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CHAPTER 1

PREFACE

In my summer internship I worked on many aspects, which are related to the loans and other bank related services. I worked on loan disbursement procedure,KYC norms,account opening and other services offered by bank.

My allotted topic for the internship by bank was “ Term Loan Finance” where my major focus was on the retail credit in which different types of loans like auto loan , home loan etc. come. Where I came to know about the procedure and documentation related to these loans.

SIP give a great practical exposure where I came across with different type of customers. While working on project I came to know about camel rating model. In CAMEL rating model ratings are obtained by five aspects of banking i.e. Capital, Asset, Management, Earning, liquidity. These five aspects are given a certain weightage and on the basis of this weightage final rating is obtained. So by this I compare different banks of both public sector and private sector with Bank Of India.

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CHAPTER 2 JUSTIFICATION

The growth rate of loans and advances of SCBs, which was as high as 33.2 per cent as at end of March 2005 has been witnessing a slowdown since then. In continuation of the trend, the growth rate of aggregate loans and advances of SCBs decelerated to 21.2 per cent as at end- March 2009 from 25.0 per cent in the previous year. Apart from cyclical factors which lead to slowdown in growth after a period of high credit growth, the deceleration was accentuated this year due to the overall slowdown in the economy in the aftermath of global financial turmoil. Notwithstanding the deceleration in growth of the term loans, their share in investment in the economy increased to 81.0 per cent in 2008-09 from 77.8 per cent in the previous year.

So as with the retail credit growth rate, which was higher than 40.0 per cent in 2004-05 and 2005- 06 has witnessed a deceleration since then. Continuing this trend, the growth rate in retail credit by banks decelerated further to 4.0 per cent as at end March 2009 from 17.1 per cent last year and 29.9 per cent as at end March 2007. It also remained lower than the growth in loans and advances of SCBs (21.2 per cent).

As a result, the share of retail credit in total loans and advances declined to 21.3 per cent at end-March 2009 from 24.5 per cent at end- March 2008. Deceleration in the growth of retail portfolio of banks was mainly on account slow down in credit for housing loans, auto loans, credit card receivables and other personal loans, though loans to consumer durables witnessed a turnaround.

The domain of retail banking market has tremendous growth potential for banks and finance companies, as at present it is largely untapped. The penetration level is 2.5 to 3 % and is in a scenario when the requirements of the consumers are growing. In the past, people never believed in buying consumer goods on credit. But today the attitude is changing. The demand for consumer products has increased. Today, about 70% of consumer goods purchased are through finance schemes/loans as against 40% about 1 to 6 years ago. The home loans alone account for nearly two-third of the total retail portfolio of the bank.so here I have tried to find out the different aspect of the retail credit and as it is a loan for the masses

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and consumers are now a days attracted towords the bank finance for all of there needs. As the per capita income of indian consumers are incressing.

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CHAPTER 3 LITERATURE REVIEW

Literature on community bank performance, especially related to the efficiency and bank strategy continues to expand at greater extend. The following discussion summarizes some of the research in this area over the past few decade. Wall (1985) examined small and medium sized banks from the early 1970’s until deregulation was occurred in the early of 1980’s. He found that the profitable banks had lower interest rate and non-interest expense than less profitable banks. In addition, the more profitable banks had lower cost of funds, greater use of transactions deposits, more marketable securities and higher capital levels.

Gup and Walter (1989) found that consistently profitable small banks stressed basic banking with low cost funds and high quality investments. The study examined banks from 1982 to 1987 during the early stages of bank deregulation. During this period there were considerable differences between regions due to declining energy, real estate and commodity prices. High performance banks during this period made higher quality loans, held proportionately more capital, invested more in securities (especially long-term) and relied on lower cost funding sources compared with the average small bank.

Zimmerman (1996) examined community bank performance in California during the early 1990’s, a period of slow recovery for these institutions. Excessive reliance on real estate lending caused deterioration in asset quality, which reduced overall profitability. Lack of geographic diversification further compounded community bank performance.

Two different studies by Bassett and Brady (2001; 2002) examined recent performance of community banks. The 2001 study found that many small banks from 1985-2000 vanished through mergers and acquisitions. Increased competition with stock, bond and mutual fund investments may have weakened the competitive position of small banks. These community banks, nevertheless, were able to compete effectively against larger banks due in part to superior knowledge of local loan markets combined with a reluctance of customers to bank with out-of- area institutions. Bassett and Brady’s (2002) study found that small banks grew more rapidly than large banks from 1985-2001 with profitability remained at a high level. While interest costs increased, this was more than offset by higher returns on earning assets.

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Gilbert and Sierra (2003) used the Federal Reserve System for Estimating Examination Ratings (SEER) surveillance system to estimate the probability of failure for community banks (which they define as less than $1 billion in assets) versus large banks (with assets greater than $1 billion). The failure probability declined for both groups during the 1990’s. The risk of failure since about 1997 rose slightly for community banks and as of 2003 was about 4 basis points higher than for large banks.

Myers and Spong (2003) examined community bank growth in the 10th Federal Reserve District (Kansas City) with an emphasis on economic conditions in slower growing markets. These slower growing markets presented problems in loan quality as well as staffing including senior management and directors. Community banks in low growth markets experienced higher overhead costs relative to income than banks in higher growth markets.

DeYoung, Hunter and Udell (2003) provided an extensive investigation of community bank performance commencing in the early 1970’s. They concluded that while many community banks have left the industry in the past three decades, many more inefficient banks must still exit in order for those remaining to be competitive with their larger bank counterparts.

Critchfield, Davis, Davison, Gratton, Hanc and Samolyk (2005) in a study of past, present and future community bank performance conducted for the FDIC concluded that community banks continue to be of interest because 1) They still constitute over 90% of all banks, 2) They are economically important to small business and agricultural lending and 3) they represent a disproportionately large percentage of FDIC failure costs.

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CHAPTER 4 OBJECTIVES

A new innovation in Indian banking system during the last two decades is the growing role of

commercial banks in the field of term loan finance. Medium and long-term loans are popularly known as the “term loan “. The business of term loan lending has gradually developed in India with the effect that the entire pattern of financing in India has changed drastically. In this report focus is entirely over the term loan facility in the retail loan,"There is a huge retail credit opportunity available. Indian Banks have low penetration in this segment currently. But it is the one area that is providing the momentum in the indian banking business now".

A personal loan is type of loan that creates a kind of consumer credit, which is typically

granted for the personal use only. This type of loans is usually denoted as unsecured loans as the transaction of lending is usually based on the borrower's integrity in fulfilling of the lending as well as the ability to repay. The main objectives of the analysis are to assess:

1. Banking structure

2. Types of loans/advances and the facilities provide in them.

3. Basics of Bank Lending

4. Documentation related to lending

5. Comparative study of different banks by using camel rating

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CHAPTER 5 COMPANY PROFILE Bank of India was founded on 7th September 1906 by a group of elite businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Beginning with one office in Mumbai, with a paid- up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks.

The Bank has 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 Zonal Offices. There are 29 branches/ offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February Total number of shareholders as on 30/09/2009 is 2, 15,790.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 29 branches (including five representative office) at key banking and financial centers viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business.

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MILESTONES

1906: Founded with Head Office in Mumbai.

1921: BoI entered into an agreement with the Bombay Stock Exchange to manage its clearing house.

1946: BoI opened a branch in London, the first Indian bank to do so. This was also the first post-WWII overseas branch of any Indian bank.

1950: BoI opened branches in Tokyo and Osaka.

1951: BoI opened a branch in Singapore.

1953: BoI opened a branch in Kenya and another in Uganda.

1953 or 54: BoI opened a branch in Aden.

1955: BoI opened a branch in Tanganyika.

