while keeping non-performing loans in check also be brought into the information-sharing fold.
(approximately 1% of outstanding credit).
CIBIL is a composite Credit Bureau, which
CIBIL was incorporated in 2000 and was caters to both commercial and consumer
promoted by the SBI, HDFC , Dun & Bradstreet segments and provides Credit Information
Information Services India Private Limited (D&B) Report. The Consumer Credit Bureau covers
and TransUnion International Inc., with SBI & credit availed by individuals while the
HDFC holding a share of 40% each. At present, Commercial Credit Bureau covers credit availed
the shareholding pattern has been diversified to by non-individuals such as partnership firms,
include various entities representing varied proprietary concerns, private and public limited
categories of credit grantors and the companies, etc. A Credit Information Report
shareholding of SBI and HDFC stands reduced (CIR) is a factual record of a borrower’s credit
to 10% each. payment history compiled from information
received from different credit grantors. Its
The aim of CIBIL is to improve the functionality purpose is to help credit grantors make informed
and stability of the Indian financial system by lending decisions - quickly and objectively. The
containing NPAs while improving credit grantors’ CIR only provides available factual credit
portfolio quality. CIBIL provides a vital service, information and does not provide any opinion,
which allows its Members to make informed, indication or comment pertaining to whether
objective and faster credit decisions. credit should or should not be granted. The credit
grantors who have received an application for
CIBIL’s aim is to fulfill the need of credit granting credit will make the credit decision. CIBIL does
institutions for comprehensive credit information not grant or deny credit. CIBIL will provide credit
by collecting, collating and disseminating credit information reports only to its members in India.
information pertaining to both commercial and
consumer borrowers. Banks, Financial Commercial Credit Bureau: The aim of CIBIL’s
Institutions, NBFCs, HFCs and Credit Card Commercial Credit Bureau is to minimise
Companies use CIBIL’s services. Data sharing instances of concurrent and serial defaults by
providing credit information pertaining to non-
individual borrowers such as public limited Access to CIBIL Information
companies, private limited companies,
partnership firms proprietorships, etc. It will CIBIL is maintaining a database on suit-filed
house the credit history of large and mid-sized accounts of Rs.1 Crore and above and suit-filed
corporates as well as the SME sector. CIBIL accounts (wilful defaulters) of Rs.25 lakh and
will maintain a central database of information above and the information is in the public domain
as received from its Members. CIBIL will then and is available at no charge. This information
collate and disseminate this information on is based on an application developed to enable
demand to members in the form of CIR to assist the users to access data through a
them in their loan appraisal process. parameterised search process across banks
and companies at various geographical
Consumer Credit Bureau: The objective of this locations. Suit-filed accounts of lower value are
Bureau is to minimise defaults and maximise being covered in a phased manner.
credit penetration and portfolio quality by
providing comprehensive credit information CIBIL claims to possess credit details of more
pertaining to individual borrowers. The Bureau than 60 per cent of the country’s borrowers and
collects credit information from its Members. It after the passage of Credit Information
then collates and disseminates, on demand, this Companies (Regulation) Act, 2005, details of the
information in the form of CIR to aid in the loan remaining 40 per cent, as well as new
appraisal process. CIBIL intends to provide borrowers, would be added to the CIBIL
world-class service while providing both, positive database. The new Act allows all the details of
and negative information to Member credit the borrowers with any bank/financial institutions
grantors. The basic Consumer CIR will broadly to be automatically submitted to CIBIL, unlike
contain the borrower information, Account the old practice of seeking borrower’s consent
details like Account type, Ownership indicator, before sharing the details with CIBIL or any other
Sanctioned amount , Current balance, Amount third party.
overdue, Suit-filed status, Days past due/Asset
classification, etc.

SME RATING AGENCY OF INDIA LIMITED (SMERA)
Joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited
(D&B), CIBIL and several leading banks in the country.
Takes into account the financial condition and several qualitative factors that have
bearing on creditworthiness of the SME.
Better rating from SMERA could lead to favourable credit terms such as lower
collateral requirements and interest rates and simplified lending.
SMERA has signed a memorandum of understanding with State Bank of India for
rating the SME clients of the bank.
SME Rating Agency of India Limited (SMERA) SMERA Ratings facilitate banks/ lending
is a joint initiative by Small Industries institutions in reducing the turnaround time in
Development Bank of India (SIDBI), Dun & processing credit applications, thereby providing
Bradstreet Information Services India Private SMEs access to timely and adequate credit.
Limited (D&B), Credit Information Bureau (India) SMERA Ratings categorise SMEs based on
Limited (CIBIL) and several leading banks in the size, so that each SME is evaluated amongst
country. SMERA is the country’s first rating its peers. This enables rational comparison of
agency that focuses primarily on the Indian SME companies of the same size, thus ensuring that
segment. SMERA’s primary objective is to the smaller companies are not at a disadvantage
while applying for credit. SMERA Ratings take
provide ratings that are comprehensive,
into account industry dynamics by factoring in
transparent and reliable.
a system through which an SME could compare
• SMERA Rating is an independent third- its strengths and weaknesses with those of other
party comprehensive assessment of the companies in the same line of business.
overall condition of the SME Composite Appraisal/Condition indicator is on a
• It takes into account the financial scale of 1 to 8 representing highest to lowest.
condition and several qualitative factors For example, 1 indicates highest condition of
that have bearing on creditworthiness of health while 8 the lowest. The Networth size
the SME. indicator is from A to D with A for Rs.20 crore
• SMERA Rating consists of a Composite and above, B for Rs.5 - 20 crore, C for Rs.1 - 5
Appraisal/Condition indicator and a size crore, and D for less than Rs.1 crore. The rating
indicator, for fair valuation of each SME is displayed as a combination of both-such as
amongst its peers. B1 or C5. For example, A 1 stands for a
• An SME unit having SMERA Rating company with Networth of Rs.20 crore and
above with highest condition of health.
would enhance its market standing
amongst trading partners and SMERA had approached the Government of
prospective customers. India for release of subsidy to meet the rating
SMERA would adopt a comprehensive, expenses. SMERA has signed a Memorandum
of Understanding (MOU) with State Bank of India
transparent and reliable rating process and it
and Indian Overseas Bank (IOB) for rating the
would have a wider acceptance within the
SME clients of the banks. SMERA expects other
banking system of the country. In addition to commercial banks to follow the example of SIDBI
this, SMERA would be supported by SIDBI and in considering softer interest rates for SMEs
a large number of public and private sector credit-rated by SMERA. Under the MoU SBI and
banks in the country. It will also simplify the IOB would encourage its SME clients to be rated
process of credit requests and make the by SMERA. It has also broached the subject with
process more cost-effective. A better rating from other banks and institutions, including SIDBI.
SMERA could lead to more favourable credit SIDBI is considering a proposal to offer
terms for the SME like lower collateral concession in interest rate to SMEs that have
requirements, lower interest rates, and simplified been rated by SMERA, and quite a few schemes
lending norms of the bank that have retail focus would insist on
the applicants being rated by SMERA.
THE INSTITUTE FOR DEVELOPMENT AND RESEARCH
IN BANKING TECHNOLOGY (IDRBT)
IDRBT was set up in 1996 at Hyderabad.
It aims to promote technology solutions in banks and FIs.
It has set up INFINET which provides connectivity to banks.
INFINET helps in facilitating inter-bank transactions and settlements.
IDRBT is now an authorised certifying authority for digital signatures.
The Institute for Development and Research in country and utilises one full transponder of 36
Banking Technology (IDRBT) was set up by RBI MHz on INSAT 3B. Various inter-bank and intra-
in 1996 at Hyderabad following the bank applications ranging from simple
recommendations of W.S. Saraff Committee on messaging, MIS, EFT, ECS, Electronic Debit,
Technology Upgradation in Payments System, Online Processing, Trading in Government
with the objective of making the institute a think- Securities, Centralised Funds querying for
tank for the promotion of technology solutions Banks and FIs, anywhere/anytime banking and
to improve the functioning of the banking and Inter-bank reconciliation are implemented
financial sector. through INFINET.
The Institute, through its various initiatives, has In tune with the developments in the field of
been spearheading the absorption of technology network-based computing, the move from the
in the Indian banking and financial sector. It has Closed User Group Network of the INFINET to
made significant contributions in every aspect the Multi-Protocol Label Switching (MPLS) has
of bringing in the best of technology for the been initiated by IDRBT. The MPLS provides for
benefit of the Sector. IDRBT has taken up Virtual Private Networks (VPNs) to
research programmes in electronic payment communicate in a secure manner over a private
systems, security, standards, certification, data network. This improves efficiency and reduces
warehousing, multi-media products, etc. with a the cost while ensuring adequate safety and
view to provide guidance to banks in networking security levels. The complete switch-over is
and security issues in applications, The institute expected to be made by early 2008.
is also actively associated with a number of
NFS: The NFS comprises a National Switch to
activities coordinated by RBI and IBA in the areas
facilitate inter-connectivity between the Banks’
of technology upgradation in banking sector,
Switches, and Inter-Bank Payment Gateway for
payment systems, messaging standards and
authentication & routing the payment details of
inter-bank applications.
various e-commerce transactions, e-
INFINET: The Indian Financial Networking government activities, etc. The NFS Network
(INFINET) a wide area satellite based networking now connects 16,891 ATMs, which is the largest
using VSAT technology, has been jointly set up number of ATMs under a single network in the
by RBI and IDRBT. INFINET is the country.
communication backbone for the Indian banking
There is a default inter-change switching fee
and financial sector. All banks, public sector,
between the banks, if the banks do not have their
private sector, cooperative, etc., and the premier
own mutual agreements. The National Financial
financial institutions in the country are eligible to
Switch allows connectivity directly to the
become members of the INFINET. The INFINET
individual bank’s switch or through their shared
is a Closed User Group (CUG) Network for the
ATM Network Switches. It is a win-win situation
exclusive use of Member banks and financial
for all the banks and more importantly, for the
institutions. It uses a blend of communication
customers. The Clearing Corporation of India
technologies such as VSATs and Terrestrial
Limited (CCIL) is the clearing and settlement
Leased Lines. At present, the network consists
agency for the switch, which also facilitates the
of over 2,300 VSATs located in 300 cities of the

NFS Disaster Recovery Site from its premises Partcipation of banks in NEFT has tremendously
at Mumbai. increased over the last one year, raising the
number of branches to over 30,000 in 84 banks.
SFMS: The need for a secure and common
messaging solution that would serve as the basic The Common Gateway for Small Banks, which
platform for intra-bank and inter-bank provides a cost-effective solution to small and
applications, and would fulfill the requirements mid-sized banks enabling them to participate in
of domestic financial messaging, gave birth to SFMS/NEFT has been operationalised and 25
the Structured Financial Messaging Solution banks have joined the Common Gateway.
(SFMS). The SFMS was launched on December
14, 2001, at the IDRBT. The SFMS is built on MMS
the lines of SWIFT but has many more utilities Electronic Mail is transforming the way people
to offer. The major advantage of SFMS is that it communicate within and outside the
can be used practically for all purposes of secure organisation. Messaging has not just become a
communication within the bank and between lot quicker, but messaging costs have dipped
banks. The intra-bank part of SFMS, which is drastically. Mission critical information now
most important, can be used by the banks to passes in and out of the user’s desktop at a
take full advantage of the secure messaging click. The Indian banking and financial sector,
facility it provides. The inter-bank messaging part waking up to the wide range of possibilities and
is useful for applications like Electronic Funds immense benefits, was on the lookout for a
Transfer (EFT), Real Time Gross Settlement reliable Corporate e-mail System.
System (RTGS), Delivery Versus Payments
(DVP), Centralised Funds Management System IDRBT is uniquely positioned to offer a robust
(CFMS), etc. The SFMS provides easy to use backbone for such a system since it owns and
Application Programme Interfaces (APIs), which operates a closed user group wide-area network
can be used to integrate all existing and future – INFINET, for all banks and financial institutions,
applications with the SFMS. The banks can and IDRBT Mail Messaging System serves as
develop comprehensive and efficient tools and the Mail Gateway for the Indian banking system.
applications and integrate them easily with SFMS With over 20 public sector banks, including RBI
for use on the Corporate Intranet. Banks can making use of this backbone, it is perhaps one
link all their important, high volume branches, of the largest Messaging Systems in the
irrespective of their category to the SFMS country.
through appropriate connectivity like PSTN/
CERTIFYING AUTHORITY
ISDN or Leased Lines. Moreover, use of SFMS
is not restricted only to computerised or partially IDRBT has become a digital certification
computerised branches. The development of authority (CA), licensed by the Controller of
Forex Module as an add-on to the SFMS has Certification Authority (CCA), Government of
been completed and steps have been initiated India and will fulfill the need for trusted third party
to test the end-to-end flow of message from services in Electronic Commerce by issuing
SFMS to SWIFT at DEIO of RBI. In a step Digital Certificates that attests to some fact
towards making available the SFMS on Internet, about the subject of the certificate, which
Client Interface through SFMS and a few fund provides independent confirmation of an attribute
settlement messages have been made available claimed by a person offering a Digital Signature.
on Internet. Following this move, digital certificates issued
by the IDRBT CA are now legally valid in the
Eighty-four banks are participating in SFMS and
Indian courts as per the Information Technology
47,240 branches have been listed in the IFSC
Act 2000.
Directory as on September 30, 2007. The
mapping of IFSC with BSR and MICR has been For securing the transactions through INFINET,
done wherever the banks provided information. IDRBT provides high-end Public Key
Infrastructure (PKI) based services and
solutions to individuals, organizations as well as

governments, that enable trust and security. information that would facilitate Incident
IDRBT has set up a high-end, global standards- Handling/ Remedial Response to the Banking
based processing Center capable of issuing and Financial community. The Institute is also
thousands of Digital Certificates, an important in the process of analysing different tools
component of PKI. IDRBT CA will issue, available for Incident Handling/Remedial
administer and revoke the digital certificates Response.
which are trustworthy and legally valid.
Service Bureau (SB) for all SWIFT Users:
The IDRBT Certifying Authority has issued IDRBT has initiated steps for the establishment
1,14,350 Digital Certificates as on September of a Service Bureau (SB) for all SWIFT Users in
30, 2007.The banks and financial institutions are India. A White Paper has been circulated to the
using the Certificates issued by IDRBT CA for banks highlighting the concept, model and the
Corporate E-mail, RTGS, SFMS, Web Servers possible cost saving on joining the SB.
used for Internet Banking,CFMS, EFT/ECS and Meanwhile, the SWIFT have agreed in principle
CCIL Settlement Applications. to the idea of SB being established bythe IDRBT.
Indian Financial Computer Emergency Recognizing the crucial significance of Mobile
Response Team (INFICERT) Payments and the need to evolve standards,
IDRBT in association with the Rural Technology
The Institute is in the process of developing a Banking Incubator, IIT, Madras has set up the
portal on INFICERT for the benefit of INFINET Mobile Payment Forum of India.
CUG members. This portal would disseminate

CLEARING CORPORATION OF INDIA LTD. (CCIL)
CCIL was incorporated in 2001.
Country’s first clearing house for the Government Securities, Forex and other related
market segments.
Operates Collateralized Borrowing and Lending Obligation (CBLO) a repo variant
with several unique features for NDS Members.
Recognising the need for upgrading the country’s to manage dealing platforms in Money and
financial infrastructure in respect of Clearing and Currency Markets.
Settlement of debt instruments and forex Operationalised Anonymous Auction System
transactions, RBI set up the Clearing Corporation to facilitate Buy Back of Government
of India Ltd (CCIL). CCIL was incorporated on Securities by Government of India.
the 30th April, 2001, as the country’s first clearing
house for the Government Securities, Forex and Launched Electronic Currency Dealing
other related market segments. State Bank of Platform “FX Clear” to facilitate inter-bank
India took the lead in piloting the discussions foreign exchange dealing.
finalising a blueprint for CCIL’s formation. Electronic movement of Member Margins/
Collaterals facilitated through “Value Free
The primary objective of setting up CCIL has Transfer Module” of NDS.
been to establish a safe institutional structure
for the clearing and settlement of trades in the Extended scope of coverage of foreign
Government Securities, Forex (FX), Money and exchange settlements to include INR/USD
Debt Markets so as to bring in efficiency in the Cash and TOM trades.
transaction settlement process, and insulate the Commenced net settlements in Government
financial system from shocks emanating from Securities as per DVP III Guidelines of RBI.
the operations related issues. Started clearing and settlement of ATM
The six ‘core promoters’ for CCIL are SBI, IDBI, transactions of National Financial Switch
ICICI Ltd., LIC, Bank of Baroda, and HDFC Bank. operated by Institute for Development and
The authorized share capital is Rs.50 crore. Research in Banking Technology (IDRBT).
Operationalised “Straight Through
The following gives an overview of the activities Processing” arrangement for settlement of
of CCIL: foreign exchange trades done on FXCLEAR.
Clearing house for settlement of market Govt. Securities Lending and Borrowing
trades in Government Securities Scheme was operationalised.
Inter-bank foreign exchange transactions Released its Sovereign Bond Indices,CCIL
Facility of guaranteed settlement for trades BROAD GILTS INDEX, consisting of top 20
in Government Securities. securities and CCIL LIQUID GILTS INDEX,
Guaranteed settlement of inter-bank foreign consisting of the 5 most liquid bonds, to track
exchange Spot trades in INR/USD and the movement of the government securities
Forward Trades on Spot Window. market.
Launched new Money Market Instrument – Commenced settlement of cross currency
“Collateralised Borrowing and Lending transactions through CLS.
Obligation” (CBLO), a repo variant with Released its T-Bill Index consisting of two T-
several unique features for NDS Members. bill indices – CCIL EQUAL WEIGHT T-Bills
Set up a wholly-owned Subsidiary Company INDEX and CCIL LIQUIDITY WEIGHT T-Bills
– Clearcorp Dealing Systems (India) Pvt. Ltd. INDEX. The CCIL T-Bills indices are
instruments that would capture the market

movement in the short-term maturity Mumbai Inter-Bank Bid Rate) based on
segment. Dealt Quotes from NDS-Call.
RBI launched the anonymous screen based Extended the eNotice System to Non-NDS
order matching trading module for govt. Associate Members.
securities on its Negotiated Dealing System– Launched Version 3.0 of the NDS-OM
Order Matching Segment (NDS-OM) with enabling Odd Lot trading, trading of new
CCIL as the central counterparty to all deals. securities in the When Issued market and
CBLOi (Internet Trading System for Non- trading of CSGL entities on this platform.
NDS Members) commenced operations. Started releasing the Daily Spot Reference
Launched Overnight Collateralised Rates through its website.
Benchmark Reference Rates for Indian Operationalized CCIL’s reporting platform for
market, namely CCIL Collateralised the transactions in OTC Interest Rate
Benchmark Bid Rate (CCBID) and CCIL Derivatives (Interest Rate Swaps and
Collateralised Benchmark Offer Rate Forward Rate Agreements (IRS/FRA)).
(CCBOR).
Launched Version 2.0 of NDS-CALL
Version - 2.0 of the NDS - OM Trading electronic screen-based quote driven dealing
Platform launched, enabling trading in system for Call, Notice and Term money.
Treasury Bills and the When Issued market.
Received the ISO/IEC 27001:2005 Future Plans
certification for securing its information CCIL has continuously extended its frontiers
assets. from the settlement of trades in the outright and
Released its CCIL ALL SOVEREIGN BOND repo segment of fixed income market and
INDICES (CASBI), which would reflect the FOREX trades to developing trading platforms
broad movement of the market as it contains for transactions in the outright, FOREX and
all available sovereign bonds. money market. CBLO, the money market
instrument developed by CCIL, has been able
Launched its eNotice System available to to capture significant volumes in the money
all members for sending their collateral market. Trading on this platform has been
notices in electronic form. extended to Non-NDS members also. Cross-
Launched Intraday Securities Withdrawal currency trades have been taken for settlement
in CBLO segment. by CCIL through the CLS Bank. It has been the
Launched NDS - CALL, an electronic constant endeavour of CCIL to fulfill market
screen-based quote driven dealing system requirements and expectations.
for all Call, Notice and Term Money Towards this end, CCIL plans to consider
operations. acceptance of Forward Trades from trade date
NDS Auction module went live to facilitate itself for guaranteed settlement from the existing
bidding in Primary Treasury Bill Auctions. settlement of these trades under the Spot
Signed a Memorandum of Understanding window. CCIL, in consultation with market users,
(MOU) with Euroclear regarding post-trade has finalized the business model, including the
processing collaboration. risk management processes, for settlement of
OTC trades in Rupee Derivative Products
Launched the CCIL MIBOR (CCIL Mumbai (Interest Rate Swaps and Forward Rate
Inter-Bank Offer Rate)/MIBID (CCIL Agreements).

ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED
Established in August 2003 under SARFAESI Act.

ARCs act as debt aggregators and engage in acquisition and resolution of NPAs.
It can restructure debts, strip and sell assets, settle with promoters, act as managers
and agents for recovery.
Asset Reconstruction Company India Limited of resolution strategy. ARCIL will pioneer the
(ARCIL) is the first ARC in the country to be development of an active secondary market for
licensed by RBI under the SARFAESI Act, 2002 Restructured Debt paper. ARCIL offers a
to initiate business in India in the year 2003, with comprehensive range of resolution strategies
a vision to be a major contributor to the Indian such as debt restructuring, mergers and
economy by capturing value from the impaired acquisitions, settlement with promoters and strip
assets. The company’s main objective is to sale of assets, based on an in-depth analysis of
establish fair and transparent business parctices enterprise characteristics. Resolution strategy
and facilitate development of a market for adopted by ARCIL will be targeted towards
distressed debt. Adopting a bank-based model maximizing realization of value for the selling
of ARC, ARCIL has been funded by important banks.
players in the Indian financial sector, namely the The SARFAESI Act, 2002 provides that no fresh
State Bank of India, ICICI Bank, Industrial reference to BIFR can be made once assets are
Development Bank of India and Punjab National acquired by an ARC. ARCs are empowered to
Bank. SBI holds 19.95% share in ARCIL. ARCIL change / takeover management and sale / lease
has been established as a private sector body of assets under the Act. This empowerment will
with 51% of its equity capital being held by private be available as soon as RBI guidelines in this
sector banks. It acquired a few financial assets regard are issued. These provisions facilitate
from institutions and banks, creating a record of timely and effective implementation of the
being the first ARC to get hold of financial assets resolution strategy.
in India. It is also an associate member of the
IBA and a member of the Corporate Debt The sale of the financial assets to ARCIL enables
Restructuring system. the NPA to be taken off the loan books of the
Bank/FI and unlocks capital. Sale of NPAs on a
ARCIL’s Objectives portfolio basis enables loss on sale of any one
Convert NPA into performing assets asset to be set off against capital gains on
Act as a nodal agency for NPA resolution another, subject to RBI guidelines on
Unlock value by utilizing productive assets provisioning/valuation norms. Takeover of debt
Create a vibrant market for NPA/ by ARCs reduces expenditure on NPA
Restructured debt paper maintenance (legal expenditure, follow-up
requirements, etc.) and releases resources for
Revitalizing the national economy core operations. Value realizable to lenders is
Re-energize the financial sector determined by the fair price of the NPA (usually
No single promoter has a majority stake ensuring determined by an independent valuer). Sellers
independence of operations have an opportunity to invest, as Qualified
Institutional Buyers (QIBs), in Security Receipts
ARCIL – Key Strengths
(SRs) issued by ARCIL for acquisition of NPAs.
ARCIL will bring about faster debt aggregation Subsequent to the sale of NPAs no known liability
and resolution of inter creditor issues. Debt devolves on the Banks/FIs. The sale provides
aggregation by ARCIL will enable single point
responsibility and ensure speedy implementation

for sharing of upside upon eventual realization stand to gain by remaining invested. This is in
by ARCIL. contrast to a clean exit at the initial stages where
the benefit of the upside, if any, will not be
Cash Purchase Vs. Purchase through SRs available to the banks. Cash purchase/sale of
By investing in SRs of the ARCIL trusts, banks NPAs would in all likelihood have lower pricing
convert their NPAs into investment in their books compared to price offers of ARCs.
as standard investment and do not require In general, banks with weaker capital bases and
further provisioning. SRs represent undivided
low provisioning exposure choose to keep the
rights, title and interest of the investors in the
bad loans in their own books rather than sell it to
financial assets held in the Fund floated by the
ARCs because when a bank sells a loan to
trusts. Thus the banks retain direct interest in
the underlying assets (NPAs). ARCIL passes on ARCIL, it needs to provide for the difference
bulk of the upside from the resolution to the between the asset’s book value and the value at
investors and thus banks as seller investors which ARCIL acquires it.
Performance Highlights
The Acquisition Particulars of ARCIL in respect of
Corporate Loans as on September 30, 2007
(Amt. in Rs. crore)
Number of NPA accounts acquired from banks and financial institutions 919
Total dues in respect of the above NPAs 28,745
Aggregate value of Security Receipts subscribed by the investors for
payment of purchase consideration for the above NPAs 7,845
Number of banks and financial institutions from whom NPAs have
been acquired 41
Break-up of Acquired Cases in terms of Size of Cases

based on a Cut-off of Rs.20 crore
(Amt. in Rs. crore)
Type of cases No. of borrowers Total dues SRs issued % to total

acquired SRs issued
Large cases (total 177 22,690 7,500 96

outstanding over Rs.20 crore)
Small cases (total outstanding 742 6,055 345 4

up to Rs.20 crore)
Total 919 28,745 7,845 100

Resolution-strategy-wise break-up –
Large Cases Resolved as on September 30, 2007
(Amt. in Rs. crore)

Resolution strategy Large Resolved Cases
No. of borrowers SR value % to total SR value
Restructuring 22 1,994 46
Sale of assets 29 805 19
Sale of business/M&A 11 481 11
Settlement 42 1,017 24
Total 104 4,297 100
Details of Cases Resolved as on September 30, 2007

(Amt. in Rs. crore)
Particulars Large cases Small cases Total

Total number of cases resolved 104 283 387
Total dues involved 14,861 1,974 16,835
Total number of cases exited 44 213 257
Total dues involved 3,160 1,447 4,607
Total cash recovered and distributed 2,055 220 2,275
• As on September 30, 2007 ARCIL has given a net IRR of 23% to SR holders.
• For the year ended March 31, 2007, ARCIL posted a net profit of Rs.53.97 crore, an increase
of about 75% over net profit of Rs.30.83 crore for the FY 2005-06.
Source: Booklet brought out by ARCIL, 2007.

MULTI COMMODITY EXCHANGE OF INDIA
(MCX, NCDEX & NMCEIL)
MCX an independent and de-mutulised multi commodity exchange for facilitating online
trading, clearing and settlement operations for commodity futures markets across the
country.
NCDEX is a professionally managed online multi commodity exchange.
National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-
mutualized, Electronic Multi-Commodity Exchange in India
Forward Markets Commission (FMC) Inaugurated in November 2003 , MCX offers

headquartered at Mumbai is the regulatory futures trading in the following commodity
authority for the commodity exchanges, which categories: Agri Commodities, Bullion, Metals-
is overseen by the Ministry of Consumer Affairs Ferrous & Non-ferrous, Pulses, Oils & Oilseeds,
and Public Distribution, Govt. of India. It is a Energy, Plantations, Spices and other soft
statutory body set up in 1953 under the Forward commodities.
Contracts (Regulation) Act, 1952. The MCX has built strategic alliances with some of
exchanges that have been set up under overall the largest players in commodities eco-system
control of Forward Market Commission (FMC) like New York Mercantaile Exchange, Inc
of Government of India are Multi Commodity (NYMEX), London Metal Exchange, Chicago
Exchange of India Limited (MCX), National Exchange, etc. MCX is offering spectacular
Commodity & Derivatives Exchange Limited growth opportunities and advantages to a large
(NCDEX) and National Multi-Commodity cross section of the participants including
Exchange of India Limited (NMCEIL) Producers/Processors, Traders, Corporates,
Regional Trading Centers, Importers, Exporters,
MCX an independent and de-mutulised multi Cooperatives, Industry Associations, amongst
commodity exchange has permanent others. MCX being nation-wide commodity
exchange, offering multiple commodities for
recognition from Government of India for
trading with wide reach and penetration and
facilitating online trading, clearing and settlement
robust infrastructure, is well placed to tap this
operations for commodity futures markets
vast potential.
across the country. Key shareholders of MCX
include Financial Technologies (I) Ltd., State With the view to extending the benefits of demat
Bank of India (India’s largest commercial bank) system, it has been introduced in the commodity
& Associates, Fidelity International, National sphere for better and efficient settlement
Stock Exchange of India Ltd. (NSE), National system. Delivery of commodities can now be
Bank for Agriculture and Rural Development effected through warehouse receipt in demat
(NABARD), HDFC Bank, SBI Life Insurance Co. form.
Ltd., Union Bank of India, Canara Bank, Bank of The exchange has consistently been on a growth
India, Bank of Baroda and Corporation Bank. path since its inception. At present, the average
daily turnover of MCX is around USD 1.55 billion
Headquartered in Mumbai, MCX is led by an
(Rs.7,000 crore - April 2006), with a record peak
expert management team with deep domain
turnover of USD 3.98 billion (Rs.17,987 crore)
knowledge of the commodity futures markets. on April 20, 2006. In November 2005, it entered
Through the integration of dedicated resources, into a joint venture with Dubai Metals and
robust technology and scalable infrastructure, Commodities centre to set up Dubai Gold and
since inception MCX has recorded many firsts Commodities Exchange. It has launched the
to its credit. MCX-COMDEX, India’s first composite

commodity futures Index, which is calculated and NCDEX is located in Mumbai and offers facilities
displayed on a real-time basis. to its members through about 550 centres
throughout India. The reach will gradually be
National Commodity & Derivatives Exchange expanded to more centres.
Limited (NCDEX)
National Commodity & Derivatives Exchange NCDEX currently facilitates trading of 57
Limited (NCDEX) located in Mumbai is a public commodities
limited company incorporated on April 23, 2003 National Multi-Commodity Exchange of India
under the Companies Act, 1956 and had Limited (NMCEIL)
commenced its operations on December 15,
2003. Its promoter shareholders are: NABARD, National Multi Commodity Exchange of India
LIC and NSE. The Other shareholders are: Limited (NMCEIL) is the first de-mutualized,
Canara Bank, CRISIL Limited, Goldman Sachs, Electronic Multi-Commodity Exchange in India.
Intercontinental Exchange (ICE), Indian Farmers On 25th July, 2001, it was granted approval by
Fertiliser Cooperative Limited (IFFCO) and the Government to organise trading in the edible
Punjab National Bank (PNB). oil complex. It was operationalised from
November 26, 2002. It is being supported by
NCDEX is the only commodity exchange in the Central Warehousing Corporation Ltd., Gujarat
country promoted by national-level institutions. State Agricultural Marketing Board and Neptune
This unique parentage enables it to offer a Overseas Limited. It got its recognition in October
bouquet of benefits, which are currently in short 2002.
supply in the commodity markets. The
institutional promoters and shareholders of Commodity exchange in india plays an important
NCDEX are prominent players in their respective role where the prices of any commodity are not
fields and bring with them institutional building fixed, in an organised way. Earlier only the buyer
experience, trust, nationwide reach, technology of produce and its seller in the market judged
and risk management skills. upon the prices. Others never had a say. Today,
commodity exchanges are purely speculative in
NCDEX is a nation-level, technology driven de- nature. Before discovering the price, they reach
mutualised on-line commodity exchange with an to the producers, end-users, and even the retail
independent Board of Directors and professional investors, at a grassroots level. It brings a price
management - both not having any vested transparency and risk management in the vital
interest in commodity markets. It is committed market.
to provide a world-class commodity exchange A big difference between a typical auction, where
platform for market participants to trade in a wide a single auctioneer announces the bids, and the
spectrum of commodity derivatives driven by best Exchange is that people are not only competing
global practices, professionalism and to buy but also to sell. By Exchange rules and
transparency. by law, no one can bid under a higher bid, and
no one can offer to sell higher than somone
NCDEX is regulated by Forward Markets else’s lower offer. That keeps the market as
Commission. NCDEX is subjected to various efficient as possible, and keeps the traders on
laws of the land like the Forward Contracts their toes to make sure no one gets the purchase
(Regulation) Act, Companies Act, Stamp Act, or sale before they do.
Contract Act and various other legislations.

NON BANKING FINANCE COMPANIES (NBFCs)
NBFCs are popular due to simple procedures, speed of service, higher rate of interest
and timeliness in meeting credit needs of clients.
NBFCs are now subjected to Capital Adequacy, IRAC norms, reserve requirements.
Some types: Leasing Company, hire purchase company, housing finance company,
Loan company, Residual non-banking finance company, etc.
Revised framework made effective from April 1, 2007.
Non-banking financial companies represent a investment in shares and loans and advances
heterogenous group of institutions separated by to subsidiaries, companies in the same group
their type of activity, organisational structure and and other NBFCs in excess of 10% of owned
portfolio mix. Four types of institutions, fund. Information of NOFs can complement the
categorized in terms of their primary business information on CRAR.
activity and under the regulatory purview of RBI,
are equipment leasing companies, hire Types of NBFCs
purchase companies, loan companies and Some of the major types of NBFCs are as
investment companies. The residuary non- under:
banking companies (RNBCs) have been
classified as a separate category as their • Equipment Leasing Company: Principal
business does not conform to any of the other business is leasing or equipment or
defined classes of NBFC businesses. Besides, financing of such activity
there are other NBFCs, viz., miscellaneous
nonbanking companies (Chit Fund), mutual • Hire Purchase Finance Company: Principal
benefit finance companies (Nidhis and Potential business is hire purchase transactions or
Nidhis) and housing finance companies, which the financing of such transactions
are either partially regulated by RBI or are outside
the purview of RBI. • Housing Finance Company: Principal
business is financing the acquisition or
A Non-Banking Financial Company (NBFC) is a construction of houses including acquisition
company registered under the Companies Act, and development of plots.
1956 and is engaged in the business of loans
and advances, acquisition of shares/stock/ • Investment Company: Principal business is
bonds/debentures/securities, etc., or receiving acquisition of securities
deposits under any scheme. All NBFCs are not
entitled to accept public deposits. Only those • Loan Company: Principal business is
NBFCs having minimum stipulated Net Owned providing finance by way of loans and
Fund and holding a valid Certificate of advances.
Registration with authorisation to accept Public • Mutual Benefit Finance Company: A
Deposits can accept/hold public deposits.
company notified by Central Government
under Sec 620 A of the Companies Act. They
NBFCs, which commenced operations after are also called Nidhi Companies
April 21, 1999 are required to have a minimum
Net Owned Funds (NOF) of Rs.2 crore. Net Residual Non-Banking Companies: These are
Owned Fund is the aggregate of paid-up capital companies not falling under any of the above
and free reserves after adjusting a) the amount and governed by the provisions of Residuary
of accumulated loss, b) deferred revenue Non-Banking Companies (RBI) Directions,
expenditure and other intangible assets, c) 1987.

Ceiling on acceptance of Public Deposits
Category of NBFC Ceiling on public deposits
EL/HP Companies maintaining CRAR of 15% 1.5 times of NOF or Rs 10 crore whichever
without credit rating EL/HP Companies with is less
CRAR of 12% and having minimum investment
grade credit rating
LC/IC with CRAR of 12% and having minimum

investment grade credit rating 4 times of NOF
LC/IC with CRAR of 12% and having minimum 1.5 times of NOF
investment grade credit rating
The NBFCs are allowed to accept/renew public acceptance norms and improved disclosures.
deposits for a minimum period of 12 months and NBFCs were allowed to enter into credit card
maximum period of 60 months. They cannot business on their own or in association with
accept deposits repayable on demand. The another NBFC or a scheduled commercial
maximum rate of interest a NBFC can offer is bank. NBFCs are not allowed to issue any
11%. A NBFC cannot accept deposit without debit card as it tantamounts to opening and
rating except an EL/HP company complying with operating a demand deposit account, which is
prudential norms and having CRAR of 15%, the exclusive privilege of banks. NBFCs which
though not rated, may accept public deposit up were granted Certificate of Registration (CoR)
to 1.5 times of NOF or Rs.10 crore whichever in the non-public deposit taking category should
is less. Advances constitute the main assets of meet the minimum capital requirement of Rs.2
NBFCs. crore for being eligible to apply to RBI for
accepting deposits. NBFCs/RNBCs also will
Prudential Norms for NBFCs have to follow certain customer identification
procedure for opening of accounts and
Guidelines are prescribed on income monitoring transactions of a suspicious nature
recognition, asset classification and provisioning for the purpose of reporting it to the appropriate
requirements applicable to NBFCs, exposure authority under the ‘know your customer’ (KYC)
norms, constitution of audit committee, guidelines and were required to ensure full
disclosures in the balance sheet, requirement compliance with the provisions of the guidelines
of capital adequacy, restrictions on investments before December 31, 2005.
in land and building and unquoted shares.
Supervisory oversight by RBI over NBFCs
All the NBFCs having assets size of Rs.500 encompasses a four-pronged strategy; (a) on-
crore and above but not accepting public site inspection based on the CAMELS
deposits are required to submit Quarterly Return methodology; (b) off-site monitoring supported
on important financial parameters of the by state-of-the-art technology; (c) market
company. All companies not accepting public intelligence; and (d) exception reports of
deposits have to pass a board resolution to the statutory auditors.
effect that they have neither accepted public NBFCs are increasingly being recognised as
deposit nor would accept any public deposit complementary to the banking system; they are
during the year. capable of absorbing shocks as also spreading
risks at times of financial distress. The
The focus of regulatory initiatives in respect of application of different levels of regulations to
NBFCs during 2004-05 was on deposit the activities of banks and NBFCs, and even

among different categories of NBFCs, had given their lending operations, NBFCs were advised
rise to some issues arising out of the uneven in September 2006 to put in place the Fair
coverage of regulations. Based on the Practices Code. The Code mandates a
recommendations of an Internal Group to minimum benchmark, leaving the discretion to
examine the issues relating to the level playing the NBFCs to enhance the practices. The
field, regulatory convergence and regulatory guidelines in this respect require the NBFCs to,
arbitrage in the financial sector and taking into inter alia, provide the specified information in loan
consideration the feedback received thereon, it application forms; introduce a system of
was decided to put in place a revised framework acknowledgement for receipt of all loan
to address the issues pertaining to the overall applications; indicate a timeframe for disposal
regulation of systemically important NBFCs and of loan applications; convey in writing to the
the relationship between banks and NBFCs. borrower the amount of loan sanctioned along
Furthermore, under the revised framework, non- with the terms and conditions including
deposit taking NBFCs with asset size of Rs.100 annualised rate of interest and method of
crore and above have been defined as application thereof; give notice to the borrower
‘systemically important NBFCs’ (NBFC-ND-SI). of any change in terms and conditions; refrain
Such NBFCs are required to maintain a from interference in the affairs of the borrower;
minimum CRAR of 10 per cent and should not and refrain from undue harassment of the
(i) lend to any single borrower/any single group borrower in the matter of recovery of loans. The
of borrowers more than 15 per cent/25 per cent boards of directors of NBFCs should also put in
of their owned funds, respectively; (ii) invest in place appropriate grievance redressal
the shares of another company/any single group mechanism within the organisation to resolve
of companies more than 15 per cent/25 per cent disputes arising in this regard.
of their owned funds, respectively; and (iii) lend
and invest (loan/investment taken together) more NBFCs no longer engaged in the business of
than 25 per cent/40 per cent of their owned funds non-banking financial institution (NBFI) were
to a single party/a single group of parties, observed to be holding the certificate of
respectively. The above credit/investment norms registration (CoR) granted by RBI, although they
can be exceeded by 5 percentage points for any are not required/eligible to hold the same. NBFCs
single party and by 10 percentage points for a were, therefore, advised in September 2006 to
single group of parties, if the additional exposure submit a certificate from their Statutory Auditors
is on account of infrastructure loan and/or every year to the effect that they continue to
investment. Asset finance companies (AFCs) undertake the business of NBFI.
are permitted to exceed the exposure norms up In terms of extant instructions, in the case of a
to a further 5 percentage points of their owned change of management and control of NBFCs,
funds, in exceptional circumstances with the prior public notice of 30 days was required
approval of their boards. NBFC-ND-SI not before effecting the sale, or transfer of the
accessing public funds, both directly and ownership by sale of shares, or transfer of
indirectly, may apply to the Reserve Bank for an control, whether with or without sale of shares
appropriate dispensation, consistent with the or by way of amalgamation/merger of an NBFC
spirit of the exposure limits. The ceiling on with another NBFC or a non-financial company
investment is not applicable to investment by by the NBFC and also by the transferor, or the
NBFCs in the equity capital of an insurance transferee. From October 2006, such prior
company to the extent permitted by RBI. The public notice has to be given by the NBFC and
revised framework was made effective from also by the transferor or the transferee or jointly
April 1, 2007. The residuary non-banking by the parties concerned.
companies (RNBCs) and primary dealers will
continue to be governed by the extant guidelines, In order to strengthen the NBFC sector by
pending a review. allowing diversification in their area of business,
NBFCs were allowed in December 2006 to (i)
In order to ensure improved customer market and distribute mutual fund products as
satisfaction as also to impart transparency to agents of mutual funds; and (ii) issue co-

branded credit cards with commercial banks, securitisation, an amount not less than 5 per
without risk sharing. These businesses, with the cent under each scheme. In October 2006, the
prior approval of RBI for an initial period of two SCs/RCs, which had obtained a CoR from RBI
years (to be reviewed thereafter), would be under Section 3 of the SARFAESI Act, 2002,
subject to fulfilment of the following minimum were directed to commence business within six
requirements by the NBFCs: (a) minimum net months from the date of grant of the CoR. RBI
owned fund of Rs.100 crore; (b) net profit as may, on an application made by the SC/RC,
per last two years’ audited balance sheet; (c) grant extension of time for commencement of
net NPAs not exceeding 3 per cent of net business beyond six months, up to a maximum
advances, as per the last audited balance sheet; of 12 months from the date of grant of the CoR.
(d) CRAR of 10 per cent for non-deposit-taking In May 2007, SCs/RCs registered with RBI
NBFCs (NBFCs-ND) and 12 per cent/15 per under the SARFAESI Act, 2002 were advised to
cent for deposit-taking NBFCs (NBFCs- D). With declare net asset value of the security receipts
regard to mutual fund business, NBFCs should, issued by them at periodic intervals. RBI has so
inter alia, also comply with SEBI guidelines/ far granted the CoR to six SCs/ RCs, of which
regulations and they should only act as an agent three have commenced the business of
and not acquire units of mutual funds. In the case securitisation/reconstruction of assets.
of credit card business, the role of NBFC would,
inter alia, be limited only to marketing and All NBFCs accepting/holding public deposits
distribution. were hitherto required to create floating charge
on the statutory liquid assets invested in favour
The classification of NBFCs was modified in of their depositors. In view of the practical
December 2006 to provide a separate difficulties in creating charge in favour of a large
classification for companies financing physical number of depositors, NBFCs accepting/holding
assets supporting productive/economic activity. public deposits were allowed (January 2007) to
Accordingly, NBFCs, whose principal business, create the floating charge through the
i.e., not less than 60 per cent of their total assets mechanism of ‘Trust Deed’, by March 31, 2007.
and total income is from the financing of real/
physical assets supporting economic activity As the regulation of Mutual Benefit Financial
such as automobiles, general purpose industrial Companies (Notified Nidhis) (MBFCs) and
machinery and the like, have been classified as Mutual Benefit Companies (Potential Nidhis)
asset finance companies (AFCs). Consequent (MBCs) has been taken over by the Ministry of
upon this reclassification, the NBFCs earlier Company Affairs (since renamed as the Ministry
classified as equipment leasing (EL) companies of Corporate Affairs), it was decided not to call
and hire-purchase (HP) companies will emerge for returns from MBFCs and MBCs. However, if
as asset finance companies. Since the the application of MBCs (Potential Nidhis) for the
classification for the purpose of income grant of the nidhi status is rejected by the Ministry,
recognition, asset classification and provisioning the provisions as applicable to NBFCs would
norms is based on asset specification, the extant apply to such companies.
prudential norms continue as hitherto. However, In order to increase investor confidence through
the exposure norms relating to restriction on adoption of best corporate practices, deposit
investments in land and buildings and unquoted taking NBFCs with deposit size of Rs.20 crore
shares would be modified and the provisions and above and NBFCs-ND-SI have been advised
applicable to EL/HP companies would also be to frame internal guidelines on corporate
applicable to AFCs. governance covering, inter alia, constitution of
Securitisation companies/reconstruction audit committee, nomination committee and risk
companies (SCs/RCs) were advised management committee, and disclosure and
(September 2006) to invest in security receipts, transparency practices.
issued by the trust set up for the purpose of

ECONOMY & FINANCE
FINANCIAL
MARKETS

MONEY MARKET
As a result of various reform measures, the money market in India has undergone
significant transformation in terms of volume, number of instruments and participants
and development of risk management practices.
In line with the shifts in policy emphasis, various segments of the money market have
acquired greater depth and liquidity. The price discovery process has also improved.
RBI has accorded prime attention to the introduction of regular auctions of Treasury Bills
development of the money market as it is the paved the way for the emergence of a risk free
key link in the transmission mechanism of rate, which has become a benchmark for pricing
monetary policy to financial markets and finally, the other money market instruments.
to the real economy. In the past, development Concomitantly, with the increased market
of the money market was hindered by a system orientation of monetary policy along with greater
of administered interest rates and lack of proper global integration of domestic markets, the RBI’s
accounting and risk management systems. With emphasis has been on setting prudential limits
the initiation of reforms and the transition to on borrowing and lending in the call money
indirect, market-based instruments of monetary market, encouraging migration towards the
policy in the 1990s, RBI made conscious efforts collateralised segments and developing
to develop an efficient, stable and liquid money derivative instruments for hedging market risks.
market by creating a favourable policy This has been complemented by the
environment through appropriate institutional institutionalisation of the Clearing Corporation of
changes, instruments, technologies and market India Limited (CCIL) as a central counterparty.
practices. Accordingly, the call money market The upgradation of payment system
was developed into primarily an inter-bank technologies has also enabled market
market, while encouraging other market participants to improve their asset liability
participants to migrate towards collateralised management. All these measures have widened
segments of the market, thereby increasing and deepened the money market in terms of
overall market integrity. instruments and participants, enhanced
transparency and improved the signalling
In line with the objective of widening and mechanism of monetary policy while ensuring
deepening of the money market and imparting financial stability.
greater liquidity to the market for facilitating
efficient price discovery, new instruments, such These policy initiatives over time have led to the
as collateralised lending and borrowing development of a relatively deep, liquid and
obligations (CBLO), have been introduced. vibrant money market in the country. Activity in
Money market instruments such as market repo all the segments has increased significantly,
and CBLO have provided avenues for non-banks especially during the last three years. With the
to manage their short-term liquidity mismatches development of market repo and CBLO
and facilitated the transformation of the call segments, the call money market has been
money market into a pure inter-bank market. transformed into a pure inter-bank market from
Furthermore, issuance norms and maturity August 2005. A recent noteworthy development
profiles of other money market instruments such is the substantial migration of money market
as commercial paper (CP) and certificate of activity from the uncollateralised call money
deposits (CDs) have been modified over time segment to the collateralised market repo and
to encourage wider participation while CBLO markets. Thus, uncollateralised overnight
strengthening the transmission of policy signals transactions are now limited to banks and
across the various market segments. The primary dealers in the interest of financial
abolition of ad hoc Treasury Bills and stability.

