Test Details

Sr. No. Name of Module Fees (Rs.) Test No. of Maximum Pass Duration Questions Marks Marks (in (%) minutes) "*) "*) "*) "*) "*) "*) ")( ")( "*) "*) "*) "*) +) +) +) +) +) +) +) +) +) +) +) +) ")) ")) ")) ")) ")) ")) ")) ")) ")) ")) ")) ")) () () () () () () +) () +) +) +) +) Certificate alidit! (in !ears) ( ( ( ( ( ( ( ( , ( ( ,

" * , . ( + 2 3 6 ") "" "* ",

Financial Markets# $ %e&inners' Module Mutual Funds # $ %e&inners' Module Currenc! Deri-ati-es# $ %e&inner's Module /0uit! Deri-ati-es# $ %e&inner's Module 1nterest Rate Deri-ati-es# $ %e&inner's Module Commercial %ankin& in 1ndia# $ %e&inner's Module Securities Market (%asic) Module Ca4ital Market (Dealers) Module 5 Deri-ati-es Market (Dealers) Module 55 F1MMD$7NS/ De8t Market (%asic) Module 1n-estment $nal!sis and Portfolio Mana&ement Module N1SM7Series71# Currenc! Deri-ati-es Certification /xamination N1SM7Series7117$# Re&istrars to an 1ssue and S9are Transfer $&ents 7 Cor4orate Certification /xamination N1SM7Series7117%# Re&istrars to an 1ssue and S9are Transfer $&ents 7 Mutual Fund Certification /xamination N1SM7Series71 # 1nterest Rate Deri-ati-es Certification /xamination N1SM7Series7 7$# Mutual Fund Distri8utors Certification /xamination NSD:7De4ositor! ;4erations Module Commodities Market Module Sur-eillance in Stock /xc9an&es Module Cor4orate =o-ernance Module Com4liance ;fficers (%rokers) Module Com4liance ;fficers (Cor4orates) Module 1nformation Securit! $uditors Module (Part7") 1nformation Securit! $uditors Module (Part7*)

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*. *( *+ 5 55

;4tions Tradin& Strate&ies Module FPS% 1ndia /xam " to .555 /xamination (>$d-anced Financial Plannin&

( N$ N$

Candidates 9a-e t9e o4tion to take t9e CMDM test in /n&lis9? =u@arati or Aindi lan&ua&e. T9e Bork8ook for t9e module is 4resentl! a-aila8le in /N=:1SA. Candidates 9a-e t9e o4tion to take t9e DMDM test in /n&lis9? =u@arati or Aindi lan&ua&e. T9e Bork8ook for t9e module is also a-aila8le in /N=:1SA? =CD$R$T1 and A1ND1 lan&ua&es.

< Candidates securin& 3)% or more marks in NSD:7De4ositor! ;4erations Module ;N:E Bill 8e certified as 'Trainers'. 555 Modules of Financial Plannin& Standards %oard 1ndia (Certified Financial Planner Certification) i.e. (i) Risk $nal!sis F 1nsurance Plannin& (ii) Retirement Plannin& F /m4lo!ee %enefits (iii) 1n-estment Plannin& and (i-) Tax Plannin& F /state Plannin&.

C;NT/NTS
CA$PT/R "# 1NTR;DCCT1;N ................................................................................... ( "." ".* "., ".. Definition of 8anks ............................................................................................ ( /-olution of Commercial %anks in 1ndia ............................................................... + Functions of Commercial %anks .......................................................................... 2 Com4etiti-e :andsca4e of %anks in 1ndia ............................................................. 3

CA$PT/R *# %$NG1N= STRCCTCR/ 1N 1ND1$ ........................................................ ") *." *.* %ankin& Structure in 1ndia ................................................................................ ") Role of Reser-e %ank of 1ndia -is7H7-is Commercial %anks .................................... ".

CA$PT/R ,# %$NG D/P;S1T $CC;CNTS ................................................................ "+ ,." ,.* 1ntroduction to %ank De4osits ........................................................................... "2 T!4es of De4osit $ccounts ................................................................................. "6 ,.*." ,.*.* ,.*., ,., ,.. ,.( ,.+ Current De4osits ................................................................................... *) Sa-in&s %ank De4osits .......................................................................... *) Term De4osits ...................................................................................... *"

Strate&ies of mo8iliIin& de4osits ........................................................................ ** Common =uidelines of ;4enin& and ;4eratin& De4osit $ccounts ........................... *, De4osit Related Ser-ices ................................................................................... *( De4osit Ser-ices ;ffered to Non7Resident 1ndians ................................................ *3 ,.+." ,.+.* ,.+., Non Resident ;rdinar! $ccounts (NR;) ................................................... *6 Non7Resident (/xternal) Ru4ee $ccounts ................................................. *6 Forei&n Currenc! Non Resident $ccount (%anks) ....................................... ,)

,.2

De4osit 1nsurance ............................................................................................ ,* ,.2." ,.2.* %anks insured 8! t9e D1C=C .................................................................. ,* Features of t9e sc9eme ......................................................................... ,*

CA$PT/R .# %$S1CS ;F %$NG :/ND1N= ............................................................... ,( .." Princi4les of :endin& and :oan 4olic! .................................................................. ,( .."." ..".* .."., ..* Princi4les of lendin& .............................................................................. ,( :oan Polic! ........................................................................................... ,+ Com4liance Bit9 R%1 &uidelines .............................................................. ,3

%asics of :oan $44raisal? Credit decision7makin& and Re-ieB ................................ ., ..*." Credit a44ro-al aut9orities ..................................................................... ., "

..*.* ..*., ..,

Credit a44raisal and credit decision7makin& ............................................. ., Monitorin& and Re-ieB of :oan Portfolio ................................................... ..

T!4es of $d-ances ............................................................................................ .. ..,." ..,.* ..,., ..,.. ..,.( ..,.+ ..,.2 Jorkin& Ca4ital Finance ......................................................................... .( Pro@ect Finance ..................................................................................... .( :oans to Small and Medium /nter4rises ................................................... .+ Rural and $&ricultural :oans ................................................................... .2 Directed :endin& ................................................................................... .2 Retail :oan ........................................................................................... .6 1nternational :oans /xtended 8! %anks ................................................... ()

...

Mana&ement of Non Performin& $ssets ............................................................... () ...." ....* ...., ..... Classification of non74erformin& $ssets .................................................... (" De8t Restructurin& ................................................................................ (* ;t9er reco-er! o4tions .......................................................................... (* S$RF$/S1 $ct? *))* .............................................................................. (,

CA$PT/R (# %$NG 1N /STM/NTS .......................................................................... (( (." (.* 1n-estment Polic! ............................................................................................ (+ Statutor! Reser-e Re0uirements ........................................................................ (2 (.*." (.*.* (., Maintenance of Statutor! :i0uidit! Ratio (S:R) ......................................... (2 Penalties .............................................................................................. (3

Non7S:R 1n-estments ....................................................................................... (6 (.,." (.,.* %ank =uidelines for in-estments in ot9er t9an =o-ernment Securities ......... (6 Statutor! Prescri4tions .......................................................................... +) aluation Norms .......................................... +"

(..

%anks' 1n-estment Classification and (..." (...*

Treasur! Mana&ement ........................................................................... +* Forex Treasur! Mana&ement .................................................................. +,

CA$PT/R +# ;TA/R $CT1 1T1/S ;F C;MM/RC1$: %$NGS ..................................... +. +." ;t9er %asic %ankin& $cti-ities ........................................................................... +. +."." +.".* +."., +.".. +.".( Forei&n /xc9an&e Ser-ices ..................................................................... +. %anks' ser-ices to =o-ernment ............................................................... +. Pa!ment and Settlement S!stems ........................................................... +( NR1 Remittances ................................................................................... 2) Cas9 Mana&ement Ser-ices and Remittances ........................................... 2) *

+.*

Para78ankin& $cti-ities ..................................................................................... 2) +.*." +.*.* +.*., +.*.. +.*.( +.*.+ +.*.2 Primar! Dealers9i4 %usiness ................................................................... 2) 1n-estment %ankin&> Merc9ant %ankin& Ser-ices ...................................... 2" Mutual Fund %usiness ............................................................................ 2* Pension Funds Mana&ement (PFM) 8! 8anks ............................................. 2* De4ositor! Ser-ices ............................................................................... 2, Jealt9 Mana&ement> Portfolio Mana&ement Ser-ices ................................ 2. %ancassurance ..................................................................................... 2(

CA$PT/R 2# R/:$T1;NSA1P %/TJ//N %$NG $ND CCST;M/R .............................. 22 2." Strate&! for ex4andin& customer 8ase ................................................................ 22 2."." 2.".* 2."., 2.* Product :ife C!cle Strate&! .................................................................... 22 $44ro4riate tar&etin& ............................................................................ 23 /x4andin& 4roduct 4ortfolio .................................................................... 23

Ser-ices to different Customer =rou4s ................................................................ 23 2.*." 2.*.* 2.*., 2.*.. Retail Customers .................................................................................. 26 Cor4orate Customers ............................................................................ 3) 1nternational Presence ........................................................................... 3) Rural %ankin& Customers ....................................................................... 3"

2.,

Com4etition amon&st %anks for Customers ......................................................... 3" 2.,." 2.,.* 2.,., 2.,.. Com4etition for Retail Products and Ser-ices ............................................ 3" Com4etition for Cor4orate Products and Ser-ices ...................................... 3" Com4etition for 1nternational %ankin& ..................................................... 3* Com4etition for Rural Customers ............................................................ 3*

2..

Customer Relations9i4 Mana&ement ................................................................... 3* 2..." 2...* 2..., 3. 2.... 2...( 2...+ Committees on Customer Ser-ice ........................................................... 3, %oard7a44ro-ed Policies on Customer Ser-ice .......................................... 3, =i-in& Pu8licit! to t9e Policies ................................................................ ;4erations of $ccounts 8! S4ecial Cate&or! of Customers ......................... 3. Customer Confidentialit! ;8li&ations ....................................................... 3. National Do Not Call Re&istr! .................................................................. 3(

2.(

%ankin& ;m8udsman Sc9eme ........................................................................... 3( 2.(." $44ointment of %ankin& ;m8udsman ...................................................... 3( ,

2.(.* 2.(., 3( 2.(.. 2.+

Filin& a Com4laint to t9e %ankin& ;m8udsman ......................................... 3( :imit on t9e $mount of Com4ensation as S4ecified in an $Bard .................. Furt9er recourse a-aila8le ...................................................................... 3(

GnoB Eour Customer (GEC) norms ..................................................................... 3+ 2.+." 2.+.* 2.+., 2.+.. Customer $cce4tance Polic! ................................................................... 3+ Customer 1dentification Procedures ......................................................... 3+ Monitorin& of Transactions ..................................................................... 3+ Risk Mana&ement ................................................................................. 3+

2.2

Pre-ention of Mone! :aunderin& $ct (PM:$)? *))* ............................................... 36

CA$PT/R 3# / ;: 1N= TR/NDS 1N M;D/RN %$NG1N= ......................................... 6) 3." Tec9nolo&! 3."." 3.".* 3."., 3.* 3., ................................................................................................. 6)

1nternet %ankin& ................................................................................... 6) Mo8ile %ankin& Transactions .................................................................. 6" Point of Sale (PoS) Terminals ................................................................. 6"

;utsourcin& of Non7core $cti-ities ..................................................................... 6* Financial 1nclusion ............................................................................................ 6. 3.,." 3.,.* 1nitiati-es taken 8! t9e R%1 .................................................................... 6. Micro Credit ......................................................................................... 6+

Distri8ution of Bei&9ts in t9e Commercial %ankin& in 1ndia# $ %e&inner's Module Curriculum C9a4ter No " * , . ( + 2 3 Title 1ntroduction %ankin& structure in 1ndia %ank De4osit $ccounts %asics of %ank :endin& %ank 1n-estments ;t9er $cti-ities of Commercial %anks Relations9i4 8etBeen %ank and customer /-ol-in& Trends in modern %ankin& Jei&9ts (%) ") "+ "2 "+ "( ") + ")

Note#

Candidates are ad-ised to refer to NS/'s Be8site# BBB.nseindia.com? click

on

'NCFM' link and t9en &o to '$nnouncements' link? re&ardin& re-isions>u4dations in NCFM modules or launc9 of neB modules? if an!.

Co4!ri&9t K *)") 8! National Stock /xc9an&e of 1ndia :td. (NS/) /xc9an&e PlaIa? %andra Gurla Com4lex? %andra 1ND1$ (/ast)? Mum8ai .)) )("

$ll content included in t9is 8ook? suc9 as text? &ra49ics? lo&os? ima&es? data com4ilation etc. are t9e 4ro4ert! of NS/. T9is 8ook or an! 4art t9ereof s9ould not 8e co4ied? re4roduced? du4licated? sold? resold or ex4loited for an! commercial 4ur4oses. Furt9ermore? t9e 8ook in its entiret! or an! 4art cannot 8e stored in a retrie-al s!stem or transmitted in an! form or 8! an! means? electronic? mec9anical? 49otoco4!in&? recordin& or ot9erBise.

CA$PT/R "# 1ntroduction

%anks 9a-e 4la!ed a critical role in t9e economic de-elo4ment of some de-elo4ed countries suc9 as Da4an and =erman! and most of t9e emer&in& economies includin& 1ndia. %anks toda! are im4ortant not @ust from t9e 4oint of -ieB of economic &roBt9? 8ut also financial sta8ilit!. 1n emer&in& economies? 8anks are s4ecial for t9ree im4ortant reasons. First? t9e! take a leadin& role in de-elo4in& ot9er financial intermediaries and markets. t9e cor4orate Finall!? in emer&in& markets funds? 8ecause of t9eir Second? due to t9e a8sence of Bell7de-elo4ed e0uit! and 8ond markets? sector de4ends 9ea-il! on 8anks to meet its financin& needs.

suc9 as 1ndia? 8anks cater to t9e needs of a -ast num8er of sa-ers from t9e 9ouse9old sector? B9o 4refer assured income and li0uidit! and safet! of inade0uate ca4acit! to mana&e financial risks. Forms of 8ankin& 9a-e c9an&ed o-er t9e !ears and e-ol-ed Bit9 t9e needs of t9e

econom!. T9e transformation of t9e 8ankin& s!stem 9as 8een 8rou&9t a8out 8! dere&ulation? tec9nolo&ical inno-ation and &lo8aliIation. J9ile 8anks 9a-e 8een ex4andin& into areas B9ic9 Bere traditionall! out of 8ounds for t9em? non78ank intermediaries 9a-e 8e&un to 4erform man! of t9e functions of 8anks. %anks t9us com4ete not onl! amon& t9emsel-es? 8ut also Bit9 non7 8ank financial intermediaries? and o-er t9e !ears? t9is com4etition 9as onl! &roBn in intensit!. =lo8all!? t9is 9as forced t9e 8anks to introduce inno-ati-e 4roducts? seek neBer sources of income and di-ersif! into non7traditional acti-ities. T9is module 4ro-ides some 8asic insi&9ts into t9e 4olicies and 4ractices currentl! folloBed in t9e 1ndian 8ankin& s!stem. T9e C9a4ter ,? lendin& and in-estments in first tBo c9a4ters 4ro-ide an introduction to commercial 8ankin& in 1ndia and its structure. %ank de4osits are dealt Bit9 in detail in C9a4ter . F C9a4ter ( res4ecti-el!. C9a4ter + modern 8ankin& deals Bit9 ot9er 8asic 8ankin& acti-ities of commercial 8anks? B9ile C9a4ters 2 and 3 ex4lain t9e relations9i4 8etBeen a 8ank and its customers and t9e trends in res4ecti-el!.

"."
$ct?

Definition of 8anks
(%R $ct)? "6.6. $ccordin& to Section ((c) of t9e %R $ct? 'a 8ankin& com4an! is a

1n 1ndia? t9e definition of t9e 8usiness of 8ankin& 9as 8een &i-en in t9e %ankin& Re&ulation com4an! B9ic9 transacts t9e 8usiness of 8ankin& in 1ndia.' Furt9er? Section ((8) of t9e %R $ct defines 8ankin& as? 'acce4tin&? for t9e 4ur4ose of lendin& or in-estment? of de4osits of mone! from t9e 4u8lic? re4a!a8le on demand or ot9erBise? and Bit9draBa8le? 8! c9e0ue? draft? order or ot9erBise.' T9is definition 4oints to t9e t9ree 4rimar! acti-ities of a commercial 8ank B9ic9 distin&uis9 it from t9e ot9er financial institutions. T9ese are# (i) maintainin& de4osit accounts includin& current accounts? (ii) issue and 4a! c9e0ues? and (iii) collect c9e0ues for t9e 8ank's customers." +

"

/ac9 of t9ese functions is descri8ed in detail in later c9a4ters.

".*

/-olution of Commercial %anks in 1ndia

1ndian =o-ernment at t9e time esta8lis9ed t9ree Presidenc!

T9e commercial 8ankin& industr! in 1ndia started in "23+ Bit9 t9e esta8lis9ment of t9e %ank of %en&al in Calcutta. T9e 8anks? -iI.? t9e %ank of %en&al (esta8lis9ed in "3)6)? t9e %ank of %om8a! (esta8lis9ed in "3.)) and t9e %ank of Madras (esta8lis9ed in "3.,). 1n "6*"? t9e t9ree Presidenc! 8anks Bere amal&amated to form t9e 1m4erial %ank of 1ndia? B9ic9 took u4 t9e role of a commercial 8ank? a 8ankers' 8ank and a 8anker to t9e =o-ernment. T9e 1m4erial %ank of 1ndia Bas esta8lis9ed Bit9 mainl! /uro4ean s9are9olders. 1t Bas onl! Bit9 t9e esta8lis9ment of Reser-e %ank of 1ndia (R%1) as t9e central 8ank of t9e countr! in "6,(? t9at t9e 0uasi7central 8ankin& role of t9e 1m4erial %ank of 1ndia came to an end. 1n "3+)? t9e conce4t of limited lia8ilit! Bas introduced in 1ndian 8ankin&? resultin& in t9e esta8lis9ment of @oint7stock 8anks. 1n "3+(? t9e $lla9a8ad %ank Bas esta8lis9ed Bit9 4urel! 1ndian s9are9olders. Pun@a8 National %ank came into 8ein& in "36(. %etBeen "6)+ and "6",? ot9er 8anks like %ank of 1ndia? Central %ank of 1ndia? %ank of %aroda? Canara %ank? 1ndian %ank? and %ank of M!sore Bere set u4. $fter inde4endence? t9e =o-ernment of 1ndia started takin& ste4s to encoura&e t9e s4read of 8ankin& in 1ndia. 1n order to ser-e t9e econom! in &eneral and t9e rural sector in 1ndia and 4articular? t9e $ll 1ndia Rural Credit Sur-e! Committee recommended t9e creation of a state74artnered and state7s4onsored 8ank takin& o-er t9e 1m4erial %ank of inte&ratin& Bit9 it? t9e former state7oBned and state7associate 8anks. $ccordin&l!? State

%ank of 1ndia (S%1) Bas constituted in "6((. Su8se0uentl! in "6(6? t9e State %ank of 1ndia (su8sidiar! 8ank) $ct Bas 4assed? ena8lin& t9e S%1 to take o-er ei&9t former state7associate 8anks as its su8sidiaries. To 8etter ali&n t9e 8ankin& s!stem to t9e needs of 4lannin& and economic 4olic!? it Bas considered necessar! to 9a-e social control o-er 8anks. 1n "6+6? ". of t9e ma@or 4ri-ate sector 8anks Bere nationaliIed. T9is Bas an im4ortant milestone in t9e 9istor! of 1ndian 8ankin&. T9is Bas folloBed 8! t9e nationalisation of anot9er six 4ri-ate 8anks in "63). Jit9 t9e nationaliIation of t9ese 8anks? t9e ma@or se&ment of t9e 8ankin& sector came under t9e control of t9e =o-ernment. T9e im4etus to 8ranc9 ex4ansion in nationalisation of 8anks im4arted ma@or B9ic9 in turn un78anked rural and semi7ur8an areas?

resulted in 9u&e de4osit mo8iliIation? t9ere8! &i-in& 8oost to t9e o-erall sa-in&s rate of t9e econom!. 1t also resulted in scalin& u4 of lendin& to a&riculture and its allied sectors. AoBe-er? t9is arran&ement also saB some Beaknesses like reduced 8ank 4rofita8ilit!? Beak ca4ital 8ases? and 8anks &ettin& 8urdened Bit9 lar&e non74erformin& assets. To create a stron& and com4etiti-e 8ankin& s!stem? a num8er of reform measures Bere initiated in earl! "66)s. T9e t9rust of t9e reforms Bas on increasin& o4erational efficienc!? stren&t9enin& su4er-ision o-er 8anks? creatin& com4etiti-e conditions and de-elo4in& tec9nolo&ical and institutional infrastructure. 3 T9ese measures led to t9e im4ro-ement in t9e financial 9ealt9? soundness and efficienc! of t9e 8ankin& s!stem.

;ne im4ortant feature of t9e reforms of t9e "66)s Bas t9at t9e entr! of neB 4ri-ate sector 8anks Bas 4ermitted. FolloBin& t9is decision? neB 8anks suc9 as 1C1C1 %ank? ADFC %ank? 1D%1 %ank and CT1 %ank Bere set u4. Commercial 8anks in financial needs of 1ndia 9a-e traditionall! focused on meetin& t9e s9ort7term

industr!? trade

and a&riculture. AoBe-er? &i-en t9e increasin&

so49istication and di-ersification of t9e 1ndian econom!? t9e ran&e of ser-ices extended 8! commercial 8anks 9as increased si&nificantl!? leadin& to an o-erla4 Bit9 t9e functions 4erformed 8! ot9er financial institutions. Furt9er? t9e s9are of lon&7term financin& (in total 8ank financin&) to meet ca4ital &oods and 4ro@ect7financin& needs of increased o-er t9e !ears. industr! 9as also

".,

Functions of Commercial %anks2

T9e main functions of a commercial 8ank can 8e se&re&ated into t9ree main areas# (i) Pa!ment S!stem (ii) Financial 1ntermediation (iii) Financial Ser-ices. Fi&ure "."# 8ank Main functions of a commercial

(i)

Pa!ment S!stem %anks are at t9e core of t9e 4a!ments s!stem in an econom!. $ 4a!ment refers to t9e means 8! B9ic9 financial transactions are settled. $ fundamental met9od 8! B9ic9 8anks 9el4 in settlin& t9e financial transaction 4rocess is 8! issuin& and 4a!in& c9e0ues issued on 8e9alf of customers. Furt9er? in modern 8ankin&? t9e 4a!ments s!stem also in-ol-es electronic 8ankin&? Bire transfers? settlement of credit card transactions? etc. 1n all suc9 transactions? 8anks 4la! a critical role.

(ii)

Financial 1ntermediation T9e second 4rinci4al function of a 8ank is to take different t!4es of de4osits from customers and t9en lend t9ese funds to 8orroBers? in ot9er Bords? financial intermediation. 1n financial terms? 8ank de4osits re4resent t9e 8anks' lia8ilities?

B9ile loans dis8ursed? and in-estments made 8! 8anks are t9eir assets. %ank de4osits ser-e t9e useful 4ur4ose of addressin& t9e needs of de4ositors? B9o Bant to ensure li0uidit!? 6

T9e functions of commercial 8anks 9a-e 8een descri8ed in detail in later c9a4ters.

" )

safet! as Bell as returns in t9e form of interest. ;n t9e ot9er 9and? 8ank loans and in-estments made 8! 8anks 4la! an im4ortant function in c9annellin& funds into 4rofita8le as Bell as sociall! 4roducti-e uses. (iii) Financial Ser-ices 1n addition to actin& as financial intermediaries? 8anks toda! are increasin&l! in-ol-ed Bit9 offerin& customers a Bide -ariet! of financial ser-ices includin& in-estment 8ankin&? insurance7related ser-ices? &o-ernment7related 8usiness? forei&n exc9an&e 8usinesses? Bealt9 mana&ement ser-ices? etc. 1ncome from 4ro-idin&

suc9 ser-ices im4ro-es a 8ank's 4rofita8ilit!.

"..

Com4etiti-e :andsca4e of %anks in 1ndia

in t9e 4u8lic and

%anks face com4etition from a Bide ran&e of financial intermediaries

4ri-ate sectors in t9e areas of financial intermediation and financial ser-ices (alt9ou&9 t9e 4a!ments s!stem is exclusi-el! for 8anks). Suc9 intermediaries form a di-erse &rou4 in terms of siIe and nature of t9eir acti-ities? and 4la! an im4ortant role in t9e financial s!stem 8! not onl! com4etin& Bit9 8anks? 8ut also com4lementin& t9em in 4ro-idin& a Bide ran&e of financial ser-ices. Some of t9ese intermediaries include# L institutions L L L (i) Term7lendin&

Non78ankin& financial com4anies 1nsurance com4anies Mutual funds Term7:endin& 1nstitutions

Term lendin& institutions exist at 8ot9 state and all71ndia le-els. T9e! 4ro-ide term loans (i.e.? loans Bit9 medium to lon&7term maturities) to -arious industr!? ser-ice and

infrastructure sectors for settin& u4 neB 4ro@ects and for t9e ex4ansion of existin& facilities and t9ere8! com4ete Bit9 8anks. $t t9e all71ndia le-el? t9ese institutions are t!4icall!

s4ecialiIed? caterin& to t9e needs of s4ecific sectors? B9ic9 make t9em com4etitors to 8anks in t9ose areas., 1ndustries T9ese include t9e /x4ort 1m4ort %ank of 1ndia (/M1M %ank)? Small of 1ndia

De-elo4ment %ank of 1ndia

(S1D%1)? Tourism Finance Cor4oration

:imited (TFC1)? and PoBer Finance Cor4oration :imited (PFC:).

$ nota8le exce4tion is t9e 1FC1 :td? B9ic9 lends into a -ariet! of sectors.

")

$t t9e state le-el? -arious State Financial Cor4orations (SFCs) 9a-e 8een set u4 to finance and 4romote small and medium7siIed enter4rises. T9ere are also State 1ndustrial

De-elo4ment Cor4orations (S1DCs)? B9ic9 4ro-ide finance 4rimaril! to medium7siIed and lar&e7siIed enter4rises. 1n addition to SFCs and S1DCs? t9e Nort9 /astern De-elo4ment Financial 1nstitution :td. (N/DF1) 9as 8een set u4 to cater s4ecificall! to t9e needs of t9e nort97eastern states. (ii) Non7%ankin& Finance Com4anies (N%FCs)

1ndia 9as man! t9ousands of non78ankin& financial com4anies? 4redominantl! from t9e 4ri-ate sector. N%FCs are re0uired to re&ister Bit9 R%1 in terms of t9e Reser-e %ank of 1ndia ($mendment) $ct? leasin&? "662. T9e 4rinci4al acti-ities of N%FCs include e0ui4ment7 finance. N%FCs 9a-e 8een

9ire7 4urc9ase? loan and in-estment and asset

com4etin& Bit9 and com4lementin& t9e ser-ices of commercial 8anks for a lon& time. $ll N%FCs to&et9er currentl! account for around nine 4ercent of assets of t9e total financial s!stem. Aousin&7finance com4anies form a distinct su87&rou4 of t9e N%FCs. $s a result of some recent &o-ernment incenti-es for in-estin& in t9e 9ousin& sector? t9ese com4anies'

8usiness 9as &roBn su8stantiall!.

Aousin& De-elo4ment Finance Cor4oration :imited

(ADFC)? B9ic9 is in t9e 4ri-ate sector and t9e =o-ernment7controlled Aousin& and Cr8an De-elo4ment Cor4oration :imited (ACDC;) are t9e tBo 4remier 9ousin&7finance com4anies. T9ese com4anies are ma@or 4la!ers in t9e mort&a&e 8usiness? and 4ro-ide stiff com4etition to commercial 8anks in t9e dis8ursal of 9ousin& loans. (iii) 1nsurance Com4anies

1nsurance>reinsurance com4anies suc9 as :ife 1nsurance Cor4oration of 1ndia (:1C)? =eneral 1nsurance Cor4oration of 1ndia (=1C1)? and ot9ers 4ro-ide su8stantial lon&7term financial assistance to t9e industrial and 9ousin& sectors and to t9at extent? are com4etitors of 8anks. :1C is t9e 8i&&est 4la!er in t9is area. (i-) Mutual Funds

Mutual funds offer com4etition to 8anks in t9e area of fund mo8iliIation? in t9at t9e! offer alternate routes of in-estment to 9ouse9olds. Most mutual funds are standalone asset mana&ement com4anies. 1n addition? a num8er of 8anks? 8ot9 in t9e 4ri-ate and 4u8lic sectors? 9a-e s4onsored asset mana&ement com4anies to undertake mutual fund 8usiness. %anks 9a-e t9us entered t9e asset mana&ement 8usiness? sometimes on ot9er times in @oint -enture Bit9 ot9ers. t9eir oBn and

""

CA$PT/R *# %ankin& Structure in 1ndia

*." %ankin& Structure in 1ndia

%ankin& Re&ulator T9e Reser-e %ank of 1ndia (R%1) is t9e central 8ankin& and monetar! aut9orit! of 1ndia? and also acts as t9e re&ulator and su4er-isor of commercial 8anks. Sc9eduled %anks in 1ndia. Sc9eduled 8anks com4rise sc9eduled commercial 8anks and sc9eduled co7o4erati-e 8anks. Sc9eduled commercial 8anks form t9e 8edrock of t9e 1ndian financial s!stem? currentl! accountin& for more t9an t9ree7fourt9s of all financial institutions' assets. SC%s are 4resent t9rou&9out 1ndia? and t9eir 8ranc9es? 9a-in& &roBn more t9an four7fold in t9e last .) !ears noB num8er more t9an 3)?()) across t9e countr! (see Ta8le *."). ;ur focus in t9is module Bill 8e onl! on t9e sc9eduled commercial 8anks. $ 4ictorial re4resentation of t9e structure of SC%s in 1ndia is &i-en in fi&ure *.". Fi&ure *."# Sc9eduled %ankin& Structure in 1ndia

Sc9eduled 8anks in 1ndia are t9ose t9at are listed in t9e Second Sc9edule of t9e Reser-e %ank of 1ndia $ct? "6,.. R%1 includes onl! t9ose 8anks in t9is sc9edule B9ic9 satisf! t9e criteria as laid doBn -ide section .* (+) (a) of t9e $ct.

"*

Pu8lic Sector %anks Pu8lic sector 8anks are t9ose in B9ic9 t9e ma@orit! stake is 9eld 8! t9e =o-ernment of 1ndia (=o1). Pu8lic sector 8anks to&et9er make u4 t9e lar&est cate&or! in t9e 1ndian 8ankin& s!stem. T9ere are currentl! *2 4u8lic sector 8anks in 1ndia. T9e! include t9e S%1 and its + associate 8anks (suc9 as State %ank of 1ndore? State %ank of %ikaner and Dai4ur etc)? "6 nationalised 8anks (suc9 as $lla9a8ad %ank? Canara %ank etc) and 1D%1 %ank :td. Pu8lic sector 8anks 9a-e taken t9e lead role in 8ranc9 ex4ansion? 4articularl! in t9e rural areas. From Ta8le *."? it can also 8e seen t9at# L *))6). L *))6? Pu8lic sector 8anks account for 8ulk of t9e 8ranc9es in 1ndia (33 4ercent in

1n t9e rural areas? t9e 4resence of t9e 4u8lic sector 8anks is o-erB9elmin&N in 6+ 4ercent of t9e rural 8ank 8ranc9es 8elon&ed to t9e 4u8lic sector. T9e 4ri-ate sector 8anks and forei&n 8anks 9a-e limited 4resence in t9e rural areas.

Ta8le *."# %reak7u4 of %ank %ranc9es (as on Dune ,)? *))6) T!4e of %ank "6+6 *)). *))6 Rural %ranc9es as on Dune ,)? *))6 Rural %ranc9es as % of all 8ranc9es on Dune ,)? *))6 ,... ,,.3 2+.+ .,." "*.(

S%1 F $ssociates Nationalised %anks Re&ional Rural %anks Total Pu8lic Sector %anks ;t9er Sc9eduled Commercial 8anks Forei&n %anks Non7sc9eduled Commercial %anks Total ($ll Commercial %anks)

*.+* .((, O 2)"( 6))

",+*" ,,,(6 "..3+ +".++ (3)2

"+*6. ,62), "("66 2""6+ 3626

(+"6 ",.*( ""+.. ,)+33 ""*+

",) *"2

*"3 ,*

*6( ..

. ""

".. *(.)

3*+*

+2(*,

3)(".

,"3*6

,6.(

Source# /conomic Sur-e! *))67")? =o-ernment of 1ndia. Re&ional Rural %anks Re&ional Rural %anks (RR%s) Bere esta8lis9ed durin& "62+7"632 Bit9 a -ieB to de-elo4 ",

t9e rural econom!. /ac9 RR% is oBned @ointl! 8! t9e Central =o-ernment? concerned State

".

=o-ernment and a s4onsorin& 4u8lic sector commercial 8ank. RR%s 4ro-ide credit to small farmers? artisans? small entre4reneurs and a&ricultural la8ourers. ;-er t9e !ears? t9e =o-ernment 9as introduced a num8er of measures of im4ro-e -ia8ilit! and 4rofita8ilit! of RR%s? one of t9em 8ein& t9e amal&amation of t9e RR%s of t9e same s4onsored 8ank Bit9in a State. T9is 4rocess of consolidation 9as resulted in a stee4 decline in t9e total num8er of RR%s to 3+ as on Marc9 ,"? *))6? as com4ared to "6+ at t9e end of Marc9 *))(. Pri-ate Sector %anks 1n t9is t!4e of 8anks? t9e ma@orit! of s9are ca4ital is 9eld 8! 4ri-ate indi-iduals and cor4orates. Not all 4ri-ate sector 8anks Bere nationaliIed in in "6+6? and "63). T9e 4ri-ate 8anks B9ic9 Bere not nationaliIed are collecti-el! knoBn as t9e old 4ri-ate sector 8anks and include 8anks suc9 as T9e Dammu and Gas9mir %ank :td.? :ord Gris9na %ank :td etc.( /ntr! of 4ri-ate sector 8anks Bas 9oBe-er 4ro9i8ited durin& t9e 4ost7nationalisation 4eriod. 1n Dul! "66,? as 4art of t9e 8ankin& reform 4rocess and as a measure to induce com4etition in t9e 8ankin& sector? R%1 4ermitted t9e 4ri-ate sector to enter into t9e 8ankin& s!stem. T9is resulted in t9e creation of a neB set of 4ri-ate sector 8anks? B9ic9 are collecti-el! knoBn as t9e neB 4ri-ate sector 8anks. $s at end Marc9? *))6 t9ere Bere 2 neB 4ri-ate sector 8anks and "( old 4ri-ate sector 8anks o4eratin& in 1ndia.+ Forei&n %anks Forei&n 8anks 9a-e t9eir re&istered and 9ead offices in a forei&n countr! 8ut o4erate

t9eir 8ranc9es in 1ndia. T9e R%1 4ermits t9ese 8anks to o4erate eit9er t9rou&9 8ranc9esN or t9rou&9 B9oll!7oBned su8sidiaries.2 T9e 4rimar! acti-it! of most forei&n 8anks in 1ndia 9as 8een in t9e cor4orate se&ment. AoBe-er? some of t9e lar&er forei&n 8anks 9a-e also made consumer7 financin& a si&nificant 4art of t9eir 4ortfolios. T9ese 8anks offer 4roducts suc9 as automo8ile finance? 9ome loans? credit cards? 9ouse9old consumer finance etc. Forei&n 8anks in 1ndia are re0uired to ad9ere to all t9e neB 4ri-ate 8anks in t9e mid7 6)s? t9e increased 4resence of forei&n 8anks in 1ndia 9as also contri8uted to 8oostin& com4etition in t9e sector. 8ankin& 8ankin& re&ulations? includin& 4riorit!7sector lendin& norms as a44lica8le to domestic 8anks.3 1n addition to t9e entr! of

Some of t9e existin& 4ri-ate sector 8anks? B9ic9 s9oBed si&ns of an e-entual default? Bere mer&ed Bit9 state oBned 8anks. 1t ma! 8e noted t9at tBo im4ortant erstB9ile de-elo4mental financial institutions? -iI. 1ndustrial De-elo4ment %ank of 1ndia (1D%1) and 1ndustrial Credit and 1n-estment Cor4oration of 1ndia (1C1C1) con-erted t9emsel-es into commercial 8anks after t9e neB 8ank licensin& 4olic! Bas announced in Dul! "66,. 1n addition? a forei&n institution could also in-est u4 to 2.% in domestic 4ri-ate 8ank? in B9ic9 u4 to .6% can

"(

8e -ia 4ortfolio in-estment.

3

Priorit! sector lendin& 9as 8een descri8ed in a later c9a4ter.