1960: BoI opened a branch in Hong Kong.

1962: BoI opened a branch in Nigeria.

1967: The Government of Tanzania nationalized BoI's operations in Tanzania and folded them into the government-owned National Commercial Bank, together with those of Bank of Baroda and several other foreign banks.

1969: The Government of India nationalized the 14 top banks, including Bank of India. In the same year, the People's Democratic Republic of Yemen nationalized BoI's branch in Aden, and the Nigerian and Ugandan governments forced BoI to incorporate its branches in those countries.

1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen, together with those of all the other banks in the country; this is now National Bank of Yemen. BoI was the only Indian bank in the country.

1972: BoI sold its Uganda operation to Bank of Baroda.

1973: BoI opened a rep in Jakarta.

1974: BoI opened a branch in Paris. This was the first branch of an Indian bank in

Europe.

1976: The Nigerian government acquired 60% of the shares in Bank of India (Nigeria).

1978: BoI opened a branch in New York.

1970s: BoI opened an agency in San Francisco.

1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.

1986: BoI acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank) in Kerala in a rescue.

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1987: BoI took over the three UK branches of Central Bank of India (CBI). CBI had been caught up in the Sethia fraud and default and the Reserve Bank of India required it to transfer its branches.

2003: BoI opened a representative office in Shenzhen.

2005: BoI opened a representative office in Vietnam.

2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to branches, and to open representative offices in Beijing, Doha, and Johannesburg. In addition, BoI plans to establish a branch in Antwerp and a subsidiary in Dar-es-Salaam, marking its return to Tanzania after 37 years.

2007: BoI acquired 76 percent of Indonesia-based PT Bank Swadesi

Mission & Vision

Mission "to provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders".

Vision "to become the bank of choice for corporate, medium businesses and up market retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"

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Performance as on 31.03.2010 (Rs. In Crores, Except %)

 

Deposits

229762

Operating Profit

4705

Growth

21%

Net Profit

1741

Advances

168491

Gross NPA Ratio

2.85%

Growth

18%

Net NPA Ratio

1.31%

Business Mix

 

401078

Provision Coverage

65.51%

Growth

20%

Earnings Per Share (Rs.)

33.15

Growth Return on Equity

 

14.76%

Book value per Share (Rs)

236.84

Capital

Adequacy

Ratio

(Basel-II)

12.94%

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`CHAPTER 6 INTRODUCTION Banks have played critical role in the economic development of some developed countries such as Japan and Germany and most of emerging economies including India. Banks today are important not just from the point of view of growth of economic, but also financial stability. In the emerging economies, banks are special for three vital reasons. First, they take a leading role in developing and other financial intermediaries and markets. Second, due to the absence of well-developed equity and the bond markets, the corporate sector depends heavily on the banks to meet their financing needs. Finally, in emerging markets such as India, banks cater to the needs of a large number of savers from household sectors, which prefer assured income,liquidity and safety of funds, because of their inadequate capacity to manage financial risks.

Banking industry have changed over the years and with needs of the economy its form has changed a lot. The transformation of banking system has been brought about by technological innovation and globalization. While banks have been expanding into the areas which were traditionally out of the bounds for them, non-bank intermediaries have begun to perform many of the functions of the banks. Thus the competition among the banks has incressed to many folds, but also with nonbanking financial intermediaries, and over the years, this competition has only grown. So all the banks has to introduced innovative products, seek newer sources of incomes and diversify into non-traditional activities.

6.1 DEFINITION OF BANKS The definition of business of banking has been given in the Banking Regulation Act, 1949. According to Section 5(c) of the Act, 'a banking company is a company which transacts the business of banking in India.' Further, the Section 5(b) of BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw can be able, by cheque, draft, by order or otherwise.' This definition points to the three most primary activities of a commercial bank which distinguish it from the other financial institutions. These are: (i) maintaining deposit accounts including current a/c, (ii) issue and pay cheques (iii) and collect cheques for the bank's customers.

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6.2 EVOLUTION OF COMMERCIAL BANKS IN INDIA Commercial banking industry in India started in 1786 with the start of the Bank of Bengal in Calcutta. Government at the time established three Presidency banks, viz., the Bank of Bengal (1809), the Bank of Bombay (1840) and The Bank of Madras (established in 1843). In 1921, three Presidency banks were amalgamated to form Imperial Bank of India, which took up the role of the commercial bank, a bankers' bank and a banker to the Government of India. The Imperial Bank was established with mainly European shareholders. With the establishment of RBI as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India came to end.

In 1860, limited liability concept was introduced in banking system of india, it results in the establishment of joint-stock banks. the Allahabad Bank was established with Indian shareholders. PNB came into existence in 1895. Between 1906 and 1913, Other banks like BOI, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were set up.

After independence, the Government of India started taking steps to encourage the gap of banking in India. In order to serve the entire economy in general and the rural sector in particular, recommendation of the All India Rural Credit Survey Committee about the creation of a state-partnered and state-sponsored banks taking over Imperial Bank of India and integrating with it, former state-owned and state-associate banks. SBI was established in 1955. while in 1959, the SBI (subsidiary bank) Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries.

To align banking system to the needs of planning and economic policy, it was considered necessary to have proper social control over banks. In year 1969, 14 major private sector banks were nationalized. This was an important milestone in the history of Indian banking system, followed by the nationalisation of another 6 private banks in year 1980. With nationalization of all these banks, the major segment of the banking sector came under the control of the Government of india. The nationalisation of all banks imparted major impetus to expansion of branches in un-banked rural are and semi-urban areas, which in turn resulted in huge deposit mobilization, this will give boost to the overall savings rate of the indian economy. It also resulted in scaling of lending to agriculture loan and its allied sectors. However, this type of arrangement also saw some weaknesses like reduced banks

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profitability, weak capital bases of bank, and banks getting burden of a larger non-performing assets.

For createing a strong and the competitive banking system, number of reforms measures were initiated in early of 1990s. The main stress of the reforms was on increasing operational efficiency, strengthening the supervision over banks, creating competitive conditions and developing the technological and institutional infrastructure for banks. These types measures led to the improvement in the financial health, soundness and efficiency of the indian banking system.

One of the important feature of the reforms of the 1990s was that the entry of new private sector banks in india was permitted. Following to this decision, new banks such as ICICI, HDFC Bank, IDBI Bank were set up. Indian Commercial banks have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture industry. However, the increasing sophistication and diversification of the Indian economy, the range of services extended by commercial banks has increased significantly, leading to an overlap with the functions performed by other FIs. Further, share of long-term financing (in total financing) to meet capital goods and project-financing needs of industry has increased over the years.

6.3 DIFFERENT FUNCTIONS OF A COMMERCIAL BANKS

has increased over the years. 6.3 DIFFERENT FUNCTIONS OF A COMMERCIAL BANKS figure 1: functions of

figure 1: functions of a commercial banks

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(i) Payment System Banks are the core of the payments system in an economy. Payment refers to the means by which financial transactions are settled down. The fundamental method by which banks help in settling up the financial transaction process is by issuing and paying the cheques issued on behalf of its customers. Further, in the modern banking, payments system also involves electronic banking, wire transfers, In all such type transactions, banks play a critical role.

(ii) Financial Intermediation The second important function of a bank is to take different types of deposits from customers and then after lend these funds to borrowers. In financial terms, deposits represent the banks' liabilities, while the loans disbursed, and investments made by the banks are their assets. Banks deposits serve the vital purpose of addressing the needs of depositors, who want to ensure the saftey of liquidity as well as returns in the form of interest. On the other side, bank loans and investments made by the banks play important function in channelling funds into profitable productive uses.