Volatility in call rates has declined over the years, in the narrowing of the bid-ask spread in
especially after the introduction of the Liquidity overnight rates. The abolition of ad hoc Treasury
Adjustment Facility (LAF). Under the LAF, the Bills and introduction of Treasury Bills auction
Reserve Bank sets its policy rates, i.e., repo and have led to the emergence of a risk free rate,
reverse repo rates and carries out repo/reverse which acts as a benchmark for the pricing of
repo operations, thereby providing a corridor for other money market instruments.
overnight money market rates. The weighted
average overnight rate has largely moved within Annexure: Money Market Instruments for
the corridor set by LAF rates, barring some Liquidity Management
occasions. RBI has been making efforts to develop a repo
The operating framework of monetary policy has market outside the LAF for bank and nonbank
been the maintenance of overnight market rates participants, so as to provide a stable
within an interest rate corridor defined by the floor collateralised funding alternative with a view to
of the reverse repo (absorption) rate and ceiling promoting smooth transformation of the call/
of the repo (injection) rate. During periods of notice money market into a pure inter-bank
system wide excess liquidity, overnight rates market and for deepening the underlying
tend to hug the bottom of the corridor, while Government securities market. Thus, the
touching the ceiling during other periods of following new instruments have been introduced.
liquidity shortage, as might be expected. Collateralised Borrowing and Lending
Increased volatility in capital flows, tending to Obligation (CBLO)
inject excess liquidity into the system, and in
government cash balances resulting from • Developed by the Clearing Corporation of
bunching of tax payments that suck liquidity out India Limited (CCIL) and introduced on
of the system, have made the task of liquidity January 20, 2003, it is a discounted
management somewhat more difficult over the instrument available in electronic book entry
past year. form for the maturity period ranging from one
day to ninety days (can be made available
After the adoption of the full-fledged LAF in June up to one year as per RBI guidelines).
2000, call rates, in general, witnessed a
declining trend up to 2004-05. The institution of • In order to enable the market participants to
LAF has also enabled RBI to manage liquidity borrow and lend funds, CCIL provides the
more efficiently and reduce volatility in call rates. Dealing System through Indian Financial
Network (INFINET), a closed user group to
The reduction in bid-ask spread in the overnight the Members of the Negotiated Dealing
rates indicates that the Indian money market has System (NDS) who maintain Current
become reasonably deep, vibrant and liquid. account with RBI and through Internet for
As a result of various reform measures, the other entities who do not maintain Current
money market in India has undergone significant account with RBI.
transformation in terms of volume, number of • Membership (including Associate
instruments and participants and development Membership) of CBLO segment is extended
of risk management practices. In line with the to banks, financial institutions, insurance
shifts in policy emphasis, various segments of companies, mutual funds, primary dealers,
the money market have acquired greater depth NBFCs, non-Government Provident Funds,
and liquidity. The price discovery process has Corporates, etc.
also improved. The call money market has been
transformed into a pure inter-bank market, while • Eligible securities are Central Government
other money market instruments such as market securities including Treasury Bills.
repo and CBLO have developed to provide
• Borrowing limits for members is fixed by
avenues to non-banks for managing their short-
CCIL at the beginning of the day taking into
term liquidity mismatches. The money market
account the securities deposited by
has also become more efficient as is reflected

borrowers in their CSGL account with CCIL. market through their ‘gilt accounts’
The securities are subjected to necessary maintained with the custodians.
hair-cut after marking them to market.
• Subsequently, non-scheduled urban co-
• Auction market is available only to NDS operative banks and listed companies with
Members for overnight borrowing and gilt accounts with scheduled commercial
settlement on T+0 basis. At the end of the banks were allowed to participate.
Auction market session, CCIL initiates
auction matching process based on • Necessary precautions were built into the
Uniform Yield principle. system to ensure ‘delivery versus payment’
(DvP) and transparency, while restricting
• CCIL assumes the role of the central the repos to Government securities only.
counter party through the process of
novation and guarantees settlement of • Rollover of repo transactions in Government
transactions in CBLO. securities was facilitated with the enabling
of DvP III mode of settlement in Government
• Automated value-free transfer of securities securities which involves settlement of
between market participants and the CCIL securities and funds on a net basis, effective
was introduced during 2004-05. April 2, 2004. This provided significant
flexibility to market participants in managing
• Members can reckon unencumbered their collateral.
securities for SLR calculations.
Some Assessments
• The operations in CBLO are exempted from
cash reserve requirement (CRR). • CBLO and market repo helped in aligning
short-term money market rates to the LAF
Market Repo corridor.
• To broaden the repo market, RBI enabled • Mutual funds and insurance companies are
non-banking financial companies, mutual generally the main supplier of funds while
funds, housing finance companies and banks, primary dealers and corporates are
insurance companies not holding SGL the major borrowers in the repo market
accounts to undertake repo transactions outside the LAF.
with effect from March 3, 2003. These
entities were permitted to access the repo

GOVERNMENT SECURITIES MARKET
Various measures undertaken have led to a significant improvement in the functioning

of the government securities market.
The primary market has attained a greater resilience, benefiting from measures taken
for the development of institutions and instruments.
Introduction of the auction based system has improved the price discovery process.
The establishment of settlement and trading infrastructure has also led to increased
activity in the secondary market.
RBI has actively pursued the development of the dealers was developed for this purpose. Retail
government securities market since the early participation has been promoted in the primary
1990s for a variety of reasons. First, with RBI market (through a system of non-competitive
acting as the debt manager to the Government, bidding in the auctions) as well as in the
a well-developed and liquid government secondary market (by allowing retail trading in
securities market is essential to ensure the stock exchanges). Simultaneously, RBI also
smooth passage of Government’s market introduced new instruments with innovative
borrowings to finance its deficit. Second, the features to cater to diverse market preferences,
development of the government securities although the experience in this regard has not
market is also necessary to facilitate the been encouraging.
emergence of a risk free rupee yield curve to
serve as a benchmark for pricing other debt Third, with the discontinuance of the process of
instruments. Finally, the government securities unconstrained recourse by the Government to
market plays a key role in the effective RBI through automatic monetisation of deficit
transmission of monetary policy impulses in a and conversion of non-marketable securities to
deregulated environment. marketable securities,RBI gained more
operational freedom. Fourth, in an effort to
In order to foster the development of the increase liquidity, RBI has, since the late 1990s,
government securities market, it was imperative pursued a strategy of passive consolidation of
to migrate from a regime of administered debt by raising progressively higher share of
interest rates to a market-oriented system. market borrowings through re-issuances. This
Accordingly, in the early 1990s, RBI initiated has resulted in critical mass in key maturities,
several measures. First, it introduced the and is facilitating the emergence of market
auction system for issuance of government benchmarks. Fifth, improvement in overall
securities. While initially only yield-based macroeconomic and monetary management
multiple price auctions were conducted, uniform that has resulted in lower inflation, lower inflation
price-based auctions were also employed during expectations, and price stability has enabled the
uncertain market conditions and while issuing elongation of the yield curve to maturities upto
new instruments. Second, as the captive 30 years. Finally, RBI has also undertaken
investor base was viewed as constraining the measures to strengthen the technological
development of the market, the statutory infrastructure for trading and settlement. A
prescription for banks’ investments in screen-based anonymous trading and reporting
government and other approved securities was platform has been introduced in the form of NDS-
scaled down from the peak level in February OM, which enables electronic bidding in primary
1992 to the statutory minimum level of 25 per auctions and disseminates trading information
cent by April 1997. As a result, the focus shifted with a minimum time lag. Furthermore, with the
towards the widening of the investor base. A setting up of CCIL, an efficient settlement
network of intermediaries in the form of primary
mechanism has also been institutionalised, securities. By providing continuous two-way
which has imparted considerable stability to the quotes, PDs act as market makers in the
government securities market. secondary market. The liquidity in the secondary
market, in turn, lends support to the success of
With the withdrawal from the primary market primary market operations. The PD system has
from April 1, 2006 in accordance with the FRBM facilitated better distribution of primary auctioned
(Fiscal Responsibility and Budget Management stock while providing better liquidity in the
Act) stipulations, RBI introduced various secondary market. The decline in the share of
institutional changes in the form of revamping PDs in the primary issuances in the recent period
and widening of the coverage of the Primary needs to be seen in the context of increased
Dealer (PD) system to meet the emerging bidding interest by insurance companies,
challenges. Other measures taken to deepen particularly in the long dated securities.
the market and promote liquidity include
introduction of ‘when issued’ trading, ‘short One of the key issues in the development of the
selling’ of government securities and active market for a better price discovery is liquidity of
consolidation of government debt through buy securities. It was observed that, of the universe
backs. Various policy initiatives taken by RBI of a large number of outstanding securities, only
over the years to widen and deepen the a few securities are actively traded in the
government securities market in terms of secondary market. RBI has been following a
instruments as well as participants have policy of passive consolidation through re-
enabled successful completion of market issuance of existing securities with a view to
borrowing programmes of the Government enhancing liquidity in the secondary segment of
under varied circumstances. In particular, a the government securities market. The share
smooth transition to the post-FRBM phase has of re-issuances in the total securities issued was
been ensured. 97.7 per cent during 2005-06. Active
consolidation of government securities has also
The system of automatic monetisation through been attempted under the debt buyback scheme
ad hoc Treasury Bills was replaced with Ways introduced in July 2003, which is expected to be
and Means Advances in 1997, because of which more actively pursued now.
the Government resorted to increased market
borrowings to finance its deficit. Accordingly, the As a result of the developmental measures
size of the government securities market has undertaken, the volume of transactions has
increased significantly over the years. increased manifold over the past decade.
The investor base for government securities, The significant drop in turnover in 2004-05 and
which was largely determined by mandated 2005-06 could be due to a ‘buy and hold’
investment requirements before reforms, has tendency of the participants other than
expanded with the voluntary holding of commercial banks, particularly insurance
government securities. Accordingly, the share companies, which now hold a substantial portion
of commercial banks has declined from 2004- of government securities, particularly those of
05. longer maturities. The decline could also be
attributed to the asymmetric response of
The PD system was essentially conceived for investors to the interest rate cycle. In the
institutions whose basic interest is not to hold absence of a facility of short selling in
securities but to participate in the primary government securities, participants generally
auctions with the intent to act as market makers refrained from taking positions which resulted
in the secondary market. PDs are responsible in volumes drying up in a falling market.
for ensuring the success of primary auctions.
The presence of PDs in the government To keep the markets liquid and active even
securities market has brought about an element during the bearish times, and more importantly,
of dynamism, both in the primary and the to give the participants a tool to better manage
secondary segments. PDs have been actively their interest rate risk, intra-day short selling in
participating in the auctions of government government securities was permitted among

eligible participants, viz., scheduled commercial government securities market in India has
banks (SCBs) and primary dealers (PDs) in witnessed a transition to an increasingly broad-
February 2006. Subsequently, the short positions based market, characterised by an efficient
were permitted to be carried beyond intra-day auction process, an active secondary market
for a period of five trading days, effective January and a liquid yield curve. These developments
31, 2007. To further improve the liquidity in the have aided the smooth financing of government
government securities market, guidelines for debt, of both the central government and state
trading in when issued ‘WI’ market were issued governments, even when their fiscal deficits
by RBI in May, 2006. Trading in ‘WI’ segment, were high and rising. This experience has
which commenced in August 2006, was initially enabled the greater recourse of state
permitted in reissued securities. It takes place governments to market borrowing as mandated
from the date of announcement of auction till by the Twelfth Finance Commission.
one day prior to allotment of auctioned securities.
The revised guidelines extending ‘WI’ trading to Annexure: Reforms in the Government
new issuances of Central Government securities Securities Market - Institutional Measures
on a selective basis were issued in November • Administered interest rates on government
2006. securities were replaced by an auction
RBI has followed a strategy of elongating the system for price discovery.
yield curve by issuing a fine blend of long-term • Automatic monetisation of fiscal deficit
securities along with the short-term to suit the through the issue of ad hoc Treasury Bills
preference of both the issuer and the investor. was phased out.
With the issuance of longer term securities, the
yield curve on government securities has • Primary Dealers (PD) were introduced as
emerged over a spectrum of 30 years, although market makers in the government securities
the yield curve is not liquid at the longer end of market.
the maturity.
• For ensuring transparency in the trading of
Thus, various measures undertaken have led government securities, Delivery versus
to a significant improvement in the functioning Payment (DvP) settlement system was
of the government securities market. The introduced.
primary market has attained a greater resilience,
• Repurchase agreement (repo) was
benefiting from measures taken for the
introduced as a tool of short-term liquidity
development of institutions and instruments. The
adjustment. Subsequently, the Liquidity
functioning of the government securities market
Adjustment Facility (LAF) was introduced.
since the mid-1990s indicates consistent
increase in its size in tandem with the growth in • LAF operates through repo and reverse
market borrowings of both the Central and the repo auctions and provide a corridor for
State Governments. Introduction of the auction short-term interest rate. LAF has emerged
based system has improved the price discovery as the tool for both liquidity management
process. Reflecting the effectiveness of various and also signalling device for interest rates
measures to develop the market, the turnover in the overnight market.
in the secondary market has increased manifold
over the years. The establishment of settlement • Market Stabilisation Scheme (MSS) has
and trading infrastructure has also led to been introduced, which has expanded the
increased activity in the secondary market. The instruments available to RBI for managing
holding pattern of government debt shows some the enduring surplus liquidity in the system.
shift from banks to non-banks, reflecting a
• Effective April 1, 2006, RBI has withdrawn
progressive diversification of the investor base.
from participating in primary market auctions
The yield curve on government securities has
of Government paper.
emerged even as it is yet to become liquid at
the longer end of the maturity. Thus, the

• Banks have been permitted to undertake • Repo status has been granted to State
primary dealer business while primary Government securities in order to improve
dealers are being allowed to diversify their secondary market liquidity.
business.
Enabling Measures
• Short sales in Government securities is
being permitted in a calibrated manner while • Foreign Institutional Investors (FIIs) were
guidelines for ‘when issued’ market have allowed to invest in government securities
been issued recently. subject to certain limits.
• The Banking Regulation Act, 1949 has been • Introduction of automated screen-based
amended recently whereby the floor rate of trading in government securities through
25 per cent for SLR has been removed. Negotiated Dealing System (NDS).
Increase in Instruments in the Government • Setting up of risk-free payments and

Securities Market settlement system in government securities
through Clearing Corporation of India
• 91-day Treasury bill was introduced for Limited (CCIL).
managing liquidity and benchmarking. Zero
Coupon Bonds, Floating Rate Bonds, • Phased introduction of Real Time Gross
Capital Indexed Bonds were issued and Settlement System (RTGS).
exchange traded interest rate futures were • Introduction of trading in government
introduced. OTC interest rate derivatives like securities on stock exchanges for promoting
IRS/ FRAs were introduced. retailing in such securities, permitting non-
• Outright sale of Central Government dated banks to participate in repo market.
security that are not owned have been • Recent measures include introduction of
permitted, subject to the same being NDS-OM and T+1 settlement norms.
covered by outright purchase from the
secondary market within the same trading
day subject to certain conditions.

CORPORATE DEBT MARKET
The development of a corporate bond market in India has lagged behind in comparison
with other financial market segments owing to many structural factors.
It is hoped that the recent slow but steady development of insurance sector, mutual
funds, etc., coupled with the existence of a reliable government securities market
and the availability of robust reporting, trading and settlement mechanisms would
lead to a rapid development of a vibrant corporate debt market.
The development of a corporate bond market in started order driven trading platforms in July
India has lagged behind in comparison with other 2007. In practice, however, trading still continues
financial market segments owing to many to be largely OTC.
structural factors. While primary issuances have
been significant, most of these were accounted SEBI has also implemented measures to
for by public sector financial institutions and were streamline the activity in corporate bond markets
issued on a private placement basis to by reducing the shut period in line with that of G-
institutional investors. The secondary market, sec, reducing the size of standard lots to Rs.
therefore, has not developed commensurately one lakh and standardising the day count
and market liquidity has been an issue. convention. Further, to streamline the process
of interest and redemption payments, Electronic
The Government had constituted a High Level Clearing Services (ECS), Real time Gross
Committee on Corporate Bonds and Settlements (RTGS) or National Electronic
Securitisation (Patil Committee) to identify the Funds Transfer (NEFT) are required to be used
factors inhibiting the development of an active by the issuers.
corporate debt market in India and recommend
necessary policy actions. The Committee made Further progress is anticipated in regard to
a number of recommendations relating to rationalising the primary issuance procedures,
rationalising the primary issuance procedure, which is a critical step for moving away from
facilitating exchange trading, increasing the the predominance of private placements.
disclosure and transparency standards and To reduce the settlement risk and enhance
strengthening the clearing and settlement efficiency, the Patil Committee has also
mechanism in secondary market. The proposed setting up of a robust clearing
recommendations have been accepted in mechanism. The settlement was proposed to
principle by the Government, RBI and SEBI and be initially on DvP I basis (i.e., trade by trade
are under various stages of implementation. basis) to address the counterparty settlement
The two stock exchanges, namely, the Bombay risk and gradually migrate to DvP III (net
Stock Exchange (BSE) and the National Stock settlement of funds as well as securities) to
exchange (NSE), as well as the industry body impart enhanced settlement efficiency. (The
Fixed Income, Money Market and Derivatives delivery versus payment (DVP) modules can be
Association of India (FIMMDA) have since broadly classified into three broad categories,
operationalised respective trade reporting viz., DVP I, DVP II and DVP III. Under DVP I, the
platforms. While all the exchange trades in funds leg as well as the securities leg are settled
corporate bonds get captured by concerned simultaneously on a contract-by-contract basis.
exchange’s reporting platform, OTC Under DVP II, while the securities leg is settled
transactions can be reported on any of these on a contract-by-contract basis, the funds leg
platforms. The aggregated trade information is settled for the net amount). Under DVP III, both
across the platforms is being disseminated by the funds and the securities legs are settled for
FIMMDA on its website. BSE and NSE have also the net amounts).

Outlook for Development of Corporate Debt system is well entrenched, aggregate
Market consolidated public debt to GDP ratio reaches
a reasonable level, say less than 50 per cent,
Patil Committee has recommended two and the corporate debt market acquires depth
important measures to be initiated by the and liquidity with significant role for insurance
Government, namely rationalization of stamp- and pension funds in India.
duty, and abolition of tax deduction at source,
as in the case of government securities. In the past, the government securities
Hopefully, these would be acted upon soon. dominated the debt market in India, partly on
account of the fiscal dominance and the
As the corporate debt markets develop and RBI absence of contractual savings. In the absence
is assured of availability of efficient price of contractual savings only banks tended to
discovery through significant increases in public deploy their funds in the corporate bond market,
issues as well as secondary market trading, and mainly through private placement. RBI is hopeful
an efficient and safe settlement system, based that the recent slow but steady development of
on DvP III and STP is in place, RBI is committed insurance sector, mutual funds, etc., coupled
to permitting market repos in corporate bonds. with the existence of a reliable government
securities market and the availability of robust
In the medium-term, considering the overall
reporting, trading and settlement mechanisms
macro-economic situation, the ceiling for foreign
would lead to a rapid development of a vibrant
investment in both government securities and
corporate debt market. A framework for the
corporate debt will continue to be calibrated as
development is already available through the
an instrument of capital account management.
recommendations of the Patil Committee, the
In particular, a more liberalized access to foreign
implementation of which has already been taken
investment would be appropriate when, among
up by the various agencies.
other things, an efficient and safe settlement

FOREIGN EXCHANGE MARKET
The gradual development of the foreign exchange market has helped in smooth
implementation of current account convertibility and the phased and gradual opening
of the capital account.
The availability of derivatives is also helping domestic entities and foreign investors
in their risk management.
The Indian foreign exchange market has Rupee/US$ market was lower than that of some
witnessed far-reaching changes since the early major currencies.
1990s following the phased transition from a
pegged exchange rate regime to a market The EMEs’ experience, in general, in the 1990s
determined exchange rate regime in 1993 and has highlighted the growing importance of capital
the subsequent adoption of current account flows in determining the exchange rate
convertibility in 1994 and substantial movements as against trade flows and
liberalisation of capital account transactions. economic growth in the 1980s and before. In
Market participants have also been provided with the case of most developing countries, which
greater flexibility to undertake foreign exchange specialise in labour-intensive and low and
operations and manage their risks. This has intermediate technology products, profit margins
been facilitated through simplification of in the highly competitive markets are very thin
procedures and availability of several new and vulnerable to pricing power by large retail
instruments. There has also been significant chains. Consequently, exchange rate volatility
improvement in market infrastructure in terms has significant employment, output and
of trading platform and settlement mechanisms. distributional consequences. Foreign exchange
As a result of various reform measures, liquidity market conditions have remained orderly in the
in the foreign exchange market increased by post-1993 period, barring occasional periods of
more than five times between 1997-98 and 2006- volatility. The Indian approach to exchange rate
07. management has been to avoid excessive
volatility. Intervention by RBI in the foreign
In relative terms, turnover in the foreign exchange market, however, has been relatively
exchange market was 6.6 times the size of small compared to total turnover in the market.
India’s balance of payments during 2005-06 as
compared with 5.4 times in 2000-01. With the The exchange rate policy in recent years has
deepening of the foreign exchange market and been guided by the broad principles of careful
increased turnover, income of commercial monitoring and management of exchange rates
banks through such transactions increased with flexibility, without a fixed target or a pre-
significantly. Profit from foreign exchange announced target or a band, coupled with the
transactions accounted for more than 20 per ability to intervene, if and when necessary. The
cent of total profit of scheduled commercial overall approach to the management of India’s
banks in the last 2 years. foreign exchange reserves takes into account
the changing composition of the balance of
Efficiency in the foreign exchange market has payments and endeavours to reflect the ‘liquidity
also improved as reflected in the decline in bid- risks’ associated with different types of flows
ask spreads. The bid-ask spread of Rupee/US$ and other requirements.
market has almost converged with that of other
major currencies in the international market. On Apart from the spot segment, the foreign
some occasions, in fact, the bid-ask spread of exchange market in India trades in derivatives
such as forwards, swaps, and options. The
typical forward contract is for one month, three liberalisation leading to continuing opening of the
months, or six months, with three months being economy, despite a great degree of volatility in
the most common. Forward contracts for longer international markets, particularly during the
periods are not as common because of the great 1990s.
uncertainties involved. A swap transaction in the
foreign exchange market is a combination of a Annexure: Reforms in the Foreign
spot and a forward in the opposite direction. Exchange Market
Foreign exchange swaps account for the largest Exchange Rate Regime
share of the total derivatives turnover in India,
followed by forwards and options (Table 5). • Evolution of exchange rate regime from a
Options have remained insignificant despite single-currency fixed-exchange rate system
being in existence for three years. With to fixing the value of rupee against a basket
restrictions on the issue of foreign exchange of currencies and further to market-
swaps and options by corporates in India, determined floating exchange rate regime.
turnover in these segments (swap and options) • Adoption of convertibility of rupee for current
essentially reflects inter-bank transactions. account transactions with acceptance of
Article VIII of the Articles of Agreement of the
With greater opening of the capital account, the IMF. De facto full capital account
forward premia is getting gradually aligned with convertibility for non-residents and
the interest rate differential reflecting growing calibrated liberalisation of transactions
market efficiency. In the post-liberalisation undertaken for capital account purposes in
phase, forward premia of the Indian rupee vis- the case of residents.
à-vis dollar has generally remained high
indicating that rupee was at a discount to the Institutional Framework
US dollar. In recent times, however, reflecting • Replacement of the earlier Foreign
the build-up of foreign exchange reserves, the Exchange Regulation Act (FERA), 1973 by
strong capital flows and the confidence in the the market friendly Foreign Exchange
Indian economy, forward premia have come Management Act, 1999. Delegation of
down sharply from the peak reached in 1995- considerable powers by RBI to Authorised
96. Dealers to release foreign exchange for a
variety of purposes.
As a result of various measures, the Indian
foreign exchange market has evolved into a Increase in Instruments in the Foreign
relatively mature market over a period of time Exchange Market
with increase in depth and liquidity. The turnover • Development of rupee-foreign currency
in the market has increased over the years. With swap market.
the gradual opening up of the capital account,
• Introduction of additional hedging
the forward premia are getting increasingly
instruments, such as, foreign currency-
aligned with the interest rate differential. There
rupee options. Authorised dealers permitted
is also evidence of enhanced efficiency in the
to use innovative products like cross-
foreign exchange market as is reflected in low
currency options, interest rate swaps (IRS)
bid-ask spreads.
and currency swaps, caps/collars and
The gradual development of the foreign exchange forward rate agreements (FRAs) in the
market has helped in smooth implementation international forex market.
of current account convertibility and the phased Liberalisation Measures
and gradual opening of the capital account. The
• Authorised dealers permitted to initiate
availability of derivatives is also helping domestic
trading positions, borrow and invest in
entities and foreign investors in their risk
overseas market subject to certain
management. This approach has helped India
specifications and ratification by respective
in being able to maintain financial stability right
Banks’ Boards. Banks are also permitted
through the period of economic reforms and

to fix interest rates on non-resident deposits, enhanced in phases to US $ 3.2 billion by
subject to certain specifications, use March 31, 2007.
derivative products for asset-liability
• The extant ceiling of overseas investment
management and fix overnight open position
by mutual funds of US $ 2 billion is enhanced
limits and gap limits in the foreign exchange
to US $ 3 billion.
market, subject to ratification by RBI.
• Importers to be permitted to book forward
• Permission to various participants in the
contracts for their customs duty component
foreign exchange market, including
of imports.
exporters, Indians investing abroad, FIIs, to
avail forward cover and enter into swap • FIIs to be allowed to rebook a part of the
transactions without any limit subject to cancelled forward contracts.
genuine underlying exposure. • Forward contracts booked by exporters and
• FIIs and NRIs permitted to trade in importers in excess of 50 per cent of the
exchange-traded derivative contracts eligible limit to be on deliverable basis and
subject to certain conditions. cannot be cancelled.
• Foreign exchange earners permitted to • Authorised dealer banks to be permitted to
retain up to 100 per cent of their foreign issue guarantees/letters of credit for import
exchange earnings in their Exchange of services up to US $ 100,000 for securing
Earners’ Foreign Currency accounts. a direct contractual liability arising out of a
contract between a resident and a non-
• Borrowers eligible for accessing ECBs can
resident.
avail of an additional US $ 250 million with
average maturity of more than 10 years • Lock-in period for sale proceeds of the
under the approval route. Prepayment of immovable property credited to the NRO
ECB up to US $ 300 million without prior account to be eliminated, provided the
approval of RBI. amount being remitted in any financial year
does not exceed US $ 1 million.
• The existing limit of US $ 2 billion on
investments in Government securities by
foreign institutional investors (FIIs)

NON-DELIVERABLE FORWARD MARKET
NDFs are types of derivatives for trading in non-convertible or restricted currencies

without the delivery of the underlying currency.
The NDF market in the Indian rupee (INR NDF) has been in existence for around 10
years or so., reflecting onshore exchange controls and regulations.
With controls imposed by local financial The NDF market in the Indian rupee (INR NDF)
regulators and consequently the non-existence has been in existence for around 10 years or
of a natural forward market for non-domestic so., reflecting onshore exchange controls and
players, private companies and investors regulations. Besides, the INR NDF market also
investing in some economies such as China, derives its liquidity from (i) non-residents wishing
India and South Korea look for alternative to speculate on the Indian rupee without any
avenues to hedge their exposure to such exposure to the country and (ii) arbitrageurs who
currencies. In this context, non-deliverable try to exploit the differentials in the prices in two
forwards (NDFs) have become popular markets. The spread as well as volatility of the
derivative instruments for meeting the offshore INR NDF is higher than that of onshore spot and
investors’ demand for hedging. NDFs are types forward markets. Though an accurate
of derivatives for trading in non-convertible or assessment of the volumes is difficult, estimated
restricted currencies without the delivery of the daily INR NDF turnover was around USD 100
underlying currency. million in 2003/2004. NDF volumes have
reportedly grown substantially since then. While
The NDF market for Asian currencies is largely
these volumes are not large enough to affect
concentrated in Singapore, although their
the domestic onshore market under regular
existence is found in London and New York as
market conditions, in volatile market conditions,
well. The major trading currencies in the NDF
however, these may impact the domestic spot
market are the Chinese renminbi, the Korean
market. The NDF turnover for the Indian rupee
won, the New Taiwan dollar, the Indian rupee,
is estimated to be lower than that in the Chinese
the Indonesian rupiah and the Philippine peso.
renminbi, the Korean won and the New Taiwan
The volatility and bid-ask spread in the NDF
dollar. This could be attributed to the gradual
market for Asian currencies are found to be
relaxation of exchange controls and reasonable
lower for shorter maturities than for longer
hedging facilities available to offshore non-
maturities.
residents with exposures to the Indian rupee.

HEDGE FUNDS
A hedge funds are investment funds, charging performance fees and typically open to
only a limited range of investors’.
Hedge funds give higher return.

Reasons for hedge funds looking to India.
SEBI’s concerns.
A hedge fund is an, investment fund, charging a beta* is close to zero, that is, the portfolio beta
performance fee, and typically open to only a will remain relatively unchanged due to the
limited range of investors’ usually high net worth broad market movement. Such a portfolio will
individuals (HNIs). In the United States, hedge primarily change if the stocks move more than
funds are open to accredited investors only. An the broad market movements.
investor with net worth of US $ 1 million or annual
income of US $ 200,000 per annum or annual Consider, for instance, Hero Honda and Bajaj
income US $ 300,000 with spouse is called an Auto. The hedge fund may buy Bajaj Auto and
accredited investor. Because of this restriction, short Hero Honda, such that the portfolio beta is
they are usually exempt from any direct close to zero. Suppose Bajaj Auto moves up by
regulation by regulatory bodies. 10 per cent, and Hero Honda and the broad
market move up by 7 per cent, the fund’s net
In many offices you may find colleagues pooling
gain is 3 per cent. This is because Bajaj Auto
their money and applying for large pulic issues
outperformed the market, precisely what the
and sharing the benefits if they get allotments.
hedge fund was betting on when it constructed
They are essentially running a Hedge Fund.
the portfolio. In short, hedge funds generate
Though Hedge Funds are not informal affairs
security-specific returns, and attempt to lower
but legally incorporated and enter into contracts
market risk.
with investors. Hedge funds are no-holds-
barred investment pools for wealthy individuals
Currently, there are more than 200 hedge funds
and institutional investors who are considered
each with $ 1 billion or more in assets. Total
to be sophisticated enough to take risks that
hedge fund industry asset in 2006 was
ordinary investors should not. These investment
estimated at $ 1.442 trillion. Hedge funds do not
vehicles are allowed to do things that mutual
constitute a homogenous asset class. Many
funds are barred from doing. They can follow
different approaches are used taking different
complex investment strategies e.g. being long
exposures, exploiting different market
or short on assets and entering into futures,
opportunities, using different technique and
swaps and other derivatives contracts.
different instruments. Investing in hedge funds
Appropriate to their name, hedge funds may
is considered to be a riskier proposition than
often seek to offset potential losses in the
investing in a regulated fund. The primary
principal markets they invest in by hedging via
reasons are:
a number of methods. However, the term
‘hedge fund’ has come in modern parlance to
_____________________________________________________________________
be overused and inappropriately applied to any
*Beta is a popular name of risk in a stock. Lower the
absolute-return fund – many of them do not beta, lower is the risk of that stock. Its an indicator of, by
actually hedge their investments. how much percent the price of a stock will change
relative to the change in overall index of the stock
A hedge fund may for example take long market. Higher the beta higher is the volatility of the
positions in certain stocks and short positions stock relative to the market and hence higher is the risk.
in certain other stocks such that their portfolio

Leverage: In addition to putting money into Why Hedge Funds Are Looking to India
the fund by investors, hedge funds will also
borrow money. Some funds borrow many The size of the hedge fund industry worldwide
times greater than the initial investment. is over $1.5 trillion. The Indian market
Where a hedge fund has borrowed Rs 9000 capitalisation today is around $1 trillion.
for every Rs 1000 invested a loss of only Estimation about hedge fund allocations in India
10% of the value of the investment can wipe is about 5%. Few years ago hedge funds were
out 100 % of the value of the investors stake barely considering India as a potential market to
in the fund. invest in and they were highly secretive
investment vehicles even in the U.S.
Short selling : When hedge funds use However, things are developing rapidly like in any
short selling as an investment strategy other emerging market, with new strategies,
rather than hedging strategy it can suffer new rules and new players coming to fore.
very high losses. Market situations have changed and so did the
attitude of these funds towards India. Today, it’s
Appetite for risk: Hedge funds culturally a different story. As big returns are no longer
take more risks than other types of funds. easy to come by in US, European, Japanese
They invest in distressed securities and stock markets, international hedge funds are
collateralized debt obligations against sub- increasingly looking to emerging countries like
prime. India and other developing economies and
evaluating investment opportunities and the
Lack of transparency: Hedge funds are potential gains to be made.
secretive entities. It is therefore difficult for
an investor to assess trading strategies, Unlike other developing economies like China,
diversification of the portfolio and other where stock markets are not well developed and
factors related to investment decisions. company information is relatively opaque, India
has much of the necessary institutional
Lack of regulation: Hedge funds are not framework for hedging, including a regulatory
subject to as much oversight from financial regime and good information disclosure
regulators and therefore some may carry standards. The Chinese economy is larger, but
undisclosed risks. the capital markets are better developed in India.
Investors in hedge funds are willing to take these Another important reason of hedge funds
risks because of the corresponding rewards. investing in India market place is bandwagon
Short-selling opens up new investment effect. They are here with the idea that they’ll
opportunities, riskier investments which provide get extraordinary returns, and of course with
higher return; secrecy prevents imitation by India being a growth story, those returns are
competitors and being unregulated reduces cost definitely possible. Investors are looking for such
and gives more freedom to the fund manager. emerging market plays. If you go back to the
time when China started moving, it took people
Many hedge funds are established in off-shore by surprise. Now that India is moving, everybody
tax havens so that the fund can avoid paying tax wants to invest in India.
on the increase in its value of portfolio. More than
half of the world’s hedge funds are located in Regulatory concerns
off-shore locations such as Cayman Islands,
British Virgin Islands, Bermuda and Bahamas. By definition, hedge funds are pooled funds that
USA and European Union were the next most invest in several instruments across markets
popular locations. However, the investors pay and are organised as private investment
capital gains taxes on any profit they make partnerships. Due to closely held nature of
when they realises their investments. investment, hedge funds have managed to
escape regulation in US for a long time. Its only

after the fall of LTCM (Long Term Capital hedge funds who agree to lock-in clause will get
Management), they have started attracting a preference in entering the Indian stock market.
scrutiny. By its very nature, hedge funds may be averse
to accepting such a commitment.
The Securities and Exchange Board of India
(SEBI) has told several hedge funds wanting to The issue of registration of these classes of
invest in India that they should agree to a lock-in investors has been discussed by the SEBI board.
period of two years as a cushion against sudden Officials say the regulations governing foreign
withdrawal under adverse circumstances. institutional investors (FIIs), dating back to 1995,
Some of these are already invested in the Indian do not bar registration of hedge funds. However,
market through participatory notes (PNs). SEBI the capital markets regulator has not approved
is trying to persuade many other new hedge any applications from hedge funds on the ground
fund applicants to provide a lock-in undertaking. that they cannot come in as foreign portfolio
The regulator also wants to ensure that hedge investors since they are not regulated in their
funds registering directly with it are regulated in home countries.
the country of their origin. As per SEBI, those

PRIVATE EQUITY
It is a practice of pooling capital from high net-worth individuals and investing it in companies
through negotiated process.
Private Equities (PE) provide long term, committed-share capital to unquoted companies.
They help to expand, start up, turnaround or revitalise a company.
Though Private Equities have some close similarities with Hedge Funds (HF), they have
markedly different characteristics and operating patterns.
It is a practice of pooling capital from high net- ideas and concepts into reality through Venture
worth individuals and investing it in companies Capital. Companies like Microsoft, Apple, FedEx
through negotiated process. Private Equity etc., were financed by PEs in their nascent
investments usually concentrate on areas of years. However sometimes PEs are blamed
venture capital, buy-outs or distress financing. for adopting predatory practices in taking over
Unlisted securities also can be sold directly to control of companies.
Private Equity Funds. Private Equities (PE)
Though Private Equities have some close
provide long term, committed-share capital to
similarities with Hedge Funds (HF), they have
unquoted companies. They help to expand, start
up, turnaround or revitalise a company. All these markedly different characteristics and operating
investments are often fraught with high risk and patterns. Private Equity funds buys either all of
high returns. Private Equity investments are the equity of a company or controlling stake and
generally transformational and they involve in the participate in management. Controlling stake
management of the company they finance. PE is not a goal in the case of Hedge Funds.
Investments by PEs normally longer term
will receive returns on their investment by way
investments spanning five to seven years or
of IPO (in case of venture capital) or sale of the
company after turning it around or after value longer as a result investments in PEs are not
addition. that liquid whereas HFs have short-term
investment and return target. HFs sees market
Only high net-worth individuals and institutional volatility as an advantage and look for market
investors can invest in Private Equities, as the inefficiencies and pricing anomalies to make
minimum investment limit is very high. returns. PEs seek to create value in the
Investors in PEs should be prepared to lock-in companies they invest through participation in
their capital for long periods or even a complete or complete takeover of management.
wipe out of capital. In the US only accredited
India is favoured destination for international PE
investors (having net worth of $1million or
individual income of $2,00,000 or combined players. In the year 2007, the incremental PE
income (with spouse) of $3,00,000 in the past investment in India is expected to cross $10
two years and expect to sustain such income billion. There is hardly any India based PE funds
levels in the future) are allowed to invest in PEs. though there are venture capital funds promoted
Though PEs resemble to Mutual Funds by their by banks and financial institutions. Also there
is no separate regulatory framework for PEs.
structure, they are very loosely regulated than
Currently it is viewed as a different form of
the Mutual Funds. The dealings between the
PEs and their investors are seldom brought to Mutual Fund. However RBI and SEBI have
public domains. formed study groups to analyse the structure
and operating patterns of PEs.
Private Equities have made commendable
contributions to the society by nurturing new

PARTICIPATORY NOTES
Participatory Notes are offshore derivative instruments issued by SEBI-registered

(FIIs) to their overseas investors.
Reasons for their preference by foreign investors.
Concerns of Indian regulators.
Recent guidelines of SEBI to regulate P-notes .
Participatory Notes are offshore derivative of foreign investors putting money in PNs. On
instruments issued by SEBI-registered Foreign the other hand, Indian investors have to disclose
Institutional Investors (FIIs) to their overseas the full details about their funds and identity while
investors, who wish to invest in the Indian stock putting funds in the market. So there is no level
markets without registering themselves with playing field. There is also a fear that PNs bring
SEBI. The investors, who buy PNs, deposit their in hot money which comes into the country
funds with offices of the FIIs situated outside suddenly and exits at the same speed. Finally,
India. The FIIs use their proprietary account to the government is worried about whether the PN
buy stocks in India. The FIIs or the brokers act route is being used to launder money. Earlier, a
like exchanges since they execute the trade SEBI investigation exposed how Indian money
and use their internal accounts to settle this. FIIs was routed from India to Mauritius, London,
issue PNs to their overseas clients which give British Virgin Islands and the US and re-entered
details of the underlying stocks. Foreign clients India as foreign money through the PN route.
get dividends or capital gains collected from the
Reserve Bank of India, which had sought a ban
underlying securities.
on PNs, believes that it is difficult to establish
One reason for using PNs is to keep the the beneficial ownership or the identity of the
investors’ name anonymous. Some investors ultimate investor, which is possible for registered
use the instrument to save on transaction costs, FIIs. It fears that FIIs, which have to comply with
record keeping, overheads and regulatory the know-your customer (KYC) norms, know the
compliance overseas. Investors often find it identity of the investor to whom the note was
expensive to establish broker and custodian issued. But it is possible for the investor to sell
bank relationships, deal in foreign exchange, pay the PN to another player resulting in multi-
taxes and/or filing, obtain or maintain an layering. Tax officials fear that PNs are becoming
investment identity or regulatory approval in a favourite with a host of Indian money launderers
certain markets, where their total exposure is who use the instrument to first take out funds
not going to be very large. Such investors look out of the country, through the hawala route, and
for derivative solution to gain exposure in then get it back using PNs.
individual, or a basket of, stocks in the relevant
market. Sometimes, investors enter the Indian Over the years, the use of PNs has increased
markets in a small way using PNs, and when from 17 Foreign Institutional investors issuing it
in 2005 to over two dozen funds now in the
their positions become larger, they find it
current year. Merrill Lynch, Morgan Stanley,
advantageous to shift over to a full-fledged
Foreign Institutional Investors structure. Credit Lyonnais, Citigroup and Goldman Sachs
are the biggest issuers. The total value of
The biggest problem is their opacity in an era of underlying investments in equity represented by
transparency. Indian regulators do not have any the PNs was Rs 67,185 crore representing
idea about the source of funds and the identity about 25.7% of the cumulative net investments

in equities by FIIs at the end of June, 2005. As of concerned sectoral regulator) will be
August 2007, the notional value of PNs was Rs allowed to invest through PN.
3.53 lakh crore — about 51.4% of all assets
under all FIIs present in India. iv. PN issuing FIIs where outstanding PNs are
less than 40% of the FIIs assets under
Securities and Exchange Board (SEBI) has custody will be allowed an incremental
recently announced the following changes in the issuance of 5% a year subject to a cap of
PN business. 40% of the FIIs assets under custody; FIIs
that are already over 40% limit will be
i. There will be no more issues of PNs against allowed to issue/renew fresh PNs only on
underlying derivatives either by FIIs or the cancellation/redemption of PNs to an
sub-account holders. equivalent extent.
ii. Existing positions will have to be unwound The sensex initially reacted negatively on the
in 18 months. announcement of SEBI’s guidelines, but picked
iii. Only regulated entities ( those subject to up after Finance Minister and SEBI’s
oversight in their home country by the clarifications. The long-term impact of SEBI’s
policies would be known only in times to come.

CARBON CREDITS & EMISSION TRADING
Carbon Credits are key components in emission trading schemes.

The concept of Carbon Credits formally came into existence as a result of Kyoto Protocol
Kyoto protocol envisages a cap and trade system. The cap lays down that the developed
countries should reduce their emissions 5.2% below their 1990 levels over the five year
period from 2008-2012.
Since Carbon Credits are tradable instruments with a transparent price, financial investors
like banks, brokers, funds, and private traders have also started buying them for pure
trading purposes.
Managing emissions has become one of the line. This has to be achieved in the time period
fastest-growing segments in financial services. between 2008 and 2012. The present treaty
Eventually emission trading is expected to expires in 2012. The major share of past and
become the biggest commodity market in the present emissions is from developed countries.
world. Emission trading provides a free market Per capita emissions, even in large developing
tool to control the environmental pollution caused countries like India and China are low in
due to greenhouse gases. Carbon Credits are comparison. However, even without a target or
key components in emission trading schemes. commitment to reduce the emissions according
The concept of Carbon Credits formally came to Kyoto limits, developing countries share the
into existence as a result of Kyoto Protocol, an common responsibility to reduce emissions.
international agreement between 175 countries. Kyoto protocol envisages a cap and trade
Greenhouse effect is the warming of earth system. The cap lays down that the developed
due to presence of Greenhouse gases (GHG). countries mentioned in the Annexure I of United
The phenomenon is similar to what is happening Nations Framework Convention on Climate
in a glasshouse (Greenhouse) where plants are Change (UNFCCC) should reduce their
cultivated in controlled conditions. Part of the emissions 5.2% below their 1990 levels over the
heat energy received from the sun is absorbed five year period from 2008-2012 (current
by earth’s surface and part is radiated back into commitment period). These are national level
the atmosphere. This return radiation is of a targets for participating countries. Countries
higher wavelength than that of radiation received manage their emission quotas through registries
from the sun and cannot easily pass through at the national level. These registries are
the blanket of greenhouse gases covering the required to be validated by the UNFCCC. In turn
earth’s atmosphere, resulting in warming the countries may set quotas on the emissions of
atmosphere close to the earth. installations run by various business entities and
organisations (operators).
The main greenhouse gases are carbon
dioxide, methane, nitrous oxide and various Each operator (business entity or organisation)
flouro carbons of which CO 2 is the largest will get Assigned Allocation Units or in short
component comprising 76% of all green house ‘Allowances’ of emission quotas. Each unit of
gases. The main cause of CO2 emission is allowance (credit) allows an operator to emit one
burning of fossil fuels like coal, oil and natural metric tonne of Carbon Dioxide or other
gas. The second factor that increases CO2 level equivalent greenhouse gas. The operators who
in the atmosphere is deforestation. have not used up their quotas (or prevented the
emission to that extent) can sell their unused
Kyoto Protocol aims at reducing the
allowances as Carbon Credits and those who
emissions in the developed nations by five
have exceeded their quotas can buy the extra
percent (5.2% to be exact) below the 1990 base
allowance as credit from other operators directly Besides the companies and manufacturing
or from the market place. By allowing credits to units, community based projects can also earn
be bought and sold, an operator can decide the carbon credits and sell it in the international
most cost-effective way of reducing its market. For example, if a community
emissions either by investing in low emission undertakes tree plantation under Clean
machineries or production processes or by Development Mechanism (CDM), it helps to
purchasing credits from others. absorb carbon from the atmosphere and
becomes eligible for carbon credits. There are
Under Kyoto Protocol, developed countries and
defined standards based on the woodmass to
operators who exceed their quotas can acquire
estimate the amount of carbon absorbed by the
emission credits by:
trees in a given area.
(i) Setting up a greenhouse gas emission
Since Carbon Credits are tradable instruments
reduction project in another developed
with a transparent price, financial investors like
country (known as JI or Joint
banks, brokers, funds, and private traders have
Implementation)
also started buying them for pure trading
(ii) Sponsor a greenhouse gas emission purposes.
reduction project in a developing country
Greenhouse gases other than CO2 also can be
(known as CDM or Clean Development
traded, but they are quoted as standard
Mechanism)
multiples of carbon dioxide with respect to their
(iii) Buy it from countries with surplus credits global warming potential. Carbon prices are
under International Emission Trading normally quoted in Euros per tonne of carbon
system. dioxide or its equivalet (CO2e) also known as
If an Annexure I country is not in compliance with European Union Allowance (EUA). Currently one
its emissions limitation in the first commitment EUA is traded at about 22 Euros. Climate
period (2008-2012), then that country is required exchanges provide spotmarket as well as
to make up the difference plus an additional 30% futures and options market for carbon trading.
in the second commitment period. In addition, At present, there are four major exchanges,
that country will be suspended from making namely, Chicago Climate Exchange (CCX),
transfers under an emissions trading European Climate Exchange (ECX), Oslo-
programme. Emission Trading under Kyoto based Nord Pool and Paris-based PowerNext,
Treaty will commence from 2008. However, trading in Carbon Credits.
European Union has commenced the trading in Indian share in carbon trading has crossed $5
2005 under its Emission Trading Scheme (EU billion and the country is expected to be a major
ETS). Though America is yet to ratify the Treaty, player in the arena by 2012 generating 30 to 50%
many of its states are contemplating introducing of the estimated 700 million units of carbon
such schemes. credits traded globally. Indian companies have
Emission Trading in a way makes the developed a strategic advantage as the cost of emission
nations to pay for their emission sins and reduction in India is very low as compared to
rewards the countries with good compliant the developed countries. However the regulatory
behaviour. This process also causes the framework in India in respect of carbon trading
transfer of technology and wealth from rich is somewhat in a nascent stage and yet to have
nations to poor nations. The large number of clear guidelines in various aspects including
companies coming up in developing nations can taxation of income from carbon credits, financing
opt for cleaner technologies. They can have an of CDM projects etc.
edge over companies in developed nations Meanwhile, Multi-Commodity Exchange of India
which were established in the past and are Ltd (MCX) had already entered into a strategic
dependent on technology and machinery that do alliance with the Chicago Climate Exchange
not meet new-age emission standards. (CCX) and is all set to launch trading in carbon
Replacement of such machineries and credits shortly.
processes can be prohibitively costly.

Though the scenario presents itself as very Even before 2012, there can be high volaitility in
appealing, some degree of caution is warranted. the price due to industries exploiting loopholes
There appears to be some snags lurking ahead in the system like exaggerating their expected
in the track. The Kyoto Treaty itself will expire in emission levels to get more quotas from the
2012 which does not mean that carbon trading government and selling such excess credits.
would come to an end by that date but what is This can bring down the price. Also if corrupting
not predictable is the nature of the treaty that the inspecting mechanism is easier and cheaper
will succeed the present one. Emission Trading than buying carbon credits, large pollutors might
markets depend on tough targets, without which take such routes and bring down the demand in
there would be no demand. America, having the global market. Several environmentlists are
not ratified the present treaty, has threatened to already against carbon trading, as the concept
disrupt a major clause that exempts the large hardly helps to bring down the emission. They
developing countries like India and China from see it as hiring someone to diet for you. Also
emission cap. China is set to overtake the they accuse that instead of getting penalised,
USA this year as the world’s largest CO2 polluter. the big industrial pollutors are allotted with credits
This has already become an election issue in worth billions.
America. Australia, another major developed
The European Union recently adopted
country yet to ratify the Kyoto Protocol, also
emissions targets to 2020 which will guarantee
demands that developing nations too have to
its carbon market until then, regardless of any
restrict their greenhouse gas emissions. This
successor to Kyoto. So notwithstanding the
demand, if allowed, can bring down the
uncertainities in price, demand, supply and
availability of surplus carbon credits in the
regulations, emission trading is here to stay.
developing nations.

EXCHANGE TRADED FUNDS
ETFs are funds that are listed on stock exchanges and traded like individual stocks.
ETFs are linked to some index.
In this the underlying shares are not traded.
The prices of ETFs are determined by market dynamics.
Benefits: It provides the benefit of diversified index funds and brings trading flexibility
of stocks. The operating expenses are lower.
The first ETF in India was launched in 2001.
What are Exchange Traded Funds? What are the Advantages and
Exchange Traded Funds, more popularly known Disadvantages of investing in ETFs?
as ETFs, are a hybrid of open-ended mutual While providing the benefits of diversified index
funds and listed individual stocks. In simple funds, ETFs bring in the trading flexibility of
terms, ETFs are funds that are listed on stock stocks. Just like the shares, ETFs can be bought
exchanges and traded like individual stocks. on margin, short sold, etc. Thus, investors have
Therefore, ETFs bring the trading and real time ready liquidity even when they own not shares
pricing advantage of individual stocks to mutual but only a part of a diversified portfolio. Moreover,
funds. the operating expenses of these funds are lower
How do ETFs Compare with Mutual Funds than even that of similar index funds. This
Structurally? difference is reflected in the somewhat higher
NAV against an index fund of same portfolio.
ETFs are not much different from mutual funds
in that they too enable an investor to own part of However, because ETFs are bought and sold
a portfolio managed by a professional. Also, like over stock exchanges, there is a transaction
mutual funds, ETFs entitle investors to a cost involved in dealing with brokers. Also, at
proportionate amount in their underlying portfolio. times, an ETF can trade at a discount to the
However, unlike the mutual funds, which are NAV of the underlying net asset value.
actively managed by the fund manager, ETFs What Determines the Price of Exchange
are linked to some index and are not managed. Traded Funds?
In that sense, an investor does not have to worry Since ETFs are listed on stock exchanges, it is
about the performance of the fund manager. possible to buy and sell these throughout the
But there are some significant differences day, which one cannot do with mutual funds. And
between mutual funds and ETFs. Unlike mutual because ETFs are traded on the stock
funds, ETFs do not sell their shares directly to exchanges, their price is determined by the
investors for cash. A securities firm creates demand-supply dynamics in the market.
ETFs by depositing a basket of stocks. This large However, since they are essentially open-ended
block of stocks is called a creation unit. In return mutual funds, the price is also dependent on the
for these stocks deposited, the ETF receives value of assets held by them. In practice, they
shares, which are then offered to investors over trade in a small range around the value of the
the stock exchange. Thus, the stocks deposited assets (NAV) held by them.
form the holding of the ETF. Does India have an Exchange Traded Fund?
In the case of mutual funds, the portfolio The first exchange traded fund in the world -
undergoes changes whenever an investor buys Standard & Poors’ Depository Receipt (SPDR)
or redeems units, but in the case of ETFs, - was launched in 1993. India’s first ETF - Nifty
trading at the stock exchanges does not affect Benchmark Exchange Traded Scheme (Nifty
their portfolio. BeES) - was launched towards the end of 2001
by Benchmark Mutual Funds.