"+

%ox *."# Num8er of Forei&n %anks $t t9e end of Dune *))6? t9ere Bere ,* forei&n 8anks Bit9 *6, 8ranc9es o4eratin& in 1ndia. %esides? ., forei&n 8anks Bere o4eratin& in 1ndia t9rou&9 re4resentati-e offices. Cnder t9e Jorld Trade ;r&anisation (JT;) $&reement? R%1 alloBs a minimum "* 8ranc9es of all forei&n 8anks to 8e o4ened in a !ear. Source# Re4ort on Trend and Pro&ress of %ankin& in 1ndia *))37)6? R%1. Co7o4erati-e %anks Co7o4erati-e 8anks cater to t9e financin& needs of a&riculture? retail trade? small industr! and self7em4lo!ed 8usinessmen in ur8an? semi7ur8an and rural areas of 1ndia. $ distincti-e feature of t9e co7o4erati-e credit structure in 1ndia is its 9etero&eneit!. T9e structure differs across ur8an and rural areas? across states and loan maturities. Cr8an areas are ser-ed 8! ur8an co7 o4erati-e 8anks (CC%s)? B9ose o4erations are eit9er limited to one state or stretc9 across states. T9e rural co7o4erati-e 8anks com4rise State co7o4erati-e 8anks? district central co7 o4erati-e 8anks? SC$RD%s and PC$RD%s.6 T9e co7o4erati-e 8ankin& sector is t9e oldest se&ment of t9e 1ndian 8ankin& s!stem. T9e netBork of CC%s in 1ndia consisted of "2*" 8anks as at end7Marc9 *))6? B9ile t9e num8er of rural co7o4erati-e 8anks Bas """6 as at end7Marc9 *))3.") ;Bin& to t9eir Bides4read &eo&ra49ical 4enetration? coo4erati-e 8anks 9a-e t9e 4otential to 8ecome an im4ortant instrument for lar&e7scale financial inclusion? 4ro-ided t9e! are financiall! stren&t9ened."" T9e R%1 and t9e National $&riculture and Rural De-elo4ment %ank (N$%$RD) 9a-e taken a num8er of 8anks. measures in recent !ears to im4ro-e financial soundness of co7o4erati-e

*.*

Role of Reser-e %ank of 1ndia -is7H7-is Commercial %anks

1t Bas esta8lis9ed

T9e Reser-e %ank of 1ndia (R%1) is t9e central 8ank of t9e countr!."* on

$4ril "? "6,( under t9e Reser-e %ank of 1ndia $ct? "6,.? B9ic9 4ro-ides t9e statutor! 8asis for

SC$RD%

stands for

state co7o4erati-e a&ricultural and rural de-elo4ment 8anks and PC$RD%

stands for

4rimar! co7o4erati-e a&ricultural and rural de-elo4ment 8anks.

")

1n addition? t9e rural areas are ser-ed 8! a -er! lar&e num8er of 4rimar! a&ricultural credit societies (6.?6.* at end7Marc9 *))3). Financial 1nclusion im4lies 4ro-ision of financial ser-ices at afforda8le cost to t9ose B9o are excluded from t9e

""

"2

formal financial s!stem.

"*

/-er! countr! 9as its oBn central 8ank. T9e central 8ank of CS$ is called t9e Federal Reser-e %ank? t9e central 8ank of CG is %ank of /n&land and t9e central 8ank in C9ina is knoBn as t9e Peo4le's %ank of C9ina and so on. Most central 8anks Bere esta8lis9ed around t9e earl! tBentiet9 centur!.

"3

its functionin&. J9en t9e R%1 Bas esta8lis9ed? it took o-er t9e functions of currenc! issue from t9e =o-ernment of 1ndia and t9e 4oBer of credit control from t9e t9en 1m4erial %ank of 1ndia. $s t9e central 8ank of t9e countr!? t9e R%1 4erforms a Bide ran&e of functionsN 4articularl!? it# L L L $cts as t9e currenc! aut9orit! Controls mone! su44l! and credit Mana&es forei&n exc9an&e Ser-es as a 8anker to t9e

L &o-ernment L infrastructure L L

%uilds u4

and stren&t9ens

t9e countr!'s financial

$cts as t9e 8anker of 8anks Su4er-ises 8anks

$s re&ards t9e commercial 8anks? t9e R%1's role mainl! relates to t9e last tBo 4oints stated a8o-e. R%1 %ank as %ankers'

$s t9e 8ankers' 8ank? R%1 9olds a 4art of t9e cas9 reser-es of 8anks?N lends t9e 8anks funds for s9ort 4eriods? and 4ro-ides t9em Bit9 centralised clearin& and c9ea4 and 0uick remittance facilities. %anks are su44osed to meet t9eir s9ortfalls of cas9 from sources ot9er t9an R%1 and a44roac9 R%1 onl! as a matter of last resort? 8ecause R%1 as t9e central 8ank is su44osed to function as onl! t9e 'lender of last resort'. To ensure li0uidit! and sol-enc! of indi-idual commercial 8anks and of t9e 8ankin& s!stem as a B9ole? t9e R%1 9as sti4ulated t9at 8anks maintain a Cas9 Reser-e Ratio (CRR). T9e CRR refers to t9e s9are of li0uid cas9 t9at 8anks 9a-e to maintain Bit9 R%1 of t9eir net demand and time lia8ilities (NDT:).", CRR is one of t9e ke! instruments of controllin& mone! su44l!. %! increasin& CRR? t9e R%1 can reduce t9e funds a-aila8le Bit9 t9e 8anks for lendin& and t9ere8! ti&9ten li0uidit! in t9e s!stemN con-ersel! reducin& t9e CRR increases t9e funds a-aila8le Bit9 t9e 8anks and t9ere8! raises li0uidit! in t9e financial s!stem.

"6

",

T9ese are mainl! de4osits. NDT: is discussed in C9a4ter , under section ,.,.

*)

R%1 su4er-isor To

as t9e countr!? t9e R%1 T9e exercises 4oBers of 8ank's re&ulator!

ensure a sound 8ankin& s!stem in

su4er-ision? re&ulation and control o-er commercial 8anks. functions relatin& to 8anks co-er t9eir esta8lis9ment li0uidit! of reconstruction t9eir assets? mana&ement and and met9ods of

(i.e. licensin&)? 8ranc9 ex4ansion? Borkin&? amal&amation?

li0uidation. R%1 controls t9e commercial 8anks t9rou&9 4eriodic

ins4ection of 8anks and folloB7u4 action and 8! callin& for returns and ot9er information from t9em? 8esides 9oldin& 4eriodic meetin&s Bit9 t9e to4 mana&ement of t9e 8anks. J9ile R%1 is directl! in-ol-ed Bit9 commercial 8anks in carr!in& out t9ese tBo roles? t9e commercial 8anks 9el4 R%1 indirectl! to carr! out some of its ot9er roles as Bell. For exam4le? commercial 8anks are re0uired 8! 4ercenta&e of laB to in-est a 4rescri8ed minimum in 4rescri8ed t9eir res4ecti-e net demand and time lia8ilities (NDT:)

securities? B9ic9 are mostl! &o-ernment securities.". T9is 9el4s t9e R%1 to 4erform its role as t9e 8anker to t9e =o-ernment? under B9ic9 t9e 4ro&ram. R%1 conducts t9e =o-ernment's market 8orroBin&

"+

".

T9e conce4t of demand and time lia8ilities 9as 8een ex4lained in C9a4ter ,.

"2

CA$PT/R ,# %ank De4osit $ccounts

$s stated earlier? financial intermediation 8! commercial 8anks 9as 4la!ed a ke! role in 1ndia in su44ortin& t9e economic &roBt9 4rocess. $n efficient financial intermediation 4rocess? as is Bell knoBn? 9as tBo com4onents# effecti-e mo8iliIation of sa-in&s and t9eir allocation to t9e most 4roducti-e uses. 1n t9is c9a4ter? Be Bill discuss one 4art of t9e

financial intermediation 8! 8anks# mo8iliIation of sa-in&s. J9en 8anks mo8iliIe sa-in&s? t9e! do it in t9e form of de4osits? B9ic9 are t9e mone! acce4ted 8! 8anks from customers to 8e 9eld under sti4ulated terms and conditions. De4osits are t9us an instrument of sa-in&s. Since t9e first e4isode of 8ank nationaliIation in "6+6? 8anks 9a-e 8een at t9e core of t9e financial intermediation 4rocess in 1ndia. T9e! 9a-e mo8iliIed a siIea8le s9are of sa-in&s of t9e 9ouse9old sector? t9e ma@or sur4lus sector of t9e econom!. T9is in turn 9as raised t9e financial sa-in&s of t9e 9ouse9old sector and 9ence t9e o-erall sa-in&s rate.

NotBit9standin& t9e li8eraliIation of t9e financial sector and increased com4etition from -arious ot9er sa-in& instruments? 8ank de4osits continue to 8e t9e dominant instrument of sa-in&s in 1ndia. 1t can 8e seen from Ta8le ,." t9at &ross domestic sa-in&s of t9e 1ndian econom! 9a-e 8een &roBin& o-er t9e !ears and t9e 9ouse9old sector 9as 8een t9e most si&nificant contri8utor to sa-in&s. Aouse9old sector sa-es in tBo ma@or Ba!s? -iI. financial assets and 49!sical assets. Ta8le ,.* s9oBs t9at Bit9in t9e financial sa-in&s of t9e 9ouse9old sector? 8ank de4osits are t9e most 4rominent instrument? accountin& for nearl! 9alf of total financial sa-in&s of t9e 9ouse9old sector. Ta8le ,."# =ross Domestic Sa-in&s 1tem Percent of =DP (at current market 4rices) *)))7)" ". Aouse9old Sa-in&s? of B9ic9 a) Financial $ssets 8) P9!sical $ssets *. ,. .. Pri-ate cor4orate sector Pu8lic sector =ross domestic sa-in& *".6 ").2 ""., .." 7*., *,.2 *))+7)2 *.." "".2 "*.. 3., ,., ,(.2 *))27)3 *.., "".2 "*.+ 3.3 ..( ,2.2

Source# Central Statistical ;r&aniIation. "3

Ta8le ,.*# Financial Sa-in&s of t9e Aouse9old Sector (=ross) Percent to Total Financial Sa-in&s of Aouse9old Sector *))+7)2 Financial Sa-in&s a) Currenc! 8) De4osits i) Jit9 %anks ii) Non78ankin& Cos. iii) Co7o4erati-e 8anks> societies c) S9ares F De8entures ")) ").* .6." .2.3 ).* ).) 6.) ,.) "2.2 ""." *))27)3 ")) "".. (*.* ().. ).( ).) "*.. 7..) "3.) 6.6 *))37)6 ")) "*.( (3.( (..6 ".3 ).) *.+ 7,." *)." 6.(

d) Claims on =o-ernment e) 1nsurance Funds f) Pro-ident F Pension Funds

Source# R%1 $nnual Re4ort? *))37)6

,."

1ntroduction to %ank De4osits

;ne of t9e most im4ortant functions of an! commercial 8ank is to acce4t de4osits from t9e 4u8lic? 8asicall! for t9e 4ur4ose of lendin&. De4osits from t9e 4u8lic are t9e 4rinci4al

sources of funds for 8anks. Ta8le ,., 4ro-ides t9e s9are of de4osits of different classes of sc9eduled commercial 8anks (SC%s). 1t can 8e seen t9at t9e 4u8lic sector 8anks continue to dominate t9e 1ndian 8ankin& industr!. AoBe-er? t9e s9are of t9e neB 4ri-ate sector 8anks 9as 8een risin& at t9e ex4ense of t9e 4u8lic sector 8anks? 4articularl! in t9e last feB !ears.

"6

Ta8le ,.,# S9are of De4osits of SC%s7=rou4Bise %ank =rou4 $t end7Marc9 (in 4ercent) *)), Pu8lic Sector %anks 7 Nationalised %anks 7 State %ank =rou4 7 ;t9er Pu8lic Sector %anks Pri-ate Sector %anks 7 ;ld Pri-ate Sector %anks 7 NeB Pri-ate Sector %anks Forei&n %anks Total SC%s 26.+ ().3 *3.3 77 "(., +.2 3.( (." ")).) *))6 2+.2 .6." *..3 *.3 "3." ..6 ",.* (.* ")).)

Source# Re4ort on Trend and Pro&ress of %ankin& in 1ndia *))37)6 F *)),7).? R%1 Safet! of de4osits $t t9e time of de4ositin& mone! Bit9 t9e 8ank? a de4ositor Bould Bant to 8e certain t9at 9is> 9er mone! is safe Bit9 t9e 8ank and at t9e same time? Bants to earn a reasona8le return. T9e safet! of de4ositors' funds? t9erefore? forms a ke! area of t9e re&ulator! frameBork for 8ankin&. 1n 1ndia? t9is as4ect is taken care of in t9e %ankin& Re&ulation $ct? "6.6 (%R $ct). T9e R%1 is em4oBered to issue directi-es>ad-ices on se-eral as4ects re&ardin& t9e conduct of de4osit accounts from time to time. Furt9er? t9e esta8lis9ment of t9e De4osit 1nsurance Cor4oration in "6+* (a&ainst t9e 8ackdro4 of failure of 8anks) offered 4rotection to 8ank de4ositors? 4articularl! small7account 9olders. T9is as4ect 9as 8een discussed later in t9e C9a4ter. Dere&ulation of interest rates T9e 4rocess of dere&ulation of interest rates started in $4ril "66*. Cntil t9en? all interest rates Bere re&ulatedN t9at is? t9e! Bere fixed 8! t9e R%1. 1n ot9er Bords? 8anks 9ad no freedom to fix interest rates on t9eir de4osits. Jit9 li8eraliIation in t9e financial s!stem? nearl! all t9e interest rates 9a-e noB 8een dere&ulated. NoB? res4ect of sa-in&s de4osits and NR1 de4osits? lea-in& ot9ers for indi-idual 8anks to determine."( *) 8anks 9a-e t9e freedom to fix t9eir oBn de4osit rates Bit9 onl! a -er! feB exce4tions. T9e R%1 4rescri8es interest rates onl! in

"(

Sa-in&s de4osits and NR1 de4osits 9a-e 8een descri8ed later in t9is c9a4ter.

*"

De4osit 4olic! T9e %oard of Directors of a 8ank? alon& Bit9 its to4 mana&ement? formulates 4olicies

relatin& to t9e t!4es of de4osit t9e 8ank s9ould 9a-e? rates of interest 4a!a8le on eac9 t!4e? s4ecial de4osit sc9emes to 8e introduced? t!4es of customers to 8e tar&eted 8! t9e 8ank? etc. ;f course? de4endin& on t9e c9an&in& economic en-ironment? t9e 4olic! of a 8ank toBards de4osit mo8iliIation? under&oes c9an&es.

,.*

T!4es of De4osit $ccounts

demand de4osits and (8) time

T9e 8ank de4osits can also 8e classified into (i) de4osits. (i)

Demand de4osits are defined as de4osits 4a!a8le on demand t9rou&9 c9e0ue or ot9erBise. Demand de4osits ser-e as a medium of exc9an&e? for t9eir oBners9i4 can 8e transferred from one 4erson to anot9er t9rou&9 c9e0ues and clearin& arran&ements 4ro-ided 8! 8anks. T9e! 9a-e no fixed term to maturit!.

(ii)

Time de4osits are defined as t9ose de4osits B9ic9 are not 4a!a8le on demand and on B9ic9 c9e0ues cannot 8e draBn. T9e! 9a-e a fixed term to maturit!. $ certificate of de4osit (CD)? for exam4le? is a time de4osit (See 8ox ,.*)

%ox ,."# Certificate of De4osit $ Certificate of De4osit (CD) is a ne&otia8le mone! market instrument and is issued in dematerialised form or as a Csance Promissor! Note? for funds de4osited at a 8ank or ot9er eli&i8le financial institution for a s4ecified time 4eriod. =uidelines for issue of CDs are currentl! &o-erned 8! -arious directi-es issued 8! t9e R%1? as amended from time to time. CDs can 8e issued 8! (i) sc9eduled commercial 8anks (SC%s) excludin& Re&ional Rural %anks (RR%s) and :ocal $rea %anks (:$%s)N and (ii) select all71ndia Financial 1nstitutions t9at 9a-e 8een 4ermitted 8! t9e R%1 to raise s9ort7term resources Bit9in t9e um8rella limit fixed 8! R%1. t9ereof. Demand and time de4osits are tBo 8road cate&ories of de4osits. Note t9at t9ese are onl! cate&ories of de4ositsN t9ere are no de4osit accounts a-aila8le in t9e 8anks 8! t9e names 'demand de4osits' or 'time de4osits'. Different de4osit accounts offered 8! a 8ank? De4osit amounts for CDs are a minimum of Rs." lak9? and multi4les

de4endin& on t9eir c9aracteristics? fall into one of t9ese tBo cate&ories. T9ere are se-eral de4osit accounts offered 8! cate&ories# ** 8anks in 1ndiaN 8ut t9e! can 8e classified into t9ree main

L L L account

Current account Sa-in&s 8ank account Term de4osit

*,

Current account de4osits fall entirel! under t9e demand7de4osit cate&or! and term de4osit account falls entirel! under time de4osit. Sa-in&s 8ank accounts 9a-e 8ot9 demand7de4osit and time7de4osit com4onents. 1n ot9er Bords? some 4arts of sa-in&s de4osits are considered demand de4osits and t9e rest as time de4osits. Je 4ro-ide 8eloB t9e 8road terms and conditions &o-ernin& t9e conduct of current? sa-in&s and term7de4osit accounts. ,.*." Current De4osits

$ current account is a form of demand7de4osit? as t9e 8anker is o8li&ed to re4a! t9ese lia8ilities on demand from t9e customer. Jit9draBals from current accounts are alloBed an! num8er of times de4endin& u4on t9e 8alance in t9e account or u4 to a 4articular a&reed amount. Current de4osits are non7interest 8earin&. $mon& t9e t9ree 8road cate&ories of

de4osits77current account de4osit? sa-in&s accounts de4osit and term de4osits77current account de4osits account for t9e smallest fraction. $ current account is 8asicall! a runnin& and acti-el! o4erated account Bit9 -er! little restriction on t9e num8er and amount of draBin&s. T9e 4rimar! o8@ecti-e of a current

account is to 4ro-ide con-enient o4eration facilit! to t9e customer? -ia continuous li0uidit!. ;n account of t9e 9i&9 cost of maintainin& suc9 accounts? 8anks do not 4a! an! interest on suc9 de4osits. 1n addition? man! 8anks insist on customers maintainin& minimum 8alances to offset t9e transaction costs in-ol-ed. 1f minimum 8alances are not maintained? t9ese 8anks c9ar&e t9e customers a certain amount. Current accounts can 8e o4ened 8! ric9 indi-iduals> 4artners9i4 firms> 4ri-ate and limited com4anies> Aindu Cndi-ided Families (ACFs)> societies> trusts? etc. ,.*.* Sa-in&s %ank De4osits t9e

Sa-in&s de4osits are a form of demand de4osits? B9ic9 is su8@ect to restrictions on num8er of Bit9draBals as Bell as on

t9e amounts of Bit9draBals durin& an! s4ecified order to offset t9e cost of

4eriod. Furt9er? minimum 8alances ma! 8e 4rescri8ed in

maintainin& and ser-icin& suc9 de4osits. Sa-in&s de4osits are de4osits t9at accrue interest at a fixed rate set 8! R%1 (,.( 4ercent as of Danuar! *)")). Sa-in&s 8ank accounts are used 8! a lar&e se&ment of small de4ositors as t9e! can 4ut t9eir re&ular incomes into t9ese accounts? Bit9draB t9e mone! on demand and also earn interest on t9e 8alance left in t9e account. T9e flexi8ilit! 4ro-ided 8! suc9 a 4roduct means t9at sa-in&s 8ank accounts cannot 8e 8i& tradin& or 8usiness firms. Similarl!? institutions suc9 as &o-ernment

o4ened 8!

de4artments and 8odies? local aut9orities? etc. cannot o4en sa-in&s 8ank accounts.

*.

Sa-in&s account de4osits to&et9er Bit9 current account de4osits are called C$S$ de4osits (See %ox ,.*). %ox ,.*# De4osits C$S$

From a 8ank's -ieB4oint? C$S$ de4osits (Current $ccount and Sa-in&s $ccount de4osits) are loB7cost de4osits? as com4ared to ot9er t!4es of de4osits. Current account is non7 interest 8earin&? B9ile interest 4a!a8le on sa-in&s accounts is -er! loB (currentl! ,.( 4ercent). To 8e com4etiti-e? it is im4ortant for 8anks to &arner as muc9 loB7cost de4osits as 4ossi8le? 8ecause 8! doin& so 8anks can control t9e cost of raisin& de4osits and 9ence can lend at more com4etiti-e rates. T9e met9ods used 8! 8anks to mo8iliIe C$S$ de4osits include offerin& salar! accounts to com4anies? and encoura&in& merc9ants to o4en current accounts? and use t9eir cas97mana&ement facilities. %anks Bit9 loB C$S$ ratios (C$S$ de4osits as % of total de4osits) are more de4endent on term de4osits for t9eir fundin&? and are -ulnera8le to interest rate s9ocks in t9e econom!? 8esides t9e loBer s4read t9e! earn. ($s discussed a8o-e? 8anks earn 4rofit on t9e s4read 8etBeen t9eir de4osit and loans rates.) T9e ta8le &i-en 8eloB s9oBs t9at t9e s9are of current account and sa-in&s account

(C$S$) de4osits in total de4osits is t9e 9i&9est for forei&n 8anks folloBed 8! t9e State %ank =rou4. 1t can also 8e o8ser-ed t9at t9e s9are of C$S$ de4osits in total de4osits of t9e sc9eduled commercial 8anks as a B9ole 9as 8een declinin&. T9is cost of c9allen&e for t9e 8ankin& sector in t9e comin& !ears. %ank7Bise S9are of C$S$ De4osits in Total De4osits (in 4ercent) Marc9 end %ank =rou4 State %ank =rou4 Nationalised %anks Pri-ate %anks Forei&n %anks Total SC%s *))+ .,.. ,3.* ,).. ().( ,3.+ *))2 .*.6 ,(.. *6.3 .(." ,+.+ *))3 .*.) ,,.) ,*.3 ...2 ,(.2 *))6 ,3.+ *6.6 ,*.6 .".2 ,,.* means t9at t9e de4osit mo8iliIation of t9e commercial 8anks is risin&? B9ic9 ma! 4ose a

Source# Re4ort on Trend and Pro&ress of %ankin& *))37)6? R%1. ,.*., Term De4osits

$ PTerm de4ositP is a de4osit recei-ed 8! t9e %ank for a fixed 4eriod? after B9ic9 it can 8e Bit9draBn. Term de4osits include de4osits suc9 as Fixed De4osits > Rein-estment *(

de4osits>

*+

Recurrin& De4osits etc. T9e term de4osits account for t9e lar&est s9are and 9a-e remained Bit9in t9e ran&e of +"% to +2 % of total de4osits in t9e recent !ears. 1nterest is 4aid on term7de4osits? eit9er on maturit! or at sti4ulated inter-als de4endin& u4on t9e de4osit sc9eme under B9ic9 t9e mone! is 4laced. $lso? a customer can earn interest on a term7de4osit for a minimum 4eriod of 2 da!s. 1nterest rates on term7de4osits are

usuall! 9i&9er t9an on sa-in&s de4osits. Term de4osits include# L inter-alsN L Fixed de4osits on B9ic9 a fixed rate of interest is 4aid at fixed? re&ular

Re7in-estment de4osits? under B9ic9 t9e interest is com4ounded 0uarterl! and 4aid on maturit!? alon& Bit9 t9e 4rinci4al amount of t9e de4osit. Some 8anks 9a-e introduced PflexiP de4osits under B9ic9? t9e amount in sa-in&s de4osit accounts 8e!ond a fixed limit is automaticall! con-erted into term7de4ositsN and

Recurrin& de4osits? under B9ic9 a fixed amount is de4osited at re&ular inter-als for a fixed term and t9e re4a!ment of 4rinci4al and accumulated interest is made at t9e end of t9e term. T9ese de4osits are usuall! tar&eted at 4ersons B9o are salaried or recei-e ot9er re&ular income. $ Recurrin& De4osit can usuall! 8e o4ened for an! 4eriod from + mont9s to "*) mont9s.

,.,

Strate&ies of mo8iliIin& de4osits

to mo8iliIe sa-in&s at t9e J9ile mo8iliIin& de4osits? 8anks 9a-e to com4l! Bit9 -arious

To maximiIe t9eir 4rofits? commercial 8anks alBa!s attem4t loBest cost 4ossi8le.

directi-es issued 8! t9e R%1? t9e 1ndian %ank $ssociation (1%$)? =o-ernment of 1ndia and ot9er statutor! aut9orities>a&encies. $t t9e same time? since 8anks o4erate in a -er! com4etiti-e en-ironment? t9e! 9a-e to reac9 out to a Bide s4ectrum of customers and also offer de4osit 4roducts t9at lead to 9i&9er customer satisfaction. %anks de-ise -arious strate&ies to ex4and t9e customer 8ase and reducin& t9e cost of raisin& de4osits. T9is is done 8! identif!in& tar&et markets? desi&nin& t9e 4roducts as 4er t9e re0uirements for customers? takin& measures for marketin& and 4romotin& t9e de4osit 4roducts. 1t is essential not onl! to ex4and t9e customer 8ase 8ut also to retain it. T9is is done 8! 4ro-idin& counsellin&? after7sales information and also t9rou&9 4rom4t 9andlin& of customer com4laints. J9ile t9e strate&ies for mo8iliIin& 8ank de4osits -ar! from 8ank to 8ank? one common

feature is to maximiIe t9e s9are of C$S$ de4osits (%ox ,.*). T9e ot9er common features &enerall! o8ser-ed are as folloBs# L Staff mem8ers 4osted at 8ranc9es are ade0uatel! trained to offer efficient and *2

courteous ser-ice to t9e customers and to educate t9em a8out t9eir ri&9ts and o8li&ations.

*3

$ 8ank often offers 4ersonaliIed 8ankin& relations9i4 for its 9i&97-alue customers 8! a44ointin& Customer Relations9i4 Mana&ers (CRMs).

Senior citiIens>4ensioners 9a-e 8ecome an im4ortant cate&or! of customers to 8e tar&eted 8! a 8ank. Products are de-elo4ed 8! 8anks to meet t9e s4ecific re0uirements of t9is &rou4.

J9ile 8anks endea-our to 4ro-ide ser-ices to t9e satisfaction of customers? t9e! 4ut in 4lace an ex4editious mec9anism to redress t9e com4laints of t9e customers.

,..

Common =uidelines of ;4enin& and ;4eratin& De4osit $ccounts

To o4en and o4erate a 8ank account? t9e folloBin& &uidelines need to 8e folloBed. Due Dili&ence Process# $ 8ank 8efore o4enin& an! de4osit account 9as to carr! out due dili&ence as re0uired under PGnoB Eour CustomerP (GEC) &uidelines issued 8! R%1 and or suc9 ot9er norms or 4rocedures ado4ted 8! t9e 8ank."+ T9e 'due dili&ence' 4rocess? B9ile o4enin& a de4osit account? in-ol-es t9e 8ank 9a-in& ade0uate knoBled&e of t9e 4erson's identit!? occu4ation? sources of income? and location. ;8tainin& an introduction of t9e 4ros4ecti-e de4ositor from a 4erson acce4ta8le to t9e 8ank? o8tainin& recent 49oto&ra49s of 4eo4le o4enin&> o4eratin& t9e account are 4art of t9e due dili&ence 4rocess. For customers 4ro-idin& 4roof of identification and address? t9ere is no need for 4ersonal introduction to t9e 8ank for o4enin& of a neB sa-in&s 8ank account. To 4romote financial inclusion in rural areas > tri8al areas? GEC norms 9a-e 8een relaxed for 8eloB t9e 4o-ert! line (%P:) families. Minimum %alance# For de4osit 4roducts like a sa-in&s 8ank account or a current account? 8anks normall! sti4ulate certain minimum 8alances to 8e maintained as 4art of terms and conditions &o-ernin& o4eration of suc9 accounts. %ut for 4eo4le 8eloB t9e 4o-ert! line?

8anks encoura&e t9e o4enin& of 'No7frills $ccounts'? t!4icall! a s4ecial sa-in&s 8ank account B9ere no minimum 8alance re0uirement is re0uired. For a sa-in&s 8ank account? t9e 8ank ma! also 4lace restrictions on &i-en 4eriod. Trans4arenc!# Failure to maintain minimum 8alance in t9e accounts? B9ere a44lica8le? Bill attract le-! of c9ar&es as s4ecified 8! t9e 8ank from time to time. Similarl!? t9e 8ank ma! s4ecif! c9ar&es for issue of c9e0ues 8ooks? additional statement of accounts? du4licate 4ass8ook? folio c9ar&es? etc. $ll suc9 details re&ardin& terms and conditions for o4eration of t9e accounts and sc9edule of c9ar&es for -arious ser-ices 4ro-ided s9ould 8e communicated to t9e 4ros4ecti-e de4ositor B9ile trans4arenc!. o4enin& t9e account for *6 t9e sake of num8er of transactions? cas9 Bit9draBals? etc.? durin& a

"+

T9e GEC &uidelines 9a-e 8een descri8ed in detail in C9a4ter 2.

,)

/li&i8ilit!# $ sa-in&s 8ank account can 8e o4ened 8! eli&i8le 4erson(s) and certain or&aniIations>a&encies? as ad-ised 8! t9e R%1 from time to time. %ut current accounts can 8e o4ened 8! indi-iduals? 4artners9i4 firms? 4ri-ate and 4u8lic limited com4anies? Aindu

Cndi-ided Families (ACFs)? s4ecified associates? societ! trusts? etc. /li&i8ilit! criteria for a sa-in&s account and a current account are lar&el! similar? 8ut t9ere are im4ortant differences too. J9ile 8ot9 t9e accounts can 8e o4ened 8! indi-iduals? t9e sa-in&s account cannot 8e o4ened 8! 9olders. Re0uirement of P$N# 1n addition to t9e due dili&ence re0uirements? under GEC norms? 8anks are re0uired 8! laB to o8tain a Permanent $ccount Num8er (P$N) from t9e a firm. Term De4osit $ccounts can 8e o4ened 8! all cate&ories of account

4ros4ecti-e account 9older or alternate declarations as s4ecified under t9e 1ncome Tax $ct. ;4eration of Doint $ccount# De4osit accounts can 8e o4ened 8! an indi-idual in 9is oBn name or 8! more t9an one indi-idual in t9eir oBn names (knoBn as a '@oint account'). $ @oint account can 8e o4erated 8! a sin&le indi-idual or 8! more t9an one indi-idual @ointl!. T9e mandate for B9o can o4erate t9e account can 8e modified Bit9 t9e consent of all account 9olders. Doint accounts o4ened 8! minors Bit9 t9eir 4arents or &uardians can 8e onl! o4erated 8! t9e latter. $ccount9olders of a @oint account can &i-e mandates on t9e o4eration of t9e account? and t9e dis4osal of 8alances in t9e e-ent of t9e demise of one or more of t9e 9olders. %anks classif! t9ese mandates as '/it9er or Sur-i-or'? and '$n!one or Sur-i-or(s)'? etc. PoBer of $ttorne!# $t t9e re0uest of t9e de4ositor? t9e 8ank can re&ister mandate>4oBer of attorne! &i-en 8! 9im aut9oriIin& anot9er 4erson to o4erate t9e account on 9is 8e9alf. Closure>reneBal of de4osits# Term7de4osit account 9olders at t9e time of 4lacin&

t9eir de4osits can &i-e instructions Bit9 re&ard to closure of de4osit account or reneBal of de4osit for furt9er 4eriod on t9e date of maturit!. 1n a8sence of suc9 mandate? t9e 8ank Bill usuall! seek instructions from t9e de4ositor(s) as to t9e reneBal of t9e de4osit or ot9erBise 8! sendin& intimation 8efore sa!? "( da!s of t9e maturit! date of t9e term de4osit. 1f no mandate is &i-en or recei-ed 8! t9e 8ank 8efore t9e date of maturit! of term de4osit? t9e 8ank Bill 8e at li8ert! to roll o-er t9e de4osit on due date. Nomination# $ de4ositor is 4ermitted to officiall! aut9oriIe someone? B9o Bould recei-e t9e mone! of 9is account B9en t9e de4ositor 4asses aBa!. T9is facilit! is a-aila8le on is called t9e nomination indi-iduals.

4rocess. Nomination

all de4osit accounts o4ened 8!

Nomination is also a-aila8le to a sole 4ro4rietar! concern account. Nomination can 8e made in fa-our of one indi-idual onl!. Nomination so made can 8e cancelled or c9an&ed 8! t9e account 9older>s an! time. Nomination can 8e made in fa-our of a minor too. ,"

%ox ,.,# ;4eration of S4ecial Classes of De4osit $ccount Aolders Minors' $ccounts Sa-in&s 8ank accounts can 8e o4ened 8! minors alon& Bit9 t9eir &uardians? and o4erated solel! 8! t9e &uardians? until t9e minor attains ma@orit!. erification of si&natures and

ot9er identification is re4eated 8efore t9e ma@or starts o4eratin& t9e account. $ccount of illiterate>-isuall! c9allen&ed 4ersons $ccounts of illiterate>-isuall! c9allen&ed indi-iduals are usuall! o4ened 8! 8anks at t9eir oBn discretion? in t9e 4resence of a mutuall! knoBn Bitness. Terms and conditions of o4eratin& t9e account in t9is case are t9en s4ecificall! ex4lained 8! account79older. De4osit sc9emes for Senior CitiIens %anks 9a-e de-elo4ed fixed7de4osit sc9emes s4ecificall! meant for senior citiIens t9e 8ank to t9e

(i.e.? indi-iduals o-er t9e a&e of +) !ears). Suc9 sc9emes usuall! 4ro-ide an incenti-e 8! Ba! of additional interest? o-er and a8o-e t9e normal rate of interest? on term7de4osits across -arious maturities. Suc9 sc9emes are a44lica8le for 8ot9 fres9 de4osits as Bell as reneBals of maturin& de4osits.

,.(

De4osit Related Ser-ices

$s 4er t9e R%1 &uidelines? 8anks are re0uired to 4ro-ide some ser-ices to t9e de4ositors and to reco&nise t9e ri&9ts of de4ositors. T9e ultimate o8@ecti-e of t9e 8ankin& industr! s9ould 8e to 4ro-ide a customer different ser-ices t9e! are ri&9tfull! entitled to recei-e Bit9out demand. Je take a 0uick look at some suc9 ser-ices 4ro-ided 8! 8anks in 1ndia. Customer 1nformation Customer information collected from t9e customers s9ould not 8e used for cross7sellin& of ser-ices or 4roducts 8! t9e 8ank? its su8sidiaries and affiliates. 1f t9e 8ank 4ro4oses to use suc9 information? it s9ould 8e strictl! Bit9 t9e 'ex4ress consent' of t9e account79older. %anks are not ex4ected to disclose details>4articulars of t9e customer's account to a t9ird 4erson or 4art! Bit9out t9e ex4ressed or im4lied consent from t9e customer. AoBe-er? t9ere are some exce4tions? suc9 as disclosure of information under com4ulsion of laB or B9ere t9ere is a dut! to 4u8lic for t9e 8ank to disclose. 1nterest Pa!ments L Sa-in&s 8ank accounts# 1nterest is 4aid on sa-in&s 8ank de4osit account at t9e rate s4ecified 8! R%1 from time to time. 1n case of sa-in&s 8ank accounts? till ,*

recentl!? 8anks 4aid interest on t9e minimum 8alance 8etBeen t9e ""t9 and t9e last da! of t9e

,,

mont9. Jit9 effect from $4ril "? *)")? 8anks 9a-e 8een ad-ised to calculate interest on sa-in&s 8ank de4osit 8! considerin& dail! 4roduct? B9ic9 Bould 8enefit t9e 9olders of sa-in&s 8ank accounts. L Term de4osits# Term7de4osit interest rates are decided 8! indi-idual 8anks Bit9in t9ese &eneral &uidelines. 1n terms of R%1 directi-es? interest is calculated at 0uarterl! inter-als on term de4osits and 4aid at t9e rate decided 8! t9e 8ank de4endin& interest on term de4osits is calculated 8! t9e 1ndian %ank u4on t9e 4eriod of de4osits. T9e $ssociation."2 $lso? a customer can earn interest on a term de4osit for a minimum 4eriod of 2 da!s? as stated earlier. L Tax deducted at source (TDS)# T9e 8ank 9as statutor! o8li&ation to deduct tax at source if t9e total interest 4aid>4a!a8le on all term de4osits 9eld 8! a 4erson exceeds t9e amount s4ecified under t9e 1ncome Tax $ct and rules t9ere under. T9e %ank Bill issue a tax deduction certificate (TDS Certificate) for t9e amount of tax deducted. T9e de4ositor? if entitled to exem4tion from TDS? can su8mit a declaration to t9e 8ank in t9e 4rescri8ed format at t9e 8e&innin& of e-er! financial !ear. Premature Jit9draBal of Term De4osit T9e 8ank on re0uest from t9e de4ositor? at its discretion? ma! alloB Bit9draBal of

8ank in accordance Bit9 t9e formulae and con-entions ad-ised 8!

term7 de4osit 8efore com4letion of t9e 4eriod of t9e de4osit a&reed u4on at t9e time of 4lacin& t9e de4osit. %anks usuall! c9ar&e a 4enalt! for 4remature Bit9draBal of de4osits. T9e 8ank s9all declare t9eir 4enal interest rates 4olic! for 4remature Bit9draBal of term de4osit? if an!? at t9e time of o4enin& of t9e account. Premature ReneBal of Term De4osit 1n case t9e de4ositor desires to reneB t9e de4osit 8! seekin& 4remature closure of an

existin& term de4osit account? t9e 8ank Bill 4ermit t9e reneBal at t9e a44lica8le rate on t9e date of reneBal? 4ro-ided t9e de4osit is reneBed for a 4eriod lon&er t9an t9e 8alance 4eriod of t9e ori&inal de4osit. J9ile 4rematurel! closin& a de4osit for t9e 4ur4ose of reneBal? interest on t9e de4osit for t9e 4eriod it 9as remained Bit9 t9e 8ank Bill 8e 4aid at t9e rate a44lica8le to t9e 4eriod for B9ic9 t9e de4osit remained Bit9 t9e 8ank and not at t9e contracted rate. $d-ances a&ainst De4osits T9e %ank ma! consider re0uests of t9e de4ositor(s) for t9e de4ositor(s) on loan>o-erdraft facilit! a&ainst

term de4osits dul! disc9ar&ed 8! documents.

execution of

necessar! securit!

,.

"2

T9e 1ndian %anks' $ssociation (1%$) is an association of 8anks from 8ot9 t9e 4u8lic and t9e 4ri-ate sector and re4resents t9e mana&ement of 8anks.