(iii) Financial Services In addition to acting as the financial intermediaries, banks today are increasingly involved with offering customers a wide range of financial services including investment banking, insurance-related services, government-related business, forex businesses, wealth management services. Income from providing such services improves the bank's profitability.

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CHAPTER 7 BANKING STRUCTURE IN INDIA

7.1 BANKING STRUCTURE Reserve Bank of India is the central banking and monetary authority of India, and also acts as the regulator and supervisor of Indian commercial banks.

Scheduled Banks in India Indian Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. SCB form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all Fis assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country.

more than four-fold in the last 40 years now number more than 80,500 across the country.

figure 2: banking structure

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Public Sector Banks PSU banks are those in which the majority shares is held by the Government of India. A PSU banks together make up the largest category in the Indian banking system. There are currently 27 psu banks in India . Including SBI & its 6 associate banks (such as State Bank of Indore, SBBJ etc), 19 nationalised banks are there ( Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.

PSU have taken the lead role in branch expansion, particularly in the rural areas.

• PSU banks account for bulk the branches in India (88 % in 2009).

• In the rural areas, the presence of the PSUbanks is overwhelming; in year 2009, 96%

of the rural br. belonged to the PSU. Private sector and foreign banks have limited presence in the rural areas.

Break-up of Bank Branches (as on June 30, 2009)

rural areas. Break-up of Bank Branches (as on June 30, 2009) source : Reserve bank of

source : Reserve bank of India Table 1: break-up of bank branches

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Regional Rural Banks RRB were established during 1976-87 with a view to develop the rural economy. RRB is totally owned or jointly by Central Government, concerned State Government and a sponsoring PSU commercial bank. RRBs provides credit to the small farmers, small entrepreneurs and agricultural labourers. Over the years, Government has introduced a number of a measures of improve viability and profitability of RRBs, one of them being the amalgamation of RRBs of the same sponsored commercial bank within a State. This process of the consolidation has resulted in a steep decline in total number of RRBs to 86 as on March 31, 09, as compared to 196 at end of March 2005.

Private Sector Banks In this types of banks, the majority of stock capital is held by the private individuals and corporate. Not all of the private sector banks were got nationalized in 1969, and 1980. Private banks which were not nationalized are collectively known as old private sector banks and it include banks such as The Jammu & Kashmir Bank Ltd., Lord Krishna Bank Ltd. Entry of the private sector banks was however prohibited during post-nationalisation period. In July 1993 as part of the banking system reform process and as a measure to induce competition in the banking sector of india, RBI permitted the private sector to enter into the Indian banking system. This resulted in to the creation of new set of private sector banks, which are collectively known as new private sector banks. At end March, 2009 there were seven new private sector banks and 15 old private sector banks operating in the India.

Foreign Banks Foreign banks have their registered & head offices in a foreign country but operate their branches in India. RBI permits these types of banks to operate either through branches; or through wholly-owned subsidiaries. The primary activity of most of the foreign banks in India has been in the corporate segment. However, some large foreign banks have also made consumer financing a significant part of their portfolios. These banks offer various type of products such as automobile finance, home loans, CC, household consumer finance etc. Foreign banks in India are required to stick to all banking regulations, including priority- sector lending norms as applicable to the domestic banks. In addition to entry of the new private banks in the mid of 90s, the increased presence of foreign banks in the India has also contributed to a boosting competition in the banking sector.

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Co-operative Banks Co-operative banks are there for catering the financing needs of agriculture, retail trade, SME and self-employed businessmen in urban, semi-urban and rural areas. A very distinctive feature of co-operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas across all states and loan maturities. Urban areas are served by the urban cooperative banks (UCBs), whose operations level are either limited to one state or stretch across states. The rural co-operative banks comprises of State co-operative banks, district central cooperative banks, SCARDBs and PCARDBs.

The co-operative banking sector is one of the oldest segment of the Indian banking. The network of UCBs in India constitute of 1721 banks as at end-March 2009, while the number of the rural co-operative banks was 1119 as of end-March 2008. Owing to the their widespread geographical penetration; cooperative banks have potential to become an important instrument for the large-scale financial inclusion, provided they are financially strengthened. The RBI and National Agriculture and Rural Development Bank have taken a number of measures in the recent years to improve financial soundness of co-operative banks.

7.2 ROLE OF RESERVE BANK OF INDIA VIS-À-VIS COMMERCIAL BANKS RBI is the central bank of the India. It was established on 1 st April 1935 under the RB Act, 1934, this provides statutory basis for its functioning. When RBI was established, it took over the functions of currency issue from the Government of India (GOI) and the power of credit control from the Imperial Bank of India.

As the central bank of the country RBI performs a wide range of functions:

• Acts as currency authority

• It Controls money supply and credit

• It Manages foreign exchange

• It Serves as a banker to the government

• Builds up & strengthens the country's financial infrastructure

• Acts as the banker for the banks

• Supervises the banks the RBI's role mainly relates to last two points stated

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CHAPTER 8 BANK DEPOSIT Financial intermediation by schedule commercial banks of India has played a key role in supporting the economic growth process. An efficient financial intermediation process is well known that has two components: 1) effective mobilization of savings and their allocation to most productive uses. When commercial banks mobilize savings they do it in the form of deposits, which are the money accepted by the banks from customers to be held under the stipulated terms and conditions. Deposits are treated as an instrument of savings.

Since the first part of bank nationalization in 1969, banks have been at the core of financial intermediation process in India. They have mobilized a sizeable share of savings of household sector, the major surplus sector of the India economy. This in turn has raised financial savings of the household sector and hence overall savings rate. Notwithstanding the liberalization of the India financial sector and increased competition from various other saving instruments, bank deposits still continue to be the dominant instrument of savings in India.

It can be seen from Table that gross domestic savings of the economy have been growing over the past years and the household sector has been the most significant contributor to savings. Household sector saves in 2 major ways, viz. financial and physical assets.

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Gross Domestic Savings

Gross Domestic Savings Table 2: gross domestic savings Financial Savings of the Household Sector (Gross) Table

Table 2: gross domestic savings

Financial Savings of the Household Sector (Gross)

domestic savings Financial Savings of the Household Sector (Gross) Table 3: financial savings of the household

Table 3: financial savings of the household sector

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Share of Deposits of SCBs-GroupWise

Share of Deposits of SCBs-GroupWise Table 4: share of deposits of scbs-groupwise 8.2 STRATEGIES OF MOBILIZING

Table 4: share of deposits of scbs-groupwise

8.2 STRATEGIES OF MOBILIZING DEPOSITS To maximize tprofits, commercial banks always attempt to mobilize savings at lowest cost possible. While mobilizing the deposits, banks have to comply with the various directives issued by the RBI, Indian Bank Association (IBA), Government of India and other statutory authorities. At the same time since banks are operating in a very competitive environment, they have to reach out to wide spectrum of customers and also offer deposit products that

lead to higher satisfaction. Banks uses various strategies to expand their customer base and reducing the cost of raising deposits. This is done by identifying their target markets, designing the products as per the requirements of the customers, taking measures for marketing and promoting the various deposit products.

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It is essential not only to expand customer base but also to retain it. This is done by providing proper counselling, after-sales information and also through the prompt handling of customer

complaints. While the strategies for the mobilizing bank deposits vary from bank to bank, one common feature is to maximize the share of CASA deposits. The other common features generally observed are:

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• Staff members posted at branches must have to be adequately trained to offer efficient and courteous service to the customers and to educate them about their rights & obligations.

• A bank often offers the personalized banking relationship for its high-value customers by

appointing a Customer Relationship Managers (CRMs). • Senior citizens/pensioners have become an important category of the customers to be targeted by a bank. Products are developed by the banks to meet specific requirements of this group.

• While banks endeavour to provide services to satisfaction of customers, they put in place an expeditious mechanism to redressal the complaints of the customers.