GOLD DEMAT
Commodity futures including gold are traded in commodity exchanges and online
exchanges such as MCX, NCDEX, NMCE and NBoT in India.
Gold and silver are highly traded on the MCX; Agri commodities are traded more
on the NMCE and the NCDEX.
The gold traded is required to meet certain pre-set quality specifications.
MCX, in association with the World Gold Council, has launched a new product - a
gold contract that is settled in a week (T+7).
The lifting of the 30-year ban on commodity traded more on the NMCE and the NCDEX.
futures trading in India has opened yet another Commodity future contracts are tradeable
avenue for investors. Commodity futures are standardised contracts, the terms and
traded in commodity exchanges and popular conditions of which are set in advance by the
online exchanges such as the Multi Commodity exchanges regulating the trade.
Exchange (MCX), the National Commodity and
Derivatives Exchange (NCDEX), the National The gold traded is required to meet certain pre-
Multi-Commodity Exchange (NMCE) and the set quality specifications. On the NCDEX and
National Board of Trade (NBoT) in India. These MCX a minimum fineness of 0.995 and a serial
are platforms on which market participants number of an approved refiner is required while
come together to effect their trades. The NCDEX it is 0.999 fineness in the NMCE.The Lot size is
and the MCX are located in Mumbai, the NMCE kg in MCX and 100 gm in NCDEX and
in Ahmedabad and the NBoT in Indore. These NMCE.The quotation is 10 gm of 0.999 fineness
exchanges are promoted by leading banks. The in all the exchanges. The delivery centre for
NCDEX is co-promoted by the NSE; the MCX NCDEX is Mumbai and for MCX Mumbai and
by the State Bank Group; and the NMCE by the Ahmedabad while NMCE has 7 delivery centres.
Central Warehousing Corporation. The delivery size is 100 gm in NMCE and 1000
gm in the case of NCDEX and MCX.
Investors are required to open a trading account
with a broker or sub-broker by providing If a person wants to enter into a delivery
documents establishing address, identity proof settlement for gold, he will have to enter into a
and bank account details. Those who want to minimum of 10 contracts or multiples thereof.
give or take physical delivery for a contract on Market participants are required to negotiate only
the MCX and the NCDEX are additionally the quantity and price of the contract, as all other
required to open a demat account with NSDL or parameters are predetermined by the exchange.
CDSL, apart from providing local sales tax A settlement takes place either through squaring
registration details of the delivery centre. off your position or by cash settlement or physical
delivery. Squaring off is taking a contrary position
The Forward Markets Commission (FMC) to the initial stance, which means in the case of
approves commodities that can be traded. an original buy contract an investor would have
Commodities available for trading include bullion to take a sell contract. An investor who intends
— gold and silver; metals — steel, copper, to give or take delivery would have to inform his
aluminium, lead and nickel; crude; and several broker of the same prior to the start of delivery
agri commodities. Crude, gold and silver are period.
highly traded on the MCX, agri commodities are

Delivery is at the option of the seller; a buyer contract enters the delivery period in case of
can take delivery only in case of a willing seller. delivery settlements.
All unmatched/rejected/excess positions are
cash settled; all open positions for which no A seller intending to give delivery would have to
delivery information is submitted are also cash approach the accredited warehouse for
settled. Under cash settlement, the difference availability of space and the assayer, who
between the contract price and settlement price certifies the quality of the goods; the goods are
is to be paid or received. Unlike the stock markets required to meet the pre-set quality
that close by 3.30 p.m., the NMCE is open till specifications. The seller has to bear storage
8.00 p.m. and the MCX and the NCDEX until charges until the date of demat credit, loading/
11.00 p.m. Unlike equity futures, which have a unloading and all other incidental charges,
life cycle of three months, contract duration in including assaying charges. A buyer intending
case of commodity futures varies, and in some to take physical delivery has to request his
instances extends up to six months. broker. The buyer has to then approach the
warehouse with the document. It is possible to
Market participants can hedge their position over take partial delivery from the warehouse. All
a longer period. Commodity futures are also incidental charges pertaining to taking delivery
easier to understand compared to equity futures, are to be borne by the buyer.
as one has to just keep track of demand and
supply and not the several financial metrics that Investors can now buy, hold and trade gold in
the latter calls for. Sales tax is applicable only dematerialised form without having to worry
when a contract results in delivery. about parking it in a vault for its safe-keeping.
MCX, in association with the World Gold Council,
Investors are required to maintain margins and has launched a new product - a gold contract
top up their accounts on a daily basis — marked- that is settled in a week (T+7). Investors can
to-market margin — for fluctuations based on get exposure to gold through a one-week
the tick size. Margins have different contract, which is closer to a spot market. A Gold
components; there is an additional delivery passbook would be issued to investors opting
margin that has to be maintained once the for this product. MCX would be linked to NSDL
for offering this product.

BOOK BUILDING
Introduced in India in 1995

It is a process of determining price of shares based on market feedback
Under this, the offer price is not determined by the issuer but by the quotes given
by the prospective buyers. Hence, it is also called price discovery mechanism.
Benefits: Evaluation of the intrinsic worth of the shares; savings on issue expenses;
investors have a say in pricing; market determined pricing; reduction in lead time.
Concept for companies without a profit track record

Book building is rather a new concept for us in provided they did so only through the book
India, being introduced only in 1995. Under book building route and 60% of the issue is picked up
building process, the issuer (or issuing by qualified institutional buyers. SEBI further
company) is required to tie up the issue amount stipulated that all issues of over five times the
by way of private placement. The issue price is networth via the book building route only and all
not priced in advance. It is determined by offer pre-IPO and preferential allotments to have a
of potential investors about the price which they lock-in period of one year.
may be willing to pay for the issue. In course of Benefits of Book Building
the roadshow exercises, the issue manager, 1. Book-building helps in evaluating the
called Book-Runner, records the amounts intrinsic worth of the instrument being
offered by various investors. The price of the offered.
instrument (i.e., equity, debenture or bonds) is
2. Price of instrument is determined in a more
arrived at as an weighted average at which the
realistic way on the commitments made by
majority of investors are willing to buy the
the prospective investors to the issue.
instrument.
3. The process of book building is
Determining Issue Price
advantageous to the issuer company since
Book building is a process of price discovery. the final price is decided at a date very close
Book building is a pricing mechanism whereby to the date of opening of the issue. Book
new securities are valued on the basis of a building also offers access to capital more
demand feedback following a period of quickly than the public issue.
marketing. Book building is a transparent and
4. As the issue is pre-sold, there would be no
flexible system based on real-time feedback of
uncertainties relating to the fate of the issue
investors and is an alternative to the rigidity of
involved.
the existing system of fixed pricing. Book
building enables fair pricing of the issue. Fair 5. The issuer company saves on advertising
price is supposed to emerge out of offers given and brokerage and they can choose
by various institutional investors. investors by quality.
Statutory Requirements 6. Investors have a voice in the pricing of
issues. They have a greater certainty of
Book building is a novel concept and is in infancy
being allotted what they demand.
in India. The concept has assumed significance
in India as the SEBI has approved the book 7. The issue price is market determined. It is
building process in pricing new issues with effect a distant possibility that the market price of
from the 1st November, 1995. SEBI has further the shares would fall lower than the issue
clarified in December 1996 that the option of price.
book building is available to all body corporates 8. Optimal demand-based pricing is possible.
which are otherwise eligible to make an issue 9. Efficient capital raising and improved issue
of capital to the public. procedures lead to a reduction in (a) issue
SEBI has thrown open the doors for public issue costs, (b) paper work and (c) lead time.

BUY BACK
Buy Back is an arrangement by which shares issued to equity holders are bought
back by the company.
Why done: To support market price; to acquire controlling interest; to deploy surplus
funds.
Funds for buy back should come from authorised sources.
Effects: Buy back may affect company’s liquidity, profits, EPS, Book Value and
gearing ratio.
back as a weapon to soothe their nerves
What is Buy Back?
by supporting the share price during periods
Buy back is paying back of paid-up capital of of temporary weakness.
specified securities (including employees stock
2. Company is not Performing Well: Some
option or other securities as may be notified by
companies may not be performing well
the Central Government from time to time)
leading to bear hammering of their scrips.
which are in excess of the requirements of the
Buy back of shares can be used as a market
company.
support operation for the scrip of such a
Buy back can be in one of the following ways company.
1. Shares/securities bought back may be 3. Controlling Interest: If buy back takes
extinguished: As per Companies Act, the place in which promoters will not sell, the
company buying back its own securities percentage holdings of the promoters will
shall extinguish and physically destroy the increase without bringing in a single paisa.
securities bought back within 7 days of the Thus buy back of shares by the company
last date of completion of buy back. can block unwelcome take-overs.
2. Shares/securities bought back may not 4. Returning surplus cash to
be extinguished: The shares or securities shareholders: If the company is generating
bought back by the company can be more cash than they need or when the
retained and reissued after some time. This business in which they are operating does
type of buy back is not permitted in India. not offer substantial opportunity for growth
3. Liability on any of its shares/securities and does not find long-term avenues for
may be reduced: Under this scheme, the deployment, then the company may decide
liability of the company buying back can to return the surplus cash to shareholders.
reduce the liability of the company Conditions
proportionately on the security/share but not
1. Ultimate Sources
to the full amount of the face value. This
type of buy back is also not permitted in Buy back shall be out of the following sources
India. as per Section 77A1 of the Companies Act.
Why buy back at all? out of its free reserves
Buy back of shares is done for one or more of out of the securities premium account
the following purposes: out of the proceeds of an earlier issue other
1. Shares are underpriced: Sometimes, than fresh issue of shares made specifically
despite fundamentals of the company being for buy back purposes
strong, the prices of shares fall below the 1. In other words, the funds required for buy
intrinsic value of the stock making the back shall not exceed the balances under
investors nervous. Companies can use buy
the above mentioned three sources. Thus the profit before tax (PBT) if all other factors
the rule has also ensured that buy back of remain constant. If the funds are raised by
shares is not directly financed by issue of way of interest bearing liabilities, the interest
securities. payable on these liabilities will be a charge
2. The buy back shall not exceed 25% of the on the profits and hence the PBT will
total paid-up capital and free reserves of the decrease if the others remain constant.
company purchasing its own shares or The corporate tax liability will also decrease
other specified security. due to the decrease in the taxable profit of
3. The ratio of the debt owed by the company the company and the charges on income
is not more than twice the capital and its allowed by the Income Tax Act.
free reserves after such buy back. Since the PBT will decrease, the Profit after
Procedure Tax (PAT) will also decrease even after the
decreased tax liability of the company.
1. Buy back from the existing security
holders on a proportionate basis 3. Earnings Per Share: Though the profits
through the tender offer: Offer by a will decrease, the number of shares after
company to buy back its shares through a the buy back will also decrease. Thus the
letter of offer from the holders of shares is number of shareholders eligible for dividend
called tender offer. Since the offer is to all will decrease. Hence the earnings per share
the shareholders, this will be on will go up.
proportionate basis. The offer shall be open 4. Book Value of the Share: Book value of
within the range of 7 to 30 days. the share will also increase after the buy
2. From open market: Under this it can be back of shares.
under 2 ways. One is through book building 5. Gearing Ratio: If liquidity for buy back
process and the other through stock comes from the proceeds of assets, or from
exchange. The announcement shall come additional liabilities, the gearing ratios of the
at least 7 days in advance. company will be adversely affected.
In case of book building, the offer shall be open Shareholders’ Perspective: If the EPS of the
for 15 to 30 days. The price shall be determined company is expected to increase after the buy
based on the acceptance received. The final buy back of shares, why the present shareholders
back price, which shall be the highest price shall sell the shares at all?
accepted, shall be paid to all the holders whose 1. Liquidity: The shareholders in need of
shares have been accepted for buy back. funds may need to dispose of some of the
Effects on the company shares. In such a case they would dispose
1. Liquidity of the Company: Though the of the shares at the rate being bought back
company may be having adequate because there will be ready demand for it.
undistributed profits, etc., these funds might 2. Profitability: Generally, the shares are
have already been used for treasury bought back at a price higher than market
function/holding current assets/creation of value. Such price makes it attractive for
fixed assets. Hence the nature of immediate holder to dispose of the shares.
source of funds for buying back the shares 3. Booking of Profits: The holder of shares
will determine the liquidity position/current may decide to book profits or cut loss and
ratio of the company. therefore surrender the shares to the
2. Profits of the company: If the source of company under buy back.
funds are the sale proceeds of the earning The proceeds of the shares under buy back are
assets, the income that would have been subject to capital gains tax in the hands of the
earned therefrom will cease, thus reducing share disposers.

STOCK INDEX FUTURES
● Futures are standardized contracts and are tradeable

● Standardisation implies that size, date of expiry and other features are standardized.
● Stock Index represents an average price of various scrips
● Advantages: Serves as a hedging mechanism; guards against price fluctuation caused
by FII’s investment strategy; preserves portfolio value during market stress.
Futures contracts are standardised tradeable available in sufficient quantity. The

contracts. They are standardised in size, availability of stock index futures can take
expiration date and all other features. They are care of this problem.
traded on specially designated exchanges in a iii) Open-ended funds: In the case of open-
highly sophisticated environment. The futures ended scheme, repurchases may
trading system has effective in-built safeguards sometimes necessitate liquidation of a part
in the form of cash adjustments (mark to of the portfolio but there are problems in
market) to the account of trading member on executing such liquidations. Selling each
daily price change. holding in proportion to its weight in the
Stock Index Futures portfolio is often impracticable. Some of the
holdings may be relatively illiquid. Rushing
Stock Index represents an average price of
to the cash market to liquidate would drive
various scrips. Also, Index futures do not
down prices. Stock Index Futures can help
represent a physically deliverable asset.
to overcome these problems to the
Institutional and other large equity holders need
advantage of the unit holders.
portfolio hedging facility and Stock Index Futures
help investors to hedge their funds. iv) Preserving the value of portfolio during times
of market stress: There are times when the
Stock Index Futures offers the following
main worry is the possibility that the value
advantages:
of the entire equity portfolio may fall
i) Reducing the equity exposure in a mutual substantially if, say, event ‘X’ occurs. Sales
fund scheme: Suppose that a balanced of Stock Index Futures can be used to
mutual fund scheme decides to reduce its insure against the risk.
equity exposure from, say 40% to 30% of
v) International investors: The buying and
the corpus. At present, this can be achieved
selling operations of FIIs, at present, cause
only by actual selling of equity holding. Such
disproportionate price-effect on the Indian
selling entails three problems: first, it is likely
bourses. In other words, what the FIIs buy/
to depress equity prices, second, it cannot
sell is a “piece” of the whole Indian equities
be achieved speedily and third, it is a costly
market. If stock index futures are available,
procedure because of brokerage, etc. The
this can be carried out with greater speed
same objective can be achieved through
and less cost and without adding too much
index futures at once, at much less cost
to market. While trying to maximise the net
and with much less impact on the cash
inflow of FII portfolio investment, its
market.
disturbing effects can possibly be
ii) Investing the funds raised by new schemes: minimised if the facility of stock index futures
When a new scheme is floated, the money is available.
raised does not get fully invested for
vi) Stock index is difficult to be manipulated as
considerable time. Suitable securities at
compared to individual stock prices, more
reasonable prices may not be immediately

so in India, and the possibility of cornering at 5000. At least 50 contracts of Sensex futures
is reduced. Of course, manipulation of stock have to be bought and each contract is priced
index can be attempted by influencing the at Rs.5.
cash prices of its component securities. Suppose we buy 50 July contracts of Sensex
While the possibility of such manipulation futures at 5000, our contract value will be
cannot be ruled out, it is reduced by Rs.12.5 lakhs (50 contracts x Rs.5 per contract
designing the index appropriately. x 5000 index).
vii) Stock index futures enjoy distinctly greater The entire money need not be paid upfront; for
popularity, and are, therefore, likely to be futures contracts work on a margin basis. The
more liquid than all other types of equity initial margin is fixed at 5 per cent or a
derivatives as is learnt by international percentage based on Value at Risk (VaR) model,
experience. whichever is higher. Suppose the margin is 5
viii) Stock index, being an average, is much less per cent, we have to pay just Rs.62,500 on the
volatile than individual stock prices. This contract worth Rs.12.5 lakh. But that is not the
implies much lower capital adequacy and end of the transaction.
margin requirements in the case of index What if the Sensex futures rises to 5200 the
futures. The lower margins will induce more next day?
players to join the market.
We have already gained 200 points on our
ix) Since Index futures do not represent a futures contract (5200-5000 points). We have,
physically deliverable asset, they are cash thus, made a profit of Rs.50,000 (200 points x
settled all over the world on the premise that 50 contract x Rs.5 per contract) which we will
the index value is derived from the cash receive from the seller. But what if the Sensex
market. This, of course, implies that the falls to 4,700 the day after we purchase the
cash market is functioning in a reasonably futures contract? Since we have lost 300
sound manner and the index value based points per contract, we will have to pay the seller
on it can be safely accepted as the Rs.75,000. This mark-to-market transaction is
settlement price. carried out on a daily basis till the futures
Regulatory complexity is likely to be less in the contract expires.
case of stock index futures than for other kinds How is the final settlement made? Suppose
of equity derivatives, such as stock index the contract expires on the last Thursday of July
options, or individual stock options. and the Sensex futures closes the previous day
Stock Index Futures Trading at 5200. If the Sensex in the cash market closes
The BSE and NSE ushered in a new era by on the last Thursday at 5400, we have gained
launching index futures trading in the second 200 points (5400 in the cash market - 5200, the
week of June, 2000. A trader can bet on Sensex previous day’s futures price). We will, thus,
futures of six types - one month, two months receive Rs.50,000 (200 points x 50 contracts x
and three months and three spread futures Rs.5 per contract) from the seller.
(June-July, July-August and June-August). The If, however, the Sensex loses 300 points on the
mechanics of trading are as under: expiry of the contract, we will have to pay the
Suppose Sensex futures for July is 5000; it seller Rs.75,000 as the final settlement.
means that the market today expects the The most important point is that on final
Sensex to close at 5000 on expiry of the futures settlement, the Sensex value in the cash market
contract in July. is compared with the Sensex futures value of
If we believe that the Sensex will close at a higher the previous day.
level by end-July, we can buy the index futures

EMPLOYEES STOCK OPTION PLANS (ESOPS)
Employee stock option plan gives the right to employees to purchase share of a
company at a set price.
Under this, employees are offered shares in lieu of salary or other compensation.
Advantages: Increased employee commitment; no drain on cash.
Disadvantages: Stock options will not be attractive when share prices fall.
ESOP Accounting That is because the US GAAP allows them to

do so. Never before in the history of corporates,
A Stock option confers on an employee the right
the concept of shareholder value was so dearly
to purchase the share of the company at a set
adored as it is in the present day. Thanks to
price, after a set period of time. As the
stock options, more and more company bosses
company’s share price goes up, so will the value
today are more bothered about shareholder
of the option.
value than they would otherwise be. Normally
Nowhere the use of employees stock options is this should be considered a healthy
as widely prevalent as in corporate America. development but this led to unusual chemistry
Today it is not only the chief executive who gets in corporate America. Shareholder value is
paid in stocks but also the lower level employee. measured by the increase in the market prices
Much of the success of the tech companies of of equities. The market prices in turn are
Silicon Valley as also the techies who inhabit it influenced by the profitability of the firms. The
is ascribed to the stock options. Tech companies market became so sensitive to profits, that if a
whose success depends on the skill of human company reports a drop of 10 percent in profits,
assets found stock options a handy device to its market price gets battered by more than as
lure the human capital. much. That is keeping the CEOs on toes to report
year on year increases in profits lest they shall
The underlying logic is that when managers own meet the wrath of the market. Strangely, it is this
part of the stock of the firm they tend to make focus on shareholder value that is driving the
decisions that increase the value of the firm as company bosses to report highest profits, come
also that of their holdings in the process. what may. Given such a situation, it is
Also, stock options do not result in a drain on understandable that company bosses dislike the
cash resources upfront, unlike other forms of idea of taking a shot on their company profits by
compensation. For employees the booty treating the stock options as cost.
represented a beautiful road to riches. The stock While granting stock options does not result in
options turned many of the young techies into cash cost, more and more companies are
millionaires. borrowing money to buy back the equities to
The accounting framework makes the stock enable their employees to exercise their options.
options a cheaper way to pay. In simpler terms Thus companies are under double constraints,
devoid of jargon what it means is that when the firstly they come under debt trap not for
salaries are paid in cash they become cost and expansion but to pay their employees. Secondly,
reduce the reported profits. When the salaries with the market prices ruling at historic highs,
are paid in the form of stock options they do not. they tend to buy equities at high costs. There is
no gainsaying the fact that human capital is the

driving force of the tech companies, but the Various options are available to the employers
enormous price that is being paid, that too for granting ESOPs to their employees. While
outside the accounting framework, is a cause in some cases ESOPs can be granted by
for serious concern. A bold approach has been allotting to the employees equity shares of the
taken with regard to taxation of the perquisite employer company at face value itself, in the
value of the shares, etc., allotted under the alternative ESOPs may contain a proposal to
ESOP. And as a result of the amendment to the grant shares of the employer company at a price
Income Tax Act, ESOPs is not taxed as a lower than the prevailing market price.
perquisite in the hands of the employees but Reversely, ESOPs may also be in form of free
subjected only to one-time capital gains tax and issue of shares or debentures to the employees.
that too only at the time of its sale. As a result of
this amendment, ESOPs are virtually tax-free.

MARGIN TRADING
Margin trading is an arrangement whereby an investor purchases securities by

borrowing a portion of the purchase value
SEBI has allowed member brokers to provide margin trading facility to their clients
in the cash segment since April 1, 2004
Only corporate brokers with “net worth” of at least Rs.3 crore would be eligible to
participate
Margin trading is an arrangement whereby an subject of the SEBI guidelines prescribed on

investor purchases securities by borrowing a March 19, 2004. Initial and maintenance margin
portion of the purchase value from the authorized for the client shall be a minimum of 50 per cent
brokers by using securities in his portfolio as and 40 per cent, respectively, which has to be
collateral. paid in cash. Initial margin is the minimum
amount, calculated as a percentage of the
The Securities Exchange Board of India (SEBI)
transaction value, to be placed by the client with
has allowed member brokers to provide margin
the broker before the actual purchase. The
trading facility to their clients in the cash segment
maintenance margin is the minimum amount,
since April 1, 2004. Securities with mean impact
calculated as a percentage of the market value
cost of less than or equal to one and traded at
of securities with respect to the last trading day’s
least 80 per cent (+/-5 per cent) of the days
closing price to be maintained by the client with
during the previous 18 month s would be eligible
the broker. When the balance deposit in the
for margin trading facility. Only corporate brokers
client’s margin trading accounts falls below the
with “net worth” of at least Rs.3 crore would be
required maintenance margin, the broker shall
eligible to participate. Brokers wishing to extend
promptly make the margin call. According to the
the facility of margin trading to their clients are
current arrangement, the broker may liquidate
required to obtain prior permission from the
the securities if: (i) the client fails to meet the
exchange(s) where the facility is proposed to
margin call made by the broker; (ii) fails to
be provided. The broker may use his own funds
deposit the cheques after the marginal call has
or borrow from scheduled commercial banks
been made; (iii) where the cheque deposited by
and/or NBFCs regulated by RBI. At any point of
the client has been dishonoured; and (iv) if the
time, total indebtedness of a broker for the
client’s deposit in the margin account (after
purpose of margin trading is not allowed to
adjustment for mark to market losses) falls to
exceed 5 times of his net worth as defined by
30 per cent or less of the latest market value of
SEBI. The “total exposure” of a broker towards
the securities. The broker shall maintain
the margin trading facility shall be within the self-
separate client-wise accounts of the securities
imposed prudential limit and shall not, in any
purchased on the basis of margin trading with
case, exceed the borrowed funds and 50 per
depositories. The SEBI and stock exchange(s)
cent of “net worth”. The exposure to any single
have the right to inspect the books of accounts
client at any point of time is restricted to 10 per
maintained by brokers with respect to the margin
cent of the “total exposure” of the broker.
trading facility.
The margin arrangement has to be agreed upon
between the authorized broker and the client

INTERNET TRADING
Internet trading is buying and selling of securities through the Internet.

It helps in transparency, creates a fair and efficient market and reduces systemic
risk.
SEBI has issued regulatory guidelines on Internet trading.
Worldwide, e-broking otherwise called as Banks have discounted the benefits of Internet
Internet broking has radically transformed the trading long back and thus, started working in
way people trade in stocks. Since Internet is the the same line much before. The speed at which
fastest medium to get stock quotes no other Net brokerages are mushrooming will certainly
medium can beat the net in speedy make a huge difference in the coming days in
dissemination of information and, therefore, net- the capital market. Some of the foreign and
based trading has the enormous potential for private banks are in the fray to provide the best
the Indian stock market. facilities to the investors with the help of their
integrated network. ICICI, for instance, has its
Objectives
own bank, broking house, and is also a
Internet trading is expected to depository participant. SBI provides Internet
trading in collaboration with a reputed private
increase transparency in the markets broking house.
enhance market quality through improved Regulatory Initiatives
liquidity, by increasing quote continuity and
market depth, SEBI adopted the roadmap laid down by the
International Organisation of Securities
reduce settlement risks due to open trades, Commission (IOSCO) in framing its policy on
by elimination of mismatches, the use of Internet in the securities market.
provide management information system SEBI has laid down the conditions to be enforced
(MIS), by the stock exchanges for permitting their
introduce flexibility in systems, so as to stockbrokers to trade on Internet. These
handle growing volumes easily and to conditions pertain to operational integrity, system
support nationwide expansion of market capacity, signature authentication, client-broker
activity. relationship, contract notes, trade confirmation,
risk management, network security protocols
Besides, through Internet trading three and interface standards. Regarding the
fundamental objectives of securities regulation operational and system requirements, SEBI has
can be easily achieved. These are: directed the exchanges to ensure that the
investor protection system used by the stock broker has provisions
for security, reliability and confidentiality of data
creation of a fair, and efficient market and
through use of encryption technology.
reduction of the systematic risk.

VENTURE CAPITAL IN INDIA: GROWTH AND
CHALLENGES
Venture Capitalists finance innovations or ideas, which have the potential for high
growth with inherent uncertainties.
VCs help in development of entrepreneurship, innovation and economic growth.
VCs provide finance, purchase equities, assist in the development of new products
and have a long-term orientation
Poor growth of VCs in India may be attributed to negative mindset, delay in issue of
licence, problem in scalability, regulatory issues and difficulty to exit
Introduction for the failures. In return for investing, the venture

capitalists not only receive a major equity stake
Venture capital is different from traditional in the firm, but also demand seats on the board
sources of financing. Venture capitalists finance of directors. By active intervention and
innovations or ideas which have the potential for assistance, venture capitalists act to increase
high growth but with inherent uncertainties. This the chances of survival and rate of growth of the
makes it a high-risk, high-return investment. Apart new firms. Their involvement extends to several
from finance, venture capitalists provide functions, such as helping to recruit key
networking, management and marketing support personnel, giving strategic advice and
as well. In the broadest sense, venture capital introduction to potential customers, strategic
connotes financial as well as human capital. partners, later-stage financiers, investment
Venture capitalists actively work with the bankers and various other contacts. Venture
company’s management by contributing their capitalist, therefore, provides more than money.
experience and business savvy gained from This is a crucial difference between venture
helping other companies with similar growth capital and other types of funding. The venture
challenges. capital process is complete when the company
is sold through either a listing on the stock
Venture capitalists are professionals, often with
market or the acquisition of the firm by another
industry experience, and the investors are silent
or when the company fails. For this reason, the
limited partners. At present, a fund generally
venture capitalist is a temporary investor. The
operates for a set number of years (usually
firm is a product to be sold not retained. The
betweem 7 and 10) and then it is terminated.
venture capital process requires that
Normally, each firm manages more than one
investments be liquidated so there is the
partnership simultaneously. Even though the
possibility of exiting the firm. Countries that erect
venture capital firm has the quintessential
impediments to any of the exit paths (including
organisational format, there are other vehicles,
bankruptcy) are choosing to handicap the
the most persistent of which have been venture
development of the institution of venture capital.
capital subsidiaries of major corporations,
financial and non-financial. Venture capital is collected through different
sources to invest alongside management in
The venture capitalist invests in recently
rapidly growing industries. It is an important
established firms believed to have the potential
source of equity of start-up companies. Venture
to provide a return of ten times or more in less
capital firms (VCF) are private partnerships or
than five years. This is highly risky, and many of
closely held corporations funded by private and
the investments fail entirely; however, the large
public pension funds, endowment funds,
winners are expected to more than compensate
foundations, corporations, wealthy individuals,

foreign investors, and the venture capitalists. capital operations (Ministry of Finance 1988).
Venture capitalists are persons with razor sharp Prior to this, there was no policy regarding
minds and deep pockets who are ready to take venture capital; in fact, there was no formal
the challenge to enter into untested areas. venture capital. These regulations really aimed
at allowing state-controlled banks to establish
Venture capitalists generally
venture capital subsidiaries, though there was a
• Finance new and rapidly growing companies; possibility for other investors to create a venture
• Purchase equity securities; capital firm. However, there was only a minimal
• Assist in the development of new products interest in the private sector in establishing a
or services; venture capital firm.
• Add value to the company through active
participation; They were also allowed to exit investments at
• Take higher risks with the expectation of prices not subject to the control of the Ministry
higher rewards; of Finance’s Controller of Cpaital Issues (which
• Have a long-term orientation. otherwise did not pemit exit at a premium). The
fund promoters had to be banks, large financial
For decades, venture capitalists have nurtured institutions or private investors. Private investors
the growth of America’s high technology and could own no more than 20 per cent of the fund
enterpreneurial communities resulting in management companies (although a public
significant job creation, economic growth and listing could be used to raise the needed funds).
international competitiveness. Companies such The funds were restricted to investing in a small
as Digital Equipment Corporation, Apple, Federal amount per firm (less than 100 million rupees):
Express, Compaq, Sun Microsystems, Intel and the recipient forms had to be involved in
Microsoft are famous examples of companies technology that was “new, relatively untried, very
that received venture capital early in their closely held or being taken from pilot to
development. An OECD Report (2000) has also commercial stage, or which incorporated some
identified venture capital as a critical component significant improvement over the existing ones
for the success of enterpreneurial high- in India”. The government also specified that the
technology firms and recommended that all recipient firm’s founders should be “relatively
countries consider strategies for encouraging the new, professionally or technically qualified and
availability of venture capital. In India, which is with inadequate resources or banking to finance
booming with Information Technology, venture the project”. There were also other bureaucratic
capital in this particular sector can play an fetters including a list of approved investment
important role, as it is faced with problems such areas. Two government sponsored development
as rapid changes in the technologies used, banks, ICICI and IDBI, were required to
upgradation and high cost of employee retention. scrutinise portfolio firm’s application to a venture
capital firm to ensure that it fulfilled the right
Development of Venture capital in India
purposes. In addition, the Controller of Capital
First Stage in Venture Capital Industry Issues of the Ministry of Finance had to approve
every line of business in which a venture capital
In the early 1980s, there was no conducive firm wished to invest.
environment for venture capital in India. The
country’s highly bureaucratised economy, Four state-owned financial institutions
avowed pursuit of socialism, still quite established venture capital subsidiaries under
conservative social and business worlds and a these restrictive guidelines and received a total
risk averse financial system provided little of $45 million from the World Bank, Of the four
institutional space for the development of venture new venture capital firms, two were established
capital. But the environment began to change by two well-managed state-level financial
after 1985. In 1988, the Government of India organisations (Andhra Pradesh and Gujarat), one
issued its first guidelines to legalise venture by a large nationalised bank (Canara Bank) and
one by a development finance organisation segments. Many State governments have also
(ICICI). set up venture capital funds for the IT sector in
partnership with local state financial institutions
Second Stage of Development in Venture
and SIDBI. Thus in 1990 a number of new
Capital
regulations were promulgated. Some of the most
The success of Indian entrepreneurs in Silicon significant of these were related to liberalising
Valley that began in 1980s became far more the regulations regarding the ability of various
visible in the 1990s. This attracted attention and financial institutions to invest in venture capital.
encouraged the notion in the United States that Perhaps the most important of these, banks
India might have more possible entrepreneurs. were allowed to invest upto 5 per cent of their
It encouraged the entry of foreign institutional new funds annually in venture capital. However,
investors. This included investment arms of banks have not made much venture capital
foreign banks, but particularly important were investment so far. This is because bank
venture capital funds raised abroad. Very often managers are rewarded for risk averse
NRIs were important investors. The overseas behaviour. Lending to a risky, fast growing firm
private sector investors became a dominant could be unwise because the loan principal is at
force in the Indian venture capital industry. risk while the reward is only interest. Since banks
control the bulk of discretionary financial savings
In the late 1990s, the Indian government became in the country, there is little internally generated
aware of the potential benefits of a healthy capital available for venture investing.
venture capital sector. In 1996, the venture
capital regulator, the Securities and Exchange Like in the United States, in India also there is a
Board of India (SEBI), announced the first clustering of venture capital firms in Mumbai, New
guidelines for registration and investment by Delhi and Bangalore. In contrast to the United
venture capital firms. Since March 1999, States, where Silicon Valley asserted its
Government of India has taken several initiatives dominance as a technology centre at the end of
in formulating policies regarding sweat equity, the 1970s, Bangalore had a smaller share of
stock options; tax breaks for venture capital along offices in 1998 when compared with Mumbai and
with overseas listings have all contributed to the New Delhi, which are the financial and political
enthusiasm amongst investors and capitals of India respectively.
entrepreneurs. In the year 2000, the Finance Problems for the Development of Venture
Ministry announced a major liberalisation of the Capital in India
tax treatment for venture capital funds to promote
When compared to the success of venture
knowledge-based enterprises and job creation.
capital industry in U.S.A, in India there are several
Besides this, SEBI was made the single point
hurdles for its development. These are negative
nodal agency for registration and regulation for
mindset, delay in issue of licence, problem in
both domestic and overseas venture capital
scalability, regulatory issues and difficulty in
funds. This liberalisation and simplification of
exiting.
procedures was done to encourage NRIs in
Silicion Valley and elsewhere to invest some of Conclusion
their capital, knowledge and enterprise in
India still remains in difficult environment as
ventures in their motherland.
regards venture capital. In India, venture capital
A National Venture Capital Fund for the software remains a small industry precariously dependent
and IT industry (NFSIT) was set up in association upon other institutions, particularly the
with various financial institutions and the industry government, the external actors such as
is operating under the umbrella of the SIDBI to international lending agencies, overseas
encourage entrepreneurship in the areas of investors and successful Indian enterpreneurs
software, services and other IT related in Silicon Valley.

ECONOMY & FINANCE
EXTERNAL SECTOR

THE SUBPRIME CRISIS
The term subprime lending refers to loans that are given to borrowers with less than
satisfactory credit history/ credit rating.
They are high-risk group attracting higher interest rates.
Investment banks packaged the subprime mortgages into Mortgage Backed
Securities (Collaterlised Debt Obligations) and sold it to commercial banks, pension
funds, hedge funds etc.
Between 2004 and 2006 the Fed rate rose from 2% to 6.25%. The subprime
mortgages were reset to very high interest rates. Delinquency, default and foreclosure
became the order of the day and brought down the sub prime mortgage industry.
The term subprime lending refers to loans that wholesale lenders through unregulated or under
are given to borrowers with less than regulated brokers who tricked and trapped the
satisfactory credit history/ credit rating. Such borrowers. Prospective borrowers were seldom
borrowers do not qualify for loans at best interest given the correct picture about the schemes.
rates. They are high-risk group attracting higher They were almost never told about the
rates of interest. The phrase ‘subprime’ repayment burden. Brokers persuaded them by
indicates the inferior credit status of borrower telling what all they could do with this easy
and not a reflection of the interest rate. There money. So they were lured to avail loans (more
are variety of products for this segment like sub often with cooked up financial statements) much
prime mortgage loan, sub prime car loan, sub in excess of their repayment capacity. As
prime credit cards etc. housing prices saw a steady increase from 2000
to 2005, attributable to demand pull due to easy
The genesis of the current crises can be traced
availability of funds, they were forced to buy
to the recession in the year 2000 due to the
properties at much higher prices. Often
collapse of the dot-com bubble. The 9/11
borrowers were required to pay only the interest
terrorist attack further aggravated the depression
for the first five years. So, many of them were in
in the world economy in general and US
effect investors trying to make ‘a quick buck’ in
economy in particular. To overcome this
a rising market. Also the rising housing prices
slowdown, US lowered the interest rates and
created a ‘feel wealthy’ effect on existing
people were encouraged to spend more to
homeowners who raised funds on the strength
rescue the sagging economy. Consumerism
of the ‘increased equity’ portion of their homes
was even equated with patriotism. The low
and the money thus raised were mostly spent
interest rate encouraged all sorts of borrowings
for consumption and speculation. The agents
and spending. Mortgage loans became more
(brokers) of subprime financing firms were
attractive than ever before. For more and more
mostly young and earned handsome rewards.
people, own house became a reality, for many
They earned ‘dream incomes’ with which came
others it became an attractive investment option.
all attractions like luxury cars, fancy vacations
Subprime mortgage lending generated more
and much more. These agents mindlessly
interest and fee income than the normal
peddled their products in an over excited
mortgage loans and lenders targeted the
market.
segment enthusiastically.
The wholesale lenders in turn pushed these
The size of this segment is so huge that as of
loans to Wall Street investment banks, who
March 2007 the U.S. subprime mortgage figure
packaged them into Mortgage Backed Securities
stood at USD 1.3 trillion. In a single year in 2005,
(Collaterlised Debt Obligations - CDOs) and sold
sub prime mortgage loans grew over $800 billion.
it to commercial banks, pension funds, hedge
These loans were mostly sold by regulated
funds etc. Such CDOs were required to be rated fixed rate to higher floating rates. The crisis has
by rating agencies before the investment banks already spread to countries outside the USA as
could sell them. The same investment banker several European and Asian funds and banks
naturally paid these rating agencies for their have exposure in the American subprime market.
services. The rating agencies in turn gave more Experts are predicting a contagion where the
attention to the credentials of the invest banker effect will spill over to several countries and can
than the CDO itself. As a result CDOs with bring down the asset prices across the globe.
subprime mortgages as underlying assets often Some go a step further and predict a slowdown
got high ratings. in the global economy due to decreasing
demand across a wide spectrum.
This unbridled consumerism and low interest
rates led the US economy into inflation and by So who are to be blamed for the mess? Greedy
the year 2004 the Federal Reserve began to subprime lenders, lack of effective government
raise the interest rates. Between 2004 and supervision, unscrupulous brokers who lured the
2006 the Fed rate rose from 2% to 6.25%. Then subprime borrowers into unaffordable loans,
in 2006, after several years of huge profits, the borrowers who entered into loan agreements
scenario in subprime front began to change. which they could not meet, property agents who
The subprime mortgages were reset to very inflated the prices, rating agencies who did a
high interest rates. Delinquency, default and shoddy assessment of CDOs and investors
foreclosure (take over and sale by the financier who bought the subprime mortgage securities
because of default by the borrower) became the without verifying the strength of the underlying
order of the day and brought down the sub prime assets, all of them had a role. While the fall in
mortgage industry. Asset prices began to fall property prices since 2005 was partly the cause
way below the loan outstandings. Worse still, and partly the effect, there is another important
assessing the asset price itself has become aspect. The securitisation of the loans has
difficult as the market for CDOs have practically snapped the traditional link between the lenders
collapsed. Dozens of mortgage companies and the creditors, which makes the recovery
have closed, put up for sale or have filed for process more difficult and invites foreclosure
bankruptcy. Several banks and funds are in as the first option.
trouble. So far banks have declared over USD
The Indian banks are not affected by the
30 billion in subprime related losses. The
subprime crisis as they are not exposed to
estimated losses are in the region of $200-400
derivative instruments like CDOs. The impact
billion. The full impact on the economy could
of subprime crisis on Indian economy will be
be even more substantial, because the losses
indirect such as the effect of slowdown of US
could compel banks and other lenders to curtail
economy and the effect of general liquidity
lending by as much as $2 trillion. CEOs of
crunch in the global market. Also the stock
financial giants like Citigroup and Merrill Lynch
market might experience selling pressure from
were forced to step down. The CEO and most
overseas funds and institutions that had
of the board members of Northern Rock, a UK
exposure to subprime assets. Globally, the
based bank, were forced to step down and the
booming emerging economies with large
bank itself is up for takeover. This is described
internal demand are expected to offset the
as one of UK’s worse banking crises in more
impact of US slowdown on world economy.
than a century.
The crisis can be seen as an example of what
Experts say the situation could get worse which
unbridled liquidity created through leveraging can
can result in fall of asset prices in other countries
do. The legendary investor Warren Buffet once
as well. Consumer rights groups predict that
called the derivatives as financial ‘weapons of
the number of foreclosures could go up to five
mass destruction’. Viewed from the current
million over the next several years, as the
context, the words proved prophetic.
interest rates on subprime mortgage loans given
in 2004 and 2005 are reset from the initial lower

IMPACT OF HIKE IN OIL PRICE
India imports 70% of its crude oil requirements. In the year 2006-07 it was $48
billion i.e. 6.3% of GDP.
Oil bonds issued to compensate oil companies only defer the payment for
government.
Every dollar increase in crude price leads to 0.30% increase in WPI.
Global crude oil prices have scaled a new high good from the exchequer a part of the oil
and are now within kissing distance of the $100- companies’ resultant losses, has led to a huge
per-barrel mark sending shock waves across fiscal burden. While on the one hand, the
the world. This has triggered worries about increasing oil import bill will impact the trade
inadequate supplies with the advent of the winter balance, the government’s decision to meet the
in the Northern Hemisphere and possible subsidy burden through oil bonds will be a huge
political instability in the Middle East. This cost for the fiscal. The oil bonds which only defer
increases the pressure on the Government of the payment for the government, will have to be
India to hike administered retail fuel prices in India repaid at some point. This could then pose huge
or to increase the fiscal outlay to compensate threats to the fiscal deficit targets set by the
the oil companies that recover less from retail government and its deficit reduction
sales than their costs. The rise in global crude commitment under the Fiscal Responsibility and
oil prices could leave emerging economies like Budget Management Act. Oil majors selling fuel
India and China (which are largely import at artificially low prices are managing to stay
dependent for their energy requirements) afloat thanks to the government’s bail-out
scarred, impacting the trade balance as well as package. But liquidity problems and high-debt
growth. India, for instance, paid a whopping $48 burdens are beginning to impact the financials
billion as oil import bill in 2006-07. India imports of these companies. Petroleum ministry
almost 70% of its crude oil requirement. With estimates have it that under recoveries of oil
the economy growing at around 9%, the demand companies would be far greater than Rs 54,935
for oil is also expected to grow in the coming crore projected by the Cabinet for 2007-08. Out
years. As OPEC, the oil cartel which accounts of these, Rs 26,363 crore related to the first half
for more than 40% of the global oil production of 2007-08 for which bonds of Rs 11,257 crore
has decided to cut production, as compared to have already been recommended. The
the production levels last year, prices are unlikely projected under recoveries for the second half
to change much in the near future. The of 2007-08, indicated to the Cabinet, were Rs
consistent northward spurt in crude prices may 28,572 crore. These have jumped to Rs 34,891
now force the government to take a decision on crore based on latest projections. With the
artificially depressed retail fuel prices sooner present trend current projected annual under-
than later. However, given the political sensitivity recoveries of oil companies would be around
of such a decision, the government is expected Rs 61,254 crore; this figure too may go up
to adopt a combined strategy where the burden depending on the movement of the global crude
would be shared by consumers, upstream oil prices. The price of the Indian basket has been
companies and the government. While less than $90/barrel on November 20. It had
consumers may have to see a marginal hike in touched all time high on November 7 ($91.12/
fuel prices, government is expected to dole out barrel) and the average price in the month is
a larger chunk of bonds to meet the deficit. The about $88/ barrel. India’s oil import bill as a
government’s decision to control retail fuel percentage of GDP has increased from 3.4
prices leaving them unchanged, and to make percent in 2003-04 to 6.3 percent in 2006-07.