,(

T9e 8ank ma! also consider &i-in& an ad-ance a&ainst a de4osit standin& in t9e name of minor. AoBe-er? a suita8le declaration statin& t9at t9e loan is for t9e 8enefit of t9e minor? is to 8e furnis9ed 8! t9e de4ositor7a44licant. Settlement of Dues in Deceased De4osit $ccount a) 1f t9e de4ositor 9as re&istered nomination Bit9 t9e 8ankN t9e 8alance outstandin& in t9e account of t9e deceased de4ositor Bill 8e transferred> 4aid to t9e nominee after t9e 8ank is satisfied a8out t9e identit! of t9e nominee? etc. 8) T9e a8o-e 4rocedure Bill 8e folloBed e-en in res4ect of a @oint account B9ere nomination is re&istered Bit9 t9e 8ank. c) 1n case of @oint de4osit accounts B9ere @oint account 9olders do not &i-e an! mandate for dis4osal? B9en one of t9e @oint account 9olders dies? t9e 8ank is re0uired to make 4a!ment @ointl! to t9e le&al 9eirs of t9e deceased 4erson and t9e sur-i-in& de4ositor(s). 1n t9ese cases? dela!s ma! ensue in t9e 4roduction of le&al 4a4ers 8! t9e 9eirs of t9e deceased. AoBe-er? if t9e @oint account 9olders 9ad &i-en mandate for dis4osal of t9e 8alance in t9e account in t9e forms suc9 as 'eit9er or sur-i-or'? 'former>latter or sur-i-or'? 'an!one of sur-i-ors or 9eirs of t9e deceased. d) 1n t9e a8sence of nomination? t9e 8ank Bill 4a! t9e amount outstandin& to all le&al 9eirs a&ainst @oint a44lication and on recei4t of t9e necessar! documents? includin& court order. Sto4 Pa!ment Facilit! T9e %ank Bill acce4t 'sto4 4a!ment' instructions from t9e de4ositors in res4ect of c9e0ues issued 8! t9em. C9ar&es? as s4ecified? Bill 8e reco-ered. Dormant $ccounts $ccounts B9ic9 are not o4erated for a considera8le 4eriod of time (usuall! "*>*. mont9s for sa-in&s 8ank accounts and +>"* mont9s for current accounts)? Bill 8e transferred to a se4arate dormant>ino4erati-e account status in t9e interest of t9e de4ositor as Bell as t9e 8ank."3 t9e 8ank. T9e de4ositor Bill 8e informed if t9ere are c9ar&es t9at t9e 8ank Bould le-! on dormant>ino4erati-e accounts. Suc9 accounts can 8e used a&ain on an acti-ation re0uest to sur-i-or'N etc.? t9e 4a!ment Bill 8e made as 4er t9e dela! in 4roduction of le&al 4a4ers 8! t9e

mandate. 1n suc9 cases? t9ere is no

"3

Suc9 a 4ractice is in t9e interest of t9e de4ositor since it a-oids t9e 4ossi8ilit! of frauds on t9e account. 1t is

*3

also in t9e interest of t9e 8ank as it reduces t9e ser-icin& costs t9at t9e 8ank Bould 9a-e 9ad to incur if t9e account Bere to remain acti-e.

*6

Safe De4osit :ockers T9is facilit! is not offered t9rou&9 all 8ank 8ranc9es and B9ere-er t9e facilit! is offered? allotment of safe de4osit -ault Bill 8e su8@ect to a-aila8ilit! and com4liance Bit9 ot9er terms and conditions attac9ed to t9e ser-ice. Safe de4osit lockers ma! 8e 9ired 8! indi-idual (not a minor) sin&l! or @ointl! Bit9 anot9er indi-idual(s)? ACFs? an firms? limited

com4anies? associates? societies? trusts etc. Nomination facilit! is a-aila8le to indi-idual(s) 9oldin& t9e lockers sin&l! or @ointl!. 1n t9e a8sence of nomination or mandate for dis4osal of contents of lockers? Bit9 a -ieB to a-oid 9ards9i4 to common 4ersons? t9e 8ank Bill release t9e contents of locker to t9e le&al 9eirs a&ainst indemnit! on de4osit accounts. Redress of Com4laints and =rie-ances De4ositors 9a-in& an! com4laint>&rie-ance Bit9 re&ard to ser-ices rendered 8! t9e 8ank 9a-e a ri&9t to a44roac9 t9e aut9orities desi&nated 8! t9e 8ank for 9andlin& customer com4laints> &rie-ances. 1n case t9e de4ositor does not &et a res4onse from t9e 8ank Bit9in one mont9 after t9e 8ank recei-es 9is re4resentation >com4laint or 9e is not satisfied Bit9 t9e res4onse recei-ed from t9e 8ank? 9e 9as a ri&9t to a44roac9 t9e %ankin& ;m8udsman a44ointed 8! R%1."6 t9e lines as a44lica8le to

,.+

De4osit Ser-ices ;ffered to Non7Resident 1ndians

%anks acti-el! seek 8ankin& 8usiness from Non7Resident 1ndians (NR1s) 8! offerin& different t!4es of de4osit accounts (and related ser-ices) in accordance Bit9 R%1 &uidelines? includin&# L L L Non7resident ordinar! accountN Non7resident (external) Ru4ee accountN and Forei&n currenc! non resident account (%anks)

Definition of Non7Resident 1ndian (NR1)*) $s 4er t9e Forei&n /xc9an&e Mana&ement $ct (F/M$)? "666? an NR1 means# L and L 4ass4orts) Non7Resident 1ndian National (i.e. Non7resident 1ndian 9oldin& 1ndian 4ass4ort)? Persons of 1ndian ;ri&in (i.e.? Non7residents 9oldin& forei&n

Non7resident 1ndian Nationals include (i) 1ndian citiIens B9o 4roceed a8road for em4lo!ment or for an! 8usiness or -ocation in circumstances indicatin& an indefinite 4eriod of sta! outside 1ndiaN

,)

*)

NR1 is defined differentl! under different acts. For t9e 4ur4ose of 8ank accounts? F/M$ definition 9olds.

,"

(ii)

1ndian

citiIens

Borkin&

a8road

on

assi&nments

Bit9

forei&n

&o-ernments?

international> multinational a&encies suc9 as t9e Cnited Nations? t9e 1nternational Monetar! Fund? t9e Jorld %ank etc. (iii) ;fficials of Central and State =o-ernments and Pu8lic Sector Cndertakin&s (PSCs) de4uted a8road on assi&nments Bit9 forei&n &o-ernments? multilateral a&encies or 1ndian di4lomatic missions a8road. P1; (Persons of 1ndian ;ri&in) is defined as a citiIen of an! countr! ot9er t9an %an&lades9 or Pakistan? if a. or 8. or c. 9e 9as at an! time 9eld an 1ndian 4ass4ortN 9e or eit9er of 9is 4arents or an! of 9is &rand 4arents Bas a citiIen of 1ndiaN t9e 4erson is a s4ouse of an 1ndian citiIen or a 4erson referred to in su87clause (a) or (8). 1n &eneral? NR1 is t9us a 4erson of 1ndian nationalit! or ori&in? B9o is resident a8road for 8usiness or em4lo!ment or -ocation? or Bit9 t9e intension of seekin& em4lo!ment or -ocation and t9e 4eriod of sta! a8road is uncertain.*" ,.+." Non Resident ;rdinar! $ccounts (NR;) an! 4erson resident outside 1ndia. domestic Ru4ee account &ets

T9ese are Ru4ee accounts and can 8e o4ened 8!

T!4icall!? B9en a resident 8ecomes non7resident? 9is

con-erted into an NR; account. 1n ot9er Bords? it is 8asicall! a domestic account of an NR1 B9ic9 9el4 9im &et credits B9ic9 accrue in 1ndia? suc9 as rent from 4ro4ert! or income from ot9er in-estments. NeB accounts can 8e o4ened 8! sendin& fres9 remittances from a8road. NR; accounts can 8e o4ened onl! as sa-in&s account? current account? recurrin& de4osits and term7de4osit accounts. Re&ulations on interest rates? tenors etc. are similar to t9ose of domestic accounts. J9ile t9e 4rinci4al of NR; de4osits is non7re4atria8le? current income suc9 as interest earnin&s on NR; de4osits are re4atria8le. from t9ese accounts. ,.+.* T9e Non7Resident (/xternal) Ru4ee $ccounts Non7Resident (/xternal) Ru4ee $ccount NR(/)R$ sc9eme? also knoBn as t9e NR/ Furt9er? NR1>P1; ma! remit an amount? not exceedin& CSQ"million 4er financial !ear? for 4ermissi8le transactions

sc9eme? Bas introduced in "62). T9is is a ru4ee account. $n! NR1 can o4en an NR/ account Bit9 funds remitted to 1ndia t9rou&9 a 8ank a8road. $n NR/ ru4ee account ma! 8e o4ened as current? sa-in&s? recurrin& or term de4osit account. Since t9is account is maintained in Ru4ees? t9e de4ositor is ex4osed to exc9an&e risk.

,)

*"

T9us? a student &oin& a8road for studies or a tourist &oin& a8road for 8rief -isit is not an NR1.

,"

T9is is a re4atria8le account (for 8ot9 interest and 4rinci4al) and transfer from>to anot9er NR/ account or FCNR (%) account (see 8eloB) is also 4ermitted. :ocal 4a!ments can also 8e freel! made from NR/ accounts. NR1s > P1;s 9a-e t9e o4tion to credit t9e current income to t9eir NR/ accounts? 4ro-ided income tax 9as 8een deducted > 4ro-ided for. 1nterest rates on NR/ accounts are determined 8! t9e R%1? for 8ot9 sa-in&s and term de4osits. ,.+., T9e Forei&n Currenc! Non Resident $ccount (%anks) Forei&n Currenc! Non7Resident $ccount (%anks) or FCNR(%) accounts sc9eme

Bas introduced Bit9 effect from Ma! sc9eme introduced in "62(. L

"(? "66, to re4lace t9e t9en 4re-ailin& FCNR($)

T9ese are forei&n currenc! accounts? B9ic9 can 8e o4ened 8! desi&nated currencies# Pound Sterlin&? CS Dollar? Canadian Dollar? /CR; and Da4anese Een.

NR1s

in onl!

Dollar? $ustralian

L L L

Re4atriation of 4rinci4al amount and interest is 4ermitted. T9ese de4osits can 8e o4ened onl! in t9e form of term de4osits. De4osits are in forei&n currenc! and are re4aid in t9e currenc! of issue. Aence? t9ere is no exc9an&e risk for t9e account 9older.

Transfer of funds from existin& NR/ accounts to FCNR(%) accounts and -ice7 -ersa? of t9e same account 9older? is 4ermissi8le Bit9out t9e 4rior a44ro-al of R%1.

$ 8ank s9ould o8tain t9e 4rior a44ro-al of its %oard of Directors for t9e interest rates t9at it Bill offer on de4osits of -arious maturities? Bit9in t9e ceilin& 4rescri8ed 8! R%1. Ta8le ,.. com4ares NR1s. t9e different features of t9e de4osit accounts a-aila8le to t9e

,*

Ta8le ,.. Com4arison of De4osit Sc9emes a-aila8le to NR1s Particulars Forei&n Currenc! (Non7Resident) $ccount (%anks) Sc9eme (FCNR(%) $ccount) J9o can o4en an accountR NR1s (indi-iduals>entities of %an&lades9>Pakistan nationalit!>oBners9i4 re0uire 4rior a44ro-al of R%1) Non7Resident (/xternal) Ru4ee $ccount Sc9eme (NR/ $ccount) NR1s (indi-iduals>entities of %an&lades9>Pakistan nationalit!>oBners9i4 re0uire 4rior a44ro-al of R%1) Non7Resident ;rdinar! Ru4ee $ccount Sc9eme (NR; $ccount) $n! 4erson resident outside 1ndia (ot9er t9an a 4erson resident in Ne4al and %9utan). (1ndi-iduals>entities of %an&lades9 Pakistan nationalit! oBners9i4 as Bell as erstB9ile ;C%s re0uire 4rior a44ro-al of R%1) Currenc! in B9ic9 account is denominated Re4atria8ilit! T!4e of $ccount Pound Sterlin&? CS Dollar? Da4anese Een? /uro? Canadian Dollar and $ustralian Dollar Re4atria8ilit! Term De4osit onl! 1ndian Ru4ees 1ndian Ru4ees

Re4atria8ilit! Sa-in&s? Current? Recurrin&? Fixed De4osit $t t9e discretion of t9e 8ank Su8@ect to ca4 <

Not re4atria8le 5 Sa-in&s? Current? Recurrin&? Fixed De4osit $s a44lica8le to resident accounts %anks are free to determine interest rates for term de4osits.

Period for fixed de4osits Rate of 1nterest

For terms not less t9an " !ear and not more t9an ( !ears. Su8@ect to ca4 <

Source# F$Q section? Reser-e Je8site Note#

%ank of

1ndia

5 /xce4t for t9e folloBin&# (i) current income? (ii) u4 to CSD " million 4er financial !ear ($4ril7 Marc9)? for an! 8onafide 4ur4ose out of t9e 8alances in t9e account > sale 4roceeds of assets in 1ndia ac0uired 8! Ba! of in9eritance > le&ac! inclusi-e of assets ac0uired out of settlement su8@ect to certain conditions. < $s determined 8! t9e R%1 from time to time. ,,

,.2

De4osit 1nsurance

De4osit insurance 9el4s sustain 4u8lic confidence in t9e 8ankin& s!stem t9rou&9 t9e 4rotection of de4ositors? es4eciall! small de4ositors? a&ainst loss of de4osit to a si&nificant extent. De4osit 1n 1ndia? 8ank de4osits are co-ered under t9e insurance sc9eme offered 8! 1nsurance and Credit =uarantee Cor4oration of 1ndia (D1C=C)? B9ic9 Bas

esta8lis9ed Bit9 fundin& from t9e Reser-e %ank of 1ndia. T9e sc9eme is su8@ect to certain limits and conditions. D1C=C is a B9oll!7oBned su8sidiar! of t9e R%1. ,.2." %anks insured 8! t9e D1C=C

$ll commercial 8anks includin& 8ranc9es of forei&n 8anks functionin& in 1ndia? local area 8anks and re&ional rural 8anks are insured 8! t9e D1C=C.** Furt9er? all State? Central and Primar! coo4erati-e 8anks functionin& in States>Cnion

Territories B9ic9 9a-e amended t9e local Coo4erati-e Societies $ct em4oBerin& R%1 suita8l! are insured 8! t9e D1C=C. Primar! coo4erati-e societies are not insured 8! t9e D1C=C. ,.2.* J9en 4a!R Features of t9e sc9eme is D1C=C lia8le to 4rotects 8ank de4osits t9at are 4a!a8le in 1ndia.

1n t9e e-ent of a 8ank failure? D1C=C mer&ed Bit9 anot9er 8ank.

D1C=C is lia8le to 4a! if (a) a 8ank &oes into li0uidation or (8) if a 8ank is amal&amated>

Met9ods of 4rotectin& de4ositors' interest T9ere are tBo met9ods of 4rotectin& de4ositors' interest B9en an insured 8ank fails# (i) 8! transferrin& 8usiness of t9e failed 8ank to anot9er sound 8ank*, (in case of mer&er or amal&amation) and (ii) B9ere t9e D1C=C 4a!s insurance 4roceeds to de4ositors (insurance 4a!7out met9od). T!4es of de4osit co-ered 8! D1C=C T9e D1C=C insures all de4osits suc9 as sa-in&s? fixed? current? recurrin&? etc. exce4t t9e folloBin& t!4es of de4osits# L L De4osits of forei&n =o-ernmentsN De4osits of Central>State =o-ernmentsN

**

Primar! a&ricultural credit societies (P$CS) are -illa&e7le-el coo4erati-es t9at dis8urse s9ort7term credit. T9ere are o-er 6())) suc9 societies in t9e countr!. 1n *)).? =lo8al Trust %ank Bas mer&ed into ;riental %ank of Commerce? after si&nificant losses from NP$s? and a t9ree7mont9 =o-t. im4osed moratorium.

*,

,.

L L 8ankN L L

1nter78ank de4ositsN De4osits of t9e State :and De-elo4ment %anks Bit9 t9e State co7o4erati-e

$n! amount due on account of an! de4osit recei-ed outside 1ndiaN $n! amount? B9ic9 9as 8een s4ecificall! exem4ted 8! t9e cor4oration Bit9 t9e 4re-ious a44ro-al of R%1.

Maximum D1C=C

de4osit

amount

insured

8!

t9e

/ac9 de4ositor in a 8ank is insured u4 to a maximum of Rs"))?))) for 8ot9 4rinci4al and interest amount 9eld 8! 9im in t9e same ca4acit! and same ri&9t. For exam4le? if an

indi-idual 9ad a de4osit Bit9 4rinci4al amount of Rs.2?)))? t9e total amount insured 8! t9e D1C=C 4rinci4al amount Bere Rs.

Rs.6)?))) 4lus accrued interest of Bould 8e Rs.62?))). 1f? 9oBe-er? t9e

66?))) and accrued interest of Rs +?)))? t9e total amount insured 8! t9e D1C=C Bould 8e Rs " lak9. T9e de4osits ke4t in different 8ranc9es of a 8ank are a&&re&ated for t9e 4ur4ose of

insurance co-er and a maximum amount u4 to Rs " lak9 is 4aid. $lso? all funds 9eld in t9e same t!4e of oBners9i4 at t9e same 8ank are added to&et9er 8efore de4osit insurance is determined. 1f t9e funds are in different t!4es of oBners9i4 (sa! as indi-idual? 4artner of firm? director of com4an!? etc.) or se4aratel! insured. $lso? note t9at B9ere a de4ositor is t9e sole 4ro4rietor and 9olds de4osits in t9e name of t9e 4ro4rietar! concern as Bell as in 9is indi-idual ca4acit!? t9e tBo de4osits are to 8e are de4osited into se4arate 8anks t9e! Bould t9en 8e

a&&re&ated and t9e insurance co-er is a-aila8le u4 to ru4ees one lak9 maximum. Cost of de4osit insurance De4osit insurance 4remium is 8orne entirel! 8! t9e insured 8ank. %anks are re0uired to 4a! t9e insurance 4remium for t9e eli&i8le amount to t9e D1C=C on a semi7annual 8asis. T9e cost of t9e insurance 4remium cannot 8e 4assed on to t9e customer. %ox ,..# D1C=C Premium c9ar&ed and claims 4aid 8!

T9e 4remium rates c9ar&ed 8! D1C=C Bere raised to Re ).") 4er de4osit of Rs.")) Bit9 effect from $4ril "? *))(. *))+7 ,( J9ile t9e 4remiums recei-ed 8! D1C=C durin& t9e !ears

)2? *))27)3 and *))37)6 Bere Rs.*,*" crores? Rs.*3.. crores and Rs.,.(, crores res4ecti-el!? t9e net claims 4aid 8! D1C=C durin& t9ese t9ree !ears Bere Rs.,*, crores? Rs."3) crores and Rs.6)6 crores res4ecti-el!. Source# D1C=C *))6. 7 $nnual Re4ort

,+

Jit9draBal of insurance co-er T9e de4osit insurance sc9eme is com4ulsor! and no 8ank can Bit9draB from it. T9e D1C=C? on t9e ot9er 9and? can Bit9draB t9e de4osit insurance co-er for a 8ank if it fails to 4a! t9e 4remium for t9ree consecuti-e 9alf !ear 4eriods. 1n t9e e-ent of t9e D1C=C Bit9draBin& its co-er from an! 8ank for default in t9e 4a!ment of 4remium? t9e 4u8lic Bill 8e notified t9rou&9 t9e neBs4a4ers.

,2

CA$PT/R .# %asics of %ank :endin&

%anks extend credit to different cate&ories of 8orroBers for a Bide -ariet! of 4ur4oses. For man! 8orroBers? 8ank credit is t9e easiest to access at reasona8le interest rates. %ank credit is 4ro-ided to 9ouse9olds? retail traders? small and medium enter4rises (SM/s)?

cor4orates? t9e =o-ernment undertakin&s etc. in t9e econom!. Retail 8ankin& loans are accessed 8! consumers of &oods and ser-ices for financin& t9e 4urc9ase of consumer dura8les? 9ousin& or e-en for da!7to7da! consum4tion. 1n contrast? t9e need for ca4ital in-estment? and da!7to7da! o4erations of 4ri-ate cor4orates and t9e =o-ernment undertakin&s are met t9rou&9 B9olesale lendin&. :oans for ca4ital ex4enditure are usuall! extended Bit9 medium and lon&7term maturities? B9ile da!7to7da! finance re0uirements are 4ro-ided t9rou&9 s9ort7term credit (Borkin& ca4ital loans). Meetin& t9e financin& needs of t9e a&riculture sector is also an im4ortant role t9at 1ndian 8anks 4la!.

.."
.."."

Princi4les of :endin& and :oan 4olic!

Princi4les of lendin&

To lend? 8anks de4end lar&el! on de4osits from t9e 4u8lic. %anks act as custodian of 4u8lic de4osits. Since t9e de4ositors re0uire safet! and securit! of t9eir de4osits? Bant to Bit9draB de4osits B9ene-er t9e! need and also ade0uate return? 8ank lendin& must necessaril! 8e 8ased on 4rinci4les t9at reflect t9ese concerns of t9e de4ositors. T9ese 4rinci4les include# safet!? li0uidit!? 4rofita8ilit!? and risk di-ersion. Safet! %anks need to ensure t9at ad-ances are safe and mone! lent out 8! t9em Bill come 8ack. Since t9e re4a!ment of loans de4ends on t9e 8orroBers' ca4acit! to 4a!? t9e 8anker must 8e satisfied 8efore lendin& t9at t9e 8usiness for B9ic9 mone! is sou&9t is a sound one. 1n addition? 8ankers man! times insist on securit! a&ainst t9e loan? B9ic9 t9e! fall 8ack on if t9in&s &o Bron& for t9e 8usiness. T9e securit! must 8e ade0uate? readil! marketa8le

and free of encum8rances. :i0uidit! To maintain li0uidit!? 8anks 9a-e to ensure t9at mone! lent out 8! t9em is not locked u4 for lon& time 8! desi&nin& t9e loan maturit! 4eriod a44ro4riatel!. Furt9er? mone! must come 8ack as 4er t9e re4a!ment sc9edule. 1f loans 8ecome excessi-el! illi0uid? it ma!

not 8e 4ossi8le for 8ankers to meet t9eir o8li&ations -is7H7-is de4ositors. ,3

Profita8ilit! To remain -ia8le? a 8ank must earn ade0uate 4rofit on its in-estment. T9is calls for

ade0uate mar&in 8etBeen de4osit rates and lendin& rates. 1n t9is res4ect? a44ro4riate fixin& of interest rates on 8ot9 ad-ances and de4osits is critical. Cnless interest rates are

com4etiti-el! fixed and mar&ins are ade0uate? com4etitors and 8ecome un4rofita8le. Risk di-ersification

8anks ma! lose customers to t9eir

To miti&ate risk? 8anks s9ould lend to a di-ersified customer 8ase.

Di-ersification s9ould 8e

in terms of &eo&ra49ic location? nature of 8usiness etc. 1f? for exam4le? all t9e 8orroBers of a 8ank are concentrated in one re&ion and t9at re&ion &ets affected 8! a natural disaster? t9e 8ank's 4rofita8ilit! can 8e seriousl! affected. ..".* :oan Polic!

%ased on t9e &eneral 4rinci4les of lendin& stated a8o-e? t9e Credit Polic! Committee (CPC) of indi-idual 8anks 4re4ares t9e 8asic credit 4olic! of t9e %ank? B9ic9 9as to 8e a44ro-ed 8! t9e %ank's %oard of Directors. T9e o4eratin& 4rocedures in 4resentation of all loan 4olic! outlines lendin& &uidelines and esta8lis9es credit mana&ement includin& standards for

as4ects of

credit 4ro4osals? financial co-enants? ratin& standards and 8enc9marks?

dele&ation of credit a44ro-in& 4oBers? 4rudential limits on lar&e credit ex4osures? asset concentrations? 4ortfolio mana&ement? loan re-ieB mec9anism? risk monitorin& and

e-aluation? 4ricin& of loans? 4ro-isionin& for 8ad de8ts? re&ulator!> le&al com4liance etc. T9e lendin& &uidelines reflect t9e s4ecific 8ank's lendin& strate&! (8ot9 at t9e macro le-el and indi-idual 8orroBer le-el) and 9a-e to 8e in conformit! Bit9 R%1 &uidelines. T9e loan 4olic! t!4icall! la!s doBn lendin& &uidelines in t9e folloBin& areas# L ratio L mix L L L :e-el of credit7de4osit

Tar&eted 4ortfolio

Aurdle ratin&s :oan 4ricin& Collateral securit!

Credit De4osit (CD) Ratio $ 8ank can lend out onl! a certain 4ro4ortion of its de4osits? since some 4art of de4osits 9a-e to 8e statutoril! maintained as Cas9 Reser-e Ratio (CRR) de4osits? and an additional ,2

4art 9as to 8e used for makin& in-estment in 4rescri8ed securities (Statutor! Ratio or S:R

:i0uidit!

,3

re0uirement).*. 1t ma! 8e noted t9at t9ese are minimum re0uirements. %anks 9a-e t9e o4tion of 9a-in& more cas9 reser-es t9an CRR re0uirement and in-est more in S:R securities t9an t9e! are re0uired to. Furt9er? 8anks also 9a-e t9e o4tion to in-est in non7 S:R securities. T9erefore? t9e CPC 9as to la! doBn t9e 0uantum of credit t9at can 8e &ranted 8! t9e 8ank as a 4ercenta&e of de4osits a-aila8le. Currentl!? t9e a-era&e CD ratio of t9e entire 8ankin& industr! is around 2) 4ercent? t9ou&9 it differs across 8anks. 1t is rarel! o8ser-ed t9at 8anks lend out of t9eir 8orroBin&s. Tar&eted Portfolio Mix T9e CPC aims at a tar&eted 4ortfolio mix kee4in& in -ieB 8ot9 risk and return. ToBard t9is end? it la!s doBn &uidelines on c9oosin& t9e 4referred areas of lendin& (suc9 as sunrise sectors and 4rofita8le sectors) as Bell as t9e sectors to a-oid.*( %anks t!4icall! monitor all ma@or sectors of t9e econom!. T9e! tar&et a 4ortfolio mix in t9e li&9t of forecasts for &roBt9 and 4rofita8ilit! for eac9 sector. 1f a 8ank 4ercei-es economic Beakness in a sector? it Bould restrict neB ex4osures to t9at se&ment and similarl!? &roBin& and 4rofita8le sectors of t9e econom! 4rom4t 8anks to increase neB ex4osures to t9ose sectors. T9is entails acti-e 4ortfolio mana&ement. Furt9er? t9e 8ank also 9as to decide B9ic9 sectors to a-oid. For exam4le? t9e CPC of a 8ank ma! 8e of t9e -ieB t9at t9e 8ank is alread! o-erextended in a 4articular industr! and no more loans s9ould 8e 4ro-ided in t9at sector. 1t ma! also like to a-oid certain kinds of loans kee4in& in mind &eneral credit disci4line? sa! loans for loans? etc. Aurdle ratin&s T9ere are a num8er of di-erse risk factors associated Bit9 8orroBers. %anks s9ould 9a-e a com4re9ensi-e risk ratin& s!stem t9at ser-es as a sin&le 4oint indicator of di-erse risk factors of a 8orroBer. T9is 9el4s takin& credit decisions in a consistent manner. To facilitate t9is? a su8stantial de&ree of standardisation is re0uired in ratin&s across 8orroBers. T9e risk ratin& s!stem s9ould 8e so desi&ned as to re-eal t9e o-erall risk of lendin&. For neB 8orroBers? a 8ank usuall! la!s doBn &uidelines re&ardin& minimum ratin& to 8e ac9ie-ed 8! t9e 8orroBer to 8ecome eli&i8le for t9e loan. T9is is also knoBn as t9e '9urdle ratin&' criterion to 8e ac9ie-ed 8! a neB 8orroBer. s4eculati-e 4ur4oses? unsecured

*.

/ac9 8ank 9as to statutoril! set aside a certain minimum fraction of it net demand and time lia8ilities in 4rescri8ed assets to fulfill t9ese re0uirements. CRR and S:R 9a-e 8een discussed in c9a4ter " and C9a4ter ( res4ecti-el!.

*(

For exam4le? in t9e last decade? a num8er of 8anks identified retail finance as an area Bit9 4otential for

,6

stron& &roBt9 and 9a-e t9erefore sou&9t to increase t9eir financin& in retail s4ace. ;ne ad-anta&e of financin& a lar&e num8er of small loans is t9at risk concentration is reduced. AoBe-er? durin& an economic doBnturn? t9e retail 4ortfolio ma! also ex4erience si&nificantl! 9i&9 credit defaults.

.)

Pricin& of loans Risk7return trade7off is a fundamental as4ect of risk mana&ement. %orroBers Bit9 Beak financial 4osition and? 9ence? 4laced in 9i&9er risk cate&or! are 4ro-ided credit facilities at a 9i&9er 4rice (t9at is? at 9i&9er interest). T9e 9i&9er t9e credit risk of a 8orroBer t9e 9i&9er Bould 8e 9is cost of 8orroBin&. To 4rice credit risks? 8anks de-ise a44ro4riate s!stems? B9ic9 usuall! alloB flexi8ilit! for re-isin& t9e 4rice (risk 4remium) due to c9an&es in ratin&. 1n ot9er Bords? if t9e risk ratin& of a 8orroBer deteriorates? 9is cost of 8orroBin& s9ould rise and -ice -ersa. $t t9e macro le-el? loan 4ricin& for a 8ank is de4endent u4on a num8er of its cost factors suc9 as cost of raisin& resources? cost of administration and o-er9eads? cost of reser-e assets like CRR and S:R? cost of maintainin& ca4ital? 4ercenta&e of 8ad de8t? etc. :oan 4ricin& is also de4endent u4on com4etition. Collateral securit! $s 4art of a 4rudent lendin& 4olic!? 8anks usuall! ad-ance loans a&ainst some securit!. T9e loan 4olic! 4ro-ides &uidelines for t9is. 1n t9e case of term loans and Borkin& ca4ital assets? 8anks take as '4rimar! securit!' t9e 4ro4ert! or &ranted.
*+

&oods a&ainst B9ic9 loans are

1n addition to t9is? 8anks often ask for additional securit! or 'collateral securit!'

in t9e form of 8ot9 49!sical and financial assets to furt9er 8ind t9e 8orroBer. T9is reduces t9e risk for t9e 8ank. Sometimes? loans are extended as 'clean loans' for B9ic9 onl! 4ersonal &uarantee of t9e 8orroBer is taken. .."., Com4liance Bit9 R%1 &uidelines

T9e credit 4olic! of a 8ank s9ould 8e conformant Bit9 R%1 &uidelinesN some of t9e im4ortant &uidelines of t9e R%1 relatin& to 8ank credit are discussed 8eloB. Directed credit sti4ulations T9e R%1 la!s doBn &uidelines re&ardin& minimum ad-ances to 8e made for 4riorit!

sector ad-ances? ex4ort credit finance? etc.*2 T9ese &uidelines need to 8e ke4t in mind B9ile formulatin& credit 4olicies for t9e %ank. Ca4ital ade0uac! 1f a 8ank creates assets7loans or in-estment7t9e! are re0uired to 8e 8acked u4 8! 8ank ca4italN t9e amount of ca4ital t9e! 9a-e to 8e 8acked u4 8! de4ends on t9e risk of indi-idual assets t9at t9e 8ank ac0uires. T9e riskier t9e asset? t9e lar&er Bould 8e t9e ca4ital it 9as to 8e

."

*+ *2

For exam4le? in case of a 9ome loan? t9e 9ouse for B9ic9 t9e loan is taken ser-es as t9e '4rimar! securit!'. Priorit! sector ad-ances and ex4ort credit 9a-e 8een discussed later in t9is c9a4ter.

.*

8acked u4 8!. T9is is so? 8ecause 8ank ca4ital 4ro-ides a cus9ion a&ainst unex4ected losses of 8anks and riskier assets Bould re0uire lar&er amounts of ca4ital to act as cus9ion. T9e %asel Committee for %ank Su4er-ision (%C%S) 9as 4rescri8ed a set of norms for t9e ca4ital re0uirement for t9e 8anks for all countries to folloB. T9ese norms ensure t9at 1n addition? all countries? ca4ital s9ould 8e ade0uate to a8sor8 unex4ected losses.*3

includin& 1ndia? esta8lis9 t9eir oBn &uidelines for risk 8ased ca4ital frameBork knoBn as Ca4ital $de0uac! Norms. T9ese norms 9a-e to 8e at least as strin&ent as t9e norms set 8! t9e %asel committee. $ ke! norm of t9e %asel committee is t9e Ca4ital $de0uac! Ratio (C$R)? also knoBn as Ca4ital Risk Jei&9ted $ssets Ratio? is a sim4le measure of t9e soundness of a 8ank. T9e ratio is t9e ca4ital Bit9 t9e 8ank as a 4ercenta&e of its risk7Bei&9ted assets. =i-en t9e le-el of ca4ital a-aila8le Bit9 an indi-idual 8ank? t9is ratio determines t9e maximum extent to B9ic9 t9e 8ank can lend. T9e %asel committee s4ecifies a C$R of at least 3% for 8anks. T9is means t9at t9e ca4ital funds of a 8ank must 8e at least 3 4ercent of t9e 8ank's risk Bei&9ted assets. 1n 1ndia? t9e R%1 9as s4ecified a minimum of 6%? B9ic9 is more strin&ent t9an t9e international norm. 1n fact? t9e actual ratio of all sc9eduled commercial 8anks (SC%s) in 1ndia stood at ",.*% in Marc9 *))6. T9e R%1 also 4ro-ides &uidelines a8out 9oB muc9 risk Bei&9ts 8anks s9ould assi&n to T9e riskier t9e asset class? t9e 9i&9er Bould T9us? t9e real estate assets? for exam4le? are &i-en -er! 9i&9 risk

different classes of assets (suc9 as loans). 8e t9e risk Bei&9t. Bei&9ts.

T9is re&ulator! re0uirement t9at eac9 indi-idual 8ank 9as to maintain a minimum le-el of ca4ital? B9ic9 is commensurate Bit9 t9e risk 4rofile of t9e 8ank's assets? 4la!s a critical role in t9e safet! and soundness of indi-idual 8anks and t9e 8ankin& s!stem. Credit /x4osure :imits $s a 4rudential measure aimed at 8etter risk mana&ement and a-oidance of concentration of credit risks? t9e Reser-e %ank 9as fixed limits on 8ank ex4osure to t9e ca4ital market as Bell as to indi-idual and &rou4 8orroBers Bit9 reference to a 8ank's ca4ital. :imits on inter7 8ank ex4osures 9a-e also 8een 4laced. %anks are furt9er encoura&ed to 4lace internal ca4s on t9eir sectoral ex4osures? t9eir ex4osure to commercial real estate on 8anks' and to unsecured ex4osures. T9ese ex4osures are closel! monitored 8! t9e Reser-e %ank. Prudential norms

*3

$ %ank t!4icall! faces tBo t!4es of losses in res4ect of an! 8orroBer or

8orroBer class 7 ex4ected and

.,

unex4ected losses.

/x4ected losses s9ould 8e 8ud&eted for? and 4ro-isions s9ould 8e made to offset t9eir

ad-erse effects on t9e %ank's 8alance s9eet. AoBe-er? to cus9ion a&ainst unex4ected losses? B9ic9 are un4redicta8le? 8anks 9a-e to 9old ade0uate amount of ca4ital.

..

ex4osures to N%FCs and to related entities are also in 4lace. Ta8le .." &i-es a summar! of t9e R%1's &uidelines on ex4osure norms for commercial 8anks in 1ndia. Ta8le .."# /x4osure norms for Commercial 8anks in 1ndia /x4osure to ". Sin&le %orroBer :imit "( 4er cent of ca4ital fund ($dditional ( 4ercent on infrastructure ex4osure) *. =rou4 %orroBer .) 4ercent of ca4ital fund ($dditional ") 4ercent on infrastructure ex4osure) ,. .. (. N%FC N%FC 7 $FC 1ndian Doint enture>J9oll! oBned ") 4ercent of ca4ital fund "( 4ercent of ca4ital fund *) 4ercent of ca4ital fund

su8sidiaries a8road> ;-erseas ste4 doBn su8sidiaries of 1ndian cor4orates +. (a) Ca4ital Market /x4osure %anks' 9oldin& of s9ares in an! com4an! T9e lesser of ,) 4ercent of 4aid7u4 s9are ca4ital of t9e com4an! or ,) 4ercent of t9e 4aid7u4 ca4ital of 8anks (8) %anks' a&&re&ate ex4osure to ca4ital market (solo 8asis) (c) %anks' a&&re&ate ex4osure to ca4ital market (&rou4 8asis) (d) %anks' direct ex4osure to ca4ital market (solo 8asis) (e) %anks' direct ex4osure to ca4ital market (&rou4 8asis) 2. =ross Aoldin& of ca4ital amon& 8anks > financial institutions Source# Financial Sta8ilit! Re4ort? R%1? Marc9 *)") Some of t9e cate&ories of t9e a8o-e ta8le are discussed 8eloB# L 1ndi-idual %orroBers# $ 8ank's credit ex4osure to indi-idual 8orroBers must not exceed "( % of t9e %ank's ca4ital funds. Credit ex4osure to indi-idual 8orroBers ma! exceed t9e ex4osure norm of "( % of ca4ital funds 8! an additional ( % (i.e. u4 to *) %) 4ro-ided t9e additional credit ex4osure is on account of infrastructure financin&. .( ") 4er cent of ca4ital fund *) 4ercent of consolidated net Bort9 *) 4ercent of net Bort9 .) 4ercent of its consolidated net Bort9 .) 4ercent of its net Bort9

=rou4 %orroBers# $ 8ank's ex4osure to a &rou4 of com4anies under t9e same mana&ement control must not exceed .)% of t9e %ank's ca4ital funds unless t9e ex4osure is in res4ect of an infrastructure 4ro@ect. 1n t9at case? t9e ex4osure to a &rou4 of com4anies under t9e same mana&ement control ma! 8e u4 to ()% of t9e %ank's ca4ital funds.*6

$&&re&ate ex4osure to ca4ital market# $ 8ank's a&&re&ate ex4osure to t9e ca4ital market? includin& 8ot9 fund 8ased and non7fund 8ased ex4osure to ca4ital market? in all forms s9ould not exceed .) 4ercent of its net Bort9 as on Marc9 ," of t9e 4re-ious !ear.