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CHAPTER 9 BASICS OF BANK LENDING Banks give credit to different categories of borrowers for a wide variety of purposes. For many borrowers bank loan is the easiest to access at reasonable interest rates. Bank credit is provided to the households, retail traders, SMEs, corporate, the Government undertakings etc. in economy. Retail loans are accessed by consumers of goods and services for financing their purchase of consumer durables, housing or even for day-to-day consumption. In contrast to that the need for capital investment, and day-to-day operations of private corporate and Government undertakings are met through wholesale (huge) lending.

Loans for the capital expenditure are usually extended with medium and long-term maturities, while the day-to-day finance requirements are provided through short-term credit (working capital loans). Meeting all financing needs of the agriculture sector is also an important role that the Indian banks play.

Utility of Loans and Advances Loans and advances granted by the commercial banks are highly beneficial to the individuals, firms, companies and industrial concerns. The growth and diversification of business activities are totally effected to a large extent through bank financing. Loans and advances granted by the banks help in meeting the short-term and long term financial needs of business enterprises. Different roles played by banks in the business world by way of loans and advances as follows:-

(a) Loans and advances can be arranged from the banks in keeping with the flexibility in the

business operations. Traders may borrow money for the day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period of time to suit the convenience of the borrower.

Thus business may run efficiently with the borrowed funds from banks for financing its working capital requirements.

(b) Loans and advances are utilized for making the payment of current liabilities, wage and

salaries of all employees, and also tax liability of business.

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(c)

Loans and advances from the banks are found to be ‘economical’ for traders and the

businessmen, because banks charge a reasonable rate of interest on such type of loans/advances. For loans from money lenders rate of interest charged is very high. The

interest charged by commercial banks is regulated totally by the Reserve Bank of India.

(d) Banks do not interfere with the use, management and control of borrowed money. It takes

care to only ensure that the money lent is used only for the business purposes.

(e) Bank loans & advances are found to be the convenient as far as its repayment part is

concerned. This facilitates planning for future and timely repayment of the loans. Otherwise

business activities would have come to halt.

(f) Loans and advances by all banks generally carry element of secrecy with it. Banks are

totally duty-bound to maintain secrecy of their transactions with their customers. This

enhances people’s faith in the Indian banking system.

9.1 PRINCIPLES OF LENDING AND LOAN POLICY

9.1.1 PRINCIPLES OF LENDING To lend the money banks depend largely on the deposits from the public. Banks act as custodian of public deposits. Since depositors only require safety and security of their deposits, they want to withdraw deposits whenever they need and also need adequate return, bank lending must necessarily be based on the principles that reflect these concerns of depositors. These principles must include: safety, liquidity, profitability, and risk diversion.

Safety Banks need to ensure that advances must be safe and money lent out by them will come back. Since repayment of loans depends on the borrowers' capacity to pay, the banker must be satisfied before lending money for the business for which money is sought is a sound one. In addition to that, bankers many times insist on security against loan, which they could fall back on if things go wrong for the business. The security must be of adequate amount readily marketable and free of encumbrances.

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Liquidity To maintain the adequate liquidity, banks have to ensure that the money lent out by them must not locked up for long time by designing the proper loan maturity period appropriately. Further, money must have to come back as per the designed repayment schedule. If loans become excessively illiquid, it may not be possible for the bankers to meet their obligations.

Profitability To remain viable bank must have to earn adequate profit on its investment. This calls for adequate margin between deposit rates and the lending rates. In this respect, appropriate fixing of the interest rates on both advances and deposits is very critical. Unless the interest rates are competitively fixed and margins are adequate, banks may lose customers to their competitors and become unprofitable.

Risk diversification To mitigate the risk, banks should lend to a diversified customer base. Diversification should be in the terms of geographic location, nature of business etc. If, all the borrowers of a bank are concentrated in one region only and that region gets affected by natural disaster, the bank's profitability can be seriously eroded.

9.1.2 LOAN POLICYS Based on general principles of lending stated above, the Credit Policy Committee (CPC) of individual banks try prepares the basic credit policy of the Bank, which has to be approved by the Board of Directors. The loan policy outlines lending guidelines and establishes

operating procedures in all the aspects of credit management including standards for presentation of credit proposals, rating standards and benchmarks, delegation of the credit approving powers, prudential limits on large credit exposures of banks, asset concentrations, portfolio management, loan review mechanism, risk monitoring and evaluation procedure, pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending guidelines reflect specific bank's lending strategy (both at the macro level and individual borrower level) and have to be in conformity with RBI rules The loan policy typically lays down lending guidelines in following areas:

• Level of credit-deposit ratio

• Targeted portfolio mix

• Hurdle ratings

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• Loan pricing

• Collateral security

Credit Deposit (CD) Ratio A bank can lend out only a certain proportion of its total deposits, since some part of the total deposits have to be statutorily maintained as Cash Reserve Ratio (CRR) deposits, and an additional part has to be used for making the investment in prescribed securities (Statutory Liquidity Ratio or SLR requirement). It may be noted that these are minimum mendatory requirements. Banks have option of having more cash reserves than CRR requirement and invest more in the SLR securities. Further, banks also have the option to invest in non-SLR securities approved by goverment.

Therefore, CPC has to lay down the quantum of credit that can be granted by banks as a percentage of total deposits available. Currently, average CD ratio of the entire banking industry is around 70%, though it differs across banks. It is rarely observed that the banks lend out of their borrowings.

Targeted Portfolio Mix The CPC totally aims at a targeted portfolio mix keeping in the view both risk and return. Toward this end, it lays down guidelines on choosing preferred areas of the lending (such as sunrise sectors and profitable sectors) as well as the sectors to avoid. Banks typically monitor all the major sectors of the economy. They target a particular portfolio mix in the light of forecasts for growth and profitability for each of the sector. If a bank perceives economic weakness in a particular sector, it would restrict new exposures to that segment and similarly, growing and profitable sectors of the economy prompt banks to increase new exposures to those sectors. This entails to a active portfolio management. Further, the bank also has to decide about which sectors to avoid.like, the CPC of a bank may be of the view that the bank is already has over extended in a particular industry and no more loans an advances should be provided in that sector. It may also like to avoid certain kinds of loans keeping in mind the general credit discipline, say loans for the speculative purposes, unsecured loans, etc.

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Hurdle ratings There are a number of the diverse risk factors associated with borrowers. Banks should have a comprehensive risk rating system that must serves as a single point indicator of diverse risk factors of a borrower. This helps to take credit decisions in a consistent manner. To facilitate this, a substantial degree of standardisation is a must required in ratings across borrowers. The risk rating system should be so designed as to reveal the overall risk of lending. For the new borrowers, a bank usually lays down the guidelines regarding minimum rating to be achieved by the borrower to become eligible for bank loan. This is also known as the 'hurdle rating' criterion to be achieved by a all types of new borrower.

Pricing of loans Risk nd return trade-off is a fundamental aspect of the risk management. Borrowers with having weak financial position and hence, placed in the higher risk category are provided the credit facilities at a higher price . The higher the credit risk of a the borrower the higher would be his cost of borrowing. To price the credit risks, banks devise the appropriate systems, which usually allow a flexibility for revising the price (risk premium) due to the changes in rating. In other words, if risk rating of a borrower deteriorates, his cost of the borrowing should rise and vice versa.

At the macro level, loan pricing for a bank is usualy dependent upon a number of its cost factors such as cost of the raising resources, cost of administration and overheads, cost of reserve like CRR and SLR, cost of maintaining adequate capital, % of bad debt, etc. Loan pricing is also dependent upon level of competition.