With India’s increasing oil imports (in volume potentially add 15 basis points to WPI inflation
terms) the sharp increase in prices will lead to directly and another 15 basis points indirectly. A
a higher foreign exchange outgo. There certainly study in the year 2001 concluded that a 20
is a correlation, between international oil prices percent increase in oil price leads to a 1.3
and an increase in domestic oil prices results in percent increase in inflation and 2.1 percent
increased inflation and reduced GDP growth. As decrease in output growth. Similar pattern has
per RBI Annual policy statement for the year been noticed in various countries world over.
2004-05, every US dollar increase in crude could

CHINA'S BANKING SECTOR
Types of banks in China

What is their role and market share in Chinese economy
Nature of dominance of state owned banks
Opening of Chinese banking sector
China’s banking sector has undergone created the so-called policy banks in order to
significant reform but it still exhibits the legacy take over the big four’s state-directed lending
of a centrally planned economy. There are four role. Despite the big four’s move away from the
types of banks in China: wholly state-owned policy-directed lending function toward
banks, commercial banks (partially private), commercial lending, the legacy of their past
credit co-operatives, and foreign banks. lending continues to constrain their earnings and
profitability. The return on assets (ROA) of the
Wholly state-owned banks: They comprise big four has lagged behind other commercial
state-owned commercial banks and policy banks in recent years.
banks.
b. Policy banks: The government established
a. State-owned commercial banks: There three policy banks in 1994 to relieve the “big four”
are four state-owned commercial banks, of their state-directed lending role.
commonly referred to as the “big four”. They are
the most dominant, influential and formidable They are:
players in China’s banking sector. Together they i. Agricultural Development Bank of
account for around 60% of the banking sector’s China, which primarily took over the policy
total assets. How they evolve will determine the lending role from the ABC.
direction of the sector and the pace of economic
ii. China Development Bank, which primarily
reform. The big four are:
took over the policy lending role from the
i. Agricultural Bank of China (ABC), CCB and to a certain extent from the ICBC.
originally set up to provide loans to the
iii. Export-Import Bank of China, which
agricultural and rural sectors.
primarily took over the policy lending role
ii. Bank of China (BOC), initially mandated from the BOC, particularly the trade
to specialise in international transactions financing function.
e.g. foreign exchange services and trade
Policy banks fund themselves primarily through
credit.
the issuance of bonds, and they accept few
iii. China Construction Bank (CCB), initially deposits. The combined assets of the three
set up to specialise in financing construction policy banks have grown rapidly and now make
and infrastructure projects, usually in the up around 10% of the total banking sector, which
form of long-term loans. bears evidence of the continued presence of
iv. Industrial & Commercial Bank of China state-directed lending in the banking sector.
(ICBC), originally mandated to provide c. Commercial banks: Equity ownership of
working-capital loans to the industrial and these banks is distributed among the
commercial sectors in the urban areas. Government and private investors. There are
All four banks have diversified from their original currently 120 commercial banks, together
mandate since 1994, when the government
accounting for 18% of the banking sector’s concentrated in the city where they are
assets. While not as prominent as the big four, located (according to their original
they are nevertheless an important group within mandate). They are thus unable to operate
the banking sector, and their market share is on their own on a national or regional scale,
growing. Some are looked up to for their more unlike the joint- commercial banks, which
dynamic and bottom line-oriented style. is a major comparative disadvantage for
Commercial banks are divided into 2 sub- their future expansion.
groups:
d. Credit co-operatives: The co-operatives
i. Shareholding or joint-stock commercial typically provide credit to small and medium-
banks: These banks are incorporated as sized enterprises and individuals. The
joint-stock limited companies under the cooperative sector is divided into urban credit
People’s Republic of China’s Company Law. co-operatives and rural credit co-operatives.
Most, however, still have fairly concentrated Together there are close to 50,000 of them,
and predominantly state-dominated accounting for around 11% of total banking-
shareholding structures. There are currently sector assets. The rural credit co-operatives
11 shareholding banks, which include well- were formerly supervised by the Agricultural
known names such as Bank of Bank of China (ABC) and then by China’s central
Communications, China Minsheng Bank, bank, the People’s
China Everbright Bank, China Merchants
Bank of China (PBC). A new regulatory agency,
Bank, Shanghai Pudong Development Bank
the China Banking Regulatory Commission
and Shenzen Development Bank. They are
(CBRC), has taken over the supervisory
allowed to engage in a wide variety of
functions in 2003 and also supervises the urban
banking services including accepting
credit cooperatives. Due to their collective-
deposits, extending loans as well as
ownership status, both types of credit co-
providing foreign exchange and international
operatives are subject to state control, thus their
transaction services. Given their smaller
loan extension is still influenced by local policy
size and result oriented corporate culture,
considerations. Some private analysts estimate
they are more nimble than the state-owned
that the NPA level at rural credit cooperatives is
counterparts and have been successful at
around 50% of total lending, and there is a
gaining market share at the expense of the
growing concern that rural credit co-operatives
big four. They have made inroads particularly
will face heavy losses when China’s agricultural
into the small and medium enterprise (SME)
sector opens up under WTO requirements.
loan market, the area which had not been
Given the significance of the rural sector in
tapped by State owned banks. They also
China, with around 800 million people (almost
tend to be more profitable, recording higher
two-thirds of the total population) living in rural
ROA. Joint-stock banks have recently been
areas, the government has been explicit about
the preferred joint-venture partner of
its intention to provide financial support for the
international banks trying to gain access to
rural credit co-operatives in need.
China’s banking sector. Their expanding role
will be instrumental in nurturing China’s e. Foreign banks: There are close to 200
budding economy, particularly the SME foreign banks operating in China, most of which
segment, which is essential for laying a firm are branches of foreign banks, and the rest is a
foundation for the market economy in China. handful of locally incorporated banks (either joint
ventures or wholly foreign-owned banks).
ii. City commercial banks: City commercial
Foreign banks currently account for only around
banks have evolved from urban credit co-
1% of total banking-sector assets as their role
operatives . Due to their history, mandate
is still constrained by China’s domestic law.
and capital strength, the scope of city
However, WTO requirements will gradually allow
commercial banks’ business tends to be

foreign banks greater access to China’s first allowed to provide CNY services, but only
domestic banking business. to foreign companies and individuals in Shanghai
and Shenzen. Since China gained WTO entry
The local currency business (based in Chinese
in December 2001, the geographical restriction
yuan – CNY) was until some years ago closed
has started to be phased out, while rules on the
to foreign banks. The original role of foreign
type of customer to whom foreign banks can
banks was to provide foreign currency
provide CNY services will start to be relaxed
intermediation in order to facilitate the operations
soon
of foreign investors and manufacturers in China.
The CNY business has been opened only
gradually since 1996 when foreign banks were

EXTERNAL SECTOR: AN OVERVIEW
The post-reform period has witnessed the external sector imparting significant resilience
to the Indian economy. Indian economy is getting more integrated with the global economy,
marked by its growing openness and two-way financial flows.
RBI has advised banks, financial institutions and corporates to remain alert with appropriate
risk mitigation strategies to deal with considerably higher volatility than before. In view of
the above, RBI continuously urges them to monitor various types of exposures and hedge
them to protect their balance sheets.
Global Integration Liberalized External Payments Regime
The post-reform period has witnessed the The external payments regime has been
external sector imparting significant resilience liberalized to a great extent and this has
to the Indian economy. Indian economy is getting facilitated the process of Indian corporates going
more integrated with the global economy, in for acquisition of foreign companies. The trend
marked by its growing openness and two-way is observed both in the manufacturing and
financial flows. The ratio of merchandise exports services sectors. The principal motivation
to GDP has been increasing since the early behind this has been the prospects of reaping
1990s, implying growing international economies of scale and seizing offshore
competitiveness. During 2002-06, India’s export markets to face the global competition. Although
growth was at a much higher level than its close outflows have been higher, net capital inflows
competitors in the Asian region, except China. have reflected a significant increase to almost
Simultaneously, import intensity has been rising 5% of GDP in 2006-07 from an average of 2%
steadily. Domestic companies are increasingly during 2000-01 to 2002-03. However, the
accessing globally available raw materials and emergence of substantial net capital flows
intermediate goods as also quality inputs for (above the current account deficit) has posed
producing world-class products for domestic challenges for the conduct of monetary policy
consumption as well as exports. There is a and maintenance of macroeconomic and
structural transformation in the India’s balance financial stability.
of payments which has contributed to its stability Reserve Management
and strength. The structural shift is underpinned
by services exports, led by software and other RBI, the manager of the country’s foreign
business services, and remittances. The exchange reserves, is driven by two
surplus in net invisibles has mitigated a considerations: (a) the changing composition of
substantial part of the widening trade deficit and the balance of payments (b) the ‘liquidity risks’
helped in keeping the current account deficit to associated with different types of flows.
1% of GDP on an average since the early 1990s. Preservation of the long-term value of the
Gross current receipts (merchandise exports reserves in terms of purchasing power and the
and invisible receipts) and gross current need to minimize risk and volatility in returns
payments (merchandise imports and invisible have been the twin objectives of reserve
payments) taken together, at present, constitute management in India. In India, capital inflows
more than 50% of GDP, underscoring the high have been the major source of foreign exchange
degree of integration of the Indian economy with reserves which is in contrast with other Asian
the global economy. economies which have accumulated a
significant part of the reserves through current

account surpluses. These countries intervene liberalized over the years. Also, several policy
in the foreign exchange market as reflected in rigidities still in vogue constrain the quick and
their high level of foreign exchange reserves flexible adjustments that are needed in a well-
across Asia. Besides, surplus global liquidity, functioning market economy; (iv) in India, the
relatively low interest rates in major advanced banking system has been deregulated and
economies and the quest for yield have resulted market-based instruments dominate the
in large capital inflows into emerging market conduct of monetary policy. Therefore, the role
economies (EMEs). of administrative instruments such as
prescribing deposit and lending rates, which
In India, interventions have been generally
some other countries may be able to use, is
successful in maintaining orderly conditions in
limited; (v) Finally, it is also noteworthy that India
the foreign exchange market, and have kept
is one of the few EMEs to have registered
overall financial stability intact. This, aided by
current account deficits, along with a significantly
other factors, has resulted in India emerging as
high trade deficit.
a preferred investment destination for the
overseas investors. When it comes to Liberalization of Capital Outflows
management of increased volatility, large
corporates are in a position to manage the same. Capital outflows liberalization has been carried
This is unlike a large section of the population forward to a great extent; nevertheless RBI
which is not capable of withstanding volatility in intends to carry further this policy of liberalization
the financial markets. RBI also keeps in view in future. However, the policy towards capital
the interests of such sections of the population outflows is country-specific and depends upon
the characteristics of the real sector, and not
against volatility. Excessive volatility can also
merely the contextual level of inflows and current
endanger financial stability and adversely affect
the real sector. Therefore, the extent of volatility absorptive capacity of the economy. First, a
has to be in keeping with the objectives of growth, liberal, but not incentivized, framework
and price and financial stability. Here, it is characterizes the extant regime of outflows in
pertinent to recall that during the Asian crisis, India for corporates to invest in the real economy
even large corporates could not withstand of foreign countries, including through the
acquisition route. The regime has proved
sudden volatility in exchange rates and interest
successful as Indian corporates are increasingly
rates as weaknesses in corporate balance
sheets affected other participants in the able to synergize with overseas units, to
economy, including the banking sector. increase economies of scale and quickly
accomplish domain knowledge through
Excess foreign exchange inflows is affecting acquisition. Second, the policy towards outflows
monetary management in India as well as in by individual households has been considerably
several other countries which are also inundated liberalized following recommendations of the
with foreign capital flows. However, monetary Committee on Fuller Capital Account
management at this juncture in India is more Convertibility (Chairman: Shri S. S. Tarapore,
intricate than in other EMEs for several reasons: 2006). RBI intends to implement further
(i) the return on foreign exchange reserves are liberalization here also but would be guided by
lower than domestic interest rates, leading to some international experience which shows that
quasi-fiscal costs; (ii) although the fiscal deficit resident individuals initiate outflows before
and public debt have declined in recent years in overseas investors when the perceptions in
India, by international standards, they are still respect of domestic economy’s performance or
high. This blunts the flexibility of fiscal policy to stability appear gloomy. Third, the policy for
control inflation; (iii) in India, it is difficult to carry outflows through financial intermediaries is
out supply management through administrative marked by caution and quantitative restrictions
measures since the real sector has been whereby both prudential considerations and

compulsions of management of capital account reverse and it is difficult to apply the “rules of
are relevant. origin” with regard to such capital flows. Against
this backdrop, RBI will gradually proceed with
Trade integration is no doubt beneficial but
fuller capital account liberalization over the
financial integration produces both, benefits and
medium-term, since it knows that in a world of
risks, at the present stage of India’s
growing trade and financial integration, micro
development. Foreign Direct Investment (FDI)
controls are ineffective. Thus, in India, the trade,
is generally seen as an investment creating
financial and capital account liberalization go
physical assets and is stable. However, new
hand in hand in a harmonious and well-
types of FDI flows through private equity funds
sequenced manner, keeping in view the
and venture capital funds may not necessarily
progress in the real sector, fiscal sector and
be so. Similarly, inflows to acquire existing
institutional developments, including
stakes or expanding foreign stakes in Indian
governance.
corporates are classified as FDI, but they do not
create incremental physical assets. However, A Caution
these inflows do escalate the foreign resources
available for investment in the Indian economy, Rapid developments in global financial markets
which would be most productive if and when will continue to nudge Indian markets and
complemented with equally good absorptive monetary policy settings. Therefore, RBI has
capacity at the macro level. Similarly, FII advised banks, financial institutions and
investments are generally long-term and such corporates to remain alert with appropriate risk
investors have little or no interest in managerial mitigation strategies to deal with considerably
higher volatility than before. In view of the above,
control. However, investments through FIIs in
RBI continuously urges them to monitor various
India have a large chunk of portfolio flows
through PNs and sub-accounts. However, this types of exposures and hedge them to protect
problem has been recently addressed by the their balance sheets. RBI has increased the
capital market regulator, SEBI. Nevertheless, range of hedging tools available to market
direction of the volatile portfolio flows can easily players over the years and helped dynamic
hedging.

MANAGEMENT OF MOUNTING FOREX RESERVES
The huge increase in forex reserves since 1990-91 has come in response to both
international and domestic conditions.
The forex reserves which India has accumulated in recent years represent influx of foreign
capital by way of direct investment in Indian companies, investment in stock market shares
and more recently, investment in real estate.
India can explore new possibilities of using forex reserves profitably and get a “reasonable”
return.
One of the possibilities being debated is to use a part of the forex reserves for infrastructure
development.
(USD million)
End of Foreign Gold SDRs Reserve Total
Currency Tranche
Assets Position in IMF
2002-03 71,890 3,534 4 672 76,100
2003-04 1,07,448 4,198 2 1,311 1,12,959
2004-05 1,35,571 4,500 5 1,438 1,41,514
2005-06 1,45,108 5,755 3 756 1,51,622
2006-07 1,91,924 6,784 2 469 1,99,179
2007-08* 2,61,923 7,811 13 434 2,70,181
*Up to November 9. Source: RBI Bulletin December 2007.

The huge increase in forex reserves since 1990- the one hand and sold Government securities
91 has come in response to both international so as to mop up liquidity on the other.
and domestic conditions. USA had cut interest Accordingly, India did not suffer from inflationary
rate drastically to check recession and to pressure. RBI, however, was left with holding
stimulate the American economy. Despite cut in huge forex reserves (refer to Table above), which
interest rates in India, relatively higher Indian earn very little interest income and which are
interest rate had attracted NRI investments to highly volatile.
India.
Normally, a country accumulates forex reserves
There was also a strong bullish turn in the Indian to meet its commitments to other countries. The
stock market since 2001, particularly since May forex reserves which India has accumulated in
2003. This attracted foreign institutional investor recent years represent influx of foreign capital
funds to India and consequent rise in forex by way of direct investment in Indian companies,
resources. investment in stock market shares and more
recently, investment in real estate. The growth
Actually, the heavy increase in forex reserves of India’s forex reserves also reflects the
would have increased the money supply in India- confidence of foreign investors in India’s
increase in liquidity-led inflation, substantially economic fundamentals and its rate of economic
appreciated the rupee, killed exports and growth. Some of the forex reserves, however,
boosted imports. But RBI managed, rather may be regarded as hot money having entered
efficiently, to neutralize the adverse effects of India for stock market speculation.
heavy inflow of dollars. RBI bought dollars on

Deployment of Forex Reserves regarding the use of forex resources within India
itself when the rate of growth of GDP is 9 percent
With such large forex reserves, India need not - a comparable rate of return to any investment
worry about ballooning of crude oil prices and elsewhere. Investment within India will add to the
the consequences of adverse of balance of production capacity of the country and increase
payments in the current account. At the same employment opportunities. Besides, the sectors
time, RBI is always prepared for any flight of hot suffering from obsolescence of plant and
money from India. But the real questions are: machinery and which need massive inputs of
how much forex reserves should RBI keep to sophisticated machinery and equipment can be
meet sudden withdrawals and what should it do helped through forex reserves. This will
with the balance of reserves? For, it should not overcome the usual complaint of the Government
be forgotten that forex reserves are mostly that it is short of resources. A good example is
sterile, earning only two to three percent rate of Taiwan, whose Government has given $15 billion
interest. to banks to finance major development projects.
In this connection, a few cases of forex Thirdly, India can follow the example of China in
deployment of some Asian countries may be using forex reserves to raise the capital base of
cited. Singapore - only a city-state - has forex Public Sector Banks (PSBs). The Government
reserves of nearly $ 130 billion (in May 2006, 7th of India issued Rupee Bonds to recapitalize
highest reserves in the world), which is managed some of the PSBs in difficulty. RBI has allowed
by Singapore’s Government Investments some PSBs to increase their capital assets by
Corporation (GIC). The reserves are kept in USA, raising debt instruments abroad. Instead India
Europe, Japan and in some developing can follow the Chinese model. China, for
countries; the reserves are kept in US instance, injected $60 billion of its forex reserves
Government securities, equities, bonds, real into Bank of China, the Construction Bank of
estate, commodities and other investments; GIC China and Industrial Construction Bank of China.
has allowed private investment agencies to
manage 25 percent of the forex reserves. The Fourthly, India can use forex reserves for
result is that Singapore has managed to get pre-payment of commercial debt borrowed at
annual rate of return of over 9 percent (in dollar higher rate of interest. India has done this before;
terms) and 8.2 percent in Singapore currency it can do so now, as it has huge reserves. There
(contrast this with the 3.1 percent return from is, therefore, a strong opinion - initially, the
Indian forex reserves). proposal came from Dr. Montek Singh Ahluwalia,
the Deputy Chairman of the Planning
South Korea, China and Taiwan have also Commission - that RBI should use/divert a part
adopted Singapore model. For instance, South of its forex reserves for infrastructure
Korea has set up the Korean Investment development of the country. If this proposal is
Corporation to manage its external reserves but accepted, RBI may place them at the disposal
the Government has kept the option to recall the of Infrastructure Development Finance
assets in the event of an emergency. Corporation (IDFC) and other financial institutions
China has huge forex reserves to the tune of which, in turn will lend to the private and public
$925 billion (in May 2006) out of which $300 billion sector units to develop roads, ports, airports,
are kept in US government securities. China has power and so on. The development of economic
also planned to adopt Singapore model. infrastructure is very essential and has actually
been a serious constraint on India’s economic
In other words, India too can explore new development.
possibilities of using forex reserves profitably and
get a “reasonable” return. First of all, RBI has The major objection to this proposal is that while
after a long period of hesitation, assigned a small forex reserves - at least a good part of them -
portion of forex reserves to be managed by constitute short-term hot money, they should not
international brokers and investments advisors. be invested in long-term infrastructure
investments. Since large forex reserves have
Secondly, there is a serious discussion in India entered for purpose of stock exchange

speculation in India, they may be withdrawn at be kept and the balance used more productively.
very short notice. This necessitates that RBI
should always be prepared for this eventuality. Because of its strong foreign exchange reserves
position, India, a traditional borrower of IMF, has
There is, however, no danger in using part of the now become the latter ’s creditor. Since
forex reserves in infrastructural development. If September 2002, India has been invited by IMF
need be, the Government of India can guarantee to contribute to its Financial Transactions Plan
such investment by RBI. Besides, for purposes (FTP). These funds enable IMF to finance the
of security and emergencies and market balance of payments needs of other member
intervention, a cut-off limit of say, $100 billion can countries.

EXTERNAL COMMERCIAL BORROWINGS:
THE CURRENT STATUS
ECB refers to commercial loans availed from non-resident lenders.

ECB can be accessed under two routes, viz., Automatic Route and Approval Route
ECB more than US $ 20 million per borrower company per financial year is permitted
only for foreign currency expenditure.
Prepayment of ECB up to USD 500 million is permitted without prior approval of RBI
ECB are a key component of India’s overall subordinated debt placed by head offices of
external debt which includes. inter alia. external foreign banks with their branches in India as Tier
assistance. buyers’ credit. suppliers’ credit. NRI II capital, capital funds raised/augmented by
deposits. short-term credit and Rupee debt. issue of innovative perpetual debt instruments
ECB refer to commercial loans in the form of bank (IPDI) and other overseas borrowing with the
loans, buyers’ credit, suppliers’ credit, specific approval of the Reserve Bank would,
securitised instruments (e.g. floating rate notes however, continue to be outside the limit of 50
and fixed rate bonds)] availed from non-resident per cent.
lenders with minimum average maturity of 3 ECB can be accessed under two routes. viz.. (i)
years. The policy for ECB is also applicable to Automatic Route and (ii) Approval Route.
FCCBs. The issue of FCCBs are also required
ECB for investment in real sector -industrial sector,
to adhere to the provisions of Notification FEMA
especially infrastructure sector-in India, are under
No. 120/RB-2004 dated July 7, 2004, as
Automatic Route, i.e. do not require RBI /
amended from time to time. Any legal entity
Government approval. In case of doubt as regards
such as a corporate financial intermediary is an
eligibility to access Automatic Route, applicants
eligible borrower. In view of its implication for
may take recourse to the Approval Route.
potential systemic risks. ECB availed by
financial intermediaries need to be distinguished I. AUTOMATIC ROUTE:
from those availed by corporates. (i) Eligible borrowers
Banks have the facility (i) to borrow from its or (a) Corporates (registered under the
branch or correspondents outside India (including Companies Act except financial
borrowings for financing export credit, ECBs and intermediaries (such as banks, financial
overdrafts from their Head Office/Nostro account) institutions (FIs), housing finance
up to 50 per cent of its unimpaired Tier-I Capital companies and NBFCs) are eligible to raise
or US$ 10 million. whichever is higher. Short- ECB. Individuals, Trusts and Non-Profit
term borrowings up to a period of one year or less, making Organisations are not eligible to
however, should not exceed 20 per cent of raise ECB.
unimpaired Tier I capital within the overall limit of
50 per cent (ii) to borrow from its head office (b) Non-Government Organisations (NGOs)
or branch or correspondents outside India without engaged in micro finance activities are
limit for the purpose of replenishing Rupee eligible to avail ECB. Such NGO (i) should
resources (not for investment in call money or have a satisfactory borrowing relationship
other markets) and (iii) to avail lines of credit for at least 3 years with a scheduled
from a bank ! financial institution outside India commercial bank authorised to deal in
without any limit for the purpose of granting pre- foreign exchange and (ii) would require a
shipment / post-shipment credit to its certificate of due diligence on ‘fit and proper’
constituents. all borrowings in the form of status of the board/committee of
management of the borrowing entity from

the designated Authorised Dealer (AD) in good esteem by the business/local
bank. community and (iii) that there is no
criminal action pending against it.
(c) Units in Special Economic Zones (SEZ) are
allowed to raise ECB for their own (ii) Individual Lender has to obtain a
requirement. However, they cannot transfer certificate of due diligence from an
or on-lend ECB funds to sister concerns or overseas bank indicating that the lender
any unit in the Domestic Tariff Area. maintains an account with the bank for
at least a period of two years. Other
(ii) Recognised Lenders
evidence /documents such as audited
(a) Borrowers can raise ECB from statement of account and income tax
internationally recognised sources such as return which the overseas lender may
(i) international banks, (ii) international furnish need to be certified and
capital markets, (iii) multilateral financial forwarded by the overseas bank.
institutions (such as IFC, ADB, CDC etc.,), Individual lenders from countries
(iv) export credit agencies, (v) suppliers of wherein banks are not required to
equipment, (vi) foreign collaborators and (vii) adhere to Know Your Customer (KYC)
foreign equity holders (other than erstwhile guidelines are not eligible to extend
OCBs). A “foreign equity holder” to be eligible ECB.
as “recognized lender” under the automatic
(iii) Amount & Maturity
route would require minimum holding of
equity in the borrower company as set out (a) The maximum amount of ECB which can
below: be raised by a corporate is USD 500 million
or equivalent during a financial year.
i. For ECB up to USD 5 million - minimum
equity of 25 percent held directly by the (b) ECB up to USD 20 million or equivalent in a
lender, financial year with minimum average
maturity of three years
ii. For ECB more than USD 5 million -
minimum equity of 25 per cent held (c) ECB above USD 20 million and up to USD
directly by the lender and debt-equity 500 million or equivalent with a minimum
ratio not exceeding 4:1 (i.e. the proposed average maturity of five years.
ECB not exceeding four times the direct
(d) NGOs engaged in micro finance activities
foreign equity holding).
can raise ECB up to 5 million during a
(b) Overseas organisations and individuals financial year. Designated AD bank has to
complying with following safeguards may ensure that at the time of drawdown the forex
provide ECB to Non-Government exposure of the borrower is hedged.
Organisations (NGOs) engaged in micro
(e) ECB upto USD 20 million can have call/put
finance activities.
option provided the minimum average
(i) Overseas organisations proposing to maturity of 3 years is complied with before
lend ECB would have to furnish a exercising call/put option.
certificate of due diligence from an
(iv) All in Cost ceilings
overseas bank which in turn is subject
to regulation of host-country regulator All-in-cost includes rate of interest, other fees
and adheres to Financial Action Task and expenses in foreign currency except
Force (FATF) guidelines to the AD bank commitment fee, pre-payment fee, and fees
of the borrower. The certificate of due payable in Indian Rupees. Moreover, the
diligence should comprise the following payment of withholding tax in Indian Rupees is
(i) that the lender maintains an account excluded for calculating the all-in-cost. The all-
with the bank for at least a period of two in-cost ceilings for ECB are reviewed from time
years, (ii) that the lending entity is to time.
organised as per the local law and held

The following ceilings are currently applicable: borrowers raising ECB more than USD 20
million shall park the ECB proceeds
Average Maturity All-in-cost Ceilings overseas for use as foreign currency
Period over 6 month LIBOR* expenditures for permissible end-uses and
shall not remit the funds to India.
Three years and up
(f) ECB up to USD 20 million per borrowing
to five years 150 basis points
company per financial year would be
permitted for foreign currency expenditures
More than five years 250 basis points
for permissible end-uses under the
Automatic Route and these funds shall be
*for the respective currency of borrowing or parked overseas and not be remitted to
applicable benchmark India. Borrowers proposing to avail ECB up
to USD 20 million for Rupee expenditure for
(v) End Use
permissible end-uses would require prior
(a) ECB can be raised only for investment approval of the Reserve Bank under the
[such as import of capital goods (as Approval Route. However, such funds shall
classified by DGFT in the Foreign Trade be continued to be parked overseas until
Policy), new projects, modernization/ actual requirement in India.
expansion of existing production units] in
(vi) Parking of ECB Proceeds overseas
real sector - industrial sector including small
and medium enterprises (SME) and ECB proceeds shall be parked overseas until
infrastructure sector - in India. Infrastructure actual requirement in India. ECB proceeds
sector is defined as (i) power, (ii) parked overseas can be invested in the following
telecommunication, (iii) railways, (iv) road liquid assets:
including bridges, (v) sea port and airport
(a) Deposits or Certificate of Deposit or other
(vi) industrial parks and (vii) urban
products offered by banks rated not less
infrastructure (water supply, sanitation and
than AA(-) by Standard and Poor/Fitch IBCA
sewage projects);
or Aa3 by Moody’s;
(b) ECB proceeds can be utilised for overseas
(b) Deposits with overseas branch of an
direct investment in Joint Ventures (JV)/
Authorised Dealer in India; and (c) Treasury
Wholly Owned Subsidiaries (WOS) subject
bills and other monetary instruments of one
to the existing guidelines on Indian Direct
year maturity having minimum rating as
Investment in JV/WOS abroad.
indicated above. The funds should be
(c) Utilisation of ECB proceeds is permitted in invested in such a way that the investments
the first stage acquisition of shares in the can be liquidated as and when funds are
disinvestment process and also in the required by the borrower in India.
mandatory second stage offer to the public
(vii) End Uses not permitted
under the Government’s disinvestment
programme of PSU shares. Utilisation of ECB proceeds is not permitted for
(d) NGOs engaged in micro finance activities (i) on-lending
may utilise ECB proceeds for lending to self- (ii) investment in capital market
help groups or for micro-credit or for
bonafide micro finance activity including (iii) acquiring a company (or a part thereof) in
capacity building. India by a corporate,
(e) With effect from 7th August 2007, ECB more (iv) real estate,
than USD 20 million per borrower company (v) working capital,
per financial year would be permitted only
(vi) General corporate purpose and
for foreign currency expenditure for
permissible end-uses of ECB. Accordingly, (vii) repayment of existing Rupee loans.

(viii) Guarantee /LOC Corporation, Power Trading Corporation,
IRCON and EXIM Bank are considered on
Issuance of guarantee, standby letter of credit,
a case by case basis.
letter of undertaking or letter of comfort by
banks, Financial Institutions and Non-Banking b) Banks and financial institutions which had
Financial Companies (NBFCs) relating to ECB participated in the textile or steel sector
is not permitted. restructuring package as approved by the
Government are also permitted to the extent
(ix) Security
of their investment in the package and
The choice of security to be provided to the assessment by Reserve Bank based on
lender/supplier is left to the borrower. However, prudential norms. Any ECB availed for this
creation of charge over immoveable assets and purpose so far will be deducted from their
financial securities, such as shares, in favour entitlement.
of the overseas lender is subject to Regulation
c) ECB with minimum average maturity of 5
8 of Notification No. FEMA 21/RB-2000 dated
years by Non- Banking Financial Companies
May 3, 2000 and Regulation 3 of Notification No.
(NBFCs) from multilateral financial
FEMA 20/RB-2000 dated May 3, 2000,
institutions, reputable regional financial
respectively, as amended from time to time.
institutions, official export credit agencies
(x) Prepayment and international banks to finance import of
Prepayment of ECB up to USD 500 million may infrastructure equipment for leasing to
be allowed by AD banks without prior approval infrastructure projects.
of RBI subject to compliance with the stipulated d) Foreign Currency Convertible Bonds
minimum average maturity period as applicable (FCCB) by housing finance companies
to the loan. satisfying the following minimum criteria: (i)
(xi) Refinancing of an existing ECB the minimum net worth of the financial
intermediary during the previous three years
The existing ECB may be refinanced by raising shall not be less than Rs. 500 crore, (ii) a
a fresh ECB subject to the condition that the listing on the BSE or NSE, (iii) minimum size
fresh ECB is raised at a lower all-in-cost and of FCCB is USD 100 million, (iv) the
the outstanding maturity of the original ECB is applicant should submit the purpose / plan
maintained. of utilization of funds.
(xii) Procedure e) Special Purpose Vehicles, or any other entity
The designated Authorised Dealer (AD) bank notified by the Reserve Bank, set up to
has the general permission to make remittances finance infrastructure companies / projects
of instalments of principal, interest and other exclusively, will be treated as Financial
charges in conformity with ECB guidelines Institutions and ECB by such entities will be
issued by Government / Reserve Bank of India considered under the Approval Route.
from time to time. Borrowers may enter into loan f) Multi-State Co-operative Societies engaged
agreement complying with ECB guidelines with in manufacturing activity satisfying the
recognised lender for raising ECB under following criteria i) the Co-operative Society
Automatic Route without prior approval of RBI. is financially solvent and ii) the Co-operative
The borrower must obtain a Loan Registration Society submits its up-to-date audited
Number (LRN) from the Reserve Bank of India balance sheet.
before drawing down the ECB.
g) Cases falling outside the purview of the
II. APPROVAL ROUTE: automatic route limits and maturity period.
(i) Eligible borrowers (ii) Recognised Lenders
a) Financial institutions dealing exclusively (a) Borrowers can raise ECB from
with infrastructure or export finance such internationally recognised sources such as
as IDFC, IL&FS, Power Finance (i) international banks, (ii) international

capital markets, (iii) multilateral financial projects, modernization/expansion of
institutions (such as IFC, ADB, CDC etc.,), existing production units] in real sector -
(iv) export credit agencies, (v) suppliers’ of industrial sector including small and
equipment, (vi) foreign collaborators and (vii) medium enterprises (SME) and
foreign equity holders (other than erstwhile infrastructure sector in India. Infrastructure
OCBs). sector is defined as (i) power, (ii)
telecommunication, (iii) railways, (iv) road
(b) From ‘foreign equity holder’ where the
including bridges, (v) sea port and airport
minimum equity held directly by the foreign
(vi) industrial parks and (vii) urban
equity lender is 25 per cent but debtequity
infrastructure (water supply, sanitation and
ratio exceeds 4:1(i.e. the proposed ECB
sewage projects);
exceeds four times the direct foreign equity
holding). (b) ECB proceeds can be utilised for overseas
direct investment in Joint Ventures (JV)/
(iii) Amount and Maturity
Wholly Owned Subsidiaries (WOS) subject
Corporates can avail of ECB of an additional to the existing guidelines on Indian Direct
amount of USD 250 million with average maturity Investment in JV/WOS abroad.
of more than 10 years under the approval route,
(c) Utilisation of ECB proceeds is permitted in
over and above the existing limit of USD 500
the first stage acquisition of shares in the
million under the automatic route, during a
disinvestment process and also in the
financial year. Other ECB criteria such as end-
mandatory second stage offer to the public
use, all-in-cost ceiling, recognised lender, etc.
under the Government’s disinvestment
need to be complied with. Prepayment and call/
programme of PSU shares.
put options, however, would not be permissible
for such ECB up to a period of 10 years. (d) With effect from 7th August 2007, ECB
more than USD 20 million per borrower
(iv) All in Cost ceilings
company per financial year would be
All-in-cost includes rate of interest, other fees permitted only for foreign currency
and expenses in foreign currency except expenditure for permissible end-uses of
commitment fee, pre-payment fee, and fees ECB. Accordingly, borrowers raising ECB
payable in Indian Rupees. Moreover, the more than USD 20 million shall park the ECB
payment of withholding tax in Indian Rupees is proceeds overseas for use as foreign
excluded for calculating the all-in-cost. The all- currency expenditures for permissible end-
in-cost ceilings for ECB are reviewed from time uses and shall not remit the funds to India.
to time. The above modifications would be applicable
The following ceilings are currently applicable: to ECB exceeding USD 20 million per
financial year both under the Automatic
Average Maturity All-in-cost Ceilings Route and under the Approval Route.
Period over 6 month LIBOR* (e) Borrowers proposing to avail ECB up to
USD 20 million for Rupee expenditure for
Three years and up permissible end-uses would require prior
to five years 150 basis points approval of the Reserve Bank under the
Approval Route. However, such funds shall
More than five years 250 basis points be continued to be parked overseas until
actual requirement in India.
*for the respective currency of borrowing or (v) Parking of ECB Proceeds overseas
applicable benchmark
ECB proceeds shall be parked overseas until
(iv) End use actual requirement in India. ECB proceeds
(a) ECB can be raised only for investment [such parked overseas can be invested in the following
as import of capital goods (as classified by liquid assets:
DGFT in the Foreign Trade Policy), new

(a) Deposits or Certificate of Deposit or other 8 of Notification No. FEMA 21/RB-2000 dated
products offered by banks rated not less May 3, 2000 and Regulation 3 of Notification No.
than AA(-) by Standard and Poor/Fitch IBCA FEMA 20/RB-2000 dated May 3, 2000,
or Aa3 by Moody’s; respectively, as amended from time to time.
(b) Deposits with overseas branch of an (ix) Prepayment
Authorised Dealer in India; and (c) Treasury
(a) Prepayment of ECB up to USD 500 million
bills and other monetary instruments of one
may be allowed by AD banks without prior
year maturity having minimum rating as
approval of RBI subject to compliance with
indicated above. The funds should be
the stipulated minimum average maturity
invested in such a way that the investments
period as applicable to the loan.
can be liquidated as and when funds are
required by the borrower in India. (b) Pre-payment of ECB for amounts exceeding
USD 500 million would be considered by the
(vi) End Uses not permitted
Reserve Bank under the Approval Route
Utilisation of ECB proceeds is not permitted for
(x) Refinancing of an existing ECB
(a) on-lending
The existing ECB may be refinanced by raising
(b) investment in capital market a fresh ECB subject to the condition that the
fresh ECB is raised at a lower all-in-cost and
(c) acquiring a company (or a part thereof) in
the outstanding maturity of the original ECB is
India by a corporate,
maintained.
(d) real estate,
(xi) Procedure
(e) working capital,
Applicants are required to submit an application
(f) General corporate purpose and in form ECB through designated AD bank to the
(g) repayment of existing Rupee loans. Chief General Manager, Foreign Exchange
Department, Reserve Bank of India, Central
(vii) Guarantee Office, External Commercial Borrowings
Issuance of guarantee, standby letter of credit, Division, Mumbai, along with necessary
letter of undertaking or letter of comfort by banks, documents. Reserve Bank has set up an
financial institutions and NBFCs relating to ECB Empowered Committee to consider proposals
is not normally permitted. Applications for coming under the Approval Route.
providing guarantee/standby letter of credit or II . REPORTING ARRANGEMENTS AND
letter of comfort by banks, financial institutions DISSEMINATION OF INFORMATION
relating to ECB in the case of SME will be
considered on merit subject to prudential norms. Reporting Arrangements
With a view to facilitating capacity expansion and (a) With a view to simplify the procedure,
technological upgradation in Indian Textile submission of copy of loan agreement is
industry, issue of guarantees, standby letters of dispensed with.
credit, letters of undertaking and letters of (b) For allotment of loan registration number,
comfort by banks in respect of ECB by textile borrowers are required to submit Form 83,
companies for modernization or expansion of in duplicate, certified by the Company
textile units will be considered under the Approval Secretary (CS) or Chartered Accountant
Route subject to prudential norms. (CA) to the designated AD bank. One copy
(viii) Security is to be forwarded by the designated AD
bank to the Director, Balance of Payments
The choice of security to be provided to the Statistics Division, Department of Statistical
lender/supplier is left to the borrower. However, Analysis and Computer Services
creation of charge over immoveable assets and (DESACS), Reserve Bank of India, Bandra-
financial securities, such as shares, in favour Kurla Complex, Mumbai – 400 051 [Note:
of the overseas lender is subject to Regulation copies of loan agreement , offer documents

for FCCB are not required to be submitted (b) The foreign equity holding after such
with form 83). conversion of debt into equity is within the
sectoral cap, if any,
(c) The borrower can draw-down the loan only
after obtaining the loan registration number (c) Pricing of shares is as per SEBI and
from DESACS, Reserve Bank of India. erstwhile CCI guidelines/regulations in the
case of listed/unlisted companies as the
(d) Borrowers are required to submit ECB-2
case may be.
Return certified by the designated AD bank
on monthly basis so as to reach DESACS, (ii) Conversion of ECB may be reported to the
RBI within seven working days from the Reserve Bank as follows:
close of month to which it relates.
(a) Borrowers are required to report full
Dissemination of Information conversion of outstanding ECB into
equity in the form FC-GPR to the
For providing greater transparency, information
concerned Regional Office of the Reserve
with regard to the name of the borrower, amount,
Bank as well as in form ECB-2 submitted
purpose and maturity of ECB under both
to the DESACS, RBI within seven working
Automatic Route and Approval Route are put on
days from the close of month to which it
the Reserve Bank website on a monthly basis
relates. The words “ECB wholly converted
with a lag of one month to which it relates.
to equity” should be clearly indicated on top
III. STRUCTURED OBLIGATIONS of the ECB-2 form. Once reported, filing of
In order to enable corporates to raise resources ECB-2 in the subsequent months is not
domestically and hedge exchange rate risks, necessary.
domestic rupee denominated structured (b) In case of partial conversion of
obligations are permitted to be credit enhanced outstanding ECB into equity, borrowers
by international banks/international financial are required to report the converted portion
institutions/joint venture partners. Such in form FC-GPR to the concerned Regional
applications will be considered under the Office as well as in form ECB-2 clearly
Approval Route. differentiating the converted portion from the
IV. COMPLIANCE WITH ECB GUIDELINES unconverted portion. The words “ECB
partially converted to equity” should be
The primary responsibility to ensure that ECB indicated on top of the ECB-2 form. In
raised / utilised are in conformity with the ECB subsequent months, the outstanding portion
guidelines and the Reserve Bank regulations / of ECB should be reported in ECB-2 form
directions is that of the concerned borrower and to DESACS.
any contravention of the ECB guidelines will be
viewed seriously and will invite penal action VI. CRYSTALLISATION OF ECB
under FEMA 1999 (cf. A. P. (DIR Series) Circular AD banks desiring to crystallize their foreign
No. 31 dated February 1, 2005). The designated exchange liability arising out of guarantees
AD bank is also required to ensure that raising / provided for ECB raised by corporates in India
utilisation of ECB is in compliance with ECB into Rupees, may make an application to the
guidelines at the time of certification. Chief General Manager, Foreign Exchange
V. CONVERSION OF ECB INTO EQUITY Department, External Commercial Borrowings
Division, Reserve Bank of India, Central Office,
(i) Conversion of ECB into equity is permitted Mumbai, giving full details viz., name of the
subject to the following conditions: borrower, amount raised, maturity,
(a) The activity of the company is covered under circumstances leading to invocation of guarantee
the Automatic Route for Foreign Direct /letter of comfort, date of default, its impact on
Investment or Government approval for the liabilities of the overseas branch of the AD
foreign equity participation has been bank concerned and other relevant factors.
obtained by the company,

UCP 600: ICC’S NEW RULES ON LETTERS OF CREDIT
The new UCP 600, the sixth of its kind, suits the requirements of the fast changing pattern
of the international trade.
There were 13 suggestions but no single suggestion received more than 10 country votes;
therefore, no new articles are included in the final text.
From 1st July 2007, UCP 500 is no longer effective in governing the application and
operations of Letter of Credit. UCP 600 is the new governing set for all parties concerned.
It is estimated that about 80% of the world trade rules are voluntary, they are observed in
is settled on open account method, 3% on countless thousands of transactions every day
advance payment method, 10% on Letters of and have become part of the fabric of
Credit method and remaining 7% on other international trade.
methods. The world trade settled using
commercial letters of credit would be almost The UCP
USD 1 trillion per annum. Historically, the The Uniform Customs and Practice for
commercial parties, particularly banks, have Documentary Credits (UCP) is a set of rules
developed the techniques and methods for governing the issuance and use of letters of
handling letters of credit in international trade credit. The UCP is utilised by bankers and
finance. This commercial parties in more than 175 countries.
has been standardised by the ICC (International The ICC rules of practice are designed by
Chamber of Commerce) by publishing the UCP bankers and merchants and not by legislatures
in 1933 and subsequently updating it throughout with political and local considerations. The rules
the years. accordingly demonstrate the needs, customs
and practices of business. Because the rules
The ICC are incorporated voluntarily into contracts, the
rules are flexible while providing a stable base
The international Chamber of Commerce (ICC) for international review, including judicial scrutiny.
was founded in 1919 to serve world business International revision is thus facilitated permitting
by promoting trade and investment, open the incorporation of the changing practices of
markets for goods and services, and the free the commercial parties. It remains, to date, the
flow of capital. The organization’s international most successful set of private rules for trade
secretariat was established in Paris. Initially ever developed. UCP 600 which has become
representing the private sectors of Belgium, effective from 1st July 2007 represents the sixth
Britain, France, Italy and the United States, it revision of the Uniform Customs and Practice
expanded to represent worldwide business for Documentary Credits, since its inception.
organizations in around 130 countries. Its
conviction that trade is a powerful force for peace History of UCP
and prosperity dates from the organization’s
origins, the small group of far-sighted business The first UCP by the ICC was effective in 1933.
leaders who founded ICC, called themselves the UCP rules are regularly reviewed and updated
‘merchants of peace’. when necessary to reflect current banking and
trade practice. The new UCP600, the sixth of
Because its member companies and its kind, will replace the existing UCP500 to suit
associations are themselves engaged in the requirements of the fast changing pattern of
international business, ICC has unrivalled the international trade. Historically the UCP has
authority in making rules that govern the conduct been revised about every 10 years.
of business across borders. Although these

• UCP 82 - 1933 created Several relevant drafts were sent for review to
• UCP 151 - 1951 1st revision the ICC Commission of Transport and Logistics,
the Commission of Commercial Law and
• UCP 222 - 1962 2nd revision
Practice and the Committee on Insurance.
• UCP 290 - 1974 3rd revision
UCP Revision - National Committee Votes
• UCP 400 - 1983 4th revision on Selected Issues
• UCP 500 - 1993 5th revision
Retention or removal of the expression “on its
• UCP 600 - 2007 6th revision face”. 67% voted to remove, 33% to keep. The
A few important reasons why UCP500 was result was to keep it in only one place because
revised are: of court precedents.
High discrepancy rate in documents Delete or retain and define “reasonable time”.
presented under letters of credit subject to 97% voted to delete, 3% to keep. The phrase
UCP500 was removed from the final text.
High level of inquiries pertaining to 7 articles
If “reasonable time” were to be deleted, how
Law-suits highlighting unclear parts of the
UCP many days should be the maximum period for
New disclaimers emerging in bills of lading acceptance or refusal of documents? 41% voted
for 5 days, 25% for 6 days, 28% for 7 days, 6%
UCP 600 - The Revision Process gave no comments. Five days are used in the
final text.
The development of the UCP 600 revision began
in May of 2003, under the auspices of the ICC Whether to use the term “parties” or “banks” in
Commission on Banking Technique and the rules. 73% voted for banks, 24% for parties
Practice. The Drafting Group, comprised of 9 and 3% had no view either way. “Banks” is used
members was headed by Mr. Gary Collyer, the in the final text.
Technical Advisor to the ICC Banking
Deferred payment credits. Whether to allow for
Commission and formerly a Corporate Director
discounting or not. 75% voted yes, and 27%
of ABN Bank N.V., London England. A UCP
voted no. The result is three sub-articles on
Consulting Group was also established as an
discounting included in the final text (in articles
advisory body to the Drafting Group. This group
7, 8 and 12).
was co-chaired by John Turnbull, Deputy
General Manager, Sumitomo Mitsui Banking Whether to retain the equivalent of Article 28 of
Corporation Europe Ltd., London and Carlo Di UCP 500 or split it into three separate articles.
Ninni, Advisor, Italian Bankers Association, Rome 54% voted to keep it as is and 45% voted to split
and More than 40 banking and transport industry it. The final text retains road, rail and inland
experts from 26 countries. More than 400 waterway transport documents in a single article
members of the ICC Banking Commission as it was in UCP 500. (The new article 24.).
reviewed and recommended changes to the
various drafts. The majority of the 91 ICC Whether there was a need to keep the
National Committees took an active role equivalent of UCP 500 Article 30 concerning
soliciting and consolidating comments from their freight forwarder bills of lading. 82% voted to
members. Representatives from the Transport remove and 18% voted to keep. In the final
and Insurance industries played an active role version, sub-article 14 (i) indicates that a
in shaping the final draft. The Banking transport document may be issued by a party
Commission has had a total of 7 days of other than the carrier, master, etc. if certain
discussions on the text. conditions are met.
The UCP Drafting Group has met 15 times and Whether defined terms should be capitalized or
reviewed around 5,000 individual comments not. 49% voted to capitalize, 41% to not and
from national committees. There were 15 drafts 10% offered no decision. Given the closeness
sent out, 3 of which were complete drafts and 9 of the vote and the fact that a text with
of which were reviewed by the Consulting Group capitalization was overloaded with capital letters,
before being sent to the National committees. the decision was taken not to capitalize.

Request for “new articles” to be included in the • New provisions allow for the discounting of
rules. There were 13 suggestions but no single deferred payment credits.
suggestion received more than 10 country • Banks can now accept an insurance
votes, therefore, no new articles are included in document that contains reference to any
the final text. exclusion clause.
Non-documentary conditions. Three options • New sections on “definitions” and
were given, two of which were variations on the “interpretations” have been added to clarify
current UCP 500 text. 81% voted to retain the the meaning of ambiguous terms.
current wording with 19% splitting their vote
• Credit must state if reimbursement is
between the other two options. The main theme
subject to the ICC rules for bank to bank
of the UCP 500 wording was included in the final
reimbursements.
text of Article 14.
• An applicant or beneficiary address
Force majeure. Whether to use the current
appearing in any stipulated document need
wording or a five banking day period after the
not be the same but must be within the same
bank re-opens. 49% voted to keep as is, 51%
country as the address stated in the credit
change to 5 days. Due to no clear guidance, the
and contact details such as fax, phone,
wording was retained as currently exists in UCP
email and the like, when stated as a part of
500.
the applicant or beneficiary address will be
Inconsistent data – sub-article 14(d) of UCP disregarded…unless the address and
600. 91% voted for the concept now in this sub- contact details appear as part of the
article with 9% voting in favor of a version that consignee or notify party details on a
would not require banks to check data across transport document subject to the transport
documents. document articles of the UCP 600. In that
Whether to retain negotiation as a settlement case they must appear as stated in the
type. The vote was more than 3-1 to retain it. credit.
Negotiation remains in the final text as a • The word “clean” need not appear on a
settlement type. transport document even if a credit has a
Final text of UCP 600 was unanimously requirement for that transport document to
approved on October 25, 2006 at the ICC be “clean on board”.
Banking Committee meeting in Paris, France. • The flight stamp shown on an airway bill will
be considered as the date of shipment,
UCP 600 - Highlights
whether requested in the credit or not.
UCP500 Articles not incorporated into • The turndown notice has two new options:
UCP600 text: • to hold documents pending applicant waiver
o Article 5 [Instructions to Issue/ or receipt of additional instructions from the
Advise Credits] presenter or
o Article 6 [Revocable v. Irrevocable • that the bank is acting in accordance with
Credits] instructions previously received from
o Article 8 [Revocation of a Credit] presenter.
o Article 12 [Incomplete or Unclear • At least one original of each document
Instructions] stipulated in a credit must be presented.
o Article 38 [Other Documents] • The concept of a revocable credit was
Content of Articles 2, 6, 9, 10, 20, 21, 22, removed from UCP.
30, 31, 33, 35, 36, 46 and 47 were merged From 1st July 2007, UCP 600 is the new
or otherwise provided for in other ways governing set for all parties concerned; bankers,
within the text of the UCP 600. traders, transport operators, insurance
• The phrase “reasonable time” for companies, lawyers, etc. International Standard
acceptance or refusal of documents has Banking Practice for examination of documents
been replaced by a firm period of five banking under documentary credits 2007 revision for
days. UCP 600 (ICC Publication No.681) has already
• The number of articles reduced to 39. been brought out by ICC.
SAARCFINANCE: NETWORK OF SAARC COUNTRY
CENTRAL BANKS
SAARCFINANCE is a Network of Central Banks and Finance Secretaries of SAARC
countries.
It aims at achieving cooperation among SAARC nations.
The 10th SAARC Summit of the Head of the 5. To study global financial developments and
States of the SAARC Region agreed, in principle, their impact on the region including
to establish a Network of Central Bank discussions relating to emerging issues in
Governors and Finance Secretaries of the the financial architecture, IMF and World
SAARC Region (SAARCFINANCE) with a view Bank and other international lending
to opening dialogues on macroeconomic agencies.
policies of the region and sharing mutual 6. To monitor reforms of the international
experiences and ideas. SAARCFINANCE was financial and monetary system and to evolve
established on September 9, 1998 as a regional a consensus among SAARC countries in
network of the SAARC Central Bank Governors respect of the reforms.
and Finance Secretaries. 7. To evolve, whenever feasible joint strategies,
plan and common approaches in
Objectives
international fora for mutual benefit
The basic objective of establishing the particularly in the context of liberalization of
SAARCFINANCE Network is to share financial services.
experiences on macroeconomic policy issues 8. To undertake training of staff of the
among member countries of the region. ministries of finance, central banks and
However, the broad objectives of the other financial institutions of the SAARC
SAARCFINANCE Network are as follows: member countries in subjects relating to
economics and finance.
1. To promote cooperation among central
banks and finance ministries in SAARC 9. To explore networking of the training
member countries through staff visits and institutions within the SAARC region
regular exchange of information. specializing in various aspects of monetary
policy, exchange rate reforms, bank
2. To consider and propose harmonization of
supervision and capital market issues.
banking legislations and practices within the
region. 10. To promote research on economic and
financial issues for the mutual benefit of
3. To work towards a more efficient payment
SAARC member countries.
system mechanism within the SAARC
region and strive for higher monetary and 11. To consider any other matter on the
exchange cooperation. direction/request of the SAARCFINANCE,
Council of Ministers or other SAARC bodies.
4. To forge closer cooperation on
macroeconomic policies of SAARC List of SAARC Nations : India, Nepal, Bhutan,
member states and to share experiences Bangladesh, Sri Lanka, Maldives and Pakistan.
and ideas.

MONEY LAUNDERING MENACE FOR BANKS: AN
INTERNATIONAL PERSPECTIVE
Increased complexity of financial markets has made the task costly.
To fight the menance of Money Lundering Governmental and International regulations
should be increased.
An effective coordination betwen banks and regulatory authorities is a must for
defeating money launderers.
The cost of fighting money laundering has risen However, there is significant concern amongst
dramatically for banks across the world as they banks that governmental and international
have become increasingly engaged in the regulation needs to be more effectively targeted.
struggle against criminality. However, the task Half of respondents said they believe that while
is becoming more difficult due to the increasing the overall regulatory burden is acceptable, the
complexity of the financial markets in which they requirements need to be better focused, while
operate, including greater exposure to nearly one in ten (8 percent) believe that
sometimes unfamiliar emerging markets and regulation should actually be increased in order
the dramatic growth of alternative assets, to combat money laundering more effectively.
according to a global study by KPMG Forensic.
In addition, there is evidence that transaction
KPMG’s study among 224 banks from 55 monitoring systems need to be enhanced.
countries found that banks’ spending on anti- Despite sophisticated monitoring technology
money laundering (AML) systems and being available, 97 percent of banks say that they
processes has risen by an average of 58 percent are dependent on the vigilance of staff to monitor
over the last three years. In North America and and identify suspicious activity, and a third of
in the Middle East and Africa, spending has banks (34 percent) say that they are not satisfied
increased by 70 percent or more. These with the effectiveness of their transaction
increases are far in excess of banks’ own monitoring systems. Fewer than one in five (18
predictions when KPMG Forensic carried out its percent) describe themselves as ‘very satisfied’.
last study in 2004, when respondents on average
Karen Briggs, Global Head of Anti-Money
predicted an increase of 43 percent. The biggest
Laundering at KPMG Forensic and partner in the
spending continues to be on transaction
U.K. firm, said: “Banks are clearly continuing to
monitoring and staff training costs.
make increased efforts to tackle the money
However, just as three years ago banks under- laundering threat effectively. These efforts are
estimated their likely level of spend in the future, considerable, but nevertheless many banks are
so now they still seem in danger of being over- struggling to design and implement an effective
optimistic: on average, they are predicting an anti-money laundering strategy. Significant
increase of only 34 percent in their spending over numbers say that the regulatory environment is
the next three years to 2010. not helping them as well as it should do – this is
clearly a matter of concern, as effective
Senior management are getting more involved coordination between parties is one of the keys
in AML, with 71 percent of banks saying directors to defeating money launderers.”
at the highest level are actively involved in it, up
from 61 percent in 2004. Most respondent banks “With international banks bolstering their
(85 percent) have a global AML policy, ranging presence in emerging market economies, and
from a high of 100 percent in North America to a with a low interest rate environment driving
low of 58 percent in the Middle East and Africa. growth in alternative assets including hedge

funds, private equity and commodity reflect that banking secrecy and data protection
investments, the need for more stringent anti- laws in some countries prevent the sharing of
money laundering processes has only grown. information around a banking group.
Banks will need to work extremely hard from here
if they are to maintain any advantage in the war North American banks are ahead of their peer
group in this respect, however, with 42 percent
against money laundering and terrorist
of banks capable of monitoring across borders.
financing.”
Globally, 41 percent of banks said they were not
With greater spending and training, the number capable of tracking across countries, and 26
of suspicious activity reports (SARs) being percent were only partially capable.
generated has also increased at over 70 percent
of banks. Forty-two percent of banks say that In its report, KPMG Forensic also highlights the
the number of SARs has increased additional AML risks created by the enlargement
“substantially”. of the EU. Many of the ten countries that have
recently joined have not historically had stringent
Banks are also making greater efforts to identify AML processes in place and it is likely to take
politically exposed persons (PEPs) who could these countries some time to bring their
be the conduits for laundered money. Over processes up to the standards required under
seven out of ten banks say they perform the EU Third Money Laundering Directive. Some
enhanced due diligence on PEPs, markedly up banks may be particularly vulnerable to risks if
from the worrying low of 45 percent three years their internal procedures are based on the
ago. There are significant variations here, assumption that all EU banks are low risk and
however, with only 42 percent of banks in the accordingly apply less scrutiny to these
Asia Pacific region and only 65 percent of banks relationships.
in Europe monitoring for PEPs. Within Europe,
As per KPMG’s Financial Services practice there
this ranged dramatically, from 86 percent in the
U.K. to only 29 percent in Spain and 13 percent is no doubt that a more even regulatory playing
in Italy. The task facing banks here is made more field globally would help banks coordinate their
difficult by the lack of a common definition of a anti-money laundering processes more
PEP and the fact that in some markets business effectively. The desire and commitment is there,
and politics are closely intertwined. as banks recognize that money laundering is
an issue with significant adverse reputational
Despite all of these efforts, it is clear that issues for them if things go wrong. However, a
significant challenges remain. Less than a mixed regulatory landscape and banks’ own
quarter of respondent banks with an legacy issues in their KYC (know your
international presence are capable of monitoring customer) information, IT systems and culture
a single customer’s transactions and account is making the task difficult for many. As the
status across multiple countries. There was no expansion into emerging and alternative markets
evidence that larger banks are any more capable continues apace, these challenges are only
in this respect than smaller banks, and this may likely to grow.”