1n addition to ensurin& com4liance Bit9 t9e a8o-e &uidelines laid doBn 8! R%1? a %ank ma! fix its oBn credit ex4osure limits for miti&atin& credit risk. T9e 8ank ma!? for exam4le? set u44er ca4s on ex4osures to sensiti-e sectors like commodit! sector? real estate sector and ca4ital markets. %anks also ma! la! doBn &uidelines re&ardin& ex4osure limits to unsecured loans. :endin& Rates %anks are free to determine t9eir oBn lendin& rates on all kinds of ad-ances exce4t a feB suc9 as ex4ort financeN interest rates on re&ulated 8! t9e R%1. 1t ma! 8e noted t9at t9e Section *"$ interest c9ar&ed is excessi-e. T9e conce4t of No-em8er 8enc9mark 4rime lendin& rate (%P:R) Bas 9oBe-er introduced in of t9e %R $ct 4ro-ides t9at t9e rate of interest t9e &round t9at t9e rate of t9ese exce4tional cate&ories of ad-ances are

c9ar&ed 8! a 8ank s9all not 8e reo4ened 8! an! court on

*)), for 4ricin& of loans 8! commercial 8anks Bit9 t9e o8@ecti-e of en9ancin& trans4arenc! in t9e 4ricin& of t9eir loan 4roducts. /ac9 8ank must declare its 8enc9mark 4rime lendin& rate (%P:R) as a44ro-ed 8! its %oard of Directors. $ 8ank's %P:R is t9e interest rate to 8e c9ar&ed to its 8est clientsN t9at is? clients Bit9 t9e loBest credit risk. /ac9 8ank is also re0uired to indicate t9e maximum s4read o-er t9e %P:R for -arious credit ex4osures. AoBe-er? %P:R lost its rele-ance o-er time as a meanin&ful reference rate? as t9e 8ulk of loans Bere ad-anced 8eloB %P:R. Furt9er? t9is also im4edes t9e smoot9 transmission of monetar! si&nals 8! t9e R%1. T9e R%1 t9erefore set u4 a Jorkin& =rou4 on %enc9mark Prime :endin& Rate (%P:R) in Dune *))6 to &o into t9e issues relatin& to t9e conce4t of %P:R and su&&est measures to make credit 4ricin& more trans4arent.

*6

%anks ma!? in exce4tional circumstances? Bit9 t9e a44ro-al of t9eir 8oards? en9ance t9e ex4osure 8! additional

.+

(% for 8ot9 indi-idual? and &rou4 8orroBers

.2

FolloBin& t9e recommendations of t9e =rou4? t9e Reser-e %ank 9as issued &uidelines in Fe8ruar! *)"). $ccordin& to t9ese &uidelines? t9e '%ase Rate s!stem' Bill re4lace t9e %P:R s!stem

Bit9 effect from Dul! )"? *)").$ll cate&ories of loans s9ould 9encefort9 8e 4riced onl! Bit9 reference to t9e %ase Rate. /ac9 8ank Bill decide its oBn %ase Rate. T9e actual lendin& rates c9ar&ed to 8orroBers Bould 8e t9e %ase Rate 4lus 8orroBer7s4ecific c9ar&es? include 4roduct7 s4ecific o4eratin& costs? credit risk 4remium and tenor 4remium. Since trans4arenc! in t9e 4ricin& of loans is a ke! o8@ecti-e? 8anks are re0uired to ex9i8it t9e information on t9eir %ase Rate at all 8ranc9es and also on t9eir Be8sites. C9an&es in t9e %ase Rate s9ould also 8e con-e!ed to t9e &eneral 4u8lic from time to time t9rou&9 a44ro4riate c9annels. $4art from trans4arenc!? 8anks s9ould ensure t9at interest rates c9ar&ed to customers in t9e a8o-e arran&ement are non7discriminator! in nature. =uidelines on Fair Practices Code for :enders R%1 9as 8een encoura&in& 8anks to introduce a fair 4ractices code for 8ank loans. :oan a44lication forms in res4ect of all cate&ories of loans irres4ecti-e of t9e amount of loan sou&9t 8! t9e 8orroBer s9ould 8e com4re9ensi-e. 1t s9ould include information a8out t9e fees> c9ar&es? if an!? 4a!a8le for 4rocessin& t9e loan? t9e amount of suc9 fees refunda8le in t9e case of non7 acce4tance of a44lication? 4re4a!ment o4tions and an! ot9er matter B9ic9 affects t9e interest of t9e 8orroBer? so t9at a meanin&ful com4arison Bit9 t9e fees c9ar&ed 8! ot9er 8anks can 8e made and informed decision can 8e taken 8! t9e 8orroBer. Furt9er? t9e 8anks must inform 'all7in7cost' to t9e customer to ena8le 9im to com4are t9e rates c9ar&ed Bit9 ot9er sources of finance. Re&ulations relatin& to 4ro-idin& loans T9e 4ro-isions of t9e %ankin& Re&ulation $ct? "6.6 (%R $ct) &o-ern t9e makin& of loans 8! 8anks in 1ndia. R%1 issues directions co-erin& t9e loan acti-ities of 8anks. Some of t9e ma@or &uidelines of R%1? B9ic9 are noB in effect? are as folloBs# L $d-ances a&ainst 8ank's oBn s9ares# a 8ank cannot &rant an! loans and ad-ances a&ainst t9e securit! of its oBn s9ares. L $d-ances to 8ank's Directors# T9e %R $ct la!s doBn t9e restrictions on loans and ad-ances to t9e directors and t9e firms in B9ic9 t9e! 9old su8stantial interest. L Restrictions on Aoldin& S9ares in Com4anies# 1n terms of Section "6(*) of t9e %R $ct? 8anks s9ould not 9old s9ares in an! com4an! exce4t as 4ro-ided in su87 section (") B9et9er as 4led&ee? mort&a&ee or a8solute oBner? of an amount B9ic9 Bill

exceedin& ,)% of t9e 4aid7u4 s9are ca4ital of t9at com4an! or ,)% of its oBn .3

4aid7u4 s9are ca4ital and reser-es? B9ic9e-er is less.

.6

..*
..*."

%asics of :oan $44raisal? Credit decision7makin& and Re-ieB

Credit a44ro-al aut9orities

T9e %ank's %oard of Directors also 9as to a44ro-e t9e dele&ation structure of t9e -arious credit a44ro-al aut9orities. %anks esta8lis9 multi7tier credit a44ro-al aut9orities for cor4orate 8ankin& acti-ities? small enter4rises? retail credit? a&ricultural credit? etc. Concurrentl!? eac9 8ank s9ould set u4 a Credit Risk Mana&ement De4artment (CMRD)?

8ein& inde4endent of t9e CPC. T9e CRMD s9ould enforce and monitor com4liance of t9e risk 4arameters and 4rudential limits set u4 8! t9e CPC. T9e usual structure for a44ro-in& credit 4ro4osals is as folloBs# L Credit a44ro-in& aut9orit!# multi7tier credit a44ro-in& s!stem Bit9 a 4ro4er sc9eme of dele&ation of 4oBers. L 1n some 8anks? 9i&9 -alued credit 4ro4osals are cleared t9rou&9 a Credit Committee a44roac9 consistin& of? sa! ,> . officers. T9e Credit Committee s9ould in-aria8l! 9a-e a re4resentati-e from t9e CRMD? B9o 9as no -olume or 4rofit tar&ets. ..*.* Credit a44raisal and credit decision7makin&

J9en a loan 4ro4osal comes to t9e 8ank? t9e 8anker 9as to decide 9oB muc9 funds does t9e 4ro4osal reall! re0uire for it to 8e a -ia8le 4ro@ect and B9at are t9e credentials of t9ose B9o are seekin& t9e 4ro@ect. 1n c9eckin& t9e credentials of t9e 4otential 8orroBers? Credit 1nformation %ureaus 4la! an im4ortant role (see %ox) %ox .."# Credit 1nformation %ureaus T9e Parliament of 1ndia 9as enacted t9e Credit 1nformation Com4anies (Re&ulation) $ct? *))(? 4ursuant to B9ic9 e-er! credit institution? includin& a 8ank? 9as to 8ecome a mem8er of a credit information 8ureau and furnis9 to it suc9 credit information as ma! 8e re0uired of t9e credit institution a8out 4ersons B9o en@o! a credit relations9i4 Bit9 it. Credit information 8ureaus are t9us re4ositories of information? B9ic9 contains t9e credit 9istor! of commercial and indi-idual 8orroBers. T9e! 4ro-ide t9is information to t9eir Mem8ers in t9e form of credit information re4orts. To &et a com4lete 4icture of t9e 4a!ment 9istor! of a credit a44licant? credit &rantors must 8e a8le to &ain access to t9e a44licant's com4lete credit record t9at ma! 8e s4read o-er different institutions. Credit information 8ureaus collect commercial and consumer credit7 related data and collate suc9 data to create credit re4orts? B9ic9 t9e! distri8ute to t9eir Mem8ers. $ Credit 1nformation Re4ort (C1R) is a factual record of a 8orroBer's credit 4a!ment 9istor! com4iled from information recei-ed from different credit &rantors. 1ts 4ur4ose is to 9el4 credit &rantors make informed lendin& decisions 7 0uickl! and o8@ecti-el!. $s of toda!? 8ureaus 4ro-ide 9istor! of credit card 9olders and SM/s. ()

..*.,

Monitorin& and Re-ieB of :oan Portfolio

1t is not onl! im4ortant for 8anks to folloB due 4rocesses at t9e time of sanctionin& and dis8ursin& loans? it is e0uall! im4ortant to monitor t9e loan 4ortfolio on a continuous 8asis. %anks need to constantl! kee4 a c9eck on t9e o-erall 0ualit! of t9e 4ortfolio. T9e! 9a-e to ensure t9at t9e 8orroBer utiliIes t9e funds for t9e 4ur4ose for B9ic9 it is

sanctioned and com4lies Bit9 t9e terms and conditions of sanction. Furt9er? t9e! monitor indi-idual 8orroBal accounts and c9eck to see B9et9er 8orroBers in different industrial sectors are facin& difficult! in makin& loan re4a!ment. 1nformation tec9nolo&! 9as 8ecome an im4ortant tool for efficient 9andlin& of t9e a8o-e functions includin& decision su44ort s!stems and data 8ases. Suc9 a sur-eillance and monitorin& a44roac9 9el4s to miti&ate credit risk of t9e 4ortfolio. %anks 9a-e set u4 :oan Re-ieB De4artments or Credit $udit De4artments in order to

ensure com4liance Bit9 extant sanction and 4ost7sanction 4rocesses and 4rocedures laid doBn 8! t9e %ank from time to time. T9is is es4eciall! a44lica8le for t9e lar&er ad-ances. T9e :oan Re-ieB De4artment 9el4s a 8ank to im4ro-e t9e 0ualit! of t9e credit 4ortfolio 8! detectin& earl! Barnin& si&nals? su&&estin& remedial measures and 4ro-idin& t9e to4

mana&ement Bit9 information on credit administration? includin& t9e credit sanction 4rocess? risk e-aluation and 4ost7sanction folloB u4.

..,

T!4es of $d-ances
can 8e 8roadl! classified into# fund78ased lendin& and non7fund 8ased

$d-ances lendin&.

Fund 8ased lendin&# T9is is a direct form of lendin& in B9ic9 a loan Bit9 an actual cas9 outfloB is &i-en to t9e 8orroBer 8! t9e %ank. 1n most cases? suc9 a loan is 8acked 8!

4rimar! and>or collateral securit!. T9e loan can 8e to 4ro-ide for financin& ca4ital &oods and>or Borkin& ca4ital re0uirements. Non7fund 8ased lendin&# 1n t9is t!4e of facilit!? t9e %ank makes no funds outla!.

AoBe-er? suc9 arran&ements ma! 8e con-erted to fund78ased ad-ances if t9e client fails to fulfill t9e terms of 9is contract Bit9 t9e counter4art!. Suc9 facilities are knoBn as

contin&ent lia8ilities of t9e 8ank. Facilities suc9 as 'letters of credit' and '&uarantees' fall under t9e cate&or! of non7 fund 8ased credit. :et us ex4lain Bit9 an exam4le 9oB &uarantees Bork. $ com4an! takes a term loan from %ank $ and o8tains a &uarantee from %ank % for its loan from %ank $? for B9ic9 9e 4a!s a fee. %! issuin& a 8ank &uarantee? t9e &uarantor 8ank (%ank %) undertakes to re4a! %ank $? if t9e com4an! fails to meet its 4rimar! res4onsi8ilit! of re4a!in& %ank $. ("

1n t9is c9a4ter? Be lendin&.

Bill discuss onl! some im4ortant t!4es of

fund78ased

(*

..,."

Jorkin& Ca4ital Finance o4eratin& 4ur4oses? resultin& in creation of current

Jorkin& ca4ital finance is utiliIed for

assets (suc9 as in-entories and recei-a8les). T9is is in contrast to term loans B9ic9 are utiliIed for esta8lis9in& or ex4andin& a manufacturin& unit 8! t9e ac0uisition of fixed assets. %anks carr! out a detailed anal!sis of 8orroBers' Borkin& ca4ital re0uirements. Credit limits are esta8lis9ed in accordance Bit9 t9e 4rocess a44ro-ed 8! t9e 8oard of directors. T9e limits on Jorkin& ca4ital facilities are 4rimaril! secured 8! in-entories and recei-a8les (c9ar&ea8le current assets). Jorkin& ca4ital finance consists mainl! of cas9 credit facilities? s9ort term loan and 8ill discountin&. Cnder t9e cas9 credit facilit!? a line of credit is 4ro-ided u4 to a 4re7 esta8lis9ed amount 8ased on t9e 8orroBer's 4ro@ected le-el of sales in-entories? recei-a8les and cas9 deficits. C4 to t9is 4re7esta8lis9ed amount? dis8ursements are made 8ased on t9e actual le-el of in-entories and recei-a8les. Aere t9e 8orroBer is ex4ected to 8u! in-entor! on 4a!ments and? t9ereafter? seek reim8ursement from t9e %ank. 1n realit!? t9is ma! not 9a44en. T9e facilit! is &enerall! &i-en for a 4eriod of u4 to "* mont9s and is extended after a re-ieB of t9e credit limit. For clients facin& difficulties? t9e re-ieB ma! 8e made after a s9orter 4eriod. ;ne 4ro8lem faced 8! 8anks B9ile extendin& cas9 credit facilities? is t9at customers can draB u4 to a maximum le-el or t9e a44ro-ed credit limit? 8ut ma! decide not to. %ecause of t9is? li0uidit! mana&ement 8ecomes difficult for a 8ank in t9e case of cas9 credit facilit!. R%1 9as 8een tr!in& to miti&ate t9is 4ro8lem 8! encoura&in& t9e 1ndian cor4orate sector to a-ail of Borkin& ca4ital finance in tBo Ba!s# a s9ort7term loan com4onent and a cas9 credit com4onent. T9e loan com4onent Bould 8e full! draBn? B9ile t9e cas9 credit com4onent Bould -ar! de4endin& u4on t9e 8orroBer's re0uirements. $ccordin& to R%1 &uidelines? in t9e case of 8orroBers en@o!in& Borkin& ca4ital credit limits of Rs. ") crores and a8o-e from t9e 8ankin& s!stem? t9e loan com4onent s9ould normall! 8e 3)% and cas9 credit com4onent *) %. %anks? 9oBe-er? 9a-e t9e freedom to c9an&e t9e com4osition of Borkin& ca4ital finance 8! increasin& t9e cas9 credit com4onent 8e!ond *)% or reducin& it 8eloB *) %? as t9e case ma! 8e? if t9e! so desire. %ill discountin& facilit! in-ol-es t9e financin& of s9ort7term trade recei-a8les t9rou&9 ne&otia8le instruments. T9ese ne&otia8le instruments can t9en 8e discounted Bit9 ot9er 8anks? if re0uired? 4ro-idin& financin& 8anks Bit9 li0uidit!. ..,.* Pro@ect Finance

Pro@ect finance 8usiness consists mainl! of extendin& medium7term and lon&7term ru4ee and forei&n currenc! loans to t9e manufacturin& and infrastructure sectors. %anks also 4ro-ide (,

financin& 8! Ba! of in-estment in marketa8le instruments suc9 as fixed rate and floatin& rate

(.

de8entures. :endin& 8anks usuall! insist on 9a-in& a first c9ar&e on t9e fixed assets of t9e 8orroBer. Durin& t9e recent !ears? t9e lar&er 8anks are increasin&l! 8ecomin& in-ol-ed in financin& lar&e 4ro@ects? includin& infrastructure 4ro@ects. =i-en t9e lar&e amounts of financin& 4ro@ect a44raisal. T9e ado4ted in-ol-ed? 8anks need to 9a-e a stron& frameBork for miti&ation of risks. T9e 4ro@ect finance a44ro-al 4rocess entails a detailed e-aluation of tec9nical? commercial? financial and mana&ement factors and t9e 4ro@ect s4onsor's financial stren&t9 and ex4erience. $s 4art of t9e a44raisal 4rocess? a risk matrix is &enerated? B9ic9 identifies eac9 of t9e 4ro@ect risks? miti&atin& factors and risk allocation. Pro@ect finance extended 8! 8anks is &enerall! full! secured and 9as full recourse to t9e 8orroBer com4an!. 1n most 4ro@ect finance cases? 8anks 9a-e a first lien on all t9e fixed assets and a second lien on all t9e current assets of t9e 8orroBer com4an!. 1n addition? &uarantees ma! 8e taken from s4onsors> 4romoters of t9e com4an!. S9ould t9e 8orroBer com4an! fail to re4a! on time? t9e lendin& 8ank can 9a-e full recourse to t9e s4onsors> 4romoters of t9e com4an!. (Full recourse means t9at t9e lender can claim t9e entire t9e com4an!.) AoBe-er? B9ile un4aid amount from t9e s4onsors > 4romoters of financin& -er! lar&e 4ro@ects? a-aila8le to t9e lendin& 8anks. ..,., :oans /nter4rises to Small and Medium

frameBork Bill need to em49asiIe 4ro4er identification of 4ro@ects? o4timal allocation and

onl! 4artial recourse to t9e s4onsors> 4romoters ma! 8e

$ su8stantial 0uantum of loans is &ranted 8! 8anks to small and medium enter4rises (SM/s). J9ile &rantin& credit facilities to smaller units? 8anks often use a cluster78ased a44roac9? B9ic9 encoura&es financin& of small enter4rises t9at 9a-e a 9omo&eneous

4rofile suc9 as leat9er manufacturin& units? c9emical units? or e-en ex4ort oriented units. For assessin& t9e credit risk of indi-idual units? 8anks use t9e credit scorin& models. $s 4er R%1 &uidelines? 8anks s9ould use sim4lified credit a44raisal met9ods for assessment of 8ank finance for t9e smaller units. Furt9er? 8anks 9a-e also 8een ad-ised t9at t9e! s9ould not insist on collateral securit! for loans u4 to Rs.") lak9 for t9e micro enter4rises. %ox ..*# Credit S4ecialised %ranc9es for SM/

=i-en t9e im4ortance of SM/ sector? t9e R%1 9as initiated se-eral measures to increase t9e floB of credit to t9is se&ment. $s 4art of t9is effort? t9e 4u8lic sector 8anks (PS%s) 9a-e 8een o4erationaliIin& s4ecialiIed SM/ 8ank 8ranc9es for ensurin& uninterru4ted credit floB to t9is sector. $s at end7Marc9 *))6? PS%s 9a-e o4erationalised as man! as ((

3+6 s4ecialiIed SM/ 8ank 8ranc9es. Source# Re4ort on Trend and Pro&ress of %ankin& in 1ndia *))37)6? R%1

(+

Small 1ndustries De-elo4ment %ank of 1ndia (S1D%1) also facilitates t9e floB of credit at reasona8le interest rates to t9e SM/ sector. T9is is done 8! incenti-isin& 8anks and State Finance Cor4orations to lend to SM/s 8! refinancin& a s4ecified 4ercenta&e of incremental lendin& to SM/s? 8esides 4ro-idin& direct finance alon& Bit9 8anks. ..,.. T9e Rural and $&ricultural :oans

rural and a&ricultural loan 4ortfolio of 8anks com4rises loans to farmers? small and farmers? 8anks extend term loans for e0ui4ments used in exam4le? 8! farmin&? financin&

medium enter4rises in rural areas? dealers and -endors linked to t9ese entities and e-en cor4orates. For includin& tractors? 4um4 sets? etc. %anks also extend cro4 loan facilit! to farmers. 1n a&ricultural financin&? 8anks 4refer an 'area 8ased' a44roac9N for ensurin& ade0uate credit floB to a&riculture and t9e rural sector. T9e conce4t of ':ead %ank Sc9eme (:%S)' Bas first mooted 8! t9e =ad&il Stud! =rou4? farmers in an ado4ted -illa&e. T9e re&ional rural 8anks (RR%s) 9a-e a s4ecial 4lace in

B9ic9 su8mitted its re4ort in ;cto8er "6+6. Pursuant to t9e recommendations of t9e =ad&il Stud! =rou4 and t9ose of t9e Nariman Committee? B9ic9 su&&ested t9e ado4tion of 'area a44roac9' in e-ol-in& credit 4lans and 4ro&rammes for credit structure? t9e :%S Bas introduced 8! de-elo4ment of 8ankin& and t9e sc9eme t9e R%1 in Decem8er? "6+6. T9e

en-isa&es allotment of districts to indi-idual 8anks to ena8le t9em to assume leaders9i4 in 8rin&in& a8out 8ankin& de-elo4ments in t9eir res4ecti-e districts. More recentl!? a Ai&9 :e-el Committee Bas constituted 8! t9e R%1 in No-em8er *))2? to re-ieB t9e :%S and im4ro-e its effecti-eness? Bit9 a focus on financial inclusion and recent de-elo4ments in t9e 8ankin& sector. T9e Committee 9as recommended se-eral ste4s to furt9er im4ro-e t9e Borkin& of :%S. T9e im4ortance of t9e role of State =o-ernments for su44ortin& 8anks in increasin& 8ankin& 8usiness in rural areas 9as 8een em49asiIed 8! t9e Committee. ..,.( T9e Directed :endin& R%1 re0uires 8anks to de4lo! a certain minimum amount of t9eir credit in certain is called directed lendin&. Suc9 directed lendin&

identified sectors of t9e econom!. T9is

com4rises 4riorit! sector lendin& and ex4ort credit. $. T9e Priorit! sector lendin& o8@ecti-e of 4riorit! sector lendin& 4ro&ram is to ensure t9at ade0uate credit floBs

into some of t9e -ulnera8le sectors of t9e econom!? B9ic9 ma! not 8e attracti-e for t9e 8anks from t9e 4oint of -ieB of 4rofita8ilit!. T9ese sectors include a&riculture? small scale enter4rises? retail trade? etc. Small 9ousin& loans? loans to indi-iduals for 4ursuin& education? loans to Beaker sections of t9e societ! etc also 0ualif! as 4riorit! sector loans. To ensure 8anks c9anneliIe a 4art of &uidelines t9eir credit to t9ese sectors? t9e R%1 (2 9as set

definin& tar&ets for lendin& to 4riorit! sector as B9ole and in certain cases? su87tar&ets for lendin& to indi-idual 4riorit! sectors (See Ta8le ..*). Ta8le ..*# Tar&ets under Priorit! Sector :endin& Domestic commercial 8anks Total Priorit! Sector ad-ances Total a&ricultural ad-ances Small /nter4rise ad-ances /x4ort credit /x4ort credit is not a 4art of 4riorit! sector for domestic commercial 8anks $d-ances to Beaker sections Differential Rate of 1nterest Sc9eme ") 4ercent of $N%C or C/;%S/? B9ic9e-er is 9i&9er " 4ercent of total ad-ances outstandin& as at t9e end of t9e 4re-ious !ear Source# Master Circular on :endin& to Priorit! Sector of 1ndia Note# $N%C# C/;%S/# $d@usted Net %ank Credit Credit /0ui-alent of ;ff7%alance S9eet /x4osure dated Dul! "? *))6? Reser-e %ank No tar&et No tar&et .) 4er cent of $N%C or C/;%S/? B9ic9e-er is 9i&9er "3 4ercent of $N%C or C/;%S/? B9ic9e-er is 9i&9er No Tar&et ") 4er cent of $N%C or C/;%S/? B9ic9e-er is 9i&9er "* 4er cent of $N%C or C/;%S/? B9ic9e-er is 9i&9er Forei&n 8anks ,* 4ercent of $N%C or C/;%S/? B9ic9e-er is 9i&9er No Tar&et

T9e R%1 &uidelines re0uire 8anks to lend at least .)% of $d@usted Net %ank Credit ($N%C) or credit e0ui-alent amount of ;ff7%alance S9eet /x4osure (C/;%S/)? B9ic9e-er is

9i&9er. 1n case of forei&n 8anks? t9e tar&et for 4riorit! sector ad-ances is ,*% of $N%C or C/;%S/? B9ic9e-er is 9i&9er. 1n addition to t9ese limits for o-erall 4riorit! sector lendin&? t9e R%1 sets su87limits for

certain su87sectors Bit9in t9e 4riorit! sector suc9 as a&riculture. %anks are re0uired to com4l! Bit9 t9e 4riorit! sector lendin& re0uirements at t9e end of eac9 financial !ear. $ 8ank 9a-in& s9ortfall in lendin& to 4riorit! sector lendin& tar&et or su87tar&et re0uired to make contri8ution to t9e Rural 1nfrastructure s9all 8e

De-elo4ment Fund (R1DF)

esta8lis9ed Bit9 N$%$RD or funds Bit9 ot9er financial institutions as s4ecified 8! t9e R%1. (3

%ox ..,# Sc9eme

Differential

Rate

of

1nterest

(DR1)

=o-ernment of 1ndia 9ad formulated in Marc9? "62* a sc9eme for extendin& financial assistance at concessional rate of interest S .% to selected loB income &rou4s for 4roducti-e endea-ors. T9e sc9eme knoBn as Differential Rate of 1nterest Sc9eme (DR1) is noB 8ein& im4lemented 8! all Sc9eduled Commercial %anks. T9e maximum famil! incomes t9at 0ualif! a 8orroBer for t9e DR1 sc9eme is re-ised 4eriodicall!. Currentl!? t9e R%1 9as ad-ised t9e 8anks t9at 8orroBers Bit9 annual famil! income of Rs."3?))) in rural areas and Rs.*.?))) in ur8an and semi7ur8an areas Bould 8e eli&i8le to a-ail of t9e facilit! as a&ainst t9e earlier annual income criteria of Rs.+?.)) in rural areas and Rs.2?*)) in ur8an areas. T9e tar&et for lendin& under t9e DR1 sc9eme in a !ear is maintained at one 4er cent of t9e total ad-ances outstandin& as at t9e end of t9e 4re-ious !ear. Source# R%1 Circulars %. /x4ort Credit

$s 4art of directed lendin&? R%1 re0uires 8anks to make loans to ex4orters at concessional rates of interest. /x4ort credit is 4ro-ided for 4re7s9i4ment and 4ost7s9i4ment re0uirements of ex4orter 8orroBers in ru4ees and forei&n currencies. $t t9e end of an! fiscal !ear? "*.)% of a 8ank's credit is re0uired to 8e in t9e form of ex4ort credit. T9is re0uirement is in addition to t9e 4riorit! sector lendin& re0uirement 8ut credits extended to ex4orters t9at are small scale industries or re0uirement. ..,.+ Retail :oan retail asset 4roducts? includin& 9ome loans? automo8ile small 8usinesses ma! also meet 4art of t9e 4riorit! sector lendin&

%anks? toda!? offer a ran&e of (suc9 as T sets?

loans? 4ersonal loans (for marria&e? medical ex4enses etc)? credit cards? consumer loans 4ersonal com4uters etc) and? loans a&ainst time de4osits and loans B9o sell automo8iles? tBo B9eelers? s9are of retail credit in total loans and a&ainst s9ares. %anks also ma! fund dealers consumer dura8les and commercial -e9icles. T9e ad-ances Bas *".,% at end7 Marc9 *))6. Customers for for retail loans are t!4icall! middle and 9i&97income? salaried or self7

em4lo!ed indi-iduals? and? in some cases? 4ro4rietors9i4 and 4artners9i4 firms. /xce4t 4ersonal loans and credit t9rou&9 credit cards? 8anks sti4ulate t9at (a) a certain set) sou&9t to 8e financed 8! t9e 4ercenta&e of t9e cost of t9e asset (suc9 as a 9ome or a T

loan? to 8e 8orne 8! t9e 8orroBer and (8) t9at t9e loans are secured 8! t9e asset financed. Man! 8anks 9a-e im4lemented a credit7scorin& 4ro&ram? B9ic9 is an automated credit a44ro-al s!stem t9at assi&ns a credit score to eac9 a44licant 8ased on certain attri8utes like income? educational 8ack&round and a&e. T9e (6 credit score t9en forms t9e 8asis of loan

e-aluation. /xternal a&encies suc9 as field a&encies ma! 8e

in-esti&ation a&encies and credit 4rocessin&

+)

used to facilitate a com4re9ensi-e due dili&ence 4rocess includin& -isits to offices and 9omes in t9e case of loans to indi-idual 8orroBers. %efore dis8ursements are made? t9e credit officer c9ecks a centraliIed delin0uent data8ase and re-ieBs t9e 8orroBer's 4rofile. 1n makin& credit decisions? 8anks draB u4on re4orts from a&encies suc9 as t9e Credit 1nformation %ureau (1ndia) :imited (C1%1:). Some 4ri-ate sector 8anks use direct marketin& associates as Bell netBork and em4lo!ees for as t9eir oBn 8ranc9

marketin& retail credit 4roducts. AoBe-er? credit a44ro-al

aut9orit! lies onl! Bit9 t9e 8ank's credit officers. TBo im4ortant cate&ories of retail loans779ome finance and 4ersonal loans77are discussed 8eloB. Aome Finance# %anks extend 9ome finance loans? eit9er directl! or t9rou&9 9ome finance su8sidiaries. Suc9 lon& term 9ousin& loans are 4ro-ided to indi-iduals and cor4orations and also &i-en as construction finance to 8uilders. T9e loans are secured 8! a mort&a&e of t9e 4ro4ert! financed. T9ese loans are extended for maturities &enerall! ran&in& from fi-e to fifteen !ears and a lar&e 4ro4ortion of t9ese loans are at floatin& rates of interest. T9is reduces t9e interest rate risk t9at 8anks assume? since a 8ank's sources of finance are &enerall! of s9orter maturit!. AoBe-er? fixed rate loans ma! also 8e 4ro-idedN usuall! Bit9 8anks kee4in& a 9i&9er mar&in o-er 8enc9mark rates in order to com4ensate for 9i&9er interest rate risk. /0uated mont9l! installments are fixed for re4a!ment of loans de4endin& u4on t9e income and a&e of t9e 8orroBer(s). Personal :oans# T9ese are often unsecured loans 4ro-ided to customers B9o use t9ese funds for -arious 4ur4oses suc9 as 9i&9er education? medical ex4enses? social e-ents and 9olida!s. Sometimes collateral securit! in t9e form of 49!sical and financial assets ma! 8e a-aila8le for securin& t9e 4ersonal loan. Portfolio of 4ersonal loans also includes micro7 8ankin& loans? B9ic9 are relati-el! small -alue loans extended to loBer income customers in ur8an and rural areas. ..,.2 %anks 1nternational :oans /xtended 8!

1ndian cor4orates raise forei&n currenc! loans from 8anks 8ased in 1ndia as Bell as a8road as 4er &uidelines issued 8! R%1> =o-ernment of 1ndia. %anks raise funds a8road for on7 lendin& to 1ndian cor4orates. Furt9er? 8anks 8ased in 1ndia 9a-e an access to de4osits

4laced 8! Non Resident 1ndians (NR1s) in t9e form of FCNR (%) de4osits? B9ic9 can 8e used 8! 8anks in 1ndia for on7lendin& to 1ndian customers.

+"

...

Mana&ement of Non Performin& $ssets

$n asset of a 8ank (suc9 as a loan &i-en 8! t9e 8ank) turns into a non74erformin& asset (NP$) B9en it ceases to &enerate re&ular income suc9 as interest etc for t9e 8ank. 1n ot9er Bords? B9en a 8ank B9ic9 lends a loan does not &et 8ack its 4rinci4al and interest on time? t9e loan is said to 9a-e turned into an NP$. Definition of NP$s is &i-en in ....". J9ile NP$s are a natural fall7out of undertakin& 8ankin& 8usiness and 9ence cannot 8e Similarl!? at t9e macro credit to 4otential com4letel! a-oided? 9i&9 le-els of NP$s can se-erel! erode t9e 8ank's 4rofits? its ca4ital and ultimatel! its a8ilit! to lend furt9er funds to 4otential 8orroBers. le-el? a 9i&9 le-el of non7 4erformin& assets means c9okin& off

8orroBers? t9us loBerin& ca4ital formation and economic acti-it!. So t9e c9allen&e is to kee4 t9e &roBt9 of NP$s under control. Clearl!? it is im4ortant to 9a-e a ro8ust a44raisal of loans? B9ic9 can reduce t9e c9ances of loan turnin& into an NP$. $lso? once a loan starts facin& difficulties? it is im4ortant for t9e 8ank to take remedial action. %ox ...# :e-el of Non Performin& $ssets T9e &ross non74erformin& assets of t9e 8ankin& se&ment Bere Rs. +3? 62, crores at t9e end of Marc9 *))6? and t9e le-el of net NP$s (after 4ro-isionin&) Bas Rs.,"? .*. crores. $lt9ou&9 t9e! a44ear to 8e -er! lar&e amounts in a8solute terms? t9e! are actuall! 0uite small in com4arison to total loans 8! 8anks. T9e ratio of Marc9 *))6. T9is of &ross non74erformin& loans to &ross total loans 9as fallen s9ar4l! o-er t9e last decade and is at *., 4er cent as at end7 ratio? B9ic9 is an indicator of soundness of 8anks? is com4ara8le Bit9 most of t9e de-elo4ed countries suc9 as France? =erman! and Da4an. T9e loB le-el &ross NP$s as a 4ercent of &ross loans in 1ndia is a 4ositi-e indicator of t9e 1ndian 8ankin& s!stem. Source# Re4ort on Trend and Pro&ress of %ankin& in 1ndia *))37)6? R%1 and Re4ort on Currenc! and Finance *))+7)3. ...." Classification of non74erformin& $ssets

%anks 9a-e to classif! t9eir assets as 4erformin& and non74erformin& in accordance Bit9 R%1's &uidelines. Cnder t9ese &uidelines? an asset is classified as non74erformin& if an! amount of interest or 4rinci4al instalments remains o-erdue for more t9an 6) da!s? in res4ect of term loans. 1n res4ect of o-erdraft or cas9 credit? an asset is classified as non7 4erformin& if t9e account remains out of order for a 4eriod of 6) da!s and in res4ect of 8ills 4urc9ased and discounted account? if t9e 8ill remains o-erdue for a 4eriod of more t9an 6) da!s. $ll assets do not 4erform uniforml!. 1n some cases? assets 4erform -er! Bell and t9e

reco-er! of 4rinci4al and interest 9a44en on time? B9ile in ot9er cases? t9ere ma! 8e dela!s in reco-er! or no reco-er! at all 8ecause of one reason or t9e ot9er. Similarl!? an asset ma! ex9i8it &ood 0ualit! 4erformance at one 4oint of time and 4oor 4erformance at some ot9er +*

4oint of time. $ccordin& to t9e R%1 &uidelines? 8anks must classif! t9eir assets on an on7 &oin& 8asis into t9e folloBin& four cate&ories#

+,

Standard assets# Standard assets ser-ice t9eir interest and 4rinci4al instalments on timeN alt9ou&9 t9e! occasionall! default u4 to a 4eriod of 6) da!s. Standard assets are called 4erformin& assets. also T9e! !ield re&ular interest to t9e 8anks and return t9e due

4rinci4al on time and t9ere8! 9el4 t9e 8anks earn 4rofit and rec!cle t9e re4aid 4art of t9e loans for furt9er lendin&. T9e ot9er t9ree cate&ories (su87standard assets? dou8tful assets and loss assets) are NP$s and are discussed 8eloB. Su87standard assets# Su87standard assets t9an 6) da!s) for a 4eriod u4 to "* mont9s. Dou8tful assets# $n asset 8ecomes dou8tful if it remains a su87standard asset for a 4eriod of "* mont9s and reco-er! of 8ank dues is of dou8tful. :oss assets# :oss assets com4rise assets B9ere a loss 9as 8een identified 8! t9e 8ank or t9e R%1. T9ese are &enerall! considered uncollecti8le. T9eir realiIa8le -alue is so loB t9at t9eir continuance as 8anka8le assets is not Barranted. ....* De8t Restructurin& re4a!in& loans or 4a!in& interest? t9e 8ank s9ould are t9ose assets B9ic9 9a-e remained

NP$s (t9at is? if an! amount of interest or 4rinci4al instalments remains o-erdue for more

;nce a 8orroBer faces difficult! in

initiall! address t9e 4ro8lem 8! tr!in& to -erif! B9et9er t9e financed com4an! is -ia8le in t9e lon& run. 1f t9e com4an!> 4ro@ect is -ia8le? t9en re9a8ilitation is 4ossi8le 8! restructurin& t9e credit facilities. 1n a restructurin& exercise? t9e 8ank can c9an&e t9e re4a!ment or interest 4a!ment sc9edule to im4ro-e t9e c9ances of reco-er! or e-en make some sacrifices in terms of Bai-in& interest etc. R%1 9as se4arate &uidelines for restructured loans. $ full! secured standard> su87standard> dou8tful loan can 8e restructured 8! interest element. T9e resc9edulin& of 4rinci4al re4a!ments and>or t9e amount of sacrifice? if an!? in t9e element of interest? is eit9er

Britten off or 4ro-ision is made to t9e extent of t9e sacrifice in-ol-ed. T9e su87standard accounts>dou8tful accounts B9ic9 9a-e 8een su8@ected to restructurin&? B9et9er in res4ect of 4rinci4al instalment or interest amount are eli&i8le to 8e u4&raded to t9e standard cate&or! onl! after a s4ecified 4eriod. To create an institutional mec9anism for ensure a timel! and trans4arent -ia8le entities facin& 4ro8lems. ...., ;t9er reco-er! o4tions t9e restructurin& of cor4orate de8t? R%1 9as

de-ised a Cor4orate De8t Restructurin& (CDR) s!stem. T9e o8@ecti-e of t9is frameBork is to mec9anism for t9e restructurin& of cor4orate de8ts of

1f re9a8ilitation of de8t t9rou&9 restructurin& is not 4ossi8le? 8anks t9emsel-es make efforts to reco-er. For exam4le? 8anks set u4 s4ecial asset reco-er! 8ranc9es B9ic9 concentrate (,

on

(.

reco-er! of 8ad de8ts. Pri-ate and forei&n 8anks often 9a-e a collections unit structured alon& -arious 4roduct lines and &eo&ra49ical locations? to mana&e 8ad loans. er! often? 8anks en&a&e external reco-er! a&ents to collect 4ast due de8t? B9o make 49one calls to t9e customers or make -isits to t9em. For makin& de8t reco-er!? 8anks la! doBn t9eir 4olic! and 4rocedure in conformit! Bit9 R%1 directi-es on reco-er! of de8t. T9e 4ast due de8t collection 4olic! of 8anks &enerall! em49asiIes on t9e folloBin& at t9e time of reco-er!# L customers L collect L L dues Res4ect to

$44ro4riate letter aut9oriIin& a&ents to Due notice to customers Confidentialit! of customers' of sim4le lan&ua&e in communication and maintenance of records of cases in courts? :ok

L Cse communication

1n difficult cases? 8anks 9a-e t9e o4tion of takin& recourse to filin&

$dalats? De8t Reco-er! Tri8unals (DRTs)? ;ne Time Settlement (;TS) sc9emes? etc. DRTs 9a-e 8een esta8lis9ed under t9e Reco-er! of De8ts due to %anks and Financial 1nstitutions $ct? "66, for ex4editious ad@udication and reco-er! of de8ts t9at are oBed to 8anks and financial institutions. $ccounts Bit9 loan amount of Rs. ") lak9s and a8o-e are eli&i8le for 8ein& referred to DRTs. ;TS sc9emes and :ok $dalats are es4eciall! useful to NP$s in smaller loans in different se&ments? suc9 as small and mar&inal farmers? small loan 8orroBers and SM/ entre4reneurs. 1f a 8ank is una8le to reco-er t9e amounts due Bit9in a reasona8le 4eriod? t9e 8ank ma! Brite off reco-eries. ..... S$RF$/S1 $ct? *))* t9e loan. AoBe-er? e-en in t9ese cases? efforts s9ould continue to make

%anks utiliIe t9e Securitisation and Reconstruction of Financial $ssets and /nforcement of Securit! 1nterest $ct? *))* (S$RF$/S1) as an effecti-e tool for NP$ reco-er!. 1t is 4ossi8le B9ere non74erformin& assets are 8acked 8! securities c9ar&ed to t9e %ank 8! Ba! of 9!4ot9ecation or mort&a&e or assi&nment. C4on loan default? 8anks can seiIe t9e securities (exce4t a&ricultural land) Bit9out inter-ention of t9e court.,)

((

,)

S$RF$/S1 is effecti-e onl! for secured loans B9ere 8ank can enforce t9e underl!in& securit! e& 9!4ot9ecation ? 4led&e and mort&a&es. 1n suc9 cases? court inter-ention is not necessar!? unless t9e securit! is in-alid or fraudu7 lent. AoBe-er? if t9e asset in 0uestion is an unsecured asset? t9e 8ank Bould 9a-e to mo-e t9e court to file ci-il case a&ainst t9e defaulters.