Collateral security As part of a the prudent lending policy, banks usually advance the loans and advances against some security. The loan policy provides proper guidelines for this. In case of term loans and working capital assets, banks take a 'primary security' the property or goods against which loans are granted by banks. In addition to this, banks often ask for additional security or 'collateral security' in the form of both physical asset and financial assets to further bind the borrower. This reduces the risk for all the bank. Sometimes, loans are extended as 'clean loans' for which only personal guarantee of the borrower is taken.

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9.1.3 COMPLIANCE WITH RBI GUIDELINES The credit policy of a bank should be conformant with RBI guidelines; some of the important guidelines of the RBI relating to bank credit are discussed below.

Directed credit stipulations The RBI lays down guidelines regarding minimum advances to be made for priority sector advances, export credit finance, etc. These guidelines need to be kept in mind while formulating credit policies for the Bank.

Capital adequacy If a bank creates assets or investment-they are required to be backed up by proper bank capital; the amount of capital they have to be backed up by depends on the risk of the individual assets that the bank acquires. The riskier the asset, the larger would be capital it has to be backed up by. It is because bank capital provides a cushion against unexpected losses of banks and the riskier assets would require larger amounts of capital to act as cushion.

Basel Committee for Bank Supervision (BCBS) has prescribed a certain set of norms for the capital requirement for the banks for all the countries to follow. These norms ensure that capital should be adequate to absorb all unexpected losses. In addition, all countries, including India, establish their own sets of guidelines for risk based capital framework known as Capital Adequacy Norms. These norms have to be at least as stringent as the norms set by Basel committee. A key norm of the Basel committee is about the Capital Adequacy Ratio (CAR), also known as Capital Risk Weighted Assets Ratio,it is a simple measure of soundness of a bank. The ratio is capital with the bank as a % of its risk-weighted assets. Given the level of capital available with an individual bank, this ratio determines the maximum extent to which a bank can lend.

The Basel committee specifies a proper CAR of at least 8% for banks. This means that capital funds of a bank must be at least 8 % of the bank's risk weighted assets. In India, the RBI has specified a 9%, which is more stringent than international norm. In fact, the actual ratio of all commercial banks (SCBs) in India stood at 13.2% in 2009.

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The RBI also provides guidelines about how much the risk weights banks should assign to different set of classes of assets (such as loans). The riskier the asset class higher would be the its risk weight. Thus, the real estate assets, like: are given very high risk weights. This regulatory requirement that each of the individual bank has to maintain a minimum level of capital, which is commensurate with risk profile of the bank's assets, plays a critical role in safety and soundness of individual banks and the India banking system.

Credit Exposure Limits As prudential measure aimed at better risk management and for avoidance of concentration of credit risks, the Reserve Bank has fixed certain limits on bank exposure to the capital market as well as to individual and a group borrowers with reference to a bank's capital. Particular Limits on inter-bank exposures have also been placed. Banks are further encouraged to place a certain internal caps on their sectoral exposures, their exposure to commercial real estate & to unsecured exposures. These exposures are closely monitored by the Reserve Bank of India. Prudential norms are there on banks exposures to NBFCs and to related entities are also in place.

Table gives a summary of the RBI's guidelines on the exposure norms for the commercial banks in India.

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Exposure norms for Commercial banks in India

Exposure norms for Commercial banks in India Table 5: Exposure norms Some categories of the above

Table 5: Exposure norms

Some categories of the above table are discussed below:

Individual Borrowers: A bank's credit exposure to the individual borrowers must not exceed 15% of the Bank's total capital funds. Credit exposure to individual borrowers may exceed the exposure norm of 15 percent of capital funds by an additional of 5 % (i.e. up to 20 %) provided additional credit exposure is on account of infrastructure financing.

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Group Borrowers: A bank's exposure to a particular group of companies under the same

management control must not exceed 40% of the Bank's capital funds in any case unless the exposure is in respect of an infrastructure project. In that case, exposure to a group of

companies under the same management control may be up to 50% of the Bank's total capital funds.

Aggregate Exposure To Capital Market: A bank's aggregate exposure to capital market,

including both the fund based and a non-fund based exposure to capital market, in all forms should not exceed 40 % of its net worth as on March 31 of previous year. In addition to ensuring compliance with the above guidelines laid down by central bank, a Bank may fix its own credit exposure limits for mitigating the credit risk. The bank may, for example, set the

upper caps on exposures to a sensitive sectors like commodity sector, real estate sector and capital markets. Banks also may lay down the guidelines regarding of exposure limits to unsecured loans.

Lending Rates Banks are free to determine their own set of lending rates on all kinds of advances except a few advances such as export finance; interest rates on these types of exceptional categories of advances are regulated by the RBI. It may be noted that the Section 21A of the BR Act provides that the rate of interest charged by a commercial bank shall not be reopened by any court on the ground that the rate of interest charged is quite excessive.

The concept of the benchmark prime lending rate (BPLR) was however introduced in November 03 for pricing of loans by commercial banks with the objective of enhancing transparency in pricing of their loan products. Each bank must have to declare its benchmark prime lending rate (BPLR) as approved by its Board of Directors. A bank's BPLR is interest rate to be charged to its best clients; that is, clients with having lowest credit risk. Each bank is also required to indicate the proper maximum spread over the BPLR for various credit exposures.

However, BPLR lost its relevance over time as meaningful reference rate, as bulk of loans were advanced below the BPLR. Further, this also impedes the smooth transmission of the monetary signals by RBI. The RBI therefore set up a unique Working Group on Benchmark Prime Lending Rate (BPLR) in June 2009 to go into the issues relating to the concept of

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BPLR and suggest proper measures to make credit pricing more transparent. Banks may, in exceptional circumstances, with approval of their boards, they enhance the exposure by additional 5% for both individual, and group borrowers and following the recommendations of the Group, the Reserve Bank has issued guidelines in February 2010. According to these guidelines, the 'Base Rate system' will replace the previous BPLR system with effect from July 01, 2010.All the categories of loans should henceforth be priced only with reference to Base Rate. Each bank will decide its own set of Base Rate. The actual lending rates charged to borrowers would be Base Rate added borrower-specific charges, which will include product wise operating costs, credit risk premium and tenor premium.

Since transparency in the pricing of the loans is a key objective, banks are required to exhibit the information on their Base Rate regime at all branches and also on their websites. Changes in the Base Rate should also be conveyed to general public from time to time through the appropriate channels. Apart from transparency, banks should also ensure that interest rates charged to customers in the above arrangement are non-discriminatory in nature.

Guidelines on Fair Practices Code for Lenders RBI has encouraging banks to introduce a fair practices code for the bank loans. Loan application forms in respect of all the categories of loans irrespective of amount of loan sought by borrower should be comprehensive. It should include the information about the fees, if any, payable for processing the bank loan, the amount of such fees refundable in case of non acceptance of application, prepayment options & any other matter which affects the interest of the borrower, so that a proper meaningful comparison with the fees charged by other banks can be made and informed decision can be taken by borrower. Further, the banks must inform to the customer to enable him to compare rates charged with other sources of finance.

Regulations Relating To Providing Loans The provisions of the BR Act, 1949 govern the making of loans by banks in India. RBI issues directions covering loan activities of commercial banks. Some of the major guidelines of RBI, which are now in effect, are as follows:

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• Advances against the banks own shares: a bank cannot grant any loans against the security of its own shares.

• Advances to the bank's Directors: The BR Act lays down the restrictions on the loans and

advances to directors and the firms in which they hold substantial interest.

• Restrictions on the Holding Shares in Companies: In terms of Section 19(2), banks should

not hold shares in any company except provided in sub-section (1) whether as pledgee, mortgagee or absolute owner, of amount exceeding 30% of the paid-up share capital of that particular company or 30% of its own paid-up share capital and reserves, whichever is less.