NATIONAL FOREIGN TRADE POLICY 2004-09
Introduced in 2004 and replaces EXIM policy.

Objectives: To double our share in global trade by 2009 and to act as an effective
instrument of economic growth with thrust on employment generation particularly
in semi-urban and rural areas.
Sectors with export prospects and potential for employment in rural and semi-
urban areas are identified as thrust sectors.
A new scheme - ‘Vishesh Krishi Upaj Yojana’ introduced to boost exports of fruits,
vegetables, flowers, minor forest produce, etc.
Target Plus, served from India scheme, removal of age of goods and decrease
in cut off of minimum depreciated value to Rs.25 crore for imported goods are
other special features.
specific sectoral strategies have been

The New government terminated the five-year
prepared.
Exim Policy, 2002-07 and introduced a Foreign
Trade Policy for a five-year term beginning this (b) Further sectoral initiatives in other sectors
fiscal year on the 31st August 2004. will be announced from time to time. For
the present, Special Focus Initiatives have
1. Strategy:
been prepared for Agriculture, Handicrafts,
(a) It is for the first time that a comprehensive Handlooms, Gems & Jewellery and Leather
Foreign Trade Policy is being notified. The & Footwear sectors.
Foreign Trade Policy takes an integrated
(c) The threshold limit of designated ‘Towns of
view of the overall development of India’s
Export Excellence’ is reduced from
foreign trade.
Rs.1,000 crore to Rs.250 crore in these
(b) The objective of the Foreign Trade Policy is thrust sectors.
two-fold:
3. Package for Agriculture
(i) to double India’s percentage share of
The Special Focus Initiative for Agriculture
global merchandise trade by 2009; and
includes:
(ii) to act as an effective instrument of
(a) A new scheme called Vishesh Krishi Upaj
economic growth by giving a thrust to
Yojana has been introduced to boost exports
employment generation, especially in semi-
of fruits, vegetables, flowers, minor forest
urban and rural areas.
produce and their value-added products.
(c) The key strategies are:
(b) Duty-free import of capital goods under
(i) Unshackling of controls; EPCG scheme.
(ii) Creating an atmosphere of trust and (c) Capital goods imported under EPCG for
transparency; agriculture permitted to be installed
anywhere in the Agri Export Zone.
2. Special Focus Initiatives:
(d) ASIDE funds to be utilized for development
(a) Sectors with significant export prospects for Agri Export Zones also.
coupled with potential for employment
generation in semi-urban and rural areas (e) Import of seeds, bulbs, tubers and planting
have been identified as thrust sectors, and material has been liberalized.

(f) Export of plant portions, derivatives and In the case of stand-alone restaurants, the
extracts has been liberalized with a view to entitlement shall be 20%, whereas in the case
promoting export of medicinal plants and of hotels, it shall be 5%. Hotels and Restaurants
herbal products. can use their duty credit entitlement for import
of food items and alcoholic beverages.
4. Export Promotion Schemes
(d) EPCG
(a) Target Plus
(i) Additional flexibility for fulfillment of export
A new scheme to accelerate growth of exports obligation under EPCG scheme in order to
called ‘Target Plus’ has been introduced. reduce difficulties of exporters of goods and
Exporters who have achieved a quantum growth services.
in exports would be entitled to duty-free credit (ii) Technological upgradation under EPCG
based on incremental exports substantially scheme has been facilitated and
higher than the general actual export target fixed. incentivised.
(Since the target fixed for 2004-05 is 16%, the
(iii) Transfer of capital goods to group
lower limit of performance for qualifying for
companies and managed hotels now
rewards is pegged at 20% for the current year).
permitted under EPCG.
Rewards will be granted based on a tiered (iv) In case of movable capital goods in the
approach. For incremental growth of over 20%, service sector, the requirement of
25% and 100%, the duty-free credits would be installation certificate from Central Excise
5%, 10% and 15% of FOB value of incremental has been done away with.
exports.
(v) Export obligation for specified projects shall
(b) Vishesh Krishi Upaj Yojana be calculated based on concessional duty
permitted to them. This would improve the
Another new scheme called Vishesh Krishi Upaj
viability of such projects.
Yojana (Special Agricultural Produce Scheme)
has been introduced to boost exports of fruits, (e) DFRC
vegetables, flowers, minor forest produce and
their value-added products. Export of these Import of fuel under DFRC entitlement shall be
products shall qualify for duty-free credit allowed to be transferred to marketing agencies
entitlement equivalent to 5% of FOB value of authorized by the Ministry of Petroleum and
exports. The entitlement is freely transferable Natural Gas.
and can be used for import of a variety of inputs
(f) DEPB:
and goods.
The DEPB scheme would be continued until
(c) ‘Served from India’ Scheme
replaced by a new scheme to be drawn up in
To accelerate growth in export of services so consultation with exporters.
as to create a powerful and unique ‘Served from
(g) New Status Holder Categorization for
India’ brand instantly recognized and respected
Export Houses
the world over, the earlier DFEC scheme for
services has been revamped and re-cast into A new rationalized scheme of categorization of
the ‘Served from India’ scheme. status holders as Star Export Houses has been
introduced as under:
Individual service providers who earn foreign
exchange of at least Rs.5 lakh, and other service Category Total performance
providers who earn foreign exchange of at least over 3 years
Rs.10 lakh will be eligible for a duty credit One Star Export House Rs.15 crore
entitlement of 10% of total foreign exchange Two Star Export House Rs.100 crore
earned by them. Three Star Export House Rs.500 crore
Four Star Export House Rs.1500 crore
Five Star Export House Rs.5000 crore
Star Export Houses shall be eligible for a number Units in the FTWZs would qualify for all other
of privileges including fast-track clearance benefits as applicable for SEZ units.
procedures, exemption from furnishing of bank
guarantee, eligibility for consideration under 7.Import of Second hand Capital Goods
Target Plus Scheme, etc. a. Import of second-hand capital goods shall
5. Export Oriented Units (EOUs) be permitted without any age restrictions.
(a) EOUs shall be exempted from Service Tax b. Minimum depreciated value for plant and
in proportion to their exported goods and machinery to be re-located into India has
services. been reduced from Rs.50 crore to Rs.25
crore.
(b) EOUs shall be permitted to retain 100% of
export earnings in EEFC accounts. 8. Services Export Promotion Council
(c) Income Tax benefits on plant and machinery An exclusive Services Export Promotion Council
shall be extended to DTA units which shall be set up in order to map opportunities for
convert to EOUs. key services in key markets, and develop
strategic market access programmes, including
(d) Import of capital goods shall be on self- brand building, in co-ordination with sectoral
certification basis for EOUs. players and recognized nodal bodies of the
services industry.
(e) For EOUs engaged in Textile & Garments
manufacture leftover materials and fabrics 9. Common Facilities Centre
upto 2% of CIF value or quantity of import
shall be allowed to be disposed of on Government shall promote the establishment of
payment of duty on transaction value only. Common Facility Centres for use by home-
based service providers, particularly in areas like
(f) Minimum investment criteria shall not apply Engineering & Architectural design, Multi-media
to Brass Hardware and Hand-made operations, software developers, etc., in State
Jewellery EOUs (this facility already exists and District-level towns, to draw in a vast
for Handicrafts, Agriculture, Floriculture, multitude of home-based professionals into the
Aquaculture, Animal Husbandry, IT and services export arena.
Services).
10. Procedural Simplification &
6. Free Trade and Warehousing Zone: Rationalisation Measures
(i) A new scheme to establish Free Trade and All exporters with minimum turnover of Rs.5 crore
Warehousing Zone has been introduced to and good track record shall be exempt from
create trade-related infrastructure to furnishing bank guarantee in any of the
facilitate the import and export of goods and schemes, so as to reduce their transactional
services with freedom to carry out trade costs.Validity of all licences/entitlements issued
transactions in free currency. This is aimed under various schemes has been increased to
at making India into a global trading hub. a uniform 24 months.Time-bound introduction
of Electronic Data Interface (EDI) for export
(ii) FDI would be permitted up to 100% in the transactions. Seventy-five per cent of all export
development and establishment of the transactions to be on EDI within six months.
zones and their infrastructural facilities.
11. Bio Technology Parks
(iii) Each zone would have minimum outlay of
Rs.100 crore and five lakh sq. mts. built-up Biotechnology Parks to be set up which would
area. be granted all facilities of 100% EOUs.

MANAGEMENT

STROKES
Strokes help in increasing the self worth of an individual.

Positive strokes help in enhancing the image of an individual in his or her own eyes. Self-
belief and self-confidence go up.
Negative strokes on the other hand have a de-motivating and demoralising effect. Repeated
negative strokes may result in low self-worth of an individual.
Unconditional positive strokes are the best because of their long term positive impact.
Visualise a football full of air kept at the centre of saying – ‘I liked your report’ or ‘your presentation
a table and there is no one to touch it for a week. was good’, etc.
What will be the condition of the football after a
Negative strokes on the other hand have a de-
week?
motivating and demoralising effect. Repeated
There will be dust on it, it will lose its shine and negative strokes may result in low self-worth of
perhaps it will go out of shape. In essence, an individual. At times, the intention of the person
energy inside the football will dissipate resulting giving a negative stroke may be to help but its
in losing its shine on the surface. A football effect will depend on how the receiver is taking
needs someone to pay attention to it, to hit it. A it. Therefore, we need to exercise extra caution
football needs strokes. while giving a negative stroke. Some examples
of negative strokes are: snubbing, spanking,
It is not only a football which needs strokes but shouting, reprimanding, etc. If a person is not
it is a need of every human being. Stroking for a getting enough positive strokes, s/he may
human being is nothing but hunger for indulge in activities to get negative strokes. All
recognition. Each one of us has an innate desire of us are aware of attention seeking activities of
to be recognised. It is said that children cry and children.
adults die for recognition. Stroking is one of the
easiest ways to satisfy this human need. This Verbal and Non Verbal
need is so deep rooted that as a punishment,
When we use words for giving strokes, they are
solitary confinement is considered worse than
verbal strokes. Words have tremendous power
death penalty.
and this power is enhanced by the way they are
Strokes help in increasing the self worth of an spoken. Only a person with high level of
individual. However, if we are not careful in giving emotional intelligence can boast that ‘sticks and
strokes, they may have a disastrous effect. stones may break my bones but words can
never hurt me’. An ordinary person will perhaps
Different Types of Strokes say ‘injuries of sticks and stones will heal but
words will continue to haunt me’.
Positive and Negative
Human brain interprets the way anything is being
Positive strokes help in enhancing the image of
said more than what is being said. Therefore,
an individual in his or her own eyes. Self-belief
influence of manner in which something is being
and self-confidence go up. They are a
said coupled with use of body language makes
motivating factor and encourage a person to
the strokes non-verbal. Do you remember
continue to do well or continue to improve
‘Jaadu ki jhappi’ of the movie ‘Munna Bhai
performance or behaviour. Everyday everyone
MBBS’? Many of us have come to understand
is doing something good. Are we able to observe
the power of touch from that movie. Non-verbal
and then appreciate it? Some examples of
strokes include loud voice, angry tone, eye
positive strokes are: giving a pat on the back,
contact, smile, hand shake, pat on the back,
embrace, etc.
Verbal and non-verbal strokes can be positive strokes. To make a difference in the world, we
or negative. must start giving unconditional positive strokes
to people around us.
Genuine and Plastic
The chart below indicates the impact of various
Origin of genuine strokes lies in the heart. When combinations of strokes.
a stroke is given spontaneously, it is likely to be
genuine. An employee brings a deposit of Rs.10 Type of Stroke Impact on Receiver
lakh and you immediately get up from your chair
Verbal/Non-verbal – Positive Positive
to shake hands with him is an example of a
genuine stroke. Verbal/Non-verbal – Negative Negative
Plastic strokes are generally given to conform Conditional – Positive Temporary Positive
to norms of an organisation or culture. An air
Conditional – Negative Negative
hostess smiling at you when you enter an
aeroplane may in all probability be a plastic Unconditional – Positive Long term POSITIVE
stroke.
Unconditional – Negative Negative
Conditional and Unconditional
Genuine – Positive Positive
When we make a stroke dependent on
Plastic – Positive Transitory Positive
fulfillment of some condition, it is a conditional
stroke. Many of us commonly practice it. Simple Genuine – Negative Positive*
example is telling a child – ‘I will get you a bicycle
if you score above 90% marks’. ‘I will write a * Positive because they are given with an
good report for you if you get A+ inspection intention to help the receiver
rating’. Use of ‘if you do’ or ‘when you do’ makes Only question that we need to ask ourselves is
any stroke a conditional stroke. whether we are giving enough strokes to
Unconditional strokes emerge out of regard for people around us?
the individuality of a person irrespective of If yes, are those strokes helpful to people
background of the person. For example, ‘I who are receiving them?
appreciate your contribution to this Branch’. ‘You
are not fit to be an officer’. Our biases, If not, the reason perhaps may not be far to seek.
prejudices and task obsession come in the way Are we giving enough strokes to ourselves
of giving unconditional strokes. We may need and what is the nature of those strokes?
to get rid of them to start giving unconditional
strokes. Before ending, let us do a small exercise.
Raise your arm parallel to the ground with your
Conditional and unconditional strokes can be palm facing the sky. Lift it up to take your palm
positive or negative. close to your back. Touch your palm on your
back three times. This is a pat on your own
Which combination of strokes is the best? back. Now, was that an unconditional
Unconditional positive strokes are the best positive stroke to yourself? You deserve it
because of their long term positive impact. and many more around you deserve it from
This combination does not place any burden on you.
another person to fulfill certain conditions to get

BURNOUT
Burnout is a state in which a person experiences emotional and physical exhaustion

and it is caused by excessive and prolonged stress.
Unhappiness caused by burnout may eventually threaten a person’s health,
relationships and job.
Burnout does not happen overnight and since it is difficult to overcome it after its
onset, it is advisable to recognise the early signs of burnout and work on them.
Since burnout is an outcome of prolonged stress, methods effective in controlling
stress are helpful in preventing burnout also.
Burnout is a state in which a person experiences • Doing work which violates one’s personal
emotional and physical exhaustion and it is values
caused by excessive and prolonged stress. It
is considered to be the result of a period where • Lack of variety or challenge in the work
a person makes too much effort at work and
• Trapped in a job (which has any of the above
has too little time for recuperation. With the
mentioned elements) for economic reasons.
continuation of stress, a person begins to lose
interest or motivation to meet the challenges of Symptoms
a certain role. Burnout brings down productivity
as well as energy, leading to feelings of Burnout does not happen overnight and since it
hopelessness, powerlessness, cynicism and is difficult to overcome it after its onset, it is
resentment. Unhappiness caused by burnout advisable to recognise the early signs of burnout
may eventually threaten a person’s health, and work on them. The earlier a person
relationships and job. recognises these warning signals, the more the
chances of avoiding it.
Causes
As discussed earlier, the symptoms of burnout
The roots of burnout generally lie in the are likely to be more mental than physical. The
workplace and no occupation is immune to it. following feelings are indicative of burnout.
However, service professionals, who spend their
time attending to the needs of others, are more • Irritability
prone to it. If they are not paid enough, not • Hopelessness & disgust
appreciated or exposed to criticism for matters • Frustration and powerlessness
beyond their control, the probability of feeling • Drained of emotional energy
burnt out increases.
• Detachment, withdrawal, isolation
Following scenarios increase the chances of • Being trapped
workplace burnout: • Cynicism
• Unrealistic goal setting – by the self or • Sadness
imposed
These feelings manifest themselves in
• Expected to play too many roles for too behaviour. Common behaviour pattern is
many people escapism or running away from reality. As a
result, the relationships, at work and in personal
• Unreasonably coercive or punitive rules of life, may begin to fall apart.
work

Difference between Stress and Burnout • Taking enough sleep
• Learning to relax
Though burnout is the result of unabated stress,
it still is not the same as too much stress. • Striking a balance in one’s life
Stress, almost always, involves ‘too much’: too
To prevent job burnout, the best thing is to stop
much work, too many demands, etc. On the
doing what you are doing and start doing
other hand, burnout is indicative of ‘not enough’:
something else. Some of the ways are:
feeling of emptiness, lack of motivation, etc.
Someone has succinctly put ‘if excessive stress • Clarify job description or develop role clarity
is like drowning in responsibilities, burnout is • Request for transfer – internal or external
being all dried up’.
• Ask for new duties
Stress Burnout • Seek career advice
Overreactive Emotions Blunted Emotions Best Defence against All Burnout: Being
with Other People
Urgency and hyperactivity Helplessness and
hopelessness While poor relationships and isolation contribute
to burnout, good relationships definitely help in
Exhausts physical energy Exhausts
preventing or reducing onset of burnout.
motivation and drive
• Invest in your close relationships – with your
Leads to anxiety disorders Leads to spouse, children and friends – by making
detachment and the time spent with loved ones positive and
depression enjoyable.
Primary damage is Primary damage is • Develop informal social relationships with
physical emotional people at workplace, deliberately avoiding
negative minded people.
Stress may kill Burnout may never
prematurely leaving not kill, but one’s life • Connect with a cause or a community group
enough time may not seem which is personally meaningful to you.
to finish what one started worth living. • Learn and practice healthy communication.
Since burnout involves negative feelings that
Moreover, while a person is generally aware of
fester and grow, express your emotions in
being under a lot of stress, one may fail to
healthy and productive ways.
recognise when burnout happens because the
symptoms can take months to surface. It, Avoiding Burnout
therefore, is important that if one receives a
feedback from someone close regarding change • Understanding where pressure comes from
in attitude and behaviour, it makes good sense - by deliberately developing the practice of
to listen to that person. self awareness. If need be, maintain a
stress diary for some time to pinpoint the
Preventing Burnout stressor.
Since burnout is an outcome of prolonged • Too much to do, too little time… the only
stress, methods effective in controlling stress way out is to practice effective time
are helpful in preventing burnout also. It is very management techniques and delegation.
important to build a foundation of good physical Learn to say no in an assertive manner to
health by: avoid your commitments getting bigger and
bigger.
• Daily exercise
• Political and people problems can best be
• Proper diet
avoided by striking a fine balance between
being reasonably open and available to While reflecting, you will probably discover some
people one lives and works with and mistakes that you made, but you may also
distancing oneself from those who drain realise these are excusable and there are
one’s emotional energy. lessons to be learnt from them.
• Avoiding exhaustion by taking adequate rest Typical lessons to be learnt through this process
and sleep and practicing relaxation are:
techniques, even on the job, regularly.
• no one is superhuman
• Finding a meaning in the job. The best way
• hard work does not cure all ills
to do this is by thinking about the people one
serves. If you burn out, how will they get • help and support of other people is equally
the benefit of your energy and enthusiasm? important for major achievements in life.
Burnout: As a Tool for Personal Growth Moving on… finding new direction. It is essential
to re-evaluate one’s life goals. Let these goals
Understanding Why You Burned Out be set in a balanced manner, after taking a
holistic view of life. Do your personal SWOT
This can be done by taking a deliberate, long,
Analysis to evaluate where you stand vis-à-vis
rational and dispassionate look at the
your goals. Thereafter, develop an action plan
circumstances which lead to the situation of
and translate it into action to reap the rewards
burnout. This learning will help in avoiding the
of a more fulfilling life.
recurrence of those circumstances.
Finally, if it is one set of actions which push a
You may also take the help of someone you trust
person towards burnout, it is another set of
and talk the situation through in detail, looking at
actions which pull one out of it. Therefore, be
every aspect which contributed to its creation in
aware of what actions are you taking.
the first place.

VALUES & ETHICS
Values can be defined as those things that are important to or valued by someone.
Organisational values are the embodiment of what an organisation stands for.
A disconnect between individual values and organisational values will be dysfunctional.
Ethics is defined as the rules or standards governing the conduct of a person, right/
wrong: good/bad.
Ethics are a subset of values. The principles or assumptions underpinning the way
individuals or organisations ought to conduct themselves.
INTRODUCTION what is “acceptable.” Group members learn

operating values, or they don’t survive for long.
Values and ethics are central to any To the extent that they differ from stated values,
organisation. What exactly do we mean by
the organisation will not only suffer from doing
values and ethics?
things less effectively, but also from the cynicism
Both are extremely broad terms, and we need of its members.
to focus in on the aspects most relevant for ETHICS
leaders and decision makers. First is the
distinctive nature of ethics for public officials, Ethics are standards of right or wrong, good or
second the forces which influence ethical bad. Ethics are concerned with what one ought
behaviour of individuals in an organisation and to do to fulfil one’s moral duty.
lastly the actions needed to build an ethical
climate. EVOLVING A PERSONAL CODE OF ETHICS
VALUES There are two aspects to ethics:
Values are the moral, ethical and professional Being able to determine what is right or
attributes of character. Individuals decide their wrong, good or bad.
own personal values and morals from which they Committing to doing what is right and good.
evolve a basic model of ethics for their interaction
with others. The latter aspect means that being ethical is
more than understanding what the right thing is
Values can be defined as those things that are to do; it means that one must do ethical actions
important to or valued by someone. In an – one must “walk the talk”. Just because
organisation they are an embodiment of what it something is desirable, it does not mean it is
stands for and are the basis for the behaviour of ethical. Using only a personal value system to
its members. However, what if members do not guide behaviour is not sufficient. Being ethical
share or internalise the organisational values? requires that decisions are based on ethical
Obviously, a disconnect between individual and standards as well as being guided by one’s
organisational values will be dysfunctional. values.
Additionally, an organisation may publish one set
of values perhaps in an effort to push forward a The influence of family, church, community and
positive image, while the values that really guide school determines individual values. The
organisational behaviour are very different. When organisation is thus, to a large extent, dealing
there is a disconnect between individual and with individuals whose value base has been
stated values, it may be difficult to determine established.

There are three qualities individuals must Multiple loyalties.
possess to make ethical decisions. The first is
the ability to recognise ethical issues and to Concealment.
reason through the ethical consequences of Four questions to ask yourself, to help determine
decisions. The second is deciding what is right ethical behaviour, ask:
in a particular set of circumstances. This is
similar to the ability to reframe. The third is the 1. Am I doing to others what I would want done
ability to deal with ambiguity and uncertainty; to me?
making a decision on the best information
2. Would I mind seeing what I am doing on
available.
the front page of a newspaper?
The ethical standards that one observes in the
3. Am I comfortable with members of my
organisation will have a significant effect on
family knowing what I am doing?
individual behaviour. People will do what they are
rewarded for doing. People are guided by their 4. Do I want to encourage employees to do
personal value systems. They often “choose the this?
harder right instead of the easier wrong”
specifically because of their intrinsic value of Therefore, individuals have to think about their
what is right. personal values and morals, from which they
can evolve a basic model or code of ethics for
ETHICAL DILEMMAS AND CHALLENGES their interactions with others in their circle of
influence.
We all believe that we are ethical people. In fact,
each of us believes we are more ethical than The first step starts in becoming self aware about
most people. However it is not possible for one’s actions, the intended and actual outcome
everyone to be more ethical than everyone else. of those actions. It is important to observe how
So, even though we may have the best intentions these outcomes affect others and what the
in the world, even the most conscientious people effective results of those actions are.
rationalize their behaviour. And, there are times
when making a decision that incorporates some CONCLUSION
ethical values may violate others. A few common Developing a personal code of ethics and
challenges and dilemmas are: aligning it to the organisation will lead to common
It is for a good cause. good and integration into the interest of all.
The end justifies the means.

CORPORATE GOVERNANCE
Corporate Governance (CG) means monitoring the functions of a company to

ensure enhancement of shareholders’ value through ethical conduct of business.
CG aims to provide positive effect on all stakeholders such as customers,
employees, suppliers, regulatory bodies and community at large.
Essential elements of CG: Adequate disclosure, distribution of power; supervision
and audit of executive functions and performance; expertise of the Board.
Birla Committee recommendations provide institutional framework for CG.
Good governance is an essential element for managers and their Board of Directors have
any organisation that wishes to maximise its in enhancing the shareholder value thus
effectiveness. This is true in all the private/public contributing for the greater image of the
sector commercial and noncommercial company by following the moral code of
organisations, not-for-profit organisations, and conduct.
the economies representing different states. The
Why Corporate Governance?
areas of discontent in corporate management
cluster around the following: Liberalisation, privatisation and globalisation of
economies followed by the establishment of
Low ethical and professional standards
World Trade Organisation (the WTO
leading to poor performance and a loss of
Agreement) to which India is a signatory, ushered
value in the various organisations.
in a new era of global economic cooperation,
Double standards allowing practice to differ reflecting the widespread desire to operate in a
from stated ideals. fairer and more open multilateral trading system.
The implication of this WTO Agreement for
Failure of commercial organisations as a
developing countries is removal of tariff and non-
result of inadequate controls or
tariff barriers to improve market access for
unsatisfactory checks and balances.
partner countries signifying that protectionism
Corporate Governance: Some Definitions has become a thing of the past. Though different
concessions, relating to time frame and tariff/
Corporate Governance means doing non-tariff barriers, have been given to developing
everything better; to improve relations countries like India, it is a fact that India will be
between companies and their able to gain from the global free-trade, marked
shareholders; to improve the quality of by reduced barriers, only when the Indian
outside directors; to encourage people to corporates learn to govern and manage their
think longer term; to ensure that information financial and non-financial affairs more efficiently.
needs of all stakeholders are met; to ensure With these liberalisation/globalisation measures,
that executive management is monitored facilitating increased flow of foreign direct
properly in the interests of shareholders, investment in different sectors of the economy,
such as through audit and other Indian corporates would not be able to avoid the
committees, and so on. rigours of international regulation and many of
Corporate Governance is nothing but the the best business practices prevalent in
traditional responsibility the corporate developed countries.

Good corporate governance enhances the ▲ discuss the matters arising from the
image/reputation of the corporation and helps audit with the external auditors
it, as a user of the capital, to build long-term
In India, SEBI has prescribed that the mandatory
relationship with the suppliers of capital. With
recommendations of Kumar Mangalam Birla
the transnationalisation of financial markets, it
Committee be complied with by listed
is used as a marketing tool to tap international
companies.
capital markets to raise required capital at lowest
possible cost. PROCESS OF CORPORATE GOVERNANCE
Cadbury Committee Recommendations Improving the relationship between
companies and their shareholder and other
There should be a clearly accepted division
stakeholders (including banks, etc.)
of responsibilities at the head of a company
which will ensure balance of power and Improving the quality of outside (Non
authority, such that no one individual has executive) directors.
unfettered powers of decision.
To encourage the people to think long-term.
A Director’s term of office should run for no
more than three years without shareholders' To enable markets to value the shares
approval for reappointment. properly by improving the quantity, quality
and frequency of financial and managerial
The Board should monitor the Executive disclosure.
Management.
To improve the monitoring mechanism
Where the Chairman is also the CEO, there (inside the company) by improving the
should be a strong independent element on quality of information that managements
the board with an independent leader. share with their boards.
Non-Executive Directors of the Board should maintaining excellent relationship with
significantly influence Board decisions. customers and suppliers.
Directors should have access to Improving compliance with applicable legal
independent professional advice at the and regulatory requirements.
Company’s expense.
Consideration and care for the interest of
There should be an Audit Committee in the employees and local community.
every organisation. The terms of reference
of the audit committee should inter-alia Corporate Governance in Banking Sector
include the following: Basel Committee Publication (Sep 1999)
▲ review the draft annual accounts prior In the opinion of the Committee there are four
to their approval by the board important forms of oversight that should be
▲ review the compliance with statutory included in the organisational structure of any
and stock exchange requirements for bank in order to ensure appropriate checks and
financial reporting balances: (1) Oversight by the board of directors
or supervisory board; (2) Oversight by individuals
▲ discuss the scope of the audit with the not involved in the day-to-day running of the
external audit various business areas; (3) Direct line
supervision of different business areas; and (4)

Independent risk management and audit Some of the recommendations made by the
functions. Narayana Murthy Committee are:
Whistle Blower Policy: Personnel who
As regards the role of the Board, the Committee
come to know about unethical or improper
sets out the following:
practices should be able to approach the
Establishing strategic objectives and a set
company’s audit committee ‘without
of corporate values that are communicated
necessarily informing their supervisors’.
throughout the banking organisation.
Whistle blowers should be protected from
Setting and enforcing clear lines of
‘unfair termination and other unfair
responsibility and accountability throughout
prejudicial practices.’
the organisation.
Corporates should take steps to see that
Ensuring that board members are qualified
the right of access to audit committees is
for their positions, have a clear
communicated to all employees through
understanding of their role in corporate
internal circulars.
governance and are not subject to undue
influence from management or outside The audit committee members should be
concerns. non-executive directors.
Ensuring that there is appropriate oversight The management should give their views
by senior management. and auditor’s comment on management
Effectively utilizing the work conducted by views regarding contingent liabilities should
internal and external auditors, in recognition be given in the annual report
of the important control functions they Regarding reports of security analysts, the
provide. SEBI should make rules for ‘disclosure
Ensuring that compensation approaches whether the company that is being written
are consistent with the bank’s ethical values, about is a client of the analyst’s employer
objectives, strategy and control or an associate of the analyst’s employer,
environment. and the nature of services rendered to such
Conducting corporate governance in a company, if any and also whether the
transparent manner. analyst employer hold or intend to hold any
Ensuring an environment supportive of debt/equity of the issuer company.
sound corporate governance.
Ganguly Committee Recommendations
Developments in the last 3 years
Task Force set up by Department of Report of the consultative group of Directors of
Company Affairs and CRISIL rating Banks/Financial Institutions set up by RBI under
The task force of the Study Group set up by the the Chairmanship of Dr.A.S.Ganguly submitted
Department of Company Affairs in May 2000 in Apr 02 made 31 recommendations. Some of
suggested setting up of a centre for corporate the key recommendations relate to carrying out
excellence in order to promote good corporate due diligence of directors, creating a pool of
governance. CRISIL has volunteered to rate the talented and professional persons for induction
corporate governance of companies, even as non-executive directors, qualification and
though the rated companies can choose to expertise of Board, separation of the office of
disclose it or not. Chairman and M.D, periodical and rigorous
review of performance by the Board, setting up
Narayana Murthy Committee Report on
of Supervisory Committee of the Board and
Corporate Governance (appointed by SEBI)
expansion of eligibility of Chairman of Audit
The Committee submitted its report in Mar 04.

Committee to include specialization in Banking The Bank has articulated its corporate
and Finance. governance objectives, which are disclosed
Naresh Chandra Committee in the Annual Report.
Recommendations The Central Board has constituted eight
The Enron and Anderson debacle resulted in the Committees of Directors, viz., (1) Executive
enactment of Sarbanes-Oxley Act, 2002 in U.S. Committee, (2) Audit Committee, (3)
The Act besides providing for setting up of a Shareholders'/Investors' Grievance
Public Company Accounting Oversight Board Committee, (4) Risk Management
contains rigorous provisions for regulating the Committee, (5) Special Committee for
relationship between a Company and the Audit Monitoring of Large Value Frauds (Rs.1
firms. The Act provides for penalty of crore and above), (6) Customer Service
imprisonment up to 5 years for CEO and CFO Committee, (7) Technology Committee and
for violation of Security Exchange Act. (8) Committee on Rural Sector Business.
Consequent to this, Department of Company Board of Directors meet regularly and the
Affairs set up a committee in Aug 2002 under date and attendance of the meeting are
the Chairmanship of Shri Naresh Chandra. The published in the Annual Report.
Committee made a number of The Bank has a well documented and
recommendations relating to company-audit transparent management process.
firm relationship, certification of accounts by Board has free access to all needed and
CEO and CFO etc. Some of the key relevant information.
recommendations of the Committee are
The Bank communicates its financial
disqualification for audit assignments, list of
performance to the public through
prohibited non-audit services, compulsory
publication of quarterly, and half yearly
rotation of audit partners, disclosure of
results.
contingent liabilities, consultation of audit
committee for appointment of auditors, Conclusion
certification of statements by CEO and CFO, In sum, Corporate Governance aims to maintain
proposal for setting up of Corporate Serious a high level of business ethics and to optimize
Fraud Office in Department of Company Affairs the value for all stakeholders. Corporate
(Cabinet has since approved the same), setting Governance facilitates effective management
up of independent quality review Board, and control of business. Corporate Governance
minimum board size, disclosure of timing and has become a corporate business imperative.
duration of Board meeting, provision of tele Since banks deal with public money, proper
conferencing and video conferencing of the implementation of corporate governance
Board, indemnity for non-executive directors and practices in banks would safeguard depositors’
provision of training for Board members interest while ensuring better returns for
Corporate Governance in State Bank of stakeholders.
India

BALANCED SCORE CARD
Developed by Dr Robert Kaplan and David Norton of Harvard Business School.

It is a performance measurement and monitoring tool.
Through measurement monitors, it attempts to link the vision, mission and values
of the organisation for application by employees.
Four perspectives namely business process, customer, financial and learning.
It helps to promote goal-oriented behaviour.
Background relative to each of these perspectives:

The Learning and Growth Perspective
Balanced Scorecard (BSC) is a management
The Business Process Perspective
decision tool for performance measurement and
The Customer Perspective
management. Traditional perfomance
The Financial Perspective
measurement tools such as financial reports,
sales reports, production reports, customer What is Balanced Scorecard?
survey reports, etc., measure performance on Performance Management is the use of
multiple dimensions and hence are not balanced performance measurement information to effect
in providing better view of performance. A new positive change in organisational culture,
approach to strategic management was systems and processes, by helping to set
developed in the early 1990’s by Drs. Robert agreed upon performance goals, allocating and
Kaplan (Harvard Business School) and David prioritizing resources and informing managers
Norton. They named this system as the to either confirm or change current policy or
‘balanced scorecard’. Recognizing some of the programme directions to meet those goals, and
weaknesses and vagueness of previous sharing the results of performance in pursuing
management approaches, the balanced those goals.
scorecard approach provides a clear The Balanced Score Card is a set of financial
prescription as to what companies should and non-financial measures relating to an
measure in order to ‘balance’ the financial organization’s critical success factors. It helps
perspective. management make right and fast decisions on
The balanced scorecard is a management what to improve and celebrate.
system (not only a measurement system) that Strategic Perspective of Balanced
enables organizations to clarify their vision and Scorecard
strategy and translate them into action. It To put it differently, the BSC is a conceptual
provides feedback around both the internal framework for translating an organisation’s vision
business processes and external outcomes in into a set of performance indicators among the
order to continuously improve strategic four perspectives namely the Financial,
performance and results. When fully deployed, Customer, Internal Business Processes and
the balanced scorecard transforms strategic Learning and Growth as mentioned above.
planning from an academic exercise into the
After a company has articulated its Vision,
nerve centre of an enterprise.
Mission and Strategy, it has to raise the following
The balanced scorecard suggests that we view questions on the four perspectives:
the organization from four perspectives, and to
Customer: To achieve our vision how
develop metrics, collect data and analyze it

should we be seen by our customers? desired outcome.
Financial: To succeed financially what kinds In the absence of measurable targets, vision
of financial performance should we provide statements remain as show pieces without
to our investors. directing appropriate behaviour among
Internal Business Processes: To satisfy employees. The authors of BSC suggest that
customers where and how should we excel normally one can have 4 to 5 measures under
in our processes? each perspective so that the number of
measures does not exceed 20. Many Fortune
Learning and Growth: To achieve our vision,
100 companies have reportedly used Balanced
how will we sustain our ability to change and
Scorecard with success.
grow?
Implementing a Balanced Scorecard
On each perspective, the organisation has to
set objectives, measures, targets and initiatives The following steps are essential for effective
so as to achieve its stated vision and mission. implementation of Balanced Scorecard:
Measures are important to align employee Make a commitment at all levels - especially
behaviour with mission, strategy and values. at the top level
Measures would promote right behaviour and Develop organisational goals
serve to numerically define the meaning of Offer training in improvement techniques
‘Success’. Establish a reward and recognition system
to foster performance improvements
To understand it better, let us look at one of our
Break down organisational barriers
mission statements: “Committed to excellence
Coordinate Headquarers and Branch
in customer satisfaction”. Let us also look at one
Responsibilities
of our values: “Excellence in customer service”.
Demonstrate a clear need for improvement
According to BSC, we have to further define what
Make realistic initial attempts at
excellence in customer service means through
implementation
select objectives and measures which would
Integrate the Scorecard into the organization
indicate our definition of excellence; and give
Change the corporate culture
targets (benchmarks) to various functionaries
Institutionalise the process.
to achieve them. For example, the following
measures may be set for excellence in Conclusion
customer service: The Balanced Scorecard attempts to align
Customer satisfaction rate of ‘Excellent’ in employee behaviour with the organisation’s
at least 90% of the cases. This can be vision, mission and values. It places
obtained through customer feedback. organisation’s strategic vision at the centre of
the performance assessment structure. It is an
Processing of credit products within the set
instrument through which organisations can
Turnaround Time (TAT). For example,
nurture goal-oriented behaviour and
delivering housing loans in ‘7’ days. The
institutionalize performance culture through
measures should be set, communicated,
measurement matrix. We find in most
monitored and improved. The processes
organisations Vision, Mission and Values are
should be tuned to meet this standard.
neither known to most employees nor
Customer grievance redressal in ‘4’ days.
understood. The BSC is a wonderful tool not only
These measures must be communicated to the to effectively communicate the strategy of the
stakeholders. We then have to track progress organisation to all its people but also to achieve
by seeing the action of each stakeholder and excellent results by focusing their energies
initiate suitable corrective action to reach the towards the ultimate goal of the organisation.
TRANSFORMATIONAL LEADERSHIP
Leadership is the ability to make followers do he wants them to do, willingly or on their
own, towards accomplishing an organizational goal.
Transactional leadership is based on the leader and the followers having “transacted” to
do it characterized by close direction, control and follow-up. The focus is on behavioural
compliance and outcome. The inner state of thinking and feeling are not matters of concern.
Transformational leadership aims at transforming people by working with and through

them on their values, beliefs, attitudes and behaviour. It aims at emotionally connecting
the followers to the vision of the leader so that they are galvanized to achieve the vision.
“Managers are people who do things right, motivate followers either by promises, praise and
while leaders are people who do right rewards or by threat and disciplinary action. The
things.”—Warren Bennis. On becoming a leadership style is characterized by directions,
leader. close control. The focus is on outcome and
behavioural compliance only. Negative
Leadership has been defined as “a process of feedbacks are used as a tool for correcting the
influencing the activities of an individual or a followers. The inner state of feeling and thinking
group in efforts towards accomplishing of a follower is not a matter of concern. They
organizational goals.” Influencing has been treat the followers as mere means to achieve
defined as the ability of the leader to make
their self-satisfying needs.
followers do, willingly or on their own, what he
wants them to do; and the measure of success TRANSFORMATIONAL LEADERSHIP
of a leader is the extent of willingness he can
generate in the followers. Transformational leadership, on the other hand,
is defined in terms of the ability of a leader to
In today’s world characterized by radical change, influence the values, attitudes, beliefs and
mergers, acquisitions, downsizing, business behaviours of others by working with and through
process re-engineering, customer focus, etc., them in order to accomplish the organisation’s
the business leader must balance the mission and goal. (Rouche, Baker, and Rose,
tremendous demands of managing the change 1989)
complexity with performance and productivity.
Transformational leaders foster model values of
High performance team is the key word today.
honesty, loyalty, and fairness and end values of
Management in the 21st century will focus on justice, equality and human rights.
the value based theory of transformational Transformational leadership aims at
leadership, rather than behaviour based concept transforming people.
of transactional leadership. Successful
leadership depends far more on the followers’ CHARACTERISTICS OF
perception of the leader than on the leader’s TRANSFORMATIONAL LEADERS
abilities. In other words, leadership is in the eye The following six characteristics are likely to be
of the followers. present in the transformational leaders:
TRANSACTIONAL LEADERSHIP 1. VISIONARY
The concept of transactional leadership is based Transformational leaders have a great vision
on the followers carrying out what they have about their organization and the road map to
“transacted” to do with the leader. These leaders

attain it. They have the great communication 4. CONSIDERATE
ability to communicate and emotionally connect
the followers to the vision; the followers are Transformational leaders treat every individual
galvanized to achieve it. as a distinct and significant human being. They
have positive regard for every follower, and listen
2. INSPIRATIONAL to their problems with empathy. They take
interest in the development of each individual.
Transformational leaders are charismatic, who
are able to obtain the devotion of the followers 5. TRUSTWORTHY
by sheer personality. These leaders are ethical,
Transformational leaders enjoy the trust of their
listen carefully to followers, provide support, are
flexible, do not make fun of opinions of others followers by being value based and maintaining
and are open to criticism. They will be role high standards of personal credibility. They are
models and have great influence on professional ethical in their dealings, keep their
and personal development of the followers. commitments. They also trust their followers.
They have no difficulty in delegating decision-
3. THOUGHTFUL making.
Transformational leaders encourage their 6. CONFIDENT

followers to provide innovative solutions and new
Transformational leaders always maintain a
ideas for achieving their vision. They encourage
positive self-concept and exhibit self-confidence
positive thinking and creative problem solving.
When things go wrong, they focus on ‘what’ and and optimism. They also repose confidence in
‘why’ of the problem rather than on ‘who’ to put their followers. They treat their followers with
the blame on. dignity and respect. They accept issue based
differences of opinion.

LEARNING ORGANIZATION
A learning organisation is one which is skilled in creating, acquiring and transferring

knowledge and changing its behaviour to reflect new knowledge and insights.
Learning provides competitive advantage and helps in organisational transformation.
Some of the characteristics include openness, encouragement for creative ideas,
sharing and constant change.
Introduction with the avowed objective of transforming the

traditional organizations into 'Learning
In a competitive environment, the market place Organizations'.
is characterized by moves and counter-moves
thereby moving beyond the traditional business Concept of 'Learning': An Overview
ethics. The organization needs to unlearn many
It is the ability to assimilate new ideas from
of the business practices and stategies which
others and past experiences and to translate
have out-lived their utility and redefine its
those ideas into action faster than a competitor
business, rediscover the markets, realign its
can. 'Learning' can be viewed as changes to
attitudes that foster customer delight. In order
the structure of the living system that allows it
to meet such a growing international
to continue to respond to environmental
competition, it is imperative for all organizations
perturbations.
- irrespective of their activity - to reposition their
competitive edge by reorienting their business Every human being is capable of learning but
goals, strategies and their management the methodology used for learning and also the
practices. skills, knowledge and attitudes of both the parties
to the process, i.e., the learner and the trainer,
This emerging economic and business order
do play a vital role in achieving the objectives of
calls for a new approach on the part of the
learning. Learning is a continuous interaction
organizations to transform themselves into a
between the individual and the particular social
treasure of newer skills, knowledge and abilities
environment in which he or she functions.
which can translate the emerging competition
Learning is more effective when one sheds one's
into business advantage by discovering new
half-knowledge, prejudices, bias, likes and
products and services meeting the ever-
dislikes and when one abandons the 'I know'
changing customer demands and preferences.
attitude and adopts the 'I want to know' approach.
Besides, the sudden breakthrough in the
Information Technology and Business 'Learning Organizations': Concept,
Communication renders the traditional skills and Definition and Features
knowledge redundant, thereby making even
some of the high-profile academic literates 'Organizational Learning' is a process of
virtually computer illiterates. As human beings continuously redefining people's beliefs and
strive to exist in the organization, for their very perceptions about how things work. In a dynamic
survival even in the midst of turbulence, there is environment, it is important for organizations to
every need for them to acquire new skills, continuously learn and adapt, organizations
knowledge and attitudes lest the system itself which discover how to tap people's commitment
will make them redundant. This is possible only and capability to learn at all levels, will only
when there exists a collective and continuous become truly successful and excel in future. In
system for effective learning in the organizations other words, the traditional organizations need

to transform themselves into a new breed of It creates open and frank communication
organizations which are called as 'Learning channels - vertical, horizontal and cross-
Organizations'. sectional - interdepartmentally and
interpersonally.
A 'Learning Organization' is an organization
which is not only skilled in creating, acquiring It is a place where the human beings are
and transferring knowledge but also at modifying encouraged to unveil their creative ideas and
behaviour to reflect new knowledge and insights. knowledge for its competitive advantage.
It is a holy place where all people working with it
It disseminates learning and shares knowledge
- irrespective of their positions and cadre - will
and vision throughout the organization.
collectively and continuously learn the
knowledge and skills for mutual benefit of It keeps the company in a state of constant
themselves and the organization. Learning change.
Organization practises how to learn in an on-
going way - the periodic surfacing and The ultimate objective of the Learning
examination of why and how work is Organization is to develop core competencies
accomplished. This enables the organization, for forging ahead with the change of times.
not only to acquire skilled people and skilled Organizational excellence can be achieved
processes but also to acquire learned through the holistic well-being of employees, as
experience which enhances the adaptability and the 'people in the organization are the key factors
probability of success, particularly in turbulent for transforming the organization as a 'Learning
and uncertain conditions. Organization'. The organizations are incrasingly
The core competence of any organization is realizing that their stategic and competitive
nothing but the quantum of individual and advantage lies mostly in leveraging knowledge
collective learning and the value addition it and working with empowered multifunctional
creates in the organization. The Learning teams. In order to achieve this holistic purpose,
Organizations are the complex economic the organizations have been adopting modern
institutions in which thinking, learning and methods like Constant Learning,
knowledge creation takes place and creative Empowerment, Benchmarking, Customer
ideas are constantly generated so as to permit Relationship Management (CRM), Employee
organizational transformation. Care and Welfare, Economic Value Added
(EVA), i.e., Return on Investment (ROI)
The chief characteristics of 'Learning Concepts, Retention of Creative Talents and
Organizations' can be listed out as under : Total Quality Management (TQM).
It is a place where high quality human learning Essential Pre-requisites for 'Organizational
goes on on a continuous basis. Learning'
The objective to transform is to learn and grow Effective organizational learning aims to improve
and change, as opposed to the traditional group performance, expand communication
bureaucratic models of organizational structure. focus on creating learning values and motivation
and creating and nurturing a culture of
It is a place where the capacity to be creative
continuous improvement. Extensive usage of
and innovative is continuously expanding.
Information Technology and adopting systems
It endeavours to unlearn old and obsolete approach to problem - solving are the essential
knowledge and to acquire new knowledge and tools for improving these processes in the
enhance the existing knowledge. organization.