(+

T9e

S$RF$/S1 $ct?

*))* &i-es 4oBers of PseiIe and desistP to 8anks. %anks can &i-e a

notice in Britin& to t9e defaultin& 8orroBer re0uirin& it to disc9ar&e its lia8ilities Bit9in +) da!s. 1f t9e 8orroBer fails to com4l! Bit9 t9e notice? t9e %ank ma! take recourse to one or more of t9e folloBin& measures# L loan L L same Take 4ossession of t9e securit! for t9e Sale or lease or assi&n t9e ri&9t o-er t9e securit! Mana&e t9e same or a44oint an! 4erson to mana&e t9e

T9e S$RF$/S1 $ct also 4ro-ides for t9e esta8lis9ment of asset reconstruction com4anies re&ulated 8! R%1 to ac0uire assets from 8anks and financial institutions. T9e $ct 4ro-ides for sale of financial assets 8! 8anks and financial institutions to asset reconstruction com4anies ($RCs). R%1 9as issued &uidelines to 8anks on t9e 4rocess to 8e folloBed for sales of financial assets to $RCs.

(2

CA$PT/R 1n-estments

(#

%ank

1n addition to loans and ad-ances? B9ic9 Bere discussed in C9a4ter .? 8anks de4lo! a 4art of t9eir resources in t9e form of in-estment in securities> financial instruments. T9e 8ulk of a 8ank's assets are 9eld eit9er in t9e form of (a) loans and ad-ances and (8) o-erall income. Commercial 8anks' in-estments. 1n-estments form a si&nificant 4ortion of a 8ank's assets? next onl! to loans and ad-ances? and are an im4ortant source of in-estments are of :i0uidit! Ratio) t9ree 8road t!4es# (a) =o-ernment securities? (8) ot9er a44ro-ed S:R in-estments com4rise

securities and (c) ot9er securities. T9ese t9ree are also cate&orised into S:R (Statutor! in-estment and non7S:R in-estments. =o-ernment and ot9er a44ro-ed securities? B9ile non7S:R in-estments consist of 'ot9er securities' B9ic9 com4rise commercial 4a4ers? s9ares? 8onds and de8entures issued 8! t9e cor4orate sector. Fi&ure (." # Classification of %ank 1n-estments

Cnder t9e S:R re0uirement? 8anks are re0uired to in-est a 4rescri8ed minimum of t9eir net demand and time lia8ilities (NDT:) in =o-ernment7 and ot9er a44ro-ed securities under t9e %R act? "6.6. (Note t9at S:R is 4rescri8ed in terms of 8anks' lia8ilities and not assets). T9is 4ro-ision amounts to 'directed in-estment'? as t9e laB directs 8anks to in-est a certain minimum 4art of t9eir NDT: in s4ecific securities. J9ile t9e S:R 4ro-ision reduces a 8ank's flexi8ilit! to determine its asset mix? it deficit.," 9el4s t9e =o-ernment finance its fiscal

(3

,"

T9e =o-ernment finances its fiscal deficit (8roadl!? &o-ernment ex4enditure minus &o-ernment re-enue) 8! 8or7 roBin&? in ot9er Bords? t9rou&9 t9e issue of =o-ernment securities. %ecause of t9e le&al 4ro-ision mandatin&

(6

1t is

t9e R%1

t9at la!s doBn &uidelines re&ardin& in-estments in

S:R and non7S:R

securities. %ank in-estments are 9andled 8! &uidelines relatin& to in-estments.

8anks t9rou&9 t9eir res4ecti-e Treasur!

De4artment. T9is c9a4ter discusses 8anks' in-estment 4olic! and o4erational details and

(."

1n-estment Polic!
framin& its oBn 1nternal 1n-estment Polic! =uidelines (or?

/ac9 8ank is res4onsi8le for

sim4l!? 1n-estment 4olic!). T9e $sset :ia8ilit! Committee ($:C;) of a 8ank? com4risin& senior 8ank officials and 9eaded in most cases 8! t9e C/;? 4la!s a ke! role in draftin& t9e in-estment 4olic! of t9e 8ank. T9e in-estment 4olic! and t9e c9an&es made t9erein from time to time 9a-e to o8tain t9e 8ank %oard's a44ro-al for it. T9e aim of an 1n-estment Polic! of a 8ank is to create a 8road frameBork Bit9in B9ic9 in-estment decisions of t9e %ank could 8e taken. T9e actual decisions re&ardin& in-estment are to 8e taken 8! t9e 1n-estment Committee set u4 8! t9e %oard. T9e 1n-estment Polic! outlines &eneral instructions and safe&uards securities are conducted in necessar! to ensure

t9at o4erations in determined in

accordance Bit9 sound and acce4ta8le duration of t9e 4ortfolio)? li0uidit!

8usiness 4ractices. T9e 4arameters on B9ic9 t9e 4olic! is 8ased are return (tar&et return as indi-idual cases)? duration (tar&et consideration and risk. T9us? B9ile t9e Polic! remains Bit9in t9e frameBork of t9e R%1

&uidelines Bit9 res4ect to 8ank in-estment? it also takes into consideration certain 8ank7 s4ecific factors? -iI.? t9e 8ank's li0uidit! condition and its a8ilit! to take credit risk? interest rate risk and market risk. T9e se4aratel!. T9e 1n-estment of Polic! 4ro-ides &uidelines Bit9 res4ect in-estment 4ortfolio? ex4osure to in-estment instruments? 8onds> 4olic! is determined for S:R and non7S:R securities?

maturit! mix de8entures?

ceilin&s? minimum ratin& of

tradin& 4olic!? accountin& standards?

-aluation of securities and income

reco&nition norms? audit re-ieB and re4ortin& and 4ro-isions for Non7Performin& 1n-estments (NP1). 1t also outlines functions of front office> 8ack office> mid office? dele&ation of financial 4oBers as a 4art of ex4editious decision7makin& 4rocess in treasur! o4erations? 9andlin& of asset lia8ilit! mana&ement ($:M) issues? etc. Se-eral 8anks folloB t9e 4ractice of a strate&! 4a4er. %ased on in t9e t9e market $sset :ia8ilit!

en-ironment en-isa&ed 8!

$sset :ia8ilit! Committee ($:C;)

Mana&ement ($:M) Polic!? a Strate&! Pa4er on in-estments and ex4ected !ield is usuall! 4re4ared B9ic9 is 4laced 8efore t9e C/; of t9e %ank. $ re-ieB of t9e Strate&! Pa4er ma! 8e done at? sa! 9alf !earl! 8asis and 4ut u4 to t9e C/;.

(2

8anks to in-est a minimum fraction of t9eir NDT: in &o-ernment securities? 8anks are ca4ti-e financiers of t9e =o-ernment's fiscal deficit. ;f course? 8anks are not t9e onl! su8scri8ers of &o-ernment securities.

(3

(.*
(.*."

Statutor! Reser-e Re0uirements

Maintenance of Statutor! :i0uidit! Ratio (S:R)

%anks' in-estments in Central and State =o-ernment dated securities includin& treasur! 8ills are &o-erned 8! t9e R%1 &uidelines re&ardin& maintenance of minimum le-el of S:R securities as Bell as t9eir oBn a44ro-ed 4olic!. $s stated earlier? under t9e %ankin& Re&ulation $ct? "6.6? t9e R%1 4rescri8es t9e

minimum S:R le-el for Sc9eduled Commercial %anks (SC%s) in 1ndia in s4ecified assets as a 4ercenta&e of t9e 8ank's NDT:. T9e actual 4ercenta&e (t9at is? t9e -alue of suc9 assets of an SC% as a 4ercenta&e of its NDT:) must not 8e less t9an suc9 sti4ulated 4ercenta&e. T9e R%1 ma! c9an&e t9e sti4ulated 4ercenta&e from time to time. ;-er t9e !ears? t9is ratio (S:R 8! ;cto8er "662? Bit9 t9e financial sector reforms &i-in& 8anks &reater flexi8ilit! to determine t9eir res4ecti-e asset mix. T9e S:R Bas furt9er reduced to *. 4ercent of NDT: in No-em8er *))3? 8ut 9as 8een raised 8ack to *( 4ercent le-el since ;cto8er *))6. Currentl!? it is at *( 4ercent le-el. %anks can and do in-est more t9an t9e le&all! 4rescri8ed minimum in S:R? as can 8e seen from Ta8le (.". Ta8le (."# S:R Re0uirement /nd7Marc9 1n-estment of SC%s# $ctual -s. Statutor! ratio) 9as c9an&ed a lot? 8ut 9as 8roadl! mo-ed on a

doBnBard tra@ector!? from t9e of ,3.(% of NDT: in t9e earl! 6)'s (Se4tem8er "66)) to *(%

$ctual S:R 1n-estment as % of NDT:

Statutor! S:R re0uirement as % of NDT: *( *( *( *.

*))+ *))2 *))3 *))6

,"., *2.6 *2.3 *3."

Source# Re4ort on Trend and Pro&ress of %ankin& in 1ndia? R%1? *))37)6 T9e R%1 9as 4rescri8ed t9at all SC%s s9ould maintain t9eir S:R in t9e folloBin& instruments B9ic9 Bill 8e referred to as Pstatutor! li0uidit! ratio (S:R) securitiesP# i. ii. iii. Dated securities as notified 8! R%1N Treasur! %ills of t9e =o-ernment of 1ndiaN Dated securities of t9e =o-ernment of 1ndia issued from time to time under t9e market 8orroBin& 4ro&ramme and t9e Market Sta8ilisation Sc9emeN i-. State De-elo4ment :oans (SD:s) of t9e State =o-ernments issued from time to (6

time under t9eir market 8orroBin& 4ro&rammeN and

+)

-.

$n! ot9er instrument as ma! 8e notified 8!

R%1. T9ese in-estments must 8e unencum8ered. T9e com4osition of in-estment 8! commercial 8anks is &i-en in t9e folloBin& Ta8le. 1t can 8e seen t9at S:R in-estments? 4articularl! &o-ernment securities? form t9e 8ulk of total securities. Non7S:R in-estments form a relati-el! small 4art of 8anks' total in-estment. Ta8le %anks (.*# 1n-estments 8! Commercial (Ru4ees crore) /nd7 Marc9 S:R 1n-estments =o-ernment ;t9er $44ro-ed Securities *))+ 2))?2.* (3*) *))2 22+?)(3 (3,) *))3 6(3?++" (3.) *))6 "?"((?23+ (3.) Securities "+?2"* (*) "(?.(3 (*) ",?)(, (") ")?+*. (") 2"2?.(. (3.) 26"?("+ (3() 62"?2". (3() "?"++?.") (3() ",(?,.) ("+) ".)?.(( ("() "2)?+)6 ("() *)2?("2 ("() 3(*?26. ("))) 6,"?62" ("))) "?".*?,*, ("))) "?,2,?6*2 ("))) Total S:R Non7S:R 1n-estments Total 1n-estments

Source# Aand8ook of Statistics on 1ndian /conom!? R%1 *))37 )6. Note# T9e fi&ures in in-estment. (.*.* Penalties 8racket s9oB t9e in-estments as a 4ercent to t9e total

1f a 8ankin& com4an! fails to maintain t9e re0uired amount of S:R securities on an! &i-en da!? it s9all 8e lia8le to 4a! to t9e R%1 4enal interest for t9at da! at t9e rate of , 4er cent 4er annum a8o-e t9e %ank Rate on t9e s9ortfall and? if t9e default continues on t9e next succeedin& Borkin& da!? t9e 4enal interest ma! 8e increased to a rate of ( 4er cent 4er annum a8o-e t9e %ank Rate s9ortfall.,* for t9e concerned da!s of default on t9e

+"

,* T9e %ank Rate is determined 8! t9e R%1 from time to time. 1t is t9e rate at B9ic9 t9e R%1 lends to t9e 8anks? and s9ould not 8e confused Bit9 t9e re4o rate? B9ic9 is t9e lendin& rate t9e R%1 uses in t9e dail! re4o (re4urc9ase) markets.

+*

(.,
1f

Non7S:R 1n-estments
an! 4ro4osal to in-est or disin-est in non7S:R securities? t9e concerned

t9ere is

officials must refer t9ese 4ro4osals to t9e 1n-estment Committee of t9e 8ank. C4on -ettin& and clearance 8! t9e 1n-estment Committee? financial sanction s9ould 8e o8tained from t9e a44ro4riate aut9orit! in terms of t9e Sc9eme of Dele&ation of Financial PoBers. Non7S:R 1n-estments can include# L %anks L 1n-estments in $ssociates> Su8sidiaries and Re&ional Rural

Strate&ic 1n-estments enture Ca4ital

L 1n-estments L L L L PSC %onds

Cor4orate 1n-estments Mutual Funds %onds>de8entures issued 8! Securitisation Com4anies (SCs) and Reconstruction Com4anies (RCs)

AoBe-er? as 4er R%1 &uidelines? t9e in-estments (S:R as Bell as Non7S:R) Bill 8e disclosed in t9e 8alance s9eet of t9e %ank as 4er t9e six7cate&or! classification listed 8eloB# a. 8. c. d. e. =o-ernment securities? ;t9er a44ro-ed securities? S9ares? De8entures F %onds? 1n-estment in su8sidiaries> @oint -entures etc? and f. etc.). ;t9ers (Commercial Pa4er? Mutual Fund Cnits? =uidelines for in-estments in ot9er t9an =o-ernment in t9e form of s9ares? de8entures? 8onds

(.,." %ank Securities

$ccordin& to t9e R%1? 8anks desirous of in-estin& in e0uit! s9ares> de8entures s9ould o8ser-e t9e folloBin& &uidelines# i. %uild u4 ade0uate ex4ertise in e0uit! researc9 8! esta8lis9in& a dedicated e0uit! researc9 de4artment? as Barranted 8! t9eir scale of o4erationsN +,

ii.

Formulate a trans4arent 4olic! and 4rocedure for in-estment in s9ares? etc.? Bit9 t9e a44ro-al of t9e %oardN and

+.

iii.

T9e

decision in re&ard to direct in-estment in s9ares? con-erti8le 8onds and Committee s9ould also 8e 9eld accounta8le for t9e

de8entures s9ould 8e taken 8! t9e 1n-estment Committee set u4 8! t9e 8ank's %oard. T9e 1n-estment in-estments made 8! t9e 8ank. Furt9er? Bit9 t9e a44ro-al of res4ecti-e %oards? 8anks s9ould clearl! la! doBn t9e 8road in-estment o8@ecti-es to 8e folloBed B9ile undertakin& transactions in securities on t9eir oBn in-estment account and on 8e9alf of clients? clearl! define t9e aut9orit! to 4ut t9rou&9 deals? 4rocedure to 8e folloBed for o8tainin& t9e sanction of t9e a44ro4riate aut9orit!? 4rocedure to 8e folloBed B9ile 4uttin& t9rou&9 deals? -arious 4rudential ex4osure limits and t9e re4ortin& s!stem. $ccordin&l!? t9e %oards of 8anks la! doBn 4olic! and 4rudential limits on in-estments in -arious cate&ories? as stated earlier. 1n-estment 4ro4osals s9ould 8e su8@ected to t9e same de&ree of credit risk anal!sis as an! loan 4ro4osal. %anks s9ould 9a-e t9eir oBn internal credit anal!sis and ratin&s e-en in res4ect of issues rated 8! external a&encies and s9ould not entirel! rel! on t9e ratin&s of external a&encies. T9e a44raisal s9ould 8e more strin&ent in res4ect of in-estments in instruments issued 8! non78orroBer customers. $s a matter of 4rudence? 8anks s9ould sti4ulate entr!7le-el minimum ratin&s> 0ualit! standards and industr!7Bise? maturit!7Bise? duration7Bise and issuer7Bise limits to miti&ate t9e ad-erse im4acts of concentration of in-estment and t9e risk of illi0uidit!. (.,.* Statutor! Prescri4tions

Statutor! 4rescri4tions relatin& to t9e in-estment 4ortfolio are to 8e com4lied Bit9. T9e in-estments 9a-e to 8e Bit9in t9e s4ecific and &eneral 4rudential limits fixed 8! R%1 and in conformit! Bit9 t9e 4ro-isions of t9e %R $ct and ot9er a44lica8le laBs and &uidelines t9at are issued 8! t9e re&ulators like R%1? Securities /xc9an&e %oard of 1ndia (S/%1)? etc. For exam4le? 8anks s9ould not in-est in non7S:R securities of ori&inal maturit! of less t9an one7!ear? ot9er t9an Commercial Pa4er and Certificates of De4osits? B9ic9 are co-ered under R%1 &uidelines. Furt9er? accordin& to R%1 &uidelines? a 8ank's in-estment in unlisted non7S:R securities s9ould not exceed ") 4er cent of its total in-estment in non7S:R securities as on Marc9 ,"? of t9e 4re-ious !ear? and suc9 in-estment s9ould com4l! Bit9 t9e disclosure re0uirements as 4rescri8ed 8! Securities /xc9an&e %oard of 1ndia (S/%1) for listed com4anies. %ank's in-estment in unlisted non7S:R securities ma! exceed t9e limit of ") 4er cent? 8! 4a4ers issued for re&istered Bit9 R%1. +( an additional ") 4er cent? 4ro-ided t9e in-estment is on account of in-estment in securitised infrastructure 4ro@ects? and 8onds> de8entures issued 8! Securitisation Com4anies (SCs) and Reconstruction Com4anies (RCs) set u4 under t9e S$RF$/S1 $ct and

$ 8ank ma! also decide to 4ut in 4lace additional 0uantitati-e ceilin&s on a&&re&ate non7 S:R in-estments as a 4ercenta&e of t9e 8ank's net Bort9 (e0uit! 4lus reser-es). T9ere are also restrictions re&ardin& ex4osure to a 4articular industr!. Ratin& re0uirements %anks must not in-est in unrated non7S:R securities. AoBe-er? t9e 8anks ma! in-est in unrated 8onds of com4anies en&a&ed in infrastructure acti-ities? Bit9in t9e ceilin& of ") 4er cent for unlisted non7S:R securities as mentioned earlier. re&istered Bit9 t9e S/%1. :imits on Markets %anks' /x4osure to Ca4ital Furt9ermore? t9e de8t securities s9all carr! a credit ratin& of not less t9an in-estment &rade from a credit ratin& a&enc!

T9e a&&re&ate ex4osure of a 8ank to t9e ca4ital markets in all forms (8ot9 fund 8ased and non7fund 8ased) s9ould not exceed .)% of its net Bort9 as on Marc9 ," of t9e 4re-ious !ear. Jit9in t9is o-erall ceilin&? t9e 8ank's direct in-estment in s9ares? con-erti8le 8onds> de8entures? units of e0uit!7oriented mutual funds and all ex4osures to -enture ca4ital funds (8ot9 re&istered and unre&istered) s9ould not exceed *) 4er cent of its net Bort9. T9e a8o-e7mentioned ceilin&s are t9e maximum 4ermissi8le and a 8ank's %oard of Directors is free to ado4t a loBer ceilin& for t9e %ank? kee4in& in -ieB its o-erall risk 4rofile and cor4orate strate&!. %anks are re0uired to ad9ere to t9e ceilin&s on an on&oin& 8asis. Restrictions on 1n-estments in a Sin&le Com4an! No 8ank can 9old s9ares? as a 4led&ee? mort&a&ee or a8solute oBner in an! com4an! ot9er t9an a su8sidiar!? exceedin& ,) 4er cent of t9e 4aid u4 s9are ca4ital of t9at com4an! or ,) 4er cent of its oBn 4aid7u4 s9are ca4ital and reser-es? B9ic9e-er is less.

(.. Norms
T9e

%anks' 1n-estment

Classification and

aluation

ke! features of R%1 &uidelines on cate&oriIation and -aluation of 8anks' in-estment

4ortfolio are &i-en 8eloB. T9e in-estment 4ortfolio of a 8ank normall! consists of 8ot9 Pa44ro-ed securitiesP (4redominantl! =o-ernment securities) and Pot9ersP (s9ares? de8entures and 8onds). T9e %ank s9ould classif! t9eir entire in-estment 4ortfolio under t9ree cate&ories -iI. 'Aeld to Maturit!' (ATM),,? 'Aeld for Tradin&' (AFT)? and '$-aila8le for Sale' ($FS). ATM includes securities ac0uired Bit9 t9e intention of 8ein& 9eld u4 s9ort7term to maturit!N AFT

includes securities ac0uired Bit9 t9e intention of 8ein& traded to take ad-anta&e of t9e

++

,,

ATM must not 8e more t9an *(% of t9e 4ortfolio.

+2

4rice> interest rate mo-ementsN and $FS refers to t9ose securities not included in ATM and AFT. %anks s9ould decide t9e cate&or! of ac0uisition. in-estment at t9e time of

Profit or loss on t9e sale of in-estments in 8ot9 AFT and $FS cate&ories is taken in t9e income statement. S9iftin& of in-estments from > to ATM ma! 8e done Bit9 t9e a44ro-al of t9e %oard of Directors once a !ear? normall! at t9e 8e&innin& of t9e accountin& !ear. Similarl!? s9iftin& of in-estments from $FS to AFT ma! 8e done Bit9 t9e a44ro-al of t9e %oard of Directors? t9e $:C; or t9e 1n-estment Committee. S9iftin& from AFT to $FS is &enerall! not 4ermitted. AoBe-er? it Bill 8e 4ermitted onl! under exce4tional circumstances like not 8ein& a8le to sell t9e securit! Bit9in 6) da!s due to ti&9t li0uidit! conditions? or extreme -olatilit!? or market 8ecomin& unidirectional. Suc9 transfer is 4ermitted onl! Bit9 t9e

a44ro-al of t9e %oard of Directors> $:C;> 1n-estment Committee. ATM securities are not marked to market and are carried at ac0uisition cost or amortised cost if ac0uired at a 4remium o-er t9e face -alue. (1n t9e case of at an ATM

securities? if t9e ac0uisition cost is more t9an t9e face -alue? 4remium s9ould 8e amortised or Britten off o-er t9e 4eriod remainin& to maturit!.) $FS and AFT securities are -alued at market or fair -alue as at t9e 8alance s9eet date. aluation of in-estments is to 8e done as 4er &uidelines issued 8! R%1 from time to

time. AoBe-er? 8anks ma! ado4t a more conser-ati-e a44roac9 as a measure of 4rudence. T9e 'market -alue' for t9e 4ur4ose of 4eriodic -aluation of in-estments included in t9e $FS and AFT Bould 8e t9e market 4rice of t9e scri4 as a-aila8le from t9e trades> 0uotes on t9e stock exc9an&es? 4rice list of R%1 and 4rices declared 8! Primar! Dealers $ssociation of 1ndia (PD$1) @ointl! Bit9 t9e Fixed 1ncome Mone! Market and Deri-ati-es $ssociation of 1ndia (F1MMD$) 4eriodicall!. 1n res4ect of un0uoted securities? R%1 9as laid doBn t9e detailed

4rocedure to 8e ado4ted. For exam4le? 8anks s9ould -alue t9e un0uoted Central =o-ernment securities on t9e 8asis of t9e 4rices> !ield to maturit! (ETM) rates 4ut out 8! t9e PD$1> F1MMD$ at 4eriodic inter-als. (..." Treasur! Mana&ement t9e

1n-estment transactions are undertaken as 4er t9e a44ro-ed in-estment 4olic! of

8ank and in accordance Bit9 t9e tradin& 4olic! and Manual of 1nstructions. Jit9 a -ieB to s!ner&isin& stren&t9s? a 8ank usuall! o4erates an inte&rated treasur! de4artment under B9ic9 8ot9 domestic and forex treasuries are 8rou&9t under a unified command structure. folloBin& distinction is im4ortant to note. T9e T9e task of domestic treasur! o4erations is discussions so far on S:R

4redominantl! to make in-estments on t9eir oBn account? B9ile t9e task of forex treasur! is to 4redominantl! conduct o4erations on 8e9alf of clients. T9e +3 and non7S:R o4erations fall under domestic treasur! mana&ement.

(...*

Forex Treasur! Mana&ement

T9e Forex de4artment of a 8ank does t9e folloBin&# L administers and monitors merc9ant or client transactions emanatin& from 8ranc9es?

L undertakes co-er o4eration for merc9ant transactions? trades in inter78ank forex market? L mana&es forei&n currenc! funds like Forei&n Currenc! Non Resident (FCNR) $ccounts? /xc9an&e /arners Forei&n Currenc! (//FC) $ccounts? etc. and maintains Nostro $ccounts
,.

J9ile 8ulk of t9e forex treasur! o4erations are on 8e9alf of t9e clients? t9e 8anks also 9andle 4ro4rietar! tradin&? i.e.? forex tradin& on t9e 8anks' oBn account. ;ne im4ortant safe&uard t9at 8anks are re0uired to take is to make a clear se4aration 8etBeen t9eir transactions on t9eir oBn account and t9ose on 8e9alf of t9eir clients.

,.

FCNR accounts are maintained 8! NR1s? B9ile //FC accounts are maintained 8! ex4ortersN a Nostro account is an account a 8ank 9olds Bit9 anot9er 8ank in a forei&n countr!? usuall! in t9e currenc! of t9at forei&n countr!

+6

CA$PT/R +# ;t9er $cti-ities of Commercial %anks

$s a continuation of t9eir main de4osit takin& and lendin& acti-ities? 8anks 4ursue former certain acti-ities to offer a num8er of ser-ices to customers. T9e! can 8e 4ut into tBo 8road cate&ories# (a) ;t9er 8asic 8ankin& acti-ities and (8) Para78ankin& acti-ities. T9e includes 4ro-ision of remittance facilities includin& issuance of drafts? mail transfers and tele&ra49ic transfers? issuance of tra-ellers' c9e0ues F &ift c9e0ues? locker facilit! etc. %anks also undertake -arious 4ara78ankin& acti-ities includin& in-estment 8ankin& ser-ices? sellin& mutual funds? sellin& insurance 4roducts? offerin& de4ositor! ser-ices? Bealt9 mana&ement ser-ices? 8rokera&e? etc. J9ile t9e ser-ices offered assist t9e 8anks to attract more de4ositors and 8orroBers? t9e! also mana&e to increase t9eir income in t9e 4rocess. %anks earn fees 8! offerin& t9ese ser-ices to t9e customers? as o44osed to interest income earned from t9e lendin& acti-ities.

+."
+."."

;t9er %asic %ankin& $cti-ities

Forei&n /xc9an&e Ser-ices

%anks undertake forei&n exc9an&e transactions for t9eir customers. T9e forei&n exc9an&e contracts arise out of s4ot (current) and forBard forei&n exc9an&e transactions entered into Bit9 cor4orate and non7cor4orate customers and counter74art! 8anks for t9e 4ur4ose of 9ed&in& and tradin&. %anks deri-e income from t9e s4read or difference 8etBeen 8u!in& and sellin& rates of forei&n exc9an&e. :eadin& 8anks 4ro-ide customer s4ecific 4roducts and ser-ices B9ic9 cater to risk 9ed&in& needs of cor4orates at domestic and international locations? arisin& out of currenc! and interest rate fluctuations. T9ese include 4roducts suc9 as o4tions and sBa4s? B9ic9 are deri-ed from t9e forei&n exc9an&e market or t9e interest rate market. T9ese are tailor made 4roducts desi&ned to meet s4ecific risk 9ed&in& re0uirements of t9e customer. 1n addition to t9e direct forei&n exc9an&e related income on 8u!in& and sellin& of forei&n exc9an&e? income is &enerated in related ser-ices B9ile undertakin& t9e main forei&n exc9an&e 8usiness. T9ese ser-ices include t9e esta8lis9ment of letters of credit? issuance of &uarantees? document collection ser-ices? etc. Some 8anks? includin& leadin& 4u8lic sector 8anks? 4ri-ate sector 8anks and local 8ranc9es of forei&n 8anks earn si&nificant income from forei&n exc9an&e related transactions. +.".* %anks' ser-ices to =o-ernment

%anks offer -arious t!4es of ser-ices to &o-ernment de4artments includin& direct and indirect tax collections? remittance facilities? 4a!ments 2) of salaries and 4ensions? etc.

%anks also

2"

undertake ot9er related 8usinesses like

distri8ution of =o-ernment and R%1 8onds and 4a! fees to 8anks for

9andlin& 4u8lic 4ro-ident fund accounts. =o-ernment de4artments 8ranc9es? are a8le to earn si&nificant income 8! de4artments. +."., Pa!ment and Settlement S!stems

undertakin& t9is 8usiness. %anks suc9 as State of %ank of 1ndia? Bit9 a Bide netBork of offerin& t9ese ser-ices to &o-ernment

$s stated in C9a4ter "? in an! econom!? 8anks are at t9e core of t9e 4a!ment and settlement s!stems? B9ic9 constitute a -er! im4ortant 4art of t9e commercial 8anks' functions. T9e 4a!ment and settlement s!stems? as a mec9anism? facilitate transfer of -alue 8etBeen a 4a!er and a 8eneficiar! 8! B9ic9 t9e 4a!er disc9ar&es t9e 4a!ment o8li&ations to t9e 8eneficiar!. T9e 4a!ment and settlement s!stems ena8le tBo7Ba! floB of 4a!ments in exc9an&e of &oods and ser-ices in t9e econom!. T9is mec9anism is used 8! indi-iduals? 8anks? com4anies? &o-ernments? etc. to make 4a!ments to one anot9er. T9e R%1 9as t9e 4oBer to re&ulate t9e 4a!ment s!stem under t9e 4ro-isions of t9e

Pa!ment and Settlement S!stems (PSS) $ct *))2? and t9e Pa!ment and Settlement S!stems Re&ulations *))3.,( T9e 8od! on %oard for Re&ulation and Su4er-ision of Pa!ment and Settlement S!stems %oard is assisted 8! a tec9nical committee called

(%PSS) is a su87committee of t9e Central %oard of R%1 and is t9e 9i&9est 4olic! makin& t9e 4a!ment s!stem. T9e National Pa!ments Council (NPC) Bit9 eminent ex4erts in t9e field as mem8ers. T9ere are tBo t!4es of 4a!ments# 4a4er 8ased and electronic. Pa!ments can 8e made in 1ndia in 4a4er 8ased forms (in t9e forms of cas9? c9e0ue? demand drafts)? and electronic forms (&i-in& electronic instructions to t9e 8anker B9o Bill make suc9 a 4a!ment on 8e9alf of 9is customersN credit cardN de8it card). Pa4er 8ased clearin& s!stems T9e 4rimar! 4a4er 8ased 4a!ment instrument is t9e c9e0ue. T9e 4rocess of c9e0ue 4a!ment starts B9en a 4a!er &i-es 9is 4ersonal c9e0ue to t9e 8eneficiar!. To &et t9e actual 4a!ment of funds? t9e recei-er of t9e c9e0ue 9as to de4osit t9e c9e0ue in 9is 8ank account. 1f t9e 8eneficiar! 9as an account in t9e same 8ank in t9e same cit! t9en t9e funds are credited into 9is account t9rou&9 internal arran&ement of t9e 8ank. 1f t9e 8eneficiar! 9as an account Bit9 an! ot9er 8ank in t9e same or in an! ot9er cit!? t9en 9is 8anker Bould ensure t9at funds are collected from t9e 4a!er's 8anker t9rou&9 t9e means of a 'clearin& 9ouse'.

2*

,(

$side from t9e re&ulator! role? t9e R%1? as t9e central 8ank of t9e countr!? 9as 8een 4la!in& a de-elo4mental role in t9is im4ortant area and 9as taken se-eral initiati-es for a secure and efficient 4a!ment s!stem.

2,

$ clearin& 9ouse is an association of 8anks t9at facilitates 4a!ments t9rou&9 c9e0ues 8etBeen different 8ank 8ranc9es Bit9in a cit!> 4lace. 1t acts as a central meetin& 4lace for 8ankers to exc9an&e t9e c9e0ues draBn on one anot9er and to claim funds for t9e same. Suc9 o4erations are called 'clearin& o4erations'. =enerall! one 8ank is a44ointed as in7 c9ar&e of t9e clearin& o4erations. 1n t9e four metros and a feB ot9er ma@or cities? 9oBe-er? R%1 is lookin& after t9e o4erations of t9e clearin& 9ouse. T9e 4a4er 8ased clearin& s!stems com4rise# (a) M1CR Clearin&? (8) Non7 M1CR clearin& and (c) Ai&9 alue clearin&. M1CR stands for Ma&netic 1nk C9aracter Reco&nition (M1CR). M1CR is a tec9nolo&! for 4rocessin& c9e0ues. T9is is done t9rou&9 information contained in t9e 8ottom stri4 of t9e c9e0ue B9ere t9e c9e0ue num8er? cit! code? 8ank code and 8ranc9 code are &i-en. =enerall!? if a c9e0ue is to 8e 4aid Bit9in t9e same cit! (local c9e0ue)? it takes *7, da!s for t9e mone! to come to t9e 8eneficiar!'s account. 1n case of Ai&9 alue Clearin&? 9oBe-er? B9ic9 is a-aila8le onl! in some lar&e cities? c9e0ue clearin& c!cle is com4leted on t9e same da! and t9e customer de4ositin& t9e c9e0ue is 4ermitted to utilise t9e 4roceeds t9e next da! mornin&.,+ T9e introduction of 'S4eed Clearin&' in Dune *))3 for collection of outstation c9e0ues 9as si&nificantl! 8rou&9t doBn t9e time taken for realisation of outstation c9e0ues from ")7 ". da!sN noB t9e funds are a-aila8le to customers on TT" (transaction da! T " da!) or TT* (transaction da! T * da!s) 8asis. C9e0ue Truncation C9e0ue Truncation is a s!stem of c9e0ue clearin& and settlement 8etBeen 8anks 8ased on electronic data> ima&es or 8ot9 Bit9out 49!sical exc9an&e of instrument. C9e0ue truncation 9as se-eral ad-anta&es. First? t9e 8ank customers Bould &et t9eir c9e0ues realised faster? as TT) (local clearin&) and TT" (inter7cit! clearin&) is 4ossi8le in C9e0ue Truncation S!stem (CTS). Second? faster realisation is accom4anied 8! a reduction in costs for t9e customers and t9e 8anks. T9ird? it is also 4ossi8le for 8anks to offer inno-ati-e 4roducts and ser-ices 8ased on CTS. Finall!? t9e 8anks 9a-e t9e additional ad-anta&e of reduced reconciliation and clearin& frauds.