4.2 BASICS OF LOAN APPRAISAL, CREDIT DECISION-MAKING AND REVIEW

9.2.1 CREDIT APPROVAL AUTHORITIES

Board of Directors also has to approve delegation structure of the various credit approval authorities. Banks establish a multi-tier credit approval authorities for the corporate banking activities, small enterprises, retail credit, etc. Concurrently, each bank should set up a Credit

Risk Management Department (CMRD), being independent of CPC. The CRMD should enforce and monitor compliance of the adequate risk parameters and prudential limits set up by the CPC.

The structure for approving credit proposals is as follows:

• The Credit approving authority: multi-tier credit approving system with proper scheme of

delegation of powers.

• In some of the banks, high valued credit proposals are cleared through a Credit Committee

approach consisting of, 4 officers. The Credit Committee must have invariably have a representative from the CRMD, who has no volume or profit targets related.

9.2.2 CREDIT APPRAISAL AND CREDIT DECISION-MAKING

When a loan proposal comes to bank, the banker has to decide how much the funds does the proposal really require for it to be a viable project and what are credentials of those who are seeking this project. In checking the credentials of the potential borrowers, Credit Information Bureaus play an vital role.

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Credit Information Bureaus The Parliament of India has enacted Credit Information Companies (Regulation) Act, 2005, pursuant to under which every credit institution, including a bank, has to become a member of a bureau and furnish to it such credit information as may be required of credit institution about persons who enjoy a credit relationship. Credit information bureaus are thus repositories of a information, which contains the credit history of the commercial and individual borrowers. They provide all this information to their Members in the form of credit information reports. To get a overall picture of the payment history of a credit applicant, credit grantors must be able to gain access to applicant's complete credit record that may be spread over the different institutions. Credit information bureaus collect a commercial and consumer credit related data and collate such data to create a credit reports, which they distribute to their genuine Members. A Credit Information Report (CIR) is a original factual record of a borrower's credit payment history compiled from information received from different credit grantors. Its purpose is to actualy help credit grantors make informed lending decisions - quickly and objectively. bureaus provide the history of credit card holders and SMEs.

9.2.3 MONITORING AND REVIEW OF LOAN PORTFOLIO It is not only important for banks to follow the due processes at time of sanctioning and disbursing loans, it is equally important to monitor the loan portfolio on the continuous basis. Banks has need to constantly keep a check on e overall quality of the portfolio. They have to ensure that the borrower genuinely utilizes the funds for the purpose for which it is sanctioned and complies with the terms and conditions of sanction. Further, they must monitor individual borrower accounts and check to see whether the borrowers in different industrial sectors are facing difficulty in making the loan repayment. Information technology has become an important tool now a days for efficient handling of the above functions including decision support systems and the data bases. Such a surveillance and monitoring approach helps to mitigate the overall credit risk of the portfolio.

Banks have set up the Loan Review Departments or Credit Audit Departments in order to ensure the compliance with extant sanction and post-sanction processes and procedures laid

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down by Bank from time to time. This is mostly applicable for larger advances. The Loan Review Department helps a bank to improve its quality of the credit portfolio by detecting early warning signals, suggesting remedial measures and by providing the top management with information on the credit administration, including the credit sanction process, risk evaluation and post-sanction.

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CHAPTER 10 LOANS AND ADVANCES

10.1 TYPES OF ADVANCES Advances can be classified into: fund-based lending and non-fund based lending.

Fund based lending: This is a direct form of the lending in which a loan with actual cash outflow is given to borrower by the Bank. In most of the cases, such a loan is backed by primary and/or collateral security. The loan is to provide for financing capital goods and/or working capital requirements.

Non-fund based lending: In this typelending , the Bank makes no funds outlay. However, such arrangements may be converted to the fund-based advances if the client fails to fulfil terms of his contract with the counterparty. Such facilities are known as the contingent liabilities of the bank. Facilities such as 'letters of credit' & 'guarantees' fall under such category of non-fund based credit. Example of how guarantees work. A company takes term loan from a Bank A and obtains a guarantee from the Bank B for its loan from Bank A, for which he pays a charge. By issuing the bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if company fails to meet primary responsibility of repaying Bank A.

10.1.1 WORKING CAPITAL FINANCE Working capital finance is utilized for the operating purposes, resulting in the creation of current assets. This is in contrast to the term loans which are utilized for establishing or expanding a manufacturing unit by acquisition of the fixed assets.

Banks carry out a detailed analysis of a borrowers' working capital requirements. Credit

limits are established in accordance with a process approved by the board of directors. The limits on Working capital facilities are primarily secured by inventories and receivables (chargeable current assets).

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Working capital finance consists mainly of cc facilities, short term loan & bill discounting. Under the cash credit facility, a line of credit is also provided up to a pre-established amount based on the borrower's projected level of the sales inventories, receivables and the cash

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deficits. Up to this particular pre-established amount, disbursements are to be made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on the payments and, thereafter, seek reimbursement from Bank. In reality, this may not happen. The facility is generally given for a particular period of up to 12 months and is extended after a proper review of the credit limit. For clients facing the difficulties, review may be made after a shorter period.

One problem faced by the banks while extending cc facilities, is that customers can draw up to a maximum level or approved credit limit, but may decide not to. Because of this, liquidity management becomes more difficult for a bank in the case of cash credit. RBI has been trying to mitigate this type of problem by encouraging the Indian corporate sector to avail working capital finance in two ways: 1) a short-term loan component 2) a cash credit component.

The loan component would be a fully drawn, while the CC component would vary depending upon borrower's requirements. According to the RBI guidelines, in the case of borrowers enjoying WC credit limits of Rs. 10 crores and above from banking system, the loan component should normally be 80 percent and CC component 20 %. Banks, however, have the freedom to change composition of WC finance by increasing the CC component beyond 20% or reducing it below 20 %, as the case may be, if so desire. Bill discounting facility involves the financing of the short-term trade receivables through negotiable instruments. These instruments can then be discounted with all other banks, if required, for providing financing banks with liquidity.

10.1.2 PROJECT FINANCE Project finance business consists mainly of an extending medium-term and long-term rupee and foreign currency advance to the manufacturing and the infrastructure sectors. Banks also provide financing by the way of investment in marketable instruments such as fixed rate and floating rate debentures. All Lending banks usually insist on having first charge on fixed assets of the borrower. During recent years, the larger banks are increasingly becoming involved in the financing of large projects, including infrastructure projects. Given large amounts of financing involved, banks need to have strong regulatary framework for project appraisal. The adopted framework will need to emphasize on proper identification of projects, optimal allocation and mitigation of the risks.

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The project finance approval process includes a detailed evaluation of technical, commercial, financial and management factors as well as the project sponsor's financial strength and experience. As part of appraisal process, a risk matrix is to be generated, which identifies each of the project risks associated to it, mitigating factors and risk allocation. Project finance extended by all the banks is generally fully secured and has full recourse to borrower company. In most project finance cases, banks have a first lien on all of the fixed assets and a second lien on all of the current assets of the borrower company. In addition, guarantees may be taken from sponsors or the promoters of company. If the borrower company fail to repay on time, the lending bank can have full recourse to sponsors or promoters of the company. (Full recourse means that lender can claim the entire unpaid amount from sponsors / promoters of the company.) However, while financing a very large projects, only partial recourse to the sponsors or to promoters may be available to the lending banks.

10.1.3 LOANS TO SMALL AND MEDIUM ENTERPRISES

A very substantial quantum of loans is granted by the banks to small and medium enterprises

(SMEs). While granting the credit facilities to smaller units, banks often use a unique cluster-based approach, which encourages the financing of small enterprises that have a all homogeneous profile such as leather manufacturing units, chemical, or even export oriented units. For assessing the credit risk of the individual units, banks use a credit scoring models.