There are certain essential prerequisites for also to take immediate and prompt corrective
making organizational learning more effective. action, wherever needed.
They are :
Organization should develop an effective
The organizational learning should be a part of system for constant scanning of external as well
the corporate vision and mission and there as internal environment so as to bring required
should be a genuine commitment to this concept resilience into the learning methods and
from the top management. strategies.
The organization should develop a culture and There should be a proper system for
policies that continually support learning maintenance of constructive relationships
behaviours. among all stakeholders in the organization.
The modus operandi being evolved for The organization should adopt an attiude of
organizational learning should be compatible with openness and bias towards change; never being
the culture, philosophy and ethos of the satisfied with the status quo and always
concerned organization. searching for ways to do better.
Appropriate time should be spent by the The learning costs should be viewed as potential
organization in reorienting behaviour towards an investments in the endeavour to achieve top
effective learning culture and as such the whole class tangible performance at all levels.
concept of time expenditure requires radical
In view of the imperative need for collective
change.
learning, organizations have been adopting
The quality and efforts of organizational learning as one of their fundamental values. The
members should be par excellent and the existing learning systems are constantly
mistakes and failures should be viewed as reviewed and the training endeavour is being
learning opportunities and stepping stones for revitalized into initiatives for change
success. management. The individual training needs are
integrated into the organizational needs and the
The organizational structure, work processes,
training is being increasingly used to bridge the
decision-making tree, reporting relationships,
gap with the external world. The organizational
communication channels, control systems and
performance and ultimate success heavily draw
leadership styles, etc., should be supportive and
from the level of organizational learning, and
effective enough for nurturing a learning
learning is the only significant mechanism for
experience among the people in the
substantive positive change. In a knowledge-
organization.
based economy, the rate at which organizations
There should be effective control, monitoring and learn and adapt may become the only
prompt feedback systems to assess the sustainable source of competitive advantage.
effectiveness of the organizational learning and

INTELLECTUAL CAPITAL
Intellectual Capital is the product of commitment and competence. Both should

exist in an employee for organizational effectiveness.
Competence should align with business strategy.
Competence can be built, bought and borrowed by organizations.
Commitment can be fostered by articulating vision and sharing power and
resources with the employees.
Leaders should raise standards, set high expectations and demand more
performance and provide corresponding resources to meet high demands.
In the ongoing debate about where managers management layers, increased obligations, and
should focus their attention something has been pressures exerted from almost every other
missing: a focus on intellectual capital. modern management practice, employees’
Intellectual capital-the commitment and work lives have not always changed for the
competence of workers- is embedded in how better.
each employee thinks about and does work and Fifth, employees with the most intellectual
how an organization creates policies and capital are often the least appreciated.
systems to get work done.
Sixth, current investments in intellectual capital
First, intellectual capital is a firm’s only are misfocused. Under the name “corporate
appreciable asset. Most other assets (building, citizenship,” many senior executives talk about
plant, equipment as machinery, and so on) begin work-family issues.
to depreciate the day they are acquired.
What is Intellectual Capital?
Intellectual capital must grow if a firm is to
prosper. A manager’s job is to make knowledge While many agree that intellectual capital
productive, to turn intellectual capital into matters, few can explicitly quantify it. A simple,
customer value. yet measurable and useful definition would be:
intellectual capital = competence x commitment.
Second, knowledge of work is increasing, not
This equation suggests that with a unit,
decreasing. As the service economy grows, the
employees’ overall competence should rise but
importance of intellectual capital increases.
that competence alone does not secure
Service generally comes from relationships
intellectual capital. Intellectual capital requires
founded on the competence and commitment
both competence and commitment. Because
of individuals.
the equation multiplies rather than adds, a low
Third, employees with the most intellectual score on either competence or commitment
capital have essentially become volunteers, significantly reduces.
because the best employees are likely to find
Tools for Increasing Competence
work opportunities in a number of firms. This
does not mean that employees work for free. There are two primary challenges in increasing
Volunteers are committed because of their competence: First, competencies must align
emotional bond to a firm; they are less interested with business strategy. Second, competencies
in economic return than in the meaning of their need to be generated through more than one
work. mechanism. There are five tools for increasing
competence within a unit (firm, site, business,
Fourth, many managers ignore or depreciate
or plant): buy, build, borrow, bounce, and bind.
intellectual capital. In the aftermath of
Appropriately using all five ensure a stable flow
downsizing, increased global competition,
of competence.
customers’ higher requirements, fewer
Buy: Managers can go outside the unit to replace of how many demands are removed or reduced,
current talent with higher quality talent. Buying competition continues.
involves staffing and selection from the entry Increase Resources: Not all demands can be
level to the officer level. reduced. Business demands accompany a
Build: By building, managers invest in the firm’s desire to compete in tough markets.
current workforce to make it stronger and better. Walking away from competition would, in many
A build strategy for intellectual capital works cases, equate to failure. Demands will inevitably
when senior managers ensure that be high in globally competitive firms. Resources
development is more than an academic represent the values, practices, and actions the
exercise, when training is tied to business results company takes to respond to demands. Certain
not theory, when action learning occurs, and resources may counterbalance demands.
when systemic learning from job experience In sharing power and giving up control,
occurs. managers implicitly trust that their employees
Borrow: In borrowing, managers invest in have the skills and motivation to do a good job.
outside vendors who bring in ideas, frameworks, Having control demonstrates trust and builds
and tools to make the organization stronger. employees commitment. Managers may use
Effectively used consultants or outsourcing control as a resource by creatively and flexibly
partners may share knowledge, create new answering: where is work done? How is work
knowledge, and design work in a way that people done? What work is done? When is work done?
too close to the work would not have done. Who does what work? As long as employees
However, appropriately used, borrowing understand and are committed to the goals, they
competence is a viable way to secure intellectual can share the way goals are accomplished.
capital. Employees commitment often comes from a
Bounce: Managers must remove those leader who shares a clear vision that
individuals who fail to perform to standard. A firm passionately communicates agenda and intent.
should systematically and courageously remove Many executives articulate visions or directions
the bottom percentiles in performance. that give employees resources and add to their
Managers must make difficult personnel resolve to cope with increased demand.
decisions decisively. Companies are learning that sharing the
Bind: Retaining employees is critical at all levels. economic gains of reaching targets helps
Keeping senior managers who have vision, employees stay motivated to reach increasingly
direction, and competence is important, and difficult goals. When employees see that a
retaining technical, operational, and hourly particularly demanding project results in
workers also matters because investment made economic payback, they are likely to be more
in individual talent often take years to pay back. committed. When the line of sight between work
How to Foster Commitment and reward is clear, employees may cope better
A company can foster commitment in three with increased demands.
ways. First, it can reduce demands. Second, it Intellectual capital comes from employees’
can increase resources. Third, it can turn competence and commitment. Both must exist
demands into resources. together for intellectual capital to grow. Leaders
Reduce Demands: Employees have many interested in investing, leveraging, and expanding
demands of varying importance. Helping them intellectual capital should raise standards, set
separate legitimate from groundless demands high expectations, and demand more of
and then removing the unnecessary ones may employees. They must also provide resources
balance their lives. Even with priority setting, to help employees meet high demands.
focusing, and reengineering, demands on Employees will become engaged and flourish,
employees will continue to increase. Regardless and the organization’s intellectual capital will
become its defining asset.

KNOWLEDGE MANAGEMENT
HRM needs to develop Knowledge Management System due to changing customer

trends, competitive products and services and changing society.
The Collective knowledge of the employees gives distinct competitive advantage.
The integrated system of KMS should value collection of knowledge, react quickly to
market changes and facilitate faster decisions.
Banks should specifically focus on finding, creating, sharing and applying knowledge
that it is relevant to its business.
The importance of knowledge for achieving keep in mind that the only long-term competitive
competitive success has been recognized in the advantage they can have is how effectively to
early 1990s, but it is only recently that the formal manage the corporate knowledge.
system for managing the acquisitions and the
use of knowledge has begun to emerge, often Role of KMS in Banking
created on the back of new information It may be noted that most of the new generation
technology applications and systems. Banking private sector banks and foreign banks have
today is more competitive and technology driven created sophisticated database of clients and
where human capital can play a pivotal role in have been able to utilize the knowledge base of
determining the worth of the institution. The their staff member with the aid of IT, to improve
organizational structure of the banks is gradually the productivity to a higher level. Interestingly,
changing and in keeping with the global trend, talent drawn from the public sector banks is
most banks are focusing on the implementation managing most of the new generation private
of core banking solution where the branch sector banks. It is interesting to note that there
network should be downsized but the delivery is a phenomenal gap between employee
system will be more dependent on technology. productivity of the PSU banks and that of the new
The rapid pace with which the changes are taking generation private sector banks. The strength
place in the banking industry is phenomenal. In of any bank is reflected by the collective
order to keep pace with the changes, it is knowledge of its employees. It is a source of
essential that the Human Resource sustainable competitive advantage, as the same
Development (HRD) in the banks develop the cannot be copied by other banks. In a service
Knowledge Management System (KMS) within organization like banks, KMS is very important
the organization so that maximum benefit as the end products are to be delivered to the
accrues to the organization. From a business client in multiple bases.
strategic perspective, changing customer
trends, competitive products and services and KMS - Experience of Leading Corporates
changing societal and governmental pressures
Leading corporates across the world are
make the existing business models, business
investing in millions to stay ahead of their
practices and business value propositions
competitors in terms of competitiveness and
obsolete. Banks that can figure out the ‘next right
technology. They institutionalize the people in
thing’ and prepare well in advance to ride the next
teams through formal/informal structures for
wave will be more effective in the longer run. All
them to effectively share the knowledge. The
the information, technology and database cannot
companies have created a group of
assure bank’s competitive advantage in the long-
communicators that comprise a team of people
term unless the same are translated into
who are practitioners of a well-defined knowledge
actionable value propositions. Banks have to

domain. As and when the need arises, the organization’s implicit knowledge base.
corporates can take advantage of the database Implicit knowledge is the kind of knowledge
of knowledge for enhancing the value of the that is presumed to be possessed by highly
shareholders. skilled individuals who are capable of
performances that mystify others.
New Delivery Channels and KMS
• Banks should significantly increase the
With the advent of Internet, a new potential
tangible assets of organizations.
delivery channel is being opened to clients where
banks should take maximum advantage of • Banks can create new opportunities typically
knowledge management structure that will resulting from the ability to create implicit
enable them to interact with the clients in a more knowledge base.
productive way. More and more time and energy
can now be spared by the employees for the Every bank’s knowledge base depends on the
growth of the organization rather than to attend quality of the people in terms of education and
to routine customer transactions. No doubt, the skills, the software and hardware it uses in the
business process and the process of storage
customers need to be educated in the use of
of data for future use. The function of HRD is to
the innovative products that may demand some
extra attention at the initial stages but in the long ensure that this base is fine-tuned in the light of
run the benefits to the banks outweigh the changing banking environment at regular
disadvantages. intervals. There should be a system where like-
minded colleagues communicate with each
Integrated System of KMS other regularly and try to innovate ways for better
productivity of banks. A sort of
Banks can formulate an integrated process of compartmentalization can be made wherein
Knowledge Management of their organization by every group can follow a specific target like say
addressing some critical issues as given below.
retail products marketing, IT development,
Thye have to capture knowledge and information
streamlining of systems and procedures in
for effective sharing amongst their employees. banks and recovery of NPA, etc. There should
• Banks should recognize the value of be project driven groups in every bank that will
collective knowledge base. focus their attention on specific area where some
deficiency is noted in terms of competition with
• Banks should ensure that the system reacts other banks or in terms of lacunae in the system.
to the market changes fast. This group can be formed from the same branch
of the bank or it can be a cluster group of staff
• Banks should see that they should not suffer
members from the branches in the same city
from any information overload.
situated at an approachable distance. Banks
• Banks’ core team should be in a position to need people who continuously strive to increase
take timely and accurate decision. knowledge. Incentives should be given to the
group achieving superordinate performance.
• Banks should try to find synergy between the
application of IT and Knowledge KMS Effectiveness and Role of HR
Management System.
Banks should focus on building capabilities,
• Banks can be protected against the making sure they are shared across the
knowledge degradation that results in losses, organization, and using those capabalities to
employee defections, and the inaccessibility create growth opportunities. The knowledge
of experts at the right place. strategy shows how the creation, dissemination
and use of knowledge can create customer and
• The speed of doing business can be shareholder value. In particular, it focuses on the
accelerated through the availability of the

Human Resources (HR) management in value of helping employees to communicate with
enhancing an organization’s ability to respond each other. The mission of Knowledge
to market forces and meeting business Management group is to facilitate
objectives. Recognizing the key link between the communication across the bank by developing
capabilities of bank employees and its overall its IT infrastructure and building communities of
success, the HR function has been transformed practice, extended across the formal
into a ‘strategic capabilities unit’ for use of the organizational structure, to enable the bank to
individual, the team and organizational learning work more efficiently than if it were formed along
with the objective of serving the customer in a traditional functional lines. Ultimately,
better way. Here the role of HR is to create a communities of practice are seen as essential
successful database for the bank and take care to accommodate the rapid growth of the bank.
to synchronize the function of education and Banks should encourage intranet to encourage
knowledge that is documented in the corporate their front-line staff to initiate contact with
database. The knowledge exchange connects customers as well as with fellow colleagues.
employees and allows them to share information.
In particular, a climate should be created by HR Conclusion
department to ensure that employee’s skill and The Knowledge Management is first seen as a
knowledge are kept up-to-date in topics like integral part of overall corporate strategy, and
finance and banking and in more general areas aims to grow, extract and exploit the bank’s
of management, technology and leadership. It knowledge to increase shareholders’ value.
should also facilitate the training and education Secondly, it focuses on improving upon the
needs of the organization by aligning HR knowledge necessary to carry specific business
development and learning strategies with overall processes and thereby improve efficiency. The
strategies of the bank. If need be, framework for future of KM depends on the extent to which it
the knowledge management structure may be can make value addition to shareholders’ value
outsourced which will take care of the growing and managing the knowledge systematically
need of the bank in future years to come. which is important for the welfare of the
Employee Communications in KMS organization. It will continue to matter as long as
organizations rely on the ability of their employees
Like any other corporate structure, banking to make good decisions. It also gives opportunity
companies typically require a host of linked to the employees to make good decision and to
knowledge management practices. Banks continue to innovate for the benefit of
should develop the valuable expertise in this area shareholder’s value. To get the optimum benefit
through a series of strategies. For example, the of KMS, banks should make a methodical
management should now be specificially approach through the whole process of KM and
conscious about finding, creating, sharing and the same should be understood by people
applying knowledge that is relevant to its many involved at all levels. Traditional management
lines of business. KM forum should contribute looks at technologies,systems and people
to knowledge sharing by stimulating separately. Banks need to develop KMS, which
communication between employees across the should treat three of them as an integrated
organization. Most organizations recognize the system with a people focus.

IT GOVERNANCE
IT governance is ideally a sub-set of the broader level of corporate governance.
This is more relevant for the financial sector, including the banking sector, where
the lack of IT governance may even lead to catastrophic consequences.
Information Technology Governance (IT technology security and control practices.

governance) or Information and Communication This is done by providing tools to assess
Technology (ICT governance) is a subset and measure the performance of 34 IT
discipline of corporate governance focused on processes of an organisation. The ITGI (IT
information technology (IT) systems and their Governance Institute) is responsible for
performance and risk management. The rising COBIT.
interest in IT governance is partly due to The ISO/IEC 27001 (ISO 27001) is a set of
compliance initiatives such as the Sarbanes- best practices for organisations to follow to
Oxley Act and Basel II, as well as the implement and maintain a security
acknowledgement that IT projects can easily get programme. It started as the British
out of control and profoundly affect the Standard 7799 (BS7799), which was
performance of an organisation. This is more published in the United Kingdom and
relevant for the financial sector, including the became a well-known standard in the
banking sector, where the lack of IT governance industry that was used to provide guidance
may even lead to catastrophic consequences. to organisations in the practice of
IT governance is ideally a sub-set of the broader information security.
level of corporate governance.
The Information Security Management
A recurring theme of IT governance discussions Maturity Model ISM3, which is a process
is that the IT capability can no longer be a black based ISM maturity model for security.
box. Owing to limited technical experience and
IT complexity, key decisions in the traditional AS8015-2005 - an Australian Standard for
handling of IT management by board level Corporate Governance of Information and
executives are deferred to IT professionals. IT Communication Technology.
governance implies a system in which all CMM - The Capability Maturity Model which
stakeholders, including the board, internal lays focus on software engineering.
customers and related areas such as finance,
provide the necessary input into the decision- The Balanced Scorecard (BSC) which is a
making process. This prevents a single method to assess an organisation’s
stakeholder, typically IT, being blamed for poor performance in many different areas.
decisions. It also prevents users from later Six Sigma which aims to focus on quality
complaining that the system does not behave assurance.
or perform as expected.
IT governance is, however, characterised by a
IT governance follows many models. While there few incumbent challenges as well. The
exist many supporting mechanisms developed manifestation of IT governance objectives
to guide the implementation of IT governance, through detailed process controls (for instance,
some of the more common ones are: in the context of project management) is a
The IT Infrastructure Library (ITIL), which is frequently controversial matter in large scale IT
a detailed framework with hands-on management. Further, difficulties in achieving a
information on how to achieve a successful balance between financial transparency and
governance of IT. cost-effective data capture in IT financial
management (i.e., to enable chargeback) is a
Control Objectives for Information and topic for which clear conclusions have not yet
related Technology (COBIT) which is an been arrived at.
approach to standardize good information
ASSESSMENT CENTRE
Assesses the adequacy of various critical attributes, functional expertise, aptitudes

and skills required in the job.
Used for higher level executives.
Some of the competencies assessed are leadership, teamwork, decision making
capability, communication skills and market orientation.
As Managers rise higher and higher in an 3. Assessing the ability to lead/work in teams
organization, they are expected to develop new and solve problems collectively
competencies, which enable them to perform 4. Assessing ability to plan, organize, decide,
more effectively. Technical skills, which most manage, and delegate
managers acquire through work experience/ 5. Assessing the decision making capability
training, are not enough to handle the on scientific basis
complexities of higher roles in an organization.
6. Assessing communication skills, patience
These must be supported by human skills, i.e.,
and interpersonal skills
how we manage/lead people in work settings.
As managers become executives in an 7. Assessing the market orientation
organization, the technical component of their As against the above, certain criteria and
role gets reduced and human skills and descriptors are selected, and process
conceptual skills assume an integral part of their observation is made by experts to find evidence
job component. Again, the competencies of particular behaviour / traits amongst the
required for different roles may vary significantly. assessees. Just to give an example, the
following criteria and descriptors may be looked
The Assessment Centres identify the various
for (‘+’ means positive behaviour, ‘-‘ means
critical attributes, functional expertise, aptitudes
negative behaviour in an assessee):
and skills that are required in our jobs, and make
an assessment of the adequacy or otherwise Criteria for Team Work Exercise
of the same through the use of various + Presents idea sensitively to maintain harmony
structured experiences and administration of with the group.
instruments and in-basket exercises. Typically, + Builds bridges with others.
this is a tool that devises an intensive laboratory - Waits to be invited to draw out his/her ideas
to run tests on candidates for promotion/or
+ Allows others to give their views
evaluating their training needs, etc., probing their
leadership qualities, prodding their ability to - Prefers working on his/her own
innovate, palpating the managerial possibilities + Cooperates effectively
that lurk within them. - Presents ideas aggressively; dominates.
A typical assessment center test may have Criteria for Leadership
group exercises as well as individual exercises. + Acts as a focal point for the group’s ideas
Competencies that are measured could be a - Shows little influence on the group working
few or all of the following:
+ Directs the group to achieve objectives
1. Assessing the negotiating skills, ability to
- Plays a passive role.
persuade and ability to compromise.
Apparently, today's executive is required to have
2. Assessing the ability to handle uncertainty,
multiple skills beyond functional abilities to
changing office environment and stress.
succeed in Assessment centre.

COMPETENCY MAPPING
Aims to match the competency of the employee with those of the job requirement.
Competency is a combination of knowledge, skill, behaviour and personal
characteristics.
There are different tools including psychometric tests used to map competency.
A formal implementation of the system will help organisations to save on costs
and improve performance.
Competency and Performance competencies of the candidates for recruitment

and selection. The main purpose of such tests
One of the major objectives of every company
is to decide whether candidates possess
is to improve its performance every year and
knowledge, skills, attitude and ethics which
set new standards and norms. For every
match with those that the company needs in the
operation and machine there is a human being
job for which they are recruiting.
and it is the quality of the man behind the machine
or the process which determines the What is Competency?
performance of the company. In view of this, the
Competency is underlying skills, personal
performance of the company depends not on
characteristics, or motive demonstrated by
the human assets but the human asset having
various observable behaviours that contribute
right match of competencies and their levels for
to outstanding performance in a job.
performance requirements. If the right match of
Competencies exist at different levels of
competencies is available with the employees,
personality. The various levels are:
then it is their motivation, work environment and
incentives which help them to give their best Knowledge: Information that an individual
performance. Company can use goal setting, has in a particular area.
performance appraisal, incentives, career
planning, and succession planning as measures Skills: An individual’s ability to do something
to further improve the performance of the well.
employees. Behaviour: Action of a person in a given
To select the employees with right match for situation.
performing the job efficiently, companies Personal Characteristics
normally recruit people based on qualifications
and conduct interview for final selection. But the Traits: A typical way of behaving such as
effectiveness of this technique in selecting the taking initiative.
right people is not even 10%. Therefore, in order
Motive: A fundamental and often
to improve performance, the companies must
unconscious driver of thoughts and
look for better and more reliable techniques to
behaviour for example, concern for
identify the right competencies among the
excellence.
employees.
Personal characteristics, unlike knowledge and
In view of this, some companies conduct
skills, are hard to develop and it is more cost-
psychometric tests so that they can identify the
effective to select people having the desired
personality traits.

What is Competency Mapping? Emotional competencies relate to the
emotions like anxiety, jealousy, anger, fear,
Competency mapping involves the
etc.
determination of the extent to which the various
competencies related do a job are possessed Conceptual competencies relate to the
by the person. For example, the extent to which information and concepts for performance
a person is adjustable, resourceful, capable of of the job.
working efficiently under stress, capable of
HR department designs a performance
anticipating threats, finding solutions and
appraisal method to check what all
contributing in innovations. This is compared
competencies and to what extent are being
with the extent to which the various
displayed by the employee during his job. Then
competencies are required for a job. The
a comparison is made between the
comparison enables one to know the suitability
competencies that head of the functional
of a person for a job. It is also useful for setting
department was looking for and the
standards and checking the employees standing
competencies being displayed by the employee
on the various competencies’ platform and to
in that job. This provides us the missing links or
identify the training needs.
gaps which can be bridged by training.
Competency Mapping and Developmental
The degree to which these competencies are
Needs
required also matter a lot. Some competencies
The competencies required for a job may be which are extremely essential for a job can be
identified by head of that functional department stated as Core Competencies which relate to
or a team which has core knowledge and the Key Responsibility Areas (KRA) and are
experience of that area. This team or head of required to a very high degree in an individual.
the functional department tries to identify the
Just as every coin has two sides, every
skills, attitude, and behaviours required for that
methodology has certain merits and demerits.
job. Competencies may be classified into four
The drawback of this model is that the
different areas: Behavioural, Technical,
competencies required in a person performing
Emotional and Conceptual competencies.
a particular job are defined by the Head of
Behavioural competencies tell us the kind Department (HOD) who might have more
of behaviour one should have to perform a inclination towards some specific
particular job. competencies.
Technical competencies relate to the

techniques required for performing a
particular job.

ORGANISATION CULTURE
Organisation culture refers to ‘the way we do things here”.
It is the easiest thing to comprehend but most difficult to define.
It is unique and distinct for every organisation.
The Johnson and Scholes cultural web model contains six inter-related elements –
rituals and routines, stories, organisation structure, symbols, power structures and
control systems.
INTRODUCTION There are certain characteristics that have made

the organisation what it is. Each organisation’s
Every Organisation has its own distinct culture culture has its own strengths and weaknesses.
and structure.
JOHNSON AND SCHOLES CULTURAL WEB
Culture has its origin in the organisational MODEL
interaction. Culture pervades all the
relationships in the organisation and influences This model enables one to look into the elements
all its decisions. that make an Organisation’s culture.
The cultural web contains 6 inter-related
Organisational Culture is the easiest thing to elements:
comprehend and at the same time the most
difficult thing to define. This is because of the 1. Rituals and routines - are concerned with
aura of mystique that surrounds Organisational the day-to-day behaviour of people in the
Culture. organisation, e.g., the way customers are
dealt with or the existence of privileges for
DEFINITION certain staff. They are things that are taken
for granted by existing staff but have to be
Organisation Culture refers to a system of learned by new people. They often present
shared meaning held by members that significant barriers to change, if people are
distinguishes the organisation from other protective of their ‘customs’. Rituals such
organisations. Organisation culture is the key as training programmes or personnel
to much that happens (or does not happen). procedures can reinforce the perception of
Organisation Culture is the fabric of meaning in how things are done, and demonstrate to
terms of which human beings interpret their staff what behaviour is desirable and valued
experience and guide their action. by senior management
An organisation’s culture is also described as 2. Stories - within the Organisation focus upon
“the way we do things here”. It is a combination past events in the organisation and are told
of deeply felt values, beliefs and attitudes about to people both outside and inside the
how the work of the organisation ‘should’ be organisation. They communicate something
done. Cultures are acquired during periods of of the organisation’s culture. Company
success, and employees see the culture as the ‘heroes’, such as charismatic leaders of the
reason for that success. However, the real past, and mavericks can be perceptions of
reasons for success are more likely to relate to ‘normal’ behaviour.
the organisation’s markets and the relevance of
its competencies 3. Symbols - Logos, language, status symbols,
e.g., company cars, office carpets, etc., can
Organisation culture is akin to the DNA of a all provide a visible reflection of company
human organism, which is unique and specific. culture.

4. Power structures – Top management and place in the organisation will definitely give an
senior managers with the most power, are employee an idea of the culture of the
likely to have the most influence. organisation. The quicker an employee
understands the culture of the Organisation and
5. Organisational structure - Both the formal tunes his or her behaviour accordingly, the
structure (as found on the organisation chart) greater the chances of adaptability with the
and the informal structure are likely to reflect organisation.
power structures and play an important part
in influencing the core values of an CONCLUSION
organisation.
An organisation’s culture evolves over time, and
6. Control systems - the measurement and is influenced by a variety of factors. As an
reward systems used in the organisation organisation grows and develops, the
When an employee joins an organisation, he or organisation culture that originally proved so
she needs to look at these aspects to helpful may begin to get in the way. Hence the
understand the culture of the organisation. culture of an organisation must be able to tune
Interacting with various people in the itself to the changing environment.
organisation, observing the processses taking

MENTORING
It is a process of making an employee more effective in his job through developing

personal working relationship.
Coaching, counselling, providing guidance, social and emotional support are some
of the ways.
Advantages: Higher performance of employees, building a better organisational
climate, generate positive feelings of pride and satisfaction.
Institution of formal mentoring process would benefit organisations.
Background someone of less experience and status in order

to help the person to become more effective.
Every organization has its own culture as defined The Protégé is the person who is being helped
by formal and informal organization. The (otherwise termed as ‘mentee’).
‘Should’ and ‘Should nots’ in any organization
are sometimes at variance with what any Activities in Mentoring
individual has experienced before joining the
Following activities form part of the mentoring
organization. Besides this, the political climate
process:
and culture of any organization are unknown to
new recruits or new role holders. The new Coaching: Coaching enables the mentee to
recruits many times are unable to reconcile the correct performance problems and find new
dilemma between competition and ways of approaching the task. It involves
collaboration. These and many other processes imparting knowledge and skills to the protégé
are clarified through a process of mentoring, for improving the quality of output. The main
where the new recruit can approach the mentor focus is task-centred.
without the fear of putting his/her career at stake.
Counselling: Counselling addresses the
What is Mentoring? emotional problems of mentees, at home or at
work, which people may encounter affecting
Mentoring has been a recognized form of
their job performance. It aims to restore the
personal development for thousand years. Since
normal cognitive abilities in people, temporarily
most ancient experiences in mentoring are
shut by emotional disturbances. Effective
informal, considering the benefits of mentoring,
counselling needs the counsellors to have
many organizations have introduced formal
empathy, listening skills and skills in
mentoring processes in their companies.
paraphrasing so that the affected person is able
Mentoring is a process of making a person to view the problem and initiate redressal
(generally new recruits or new role holders) more providing political guidance: every organization
effective in the profession by developing has its own norms and values, its own political
personal working relationship. A mentor is structures, which manifest itself into a culture,
someone with the skills, experience and which a new entrant is ignorant of. These are
perspectives that are needed by the mostly unstated, unpublished, and yet vital, for
organization; who has a reasonable amount of the social order. One of the important functions
organizational influence; and who is willing to of the mentor is to create the awareness in the
develop a personal working relationship with mentee about these norms and values, which

govern group behaviour, the ‘dos’ and ‘don’ts’ and nurture present protégés to become able
how the power is distributed in a particular mentors in future. This in effect would result in
organization. building a new climate in the organization
founded on closer inter-personal relationship,
Providing Social and Emotional Support: The
through a network of protégés and mentors.
Mentor besides the above must provide
Thus mentoring promises organizations a higher
continuous encouragement to the mentee, as
accretion of human capital.
the latter takes on new challenges. The mentor
should create a climate where the mentee feels The advantages to mentors are many. Learning
safe to air grievances, anger and sadness before new skills, the development of the ability to see
the mentor. things in new light, recognition from peers and
superiors, loyalty and support from protégés,
For discharging the afore-mentioned activities
ability to generate positive feelings of pride,
effectively, mentor should himself be seen as
satisfaction, happiness and commitment and
an ideal role model, highly positive and loyal to
finally the capacity for higher contribution to the
the organization. He should be held in esteem.
organization and the world at large.
He should also have other traits such as
awareness of the self, strengths and Sensing this potential, many organizations have
weaknesses, comfortable relationship with set up a formal mentoring process in their
peers and seniors, patience, ability to deal with institutions. With the complexity of businesses
the feelings of people, skill to generate alternative growing at rapid pace with each passing day,
solutions besides deriving satisfaction as a organizations need to find effective ways to build
mentor. their human capital. Mentoring is one of the
potent tools for strengthening human capital and
Advantages of Mentoring
building a company with emphasis on ‘human
The organization gains through higher care’. Therefore, it pays to the organization to
performance of the protégés. It helps to tap the develop and strengthen the mentoring
latent potentials for mentoring in many of the competencies of their senior functionaries and
senior functionaries of the organization. It would create a formal structure for mentoring.

360–DEGREE TECHNIQUE
Seeks to measure the performance of employees on the job from multiple

stakeholders.
Focuses more on intrinsic qualities and strengths than on achievements.
Promotes team work and voluntary self change.
Creates an atmosphere of openness and improves inter-personal relations.
Limitations of Traditional Appraisal Methodology
Performance appraisal has long been regarded The methodology used involves collecting
as one of the most critical area of human responses through standard assessment forms
resource management. Most of the appraisal about a manager from his bosses, peers and
systems are designed to evaluate past subordinates. They cover several parameters
performance and stress less on future of performance as well as behaviour. Indeed
requirements such as employees career nothing excluded from the ambit – even values,
aspirations, potential latent skills identification, ethos, fairness and balance courtesy.
career planning training & development
The forms are designed to measure subject’s
requirements to take up higher assignments.
rating on three parameters – strengths,
The traditional 90-degree performance appraisal weakness and improvement required. Each
(done by the immediate boss) judges the manager is assessed by a minimum of nine
outcome of an appraisee’s efforts but ignores persons-at least two of them being his bosses,
the road taken. He focuses on achievements two or three of them peers, and two or three of
rather than the intrinsic qualities and strengths. them subordinates. Data collected is analyzed
and graphed by computer. The responses are
360-degree Feedback
presented collectively to the appraiser.
The 360-degree feedback is understood as Depending on the interpretations of the data and
systematic collection of performance data on findings, counselling sessions are held to solve
an individual or group, derived from a number of the specific problem and the weaknesses as
stakeholders-the stakeholders being the identified by 360-degree appraisal. This is a
immediate supervisors, team members, powerful tool for self-development especially at
customers, peers and self. In fact, anyone who the senior level, which is where one tends to
has useful information on ‘how an employee get isolated.
does the job’ may be one of the appraisers. The
Benefits
personality of each manager-his talents,
behavioural traits, values, ethical standards, If 360-degree appraisal is done in a systematic
tempers, loyalties-is to be scanned, sorted out manner, it will contribute to motivation of
and stethoscoped. Corporations like General employees, clarify role of employees, provide
Electric India (GE), Reliance Industries Ltd. scope to express individual views and opinions,
(RIL), Crompton Greaves, Godrej Soaps, Wipro, recognize talents, placement requirements,
Infosys, Thermax and Thomas Cook are training needs and career planning. The merits
reportedly using this to know everything about of the technique are:
their managers.
The organization gains from heightened
self-awareness of the top managers. It contain those items only that assessors are
reveals the strengths and weakness of their capable of observing and are competent to
managing style. assess.
The gap between self-assessment and the Assessors should be trained in what and
views of one’s colleagues is reduced. how to observe.
Teamwork develops once peer group Organizations considering 360-degree

assessment is included in the methodology. feedback should start small and move
slowly.
Empowerment is facilitated.
360-degree feedback works best in
Facts about organizational culture and
organizations where the environment is
ambience are brought to light.
open and participatory, where giving, and
Inflexible managers are forced to mitigate receiving feedback is seen as valuable
self-change. source of information and development.
360-degree feedback technique holds brilliant Conclusion

promises provided it is used with utmost care
The 360-degree feedback provides a broader
keeping in view the following guidelines:
perspective about employees’ strengths and
The 360-degree assessment programme weaknesses. It facilitates greater self-
will be effective only when the top development to employees. It enables an
management backs it with the assurance employee to compare his or her perceptions
to managers that the exercise will be used about self with the perceptions of the assessors.
exclusively for individual development and Besides, 360-degree feedback creates an
benefit only. atmosphere of more openness, improved inter-
personal relations and teamwork. It makes
System should be introduced only after a employees feel more accountable to the internal
thorough study of the organizational climate and external customers. However, there are
and the requirements of the system in a drawbacks associated with 360-degree
given set-up. feedback. Receiving feedback on performance
People should be prepared mentally to from multiple sources can be intimidating.
adapt to the system. Their doubts must be Further, selecting the assessors, designing
clarified. There should be full transparency questionnaires and analyzing data may be
about its mechanism. cumbersome and time consuming tasks. In
addition, there might be difficulties in getting
Employees need to believe that the data is objective feedback due to personal differences
unbiased and objective. and biases. Notwithstanding, more and more
number of companies are using 360-degree
360-degree feedback system should not
feedback. It is essential that the organization
replace the existing appraisal system of the
should follow the above-mentioned guidelines
organization but it should be done as an
and create a conducive environment by
addition to that system.
emphasizing the positive impact of the technique
Assessors should encourage open on employees’ performance and development.
discussions on the feedback.
360-degree assessment form should

EMOTIONAL INTELLIGENCE
Emotional Intelligence is the capacity to recognise one’s own feelings and those
of others.
It helps to motivate oneself, manage emotions of self and others; contribute to
effective performance in the job and developing satisfying relationship in life.
Most leaders succeed because of EI.
Four essential capabilities: emotional self awareness; self-management; social
awareness and social skill.
Emotional Intelligence is the key ingredient which Accurate self-assessment: a realistic

distinguishes star performers from performers. evaluation of your strengths and limitations.
It is one of the differentiating factors for success
Self-confidence: a strong and positive sense
and a study of 15 global companies attributes
of self worth.
85 to 90% of leadership success to emotional
intelligence. Emotional competence is twice as Self-management
important as cognitive abilities for all jobs, for all
roles. Intelligent Quotient is only a threshold Self-control: the ability to keep disruptive
competence, but it is emotional intelligence that emotions and impulses under control.
distinguishes star performers from others. Trustworthiness: a consistent display of
Emotional intelligence is the capacity for honesty and integrity.
recognising our own feeling and those of others, Conscientiousness: the ability to manage
for motivating ourselves, and for managing yourself and your responsibilities.
emotions well in ourselves and others. It
contributes to effective performance at work, Adaptability: skill at adjusting to changing
outstanding leadership, and deeply satisfying situations and overcoming obstacles.
relationships in life.
Achievement orientation: the drive to meet
Building one’s emotional intelligence cannot and an internal standard of excellence.
will not happen without sincere desire and
● Initiative: a readiness to seize opportunities.
concerted efforts.
Social Awareness
Daniel Goleman, author of the book Emotional
Intelligence describes four fundamental Empathy: skill at sensing other people’s
capabilities of people who are high in emotional emotions, understanding their perspective,
intelligence. and taking an active interest in their
concerns.
Self-Awareness
Organisational awareness: the ability to
Emotional Self-awareness
read the currents of organisational life, build
The ability to read and understand one’s decision networks, and navigate politics.
emotions as well as their impact on work
Service orientation: the ability to recognise
performance, relationships, and the like.
and meet customers’ needs.

Social Skills learns empathy – the awareness of others'
emotions. The highest level of emotional
Visionary leadership: the ability to take
awareness is Interactivity, where one is sensitive
charge and inspire with a grand vision.
to the ebb and flow of emotions around one.
Influence: the ability to wield a range of
Emotional awareness is only the first step
persuasive tactics.
towards emotional literacy, which is a
Developing others: the propensity to bolster cornerstone of Emotional intelligence. Self
the abilities of others through feedback and management or the ability to manage one’s
guidance. emotions coupled with conscientiousness,
adaptability and initiative is also essential for
Communication: skill at listening and at Emotional Intelligence.
sending clear, convincing and well tuned
messages. Emotional regulation aims at examining the
values, beliefs and assumptions that are
Change catalyst: proficiency in initiating new responsible for each emotion, and trying to find
ideas and leading people in a new direction. a way to manage the emotion, so that one can
Conflict management: the ability to de- be more responsible for one's emotions.
escalate disagreements and encourage The mindset for a better Emotional Quotient
resolutions. (EQ) would be to remember that all feelings are
Building bonds: proficiency at cultivating and telling us something, there is no failure, only
maintaining a web of relationships. feedback; the map (of emotional journey and
experiences) is not the same for all of us; people
Team work and collaboration: competence have within them all the resources they need,
at promoting cooperation and building and mind and body are part of the same system.
teams.
Thus emotional intelligence, which refers to the
All these four capabilities and their capacity for recognising our own feelings and
competencies are interlinked and those of others, for motivating ourselves, and
interdependent. for managing emotions well in ourselves and in
our relationships can be learnt, but with
As one becomes more aware emotionally, one
commitment, diligence and practice.
is able to see what causes these emotions and

STRESS MANAGEMENT
Stress is an integral part of life.
We need to manage our abnormal response to stress that cause disease and disability.
We have to identify the stressors and symptoms of stress.
There are three levels on which stress management techniques are focused: BODY,
MIND and BEHAVIOUR.
Exercise, diet and relaxation constitute our response at body level.
Positive thinking and attitude and prayer are coping techniques at mind level.
Self monitoring, change of life style, laughter and balanced life activities are our strategies
at behaviour level.
Stress is the single most important growth • Family stressors on account of our
related stimulus for all living organisms. If there interaction with family members
is no stress, there is no growth and, • Social stressors involve our interaction with
consequently, there would be death soon. Stress people
is an integral part of life, and we cannot get rid • Change stressors result when we alter
of stress. anything important in life.
• Chemical stressors like abuse of drugs,
It is our abnormal response to stress that caffeine, nicotine, pesticides and
causes disease and disability. This is better sweeteners in food.
called ‘distress’. Whereas stress is good and • Work stressors – the tensions and
welcome, distress is the killer that needs to be pressure we experience in work place.
managed well. Up to a certain point, increased • Decision stressors arise on account of
stress improves performance. After a critical availability of more alternatives and less
level, our ability to perform effectively declines decision time.
rapidly with increasing stress. • Commuting stressors caused by long
Psychologists have defined stress as “demands distance to work and facing rush hour traffic.
of life”. Technically these demands of life are • Phobic stressors caused by exaggerated
called stressors and the actual wear and tear of fears
our body for fulfillment of the same is stress. • Physical stressors arise when we
overextend ourselves—lack of sleep,
Stress can also be defined as an adaptive malnutrious diet, injury.
response to an external situation that disturbs a • Disease and pain stressors as a result of
person’s healthy mental and physical well being. long- or short-term disorders and also old
aches and pains of new and old injuries.
Dr. Hans Selye has classified reactions to stress • Environmental stressors such as cramped
as the general adaptation syndrome (GAS). GAS offices, burning heat of summer or chilling
has three stages: cold of winter.
• Alarm Reaction: The stressor activates the COPING WITH STRESS
body to prepare for fight or flight.
Three important stepping stones in learning to
• Resistance Stage: The sign of alarm cope with stress are:
reaction are diminished or non-existent. • Admit the existence of negative attitudes and
• Exhaustion Stage: The exposure to a destructive behaviour patterns.
stressor has nearly depleted the organism’s • Believe that you can change your potentially
adaptive energy. destructive attitudes and behaviours.
WHERE DOES STRESS COME FROM? • Work out positive steps, put them into
It is important to identify the different categories practice, accept some failings, but persevere
of stressors to strengthen our coping and give yourself a pat in the back for every
mechanism: success you have.
• Emotional stressors like fear and anxiety
SYMPTOMS OF STRESS
Physical Psychological Behavioural
Tension headaches Nervousness Reduced performance
Migraine Anxiety Lower productivity
Sleep disorder Irritability/ anger Mistrust or hostility
towards associates
Fatigue Depression Missing deadlines
Overeating Losing sense of humour Shirking responsibilities
Loss of appetite Feeling withdrawn Minor accidents
Constipation/diarrhoea Feeling that you do not want Increased errors
to do things that you have to do
Low back pain Feeling emotionally drained Indecisive use of drugs
Allergy problems Difficulty in remembering Excessive use of drugs
Skin rashes Excessive use of alcohol
Aching neck/shoulders Excessive use of tobacco
Ulcers
There are three levels on which stress managed II. MIND:

techniques are focussed: a) Positive thinking and attitude: We
I. BODY can use the power of mind for self
a) Exercise: hypnosis and imagery training. We can
• Seek medical advice beforehand replace our negative thoughts with
positive thoughts and this in turn will
• Maintain regularity influence our thinking.
b) Diet: b) Prayer: Prayer simply means passing on
• Have a balanced diet and eat in our worries and anxieties to the Almighty
moderation or Mother Nature. Scientific studies have
• Intake of salt, sugar, caffeine, alcohol, shown that believers have significantly
etc., should be in moderation lower rates of stress related ailments.
• Avoid tobacco products
• Drink at least 8-10 glasses of water III. BEHAVIOUR
every day—it helps in elimination of • Self Monitoring: Take a few minutes for
toxins from our body yourself in the evening/night to analyse
• Take dinner at least two hours before stressful situations of the day and plan
sleeping corrective action for the future.
• Drink the food and eat the liquid— • Change lifestyle: Getting up early,
masticate properly what you eat and regularity of exercise, food habits, time
sip the liquids slowly. management, reasonable working
c) Relaxation: hours, etc., and take corrective action.
• Breathing exercise—breathe slowly • Laughter: Develop a habit of laughing at
using diaphragm. This makes the yourself by saying “Do not take this
whole lung expand and body cells person seriously”. A good laugh relaxes
have better oxygenation. muscles, lowers blood pressures,
• Shavasana or deep muscle suppresses stress related hormones
relaxation: This Yoga posture and enhances the immune system.
provides complete relaxation in 15- • Balanced life activities: Avoid building
20 minutes. your life around one person or one thing.
• Meditation: Meditation is silence that Live a balanced life, have many sources
is golden, and listening to our sane of happiness.
inner voice.

EMPOWERMENT
Empowerment is the authority to make decisions within one’s area of responsibility without
first having to get approval from someone else.
Empowerment is a Motivational tool in the hands of the organisation.
It enables employees to use their talents and capabilities.
Empowerment has become a buzzword in the decision making, problem solving, goal
late 1990s. Organisations see it as a competitive setting, etc.
edge and have started using this as a Motivation • Recognize that their employees are
tool. resourceful and have vast untapped capacity
VARIOUS DEFINITIONS OF EMPOWERMENT and potential
(a) Empowerment has been defined as • Treat their employees as valued members
recognising and releasing into the of the Organisation
Organisation the power that people have in Some of the misconceptions about
their wealth of useful knowledge and internal empowerment are:
motivation. • It results in loss of control
(b) It is also the authority to make decisions • People do not want power; they want to be
within one’s area of responsibility without first led
having to get approval from someone else. • Power is a fixed quantity; if you give it away,
(c) It is the process of sharing power and you lose it
providing an enabling environment in order • It always leads to beneficial results
to encourage employees to take initiative
and make decisions to achieve organisational Empowerment leads to:
and individual goals. • Respect for team members
NEED FOR EMPOWERMENT • Open Communication
• Opportunities for learning new
As people in an Organisation mature, the need
arises for them to use their talents and competencies/skills
capabilities. The competencies or skills required • Opportunities for self development
also undergo change as Organisations prepare • Autonomy
themselves for facing the competition.
Consequences of empowerment:
Empowering people may seem scary but with
trust in oneself and in one’s people it can be • Organisational commitment
overcome. Every employee needs to feel that • Work environment satisfaction
he or she is very important to the Organisation. • Role satisfaction
Empowerment is one such way.
• Job involvement
According to David McClelland, every employee
CONCLUSION:
has three basic motivating needs - Need for
Power, Need for Achievement and Need for Empowerment does not mean that employees
Affiliation. The Need for Achievement is due to can “break all the rules” with impunity nor that
the desire to do something better or more leaders abdicate their responsibilities.
efficiently. The focus is on personal Empowerment is a movement that is probably
improvement. People with high “Need for irreversible in organisational life. For higher
Achievement” will look upon Empowerment as productivity, Organisations need to find more
a great Motivational tool. and more areas in which they can empower their
Empowerment works when Organisations employees. In the end, empowerment must be
seen by the employees as something which
• Understand that the more power you give
helps them to satisfy their “Need for
the more you have
achievement”. It also must be seen as a tool
• Have faith in their employees, i.e., they which improves their quality of work life.
perceive their employees as capable in
SERVICE QUALITY MANAGEMENT
Two well-known approaches to improvement of quality are Bottom-up approach and

Top-down approach.
The quality service delivery results in customer satisfaction and their retention.
Quality is a winning attitude and it always needs improvement.
Quality is difficult to define because it is highly items also. This should be percolated down to
dependent upon customer perception. The task fulfill the commitment.
is made more complicated in the case of
services industries because of the intangible The quality initiatives have no chance of success
nature of services and the variation in services without the top management’s blessings.
offered to different customers. Changes in quality occur only after changes in
attitudes and behaviour take place. The new
The American Society for Quality Control has approach to quality improvement comprises not
defined quality as “the totality of features and of rejecting defective output and presenting only
characteristics of a product or a service that bear good quality of products and services to the
on its ability to satisfy stated or implied needs’ customers, but also not producing defective
e.g. banking services is not only for selling of goods or services at all. Once a customer
products and services to the customers but also rejects a product it is always a bad product
the total environment attached to it like how much whatever superior quality it may have.
value is added to the products and services
including the physical ambience and the quality The quality service delivery results in customer
of the products and services. satisfaction and their retention as it reinforces
the perception that the value of the service
The well-known approaches to improvement of received is greater than the price paid for it. Better
quality are: quality leads to productivity and increases the
profitability. The mechanism acts as under:
(a) Bottom-up approach
First step improvement:
(b) Top-down approach
(a) Image/perception of bank goes up
In the case of bottom-up approach, the
implementation of any policy begins from the (b) Volumes are built up because of the service/
lowest level of employees. It slowly transmits product preference
itself upwards. For example, card punching or
swiping of cards at entry or exit from workplace (c) Inspection cost is less due to improved built
may begin with the lowest cadre employee and in quality
later adopted by higher levels of management (d) Repetition of tasks is reduced by providing
to give a semblance of fairness. better quality service the very first time itself.
In top-down approach, the top management (e) Complaints are considerably reduced about
makes an initial and definitive commitment to maintenance of quality.
policy implementation and the approach is
percolated down to all levels of employees. Second step improvement:
For example, top management commits to the (a) Better price can be charged or price yield is
consumer that the bank while considering better
housing loan proposal not only takes care of
construction and value of land but also (b) Economy of scales accrue due to higher
considers the cost of consumer or beautification volumes

(c) Costs of cross selling are reduced (a) Lack of right type of employees or their
training in service delivery
(d) Costs of networking are reduced as word of
mouth publicity increases. (b) Lack of empowerment of the employees
(e) Adherence to quality norms and procedures (c) Lack of training to the franchisee’s staff
ensures the high quality of the system and
reduction in non-conformance. About 35% (d) Insufficient customer education especially
of the company’s costs are due to faults and when banks are handing over their platform
their corrections. for customers’ use.
Final results: Profitability improvement Gap 4: Mismatch between promises and

performance: In this era of competition there
Quality improvement is not a win/lose strategy is a great temptation to promise the world in
where we lose a lot of costs in order to win more order to win over customers. However, it may
profitability but a win/win strategy where be either physically impossible or financially
permanent changes are made to ensure that unviable to provide all that was promised. This
the high quality is built in to the system. results in customer disappointment. The typical
reasons for this kind of failure are:
Gap Model of Service Quality Delivery
(a) Unrealistic communication to customers
Gap 1: Not knowing what customers expect:
Gap between perceived and expected levels of (b) Overpromising through advertisement or
service quality delivery. personal selling
Reasons are: (c) Lack of internal communications.
(a) No direct interaction with customers Delivery of High Quality Service: High-quality
service delivery is not just the function of the
(b) Unwillingness to ask customers about front-end employees but of all the members of
expectations the organization. The factors that could play a
(c) Unpreparedness to address the crucial role in the quality of service delivery are
expectations many. A few important factors amongst them
are:
(d) Lack of market segmentation to understand
the needs of each segment (a) Human factor: To ensure that ‘I shall not
deliver substandard service nor shall I let
Gap 2: Inability to set the right type of anybody else deliver substandard service’
standards: The customers have service
standard expectations that may be either higher (b) Systems support: The computerized system
or lower that the standards set by the Banks. in bank has to ensure accurate and timely
delivery of the customer’s request
Reasons are:
(c) Organisational factor: Organisation with
(a) Absence of customer-driven standards of mighty structure has very poor interaction
service delivery between the front-end employees and the
higher top officials within the organization.
(b) Absence of formal quality –control goals
The interaction between the supervisors and
(c) Vague or undefined service standards the front-end service delivery employees is
very important.
Gap 3: Not delivering to service standards:
This is the most common type of failures brought (d) Feedback: Organisations need to encourage
about by day to day difficulties in service delivery. feedback from customers and every employee
The common causes for this failure are: including the front-end employees as a part of
the quality monitoring system.