,+

To encoura&e customers to mo-e from 4a4er78ased s!stems to electronic s!stems? B9ic9 are more secure? faster and less costl!? t9e 8anks Bere ad-ised in $4ril *))6 to increase t9e t9res9old amount of c9e0ue eli&i8le to 8e 4resented in Ai&9 alue Clearin& from Rs." lak9 to Rs.") lak9s and &raduall! discontinue t9e

+2

sc9eme in an undisru4ti-e manner o-er a 4eriod of t9e next one !ear. AoBe-er? t9e facilit! of M1CR> Non7 M1CR clearin& Bill continue to 8e a-aila8le for 4a4er78ased instruments.

+3

/lectronic Pa!ment S!stems Pa!ments can 8e made 8etBeen tBo or more 4arties 8! means of electronic instructions Bit9out t9e use of 8eloB.,2 Real Time =ross Settlement (RT=S) s!stem? introduced in 1ndia in Marc9 *)).? is a c9e0ues. =enerall!? t9e electronic 4a!ment s!stems are faster and safer t9an 4a4er 8ased s!stems. Different forms of electronic 4a!ment s!stems are listed

s!stem t9rou&9 B9ic9 electronic instructions can 8e &i-en 8! 8anks to transfer funds from t9eir account to t9e account of anot9er 8ank. T9e RT=S s!stem is maintained and o4erated 8! R%1 and 4ro-ides a means of efficient and faster funds transfer amon& 8anks facilitatin& t9eir financial o4erations. $s t9e name su&&ests? funds transfer 8etBeen 8anks takes 4lace on a 'real time' 8asis. T9erefore? mone! can reac9 t9e 8eneficiar! instantaneousl!. T9e s!stem B9ic9 Bas o4erationalised Bit9 res4ect to settlement of transactions relatin& to inter7 8ank 4a!ments Bas extended to customer transactions later. T9ou&9 t9e s!stem is 4rimaril! desi&ned for lar&e -alue 4a!ments? 8ank customers 9a-e t9e c9oice of a-ailin& of t9e RT=S facilit! for t9eir time7 critical loB -alue 4a!ments as Bell. More t9an +)?))) 8ranc9es as at end7Se4tem8er *))6 are 4artici4ants in t9e RT=S. /lectronic Funds Transfer (/FT) is a s!stem B9ere8! an!one B9o Bants to make 4a!ment to anot9er 4erson> com4an! etc. can a44roac9 9is 8ank and make cas9 4a!ment or /FT. T9e electronic &i-e instructions> aut9orisation to transfer funds directl! from 9is oBn account to t9e 8ank account of t9e recei-er> 8eneficiar!. R%1 is t9e ser-ice 4ro-ider for 4a!ment s!stems com4rise lar&e -alue 4a!ment s!stems as Bell mec9anisms. 1n addition? t9ere are some electronic 4a!ment s!stems B9ic9 are exclusi-el! for retail 4a!ments. T9e netBork. /lectronic Clearin& Ser-ice (/CS) is a retail 4a!ment s!stem t9at can 8e used to make 8ulk 4a!ments> recei4ts of a similar nature es4eciall! B9ere eac9 indi-idual 4a!ment is of a re4etiti-e nature and of relati-el! smaller amount. T9is facilit! is meant for com4anies and &o-ernment de4artments to make> recei-e lar&e -olumes of 4a!ments rat9er t9an for funds transfers 8! indi-iduals. T9e /CS facilit! is a-aila8le at a lar&e num8er of centres. T9e /CS is furt9er di-ided into tBo t!4es 7 /CS (Credit) to make 8ulk 4a!ments to indi-iduals> -endors and /CS (De8it) to recei-e 8ulk utilit! 4a!ments from indi-iduals. retail 4a!ment s!stem com4rises /lectronic Clearin& Ser-ices (/CS)? National /lectronic Funds Transfer (N/FT) and card 8ased 4a!ment s!stems includin& $TM as retail 4a!ment

+3

,2

1n addition to t9ese s!stems? some 8anks in 1ndia 9a-e 8e&un to offer certain 8ankin& ser-ices t9rou&9 t9e 1nternet t9at facilitate transfer of funds electronicall!.

+6

Cnder /CS (Credit)? one entit!> com4an! Bould make 4a!ments from its 8ank account to a num8er of reci4ients 8! direct credit to t9eir 8ank accounts. For instance? com4anies make use of /CS (Credit) to make 4eriodic di-idend> interest 4a!ments to t9eir in-estors. Similarl!? em4lo!ers like 8anks? &o-ernment de4artments? etc make mont9l! salar! 4a!ments to t9eir em4lo!ees t9rou&9 /CS (Credit). Pa!ments of re4etiti-e nature to 8e made to -endors can also 8e made t9rou&9 t9is mode. T9e 4a!ments are affected t9rou&9 a s4onsor 8ank of t9e Com4an! makin& t9e 4a!ment and suc9 8ank 9as to ensure t9at t9ere are enou&9 funds in its accounts on t9e settlement da! to offset t9e total amount for B9ic9 t9e 4a!ment is 8ein& made for t9at 4articular settlement. T9e s4onsor 8ank is &enerall! t9e 8ank Bit9 B9om t9e com4an! maintains its account. /CS (De8it) is mostl! used 8! utilit! com4anies like tele49one com4anies? electricit!

com4anies etc. to recei-e t9e 8ill 4a!ments directl! from t9e 8ank accounts of t9eir customers. 1nstead of makin& electricit! 8ill 4a!ment t9rou&9 cas9 or 8! means of c9e0ue? a consumer (indi-iduals as Bell as com4anies) can o4t to make 8ill 4a!ments directl! into t9e account of t9e electricit! 4ro-ider> com4an!> 8oard from 9is oBn 8ank account. For t9is 4ur4ose? t9e consumer 9as to &i-e an a44lication to t9e utilit! com4an! (4ro-ided t9e com4an! 9as o4ted for t9e /CS (De8it) sc9eme)? 4ro-idin& details of t9e 8ank account from B9ic9 t9e mont9l!> 8i7mont9l! 8ill amount can 8e directl! deducted. T9ereafter? t9e utilit! com4an! Bould ad-ise t9e consumer's 8ank to de8it t9e 8ill amount to 9is account on t9e due date of t9e 8ill and transfer t9e amount to t9e com4an!'s oBn account. T9is is done 8! creditin& t9e account of t9e s4onsor 8ank? B9ic9 a&ain is &enerall! t9e 8ank Bit9 B9om t9e com4an! recei-in& t9e 4a!ments? maintains t9e account. T9e actual 8ill Bould 8e sent to t9e consumer as usual at 9is address. T9e settlement c!cle under t9e /CS 9as 8een reduced to TT" da! from earlier TT, da!s across t9e countr!. To Biden t9e &eo&ra49ical co-era&e of /CS 8e!ond t9e existin& /CS centres and to 9a-e a centralised 4rocessin& ca4a8ilit!? t9e National /lectronic Clearin& Ser-ice (N/CS) Bas o4erationalised Bit9 effect from Se4tem8er *6? *))3. T9e N/CS is a nationBide s!stem in B9ic9 as man! as "". 8anks Bit9 ,)?23) 8ranc9es 4artici4ated as at t9e end of Se4tem8er? *))6. National /lectronic Funds Transfer (N/FT) ot9er 8ank 8ranc9. T9e de4endin& on s!stem? introduced in No-em8er *))(? is a t9e same da! or t9e next da!

nationBide funds transfer s!stem to facilitate transfer of funds from an! 8ank 8ranc9 to an! 8eneficiar! &ets t9e credit on settlement. t9e time of Ninet! one 8anks Bit9 o-er +"?))) 8ranc9es

4artici4ated in N/FT as at end of Se4tem8er *))6. T9e 8anks &enerall! c9ar&e some 4rocessin& fees for electronic fund transfers? @ust as in t9e 2)

case of ot9er ser-ices suc9 as demand drafts? 4a! orders etc. T9e actual c9ar&es de4end u4on t9e amount and t9e 8anker7customer relations9i4. 1n a 8id to encoura&e customers to mo-e

2"

from 4a4er78ased s!stems to electronic s!stems? R%1 9as rationalised and made trans4arent t9e c9ar&es t9e 8anks could le-! on customers for electronic transactions. R%1 on its 4art 9as extended t9e Bai-er of its 4rocessin& c9ar&es for electronic modes of 4a!ment u4 to t9e end of Marc9 *)"". 1n order not to 8e in-ol-ed Bit9 da!7to7da! o4erations of t9e retail 4a!ment s!stem? R%1 9as encoura&ed t9e settin& u4 of National Pa!ment Cor4oration of 1ndia (NPC1) to act as an um8rella or&anisation for o4eratin& t9e -arious retail 4a!ment s!stems in 1ndia. NPC1 9as since 8ecome functional and is in t9e 4rocess of settin& u4 its roadma4. NPC1 Bill 8e an aut9orised entit! under t9e Pa!ment F Settlement S!stems $ct and Bould? t9erefore? 8e su8@ected to re&ulation and su4er-ision of R%1. Credit> De8it cards are Bidel! used in t9e countr! as t9e! 4ro-ide a con-enient form of makin& 4a!ments for &oods and ser-ices Bit9out t9e use of c9e0ues or cas9. 1ssuance of credit card is a ser-ice B9ere t9e customer is 4ro-ided Bit9 credit facilit! for 4urc9ase of &oods and ser-ices in s9o4s? restaurants? 9otels? railBa! 8ookin&s? 4etrol 4um4s? utilit! 8ill 4a!ments? etc. T9e merc9ant esta8lis9ment B9o acce4ts credit card 4a!ments claims t9e amount su8se0uentl! from t9e customer's 8ank t9rou&9 9is oBn 8ank. T9e card user is re0uired to 4a! onl! on recei4t of t9e 8ill and t9is 4a!ment can 8e eit9er in full or 4artiall! in instalments. %anks issuin& credit cards earn re-enue from t9eir customers in a -ariet! of Ba!s suc9 as @oinin& fee? additional card fee? annual fee? re4lacement card fee? cas9 ad-ance fee? c9ar&e sli4> statement retrie-al fee? c9ar&es on o-er limit accounts and late 4a!ment fee? interest on dela!ed 4a!ment? interest on re-ol-in& credit? etc. T9e fees ma! -ar! 8ased on t9e t!4e of card and from 8ank to 8ank. %anks earn income not onl! as issuers of credit cards? 8ut also as ac0uirers B9ere t9e transaction occurs on a 4oint of sale terminal installed 8! t9e 8ank.,3 $s t9e 1ndian econom! de-elo4s? it is ex4ected t9at t9e retail market Bill increasin&l! seek s9ort7 term credit for 4ersonal uses? and to a lar&e extent? t9is risin& demand Bould 8e met 8! t9e issuance of credit cards. De8it Card is a direct account access card. Cnlike a credit card? in t9e case of a de8it card? t9e entire amount transacted &ets de8ited from t9e customer's account as soon as t9e de8it card is used for 4urc9ase of &oods and ser-ices. T9e amount 4ermitted to 8e transacted in de8it card is to t9e extent of t9e amount standin& to t9e credit of t9e card user's account.

,3

$ Point of Sale (P;S) terminal is t9e instrument in B9ic9 t9e credit card is sBi4ed. T9e 8ank t9at installs P;S terminal is called t9e ac0uirer 8ank. $ more detailed discussion on t9e P;S terminal is &i-en in Section 3.".,.

2*

$utomated Teller Mac9ines ($TMs) are mainl! used for cas9 Bit9draBals 8! customers. 1n addition to cas9 Bit9draBal? $TMs can 8e used for 4a!ment of utilit! 8ills? funds transfer 8etBeen accounts? de4osit of c9e0ues and cas9 into accounts? 8alance en0uir! and se-eral ot9er 8ankin& transactions B9ic9 t9e 8anks oBnin& t9e $TMs mi&9t Bant to offer. +.".. NR1 Remittances

NR1? as an indi-idual? can remit funds into 1ndia t9rou&9 normal 8ankin& c9annels usin& t9e facilities 4ro-ided 8! t9e o-erseas 8ank. $lternatel!? an NR1 can also remit funds t9rou&9 aut9orised Mone! Transfer $&ents (MT$). Furt9er? a num8er of 8anks 9a-e

launc9ed t9eir inBard remittance 4roducts B9ic9 facilitate funds transfer on t9e same da!> next da!. +.".( Cas9 Mana&ement Ser-ices and Remittances

Man! 8anks 9a-e 8ranc9es renderin& cas9 mana&ement ser-ices (CMS) to cor4orate clients? for mana&in& t9eir recei-a8les and 4a!ments across t9e countr!. Cnder cas9

mana&ement ser-ices? 8anks offer t9eir cor4orate clients custom7made collection? 4a!ment and remittance ser-ices alloBin& t9em to reduce t9e time 4eriod 8etBeen collections and remittances? t9ere8! streamlinin& t9eir cas9 floBs. Cas9 mana&ement 4roducts include 49!sical c9e0ue78ased clearin&? electronic clearin& ser-ices? central 4oolin& of countr!7Bide collections? di-idend and interest remittance ser-ices and 1nternet78ased 4a!ment 4roducts. Suc9 ser-ices 4ro-ide customers Bit9 en9anced li0uidit! and 8etter cas9 mana&ement.

+.*

Para78ankin& $cti-ities

T9e Reser-e %ank of 1ndia (R%1) 9as alloBed t9e Sc9eduled Commercial %anks (SC%s) to undertake certain financial ser-ices or 4ara78ankin& acti-ities and 9as issued &uidelines to SC%s for undertakin& t9ese 8usinesses. T9e R%1 9as ad-ised 8anks t9at t9e! s9ould ado4t ade0uate safe&uards so t9at 4ara78ankin& acti-ities undertaken 8! t9em are run on sound and 4rudent lines. %anks can undertake certain eli&i8le financial ser-ices eit9er

de4artmentall! or 8! settin& u4 su8sidiaries? Bit9 4rior a44ro-al of R%1. +.*." Primar! Dealers9i4 %usiness

Primar! Dealers can 8e referred to as Merc9ant %ankers to =o-ernment of 1ndia. 1n "66(? t9e Reser-e %ank of 1ndia (R%1) introduced t9e s!stem of Primar! Dealers (PDs) in t9e =o-ernment Securities Market? B9ic9 com4rised inde4endent entities undertakin& Primar! Dealer acti-it!. 1n order to 8road 8ase t9e Primar! Dealers9i4 s!stem? 8anks Bere 4ermitted to undertake Primar! Dealers9i4 8usiness in *))+7)2. To do 4rimar! dealers9i4 8usiness? it is necessar! to 9a-e a license from t9e R%1. 2,

T9e tBo 4rimar! o8@ecti-es of t9e PD s!stem are to# L stren&t9en t9e infrastructure in t9e &o-ernment securities market to make it -i8rant? li0uid and 8road 8ased. L im4ro-e secondar! market tradin& s!stem? B9ic9 Bould (a) contri8ute to 4rice disco-er!? (8) en9ance li0uidit! and turno-er and (c) encoura&e -oluntar! 9oldin& of &o-ernment securities. $ 8ank can do PD 8usiness eit9er t9rou&9 a su8sidiar! or de4artmentall!. $ su8sidiar! of a sc9eduled commercial 8ank dedicated 4redominantl! to t9e securities 8usiness (4articularl!? t9e &o-ernment securities market) can a44l! for 4rimar! dealers9i4. de4artmentall!? onl! 8anks B9ic9 do not 9a-e a 4artl! or undertakin& PD 8usiness and fulfill t9e folloBin& criteria can a44l!# L crores L cent L !ears +.*.* Ser-ices Minimum net oBned funds (N;F) of Rs."?))) Minimum CR$R of 6 4er Net NP$s of less t9an , 4er cent and a 4rofit makin& record for t9e last t9ree 1n-estment %ankin&> Merc9ant %ankin& To do PD 8usiness B9oll! oBned su8sidiar!

1n-estment %ankin& is not one s4ecific function or ser-ice 8ut rat9er an um8rella term for a ran&e of acti-ities. T9ese acti-ities include issuin& securities (underBritin&) for com4anies? mana&in& 4ortfolios of financial assets? tradin& securities (stocks and 8onds)? 9el4in& in-estors 4urc9ase securities and 4ro-idin& financial ad-ice and su44ort ser-ices. 1t can 8e seen t9at all t9ese ser-ices are ca4ital market related ser-ices. T9ese ser-ices are offered to &o-ernments? com4anies? non74rofit institutions and indi-iduals. $ num8er of commercial 8anks 9a-e formed su8sidiaries to undertake in-estment 8ankin& ser-ices. Aere? it is im4ortant to draB t9e distinction 8etBeen Merc9ant %ankin& and 1n-estment %ankin&. $s 4er t9e Securities and /xc9an&e %oard of 1ndia (S/%1) (Merc9ant %ankers) Rules? "66* and S/%1 (Merc9ant %ankers) Re&ulations? "66*? merc9ant 8ankin& ser-ice is an! ser-ice 4ro-ided in relation to issue mana&ement eit9er 8! makin& arran&ements re&ardin& sellin&? 8u!in& or su8scri8in& securities as mana&er? consultant? ad-isor or ad-isor! ser-ice in relation to suc9 issue mana&ement. renderin& cor4orate T9is? inter alia? consists of

4re4aration of 4ros4ectus and ot9er information relatin& to t9e issue? determinin& financial structure? tie u4 of financiers and final allotment and refund of t9e su8scri4tion for de8t> e0uit! issue mana&ement and actin& as ad-isor? consultant? co7mana&er? underBriter and 2.

4ortfolio mana&er. 1n addition? merc9ant 8ankin& ser-ices also include ad-isor! ser-ices on cor4orate restructurin&? de8t or e0uit! restructurin&? loan restructurin&? etc. Fees c9ar&ed 8! t9e merc9ant 8anker for are

2(

renderin& t9ese ser-ices. %anks and Financial 1nstitutions includin& Non %ankin& Finance Com4anies (N%FCs) 4ro-idin& merc9ant 8ankin& ser-ices are &o-erned 8! t9e S/%1 Rules and Re&ulations stated a8o-e. ;n t9e ot9er 9and? t9e term '1n-estment %ankin&' 9as a muc9 Bider connotation and 9as &raduall! come to refer to all t!4es of ca4ital market acti-it!. 1n-estment 8ankin& t9us encom4asses not merel! merc9ant 8ankin& 8ut ot9er related ca4ital market acti-ities suc9 as stock tradin&? market makin&? 8rokin& and asset mana&ement as Bell ad-isor! and 8usiness and financial ad-isor!. 1n-estment 8ankin& 9as a lar&e num8er of 4la!ers# 1ndian and forei&n. T9e lar&e forei&n in-estment 8anks suc9 as =oldman Sac9s and Merrill in-estment 8anks) 9a-e entered AoBe-er? t9e 1ndia attracted 8! :!nc9 (B9ic9 are standalone 1ndia's 8oomin& econom!. 8ankin& arms of as a 9ost of s4ecialiIed cor4orate ad-isor! ser-ices in t9e areas of mer&ers and ac0uisitions? 4ro@ect

1ndian in-estment 8ankin& firms (includin& in-estment

1ndian commercial 8anks) 9a-e &enerall! succeeded in 9oldin& t9eir oBn as t9e! are a8le to ser-ice 8ot9 small and lar&e customers. AoBe-er? one area forei&n 8anks still dominate is &lo8al mer&ers and ac0uisitions. +.*., Mutual Fund %usiness 8anks? 8ot9 in t9e 4ri-ate and 4u8lic sectors 9a-e s4onsored asset a su8sidiar!) and sometimes in

$ num8er of

mana&ement com4anies to undertake mutual fund 8usiness. %anks 9a-e entered t9e mutual fund 8usiness? sometimes on @oint -enture Bit9 ot9ers. T9e t9eir oBn (8! settin& u4 ;t9er 8anks 9a-e entered into distri8ution a&reements Bit9 enterin& t9e mutual fund 8usinesses is mainl! on

mutual funds for t9e sale of t9e latter's mutual fund 4roducts? for B9ic9 t9e! recei-e fees. ad-anta&e t9at 8anks en@o! in account of t9eir Bide distri8ution netBork. %ox +."# Funds %ank S4onsored Mutual include 1C1C1 %ank?

1ndian 8anks B9ic9 9a-e s4onsored mutual fund 8usiness so far

ADFC %ank and Gotak Ma9indra %ank in t9e 4ri-ate sector? and State %ank of 1ndia in t9e 4u8lic sector. $s 4er $MF1 ($ssociation of Mutual Funds in 1ndia) data? total assets under mana&ement of all mutual funds in 1ndia amounted to Rs. ."2? ,)) crores as on Marc9 ,"? *))6? of B9ic9 8ank s4onsored mutual funds accounted for "(.( 4ercent. Mone! Market Mutual Funds (MMMFs) come under t9e 4ur-ieB of S/%1 re&ulations. %anks and Financial 1nstitutions S/%1 for re&istration. +.*.. 8anks Pension Funds Mana&ement (PFM) 8! 2+ desirous of settin& u4 MMMFs Bould? 9oBe-er? 9a-e to seek necessar! clearance from R%1 for undertakin& t9is additional acti-it! 8efore a44roac9in&

Conse0uent u4on t9e issue of =o-ernment of 1ndia Notification dated 8anks

Ma!

*.? *))2?

22

9a-e 8een ad-ised t9at t9e! ma! noB undertake Pension Funds Mana&ement (PFM) t9rou&9 t9eir su8sidiaries set u4 for t9e 4ur4ose. T9is Bould 8e su8@ect to t9eir satisf!in& t9e eli&i8ilit! criteria 4rescri8ed 8! Pensions Fund Re&ulator! and De-elo4ment $ut9orit! (PFRD$) for Pension Fund Mana&ers. %anks intendin& to undertake PFM s9ould o8tain 4rior a44ro-al of R%1 8efore en&a&in& in suc9 8usiness. T9e R%1 9as issued &uidelines for 8anks actin& as Pension Fund Mana&ers. $ccordin& to t9e &uidelines? 8anks Bill 8e alloBed to undertake PFM t9rou&9 t9eir su8sidiaries onl!? and not de4artmentall!. %anks ma! lend t9eir names> a88re-iations to t9eir su8sidiaries formed for PFM? for le-era&in& t9eir 8rand names and associated 8enefits t9ereto? onl! su8@ect to t9e 8anks maintainin& 'arm's len&t9' relations9i4 Bit9 t9e su8sidiar!. 1n order to 4ro-ide ade0uate safe&uards a&ainst associated risks and ensure t9at onl! stron& and credi8le 8anks enter into t9e 8usiness of PFM? t9e 8anks com4l!in& Bit9 t9e folloBin& eli&i8ilit! criteria (as also t9e sol-enc! mar&in 4rescri8ed 8! PFRD$) ma! a44roac9 t9e R%1 for necessar! 4ermission# L L L !ears. L more. L ,%. Net Bort9 of t9e 8ank s9ould 8e not less t9an Rs.()) crores. CR$R s9ould 8e not less t9an ""% durin& t9e last t9ree !ears. %ank s9ould 9a-e made net 4rofit for t9e last t9ree consecuti-e Return on $ssets (R;$) s9ould 8e at least ).+% or :e-el of net NP$s s9ould 8e less t9an Performance of Pension Fund t9e 8ank's su8sidiaries? if an!? s9ould 8e %usiness 8!

L satisfactor!. %ox +.*# %anks

Pension Fund Re&ulator! and De-elo4ment $ut9orit! (PFRD$) 9ad in-ited /x4ressions of 1nterest from 4u8lic sector entities for se-en 4u8lic sector entities. %ank of s4onsorin& Pension Funds for =o-ernment em4lo!ees on ""t9 Ma! *))2. 1n res4onse? /x4ressions of 1nterest Bere recei-ed from $ committee constituted 8! t9e PFRD$ 9as selected State and :ife 1nsurance 1ndia (S%1)? CT1 $sset Mana&ement Com4an! (CT1$MC)

Cor4oration (:1C) to 8e t9e first s4onsors of 4ension funds in t9e countr! under t9e neB 4ension s!stem (NPS) for &o-ernment em4lo!ees. +.*.( De4ositor! Ser-ices

1n t9e de4ositor! s!stem? securities are 9eld in de4ositor! accounts in dematerialiIed form. Transfer of securities is done t9rou&9 sim4le account transfers. T9e Bit9 t9e risks and 9assles normall! associated Bit9 4a4erBork. T9e 23 met9od does aBa! enactment of t9e

De4ositories $ct?

in

$u&ust "66+? 4a-ed t9e Ba! for

t9e esta8lis9ment of

National

Securities De4ositor! :imited (NSD:) and later t9e Central De4ositor! Ser-ices (1ndia) :imited (CDS:). T9ese tBo institutions 9a-e set u4 a national infrastructure of international standards t9at 9andles most of t9e securities 9eld and settled in dematerialised form in t9e 1ndian ca4ital markets.

26

$s

a de4ositor! 4artici4ant of

t9e

National Securities

De4ositor! :imited (NSD:) or

Central De4ositor! Ser-ices (1ndia) :imited (CDS:)? a 8ank ma! offer de4ositor! ser-ices to clients and earn fees. Custodial de4ositor! ser-ices means safe kee4in& of securities of a client and 4ro-idin& ser-ices incidental t9ereto? and includes# L maintainin& accounts of securities of a clientN collectin& t9e 8enefit of ri&9ts accruin& to t9e client in res4ect of t9e

L securitiesN L

kee4in& t9e client informed of t9e action taken or to 8e taken 8! t9e issuer of securities? 9a-in& a 8earin& on t9e 8enefits or ri&9ts accruin& to t9e clientN and

maintainin& and reconcilin& records of t9e ser-ices referred to in su87clause (a) to (c).

+.*.+

Jealt9 Mana&ement> Portfolio Mana&ement Ser-ices,6 8anks and financial institutions are seekin& a s9are in t9e fast7&roBin&

$ num8er of

Bealt9 mana&ement ser-ices market. Currentl!? a 9i&9 net Bort9 indi-idual can c9oose from amon& a num8er of 4ri-ate sector and 4u8lic sector 8anks for Bealt9 mana&ement ser-ices..) 1n addition to 9i&9 net Bort9 resident 1ndians? non7resident 1ndians (NR1s) form a ma@or c9unk of t9e customer 8ase for 4ersonal Bealt9 mana&ement industr! in 1ndia. %anks t9at do 4ortfolio mana&ement on 8e9alf of t9eir clients are su8@ect to se-eral re&ulations. No 8ank s9ould introduce an! neB 4ortfolio mana&ement R%1. t9e S/%1 sc9eme (PMS) Bit9out o8tainin& s4ecific 4rior a44ro-al of &uidelines contained in t9ose issued from time to time. T9e folloBin& conditions are to 8e strictl! o8ser-ed 8! t9e 8anks o4eratin& PMS or T9e! are also to com4l! Bit9 t9e

(Portfolio Mana&ers) Rules and Re&ulations? "66, and

similar sc9eme# L PMS s9ould 8e entirel! at t9e customer's risk? Bit9out &uaranteein&? eit9er directl! or indirectl!? a 4re7determined return. L Funds s9ould not 8e acce4ted for 4ortfolio mana&ement for a 4eriod less t9an one !ear.

,6

Portfolio mana&ement deals Bit9 onl! financial assets B9ereas Bealt9 mana&ement co-ers 8ot9 financial assets and non financial assets suc9 as real estates.

.)

AS%C Pri-ate %ank in $sia? for exam4le? 4ro-ides t9e full s4ectrum of 4ri-ate 8ankin& solutions for affluent indi-iduals and t9eir families. T9eir ser-ices include in-estment ser-ices? famil! Bealt9 ad-isor! ser-ices?

3)

4ri-ate Bealt9 solutions suc9 as Bealt9 4lannin& and 4rotection? and traditional 8ankin& ser-ices. (Source# AS%C Be8site)

3"

Portfolio funds s9ould not 8e de4lo!ed for cor4orate 8odies.

lendin& in call> notice mone!N inter7

8ank term de4osits and 8ills rediscountin& markets and lendin& to> 4lacement Bit9

%anks s9ould maintain clientBise account> record of funds acce4ted for mana&ement and in-estments made and t9e 4ortfolio clients s9ould 8e entitled to &et a statement of account.

%anks' oBn in-estments and in-estments 8elon&in& to PMS clients s9ould 8e ke4t distinct from eac9 ot9er? and an! transactions 8etBeen t9e 8ank's in-estment account and client's 4ortfolio account s9ould 8e strictl! at market rates.

PMS clients' accounts s9ould 8e su8@ected 8! 8anks to a se4arate audit 8! external auditors.

+.*.2

%ancassurance

Jit9 t9e issuance of =o-ernment of 1ndia Notification dated $u&ust ,? *)))? s4ecif!in& '1nsurance' as a 4ermissi8le form of 8usiness t9at could 8e undertaken 8! Section a44ro-al of t9e R%1. 8anks under

+(") (o) of t9e %R $ct? 8anks Bere ad-ised to undertake insurance 8usiness Bit9 a 4rior AoBe-er? insurance 8usiness Bill not 8e 4ermitted to 8e undertaken de4artmentall! 8! t9e 8anks. $ num8er of 8anks (8ot9 in 4u8lic and 4ri-ate sectors) 9a-e entered into @oint -enture 4artners9i4s Bit9 forei&n insurance com4anies for 8ot9 life and non7life insurance 8usiness. $t 4resent? 1ndian 4artners (eit9er alone or @ointl!) 9old at least 2.% of 1ndian insurance @oint -entures. T9is is 8ecause t9e maximum 9oldin& 8! forei&n com4anies 4ut to&et9er :aBs and re&ulations cannot exceed *+% of t9e e0uit! of 1ndian insurance -entures.

&o-ernin& insurance com4anies currentl! 4ro-ide t9at eac9 4romoter s9ould e-entuall! reduce its stake to *+% folloBin& t9e com4letion of ") !ears from t9e commencement of 8usiness 8! t9e concerned insurance com4an!. T9e ad-anta&e t9at 8anks 9a-e in enterin& t9e insurance 8usiness is mainl! on account of t9eir Bide distri8ution netBork. %anks are a8le to le-era&e t9eir cor4orate and retail customer 8ase for cross sellin& insurance 4roducts. %anks collect fees from t9ese su8sidiaries for &eneratin& leads and 4ro-idin& referrals t9at are con-erted into 4olicies. %ox +.,# %anks 1nsurance Doint entures Promoted 8!

Some of t9e insurance @oint -entures 4romoted 8! 8anks 9a-e 8ecome leaders in t9e insurance 8usiness. 1C1C1 %ank and ADFC %ank 9a-e 4romoted @oint -entures in 8ot9 life and non7life 8usiness? B9ile State %ank of 1ndia (S%1) 9as 4romoted a successful @oint -enture in life 8usiness. 3*

1n addition? some 8anks distri8ute T9ird Part! 1nsurance Products.

Jit9 a -ieB to 4ro-ide

Pone sto4 8ankin&P to t9eir customers? 8anks distri8ute life insurance 4roducts and &eneral insurance 4roducts t9rou&9 t9eir 8ranc9es. %anks 9a-e entered into a&enc! a&reements Bit9 life and non7life com4anies to distri8ute t9eir -arious insurance 4roducts? for B9ic9 t9e! are 4aid a commission. T9e 4ersonnel in-ol-ed in sellin& t9ese insurance 4roducts 9a-e to 8e aut9orised 8! 4roducts. %ox +..# %anks :ife 1nsurance Policies Sold 8! t9e 1RD$ re&ulations to act as s4ecified 4ersons for sellin& insurance

$ccordin& to 1RD$ $nnual Re4ort? *))27)3? out of t9e total neB life insurance 8usiness 4remium ac0uired 8! all t9e life insurance com4anies durin& *))27)3? neB 8usiness sold t9rou&9 8anks accounted for 2.*3% of total neB life insurance 4remium? Bit9 :ife 1nsurance Cor4oration of 1ndia 8ein& a8le to distri8ute onl! "."(% of its total neB 8usiness 4remium t9rou&9 8anks? B9ile t9e ot9er neB life insurance -entures Bere a8le to sell "3.*)% of t9eir neB 8usiness 4remium t9rou&9 8anks. Source# 1RD$ $nnual Re4ort? *))27)3

3,

CA$PT/R 2# Relations9i4 8etBeen %ank and Customer

1n 1ndia? 8anks face a c9allen&e of 4ro-idin& ser-ices to a 8road ran&e of customers? -ar!in& from 9i&9l! rated cor4orates and 9i&9 net Bort9 indi-iduals to loB7end de4ositors and 8orroBers. %anks usuall! 4lace t9eir customers into certain cate&ories so t9at t9e! are a8le to (a) de-elo4 suita8le 4roducts accordin& to nota8l!# L J9ile 8anks are com4etin& Bit9 eac9 ot9er to attract t9e most 4rofita8le customer re0uirements and (8) ser-ice customers efficientl!. T9e 8ank7customer relations9i4 is influenced 8! se-eral dimensions?

8usinesses? financial inclusion is increasin&l! 8ecomin& 4art of t9eir a&enda. $n im4ortant issue in 1ndia is t9at a lar&e num8er of 4eo4le? nearl! 9alf of t9e adult 4o4ulation? still do not 9a-e 8ank accounts. 'Financial 1nclusion' Bould im4l! 8rin&in& t9is lar&e se&ment of t9e 4o4ulation into t9e 8ankin& fold. L customersN Second? 8anks 9a-e started usin& inno-ati-e met9ods in a44roac9in& t9e

tec9nolo&! is an im4ortant com4onent of suc9 efforts. L Finall!? on account of securit! t9reats as Bell as 8lack mone! circulatin& in t9e

s!stem? care 9as to 8e taken to identif! t9e customers 4ro4erl!? knoB t9e sources of t9eir funds and 4re-ent mone! launderin&.

2."

Strate&! for ex4andin& customer 8ase

Dri-en 8! com4etition? 8anks are increasin&l! makin& t9eir ser-ices customer7friendl!. T9ere are t9ree ke! com4onents of strate&ies to ex4and and retain t9e customer 8ase# L L L 2."." Product life c!cle strate&! $44ro4riate tar&etin& /x4andin& 4roduct 4ortfolio Product :ife C!cle Strate&!

Product life c!cle strate&! means addressin& t9e concerns of t9e customers t9rou&9out t9e life c!cle of t9e 8ankin& 4roducts. T9e (suc9 as 8ank loans) com4rises# L 1dentif!in& tar&et marketsN De-elo4in& and desi&nin& suita8le Marketin& t9e 4roduct life7c!cle strate&! of a 8ankin& 4roduct

L 4roductsN L 4roductsN L

Sales and ad-ice 4rocessesN 3.

L L

$fter7sales ser-iceN and Com4laint 9andlin&.

3(

2.".*

$44ro4riate tar&etin&." customer 4rofiles and offer differentiated de4osit and credit 4roducts to t9eir income cate&or!? a&e &rou4 and

%anks focus on

-arious cate&ories of customers de4endin& on

8ack&round. For exam4le? 8anks ma! se&ment -arious cate&ories of customers to offer tar&eted 4roducts? suc9 as Pri-ate %ankin& for 9i&9 net Bort9 indi-iduals? Defence %ankin& Ser-ices for defence 4ersonnel? and S4ecial Sa-in&s $ccounts for trusts. %anks use multi4le c9annels to tar&et s4ecific se&ments of 4o4ulation. %anks deli-er t9eir 4roducts and ser-ices t9rou&9 a -ariet! of c9annels? ran&in& from traditional 8ank 8ranc9es? extension counters and satellite offices? to $TMs? call centres and t9e 1nternet. Some 4ri-ate 8anks also a44oint direct marketin& a&ents or associates? B9o deli-er retail credit 4roducts. T9ese a&ents 9el4 8anks ac9ie-e dee4er 4enetration 8! offerin& doorste4 ser-ice to t9e customer. 2."., /x4andin& 4roduct 4ortfolio

To ensure t9at t9eir customers &et 'one7sto4 solution'? a ke! com4onent of 8anks' customer strate&! is to offer an ex4anded set of 4roducts and ser-ices. T9rou&9 t9eir distri8ution netBork? 8anks ma! offer =o-ernment of 1ndia sa-in&s 8onds? insurance 4olicies? a -ariet! of mutual fund 4roducts? and distri8ute 4u8lic offerin&s of t9e e0uit! s9ares 8! 1ndian

com4anies. $s a de4ositor! 4artici4ant of (NSD:) and

National Securities

De4ositor! :imited

Central De4ositor! Ser-ices (1ndia) :imited (CDS:)? a 8ank ma! offer

de4ositor! s9are accounts to settle securities transactions in a dematerialiIed mode and so on.

2.*

Ser-ices to different Customer =rou4s

De-elo4in& and 4ro4erl! cate&orisin& a customer data 8ase forms 4art of t9e core strate&! of a 8ank. $ t!4ical 8ank Bit9 a Bides4read netBork of 8ranc9es aims at ser-in& t9e folloBin& 8road customer &rou4s. L L L L retail customersN cor4orate customersN international customersN rural customers.

$ 8ank formulates its o-erall customer strate&! to increase 4rofita8le 8usiness kee4in& in mind its stren&t9s and Beaknesses. T9e ke! strate&! com4onents and trends in eac9 of t9ese customer &rou4s are 8riefl! discussed 8eloB. 3+

."