As RBI guidelines, banks should use a simplified credit appraisal methods for the assessment

of bank finance for smaller units. Banks have also been advised that they should not insist on

the collateral security for the loans up to Rs.10 Lakh for a micro enterprises.

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Specialised Branches for SME Credit Given the importance of the SME sector, RBI has initiated several measures to increase flow of credit to this segment. As a part of this effort, PSBs have been operationalizing the specialized SME bank branches for ensuring an uninterrupted credit flow to this sector. As at end-March 2009, PSBs have a operationalised as many as 869 core specialized SME bank branches.

Source: Report on Trend and Progress of Banking in India 2008-09, RBI

Small Industries Development Bank of India (SIDBI) also give facilitates to the flow of credit at reasonable interest rates to the SME sector. This is done by a incentivising banks and State Finance Corporations to lend SMEs by refinancing a specified % of incremental lending to SMEs, besides providing the direct finance along with banks.

10.1.4 RURAL AND AGRICULTURAL LOANS The rural and agricultural loan portfolio of banks comprises loans to farmers, small and medium enterprises in rural areas, dealers and vendors linked to these entities and even corporate. For farmers, banks extend term loans for equipments used in farming, including tractors, pump sets, etc. Banks also extend crop loan facility to farmers. In agricultural financing, banks prefer an 'area based' approach; for example, by financing farmers in an adopted village. The regional rural banks (RRBs) have a special place in ensuring adequate credit flow to agriculture and the rural sector.

The concept of the 'Lead Bank Scheme (LBS)' was first mooted by Gadgil Study Group, which actualy submitted its report in October 1969. Pursuant to these recommendations of the Gadgil Study Group and those of Nariman Committee, which suggested the adoption of 'area approach' in evolving credit plans and a programmes for development of banking and credit structure, the LBS was introduced by RBI in December, 1969. The scheme envisages allotment of districts to the individual banks to enable them to assume leadership in bringing about banking developments in their respective districts. More recently, a High Level Committee was constituted by RBI in November 2007, to review LBS and improve its effectiveness, with a focus on financial inclusion and on recent developments in the banking sector. The Committee has recommended several steps to improve the working of LBS. The

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importance of role of State Governments for supporting banks in increasing the banking business in rural areas has been emphasized by Committee.

10.1.5 DIRECTED LENDING The RBI requires banks to deploy a certain amount of their credit in the certain identified sectors of the economy. This is called the directed lending by banks. Such directed lending comprises priority sector and export credit.

A. Priority sector lending The major objective of priority sector lending program is to ensure that the adequate credit flows into some of the vulnerable sectors of economy, which may not be attractive for the banks from the point of view of profitability. These sectors include an agriculture, small scale enterprises, retail, etc. Small housing loans, loans to the individuals for pursuing an education, loans to weaker sections of the society etc also qualify as the priority sector loans.

The RBI has certain set of guidelines defining targets for lending to a priority sector as whole and in certain cases, sub-targets for lending to the individual priority sectors.

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Targets under Priority Sector Lending

Targets under Priority Sector Lending Table 6: targets under priority sector lending Note: ANBC: Adjusted Net

Table 6: targets under priority sector lending

Note: ANBC: Adjusted Net Bank Credit CEOBSE: Credit Equivalent of Off-Balance Sheet Exposure

RBI guidelines require banks to lend at least 40% of the Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure (CEOBSE), whichever higher. In case of foreign banks, their target for priority sector advances is 32% of ANBC or CEOBSE, Whichever is higher. In addition to that these limits for overall priority sector lending, the RBI sets a sub-limits for certain sub-sectors within the priority sector such as the agriculture. Banks are required to comply with priority sector lending requirements at the end of each financial year. A bank having shortfall in the lending to priority sector lending target or sub- target shall be required to make the contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or funds with other FIs as specified by the RBI.

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Differential Rate of Interest (DRI) Scheme Government of India had formulated in March, 1972 a scheme for extending a financial assistance at the concessional rate of interest @ 4 percentage to selected low income groups for the productive endeavours. The scheme known as Differential Rate of Interest Scheme (DRI) it is now being implemented by all SCB. The maximum family incomes that qualify a borrower for DRI scheme is revised periodically. Currently, the RBI has advised the banks that the borrowers with annual family income of Rs.18, 000 in a rural areas and Rs.24, 000 in urban and a semi-urban areas would be eligible to avail it as against the earlier annual income criteria of Rs.6, 400 in rural areas and Rs.7, 200 in urban areas. The target for the lending under the DRI scheme in a year is maintained at 1% of the total advances outstanding as at the end of the previous year.

Source: RBI Circulars

B. Export Credit As a part of the directed lending, RBI requires the banks to make all loans to exporters at concessional rates of interest. Export credit is provided for the pre-shipment and post- shipment requirements of the exporter borrowers in rupees and foreign currencies. At the end of any fiscal year, 12 % of a bank's credit is required to be in form of export credit. This requirement is in addition to the other priority sector lending requirement but credits extended to exporters that are SSI or small businesses may also meet part of priority sector lending requirement.

Retail Loan Banks now a days offer a range of retail asset products, including home loans, automobile loans, personal loans ,credit cards, consumer loans (such as TV sets, personal computers etc) and, loans against the time deposits and loans against firms shares. Banks also fund dealers who sell automobiles, two wheelers, consumer durables and commercial vehicles. The share of retail credit in the total loans and advances was 21 % at end- March 2009.

Customers for retail loans are typically the middle and high-income, salaried or self- employed, and, in some cases, proprietorship and partnership firms also. Except for personal loans and credit through the credit cards, banks stipulate that (a) a certain percentage of the

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cost of the asset (such as a home or a TV set) sought to be financed by the loan, to be borne by borrower and 2) that the loans are secured by the asset financed.

Many banks have to implemented a credit-scoring program, which is an automated credit approval system that assigns a credit score to each of the applicant based on certain attributes like his/her income, educational background and age. The credit score then forms a proper basis of loan evaluation. External agencies like field investigation agencies and credit processing agencies may be used to facilitate a proper comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. Before disbursements are made, the credit officer checks a overall centralized delinquent database and reviews the borrower's profile. In making credit decisions, by the banks draw upon reports from agencies such as the Credit Information Bureau (India) Limited (CIBIL).

Some private sector banks use the direct marketing associates as well as their own branch network and employees for the marketing retail credit products. However, credit approval authority lies only with bank's credit officers.

Two important categories of retail loans—are home finance and personal loans—

Home Finance: Banks extend home finance loans, either directly or through the home finance subsidiaries. Such long term housing loans are provided to the individuals and corporations and also given as construction to finance to builders. The loans are secured by a mortgage of property. These loans are extended for maturities generally ranging from 5 to 15 years and a large proportion of these loans are at floating rates. This reduces the interest rate risk that the banks assume, since a bank's sources of finance are generally of a shorter maturity. However, fixed rate loans may also be provided usually with banks keeping a higher margin over the benchmark rates in order to compensate for the higher interest rate risk. Equated monthly instalments are fixed for the repayment of loans depending upon the income and age of the borrower(s).

Personal Loans: These are often unsecured type of loans provided to customers who use these funds for various the purposes such as higher education, medical expenses, social events and holidays. Sometimes collateral security in the form of physical asset and financial assets may be available for securing the all personal loan. Portfolio of personal loans also

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includes micro-banking loans, which are relatively small in value loans extended to lower income customers in urban and the rural areas.