Employees have to be told that their opinion is (vi) Tangibles: Opinion on physical facilities,
valuable for the organizational success. equipment, environment, etc.
(e) Prevention of Customer defection. (vii)Reliability: Whether delivery of promised
service can be assured.
While obtaining feedback from the customers,
the banks can take care of the following (viii)Responsiveness: Whether providers are
dimensions to specifically evaluate service willing to help and provide prompt service
quality:
(ix) Competence: Whether service providers
(i)Credibility: To ensure trustworthiness, are in possession of skills and knowledge to
credibility and honesty of the service provider. do the job.
(ii) Security: To ensure safety and freedom from (x) Courtesy: To examine politeness, respect,
risk consideration and friendliness of the contact
person.
(iii) Access: To ascertain approachability and
ease of contact Quality is a winning attitude and it always needs
improvement. The improvement is never ending
(iv) Communication: Listening to customers and and calls for review according to market
keeping them informed scenario.
(v) Understanding the customer: Making the
effort to know the customers and their needs

NICHE MARKET
A niche market is a group of potential customers who share common characteristics
that make them receptive to a particular produce or service.
Launching a product into a niche market is far cheaper than launching a mass-
market product.
The Internet has features that make it ideal for niche marketing.
A niche market is a group of potential custom- enough, and that is not owned by one estab-
ers who share common characteristics that lished vendor already.
make them receptive to a particular produce or Three Steps of Niche Market
service.
First off, it’s too expensive and usually a very
A niche market is a focused, targeted portion of difficult task to try and develop one’s own niche.
a market. By definition, a business that focuses It is better to identify and plan on addressing an
on a niche market is addressing a need for a existing niche that has good potential for using
product or service that is not being addressed unique product or services.
by mainstream providers. One can think of a
For example, it is assumed that one has invented
niche market as a narrowly defined group of
a fantastic sports drink and want to develop the
potential customers.
market for his product.
Launching a product into a niche market is far
Here are the first three steps to find niche:
cheaper than launching a mass-market product.
The potential customers are easier to identify 1. Assess self and determine what areas of
and to target. Niche markets often develop from life are most interested (in the product) and
mass markets and mass-market manufacturers how it will interface with product.
sometimes choose to launch niche product as 2. Assess potential market to determine if
well. Conversely, what are expected to be niche there is an area that could use services.
markets sometimes develop into mass markets. An easy way to make this determination is
When Apple came up with the PC in the early just to talk to the people in targeted
1980s, for instance, it did not expect it to be- community. Another is to join groups of
come a mass-market product. Yet, it did, and people who have similar interests such as
out of that mass market there ultimately emerged health clubs, little league boosters, and
some niches, such as the educational PC mar- soccer clubs or at car racing activities.
ket. 3. Once a promising niche is found, then it
The trouble with niche markets that do not de- needs to be determined whether the same
velop into mass markets is that they soon reach can be comfortable with the anticipated
their maximum size. A niche, which can be so income from it.
helpful in getting a product off the ground, can Conclusion
soon become a straitjacket. Manufacturers have Some have seen niche marketing as a phase in
to find another niche product, or another market a 20th - century journey from mass marketing to
in which to sell their existing product. one-to-one marketing. The 50s and 60s were
The Internet has features that make it ideal for the heyday of mass marketing. There was one
niche marketing. Through its mailing lists and kind of Coca-Cola soft drink for the thirsty, one
newsgroups it gathers electronically in one spot kind of Holiday Inn hotel for the traveler. The 70s
of cyberspace precisely those groups of cus- became a decade segmentation and line exten-
tomers with similar interests that are a niche sion. It was followed in the early 80s by intensi-
marketer’s dream. Mailing lists and newsgroups fied niche marketing that sliced market into
focus on specific topics. In each discussion smaller and smaller groups of consumers. The
group there can be as many as regular readers whole world has started moving from mass mar-
with a special interest in that topic. keting to segmented marketing to niche market-
The trick to capitalizing on a niche market is to ing to tomorrow’s world of one to one marketing
find or develop a market niche that has custom- through Internet in the 21st Century.
ers who are accessible, that is growing fast
SIX SIGMA : FOR QUALITY
It is a quality tool.
It denotes tolerance of only 3.4 defects in 10 lakh operations.
Companies like Motorola and G.E have implemented this with success
Helps in customer satisfaction and retention, elimination of waste and reduction in
cost
In our Bank, CAG has successfully implemented it for issue of LC.
What is Six Sigma everyone of the business processes from

Sigma is a mathematical term that represents inventing and commercializing a new product
a measure of variation around the mean. It helps to billing and collecting after they deliver the
to determine how good or bad the performance product. Six Sigma improved Allied Signal’s
of a process is. It helps to measure how many products, their price, customer satisfaction and
mistakes a company makes in doing whatever cash flow significantly.
it does, from manufacturing steel to delivering In 1995 GE’s operating margin was about 13.5
Pizza at the customers’ doorstep. per cent. By 1998, after adopting Six Sigma, it
If a company works at one sigma level, it will was up to 16.7 per cent, a number Welch
have 7,00,000 defects out of 10,00,000, which previously thought was impossible. This
means that it is doing things right 30% of the increase represented a $600 million bonus to
time. Similarly, the defect levels for other sigma the bottom line. Today, it is reported that many
would be as under: of the Fortune 500 companies have adopted Six
Sigma.
SIGMA Defects Defects
Per Million Percentage WHY ADOPT SIX SIGMA?
To eliminate errors for achieving Customer
One 7,00,000 70%
Satisfaction and retention: Six Sigma helps
Two 3,00,000 30% in measuring the level of error in order to
Three 67,000 6.7% perfect the processes. So it pays to adopt
Four 6,000 0.6% Six Sigma to retain customers and deliver
Five 230 0.0002% customer satisfaction.
To improve the bottom line: By focusing on
Six 3.4 0.000034%
wastes and redundancies, Six Sigma helps
At Six Sigma level, there will be 3.4 defects
to enhance profits of the firm.
(called DPMO - Defects Per Million
To eliminate waste: Six Sigma helps to trace
Operations) out of 1 million parts produced.
wasteful activities in order to eliminate them.
Six Sigma therefore implies being right
In Six Sigma, quality improvement is a means
almost 100% of the time.
to an end and not an end itself. The goal of Six
Six Sigma as a Quality tool was first introduced
Sigma is not simply to improve quality for quality
by Motorola in 1988 with tremendous success.
sake, but to make customers happier and add
Later the concept was taken up by Jack Welch,
money to the bottom line. If we improve quality
the CEO of General Electric, who got the idea
by losing money without satisfying or adding
from Lawrence Bossidy, the former CEO of
value to customers, we are missing the point.
Allied Signal, a company with 70,000 employees
Thus the main thrust of Six Sigma is to
making fibres, plastics and aerospace and
reduce errors and waste in every kind of
automotive parts. Bossidy applied Six Sigma to
business endeavour to please customers
and fatten the bottom line. Six Sigma aims defects. In this step, benchmarking may
to give customers excellent products and also be useful. Benchmarking is essentially
excellent services at an acceptable price. finding out how our competitors perform in
Where Can It be Applied? this area in order to set our standards
against those benchmarks. During this
Six Sigma can be used in the service industry,
phase, we need to identify processes which
manufacturing, operations- everything from
are ‘critical to quality’ (CTQ)- that is those
accounts receivables to automobile spare parts,
that have the most impact on the outcome
from software to hardware.
in order to work on them.
How to Go About It?
Analyse: This is done to find out how well
Idea Generation
or poorly the processes are working
Find out what the customer wants compared with what is possible and with
Take one problem at a time what the competitors are doing. This would
Golden Rule: Pick the problem that gives the help us to know the maximum results
most trouble, the one that is costing the possible if everything is perfect and also
company most, the one that is making how far our company is falling short. If the
customers unhappy- the one that will reward us gap is not great, we may not stand to gain
the most if we can fix it. much and hence can move to some other
problem. In this phase, we need to raise
Getting Started- The Five Steps (DMAIC
questions such as why are the errors
Cycle)
committed and how to fix them. If we can
Find out the number: It is important to know
answer when, where and how and how
where we stand and where we want to go. For
often the defects occur it would facilitate us
this, we need to define our problems in numbers,
in remedying the problem.
as other methods are subjective and hence
Improve: Having identified the processes
impossible to measure performances and
achievements. Numbers bring clarity. To cite an ‘critical to quality’ and the defects in it, we
example, if we wish to improve our despatch have to implement the changes which will
processes, we need to define on how many improve performance.
occasions our letters are delivered wrongly. Control: Like all management processes,
Define the problem : Problem definition it is important to measure the actual
is the biggest challenge in any problem performance against the expected in order
solving effort. Wrong and incomplete to implement corrective action when there
definition of the problem results in wastage is a deviation.
of money and effort. The more accurately Experience in Service Industry
we define the problem, the more precise In the Services sector, some insurance
will be our target, the better are the chances companies such as MetLife and non-banking
of hitting the bull’s eye. finance companies in the USA have very
Measure: The next step is measurement. successfully achieved Six Sigma status. In our
Unless the problem is measurable it would Bank, CAG, Mumbai has successfully
be difficult to quantify and much more implemented Six Sigma for issue of Letter of
difficult to effectively implement change Credit. Since customer expectation and
initiatives. While doing this, we need to competition is intensifying every passing day
measure as to how many opportunities for many service companies are exploring new
defects the current process presents. This ways to enhance their service quality. Six Sigma
would help us to adopt a new process, is one of the potent tools in the hands of
which would not lend scope for congenital organisations in this mission.

TOTAL QUALITY MANAGEMENT (TQM)
TQM means ensuring error free functions all around in the organization
It aims to continually improve quality through employee and management
participation.
It attempts to increase productivity through building teams.
The focus of TQM is to satisfy the needs and expectations of customers
Zero defects, Kaizen (continuous improvement), benchmarking are its key
approaches
The Management gurus in the 1970s and 1980s be turned on. It is an evolutionary process of
were engaged with the theme of profit trust and feedback which develops over time.
maximisation which was seen as the main Continuous process improvement means
agenda of an enterprise. However during 1990s, accepting small, incremental gains as a step in
the focus has shifted to customers and frontline the right direction towards quality. It recognises
employees are expanding their reach into service that substantial gains can be achieved by the
management and service quality resulting in the accumulation of many seemingly minor
growth of knowledge about TOTAL QUALITY improvements whose synergies yield
MANAGEMENT (TQM). The concept of TQM is tremendous gains over the long run. Finally TQM
increasingly recommended as the means of involves teams. The employees are aligned with
satisfying the needs and expectations of their the organisation’s goals for improvement. This
customers. This management philosophy of personal commitment is achieved in exchange
‘tireless striving towards perfection’ is gaining for individual and team rewards, recognition and
wide acceptance as evidenced by the explosion job security.
of published material on the topic. In developed
The sum total of an error-free function all round
countries, the interest in quality extends to every
— knowledge of the work, motivation,
competitive business and industry. To stay
productivity, rationalism in work place, goal-
ahead of the competition, the organisations sell
oriented work, quality assessment, functional
quality as a value-added service introducing
assessment — is Total Quality Management.
revolutionary ideas into a very traditional
business. TQM is a science and not a witchcraft. Nothing
can happen out of the blue. A set of methods
TQM DEFINED
systematically applied for a period of time which
TQM is a co-operative form of doing business are properly planned, done, checked and acted
that relies on talents and capabilities of both upon will eventually result in total quality control
labour and management to continually improve circle. Improvements from the present
quality and productivity using teams. Embodied standards, a positive and perfect frame of mind
in this definition are three main ingredients and ‘do it right at the first time’ approach would
necessary for TQM to flourish in an organisation: culminate in full quality culture and in turn full
a. Participative management customer satisfaction.
b. Continuous process improvement and
ESSENTIALS OF TQM
c. Use of teams
The importance of management:
Participative management comes about by
Commitment of managers at all levels is
practicing TQM. Unlike a switch, it cannot simply
essential for sustained improvement.
The involvement, commitment and expectations in customers. It is the
responsibility of everybody: When we talk responsibility of the service provider to
of everybody being involved, we mean the educate the public so that the customer
customers, employees, investors, all of does not have unrealistic demands and
whom can affect quality. expectations of the service.
Quality in all processes: Processes cut Recovery: Recovery means acting quickly
across departments and the right quality when the customer is not satisfied by, for
depends on the right relations between example,
departments and organisation.
— recognising the customer’s perception
Quality as strategy: This means that the and apologising,
organisation must recognise the — giving the customer a reasonable
importance of quality and evolve a strategy explanation for what had occurred,
for improving quality. The quality strategy
— compensating the customer for the
should be part of the business strategy in
inconvenience,
the market.
— ensuring that the problem does not occur
Focus on prevention rather than again.
inspection: Instead, it is a matter of
preventing poor quality at the earliest point. Benchmarking: Benchmarking is
comparing oneself with the standards of the
Quality by design: Old services need to
best in a particular field though the
be redesigned with the customer’s needs
comparison need not be with a competitor
overriding back office needs. Service
or even with an organisation in the same
design is a way of avoiding inbuilt faults in
line of business.
the system from the start.
CONCLUSION
Continuous improvement - ‘Kaizen’
approach: The Japanese practice the The TQM approach addresses tough issues and
concept of KAIZEN widely which means describes costs and rewards of implementing
“ON-GOING IMPROVEMENT” involving the change process. TQM philosophy creates
every one including management and an opportunity which does not require in-depth
workers. Kaizen stresses the value of cost justification to convince the rank and file. It
progress on a continuous basis. is a challenging blueprint for corporate-wide
change.
Zero defects: It means doing the job right
at the first time. Zero defects are in relation In order to be effective and successful, the
to the specifications laid down and concept of Total Quality Management has to be
grounded in the customers’ needs. The applied throughout — top to bottom, vertically,
concept originated in manufacturing, but is horizontally, functional and cross functional —
now a key part of TQM for services also. just with one aim that is total customer
satisfaction. The focus should be on customer
Meeting the needs of target customers:
through management commitment, total
This means adjusting the services to the
participation and systematic analysis. Total
requirements, needs and expectations of
Quality Management is not a programme, it is a
identified special groups of customers
continuous process — never ending. The
thereby avoiding dissatisfied consumers. In
systematic methods form the architecture that
other words, marketing should be oriented
links quality to customer satisfaction.
to avoid creating wrong and often excessive

BENCHMARKING
It means observing Best Practices in competitors or companies in other industries

in some activity, function or processes and comparing one’s own performance to
theirs.
In effect, it implies setting benchmarks for excellence and working towards it.
Normally the measurement is done along three components - Products/Services,
Process/Procedure and People.
Being externally focused, Benchmarking leads to setting higher standards.
Today most organisations operate in a business products and services, business processes and
climate in which uncertainty, risk and complexity procedures and people.
in the external environment are becoming
This brings about changes that lead to quantum
fundamental facts of life. Pressures of
and continuous improvements in products,
international competition and market
processes and services that result in total
globalisation are such that organisations
customer satisfaction and competitive
intending to become corporate leaders should
advantage. The strategy consultants McKinsey
aim to be the best in class in the key areas that
& Co viewed benchmarking as a skill, an attitude
sustain competitive advantage. The market
and a practice that ensures an organisation
place is rapidly changing and consumer’s
always has its sights set on excellence, not
expectations continue to rise. Customers are
merely on improvement.
becoming more informed and more demanding
of their suppliers. Benchmarking involves observing competitors
or companies in other industries that exemplify
To continue to succeed, companies must focus
best practice in some activity, function or
increasingly on product and service
process and then comparing one’s own
development and on consumer and market
performance to theirs. This externally oriented
research. This requires the ability to focus
approach makes people aware of possible
externally, in order to compare the firm’s
improvements needed; beyond what they would
strengths and weaknesses in meeting
have thought possible. In contrast, internal
customer’s expectations relative to the best
yardsticks that measure current performance
performers. It also requires targeting in weak
in relation to prior period results, current budget,
areas within the organisation for specific
or the results of the other units within the
improvement in activities. Benchmarking
company rarely have such an eye-opening
enables the organisation to enhance its
effect. Moreover, these internally focussed
competitive advantage by learning from practice
comparisons have the disadvantage of breeding
of others internally and externally, at strategic,
complacency through a false sense of security
operational or business management level.
and of stirring up more energy for intramural
Benchmarking is a continuous management rivalry than for competition in the market place.
process that helps firms to identify the
There are four types of benchmarking activity
benchmark and to use that knowledge in
when seen from the perspective of
designing a practical plan to achieve superiority
organisations/divisions in relation to whom the
in the market place. The measurement of
benchmarking is done. They are, internal,
relative performance takes place along the three
functional, competitive and generic.
components of a total quality programme-
An effective benchmarking process has the Focus on the Bottom Line
following six steps:
A successful approach to benchmarking
Determine the key performance areas to be involves a clear focus on the business and
benchmarked. They may include product bottom line and continuing emphasis on being
and services, customers, business externally, rather than internally, focused.
processes in all departments and the Experts cite the following keys to successful
organisation, business culture and the implementation of benchmarking initiatives.
calibre and training of employees.
Commitment to the aims and the process
Identify the most relevant competitors and throughout the organisation.
best-in-class companies.
Involving the people who will make the
Set the key standards and variables to changes.
measure
Understanding customer needs and own
Measure regularly and objectively internal business processes.
Develop an action plan to gain or maintain Focusing on the processes first and the
superiority. metrics second.
Specify programmes and actions to close Identification of the right performance

the gap, implement and monitor ongoing variables to benchmark.
performance.
Taking small steps at a time by focusing on
In the service industry environment critical a few key processes initially.
business processes are similar and capable of
Making the measurements objective and
being benchmarked in the same way as in
truly comparable.
manufacturing environments. Key operational
issues which have been identified in service are: Being honest in assessment, in sharing
productivity improvement, standardisation information and in providing feedback.
versus customization, batch versus unit
processing, job design, managing queues and
capacity management.

ISO 9001
ISO 9001 is an international quality standard and adopted first in 1987.
The standard aims to promote quality and continual improvement in organizations.
The certification is issued by Registrars.
What is ISO? is revised at periodical intervals in order to reflect

ISO stands for International Standards the changes in the environment and to update
Organisation. It is a worldwide federation of the provisions based on experience.
National standards bodies. National standard Registrar and Consultant
bodies of different countries are members of ISO. It is pertinent to note that while ISO adopts
ISO was first established in 1985 when around standards it does not give certification. Each
85 countries became signatories to this universal nation has a National Body, which is an accredited
standard. The Headquarters of ISO is in Geneva, member of ISO. These National bodies in turn
Switzerland. Earlier different countries followed empower Registrars for issuing certificates to user
different standards and hence there was no Institutions on its behalf. Registrars are
uniformity. ISO seeks to establish universal designated by the National bodies based on the
standards of quality and thus help in bringing their competency, track record and experience.
about quality improvement worldwide. The Registrars issue ISO certification on behalf
Establishment Standards of the National body to various institutions. The
The work of preparing International Standards is certificate is valid for three years. However,
normally carried out through ISO technical periodical inspections are conducted to review
committees. Each member body interested in a Quality Management in a span of 6 to 9 months.
subject for whom a technical committee has been In case Quality standards as accepted by the
established has the right to be represented on users are not maintained, Registrars have the
that committee. International organisations, right to cancel certification. Registrars charge a
governmental and non-governmental, in liaison fee for certification and for conducting periodic
with ISO, also take part in the work. Publication audit. The fee charged by different Registrars
as an International Standard requires approval are different. A consultant is one who guides the
by at least 75% of the member bodies casting a certification-seeking institution, for a fee, in
vote on draft International Standards. obtaining certification.
What is Quality Auditing
Interestingly, the ISO standard does not prescribe Auditing is necessary for maintenance and
any rigid measure of quality. According to ISO, improvement of any systems and procedures. As
quality is defined as ‘The degree to which a set already mentioned, periodical auditing is done
of inherent characteristics fulfill requirements’. under ISO certification by Registrars. Besides this,
The definition takes into account the difficulty in the users themselves should conduct periodical
prescribing the uniform measure of quality due internal audit through their own staff designated
to inherent differences in resources, for the purpose. This exercise helps not only in
infrastructure and the expectations of customers regular rectification of irregularities but also in
across countries. However ISO demands that familiarizing the people in office with the quality
there should be ‘continual improvement’ in quality. management practices of the user institution.
By implication this means that while each ISO Certification will institutionalize a culture of
institution can define its own measure of quality, Quality in the organisation.
it should continuously strive for progressive The certifying bodies are proposing to issue
improvements in it. certificates for those companies which are
Revision adhering to both quality and environment
standards under Integrated Management
The ISO standard was first adopted in 1987. It
Standard (IMS) to save on multiplicity of structure,
was later revised in 1994. The present version
documents and procedures.
ISO 9001:2000 is adopted in 2000. The standard

ISO 14000
ISO 14000 is a quality standard for environmental management.

The standard is voluntary.
It can be obtained for the whole company or a department.
It helps in reduction of energy consumption, liability and risk and improves
compliance to legal and regulatory requirements.
What is ISO 14000? consumption, reducing liability and risk and

The ISO 14000 standards are voluntary improving compliance with legislative and
environmental management system standards regulatory requirements.
being created under the auspices of the It is Voluntary
International Organization for Standardization. ISO 14001 is not a mandatory requirement: it is
ISO has 111 member countries represented voluntary. But it may end up being a requirement
mainly by industry and government standards for conducting international trade. It is not a
groups. performance-based standard that prescribes
The standards can be classified according to levels of emissions and releases. But you must
their focus: commit to following the laws of the land and
Organization and process evaluation standards- preventing pollution. ISO 14001 is not a product
Environmental management system (ISO standard. Rather, it is a systems-based standard
14000,14004), environmental auditing (ISO that gives the company a blueprint for managing
14010, 14011/1, 14012) and environmental environmental impacts. ISO 14001 can be
performance evaluation (ISO 14031). implemented piece meal, in any fashion, from
the corporate level to the single-unit level.
Product-oriented standards - Life-cycle
assessment (ISO 14040, 14041, 14042, 14043), What are the Major Requirements ?
environmental labelling (ISO 14021, 14024, The standard’s first requirement is that a
14025) and environmental aspect in product company should have a publicly available
standards (ISO 14060). environmental policy articulated by top
Definition standard - A terms-and-definitions management. It should be appropriate to the
standard (ISO 14050) harmonizes the language nature of the organization and include
among the others. commitments toward pollution prevention.
Establishment and maintenance of procedures
ISO 14001, the environmental management
to identify significant environmental aspects and
system specification, is intended as the only
their associated impacts are also envisaged.
standard establishing requirements against
Procedure to ensure compliance should be
which companies will be audited for certification.
consistent with the environmental policy and
It is the backbone of the series.
include legal and other requirements. Objectives
Implementation and targets are to be documented and must be
Worldwide interest in these standards among consistent with the goals of the environmental
both countries and governments is growing. policy, including continual improvement and
Many countries and companies have already pollution prevention.
started implementing ISO 14001 with an eye The certifying bodies are proposing to issue
toward certification. certificates for those companies which are
The list of reasons companies are now adopting adhering to both quality and environment
an environmental management system, and standards under Integrated Management
ISO 14001 in particular, includes identifying Standard (IMS) to save on multiplicity of
areas for reduction in energy and other resource structure, documents and procedures.

QUALITY CIRCLES
QC is a small group of employees in the same work area, who meet regularly to
identify, analyse and solve work related problems.
The members identify problems, prioritise the most important problem to be
addressed, develop solutions and implement them.
Brain Storming, Pareto Analysis and Fish Bone Diagram are the key techniques
used.
Quality circle is a small group of employees in at solutions/recommendations to resolve each

the same work area, who meet regularly to cause individually.
identify, analyse and solve work-related BRAIN STORMING
problems in their work area. If necessary, help
1. Each member will be, in rotation, asked for
from specialists can be taken.
ideas. This has to continue until all ideas
OPERATION OF QUALITY CIRCLE are exhausted. To enable flow of ideas each
Identity problems can ask himself- What, why, when, where,
Prioritise the problems who and how ?
Choose one problem for the project 2. No idea shall be dismissed as irrelevant/
Analyse the causes of the problem stupid - Free flow of ideas shall be allowed.
Develop solution 3. No evaluation of ideas shall be done during
the process of brain storming.
Present it to Management for approval
4. Leader shall help in summarising the idea
Implement solution
and enable clarity of expression by
Review implementation and results members.
Move over to next project
5. After ideas are exhausted and brain
PARETO ANALYSIS: Pareto is an Italian storming completed, each idea shall be
economist. Pareto analysis helps in identifying taken up for detailed discussion and
the vital few from the trivial many at a glance, consensus arrived at on those which are
when projected using column graph named after valid and vital.
Pareto. It facilitates fixing the priorities for 6. Prior distribution of agenda to members will
selection of the problem to be taken up serially, enable them to think in advance and
listed after brain storming and data collection. participate in QC deliberations.
ISHIKAWA OR FISHBONE DIAGRAM: This 7. If non-members drop in during brain
technique was devised by Dr. Ishikawa who storming, they may be allowed to join in.
conceived Quality Circles. In this diagram, a
8. Keep a record of the brain storming for
systematic arrangement of all possible causes
future reference.
which give rise to the effect are made. Before
taking up a problem for detailed study it is MANAGEMENT PRESENTATION: It is the
necessary to list down all the possible causes culmination of the Quality Circles’ project study
through brain storming so that no important and helps in making the recommendations
cause is missed. based on the solutions to the problems chosen,
The causes are generally divided into the four more effectively and purposefully.
major sources (groups) viz Man, Machine, IMPLEMENTATION: Following the
Method and Material. Each source is ultimately recommendations of the QC, implementation
divided into sub-sources. After the Ishikawa has to be given priority after securing the
diagram, brainstorming is undertaken to arrive necessary approvals.
FINANCIAL ENGINEERING
Financial Engineering is a sophisticated management technique aimed to manage

the risk and return of financial transactions.
It uses derivative instruments to hedge (counter balance) risks.
Advancement in IT and telecommunication has strengthened financial engineering.
Increasing volatility of prices and interest rates underline the importance of financial
engineering.
Definition in attributing cause and effect in this area.

Financial engineering has played a part in
Financial engineering is a multi-disciplinary
encouraging liberalisation, by undermining the
approach to the management of risk and return
effectiveness of regulation.
which involves the use of derivative instruments
to decompose standard financial transactions The increasing volatility of prices during the
into their elements and then synthesise these 1970s and 1980s increased both the need to
elements into innovative cross market structures hedge risk and the opportunities for taking risk.
customised to the particular requirements of Financial engineering is the product of the
counter parties. growing sophistication of risk management
techniques. It reflects the more rigorous
The term ‘financial engineering’ was coined in
application of the scientific method to finance,
the mid-1980s, among London investment
in particular, analysis into elements and
banks and is the product of several parallel
empirical testing (in the form of financial
developments.
modelling and sensitivity analyses). It has also
The emergence of both derivative instruments been seen in a trend towards the recruitment of
and financial engineering has only been possible staff with scientific rather than financial training.
because of the development of new information
Multi-disciplinary Approach
technology, in particular, the PC and
spreadsheet software. These innovations have Financial engineering straddles several
provided a fast and flexible means of managing traditional financial markets. It is also frequently
the large volumes of information which are used to exploit anomalies in the tax, accounting
necessary to construct complex transactions. and regulatory frameworks within which markets
Other innovations, mainly in the field of operate. Financial engineering is therefore
telecommunication, have reduced the cost of conducted by ‘teams’, which bring together
generating and delivering the information. Lower traders, financial analysts, syndication staff,
costs have in turn increased the availability of corporate finance officers, lawyers, tax
information, which has extended the range of specialists, accountants, mathematicians,
opportunities for financial engineering to exploit. statisticians, compliance officers, programmers
and other specialists.
An important force behind the emergence of
financial engineering has been the trend towards Financial Engineering involves the application of
liberalisation of financial markets which began derivative instruments such as swaps and
at the end of the 1970s. The removal of official options. Through the process of decomposition
barriers has permitted the cross-market activity of financial instruments into forward and option
that characterises financial engineering. The contracts and synthesising them into new
competition it has unleashed has encouraged combinations, the objective of Financial
the process. However, care needs to be taken Engineering is achieved.

ECONOMIC VALUE ADDED (EVA)
EVA helps to measure the extent of value created for shareholders

EVA= Net Operating Profit After Tax (NOPAT) – (Cost of capital * Operating
Capital)
Eg: If NOPAT is Rs. 100000/-; Capital employed is Rs.500000 and Cost of Capital
is 12% then EVA= {100000- (500000 * 12%)= 100000-60000= Rs.40000
Capital includes both equity and debt; and determining cost of equity is difficult
The speciality of EVA is that it takes into account Capital employed and the risk as
measured by cost of capital
Various indicators are used to identify cost of capital. In reality, calculating EVA for any
companies which are investment worthy. Sales, company involves hundred of adjustments to
net profit, book value, dividend yield, Return on arrive at a credible figure of operating profit. This
networth, return on capital employed, EPS, EPS is because any changes in depreciation policy,
growth and so on, have enjoyed popularity at inventory valuation policy or in accounting for
different times. One such measure is ‘economic deferred taxation as also lease adjustments can
value-added’ (EVA). have a major impact on profits and all these
Simply put, EVA is the difference between the factors need to be adjusted.
rates at which the company is earning from its Another dangerous myth about EVA is that it is
operations and its cost of capital. Mathematically, an ideal measure for comparing value creation
it is the difference between the net operating across companies and industries. EVA by
profit after tax (NOPAT) and the operating capital definition is biased against companies which are
employed times the cost of capital. It has capital intensive. This is because EVA only
emerged as a useful tool in corporate finance to considers the capital outlay necessary for
the extent that it is able to capture the cost of creation of physical assets and ignores the
capital employed. implicit capital outlay involved in the creation of
The EVA looks at how well the company has intangible assets.
deployed its capital to get optimal returns. It looks The last and perhaps the greatest myth about
at the rate at which the assets are put to use EVA is that companies with high EVA are cash
and compares the cost of such capital. If the rich. What EVA actually depicts is the notional
company is able to earn a return which is more value created by a business. It has no relation
than its cost of capital, it is said to be creating to the liquidity requirements of the business.
wealth for its shareholders. More so for companies that are cash sensitive
EVA as a measure has an edge over traditional and where shortage of cash can lead to
measures like earnings per share (EPS) and bankruptcy of the company. That explains why
return on equity (ROE) which are pure return many software companies which show high EVA
functions and do not factor in risk. To that extent, in their books of accounts could still be on the
EVA provides a more refined barometer of value verge of bankruptcy if their cash sensitivity is
addition after defraying the costs of owed and factored in.
owned funds. There are, however, some popular EVA is the ideal measure for matured companies
myths which one need to be aware of to or matured industries. But for cash sensitive
understand EVA more effectively. companies or companies in the growth stage
One of the myths about EVA is that the only of the business cycle, where liquidity is a major
complication in calculation of EVA is the factor, the CVA (Cash Value Added) could better
estimation of the cost of equity to arrive at the depict value creation.

MARKET VALUE ADDED (MVA)
MVA is defined as the excess of the market value of the Company over the value of
investors’ capital.
Thus MVA= (Market value of debt and equity – Book value of debt and equity).
Book value of equity is the equity plus retained earnings.
MVA is similar to Price Earning Ratio except that MVA indicates an absolute figure
while PER is a ratio.
Market Value Added (MVA) is used by many theoretical market price assuming the current
companies to show how they have rewarded interest rate and the rate at which the company
their shareholders. The MVA is defined as the has borrowed. In other words, what would be
excess of the market value of the company over the price, if the total borrowings were listed in
the value of the investor’s capital. the market, assuming the current interest rates,
its credit rating and the risk perception of the
It quantifies the premium the market is willing to
company. But this may indicate only the
pay for the value created by the company.
theoretical market value and not the true value.
Mathematically, it is defined as the sum of the
This is also not the cost to the company as it
current market value of debt and equity, less the
may be able to borrow at a rate that is
economic book value.
significantly different from the market rate in the
The MVA of a company is determined by two past. Benchmarking these borrowings against
factors: The market value of the capital the current interest rate may not reflect the true
employed and its economic value. In the case cost to the company too. Hence, the best
of equity, it is possible to find out the market value alternative would be to use the book value as
if the shares are regularly traded in the stock market value. This is what many companies
exchange. In the case of unlisted companies or which give MVA finally boils down to the
infrequently traded companies, it is difficult to difference between the market value of equity
determine the market value of equity. Hence, and its economic book value. A company creates
MVA, as a concept, is not applicable to such value in the market if its MVA is positive. This
companies. would mean that the company has created more
wealth than it has raised from its shareholders
In the case of debt, it is difficult to determine the as well its retained earnings which have been
market value, as term loans from banks and reinvested.
financial institutions constitute 75-80 per cent
of the total borrowings by companies. For such The MVA is same as the price-to-book-value
term loans, there is no secondary market and, figure. The former is the difference between the
hence, it is not possible to determine the market market value and the economic value whereas
price. Where the borrowers have issued the latter is the ratio between the two parameters.
debentures, which are listed, it is possible to A price-to-book-value of more than one indicates
determine market value, but even then the rates that the company has created value in terms of
may not reflect the price, as the secondary market valuation, which is the same as a positive
market is not well developed. MVA.
Conversely, it is possible to find out the

EMERGING TRENDS IN BANKING AND FINANCE:
ROLE OF NEW GENERATION MANAGERS
The pace of changes in the world today calls for managers who have not just ‘probity
and prudence’ but the capacity to handle ‘competing priorities’.
5 significant trends: Balance sheet to Off-balance sheet intermediation, Capital
adequacy to capital efficiency, physical to virtual distribution, fragmentation to
consolidation and data to knowledge through information.
New Generation Managers should have the capacity to manage transition.
Building up an organizational architecture that strategically position themselves in this new

generates intellectual capital has been a huge environment. While some will, perhaps, choose
challenge for banks and financial institutions. It to migrate rapidly to off-balance sheet investment
is even more so today, when we are undergoing or merchant-banking activities, others may
a period of the most rapid acceleration of what stress on volume origination which they can
is alluded to as ‘creative destruction’ in the history securitize and then manage for a fee, and still
of the financial sector. In the process of creative others may continue to position themselves as
destruction, new constructs emerge. It is here traditional banking retail players focusing on
that ‘new generation’ managers may have a role deposit intermediation. Nevertheless, the trend
more demanding than that of the managers of towards off-balance sheet intermediation and the
yesteryears. A role which calls for more than just complexities that it entails will demand that the
‘probity and prudence’ that characterized the managers of the future be equipped with financial
banker of yesteryears and increasingly focuses skills in a significantly greater measure.
on managing ‘competing imperatives’.
Trend from Capital Adequacy to Capital
EMERGING TRENDS Efficiency
First, there is the transition from banking to Thirdly, there is the transition from capital
financial services. Banks are uniquely poised to adequacy to capital efficiency.
broaden their product lines into the complete
The Basel II prescriptions have already put us
offerings that would go under the rubric of
on track for transition from the traditional
financial services. This would imply a new
regulatory and market measures of capital
founded emphasis on marketing; be it of
adequacy to an evaluation of whether a bank has
investment, insurance and other products that
found the most efficient use of its capital to
consumers want. Banks have advantages in
support its new business mix. In effect, future
their image of trustworthiness and their extensive
plans may, therefore, include the fluid use of
distribution systems. How they convert this into
capital, an approach that has been called the
a marketing advantage will determine how they
“just-in time balance sheet” management, in
win market shares.
which capital flows quickly to its most efficient
Trend from Balance Sheet to Off-Balance use. In this transition, how capital is used and
Sheet Intermediation how much capital is needed will become a
significant factor in evolving return on equity
Then there is the trend from balance sheet to strategy for years ahead and strategic plans may
off-balance sheet intermediation. Banking is no be required to execute this kind of approach.
longer confined to ‘acceptance of deposits for
the purposes of lending’ - today it refers to Trend from Physical to Virtual Distribution
intermediating and managing risk. As the scope
Perhaps the most visible and overt change in
of intermediation expands to incorporate market
banking in the eyes of the public has been the
risks, bankers are taking a view on how they will
trend for banks to move away from branch

banking to electronic, anywhere-anytime of the even more important management,
distribution of financial services. If this has marketing, and risk transitions that banks must
triggered the ‘death of distance’, the Real Time make. Information is only valuable if it can be
Gross Settlements (RTGS) System is put to work and used for decision tools such as
threatening to consign time lags in settlement of programmed trading, target marketing, predictive
financial transactions to history. In reality, delivery credit modeling and scoring, amongst others.
systems like ATMs, online banking and phone Most new financial services are in fact based on
banking are a continuum of options from which technology. The transition from an old world of
the consumer selects. Consumers select the data processing and information management
delivery system that is right for them. In other to a new world in which knowledge is being put
words, distribution differentiates a bank when it to work on competitive advantage will be a major
sets up a delivery system that attracts certain strategic preoccupation in the years ahead.
customers. Distribution is the new way to
segment consumer markets and the transition ROLE OF NEW GENERATION MANAGERS
of distribution systems is in fact emerging as an Managing these transitions well is the secret to
essential part of bank repositioning strategy. strategic execution. Organizations ultimately
Trend from Fragmentation to Consolidation stand or fall on the quality of the work and
decisions made by their people. So what sets
The forces of change today are favouring larger most successful organizations apart is how they
entities which bring mergers and acquisitions manage human resources. Increasingly, banks
squarely into the strategic decision-making of all over are, therefore, adopting the socio-
the banking sector. We are slowly moving from technical approach to job design that recognizes
a regime of ‘a large number of small banks’ to ‘a the productivity gains of optimum technological
small number of large banks’. Every bank will, of arrangements as well as the importance of
course, depending on its strategy, have to workplace sociology. The new generation
migrate to its best position in this new structure. managers on their part will have to learn how to
Picking a market position and transitioning to it create and thrive in an environment that
is one of the most significant strategic decisions embraces change not as a threat but as an
a bank must make. All types of entities can be opportunity.
highly profitable if they transition to the right
market position and right cost structure to While leadership skills, the ability to multi-task
execute the strategy. and manage competing impreatives will be the
necessary ingredients of the new generation
Trend from Data to Information to Knowledge managers, the old-fashioned qualities of a desire
to learn, a strong sense of professional ethics,
Perhaps the most talked about, yet least an enquiring mind, a strategic view, the qualities
understood, transition ahead is in the area of of humility and empathy, a willingness to
information technology and information embrace practical experience, and an
application. Distribution and processing eagerness to adapt to new experiences would
technology transitions are keys to the shift to be critical.
virtual banking which is prompted by the desire
to have low cost operations. But technology-
driven information transformation is at the centre

COMMITTEES

COMMITTEE ON FULLER CAPITAL ACCOUNT
CONVERTIBILITY
The Committee on Fuller Capital Account Convertibility (Chairman: Shri S. S. Tarapore)

submitted its Report in July 2006.
The committee’s recommendations encompassed almost all segments of the financial
markets.
The Committee on Fuller Capital Account limit from direct investment in gilts could be
Convertibility (Chairman: Shri S. S. Tarapore) exempted from tax to stimulate retail
submitted its Report in July 2006. The major investments in gilts.
recommendations were as follows: • STRIPS in Government securities should
Money Market be expeditiously introduced.
• Prudential regulations should be • Non-resident investors, especially longer
strengthened to encourage capital inflows. term investors, could be permitted entry to
expand investor base.
• More players should be allowed to access
the repo market. • Repo facility in Government securities
should be widened by allowing all market
• The CBLO and the repo markets should be
players without any restrictions.
allowed to cover corporate debt
instruments. • The limit for FII investment in Government
securities could be gradually raised to 10
• Skills should be upgraded to develop the
per cent of gross issuance by the Centre
inter-bank term money market.
and States by 2009-10. The allocation by
• Prudential limits for commercial paper (CP) SEBI of the limits between 100 per cent debt
and certificates of deposit (CD) may be funds and other FIIs should be discontinued.
fixed.
Foreign Exchange Market
• The market in interest rate futures should
• The spot and forward markets should be
be activated and interest rate options should
liberalised and extended to all participants,
be allowed. Provision for netting of derivative
removing the constraint on past
transactions should be made, before
performance/underlying exposures.
opening up the swap market.
• Bank margins on foreign exchange
• Fixed Income Money Market and Derivatives
transactions of smaller customers need to
Association (FIMMDA) be suitably
be reduced by separating foreign exchange
empowered to act as a self-regulatory
business from lending transactions and
organisation to develop market ethics,
introducing an electronic trading platform.
trading standards and also undertake
regulation of participants, besides • The Reserve Bank’s intervention in the
disseminating information. foreign exchange market should be through
the anonymous order matching system.
Government Securities Market
• To nurture interest rate parity in forward
• The share of mark-to-market category
markets, more flexibility may be provided to
should be progressively increased.
banks to borrow and lend overseas both on
• Short-selling across settlement cycles with short-term and long-term, depending upon
adequate safeguards should be permitted. the strength of their balance sheet.
• Gilt funds should be exempted from the • Currency futures may be introduced subject
dividend distribution tax and income up to a to risks being contained through proper
trading mechanism, structure of contracts • Issues of corporate governance in banks
and regulatory environment. needed early attention.
• The existing guaranteed settlement platform Monetary Policy
of CCIL needs to be extended to the
• RBI should activate variable rate repo/
forwards market.
reverse repo auctions/operations on a real
• The banking sector should be allowed to time basis and also consider somewhat
hedge currency swaps by buying and selling longer-term LAF facilities.
without any monetary limits.
• To the extent RBI assesses the excess
Fiscal Consolidation liquidity to be more than transient, it should
also use the Cash Reserve Ratio (CRR)
• The Central and the State Governments
and the Statutory Liquidity Ratio (SLR).
should graduate from the present system
of computing the fiscal deficit to a measure • The authorities may consider the imposition
of the public sector borrowing requirement of an unremunerated reserve requirement
(PSBR). on fresh FII inflows in extreme situations.
• The Office of Public Debt should be set up • RBI and the Central Government should
to function independently outside RBI. jointly set out the objectives of monetary
policy for a specific period and this should
Strengthening of the Banking System
be put in the public domain. A formal
• All commercial banks should be subject to Monetary Policy Committee should be set
a single banking legislation. up for strengthening the institutional
• The minimum share of the Central framework.
Government/RBI in the capital of the public External Sector
sector banks should be reduced from 51
• A monitoring exchange rate band of +/- 5.0
per cent (55 per cent for the State Bank of
per cent around the neutral real effective
India) to 33 per cent. The proposed transfer
exchange rate (REER) may be considered
of ownership of the State Bank of India from
and the REER should incorporate services
the RBI to the Central Government should
to the extent possible.
be put on hold.
• As an operative rule, if the current account
• Setting up of new private sector banks and
deficit persists beyond three per cent of
conversion of nonbanking finance
GDP, the exchange rate policy should be
companies into banks should be
reviewed.
encouraged.

TECHNICAL GROUP TO REVIEW THE LEGISLATIONS
ON MONEY LENDING
The Technical Group recommends strict regulation of moneylenders by State
governments.
The Technical Group (Chairman: Shri S.C. forum can be decided by the State
Gupta) made the following recommendations: Governments depending upon the local
conditions.
Moneylenders should be registered
compulsorily with the State Governments. In order to ensure that the enforcement/
Unregistered moneylenders will be administration of the legislation is properly
penalised. The procedure for registration monitored, a new section has been
and renewal should be made simple and proposed which would require State
hassle free. Governments to place an annual report on
the administration of the legislation before
In order to focus the legislation on the the State Legislature.
regulation of money lending transactions,
banks, statutory corporations, co- The State Governments should take
operatives, financial institutions, NBFCs and adequate steps to publicise the maximum
RBI need to be kept out of the purview of rates of interest notified under the Act, the
the legislation. offences under the Act and the dispute
redressal machinery provided thereunder.
To provide the State Governments with the
flexibility of adjusting the rates of interest in A new chapter in the States’ money lending
accordance with the market realities, the legislations, aimed at establishing a link
maximum rates of interest to be charged between the formal and informal credit
by moneylenders should be notified by the providers, to be called ‘Accredited Loan
State Governments from time to time. While Providers’, has been recommended.
determining the maximum rate, the range
of interest rates and costs and other The Technical Group has recommended a
expenses being charged should be taken set of conditions in the agreement between
into account. In order to prevent usury, the the banks/financial institutions and the
‘accredited loan providers’ as safeguard
rule of damdupat has been recommended.
measures.
Alternate dispute resolution mechanisms
The advances made by institutional
such as Lok Adalat and Nyaya Panchayat
for speedy and economical dispensation of creditors to accredited loan providers may
justice have been recommended. be treated as priority sector lending. This
Alternatively, State Governments may think would encourage the banks to take up the
of setting up of fast-track Courts/designated role of institutional creditors and disburse
Courts to deal with disputes relating to loans through the linkage with accredited
loan providers as an additional business.
lending transactions by money lenders and
accredited loan providers. The choice of the

NATIONAL COMMISSION ON FARMERS
Prime farm land must be conserved for agriculture and should not be diverted for
non-agricultural purposes.
Livestock Feed and Fodder Corporations, National Livestock Development Council
and National Biotechnology Regulatory Authority may be established with farmers’
representatives.
User-friendly insurance instruments covering production, post-harvest operations and
market risks be introduced.
The policy and legal framework governing the cooperatives may be reviewed.
The Government of India constituted a National grains needed for the Public Distribution
Commission on Farmers (NCF) under the System (PDS) at the prices that private
chairmanship of Shri Sompal on February 10, traders are willing to pay to farmers. The
2004 to examine various issues confronting the MSP should be at least 50 per cent more
Indian farmers and to suggest appropriate than the weighted average cost of
interventions for improving the economic viability production and should be expanded to cover
and sustainability of diversified agriculture, all crops of importance for ensuring food and
including horticulture, livestock, dairy and income security to the small farmers. The
fisheries, and for doubling the farmers’ income. Commission on Agricultural Costs and
The Commission was subsequently re- Prices (CACP) should be an autonomous
constituted under the chairmanship of Prof. M.S. statutory organisation. The PDS should be
Swaminathan on November 18, 2004. The NCF universal and should undertake the task of
submitted five Reports between December enlarging the food security basket.
2004 and October 2006 to the Government of
• The Indian Trade Organisation (ITO) may
India. The major recommendations of the
be established to safeguard the interests of
Commission are:
farmers.
• Prime farm land must be conserved for
• A few Centres of Excellence on the model
agriculture and should not be diverted for
of the Indian Institute of Technology (IITs)/
non-agricultural purposes.
Indian Institute of Management (IIMs) should
• Livestock Feed and Fodder Corporations, be established to enhance competitiveness
National Livestock Development Council and of the agriculture graduates.
National Biotechnology Regulatory Authority
• As price fluctuation/competition from
may be established with farmers’
products imported from abroad are among
representatives.
the major problems facing a large number
• User-friendly insurance instruments of small farmers engaged in the cultivation
covering production, post-harvest of plantation crops, a Price Stabilisation
operations and market risks be introduced. Fund may be considered. Agriculture Risk
Fund and Food Guarantee Act should be
• The policy and legal framework governing formulated.
the cooperatives may be reviewed.
• A multi-stakeholder National Food Security
• The Minimum Support Price (MSP) of crops and Sovereignty Board chaired by the Prime
should be linked to the input costs. The Minister may be set up.
Government should procure the staple

• There is a need for an Agriculture Credit The key recommendations covering the entire
Policy and both credit and insurance literacy farming spectrum have been incorporated in the
in villages. Drought prone areas should Revised Draft National Policy for Farmers. The
have a 4-5 year repayment cycle for crop Ministry of Agriculture, Government of India, held
loans, taking into account the management a Conference of State Ministers on December
of risk. NABARD should function like a 23, 2006 to discuss the recommendations of
National Bank for Farmers. the NCF. The State Ministers of Agriculture and
Allied Sectors have supported the
• The Ministry and Departments of Agriculture, recommendations made by the NCF and have
both at the Centre and the States, may be also given a number of suggestions. The
restructured to become Ministry/ suggestions made by the NCF are under
Department of Agriculture and Farmers’ consideration of the Government of India.
Welfare in order to highlight their critical role
in ensuring the income and work security
of over 600 million members of India’s
population.

NATIONAL DEVELOPMENT COUNCIL:
RESOLUTION ON AGRICULTURE
A Food Security Mission to be launched as a Central scheme with the objective of

producing over the next four years an additional eight million tonnes of wheat, 10
million tonnes of rice and two million tonnes of pulses over the base year (triennium
ending 2006-07).
Plan for each district to be formulated utilizing resources available from all existing
schemes. State agricultural plans to be formulated based on district plans aimed at
achieving the States’ agricultural growth objective.
Actions to be taken by the Central (vi) Steps to be initiated to restructure the

Government fertiliser subsidy programme for proper
delivery to the farmers as also for providing
(i) A Food Security Mission to be launched as balanced plant nutrition without adverse
a Central scheme with the objective of effects on soils. The use of bio-fertilisers,
producing over the next four years an organic manure and micro-nutrients to
additional eight million tonnes of wheat, 10 enhance soil health will be promoted.
million tonnes of rice and two million tonnes
of pulses over the base year (triennium Actions to be taken by the State
ending 2006-07). Governments
(ii) A new Additional Central Assistance (ACA) (i) Plan for each district to be formulated
to State Plans to be introduced to incentivise utilizing resources available from all existing
States to draw up plans for their agriculture schemes. State agricultural plans to be
sector taking into account agro-climatic formulated based on district plans aimed at
conditions, natural resource issues and achieving the States’ agricultural growth
technology integrating livestock, poultry and objective. Each State will ensure that the
fisheries. baseline share of agriculture in its total State
Plan expenditure is maintained to enable it
(iii) Additional resources to be provided for to access the new ACA.
irrigation via Accelerated Irrigation Benefit
Programme (AIBP), including a component (ii) Special efforts to be made to complete
on modernisation, linked to adoption of projects under the AIBP without time and
improved participatory irrigation cost overrun and prioritise irrigation projects
management and command area according to their agriculture production
development. Schemes involving intra-State targets. States to also endeavour for better
linking of rivers could also be considered water management and improved water use
for AIBP. efficiency.
(iv) Additional resources to be provided for the (iii) Highest priority to be accorded to ensure
National Strategic Research Fund. Initiatives adequate supply of quality seeds of crops
to be taken to improve the skill development and fodder at reasonable prices and at the
in the farming community for employing right time to help in reducing the existing yield
modern methods of agriculture. gaps.
(v) The pattern of Rural Infrastructure (iv) A major expansion and revamping of State
Development Fund (RIDF) allocation by agricultural extension systems to be
NABARD to be restructured so as to build it undertaken involving the State Agricultural
properly into the State and District plans. Universities and Krishi Vigyan Kendras,

while using public private partnership (PPP), Produce Marketing Committee (APMC) Act
wherever possible. and notifying the rules thereunder. A variety
of instruments including cooperatives of
(v) Signing of the Memorandum of farmers and contract farming to be used for
Understanding (MoU) (if not done so far) to reforms in agricultural marketing. The
be expedited for early implementation of the process of notifying rules under the
Vaidyanathan Committee amended APMC legislation should be
recommendations and monitorable completed during 2007-08.
deadlines to be set for revamping the co-
operative credit structure. Concrete proposals to implement these steps
will be spelt out in detail both by the Central
(vi) Development of modern markets to be Government and the State Governments at the
encouraged by amending the Agricultural earliest.