T9is as4ect is descri8ed in detail under 2.*

32

2.*." Jit9

Retail Customers &roBin& 9ouse9old incomes? t9e 1ndian retail financial ser-ices market 9as 9i&9 ke! dimensions of t9e retail strate&! of a 8ank include customer

&roBt9 4otential. T9e

focus? a Bide ran&e of 4roducts? customer con-enience? Bides4read distri8ution? stron& 4rocesses and 4rudent risk mana&ement. T9e fee income t9at 8anks earn B9ile extendin& commercial 8ankin& ser-ices to retail

customers includes retail loan 4rocessin& fees? credit card and de8it card fees? transaction 8ankin& fees and fees from distri8ution of t9ird 4art! 4roducts. Cross sellin& of t9e entire ran&e of credit and in-estment 4roducts and 8ankin& ser-ices to customers is often a ke! as4ect of t9e retail strate&!. Retail :endin& $cti-ities T9ere is Bides4read acce4tance 8! t9e a-era&e consumer of usin& credit to finance as a ra4idl! &roBin&

4urc9ases. =i-en t9is 8ack&round? retail credit 9as emer&ed

o44ortunit! for 8anks. %anks also focus on &roBt9 in retail de4osit 8ase B9ic9 Bould include loB cost current account and sa-in&s 8ank de4osits. Retail de4osits are usuall! more sta8le t9an cor4orate 8ulk de4osits or B9olesale de4osits. %anks offer a ran&e of retail 4roducts? includin& 9ome loans? automo8ile loans? commercial -e9icle loans? tBo B9eeler loans? 4ersonal loans? credit cards? loans a&ainst time de4osits and loans a&ainst s9ares. %anks also fund dealers B9o sell consumer dura8les and commercial -e9icles. $ feB automo8iles? tBo B9eelers? 9ome finance

8anks 9a-e set u4

su8sidiaries in order to concentrate on t9is 8usiness in a more focused manner. Personal loans are unsecured loans 4ro-ided to customers B9o use t9ese funds for -arious 4ur4oses suc9 as 9i&9er education? medical ex4enses? social e-ents and 9olida!s. Personal loans include micro78ankin& loans? B9ic9 are relati-el! small -alue loans to loBer income customers in ur8an and rural areas. Credit cards 9a-e 8ecome an im4ortant com4onent of lendin& to t9e retail se&ment in t9e case of a num8er of 8anks. $s t9e 1ndian econom! de-elo4s? it is ex4ected t9at t9e retail market Bill seek s9ort7term credit for 4ersonal uses? and t9e use of credit cards Bill

facilitate furt9er extension of 8anks' retail credit 8usiness.

33

%ox 2."# S9are of retail loans in total loans T9e s9are of retail loans in total loans and ad-ances of Sc9eduled Commercial %anks maximum s9are Bas accounted for 8!

(SC%s) Bas *".,% at end7Marc9 *))6. T9e for commercial dura8les? in t9at order.

9ousin& loans folloBed 8! 'ot9er 4ersonal loans'? auto loans? credit card recei-a8les? loans

Source# Re4ort on Trends and Pro&ress of %ankin& in 1ndia? *))37)6? R%1. :endin& to enter4rises small and medium

Most of t9e 4ri-ate and forei&n 8anks 9a-e inte&rated t9e strate&! Bit9 re&ard to small and medium enter4rises Bit9 t9eir strate&! for retail 4roducts and ser-ices. Aence? t9e retail focus includes meetin& t9e Borkin& ca4ital re0uirements? ser-icin& de4osit accounts and 4ro-idin& ot9er 8ankin& 4roducts and ser-ices re0uired 8! small and medium enter4rises. ;f late? 4u8lic sector 8anks are also -er! acti-e in lendin& to t9is 8usiness se&ment. %anks often ado4t a cluster or communit! 8ased a44roac9 to financin& of small enter4rises? t9at is? identif!in& small enter4rises t9at 9a-e a 9omo&eneous 4rofile suc9 as a44arel manufacturers or @eBeller! ex4orters. 2.*.* Cor4orate Customers finance? cross 8order 9i&9l! rated

Cor4orate 8usiness co-ers 4ro@ect finance includin& infrastructure

finance? Borkin& ca4ital loans? non7fund 8ased Borkin& ca4ital 4roducts and ot9er fee78ased ser-ices. %anks often 9a-e to make s4ecial efforts to &et t9e 8usiness of cor4orations. T9e recent em49asis on infrastructure in 1ndia? includin& 4ro@ects 8ein& 8uilt on 4ri-ate74u8lic 4artners9i4 8asis? is leadin& to 4rofita8le 8usiness o44ortunities in t9is area. Furt9er? 1ndian com4anies are also &oin& &lo8al? and makin& lar&e ac0uisitions a8road. T9is trend is likel! to 4ick u4 momentum in future and 8anks B9ic9 &ear t9emsel-es u4 to meet suc9 re0uirements from t9eir customers Bill &ain. T9ere is also a &roBin& demand for forei&n exc9an&e ser-ices from t9e cor4orate

customers. %anks offer fee78ased 4roducts and ser-ices includin& forei&n exc9an&e 4roducts? documentar! credits (suc9 as letter of credit or :C) and &uarantees to 8usiness enter4rises. Cor4orate customers are also increasin&l! demandin& 4roducts and ser-ices suc9 as forBard contracts and interest rate and currenc! sBa4s. 2.*., 1nternational Presence

1ndian 8anks B9ile ex4andin& 8usiness a8road 9a-e usuall! 8een le-era&in& 9ome countr! links. T9e em49asis 9as 8een on su44ortin& 1ndian com4anies in raisin& cor4orate and 4ro@ect finance o-erseas for t9eir in-estments in 1ndia and a8road (includin& financin& 36

of o-erseas ac0uisitions 8! 1ndian com4anies)? and extendin& trade finance and 4ersonal financial ser-ices (includin& remittance and de4osit 4roducts) for non7resident 1ndians.

6)

2.*..

Rural %ankin& Customers in rural areas. Aence? t9ere is a need for 8anks to

;-er 2)% of 1ndia's citiIens li-e

formulate strate&ies for rural 8ankin&? B9ic9 9a-e to include 4roducts tar&eted at -arious customer se&ments o4eratin& in rural areas. T9ese customer se&ments include cor4orates? small and medium enter4rises and finall! t9e indi-idual farmers and traders. Primar! credit 4roducts for t9e rural retail se&ment include farmer financin&? micro7finance loans? Borkin& ca4ital financin& for a&ro7enter4rises? farm e0ui4ment financin&? and commodit! 8ased financin&. ;t9er financial ser-ices suc9 as sa-in&s? in-estment and insurance 4roducts customised for t9e rural se&ment are also offered 8! 8anks.

2.,

Com4etition amon&st %anks for Customers

%anks seek to &ain ad-anta&e o-er t9eir com4etitors 8! offerin& inno-ati-e 4roducts and ser-ices? use of tec9nolo&!? 8uildin& customer relations9i4s and de-elo4in& a team of 9i&9l! moti-ated and skilled em4lo!ees. T9e relati-e stren&t9s and Beaknesses of different classes of 8anks7suc9 as 4u8lic sector 8anks? neB 4ri-ate sector 8anks? old 4ri-ate sector 8anks and forei&n 8anks7are descri8ed 8eloB. 2.,." Com4etition for Retail Products and Ser-ices

1n t9e retail markets? com4etition is intense amon& all cate&ories of 8anks. AoBe-er? e-en t9ou&9 forei&n 8anks 9a-e 4roduct and deli-er! ca4a8ilities? t9e! are constrained 8! limited 8ranc9 netBork. ;-er t9e last decade? 8ecause of t9eir stron&er tec9nolo&! and marketin& ca4a8ilities? t9e neB 4ri-ate sector 8anks 9a-e 8een &ainin& market s9are at t9e ex4ense of 4u8lic sector 8anks. T9e! are sloBl! mo-in& toBards t9e Tier 11 cities to ta4 4otential 8usiness. 2.,.* Com4etition for Cor4orate Products and Ser-ices

1n t9e case of cor4orate 8usiness? 4u8lic sector 8anks and t9e neB 4ri-ate sector 8anks 9a-e de-elo4ed stron& ca4a8ilities in deli-erin& Borkin& ca4ital 4roducts and ser-ices. Pu8lic sector 8anks 9a-e 8uilt extensi-e 8ranc9 netBorks t9at 9a-e ena8led t9em to raise loB cost de4osits and? as a result? 4rice t9eir loans and fee78ased ser-ices -er! com4etiti-el!. T9eir Bide &eo&ra49ical reac9 facilitates t9e deli-er! of 8ankin& 4roducts to t9eir cor4orate customers located all o-er t9e countr!. Traditionall!? forei&n 8anks in 1ndia 9a-e 8een acti-e in 4ro-idin& trade finance? fee78ased ser-ices and ot9er s9ort7term financin& 4roducts to 9i&9l! rated 1ndian cor4orations. $ feB 1ndian 4u8lic sector and 4ri-ate sector 8anks effecti-el! com4ete Bit9 forei&n 8anks in t9ese areas. T9e lar&er 1ndian commercial 8anks also com4ete Bit9 forei&n 8anks in forei&n currenc! lendin& and s!ndication 8usiness. AoBe-er? forei&n 8anks are at an ad-anta&e due to t9eir lar&er 8alance s9eets and &lo8al 4resence. 6"

1n 4ro@ect finance? a feB

lar&e 1ndian commercial 8anks 9a-e entered t9e infrastructure %ank 9a-e an ad-anta&e in t9is area as t9e! Bere

finance s4ace. 1C1C1 %ank and 1D%1

alread! in t9is 8usiness in t9eir 4re-ious a-atar. AoBe-er? &i-en t9eir stron& de4osit 8ase? t9e lar&er commercial 8anks 9a-e decided to ex4and t9eir 4resence in t9is market. 1n 4ro@ect finance? forei&n 8anks 9a-e an ad-anta&e B9ere forei&n currenc! loans are in-ol-ed. 2.,., %ankin& Com4etition for 1nternational

1ndian commercial 8anks 9a-e limited access to forei&n currenc! resources? and 9ence? face difficult! in 4artici4atin& in &lo8al takeo-ers and ac0uisitions 8ein& undertaken 8! 1ndian com4anies? alt9ou&9 some leadin& 1ndian 8anks are 4artici4atin& in financin& suc9 cases in a limited manner. 1n deli-erin& so49isticated forei&n exc9an&e 4roducts like deri-ati-es? a feB 1ndian 8anks in t9e 4ri-ate sector are com4etin& Bit9 t9eir forei&n counter4arts. For 4roducts and ser-ices tar&eted at non7resident 1ndians and 1ndian 8usinesses? t9ere is intense com4etition amon& a lar&e num8er of 8anks? 8ot9 1ndian and forei&n. 2.,.. Com4etition for Rural Customers

1n t9e a&riculture and 4riorit! se&ments? t9e 4rinci4al com4etitors are t9e lar&e 4u8lic sector 8anks? re&ional rural 8anks (RR%s) and coo4erati-e 8anks. T9is is due to t9e extensi-e 49!sical 4resence of 4u8lic sector 8anks and RR%s t9rou&9out 1ndia -ia t9eir lar&e 8ranc9 netBorks and t9eir focus on a&riculture and 4riorit! sectors.

2..

Customer Relations9i4 Mana&ement

9as taken a num8er of initiati-es to im4ro-e t9e 0ualit! of

;-er t9e !ears? t9e R%1

customer ser-ice. T9ese ste4s include &rie-ance redress t9rou&9 t9e %ankin& ;m8udsman Sc9eme.* and settin& u4 a Customer Ser-ice De4artment Bit9in R%1. R%1 9as set u4 a full7fled&ed Customer Ser-ice De4artment Bit9 a -ieB to makin& 8anks more customer7friendl! and 9as taken a num8er of customer related notifications and 4ress releases on ste4s to disseminate instructions> 8anks 8! 4lacin& all site. its multi7lin&ual 1nternet &uidelines relatin& to customer ser-ice and &rie-ance redressal 8!

Customers of commercial 8anks can also a44roac9 t9e R%1 Bit9 t9eir &rie-ances. 1n Fe8ruar! *))+? R%1 set u4 t9e %ankin& Codes and Standards %oard of 1ndia (%CS%1) as an inde4endent autonomous Batc9do& to ensure t9at customers &et fair treatment in t9eir dealin&s

6*

.*

Discussed under section 2.(.

6,

Bit9 8anks. T9e %CS%1 9as 4u8lis9ed t9e PCode of %anks' Commitments to Customers P(t9e Code)P B9ic9 sets minimum standards of 8ankin& 4ractice and 8enc9marks in customer ser-ice for 8anks to folloB. Commercial 8anks 9a-e 8ecome mem8ers of t9e %CS%1 and 9a-e ado4ted t9e Code as t9eir Fair Practice Code in dealin&s Bit9 customers. T9e main R%1 directi-es on customer ser-ices include t9e folloBin&.., 2..." Committees on Customer Ser-ice

%anks are re0uired to constitute a Customer Ser-ice Committee of t9eir res4ecti-e %oards and include ex4erts and re4resentati-es of customers as in-itees to ena8le im4ro-ements in t9e 0ualit! of customer ser-ice. Furt9er? 8anks 9a-e to esta8lis9 Customer Ser-ice Committee at 8ranc9 le-el. /ac9 8ank is also ex4ected to 9a-e a nodal de4artment > official for customer ser-ice in t9e Aead ;ffice and eac9 controllin& office B9om customers Bit9 &rie-ances can a44roac9 in t9e first instance and Bit9 B9om t9e %ankin& ;m8udsman and R%1 can liaise. 2...* %oard7a44ro-ed Policies on Customer Ser-ice

Customer ser-ice is 4ro@ected as a 4riorit! o8@ecti-e of 8anks alon& Bit9 4rofit? &roBt9 and fulfilment of social o8li&ations. %anks need to 9a-e a 8oard a44ro-ed 4olic! for folloBin&# L L Polic! L Com4re9ensi-e De4osit Polic! C9e0ue Collection Customer Com4ensation Polic! in areas suc9 as erroneous de8its? 4a!ment of interest in case of dela!s in collection? etc... and L Polic! Customer =rie-ance Redressal t9e

%anks s9ould 4ro-ide a com4laints> su&&estions 8ox at eac9 of t9eir offices. Furt9er? at e-er! office of t9e 8ank? a notice re0uestin& t9e customers to meet t9e 8ranc9 mana&er ma! 8e dis4la!ed re&ardin& &rie-ances? if t9e &rie-ances remain unattended. $ com4laint 8ook Bit9 4erforated co4ies in eac9 set ma! 8e introduced? so desi&ned as to instantl! 4ro-ide an acknoBled&ement to t9e customers and intimation to t9e controllin& office.

.,

AoBe-er? t9e 8ankin& s!stem cannot de4end onl! on re&ulator! ste4s to im4ro-e customer ser-ice. Market 8ased solutions are also necessar!.

6.

..

$ccordin& to R%1 &uidelines? in t9e case of dela!s in collection of 8ills? t9e concerned 8ank s9ould 4a! interest to t9e a&&rie-ed 4art! for t9e dela!ed 4eriod in res4ect of collection of 8ills at t9e rate of *% 4er annum a8o-e t9e rate of interest 4a!a8le on 8alances of Sa-in&s %ank accounts.

6(

2..., Policies

=i-in&

Pu8licit!

to

t9e

%anks s9ould ensure t9at Bide 4u8licit! is &i-en to t9e customer 4olicies formulated 8! t9em 8! 4lacin& t9em 4rominentl! on t9eir Be87site and also disseminatin& t9e 4olicies t9rou&9 notice 8oard in t9eir 8ranc9es? issuin& 8ooklets> 8roc9ures? etc. 2.... ;4erations of $ccounts 8! S4ecial Cate&or! of Customers

%anks s9ould de-elo4 4olicies for s4ecial cate&ories of customers includin& sick> old> inca4acitated 4ersons? 4ersons Bit9 disa8ilities? -isuall! im4aired 4ersons? etc. Suc9 a customer ma! re0uire identification t9rou&9 t9e customer's t9um8 or toe im4ression 8! tBo inde4endent Bitnesses knoBn to t9e 8ank? one of official. 2...( T9e Customer Confidentialit! ;8li&ations B9om s9ould 8e a res4onsi8le 8ank

sco4e of t9e secrec! laB in 1ndia 9as &enerall! folloBed t9e common laB 4rinci4les im4lied contract. %ankers' o8li&ation to maintain secrec! a8out customers'

8ased on

accounts arises out of t9e contractual relations9i4 8etBeen t9e 8anker and customer? and as suc9 no information s9ould 8e di-ul&ed to t9ird 4arties exce4t under circumstances B9ic9 are Bell defined. T9e folloBin& exce4tions are normall! acce4ted? B9ere# L L disclose L disclosure is under com4ulsion of laB t9ere is dut! to t9e 4u8lic to interest of 8ank re0uires disclosure? and disclosure is made Bit9 t9e ex4ress or Collectin& 1nformation from im4lied consent of t9e for Cross7sellin&

L customer. %ox 2.*# Pur4oses

Customers

$t t9e time of o4enin& of accounts of t9e customers? 8anks are re0uired to collect certain informationN 8ut t9e! also collect a lot of additional 4ersonal information? B9ic9 can 8e 4otentiall! used for cross sellin& -arious financial ser-ices 8! t9e 8anks? t9eir su8sidiaries and affiliates. Sometimes? suc9 information is GnoB Eour also 4ro-ided to ot9er t9e customer for a&encies. R%1 9as ad-ised 8anks t9at t9e information 4ro-ided 8!

Customer (GEC) com4liance (see Section 2.() B9ile o4enin& an account is

confidential and di-ul&in& an! details t9ereof for cross sellin& or an! ot9er 4ur4ose Bould 8e in 8reac9 of customer confidentialit! o8li&ations. J9ere-er 8anks desire to collect an! information a8out t9e customer for a 4ur4ose ot9er t9an GEC re0uirements? it s9ould not form 4art of t9e account o4enin& form. Suc9 information ma! 8e collected se4aratel!? 4urel! on a -oluntar! 8asis? after ex4lainin& t9e 6+

o8@ecti-es to t9e customer and takin& 9is ex4ress a44ro-al for t9e s4ecific uses to B9ic9 suc9 information could 8e 4ut. Source# R%1 =uidelines

62

2...+

National Do Not Call Re&istr!

Jit9 a -ieB to reducin& t9e num8er of unsolicited marketin& calls recei-ed 8! customers? t9e R%1 9as ad-ised 8anks t9at all t9em telemarketers? -iI.? direct sellin& a&ents> Bit9 t9e direct

marketin& a&ents en&a&ed 8! Telecommunications (DoT).

s9ould 8e re&istered

De4artment of

2.(

%ankin& ;m8udsman Sc9eme

T9e %ankin& ;m8udsman Sc9eme makes a-aila8le an ex4editious and inex4ensi-e forum to 8ank customers for resolution of com4laints relatin& to certain ser-ices rendered 8!

8anks. T9e %ankin& ;m8udsman Sc9eme Bas introduced under Section ,( $ of t9e %ankin& Re&ulation $ct (%R $ct)? "6.6 Bit9 effect from "66(. $ll Sc9eduled Commercial %anks? Re&ional Rural %anks and Sc9eduled Primar! Co7o4erati-e %anks are Sc9eme. 2.(." T9e co-ered under t9e

$44ointment of %ankin& ;m8udsman %ankin& ;m8udsman is a senior official a44ointed 8! t9e R%1 to recei-e and

redress customer com4laints a&ainst deficienc! in certain 8ankin& ser-ices (includin& 1nternet 8ankin& and loans and ad-ances). $t 4resent? fifteen %ankin& ;m8udsmen 9a-e 8een a44ointed? Bit9 t9eir offices located mostl! in state ca4itals. 2.(.* Filin& ;m8udsman ;ne can file a Com4laint to t9e %ankin&

a com4laint 8efore t9e %ankin& ;m8udsman if (a) t9e re4l! to t9e

re4resentation made 8! t9e customer to 9is 8ank is not recei-ed from t9e concerned 8ank Bit9in a 4eriod of one mont9 after t9e 8ank 9as recei-ed t9e re4resentation? or (8) t9e 8ank re@ects t9e com4laint? or (c) if t9e com4lainant is not satisfied Bit9 t9e re4l! &i-en 8! t9e 8ank. T9e %ankin& ;m8udsman does not c9ar&e an! fee for filin& and resol-in& customers' com4laints. 2.(., $Bard :imit on t9e $mount of Com4ensation as S4ecified in an

T9e amount? if an!? to 8e 4aid 8! t9e 8ank to t9e com4lainant 8! Ba! of com4ensation for an! loss suffered 8! t9e com4lainant is limited to t9e amount arisin& directl! out of t9e act or omission of t9e 8ank or Rs ") lak9s? B9ic9e-er is loBer. Furt9er? t9e %ankin& ;m8udsman ma! aBard com4ensation not exceedin& Rs " lak9 to t9e com4lainant onl! in t9e case of com4laints relatin& to credit card o4erations for mental a&on! and 9arassment. T9e %ankin& ;m8udsman Bill take into account t9e loss of t9e 63

com4lainant's time? ex4enses incurred 8!

t9e com4lainant and 9arassment and mental

an&uis9 suffered 8! t9e com4lainant B9ile 4assin& suc9 aBard.

66

2.(..

Furt9er recourse a-aila8le

1f a customer is not satisfied Bit9 t9e decision 4assed 8! t9e %ankin& ;m8udsman? 9e can a44roac9 t9e $44ellate $ut9orit! a&ainst t9e %ankin& ;m8udsman's decision. $44ellate $ut9orit! is -ested Bit9 a De4ut! =o-ernor of R%1. Ae can also ex4lore an! ot9er recourse a-aila8le to 9im as 4er t9e laB. T9e 8ank also 9as t9e o4tion to file an a44eal 8efore t9e a44ellate aut9orit! under t9e sc9eme.

2.+

GnoB Eour Customer (GEC) norms

Eour Customer (GEC) &uidelines. T9ese &uidelines

%anks are re0uired to folloB GnoB

are meant to Beed out and to 4rotect t9e &ood ones and t9e 8anks. Jit9 t9e &roBt9 in or&aniIed crime? GEC 9as assumed &reat si&nificance for 8anks. T9e R%1 &uidelines on

GEC aim at 4re-entin& 8anks from 8ein& used? intentionall! or unintentionall!? 8! criminal elements for mone! launderin& or terrorist financin& acti-ities. T9e! also ena8le 8anks to 9a-e 8etter knoBled&e and understandin& of t9eir customers and t9eir financial dealin&s. T9is in turn 9el4s 8anks to mana&e t9eir risks 8etter. T9e R%1 ex4ects all 8anks to 9a-e com4re9ensi-e GEC 4olicies? B9ic9 need to 8e a44ro-ed 8! t9eir res4ecti-e 8oards. %anks s9ould frame t9eir GEC 4olicies incor4oratin& elements# a) 8) c) and d) 2.+." Customer $cce4tance Polic!N Customer 1dentification ProceduresN Monitorin& of TransactionsN Risk Mana&ement. Customer $cce4tance Polic! t9e folloBin& four ke!

/-er! 8ank s9ould de-elo4 a clear Customer $cce4tance Polic! la!in& doBn ex4licit criteria for acce4tance of customers. T9e usual elements of t9is 4olic! s9ould include t9e folloBin&. %anks? for name(s). exam4le? s9ould not o4en an account in anon!mous or fictitious> 8enami

Nor s9ould an! account 8e o4ened B9ere t9e 8ank's due dili&ence exercises %anks 9a-e to ensure t9at t9e identit! of

relatin& to identit! 9as not 8een carried out. t9e neB or existin& customers

does not matc9 Bit9 an! 4erson Bit9 knoBn criminal

8ack&round. 1f a customer Bants to act on 8e9alf of anot9er? t9e reasons for t9e same must 8e looked into. AoBe-er? t9e ado4tion of customer acce4tance 4olic! and its im4lementation s9ould not 8ecome too restricti-e and s9ould not result in denial of 8ankin& ser-ices to &eneral 4u8lic? es4eciall! to t9ose B9o are financiall! or sociall! disad-anta&ed. ") )

2.+.*

Customer 1dentification Procedures

Customer identification means identif!in& t9e customer and -erif!in& 9is>9er identit! 8! usin& relia8le? inde4endent source documents? data or information. For indi-idual customers? 8anks s9ould o8tain sufficient identification data to -erif! t9e identit! of t9e customer? 9is address and a recent 49oto&ra49. T9e accounts are &i-en in scrutiniIe t9eir %ox 2.,. For le&al status usual documents re0uired for customers documents? o4enin& de4osit 8anks s9ould oBners9i4 B9o are le&al 4ersons?

t9rou&9 rele-ant

examine t9e

structures and determine t9e natural 4ersons B9o control t9e entit!. %ox 2.,# Documents for o4enin& de4osit accounts under GEC &uidelines T9e Customer identification Bill 8e done on t9e 8asis of documents 4ro-ided 8! t9e 4ros4ecti-e customer as under# a) Pass4ort or oter 1D card or Pension Pa!ment ;rders (=o-t.>PSCs) alone? B9ereon

t9e address is t9e same as mentioned in account o4enin& form. 8) $n! one document for 4roof of identit! and 4roof of address? from eac9 of t9e under noted items# Proof of 1dentit! i) ii) Pass4ort? if t9e address differs from t9e one mentioned in t9e account o4enin& form oter 1D card? if t9e address differs from t9e one mentioned in t9e account

o4enin& form iii) i-) -) -i) -ii) P$N Card =o-t.> Defence 1D card 1D cards of re4uted em4lo!ers Dri-in& :icense Pension Pa!ment ;rders (=o-t.>PSCs)? if t9e address differs from t9e one mentioned in t9e account o4enin& form -iii) -iii) P9oto 1D card issued 8! Post ;ffices P9oto 1D card issued to 8onafide students of Cni-ersities> 1nstitutes a44ro-ed 8! C=C> $1CT/ Proof of address i) ii) Credit card statement Salar! sli4 ") "

iii)

1ncome tax> Bealt9 tax

assessment

") *

i-) -) 8ill -i) -ii) -iii) ix) x)

/lectricit! 8ill Tele49one

%ank account statement :etter from a re4uted em4lo!er :etter from an! reco&niIed 4u8lic aut9orit! Ration card Co4ies of re&istered lea-e F license a&reement> Sale Deed> :ease $&reement ma! 8e acce4ted as 4roof of address

xi)

Certificate issued 8! 9ostel and also? 4roof of residence incor4oratin& local address? as Bell as 4ermanent address issued 8! B9ere t9e student res4ecti-e 9ostel Barden of aforesaid resides? dul! countersi&ned 8! t9e Cni-ersit!> institute Re&istrar>

Princi4al> Dean of Student Jelfare. Suc9 accounts s9ould 8e closed on

com4letion of education> lea-in& t9e Cni-ersit!> 1nstitute. xii) For students residin& Bit9 relati-es? address 4roof of relati-es alon& Bit9 t9eir

identit! 4roof? can also 8e acce4ted 4ro-ided declaration is &i-en 8! t9e relati-e t9at t9e student is related to 9im and is sta!in& Bit9 9im. Source# State %ank of 1ndia Be8site 2.+., Monitorin& of Transactions

;n&oin& monitorin& is an essential element of effecti-e GEC 4rocedures. %anks can effecti-el! control and reduce t9eir risk onl! if t9e! 9a-e an understandin& of t9e normal and reasona8le acti-it! of t9e customer so t9at t9e! 9a-e t9e means of identif!in& t9e transactions t9at fall outside t9e re&ular 4attern of acti-it!. %anks s9ould 4a! s4ecial attention B9ic9 9a-e no to all com4lex? unusuall! lar&e transactions and all unusual 4atterns a44arent

economic or -isi8le laBful 4ur4ose. %anks ma! 4rescri8e t9res9old limits for a 4articular cate&or! of accounts and 4a! 4articular attention to t9e transactions B9ic9 exceed t9ese limits. %anks s9ould ensure t9at an! remittance of funds 8! Ba! of demand draft> mail> tele&ra49ic transfer or an! ot9er mode and issue of tra-ellers' c9e0ues for -alue of Rs ()?))) and a8o-e is effected 8! de8it to t9e customer's account or a&ainst c9e0ues and not a&ainst cas9 4a!ment. %anks s9ould furt9er ensure t9at t9e 4ro-isions of Forei&n Contri8ution (Re&ulation) $ct? "62+ as amended from time to time? B9ere-er a44lica8le? are strictl! ad9ered to. 2.+.. Risk Mana&ement ") ,

%anks s9ould? in consultation Bit9 t9eir 8oards? de-ise 4rocedures for creatin& risk 4rofiles of t9eir existin& and neB customers and a44l! -arious anti7mone! launderin& measures kee4in& in relations9i4. -ieB t9e risks in-ol-ed in a transaction? account or 8ankin&> 8usiness

") .

%anks s9ould 4re4are a 4rofile for eac9 neB customer 8ased on risk cate&orisation. T9e customer 4rofile ma! contain information relatin& to customer's identit!? social> financial status? nature of 8usiness acti-it!? information a8out 9is clients' 8usiness and t9eir location etc. Customers ma! 8e cate&orised into loB? medium and 9i&9 risk. For exam4le? indi-iduals (ot9er t9an 9i&9 net Bort9 indi-iduals) and entities B9ose identities and sources of Bealt9 can 8e easil! identified and transactions in B9ose accounts 8! and lar&e conform to t9e knoBn transaction 4rofile of t9at kind of customers ma! 8e cate&orised as loB risk. Salaried em4lo!ees? &o-ernment oBned com4anies? re&ulators etc fall in t9is cate&or!. For cate&or! of customers? it is sufficient to meet @ust t9e 8asic re0uirements of identit!. T9ere are ot9er customers B9o 8elon& to medium to 9i&9 risk cate&or!. %anks need to a44l! intensi-e due dili&ence for 9i&9er risk customers? customers es4eciall! t9ose for B9om t9e sources of funds are not clear. /xam4les of re0uirin& 9i&9er due dili&ence t9is -erif!in&

include (a) non7 resident customersN (8) 9i&9 net Bort9 indi-idualsN (c) trusts? c9arities? N=;s and or&aniIations recei-in& donationsN (d) com4anies 9a-in& close famil! s9are9oldin& or 8eneficial oBners9i4N (e) firms Bit9 'slee4in& 4artners'N (P/Ps) of re4utation as 4er 4u8lic information a-aila8le etc. %anks' internal audit and com4liance functions 9a-e an im4ortant role in e-aluatin& and ensurin& ad9erence to t9e GEC 4olicies and 4rocedures. Concurrent> 1nternal $uditors s9ould s4ecificall! c9eck and -erif! t9e a44lication of GEC 4rocedures at t9e 8ranc9es and comment on t9e la4ses o8ser-ed in t9is re&ard. (f) 4oliticall! ex4osed 4ersons forei&n ori&inN (&) non7face7to7face customers and (9) t9ose Bit9 du8ious

2.2
T9e

Pre-ention of Mone! :aunderin& $ct (PM:$)? *))*

PM:$? *))* casts certain o8li&ations on t9e 8ankin& com4anies in re&ard to

maintenance and re4ortin& of t9e folloBin& t!4es of transactions# a) all cas9 transactions of t9e -alue of more t9an Rs ") lak9 or its e0ui-alent in forei&n currenc!N 8) all series of cas9 transactions inte&rall! connected to eac9 ot9er B9ic9 9a-e 8een -alued 8eloB Rs ") :ak9 or its e0ui-alent in forei&n currenc! B9ere suc9 series of transactions 9a-e taken 4lace Bit9in a mont9 and t9e a&&re&ate -alue of suc9 transactions exceeds Rs ") :ak9N c) all cas9 transactions B9ere for&ed or counterfeit currenc! notes or 8ank notes 9a-e 8een used as &enuine and B9ere an! for&er! of a -alua8le securit! or a document 9as taken 4lace facilitatin& t9e transactionN and d) all sus4icious transactions B9et9er or not made in cas9 ") (

CA$PT/R %ankin&

3#

/-ol-in&

Trends

in

Modern

T9ere are a num8er of trends e-ol-in& in modern 8ankin&? t9e most im4ortant of B9ic9 relate to (a) tec9nolo&!? (8) outsourcin& of ser-ices and (c) financial inclusion

3."

Tec9nolo&!

%anks in 1ndia 9a-e started usin& tec9nolo&! in a 4roacti-e manner. T9e 9u&e num8er of 8ank customers and t9eir m!riad needs are 8ein& met in increasin&l! so49isticated Ba!s. 1n a num8er of areas? t9e forei&n 8anks and t9e neB 4ri-ate sector 8anks 9a-e 8een t9e first mo-ers in t9e a44lication of tec9nolo&!? 8ut 4u8lic sector 8anks are also catc9in& u4. ;ne ma@or ad-anta&e t9at 1ndian 8anks 9a-e is t9e a-aila8ilit! of ma@or 1T com4anies in 1ndia B9o are t9e Borld leaders in 1T a44lications. 3."." 1nternet %ankin&

T9rou&9 its Be8site? a 8ank ma! offer its customers online access to account information and 4a!ment and fund transfer facilities. T9e ran&e of ser-ices offered differs from 8ank to 8ank de4endin& mainl! on t9e t!4e and siIe of t9e 8ank. 1nternet 8ankin& is c9an&in& t9e 8ankin& industr! and affectin& 8ankin& relations9i4s in a ma@or Ba! (see 8ox 3."). %ox 3."# /xam4les of ;nline Pa!ment 8anks Ser-ices offered 8! some

S9o44in& ;nline# ;ne can s9o4 securel! online Bit9 t9e existin& de8it>credit card. T9is can also 8e done Bit9out re-ealin& t9e customer's card num8er. Pre4aid Mo8ile Refill# $ 8ank's account 9older can rec9ar&e 9is 4re4aid mo8ile 49one Bit9 t9is ser-ice. %ill Pa!# $ customer can 4a! 9is tele49one? electricit! and mo8ile 49one 8ills t9rou&9 t9e 1nternet? $TMs? mo8ile 49one and tele49one. Re&ister F Pa!# ;ne can -ieB and 4a! -arious mo8ile? tele49one? electricit! 8ills and insurance 4remiums on7line. $fter re&isterin&? customers can &et sms and e7mail alerts e-er! time a 8ill is recei-ed. RT=S Fund Transfer# RT=S is an inter78ank funds transfer s!stem? B9ere funds are

transferred as and B9en t9e transactions are tri&&ered (i.e. real time). ;nline Pa!ment of Taxes# $ customer can 4a! -arious taxes online includin& /xcise and ") +

Ser-ice etc.

Tax?

Direct

Tax

") 2

3.".*

Mo8ile %ankin& Transactions offerin& mo8ile 8ankin& and tele8ankin& to customers. T9e

Some 8anks 9a-e started

ex4ansion in t9e use and &eo&ra49ical reac9 of mo8ile 49ones 9as created neB o44ortunities for 8anks to use t9is mode for 8ankin& transactions and also 4ro-ide an o44ortunit! to extend 8ankin& facilities to t9e 9it9erto excluded sections of t9e societ!. T9e R%1 9as ado4ted %ank :ed Model in B9ic9 mo8ile 49one 8ankin& is 4romoted t9rou&9 8usiness corres4ondents of 8anks..( T9e o4erati-e &uidelines for 8anks on Mo8ile %ankin& Transactions in 1ndia Bere issued on ;cto8er 3? *))3. ;nl! 8anks B9o 9a-e recei-ed one7 time a44ro-al from t9e R%1 are 4ermitted to 4ro-ide t9is facilit! to customers. %ox 3.*# 1ndia Mo8ile %ankin& in

Till Dune ,)? *))6? ,* 8anks 9ad 8een &ranted 4ermission to o4erate Mo8ile %ankin& in 1ndia? of B9ic9 2 8elon&ed to t9e State %ank =rou4? "* to nationalised 8anks and ", to 4ri-ate> forei&n 8anks. Source# R%1. 3."., Re4ort on Trends and Pro&ress of %ankin& in 1ndia *))37)6?

Point of Sale (PoS) Terminals

To use smart cards>de8it cards>credit cards for t9e 4urc9ase of an item or for 4a!ment of a ser-ice at a merc9ant's store? t9e card 9as to 8e sBi4ed in a terminal (knoBn as Point of Sale or P;S terminal) ke4t at t9e merc9ant's store. $s soon as t9e card is 4ut on t9e terminal? t9e details of t9e card are transmitted t9rou&9 dial7u4 or leased lines to a 9ost com4uter. ;n -erification of t9e &enuineness of t9e card? t9e transaction is aut9orised and concluded. 1t is t9us a means to 'c9eck out' B9et9er t9e card9older is aut9oriIed to make a transaction usin& t9e card. P;S terminal is a relati-el! neB conce4t. $ Point of Sale (PoS) terminal is an inte&rated PC78ased de-ice? Bit9 a monitor (CRT)? PoS ke!8oard? PoS 4rinter? Customer Dis4la!? Ma&netic SBi4e Reader and an electronic cas9 draBer all rolled into one. More &enerall!? t9e P;S softBare used for c9eckouts. 1n recent !ears? 8anks are makin& efforts to ac0uire Point of Sale (PoS) terminals at t9e 4remises of merc9ants across t9e countr! as a relati-el! neB source of income. '$c0uirin&' a P;S terminal means installin& a P;S terminal at t9e merc9ant 4remises. T9e installer of t9e terminal refers to t9e 9ardBare and

") 3

.(

For more details on %usiness Corres4ondents of 8anks? 4lease see 3.,."

") 6

PoS

terminals is t9e ac0uirer of t9e terminal and t9e merc9ants are re0uired to 9old an ac0uirer 8ank le-ies eac9 T9is amount is 4a!a8le 8!

account (merc9ant account) Bit9 t9e ac0uirer 8ank. T9e transaction Bit9 a c9ar&e? sa! "% of t9e transaction -alue. t9e merc9ant. Most merc9ants do ex4and t9eir sales. Some merc9ants? 9oBe-er? 4ass on

not mind a8sor8in& t9is cost? 8ecause suc9 facilities t9e cost to t9e customer. T9is

8usiness is knoBn as merc9ant ac0uisition 8usiness. %anks are -!in& Bit9 one anot9er for PoS mac9ine ac0uisition? since it offers a 9u&e

o44ortunit! to &enerate additional income 8! increasin& t9e card 8ase and encoura&in& card 9olders to use t9em for t9eir merc9ant transactions. :eadin& 8anks778ot9 in t9e 4u8lic and 4ri-ate sectors77 are 4lannin& to install 9undreds of t9ousands of t9ese terminals across t9e countr!. Some 8anks are 4lannin& @oint -entures Bit9 &lo8al com4anies B9o 9a-e ex4erience and ex4ertise in t9is area. PoS terminals are 4redominantl! used for sale and 4urc9ase transactions. T9e PoS terminals 9a-e 4ro-ed to 8e -er! effecti-e in com8atin& fraudulent transaction 8! on7line -erification of cards. $lso? t9e R%1 is ex4ected to 4ermit cas9 Bit9draBal transactions to card9olders from PoS terminals installed Bit9 s9o4kee4ers? mall stores? etc. PoS terminals? 9a-in& &ained si&nificant acce4tance in metros? need to 8ecome more 4o4ular in tier7* and tier7, cities. Pu8lic sector 8anks a44ear to 8e more interested in tar&etin& t9e smaller toBns and cities B9ere t9e! 9a-e stron& 8ranc9 4resence. T9e settin& u4 a Bides4read PoS netBork Bill c9allen&es of 8e 4rimaril! (a) o4erational costs and (8)

-ia8ilit! in smaller toBns and cities. /x4erts feel t9at once t9e tec9nolo&! sta8ilises and costs 4er unit comes doBn? PoS terminals Bill 8ecome 4o4ular all o-er 1ndia.

3.*

;utsourcin& of Non7core $cti-ities

;utsourcin& can ena8le 8anks to sta! a9ead of com4etition. =roBin& com4etition in t9e 8ankin& sector 9as forced 8anks to outsource some of t9eir acti-ities to maintain t9eir com4etiti-e ed&e. Decision to outsource could 8e on cost considerations as Bell as lack of ex4ertise in 8anks in deli-erin& certain ser-ices. %anks t!4icall! outsource t9eir non7core functions so t9at t9e! can concentrate on t9eir core functions. AoBe-er? t9ere are risks in-ol-ed in t9e 4rocess of outsourcin& to a t9ird 4art!. T9ese risks include non7com4liance Bit9 re&ulations? loss of control o-er 8usiness? leaka&e of customer data? lack of ex4ertise of t9e t9ird 4art!? 4oor ser-ice from t9ird 4art!? etc. T9e ke! dri-in& force 8e9ind outsourcin& acti-ities 8! an! firm? irres4ecti-e of t9e nature of its 8usiness? is cost sa-in&. 1nitiall!? forei&n 8anks Bere in-ol-ed in outsourcin& t9eir acti-ities in order to le-era&e 1ndia's si&nificant cost ad-anta&es. ;r&anisations suc9 as $merican /x4ress? Citi8ank? Standard C9artered %ank? $NU =rindla!s? AS%C? and $%N $mro "" )

9a-e 8een outsourcin&

"" "

t9eir 1nformation Tec9nolo&! ;utsourcin& (1T;)>%usiness Process ;utsourcin& (%P;) re0uirements to leadin& 1ndian 1T com4anies. ;utsourcin& $cti-ities of 1ndian %anks Durin& t9e recent !ears? 1ndian 8anks also 9a-e started outsourcin& t9eir non7core acti-ities. T9e outsourced ser-ices ma! include softBare a44lication su44ort? maintenance of 9ardBare and softBare? 9ostin& ser-ices? mana&in& data centres? mana&in& $TM netBorks across t9e countr!? and disaster mana&ement. Furt9er? 8anks are also &i-in& contracts to t9ird 4arties in order to mana&e ot9er su44ort ser-ices suc9 as call7su44ort ser-ices? 9el47desk su44ort? credit card 4rocessin&? c9e0ue 4rocessin& and clearin&? $TM cas9 re4lenis9ment? c9e0ue clearin& and collection? loan ser-icin&? data 4rocessin&? etc. T9e tBo main reasons for 1ndian 8anks outsourcin& non7core acti-ities are similar to t9e o-erseas 8anks? i.e. cost consideration and lack of ex4ertise in certain areas. T9rou&9 outsourcin&? 8anks can also 8enefit from t9e domain ex4ertise of t9e ser-ice 4ro-iders. ;utsourcin& 9el4s 8anks not onl! to focus on t9eir core acti-ities? 8ut also in certain cases to reduce t9e ca4ital in-estment in de-elo4in& t9e re0uired infrastructure. Furt9er? in7 9ouse 4ro-ision of ser-ices ma! 8e more ex4ensi-e 8ecause t9e! do not en@o! an! econom! of scale. Ser-ice 4ro-iders on t9e ot9er 9and ma! en@o! economies of scale 8ecause t9e! cater to t9e outsourcin& re0uirements of a num8er of 8anks and com4anies and 4ass on some of t9e 8enefits of scale to t9e outsourcin& 8anks. 1t is not onl! t9e small 8anks B9o 9a-e started outsourcin& non7core acti-itiesN lar&e 4u8lic sector 8anks are also outsourcin& t9eir non7core ser-ices. Certain 4recautions need to 8e taken B9ile outsourcin& non7core functions. T9e 8enefits t9rou&9 a t9orou&9 anal!sis. T9e -endor's domain knoBled&e is le&al

contract entered into Bit9 t9e -endors s9ould 8e a44ro-ed onl! after t9e 0uantification of im4ortant for deli-erin& t9e ser-ices as 4er contractN for exam4le customiIin& t9e 8ank's 1T re0uirements. 1t is t9erefore im4ortant for 8anks to -erif! B9et9er t9e -endors 9a-e t9e re0uired domain knoBled&e. J9ile outsourcin&? t9e ma@or concern for 8anks relates to securit!. T9ere 9a-e 8een

case instances B9ere t9e em4lo!ees of -endors 9a-e leaked confidential information of clients. For 8anks? suc9 leaka&e of customer's account details can 8e disastrous? Bit9 9u&e fallout in terms of monetar! losses as Bell as se-ere dama&e to t9e 8ank's re4utation. To co4e Bit9 t9e c9allen&es? t9e R%1 9as 4ro4osed t9at t9e 8oard of directors of a 8ank s9ould 8e res4onsi8le for t9e outsourcin& 4olic! as Bell as a44ro-in& suc9 acti-ities undertaken 8! a 8ank. 1n addition? t9e 1nformation Tec9nolo&! $ct? *))) aims at tacklin& some as4ects of c!8er crimes suc9 as leaka&e of confidential information 8! -endors. $s 4art of internal ins4ection>audit? internal ins4ectors> auditors in 8anks look into securit! related as4ects of outsourcin&. 6.

=oin& forBard? it is ex4ected t9at outsourcin& in t9e 8ankin& sector in 1ndia Bill increase as com4etition in t9e industr! &roBs and su44ort ser-ices increasin&l! 8ecomes more so49isticated and ex4ensi-e.

3.,

Financial 1nclusion

Des4ite t9e ex4ansion of t9e 8ankin& netBork in 1ndia since inde4endence? a siIea8le 4ro4ortion of t9e 9ouse9olds? es4eciall! in rural areas? still do not 9a-e a 8ank account. Considera8le efforts 9a-e to 8e made to reac9 t9ese un8anked re&ions and 4o4ulation. Financial 1nclusion im4lies 4ro-idin& financial ser-ices -iI.? access to 4a!ments and remittance facilities? sa-in&s? loans and insurance ser-ices at afforda8le cost to t9ose B9o are excluded from t9e formal financial s!stem. %ox 3., &i-es indications of t9e loB access to 8ankin& ser-ices in 1ndia. %ox 3.,# Financial 1nclusion Statistics National Sam4le Sur-e! ;r&anisation (NSS;) data 9ouse9olds in t9e countr! (or ("..% of t9e total) do institutional or re-eal t9at .(.6 million farmer

not access credit? eit9er from

non7 institutional sources. Furt9er? des4ite t9e -ast netBork of 8ank

8ranc9es? onl! *2% of total farm 9ouse9olds are inde8ted to formal sourcesN of B9ic9 one7 t9ird also 8orroB from informal sources. Farm 9ouse9olds not accessin& credit from formal sources as a 4ro4ortion to total farm 9ouse9olds is es4eciall! 9i&9 at 6(.6"%? 3".*+% and 22.(6% in t9e Nort9 /astern? /astern and Central Re&ions res4ecti-el!. T9us? a4art from t9e fact t9at exclusion in &eneral is lar&e? it also -aries Bidel! across re&ions? social &rou4s and asset 9oldin&s. T9e 4oorer t9e &rou4? t9e &reater is t9e exclusion. Source# Re4ort of *))3 3.,." t9e Committee on Financial 1nclusion? Danuar!

1nitiati-es taken 8! t9e R%1

T9e :ead %ank Sc9eme introduced 8! t9e R%1 in "6+6 is t9e earliest attem4t 8! t9e R%1 to foster financial inclusion. Cnder t9e sc9eme? desi&nated 8anks are made ke! instruments for local de-elo4ment and entrusted Bit9 t9e res4onsi8ilit! of identif!in& &roBt9 centres? assessin& de4osit 4otential and credit &a4s and e-ol-in& a coordinated a44roac9 for credit de4lo!ment in eac9 district? in concert Bit9 ot9er 8anks and ot9er a&encies. $s at Marc9 *))6? t9ere Bere *+ 8anks? mostl! in t9e 4u8lic sector? B9ic9 9a-e 8een assi&ned lead res4onsi8ilit! in +** districts of t9e countr!. T9e R%1's recent measures to 4romote financial inclusion includes# ad-isin& 8anks to o4en 'no frills' accounts? introduction of %usiness Corres4ondent (%C)> %usiness Facilitator (%F) model and ado4tion of 1nformation and Communication Tec9nolo&! (1CT) solutions for 6(

ac9ie-in& &reater outreac9.

6+

%asic 8ankin& 'no7frills' account To ac9ie-e t9e o8@ecti-e of &reater financial inclusion? all 8anks 9a-e 8een ad-ised 8! t9e R%1 to make a-aila8le a 8asic 8ankin& 'no7frills' account eit9er Bit9 'nil' minimum 8alances. or -er! loB T9e! 9a-e also 8een ad-ised to kee4 t9e transaction c9ar&es loB? suc9 accounts could 8e restricted 8! t9e 8anks? 8ut suc9

B9ic9 Bould make suc9 accounts accessi8le to -ast sections of 4o4ulation. T9e nature and num8er of transactions in restrictions must 8e made knoBn to t9e customer in ad-ance in a trans4arent manner. T9e &roBt9 of suc9 de4osits s9ould 8e encoura&ed Bit9 afforda8le infrastructure and loB o4erational costs t9rou&9 t9e use of a44ro4riate tec9nolo&!. %ox 3..# No7frill accounts Sc9eduled Commercial %anks (SC%s) are makin& considera8le efforts toBards o4enin& no7 frills accounts. T9e num8er of no7frills accounts o4ened 8! SC%s durin& *))+7)2? *))27)3? and *))37)6 Bere +.2, million? "(.26 million and ,,.)* million res4ecti-el!. Source# Re4ort on Trends and Pro&ress of %ankin& in 1ndia? *))37)6? R%1. Cse of %usiness Facilitators and Corres4ondents Jit9 t9e o8@ecti-e of ensurin& a &reater financial inclusion and increasin& t9e outreac9 of t9e 8ankin& sector? t9e R%1 9as introduced 8usiness facilitators and 8usiness corres4ondent models to ena8le 8anks to use t9e ser-ices of N=;s? Self Ael4 =rou4s (SA=s) and micro finance institutions as intermediaries in 4ro-idin& financial and 8ankin& ser-ices. T9ese intermediaries ser-e as t9e facilitators >corres4ondents of t9e 8anks. 1n t9e 8usiness facilitator model? t9ese intermediaries 9el4 t9e 8anks facilitate ser-ices suc9 as identification of 8orroBers? collection and 4reliminar! 4rocessin& of loan a44lications? creatin& aBareness a8out sa-in&s and ot9er 4roducts? 4rocessin& and su8mission of a44lications to 8anks and 4ost7sanction monitorin&. 1n addition to acti-ities B9ic9 t9e intermediaries can en&a&e in t9e 8usiness facilitator model? t9e sco4e of acti-ities under t9e 8usiness corres4ondent's models include dis8ursal of small -alue credit? reco-er! of 4rinci4al>collection of interest? collection of small -alue de4osits? recei4t and deli-er! of small -alue remittances etc. $s t9e en&a&ement of intermediaries as 8usiness facilitators>corres4ondents in-ol-es a si&nificant re4utational? le&al and o4erational risks? 8anks need to &i-e due consideration to t9ose risks. T9e 8ank's arran&ement Bit9 t9e 8usiness corres4ondents s9ould# L S4ecif! t9e suita8le limits on cas9 9oldin& 8! intermediaries? as also limits on indi-idual customer 4a!ments and recei4ts. 62

Re0uire t9at t9e transactions are accounted for and reflected in t9e 8ank's 8ooks 8! t9e end of t9e da! or next Borkin& da!.

Re0uire all a&reements>contracts Bit9 t9e customer to clearl! s4ecif! t9at t9e 8ank is res4onsi8le to t9e customer for 8usiness facilitator > corres4ondent. acts of omission and commission of t9e

%anks 4a! reasona8le commission> fees to t9e %usiness Facilitators> Corres4ondents. fees to t9e customers for t9e ser-ices rendered 8! t9em on 8e9alf of t9e 8anks. $do4tion of tec9nolo&!

T9e

8anks' a&reement Bit9 t9em 9oBe-er s9ould s4ecificall! 4ro9i8it t9em from c9ar&in& an!

To &i-e an im4etus to financial inclusion? t9e R%1 9as formulated a sc9eme to accelerate t9e 4ace of ado4tion of t9e 8iometric access> smart card 8ased /lectronic %enefit Transfer (/%T) mec9anism 8! t9e 8anks and roll out t9e /%T s!stem in t9e States t9at are read! to ado4t t9e sc9eme. $s 4er t9e sc9eme? R%1 Bould 4artiall! reim8urse t9e 8anks? for a limited 4eriod? t9e cost of o4enin& accounts Bit9 8iometric access> smart cards. T9rou&9 t9ese accounts? 4a!ment of social securit! 8enefits? National Rural /m4lo!ment =uarantee routed. T9e 4otential of information tec9nolo&! (1T) in extendin& 8ankin& ser-ices to under7ser-ed markets in rural and semi7ur8an areas is enormous. T9e use of Smart Card tec9nolo&!? mo8ile $TMs? co-era&e of rural 4ost offices under electronic 4a!ments netBorks 7 all could contri8ute to 4ro-idin& financial ser-ices to more 4eo4le and t9ere8! ser-e financial inclusion. 1ndia is ex4eriencin& an ex4losion in t9e use of mo8ile communication tec9nolo&!? and t9is could 8e ex4loited 8! t9e financial sector for s4readin& t9e 8ankin& 9a8it. Mo8ile 49one users 8elon& to all strata of societ!? s4read across ur8an? semi7ur8an and rural areas. AoBe-er? B9ile encoura&in& t9e s4read of cost7effecti-e 8ankin& t9rou&9 mo8ile communications? it 9as to 8e ensured t9at essential securit! features are maintained. 3.,.* Credit Micro $ct (NR/=$) 4a!ments and 4a!ments under ot9er &o-ernment 8enefit 4ro&rammes Bould 8e

Micro Credit is defined as 4ro-ision of credit and ot9er financial ser-ices and 4roducts of -er! small amount to t9e 4oor in rural? semi7ur8an and ur8an areas for ena8lin& t9em to raise t9eir income le-els. Micro facilities. %anks are alloBed to de-ise a44ro4riate loan and sa-in&s 4roducts and t9e related terms and conditions includin& siIe of t9e loan? unit cost? unit siIe? maturit! 4eriod? &race 4eriod? mar&ins? etc. Suc9 credit co-ers not onl! consum4tion and 4roduction loans for -arious farm 63 Credit 1nstitutions (MC1s) are t9ose B9ic9 4ro-ide t9ese

and non7 farm acti-ities of t9e 4oor 8ut also includes t9eir ot9er credit needs suc9 as 9ousin& and s9elter im4ro-ements.

66

Self7Ael4 =rou4s (SA=s) $s stated earlier? des4ite t9e ex4ansion of t9e 8ankin& sector? t9e rural 4oor774articularl! t9e mar&inal farmers and landless la8ourers77de4end to a -er! lar&e de&ree on mone!lenders for credit. Se-eral studies 9a-e s9oBn t9at Self Ael4 t9e

Sa-in&s and Credit

=rou4s 9a-e t9e 4otential to 8rin& to&et9er t9e 8anks and t9e rural 4oor. $ Self7Ael4 =rou4 (SA=) is a re&istered or unre&istered &rou4 of "(7*) 4eo4le B9o

-oluntaril! @oin to&et9er to sa-e small amounts re&ularl!. T9ese 4ooled sa-in&s are used to make interest 8earin& loans to &rou4 mem8ers. 1n addition to inculcatin& t9e 9a8it of t9rift? SA= acti-it! de-elo4s amon& its mem8ers t9e ca4acit! to 9andle resources. J9en t9e &rou4 matures and sta8iliIes? it &ets linked to t9e 8anks under a SA=78anks linka&e

4ro&ram and 8anks start 4ro-idin& credit to SA=s. Note t9at 8anks 4ro-ides credit to SA=s and not to indi-iduals 8elon&in& to t9e SA=. 1t is t9e SA=s B9o 4ass on t9e loans to t9e indi-iduals. T9us? t9e SA=s 8ecome res4onsi8le for re4a!ment to t9e 8anks. T9e &rou4 mem8ers use collecti-e Bisdom and 4eer 4ressure to ensure 4ro4er end7use of credit and timel! re4a!ment t9ereof. Peer 4ressure acts as an effecti-e su8stitute for collaterals. %ox &rou4s. %ox 3.(# =rou4s Self Ael4 3.+ &i-es an indication of t9e financial inclusion t9rou&9 t9e self79el4

Cnder t9e SA=s7%ank :inka&e Pro&ramme (S%:P) $44roac9? as on ..* million SA=s 9ad outstandin&

Marc9 ,"? *))6?

loans of Rs.**? +3) crores from commercial 8anks?

re&ional rural 8anks and co7o4erati-e 8anks to&et9er. T9e s9are of commercial 8anks in total outstandin& loans is 2" 4er cent. Furt9er? as on Marc9 ,"? *))6? t9e num8er of SA=s maintainin& sa-in&s 8ank accounts Bit9 t9e 8ankin& sector Bas +." million Bit9 outstandin& sa-in&s of Rs. (?(.+ crores. Source# Re4ort on Trends and Pro&ress of %ankin& in 1ndia? *))37)6? R%1. J9at are t9e ad-anta&es of financin& t9rou&9 SA=sR $n economicall! 4oor indi-idual &ains stren&t9 as 4art of a &rou4. %esides? financin& t9rou&9 SA=s reduces transaction costs for 8ot9 lenders and 8orroBers. J9ile lenders 9a-e to 9andle onl! a sin&le SA= account instead of a lar&e num8er of small7siIed indi-idual accounts? 8orroBers as 4art of a SA= cut doBn ex4enses on tra-el for com4letin& 4a4er Bork and on t9e loss of Borkda!s in a-ailin& loans. Since "66"76*? t9e National %ank for $&riculture and Rural De-elo4ment (N$%$RD) 8een encoura&in& 8anks to extend micro credit loans to SA=s. T9e ")) 9as

sc9eme Bas t9en

extended to RR%s and co7o4erati-e 8anks. More t9an 6) 4er cent of t9e &rou4s linked Bit9 8anks are exclusi-e Bomen's &rou4s.

")"

J9ile t9e SA=78ank linka&e 4ro&ramme 9as emer&ed as t9e dominant micro finance dis4ensation model in 1ndia? ot9er models too 9a-e e-ol-ed. For exam4le? micro finance deli-er! t9rou&9 microfinance institutions (MF1s) 9as also emer&ed as an im4ortant deli-er! c9annel.

")*

References ". *. 1ndian Financial S!stem? 8! %9arati Pat9ak? (Pearson /ducation)

Mana&ement of %ankin& F Financial Ser-ices? 8! Dustin Paul F Padmalat9a Sures9? (Pearson /ducation)

,.

Commercial %ankin&? T9e Mana&ement of Risk? %enton / =u4 F Dames J Golari? (Jile! Student /dition)

.. Modern %ankin&? T9eor! F Practice? D.Muraleed9aran? PA1? (/astern /conom! /dition) (. +. 2. 3. 6. "). "". :aBs F Practices of %ankin&? T9e 1ndian 1nstitute of %ankers? (Macmillan) %ankin& Re&ulation $ct? "6.6 T9e Reser-e %ank of 1ndia $ct? "6,. $nnual Re4ort of t9e Reser-e %ank of 1ndia for t9e Eear *))37)6 Re4ort on Trend and Pro&ress of %ankin& in 1ndia *))37)6 Reser-e %ank of 1ndia Master Circulars Re4ort on Currenc! and Finance *))+7)3? PT9e %ankin& Sector in 1ndia# /mer&in& 1ssues and C9allen&esP? R%1.

"),

M;D/: T/ST P$P/R C;MM/RC1$: %$NG1N= 1N 1ND1$# $ %/=1NN/R'S M;DC:/

Q."

R%1 controls t9e commercial 8anks t9rou&9 (a) (8) (c) (d) 4eriodic ins4ection of 8anks folloB u4 action callin& for returns and ot9er information $ll of t9e a8o-e

V* MarksW

Q.*

T9e :ead %ank sc9eme Bas introduced 8! t9e R%1 in# (a) (8) (c) (d) "6+6 "62, "62" "6+2

V* MarksW

Q.,

Cnder t9e neB s!stem? t9e R%1 acts as t9e 8anker to Central =o-ernment onl!? not 8anker to State =o-ernments. MarksW (a) F$:S/ (8) TRC/ V*

Q..

1n a 'no frills' sa-in&s 8ank account? 8anks usuall! Bai-e minimum 8alances condition. V* MarksW (a) (8) F$:S/ TRC/

Q.(

Aindu Cndi-ided Families (ACFs) are not alloBed to o4en current accounts. V" MarkW (a) (8) TRC/ F$:S/

Q.+

J9ile 4ri-ate sector 8anks and forei&n 8anks earn fees for undertakin& &o-ernment related 8usiness? 4u8lic sector 8anks 9a-e to offer t9ese ser-ices for free to &o-ernment de4artments. (a) (8) TRC/ F$:S/ V* MarksW

Q.2

T9e t9ree main t!4es of de4osit accounts collected 8! 8anks are sa-in&s 8ank? certificates of de4osit and term de4osits. (a) (8) TRC/ F$:S/ "). V" MarkW

Q.3

and MarksW (a) (8) ACDC; (c) ACDC; (d) ACDC;

are tBo ma@or com4anies in t9e mort&a&e 8usiness and 4ro-ide V* N/DF1? ADFC ADFC? :1C?

stiff com4etion to t9e commercial 8anks in t9e dis8ursal of 9ousin& loans. N/DF1?

Q.6

1n case a de4ositor Bis9es to Bit9draB 9is de4osits 4rematurel!? 8anks MarksW (a) (8) (c) (d) do not alloB t9e same till maturit! of t9e de4osits c9ar&e a 4enalt! for t9e same do not c9ar&e an! 4enalt! and alloB t9e same do not alloB 4remature Bit9draBal

V*

Q.")

J9at 4ercenta&e of 1ndia's 4o4ulation li-es in rural areasR (a) (8) (c) (d) (e) ()% to less t9an ((% +(% to less t9an 2)% 2)% to less t9an 2(%. +)% to less t9an +(% ((% to less t9an +)%

V" MarkW

Q.""

For filin& and resol-in& customer com4laints? t9e %ankin& ;m8udsman (a) (8) (c) (d) c9ar&es a fee of Rs. ())>7 does not c9ar&e an! fee c9ar&es a fee of Rs. "())>7 c9ar&es a fee of Rs. ")))>7

V" MarkW

Q."*

Term de4osits are meant for indi-iduals and small 8usinesses? and not for lar&e com4anies. (a) (8) TRC/ F$:S/ V" MarkW

Q.",

Forei&n 8anks can 8e in-ol-ed in all se&ments of 4ersonal loans? exce4t in 9ouse9old consumer finance. V* MarksW (a) (8) TRC/ F$:S/

")(

Q.".

1n case a de4ositor is a sole 4ro4rietor and 9olds de4osits in t9e name of t9e 4ro4rietor! concern as Bell as in t9e indi-idual ca4acit!? t9e maximum insurance co-er is a-aila8le u4to. (a) (8) (c) (d) Rs. "?))?)))>7 Rs. *?))?)))>7 Rs. (?))?)))>7 None of t9e a8o-e V" MarkW

Q."(

%anks &i-e contracts to t9ird 4arties in order to mana&e su44ort ser-ices like V* MarksW (a) (8) (c) (d) 9el4 desk su44ort credit card 4rocessin& call su44ort ser-ice $ll of t9e a8o-e V* MarksW

Q."+

1n case of FCNR(%) Sc9eme? t9e 4eriod for fixed de4osits is (a) (8) (c) (d) as a44lica8le to resident accounts for terms not less t9an " !ear and not more t9an ( !ears for terms not less t9an * !ears and not more t9an + !ears at t9e discretion of t9e %ank

Q."2

To create a stron& and com4etiti-e 8ankin& s!stem? reform measures Bere initiated in earl! "66)s. T9e t9rust of t9ese reforms Bas on V* MarksW (a) (8) (c) (d) increasin& o4eration efficienc! stren&t9enin& su4er-ision o-er 8anks de-elo4in& tec9nolo&ical and institutional infrastructure $ll of t9e a8o-e

Q."3

T9e 4ast due de8t collection 4olic! of 8anks &enerall! em49asiIes on at t9e time of reco-er! MarksW (a) (8) (c) (d) res4ect to customers a44ro4riate letter aut9orisin& a&ents to collect reco-er! due notice to customers $ll of t9e a8o-e V* MarksW V*

Q."6

%ank s4onsored mutual funds dominate t9e mutual fund industr! (a) (8) TRC/ F$:S/

")+

Q.*)

$ccordin& to t9e risk di-ersification 4rinci4le of 8ank lendin&? di-ersification s9ould 8e in terms of MarksW (a) (8) (c) (d) customer 8ase &eo&ra49ic location nature of 8usiness $ll of t9e a8o-e V*

Q.*"

$ %ank's a&&re&ate ex4osure to t9e ca4ital market? includin& 8ot9 fund 8ased and non7fund 8ased ex4osure to ca4ital market? in all forms s9ould not exceed ()% of its net Bort9 as on Marc9 ," of t9e 4re-ious !ear. MarksW (a) TRC/ (8) F$:S/ V*

Q.**

J9ic9 of t9e folloBin& as4ects are outlined 8! t9e loan 4olic! of a 8ankR V* MarksW (a) (8) (c) (d) ratin& standards lendin& 4rocedures financial co-enants $ll of t9e a8o-e V*

Q.*,

Pu8lic sector 8anks are not alloBed to enter t9e mutual fund 8usiness. MarksW (a) TRC/ (8) F$:S/

Q.*.

T9e R%1 9as ado4ted V" MarkW (a) (8) (c) (d) Mo8ile $ll of t9e a8o-e %ank :ed

Model in B9ic9 mo8ile 8ankin& and is 4romoted

t9rou&9 8usiness corres4ondents of 8anks %and Mo8ile

Q.*(

Ser-ices offered to &o-ernment de4artments include all t9e a8o-e exce4t# V" MarkW (a) (8) (c) (d) 4a!ments of salaries and 4ensions distri8utin& R%1 8onds to &o-ernment de4artments direct and indirect tax collections remittance facilities V* MarksW

Q.*+

1n case of FCNR(%) Sc9eme? t9e 4eriod for fixed de4osits is (a) (8) (c) (d) for terms not less t9an " !ear and not more t9an ( !ears for terms not less t9an " !ear and not more t9an + !ears for terms not less t9an * !ears and not more t9an + !ears for terms not less t9an * !ears and not more t9an ( !ears ")2

Q.*2

T9e main ad-anta&e t9at 8anks 9a-e in enterin& t9e insurance -entures is t9e stron& ca4ital 8ase of 8anks. MarkW (a) (8) TRC/ F$:S/ V"

Q.*3

J9ile s4readin& t9e messa&e of 4romotion of financial inclusion 8anks can make use of %usiness Corres4ondents to facilitate t9e o4enin& of 'no frills' accounts. V* MarksW (a) F$:S/ (8) TRC/

Q.*6

Sa-ers from t9e 9ouse9old sector 4refer (i) (ii) (iii) (a) (8) (c) (d) assured income li0uidit! safet! of funds onl! (i) onl! (ii) onl! (iii) (i)? (ii)? (iii) V" MarkW

Q.,)

$t 4resent 8ot9 1D%1 and 1D%1 %ank o4erate as se4arate com4anies in t9e fields of term lendin& and commercial 8ankin& 8usinesses res4ecti-el!. MarksW (a) F$:S/ (8) TRC/ V*

Q.,"

T9e conce4t of 8ase rate to 8e introduced Bit9 effect from Dul! "? *)") Bould include V* MarksW (a) (8) (c) (d) 4roduct7s4ecific o4eratin& cost credit risk 4remium tenor 4remium $ll of t9e a8o-e

Q.,*

Credit a44raisal can 8e done on a sim4lified 8asis 8! 8anks B9ile carr!in& out credit a44raisal of smaller units. MarksW (a) TRC/ (8) F$:S/ V" MarkW V*

Q.,,

%CS%1 stands for (a) (8) (c) (d) %ankin& Codes and Standards %oard of 1ndia %ankin& Credit and Standards %oard of 1ndia %ankin& Codes and Ser-ice %oard of 1ndia %ankin& Credit and Ser-ice %oard of 1ndia ")(

Q.,.

J9ile 8ulk of t9e forex treasur! o4erations is on 8e9alf of t9e clients? t9e ma@or 4ortion of domestic treasur! o4erations consists of 4ro4rietar! tradin& (a) (8) F$:S/ TRC/ V* MarksW

Q.,(

%anks 9a-e to ensure t9at underBritin& commitments taken u4 8! t9em in res4ect of 4rimar! issue of s9ares or con-erti8le de8entures or units of e0uit!7oriented mutual funds com4l! Bit9 t9e ceilin& 4rescri8ed for t9e 8anks' ex4osure to t9e ca4ital markets. V" MarkW (a) (8) F$:S/ TRC/

Q.,+

T9e conce4t of limited lia8lit! introduced in 1ndian 8ankin& resulted in esta8lis9ment of (a) (8) (c) (d) @oint stock 8anks ur8an 8anks rural 8anks none of t9e a8o-e V* MarksW

Q.,2

Deri-ati-e 4roducts like sBa4s co-er onl! forei&n exc9an&e risks and not interest rate risks. MarkW (a) (8) TRC/ V" F$:S/

Q.,3

J9ic9 of t9e folloBin& t!4es of account fall under t9e time de4osit cate&or!R (i) (ii) (8) (c) (d) MarkW (a) Current account V" Term de4osit account onl! (ii) onl! (i) (i) and (ii) None of t9e a8o-e

Q.,6

$n efficient financial intermediation 4rocess 9as B9ic9 of t9e folloBin& com4onents# (i) (ii) (a) (8) (c) (d) onl! (i) onl! (ii) (i) and (ii) None of t9e a8o-e ")+ effecti-e mo8ilisation of sa-in&s V" MarkW t9eir allocation to t9e most 4roducti-e uses

Q..)

$ Nostro account is an account B9ic9 an ex4orter maintains Bit9 a 8ank a8road V* MarksW (a) (8) F$:S/ TRC/

Q.."

T9e main function of a commercial 8ank can 8e se&re&ated into# (i) 4a!ment s!stem (ii) Financial intermediation (iii) Financial Ser-ices (a) (i)? (ii)? (iii) (8) (i)? (iii) (c) (i)? (ii) (d) (ii)? (iii) V" MarkW

Q..*

Self7Ael4 =rou4s are set u4 to 8asicall! 8orroB from 8anks Bit9out makin& an! sa-in&s contri8ution. (a) F$:S/ (8) TRC/ V* MarksW

Q..,

$ commercial 4a4er issue made 8! a cor4orate is a non7S:R instrument MarksW (a) F$:S/ (8) TRC/

V*

Q...

$s at end7Dune *))3? t9e num8er of 8ank 8ranc9es in t9e countr! Bas# MarksW (a) (8) (c) (d) %etBeen 2(?))) to 3)?))) %etBeen 2)?))) to 2(?))) %etBeen 3)?))) to 3(?))) %etBeen +(?))) to 2)?)))

V*

Q..(

:oss assets com4rise assets B9ere a loss 9as 8een identified 8! MarksW (a) R%1 (8) %ank (c) (d) a and 8 None of t9e a8o-e

V*

Q..+

R%1 acts as t9e issuer of currenc! in 1ndia? 8ut onl! t9e Central =o-ernment 9as t9e ri&9t to destro! currenc! notes. MarksW (a) F$:S/ ")2 V*

(8) TRC/

")3

Q. .2

No 8ank ma! 9old s9ares in an! com4an! ot9er t9an a su8sidiar!? exceedin& *).)% of t9e 4aid u4 s9are ca4ital of t9at com4an!. MarksW (a) TRC/ (8) F$:S/ V" MarkW V*

Q..3

T9e de4osits of re&ional rural 8anks are not co-ered 8! t9e D1C=C (a) (8) F$:S/ TRC/

Q..6

Normall!? t9e folloBin& t!4es of customers re0uire 9i&9er due dili&ence under GEC norms? exce4t# MarkW (a) (8) (c) (d) 4oliticall! ex4osed 4ersons (P/Ps) of forei&n ori&in. non7resident customersN farmers Bit9 land 9oldin& o-er ") acresN 9i&9 net Bort9 indi-idualsN V" V"

Q.()

T9e %ankin& ;m8udsman is a senior official a44ointed 8! t9e R%1. MarkW (a) (8) TRC/ F$:S/

Q.("

T9e R%1 9as 4rescri8ed t9at all SC%s s9ould maintain t9eir S:Rs in MarksW (a) (8) (c) (d) dated securities notified 8! R%1 T7%ills of =o-ernment of 1ndia State De-elo4ment :oans $ll t9e a8o-e

V*

Q.(*

J9at does /%T stand forR (a) (8) (c) (d) /lectronic %elated Transfer /lectric %e&inners transaction /lectronic %enefit Transfer /lectronic %e&innin& Transaction

V" MarkW

Q.(,

Jit9 &roBin& sa-in&s amon& 9ouse9olds in 1ndia? t9e need for retail credit is declinin&. V" MarkW (a) (8) TRC/ F$:S/

")6

Q.(.

1n 1ndia? t9e R%1 4rescri8es t9e minimum S:R le-el for Sc9eduled Commercial %anks in 1ndia in s4ecified assets as a 4ercenta&e of %ank's (a) (8) (c) (d) Net Demand and Time :ia8ilities Demand :ia8ilities Time :ia8ilit! None of t9e a8o-e V, MarksW

Q.((

1f t9e 8eneficiar! of a c9e0ue 9as lost t9e c9e0ue? 9e can instruct t9e 4a!in& 8ank to sto4 4a!ment of t9e c9e0ue Bit9out Baitin& for t9e account 9older's instructions. V* MarksW (a) (8) TRC/ F$:S/ t9at 8anks 9a-e to maintain Bit9 R%1 of t9eir V*

Q.(+

T9e CRR refer to t9e s9are of net demand and time lia8ilities. MarksW (a) (8) (c) (d) &old li0uid cas9 illi0uid cas9 forex reser-es

Q.(2

J9ile outsourcin&? t9e onl! consideration s9ould 8e cost sa-in&s (a) (8) TRC/ F$:S/

V* MarksW

Q.(3

:ord Gris9na %ank :td. is a (a) (8) (c) (d) neB 4ri-ate sector 8ank old 4ri-ate sector 8ank 4u8lic sector 8ank re&ional rural 8ank

V* MarksW

Q.(6

=o-ernment securities issued 8! t9e Central =o-ernment are considered to 8e 4art of S:R securities? 8ut not securities issued 8! State =o-ernments. MarksW (a) F$:S/ (8) TRC/ V*

Q.+)

Cnder t9e %ankin& Re&ulation $ct insurance is not included in t9e list of 4ermissi8le 8usinesses. AoBe-er? Ministr! of Finance 4ro-ides s4ecial 4ermission to 8anks to enter t9e insurance 8usiness. MarksW (a) F$:S/ (8) TRC/ V*

"")

Correct $nsBers # Question No. " * , . ( + 2 3 6 ") "" "* ", ". "( "+ "2 "3 "6 *) *" ** *, *. *( *+ *2 *3 *6 ,) $nsBers (d) (a) (a) (8) (a) (8) (8) (c) (8) (c) (8) (8) (a) (a) (d) (8) (d) (d) (8) (d) (8) (d) (8) (a) (8) (a) (a) (8) (d) (a) Question No. ," ,* ,, ,. ,( ,+ ,2 ,3 ,6 .) ." .* ., .. .( .+ .2 .3 .6 () (" (* (, (. (( (+ (2 (3 (6 +) $nsBers (d) (a) (a) (8) (8) (a) (a) (a) (c) (a) (a) (a) (8) (a) (c) (a) (a) (a) (c) (a) (d) (c) (8) (a) (8) (d) (8) (8) (a) (a)