SADASIVAN WORKING GROUP ON REASONABLE
SERVICE CHARGES BY BANKS TO CUSTOMERS
The Working Group identified 27 services related to deposit/loan accounts, remittance

facilities and cheque collections, as an indicative list of basic banking services to be
offered by banks.
In order to ensure reasonableness in fixing and communicating the service charges,
the Working Group suggested a set of principles.
The Working Group to formulate a scheme for and RBI advised banks in February 2007 to
ensuring reasonableness of bank charges identify the basic banking services on the basis
examined various issues such as basic banking/ of the broad parameters indicated by the
financial services to be rendered to individual Working Group and implement the accepted
customers, the methodology adopted by banks recommendations of the Working Group on
for fixing and notifying the charges and the making available such services at reasonable
reasonableness of such charges. prices/charges. The list of services identified by
the Working Group is only an indicative one and
The Working Group identified 27 services related banks may, at their discretion, include within the
to deposit/loan accounts, remittance facilities category of basic services such additional
and cheque collections, as an indicative list of services as they may consider appropriate.
basic banking services to be offered by banks. Banks are required to provide to customers
In order to ensure reasonableness in fixing and complete information upfront on all charges
communicating the service charges, the applicable to basic services and any proposed
Working Group suggested a set of principles. changes in charges, in a timely manner.
According to these, for basic services rendered Changes in the service charges are to be
to individuals, the banks should (a) levy charges carried out only with prior notice to the
at rates lower than the rates applied when the customers of at least 30 days. Banks should
same services are given to non-individual inform the customers in an appropriate manner
entities; (b) levy charges only if they are just and regarding recovery of service charges. Banks
supported by reason; and (c) levy service are also required to inform customers in all
charges ad valorem only to cover incremental cases where a transaction initiated by the bank
cost, subject to a cap. For basic services itself results in or is likely to lead to a shortfall in
rendered to special category of individuals, banks the minimum balance required to be maintained.
should levy charges on more liberal terms than The recommendations of the Working Group
the terms on which the charges are levied to relating to redressal of grievances and financial
other individuals. education may also be implemented by banks.
The recommendations of the Working Group
were accepted by RBI with certain modifications

COMMITTEE ON FINANCIAL SECTOR ASSESSMENT
A Committee on Financial Sector Assessment (CFSA) was constituted by the

Government of India in September 2006 (Chairman: Dr. Rakesh Mohan; Co-
Chairman: Dr. D. Subbarao).
Based on an objective analysis of the present strengths and weaknesses of the
financial sector and the status with regard to standards, the CFSA is expected to lay
down a roadmap for further reforms in a medium-term perspective.
A Committee on Financial Sector Assessment (ii) Institutions and Market Structure; and (iv)
(CFSA) was constituted by the Government of Transparency Standards. The Advisory Panels
India in September 2006 (Chairman: Dr. Rakesh will prepare separate reports covering each of
Mohan; Co-Chairman: Dr. D. Subbarao) with the the above aspects. The Advisory Panels
following terms of reference: comprise non-official experts with domain
knowledge in respective areas and officials with
To identify the appropriate areas, techniques
similar expertise represented as special
and methodologies in the Handbook on
invitees. The panels would have the option of
Financial Sector Assessment brought out
coopting as special invitees any other experts
by the IMF/World Bank and also in any other
as they deem fit.
pertinent documents for financial sector
assessment relevant in the current and The Advisory Panel on Financial Stability and
evolving context of the Indian financial Stress Testing (Chairman: Shri M.B.N. Rao)
sector; would conduct macro-prudential surveillance
(including system-level stress testing) to assess
To apply relevant methodologies and
the soundness and stability of the financial
techniques adapted to the Indian system
system and suggest measures for
and attempt a comprehensive and objective
strengthening the financial structure and system
assessment of the Indian financial sector,
and its development in a medium-term
including its development, efficiency,
perspective.
competitiveness and prudential aspects;
The other three panels would (i) identify and
To analyse specific development and
consider the relevant standards and codes as
stability issues as relevant to India;
currently prescribed and applicable to different
To make available its report(s) through RBI/ areas; (ii) evaluate their implementation in the
Government of India websites. Indian context; (iii) identify gaps in adherence to
respective standards; and (iv) suggest possible
The central plank of the assessment is based roadmaps towards compliance in a medium-
on three mutually reinforcing pillars, viz., (i) term perspective. The Advisory Panel on
financial stability assessment and stress testing; Financial Regulation and Supervision
(ii) legal, infrastructural and market development (Chairman: Shri M.S. Verma) would consider the
issues; and (iii) assessment of the status and relevant standards and codes applicable for
progress in implementation of international financial regulation and supervision pertaining
financial standards and codes. To assist in the to the banking sector, financial markets and
process of assessment, the CFSA has insurance. The Advisory Panel on Institutions
constituted four Advisory Panels for the and Market Structure (Chairman: Shri C.M.
assessment of (i) Financial Stability and Stress Vasudev) would consider the relevant standards
Testing; (ii) Financial Regulation and Supervision; and codes applicable to bankruptcy laws,
accounting and auditing, payment and Panels is proposed to be peer received by
settlement systems and corporate governance international experts. The views of the peer
policies. The Advisory Panel on Transparency reviews would be taken on board while finalising
Standards (Chairman: Shri Nitin Desai) would Advisory Panels Reports.
consider the relevant standards and codes
The CFSA would publish Advisory Panel reports
applicable for transparency in monetary,
and also its own report. Based on an objective
financial, fiscal and data dissemination policies.
analysis of the present strengths and
To provide the Panels with technical notes and weaknesses of the financial sector and the
background material, the CFSA has set up status with regard to standards, the CFSA is
Technical Groups consisting of officials expected to lay down a roadmap for further
representing mainly regulatory agencies and the reforms in a medium-term perspective. The
Government in all the above subject areas which CFSA is expected to complete the assessment
have progressed with technical work and by March 2008.
assisting Advisory Panels in respective areas.
With a view to enhancing credibility of self

assessment, the assessment of the Advisory

NARASIMHAM COMMITTEE - I
(On Financial Sector Reforms-1991)
Report submitted in 1991.

Purpose: To suggest measures for financial sector reforms
Some key recommendations: Reduction in SLR/CRR; deregulation of interest rates;
introduction of IRAC norms; creation of ARF; entry of private/new banks; abolition
of branch licensing; liberal opening of foreign offices; shift to syndicated lending;
removal of dual control of RBI and Government.
Some of the important recommendations of the 5. Income Recognition and Assets

Committee are as follows: Classification. No income to be recognised in
NPAs. An asset would be considered non-
1. Reduction in SLR/CRR. SLR to be brought performing if interest on such assets remains
down in a phased manner in about 5 years. SLR past due for a period exceeding 180 days as at
should not be a major instrument for financing the balance sheet date.
the Public Sector. RBI should have the flexibility
to operate CRR to serve its monetary policy 6. Transparency of Balance Sheet. Balance
objectives. Sheets of banks and FIs should be made
transparent with full disclosures.
Interest rate on SLR investments and on CRR
in respect of impounded deposits above the 7. Alignment with Income Tax Rules. Criteria
basic minimum should be increased. Rates on recommended for NPAs and provisioning
SLR investments should be progressively requirements be given due recognition by the
market-related while that on the CRR above the tax authorities.
basic minimum should be broadly related to
8. Creation of Assets Reconstruction Fund
banks’ average cost of deposits.
(ARF). An Assets Reconstruction Fund should
2. Directed Credit. For redistributive objective, be established to take over from the banks and
the fiscal system should be used rather than FIs a portion of the bad and doubtful debts at a
the credit system. Directed credit programmes discount, the level of discount being determined
should be phased out. Priority sector should be by independent auditors on the basis of clearly
redefined to include the weaker sections. The stipulated guidelines. The ARF should be
credit target for the redefined priority sector provided with special recovery powers. Capital
should be 10% of the aggregate credit. of ARF to be subscribed by the public sector
banks and FIs.
3. Deregulation of Interest Rates.
Deregulation to reflect emerging market All bad and doubtful debts should be transferred
conditions. Interest rate on Govt. borrowings to the ARF in a phased manner. Banks and FIs
gradually brought in line with market-determined should pursue recovery through the special
rates. Interest rate structure should bear a tribunals.
relationship to the Bank Rate. Desirable to
Banks/DFIs would have to write off the losses
provide for a prime rate, which would be the floor
incurred on account of transfer of doubtful assets
of the lending rates of banks and DFIs.
to ARF, which may be difficult due to their weak
4. Capital Adequacy. The BIS standard of 8% capital position. GOI should, where necessary,
should be achieved by banks and FIs by March
1996.
provide a subordinated loan counting for capital 12. Branch Licencing/Expansion. Branch
to meet this contingency. licencing should be abolished. Opening/closing
of branches (other than rural branches for the
9. Proposed Structure of the Banking
present) should be left to the commercial
System. Suggested Structure:
judgment of the individual banks.
a) 3 or 4 large banks (including SBI),
13. Entry of Foreign Banks. RBI should allow
international in character.
foreign banks to open branches/subsidiaries
b) 8 to 10 National Banks with a network of more liberally, subject to fulfilling usual
branches throughout the country engaged requirements. Foreign banks should be placed
in universal banking. on par with domestic banks.
c) Local banks whose operations would be 14. Rationalisation of Foreign Operations of

generally confined to a specific region. Indian Banks. In addition to SBI, there is scope
for one or more of the large banks to have
d) Rural banks (including RRBs) whose operations abroad in major international financial
operations would be confined to the rural centres and in regions with strong ethnic
areas and predominantly engaged in the presence.
financing of agriculture/allied activities.
15. Freedom from RBI/GOI Directives in
The revised system should be market-driven and Internal Administration. Various RBI/GOI
based on profitability considerations and brought guidelines/directives in relating to internal
about through a process of mergers and administration such as creation/categorisation
acquisitions. of posts, promotion procedures, etc., affecting
10. Setting up of Rural Banking Subsidiaries. the banks should be rescinded.
Each Public Sector Bank to set up one or more 16. Supervision over Banks. Supervision to
rural banking subsidiary, to take over all its rural be based on evolving prudential norms and
branches, and where appropriate, swap its rural regulations, and not excessive controls. Greater
branches with those of other banks, depending emphasis on internal audit and inspection
on the size/administrative convenience of the systems.
sponsor bank. Such rural banking subsidiaries
should be treated at par with RRBs in regard to 17. Removal of Dual Controls. RBI should be
SLR/CRR requirements and refinance facilities the primary agency for regulating the banking
from NABARD. Interest rate structure of RRBs system and dual control of RBI and Ministry of
should be in line with those of the commercial Finance-Banking Division should end. A separate
banks. RRBs may have the option to merge with authority to operate as a quasi-autonomous
the sponsor banks (becoming a separate 100% body under the aegis of RBI should be set up
owned subsidiary) or to maintain a separate and Government should not engage in directing
identity. regulatory functions.
11. Entry of Private/New Banks. No further 18. Depoliticising Appointments of CMDs.

nationalisation of banks. Private Sector Banks Appointments to CMDs posts may be made by
should be on par with Public Sector Banks. the Govt. as hitherto. They should be based on
There should be no bar for entry of new banks a convention of accepting recommendations of
in the private sector, subject to meeting statutory a group of eminent persons.
and other requirements.
19. Consortium Lending. Existing Consortium

lending system should be changed to function on business principles based on
syndication or participation in lending, at the prudential norms, and to have a management
instance of not only the lenders but also the set-up suited for this purpose.
borrowers.
Conclusion
Commercial banks should be encouraged to
The Committee sought to consolidate the gains
provide term finance to industry. DFIs should
made in the Indian financial sector while
increasingly engage in providing core working
improving the quality of portfolio, providing
capital, thus enhancing, healthy competition
greater operational flexibility, and functional
between banks and DFIs.
autonomy in the internal operations of banks and
20. State-level Financial Institutions. To be FIs, so as to usher in a healthy, competitive and
distanced from the State Governments and to vibrant financial sector.

NARASIMHAM COMMITTEE - II
(On Banking Sector Reforms - 1998)
Report submitted in 1998.

To review the progress in Banking sector reforms.
Major areas covered: Strengthening capital adequacy, Asset quality, Prudential
norms & disclosure requirements; Systems and methods in Banks and structural
issues.
Some recommendations: Marking government security to market; increase in CAR;
transferring NPA to ARC as a one time measure; reduction in transit time from
sub-standard to doubtful; provision for standard asset; bringing down government
holding in nationalized banks.
Financial sector reform process in India, as a Risk weight on a government guaranteed

part of the broader programme of structural advance should be the same as for other
economic reforms, was initiated in 1992. There advances. This should be made
have been major changes in the prospective from the time the new
macroeconomic environment, policy and prescription is put in place.
institutional development. Thus the need was
Foreign exchange open credit limit risks
felt to examine the problem issues and review
should be integrated into the calculation of
some of the recommendations made earlier to
risk weighted assets and should carry a 100
see their relevance in the changed environment.
per cent risk weight.
Accordingly, a Committee was set up under the
chairmanship of Shri M. Narasimham mainly to CRAR be increased from the existing 8 per
review the progress in banking sector reforms cent to 10 per cent; an intermediate
over the past six years, especially with reference minimum target of 9 per cent be achieved
to the recommendations made by CFS. The by 2000 and the ratio of 10 per cent by 2002.
report of the Committee was submitted on April
24, 1998. PSBs which are in a position to access the
capital market to be encouraged.
The following are the important
recommendations of the Committee: Asset Quality
Strengthening Capital Adequacy An asset be classified as doubtful if it is in

Capital adequacy requirements should take the substandard category for 18 months in
into account market risks in addition to the the first instance and eventually for 12
credit risk. It implies taking into account the months, and loss if it has been identified
larger exposure of banks to off-balance but not written off.
sheet risks. For evaluating the quality of assets portfolio,
In the next three years the entire portfolio of advances covered by Government
government securities should be marked to guarantees, which have turned sticky, be
market and the schedule for the same treated as NPAs.
announced at the earliest; government and
For banks with a high NPA portfolio, two
other approved securities which are now
alternative approaches could be adopted.
subject to a zero risk weight, should have a
One approach can be that, all loan assets
5 per cent weight for market risk.
in the doubtful and loss categories, should Banks and FIs should have a system of
be identified and their realisable value recruiting skilled manpower from the open
determined. These assets could be market.
transferred to an Assets Reconstruction
Public sector banks should be given
Company (ARC) which would issue NPA
flexibility to determine managerial
Swap Bonds.
remuneration levels taking into account
An alternative approach could be to enable market trends.
the banks in difficul-ty to issue bonds which
There may be a need to redefine the scope
could form part of Tier II capital, backed by
of external vigilance and investigation
government guarantee to make these
agencies with regard to banking business.
instruments eligible for SLR investment by
banks, LIC, GIC and Provident Funds. There is need to develop information and
control system in several areas like better
The interest subsidy element in credit for
tracking of spreads, costs and NPAs for
the priority sector should be totally
higher profitability, accurate and timely
eliminated and interest rate on loans under
information for strategic decision to identify
Rs.2 lakh should be deregulated for
and promote profitable products and
scheduled commercial banks as has been
customers.
done in the case of Regional Rural Banks
and cooperative credit institutions. Public sector banks should speed up
computerisation and focus on relationship
Prudential Norms and Disclosure
banking.
Requirements
Structural Issues
In India, income stops accruing when
interest or instalment of principal is not paid With the conversion of activities between
within 180 days, which should be reduced banks and DFIs, the DFIs should, over a
to 90 days in a phased manner by 2002. period of time, convert themselves to banks.
Introduction of a general provision of 1 per Mergers to Public Sector Banks should
cent on standard assets in a phased emanate from the management of the
manner be considered by RBI. banks. Merger should not be seen as a
means of bailing out weak banks. Mergers
As an incentive to make specific provisions,
between strong banks/FIs would make for
they may be made tax deductible.
greater economic and commercial sense.
Systems and Methods in Banks ‘Weak Banks’ may be nurtured into healthy
units by slowing down on expansion,
There should be an independent loan review
eschewing high cost funds/borrowings, etc.
mechanism especially for large borrowal
accounts and systems to identify potential Small local banks should be confined to
NPAs. Banks may evolve a filtering states or cluster of districts in order to serve
mechanism by stipulating in-house local trade, small industry and agriculture.
prudential limits beyond which exposures
The minimum share of holding by
on single/group borrowers are taken
Government/RBI in the equity of the
keeping in view their risk profile as revealed
nationalised banks and the SBI should be
through credit rating and other relevant
brought down to 33%.
factors.

There is a need for a reform of the deposit market in 91 days Treasury Bills.
insurance scheme based on CAMELS
Functions of banks’ boards and
ratings awarded by RBI to banks.
management need to be reviewed so that
Inter-bank call and notice money market and the boards remain responsible for
inter-bank term money market should be enhancing shareholder value through
strictly restricted to banks; only exception formulation of corporate strategy, and not
to be made is primary dealers. get involved in credit-decision making and
other aspects of day-to-day management.
Non-bank parties be provided free access
The Committee made a strong pitch for
to bill rediscounts, CPs, CDs, Treasury
professionalising and depoliticising of bank
Bills, MMMFs.
boards, especially for appointment of non-
RBI should totally withdraw from the primary official directors.

STATISTICAL
PROFILE

Table 1: Consolidated Balance Sheet of Scheduled Commercial Banks
Item As at end-March
2006 2007
Amount Per cent Amount Per cent
to to
total total
1 2 3 4 5
Liabilities
1. Capital 25,206 0.9 29,559 0.9
2. Reserve and Surplus 1,57,974 5.7 1,89,615 5.5
3. Deposits 21,64,681 77.7 26,96,980 77.9
3.1. Demand Deposits 2,92,945 10.5 3,51,998 10.2
3.2. Saving Bank
Deposits 5,42,874 19.5 6,31,651 18.2
3.3. Term Deposits 13,28,861 47.7 17,13,330 49.5
4. Borrowings 2,03,147 7.3 2,42,870 7.0
5. Other Liabilities and
Provisions 2,34,852 8.4 3,04,381 8.8
Total Liabilities/Assets 27,85,863 100.0 34,63,406 100.0
Assets
1. Cash and Balances
with RBI 1,44,475 5.2 1,95,372 5.6
2. Balances with Banks
and Money at Call and
Short Notice 1,16,443 4.2 1,58,413 4.6
3. Investments 8,66,508 31.1 9,50,769 27.5
3.1 Government
Securities (a+b) 6,90,421 24.8 7,54,456 21.8
a. In India 6,86,464 24.6 7,50,733 21.7
b. Outside India 3,957 0.1 3,723 0.1
3.2 Other Approved
Securities 13,949 0.5 12,760 0.4
3.3 Non-Approved
Securities 1,62,137 5.8 1,83,551 5.3
4. Loans and Advances 15,16,811 54.4 19,81,216 57.2
4.1 Bills Purchased
and Discounted 1,03,657 3.7 1,24,424 3.6
4.2 Cash Credits,
Overdrafts, etc. 5,65,001 20.3 7,12,866 20.6
4.3 Term Loans 8,48,152 30.4 11,43,924 33.0
5. Fixed Assets 25,081 0.9 31,362 0.9
6. Other Assets 1,16,542 4.2 1,46,271 4.2
Source : RBI Report on Trend and Progress of Banking in India, 2006-07.

Table 2: Important Financial Indicators of Scheduled Commercial Banks
Item 2004-05 2005-06 2006-07

Amount Per cent to Amount Per cent to Amount Per cent to
Assets Assets Assets
1 2 3 4 5 6 7
1. Income 1,90,236 8.1 2,20,756 7.9 2,76,201 8.0
a) Interest Income 1,55,801 6.6 1,85,388 6.7 2,37,271 6.9
b) Other Income 34,435 1.5 35,368 1.3 38,929 1.1
2. Expenditure 1,69,278 7.2 1,96,174 7.0 2,44,998 7.1
a) Interest Expended 89,079 3.8 1,07,161 3.8 1,43,965 4.2
b) Operating Expenses 50,133 2.1 59,201 2.1 66,319 1.9
Of which : Wage Bill 29,479 1.3 33,461 1.2 36,160 1.0
c) Provision and Contingencies 30,065 1.3 29,812 1.1 34,714 1.0
3. Operating Profit 51,023 2.2 54,394 2.0 65,917 1.9
4. Net Profit 20,958 0.9 24,582 0.9 31,203 0.9
5. Net Interest Income/Margin (1a-2a) 66,722 2.8 78,227 2.8 93,306 2.7
Note : The number of scheduled commercial banks in 2004-05, 2005-06 and 2006-07 were 88, 85 and 82, respectively.

Table 3: Financial Performance of State Bank Group
Item 2005-06 2006-07 Variation

Absolute Percentage
1 2 3 4 5
A. Income (i+ii) 58,826.53 64,137.84 5,311.31 9.03

(100.00) (100.00)
i) Interest Income 49,300.60 56,338.67 7,038.07 14.28
(83.81) (87.84)
of which: Interest on Advances 25,517.09 36,147.51 10,630.42 41.66
Income on Investments 19,089.26 16,512.38 -2,576.88 -13.50
ii) Other Income 9,525.93 7,799.17 -1,726.76 -18.13
(16.19) (12.16)
of which: Commission &
Brokerage 5,310.38 6,661.30 1,350.92 25.44
B. Expenditure (i+ii+iii) 52,870.05 57,565.80 4,695.75 8.88

(100.00) (100.00)
i) Interest Expended 28,040.10 33,859.19 5,819.09 20.75
(53.04) (58.82)
of which: Interest on Deposits 25,288.64 28,638.81 3,350.17 13.25
ii) Provisions and Contingencies 9,069.99 7,719.86 -1,350.13 -14.89
(17.16) (13.41)
of which: Provision for NPAs 475.28 1,783.88 1,308.60 275.33
iii) Operating Expenses 15,759.95 15,986.75 226.80 1.44
(29.81) (27.77)
of which: Wage Bill 10,665.09 10,470.17 -194.92 -1.83
C. Profit
i) Operating Profit 15,026.47 14,291.90 -734.57 -4.89
ii) Net Profit 5,956.48 6,572.04 615.56 10.33
D. Net Interest Income/Margin 21,260.50 22,479.48 1,218.99 5.73
E. Total Assets 6,91,846.91 8,05,795.15 1,13,948.25 16.47
Note : Figures in brackets are percentage shares to the respective total.


Table 4: Lending to the Sensitive Sector by Scheduled Commercial Banks
(As at end-March)
Sector 2006 2007
Amount Per cent Amount Per cent
to Total to Total
1 2 3 4 5
1. Capital Market 22,303 7.8 30,637 7.6
(40.6) (37.4)
2. Real Estate Market 2,62,053 91.7 3,70,689 91.9
(80.0) (41.5)
3. Commodities 1,413 0.5 2,206 0.6
(-40.3) (56.1)
Total (1+2+3) 2,85,770 100.0 4,03,533 100.0
(74.4) (41.2)
Note : Figures in brackets are percentage variations over the previous year.
Table 5: Cost of Funds and Return on Funds – Bank Group-wise

(Per cent)
Indicator Public Sector Old Private New Private Foreign Scheduled
Banks Sector Banks Sector Banks Banks Commercial Banks
2005-06 2006-07 2005-06 2006-07 2005-06 2006-07 2005-06 2006-07 2005-06 2006-07
1 2 3 4 5 6 7 8 9 10 11
1. Cost of Deposits 4.3 4.5 4.5 4.9 3.6 4.7 2.8 3.2 4.1 4.5
2. Cost of Borrowings 2.5 3.4 3.1 3.4 3.1 3.1 4.5 4.7 3.0 3.6
3. Cost of Funds 4.2 4.4 4.5 4.8 3.5 4.5 3.2 3.5 4.0 4.4
4. Return on Advances 7.1 7.7 7.9 8.6 7.3 8.3 7.6 8.7 7.2 7.9
5. Return on Investments 8.2 7.5 7.2 7.2 5.5 6.6 7.5 7.6 7.7 7.3
6. Return on Funds 7.5 7.6 7.7 8.1 6.6 7.7 7.6 8.3 7.4 7.7
7. Spread (6-3) 3.3 3.2 3.2 3.3 3.1 3.2 4.3 4.8 3.3 3.3
Note : 1. Cost of Deposits = Interest Paid on Deposits/Deposits.

2. Cost of Borrowings = Interest Paid on Borrowings/Borrowings.
3. Cost of Funds = (Interest Paid on Deposits + Interest Paid on Borrowings)/(Deposits + Borrowings)
4. Return on Advances = Interest Earned on Advances/Advances
5. Return on Investments = Interest Earned on Investments/Investments
6. Return on Funds = (Interest Earned on Advanced + Interest Earned on Investments)/(Investments + Advances)

Table 6: Capital Adequacy Ratio – Bank Group-wise
(As at end-March)
(Per cent)
Bank Group 2000 2001 2002 2003 2004 2005 2006 2007
1 2 3 4 5 6 7 8 9
Scheduled Commercial Banks 11.1 11.4 12.0 12.7 12.9 12.8 12.3 12.3
Public Sector Banks 10.7 11.2 11.8 12.6 13.2 12.9 12.2 12.4
Nationalised Banks 10.1 10.2 10.9 12.2 13.1 13.2 12.3 12.4
SB Group 11.6 12.7 13.3 13.4 13.4 12.4 11.9 12.3
Old Private Sector Banks 12.4 11.9 12.5 12.8 13.7 12.5 11.7 12.1
New Private Sector Banks 13.4 11.5 12.3 11.3 10.2 12.1 12.6 12.0
Foreign Banks 11.9 12.6 12.9 15.2 15.0 14.0 13.0 12.4
Table 7: Computerisation in Public Sector Banks

(As at end-March)
(Per cent)
Category 2006 2007

1 2 3
Fully Computerised Branches (i+ii) 77.5 85.6
i) Branches Under Core Banking Solution 28.9 44.4
ii) Branches already Fully Computerised # 48.5 41.2
Partially Computerised Branches 18.2 13.4
# : Other than branches under Core Banking Solution.

Table 8: Branches and ATMs of Scheduled Commercial Banks

(As at end-March 2007)
Bank Group Number of Bank/Branches Number of ATMs
Off-site ATMs as
Rural Semi- Urban Metro- Total On-site Off-site Total ATMs as percenturban
URBAN politan percentage of
age of Branches
total
ATMs
1 2 3 4 5 6 7 8 9 10 11
i) Nationalised Banks 12,986 7,573 7,612 7,465 35,636 6,634 3,254 9,888 27.4 27.7
ii) State Bank Group 5,126 4,155 2,556 2,193 14,030 3,655 2,786 6,441 43.3 45.9
iii) Old Private Sector Banks 855 1,510 1,294 947 4,606 1,104 503 1,607 31.3 34.9
iv) New Private Sector Banks 130 554 824 989 2,497 3,154 5,038 8,192 61.5 328.1
v) Foreign Banks – 2 44 227 273 249 711 960 74.1 351.6
Total (i to v) 19,097 13,794 12,330 11,821 57,042 12,796 12,292 27,088 42.3 47.5

Table 9: Gross and Net NPAs of Scheduled Commercial Banks – Bank Group-wise
(As at end-March)
Bank Group/Year Gross Gross NPAs Net Net NPAs
Advances Amount Per cent to Per cent to Advances Amount Per cent to Per cent to
Gross Total Net Total
Advances Assets Advances Assets
1 2 3 4 5 6 7 8 9
Scheduled Commercial Banks
2004 9,02,026 64,812 7.2 3.3 8,62,643 24,396 2.8 1.2
2005 11,52,682 59,373 5.2 2.5 11,15,663 21,754 2.0 0.9
2006 15,51,378 51,097 3.3 1.8 15,16,811 18,543 1.2 0.7
2007 20,12,510 50,486 2.5 1.5 19,81,216 20,101 1.0 0.6
Public Sector Banks

2004 6,61,975 51,537 7.8 3.5 6,31,383 19,335 3.1 1.3
2005 8,77,825 48,399 5.5 2.7 8,48,912 16,904 2.1 1.0
2006 11,34,724 41,358 3.6 2.1 11,06,288 14,566 1.3 0.7
2007 14,64,493 38,968 2.7 1.6 14,40,123 15,145 1.1 0.6
Old Private Sector Banks

2004 57,908 4,398 7.6 3.6 55,648 2,142 3.8 1.8
2005 70,412 4,200 6.0 3.1 67,742 1,859 2.7 1.4
2006 85,154 3,759 4.4 2.5 82,957 1,375 1.7 0.9
2007 94,872 2,969 3.1 1.8 92,890 891 1.0 0.6
New Private Sector Banks

2004 1,19,511 5,983 5.0 2.4 1,15,106 1,986 1.7 0.8
2005 1,27,420 4,582 3.6 1.6 1,23,655 2,353 1.9 0.8
2006 2,32,536 4,052 1.7 1.0 2,30,005 1,796 0.8 0.4
2007 3,25,273 6,287 1.9 1.1 3,21,865 3,137 1.0 0.5
Foreign Banks
2004 62,632 2,894 4.6 2.1 60,506 933 1.5 0.7
2005 77,026 2,192 2.8 1.4 75,354 639 0.8 0.4
2006 98,965 1,928 1.9 1.0 97,562 808 0.8 0.4
2007 1,27,872 2,263 1.8 0.8 1,26,339 927 0.7 0.3

Table 10: Share Prices and Price/Earning Ratios of Bank Stocks at BSE
Bank Average Daily Closing Percentage Variation P/E Ratio
Price (Rs.) in Prices ( End-March)
2005-06 2006-07 2006 2007
1 2 3 4 5 6
Public Sector Banks
Allahabad Bank 85.44 80.11 -6.24 5.0 4.3
Andhra Bank 96.29 81.19 -15.68 8.1 6.9
Bank of Baroda 226.15 237.63 5.08 10.1 7.6
Bank of India 117.00 150.61 28.73 9.2 7.3
Bank of Maharashtra 33.35 32.19 -3.48 26.0 6.2
Canara Bank 225.17 242.09 7.51 8.2 5.6
Corporation Bank 370.63 316.81 -14.52 12.3 7.7
Dena Bank 32.87 32.24 -1.92 20.3 5.0
Indian Overseas Bank 89.85 100.81 12.20 6.7 5.6
Oriental Bank of Commerce 260.46 212.28 -18.50 7.4 5.7
Punjab National Bank 420.43 455.11 8.25 10.3 9.7
Syndicate Bank 75.66 73.42 -2.96 8.7 4.7
Union Bank of India 118.47 113.76 -3.98 9.1 6.2
Vijaya Bank 60.48 47.18 -21.99 18.0 6.3
State Bank of India 811.67 997.31 22.87 11.6 11.5
State Bank of Bikaner and Jaipur 2,757.41 3,465.41 25.68 14.4 5.5
State Bank of Mysore 3,513.28 5,391.86 53.47 10.5 7.4
State Bank of Travancore 2,697.68 3,575.63 32.54 8.0 4.6
UCO Bank 27.96 21.45 -23.28 10.8 5.4
Other Public Sector Banks
IDBI Ltd. 98.28 75.18 -23.50 10.1 8.9
Private Sector Banks
Axis Bank 273.09 394.79 44.56 20.5 21.0
Bank of Rajasthan Ltd. 52.07 37.94 -27.14 39.8 3.8
City Union Bank Ltd. 97.83 128.98 31.84 4.8 5.7
Centurion Bank of Punjab Ltd. 19.08 27.39 43.55 152.0 48.5
Dhanalakshmi Bank 31.81 38.14 19.90 10.5 11.6
Federal Bank Ltd. 175.56 205.36 16.97 7.7 6.3
ING Vysya Bank 158.37 144.76 -8.59 143.6 17.9
Indusind Bank Ltd. 61.38 45.13 -26.47 36.9 19.7
Jammu and Kashmir Bank Ltd. 442.28 494.24 11.75 12.4 11.4
Karnataka Bank Ltd. 102.68 121.61 18.44 6.9 11.7
Karur Vysya Bank Ltd. 174.89 228.93 30.90 6.5 8.7
Kotak Mahindra Bank Ltd. 192.96 347.18 79.92 72.7 110.7
South Indian Bank Ltd. 65.72 73.99 12.58 8.5 6.7
United Western Bank # 37.46 28.89 -22.88 -2.4 _
Bank of Punjab Ltd. * 34.42 _ _ _ _
HDFC Bank Ltd. 658.46 911.35 38.41 27.8 26.6
ICICI Bank Ltd. 506.31 711.37 40.50 21.8 28.8
Yes Bank 72.10 109.13 51.36 49.0 41.8
#: United Western Bank Ltd. was merged with IDBI Ltd. on September 30, 2006.
* : Bank of Punjab Ltd. Merged with Centurion Bank Ltd.
– : Not Available.
Note: Averages are calculated using daily closing prices.

Table 11: Share of Top Hundred Centres in Aggregate Deposits and Gross Bank
Credit
(Per cent)
As at Deposits Credit
end-March
Offices Amount Offices Amount
1 2 3 4 5
2000 21.9 59.0 21.5 74.7
2001 22.3 58.9 21.9 75.3
2002 22.5 59.1 22.1 77.0
2003 22.7 61.0 22.4 75.9
2004 23.1 63.6 22.9 75.5
2005 23.8 65.3 23.7 75.9
2006 24.2 67.0 24.0 76.5
2007 24.9 68.9 24.8 77.4
Table 12: Overseas Operations of Indian Banks

(Actually Operational)
Name of the Bank Branch Subsidiary

Representative Joint Venture Total
Office Bank
2005-06 2006-07 2005-06 2006-07 2005-06 2006-07 2005-06 2006-07 2005-06 2006-07
1 2 3 4 5 6 7 8 9 10 11
I. Public Sector Banks 106 116 15 19 24 26 6 7 151 168

1. Allahabad Bank – 1 – – 1 1 – – 1 2
2. Andhra Bank – – – – 1 1 – – 1 1
3. Bank of Baroda 40 43 7 8 3 4 1 1 51 56
4. Bank of India 20 22 1 2 4 3 1 1 26 28
5. Bharat Overseas
Bank 1 – – – – – – – 1 –
6. Canara Bank 1 2 1 1 1 1 – – 3 4
7. Indian Bank 3 3 – – – – – – 3 3
8. Indian Overseas Bank 5 6 1 1 2 2 – – 8 9
9. Punjab National Bank 1 1 – 1 4 4 1 1 6 7
10.State Bank of India 30 33 5 6 7 7 3 4 45 50
11.Syndicate Bank 1 1 – – – – – – 1 1
12.UCO Bank 4 4 – – 1 2 – – 5 6
13.Union Bank N.A. – N.A. – N.A. 1 N.A. – N.A. 1
II. New Private Sector Banks6 9 4 3 10 13 1 – 21 25
14.Axix Bank 1 3 – – – 1 – – 1 4
15.Centurian Bank of
Punjab Ltd. – – 1 – – 1 1 – 2 1
16.HDFC Bank Ltd. – – – – 1 1 – – 1 1
17.ICICI Bank Ltd. 5 6 3 3 7 8 – – 15 17
18.IndusInd Bank Ltd. – – – – 2 2 – – 2 2
Total 112 125 19 22 34 39 7 7 172 193
– : Nil/Negligible. N.A. : Not Available.

Note : Data for 2005-06 relate to end-September 2006 while that for 2006-07 relate to end-August 2007.

Table 13: List of Foreign Banks Operating in India – Country-wise
(As at end-October, 2007)
Sr. No. Name of Bank Country of No. of branches
Incorporation in India
1 2 3 4
1. ABN-AMRO Bank N.V. Netherlands 28
2. Abu Dhabi Commercial Bank Ltd. UAE 2
3. Arab Bangladesh Bank Ltd. Bangladesh 1
4. American Express Bank Ltd. USA 7
5. Antwerp Diamond Bank N.V. Belgium 1
6. Bank International Indonesia Indonesia 1
7. Bank of America USA 5
8. Bank of Bahrain & Kuwait BSC Bahrain 2
9. Bank of Nova Scotia Canada 5
10. Bank of Tokyo-Mitsubishi UFJ Ltd. Japan 3
11. BNP Paribas France 8
12. Bank of Ceylon Sri Lanka 1
13. Barclays Bank Plc UK 4
14. Calyon Bank France 5
15. Citibank N.A. USA 39
16. Chinatrust Commercial Bank Taiwan 1
17. Deutsche Bank Germany 11
18. DBS Bank Ltd. Singapore 2
19. HSBC Hongkong 47
20. J.P. Morgan Chase Bank N.A. USA 1
21. Krung Thai Bank Public Co. Ltd. Thailand 1
22. Mizuho Corporate Bank Ltd. Japan 2
23. Mahreqbank PSC UAE 2
24. Oman International Bank SAOG Sultanate of Oman 2
25. Shinhan Bank South Korea 2
26. Standard Chartered Bank UK 83
27. Sonali Bank Bangladesh 2
28. Societe Generale France 2
29. State Bank of Mauritius Mauritius 3
Total 273

Table 14: Return on Assets of Indian Banks vis-à-vis Select Countries
(Per cent)
Bank Group/Country As at end-March

2001 2007
1 2 3
India
Public sector banks 0.4 0.8
Private banks 0.7 0.9
Old private banks 0.6 0.7
New private banks 0.8 0.9
Foreign banks 0.9 1.7
Scheduled Commercial Banks 0.5 0.9
Emerging Markets
Argentina 0.0 2.1
Brazil -0.1 2.1
Mexico 0.8 3.2
Korea 0.7 1.1
South Africa 0.8 1.4
Developed Countries
US 1.1 1.2
UK 0.5 0.5*
Japan -0.6 0.4*
Canada 0.7 1.0*
Australia 1.3 1.8#
Global range for 2006 [0.2 (Tunisia) to 4.3 (Saudi Arabia and Ghana]
* : pertains to 2006. # : pertains to 2005.


Table 15: Ratio of Gross Non-performing Loans to Gross Advances of Indian Banks
vis-à-vis Select Countries
(Per cent)

2001 2007
1 2 3
India
Private banks 8.4 2.2
Emerging Markets
Argentina 13.1 3.2
Brazil 5.6 4.0
Mexico 5.1 2.2
Korea 3.4 0.8
Developed Countries
US 1.3 0.8
UK 2.6 0.9
Japan 8.4 2.5*
Canada 1.5 0.4*
Australia 0.6 0.2
Global range for 2006 [0.2 (Estonia, Luxembourg and Australia) to 24.7 (Egypt)]
* : pertains to 2006.

Table 16: Capital Adequacy Ratio- Indian
Banks vis-à-vis Select Countries
(Per cent)

2001 2007
1 2 3
India
Private banks
Emerging Markets
Argentina – –
Brazil 14.8 18.5
Mexico 13.9 16.1
Korea 11.7 13.0
Developed Countries
US 12.9 13.0
UK 13.2 12.9*
Japan 10.8 13.1*
Canada 12.3 12.4
Australia 10.4 10.4
Global range for 2006 [7.1 (Sweden) to 34.9 (Armenia)]

* : pertains to 2005.

Table 17: Distribution of Commercial Bank Branches in India –
Bank Group and Population Group-wise
Bank Group No. of Number of Branches

Banks#
As on June 30, 2006@ As on June 30, 2007@
Rural Semi- Urban Metro- Total Rural Semi- Urban Metro- Total
urban politan urban politan
1 2 3 4 5 6 7 8 9 10 11 12
1. State Bank of India 8 5,143 4,103 2,491 2,142 13,879 5,159 4,150 2,564 2,185 14,058
and Associates (37.1) (29.6) (17.9) (15.4) (100.0) (36.7) (29.5) (18.2) (15.5) (100.0)
2. Nationalised Banks 19 12,903 7,211 7,135 7,050 34,299 12,990 7,504 7,557 7,361 35,412
(37.6) (21.0) (20.8) (20.6) (100.0) (36.7) (21.2) (21.3) (20.8) (100.0)
3. Other Public 1 2 18 66 95 181 48 82 126 180 436

Sector Banks (1.1) (9.9) (36.5) (52.5) (100.0) (11.0) (18.8) (28.9) (41.3) (100.0)
4. Old Private 16 897 1,503 1,281 977 4,658 804 1,460 1,218 859 4,341
Sector Banks (19.3) (32.3) (27.5) (21.0) (100.0) (18.5) (33.6) (28.1) (19.8) (100.0)
5. New Private 8 95 325 682 898 2,000 183 617 884 1,042 2,726
Sector Banks (4.8) (16.3) (34.1) (44.9) (100.0) (6.7) (22.6) (32.4) (38.2) (100.0)
6. Foreign Banks 29 – 1 37 224 262 – 2 43 227 272

in India – (0.4) (14.1) (85.5) (100.0) – (0.7) (15.8) (83.5) (100.0)
7. Regional Rural 96 11,456 2,471 514 55 14,496 11,444 2,481 522 59 14,506
Banks** (79.0) (17.0) (3.5) (0.4) (100.0) (78.9) (17.1) (3.6) (0.4) (100.0)
8. Non-Scheduled 4 4 12 10 – 26 5 14 11 – 30
Commercial Banks (15.4) (46.2) (38.5) – (100.0) (16.7) (46.7) (36.7) – (100.0)
(Local Area Banks)
Total 181 30,500 15,644 12,216 11,441 69,801 30,633 16,310 12,925 11,913 71,781
(43.7) (22.4) (17.5) (16.4) (100.0) (42.7) (22.7) (18.0) (16.6) (100.0)
– : Nil/Negligible.
# : as on June 30, 2007.
@ : Population group wise classification of branches is based on 2001 Census.
** : No. of Regional Rural Banks as on June 30, 2007 was 96, after effecting the amalgamation of RRBs, that have taken place.
Note : 1. Number of branches data exclude administrative offices.
2. Data for June 2006 are revised and that for June 2007 are provisional.
3. Figures in brackets indicate percentages to the total in each group.

Table 18: Off-Balance Sheet Exposure of Scheduled Commercial Banks in India
Advances to State Bank Group Nationalised Banks Other Public Sector Bank Public Sector Banks
2005-06 2006-07 Percentage 2005-06 2006-07 Percentage 2005-06 2006-07 Percentage 2005-06 2006-07 Percentage
Variation Variation Variation Variation
Banking Briefs
1 2 3 4 5 6 7 8 9 10 11 12 13
1. Forward exchange 1,87,048.79 2,58,766.23 38.34 2,98,695.96 3,36,460.59 12.64 19,570.55 17,708.91 -9.51 5,05,315.30 6,12,935.74 21.30
contract (27.04) (32.11) (24.20) (21.99) (22.10) (17.05) (25.08) (25.12)
2. Guarantees given 32,631.36 46,660.81 42.99 66,955.99 82,852.31 23.74 4,027.19 8,202.08 103.67 1,03,614.54 1,37,715.20 32.91
(4.72) (5.79) (5.42) (5.41) (4.55) (7.90) (5.14) (5.64)
3. Acceptances, 77,798.20 85,248.77 9.58 1,01,837.48 1,32,760.96 30.37 53,422.32 82,616.84 54.65 2,33,058.00 3,00,626.56 28.99
endorsements, etc. (11.25) (10.58) (8.25) (8.68) (60.32) (79.56) (11.57) (12.32)
Contingent
Liabilities 2,97,478.35 3,90,675.81 31.33 4,67,489.42 5,52,073.86 18.09 77,020.06 1,08,527.82 40.91 8,41,987.84 10,51,277.50 24.86
(43.00) (48.48) (37.87) (36.07) (86.96) (104.52) (41.79) (43.09)
365
New Private Sector Banks Old Private Sector Banks Foreign Banks Scheduled Commercial Banks
2005-06 2006-07 Percentage 2005-06 2006-07 Percentage 2005-06 2006-07 Percentage 2005-06 2006-07 Percentage
Variation Variation Variation Variation
1 2 3 4 5 6 7 8 9 10 11 12 13
1. Forward exchange 4,28,420.21 7,00,301.18 63.46 41,534.74 50,491.66 21.56 21,84,020.25 42,21,527.54 93.29 31,59,290.49 55,85,256.11 76.79
contract (101.60) (119.74) (27.69) (31.45) (1,095.53) (1,518.45) (113.40) (161.25)
2. Guarantees given 27,083.86 42,009.59 55.11 5,717.74 6,613.16 15.66 24,812.58 33,279.27 34.12 1,61,228.74 2,19,617.22 36.21
(6.42) (7.18) (3.81) (4.12) (12.45) (11.97) (5.79) (6.34)
3. Acceptances, 3,34,638.06 5,15,828.30 54.15 15,778.20 14,848.87 -5.89 3,45,348.90 7,95,537.04 130.36 9,28,823.14 16,26,840.77 75.15
endorsements, etc. (79.36) (88.20) (10.52) (9.25) (173.23) (286.15) (33.34) (46.97)
Contingent
Liabilities 7,90,142.13 12,58,139.07 59.23 63,030.69 71,953.69 14.16 25,54,181.73 50,50,343.85 97.73 42,49,342.38 74,31,714.10 74.89
(187.39) (215.12) (42.03) (44.81) (1,281.20) (1,816.56) (152.53) (214.58)
Note : Figures in brackets are percentages to total liabilities of the concerned bank-group.
(For internal circulation only)

FEEDBACK FORM
(You can also email to

manas.das@sbi.co.in
kshitij.mohan@sbi.co.in
LIST OF RESEARCH STUDIES
1. Study of Collections / Remittances (Jan., 06)
2. Dissemination of information on Bank’s products and schemes - Policy imperatives (Feb., 06)
3. A study suggesting best practices for branch security in the background of burglary,
dacoity and robbery (Feb., 06)
4. Cross-selling to enable our customers in CAG/Corporates to offer various services/facilities
to their suppliers (Mar., 06)
5. Empowering employees : Myth or Reality (Mar., 06)
6. Weaving industry in Andhra Pradesh (Apr., 06)
7. A study of contribution of business to domestic branches by the exchange houses
managed by us (Apr., 06)
8. A study on Convenience Banking, 7 Day Banking and 8 to 8 Banking (Apr., 06)
9. A diagnostic study on Customer Queues (May., 06)
10. A study on AUCA - Follow-up and Recovery (Jun., 06)
11. A study on Drop Boxes (Jul., 06)
12. A study on Bank’s Exit Policy (Jul., 06)
13. Training of Women Officers (Sep., 06)
14. Quality, Integrity and Purity of Data Relating to Loans and Advances (Oct., 06)
15. Mortgage Loan (Oct., 06)
16. Developing a Model to ascertain Staff Requirement at Branches (Nov., 06)
17. Likely Demand for proposed Insurance Linked Recurring Deposit Scheme (Nov., 06)
18. Updated Savings Bank Rules (Nov., 06)
19. SECC Processes - Beyond TAT (Feb., 07)
20. Study on how other banks are attracting small depositors and strategy for our Bank to
attract low-cost deposits (Feb., 07)
21. Effectiveness of Advertisements (Mar., 07)
LIST OF REGULAR PUBLICATIONS

1. Perhaps You Are Aware (recent trends) (monthly)
2. Chayanika (selected articles) (bi-monthly)
3. Parivartan - House Magazine (Quarterly)
4. AIMS (list of project works done by the trainers in various SBLCs) (half-yearly)
5. Quest (Quality Circle events in the Bank) (yearly)
LIST OF PUBLICATIONS
1. Preventive Vigilance (Jan, 06)
2. Training Manual for POs/TOs - General (Vol. I)
(Jan, 06)
3. Credit Management (Jun., 06)
4. Rural Marketing (Jun., 06)
5. HandBook on FEMA Regulations - Imports & Exports (Jan., 07)
6. BPR: Achieving Excellence through Transformation (Jan., 07)
7. HandBook on Personal Segment Loan Products (Feb., 07)
8. Discipline and Disciplinary Proceedings (Feb, 07)
9. N.R.I. Business (Mar, 07)
10. Service Conditions of Supervising Staff (Sep., 07)
11. Marketing of SME Products (Oct., 07)
12. Banking Briefs (A Compendium of readings of relevance to Bankers) (Jan., 08)

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Banking Briefs 1 (For internal circulation only)

Our efforts will be amply rewarded if it is found useful by our colleagues.

I wish you an intellectually enriching reading.

State Bank Staff College,

Banking Briefs 2 (For internal circulation only)

(Tenth Revised & Enlarged Edition)

M.R. Das Kshitij Mohan

Satbir Singh C.S. Shaji

STATE BANK STAFF COLLEGE

(For Internal Circulation Only)

Banking Briefs 3 (For internal circulation only)

Banking Briefs 5 (For internal circulation only)

Banking Briefs 6 (For internal circulation only)

I. STATE BANK OF INDIA

III. POLICIES AND ACTS

Banking Briefs 7 (For internal circulation only)

V. CREDIT AND DERIVATIVE PRODUCTS

VI. MANAGEMENT OF ASSETS AND LIABILITIES

Banking Briefs 8 (For internal circulation only)

III. FINANCIAL MARKETS

Banking Briefs 9 (For internal circulation only)

IV. EXTERNAL SECTOR

Banking Briefs 10 (For internal circulation only)

Banking Briefs 11 (For internal circulation only)

Banking Briefs 12 (For internal circulation only)

Banking Briefs 13 (For internal circulation only)

Banking Briefs 14 (For internal circulation only)

Banking Briefs 15 (For internal circulation only)

Rural & Agri Business Group Corporate Banking Group

Banking Briefs 16 (For internal circulation only)

The Mid-Corporate Group was created in July Technology Orientation

Banking Briefs 17 (For internal circulation only)

STATE BANK OF INDIA (Source: SBI Website)

FY2002 FY2003 FY2004 FY2005 FY 2006 FY2007

Deposits 2705.6 2961.24 3186.19 3670.48 3800.46 4355.21

Banking Briefs 18 (For internal circulation only)

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007

ROA (%) 0.73 0.86 0.94 0.99 0.89 0.84

SUMMARY OF BALANCE SHEET (Rs. in billion)

MARCH MARCH MARCH MARCH MARCH MARCH

CAPITAL & LIABILITIES

MARKET RELATED RATIOS

MAR 03 MAR 04 MAR 05 MAR 06 MAR 07

Market Price (Rs)(as on last day

Banking Briefs 19 (For internal circulation only)

Banking Briefs 20 (For internal circulation only)

Banking Briefs 21 (For internal circulation only)

Banking Briefs 23 (For internal circulation only)

Financial planning is a two way interaction 6. Monitoring the financial planning

Banking Briefs 24 (For internal circulation only)

Banking Briefs 25 (For internal circulation only)

Based on the recommendations of the Working explanation and, if necessary,

Banking Briefs 26 (For internal circulation only)

Banking Briefs 27 (For internal circulation only)

Banking Briefs 28 (For internal circulation only)

Banking Briefs 29 (For internal circulation only)

Banking Briefs 30 (For internal circulation only)

Islamic Banking does not involve payment and charging of interest.

Introduction concern of Muslim intellectuals. The story of

Banking Briefs 31 (For internal circulation only)

Banking Briefs 33 (For internal circulation only)

Banking Briefs 34 (For internal circulation only)

Banking Briefs 36 (For internal circulation only)

Banking Briefs 38 (For internal circulation only)