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10.2 MODE OF CREDIT Loan is the amount borrowed from any bank. The nature of borrowing is that the money is disbursed and recovery is made in the instalments. While lending money by way of loan, credit is given for a pre definite purpose and for a pre-determined period. Depending upon the purpose and period of loan, each bank has its own procedure for granting the loan. However the bank is at liberty to grant the loan requested or refuse it on depending upon its own cash position & the lending policy. Bank grants credit facility to its all customer in any one of the following mode:

(a) A Demand Loan is a loan which is repayable on a demand by the bank. In other words,

it is repayable at the short-notice. The entire amount of demand loan is disbursed at one time

and the borrower has to pay interest on it on regular basis. The borrower can repay the loan either in lumpsum (one time) or in as agreed with bank. For example, if it is so agreed the amount of loan may be repaid in the suitable instalments. Such loans are normally granted by banks against a adequate security. The security may include materials or goods in the stock, shares of companies or any other asset. Demand loans are raised normally for the WC purposes, like purchase of raw materials, making payment of short-term liabilities.

As amount credited to a loan account in reduction of the borrowers liability to bank has the effect of permanently reducing the original advances, any further drawing permitted to account are not secured by the DP note deposited to cover the original loan. Therefore, a fresh loan account must be opened for every new advance granted to borrower and a new demand promissory note taken as security.

When the bank wants to grant further loan against the same security the bank must liquidate the existing account and have to open a fresh account opened for the same. Interest on D/L will ordinarily be charged at rates laid down by the bank from time to time subject to a minimum amount of charge of interest for seven days. This interest is calculated on basis of daily products and applied quarterly.

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(b) Term Loans: All Medium and long term loans are called term loans. Term loans are granted for more than a year and repayment of such loans is spread over a larger period. The repayment is generally made in the suitable instalments of a fixed amount. Term loan is required for purpose of starting a new business activity, renovation, modernization, expansion of existing units, purchase of plant and machinery, purchase of the vland for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like.

A T/L may be granted for any period stipulated for purpose by bank from time to time but in

no case exceeded 15 years. A T/L account is not a running a/c therefore no debits to the account may be made subsequent to the initial advance except for the interest, insurance

premium and other sunder charges.

(c) Cash credit

CC is a flexible system of lending under which the borrower has the option to withdraw the

funds as and when required and to extent of his needs. Under this arrangement the banker specifies a limit of loan for customer (known as cash credit limit) up to which the customer is allowed to withddraw. The CC limit is based on the borrower’s need and as agreed with the bank. Against the limit of CC, the borrower is permitted to withdraw as and when he needs money up to the limit sanctioned.

It is normally sanctioned for a period of 1 year and secured by the security of some tangible

assets or the personal guarantee. If the account is running satisfactorily, the limit of cash

credit may be renewed by bank at the end of year. The interest is calculated and charged to

the customer’s account as per use.CC, limits are granted by the banks against following

securities:

a)

pledge of bullion, goods or produce or the documents of title thereto,

b)

Pledge of goods or produce or documents of title thereto, with additional security or

DP

notes bearing two or more names.

c)

Hypothecation of the book debts and other assets of any undertaking engaged in

financing of hire purchase transaction.

d) DP notes may bearing two or more names

e) DP notes bearing two or more signatures, collaterally secure

f) Hypothecation of the stock of goods or produce

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g) Debentures or the fully paid shares of limited liabilities companies

h) Immovable property or documents of title thereto.

(d) Overdraft Overdraft facility is more or less similar to the ‘cash credit’ facility. Overdraft facility is the result of an agreement with bank by which a current account holder is allowed to draw over and above the credit balance in his/her account. It is a short-term facility. This facility is made available to current account holders who operate their account through the cheques. The customer is permitted to withdraw amount of overdraft allowed as and when he/she needs it and to repay it through deposits in the account as and when it is convenient to him/her.

Overdraft facility is generally granted by a bank on the basis of a written request by the customer. Sometimes the bank also insists on either a promissory note from the borrower or personal security of the borrower to ensure safety of amount withdrawn by the customer. The interest rate on overdraft is higher than is charged on loan. Overdrafts are generally granted:

a) against government or other securities of certain district boards, municipalities court

trust and improvement trusts

b) against fully paid up shares and debentures of public corporations and limited

liabilities companies

c) against receipts, certificates or any other instruments issued by the bank in evidence

of or in representing the amount deposited with in

d) against documents of titles to goods assigned to bank as security

e) against the surrender value of the policies of LIC

Without securities: OD without security or against unauthorised security can be granted to constituent by the branch manager to the extent of his discretionary powers. Without prior intimation to the customer, bank can not withdraw the OD facility .Unilaterally from the customer’s accounts irrespective of the fact that the bank has obtained an application for OD or not. Even, bank cannot reduce the limit of OD at its own.

The following are some of the benefits of cash credits and overdraft:-

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(i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of the borrower.

(ii) There is no necessity of providing security and documentation again and again for

borrowing funds.

(iii) This mode of borrowing is simple and elastic and meets the short term financial needs of

the business.

(e) Discounting of Bills Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realise his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution. Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period.

In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted is retained by the bank till its due date and is presented to the drawee on the date of maturity. In case the bill is dishonoured on due date the amount due on bill together with interest and other charges is debited by the bank to the customer’s account.

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CHAPTER 11 TERM LOAN Term Loans are counter parts of Fixed Deposits in the Bank. Banks lend money in this mode

when repayment is sought to be made in fixed, pre-determined instalments. This type of loan

is normally given to borrowers for acquiring long term assets i.e. assets which will benefit the

borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for the factory, setting up new projects fall in this category. Financing

for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category.

A term loan is a monetary loan that is repaid in regular payments over a set period of time.

Term loans usually last between one and ten years, but may last as long as 30 years in some cases. Term loans can be given on an individual basis but are often used for small business loans. The ability to repay over a long period of time is attractive for new or expanding enterprises, as the assumption is that they will increase their profit over time. Term loans are

a good way of quickly increasing capital in order to raise a business’ supply capabilities or range. For instance, some new companies may use a term loan to buy company vehicles or rent more space for their operations.

One thing to consider when getting a term loan is whether the interest rate is fixed or floating.

A fixed interest rate means that the percentage of interest will never increase, regardless of

the financial market. Low-interest periods are usually an excellent time to take out a fixed rate loan. Floating interest rates will fluctuate with the market, which can be good or bad for

you depending on what happens with the global and national economy. Since some term loans last for 10 years, betting that the rate will stay consistently low is a real risk.

11.1 SECURITIES Normally bank does not lend without adequate security. Security is the cover obtains by the banker to safeguard its fund lent. Security is regarded as an insurance against any emergent situation when the borrower fails/ is unable to pay loan or advances.

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CLASSIFICATION OF SECURITIES Securities are classified in different manners as per their nature and characteristics, as follows

PRIMARY SECURITY AND COLLATERAL SECURITY Primary security means the main cover for loan\advance. In other words asset for which bank has financed. For example in an advance for purchasing a truck, the truck is primary security which is hypothecated to bank. Collateral security is an additional cover to secure advance. These are additional securities to be realised upon in case of need and serve as a cushion to the bank. Third party guarantee or equitable mortgage of the house to secure an advance is an example of collateral security.

PERSONAL SECURITY AND IMPERSONAL SECURITY Personal security is the kind of security which provides legal remedy to the bank against the borrower. It provides personal rights of action against borrower. It provides personal right of action against borrower. A promissory note is an example of personal security. Impersonal or tangible security refers to the security which is in the physical form like shares stocks or land etc.

SPECIFIC SECURITY AND CONTINUING SECURITY Specific security is one which covers any specific or existing debt. Example is a FDR which is kept as security to cover an advance. While continuing security refers to a security which covers all sums due or may become due in future subject to a specified limit. The purpose of obtaining continuous security is to cover an advance even when the same is fully paid or temporarily liquidate. It obviates the requirement of obtaining fresh documents. Continuing security keeps the document valid and enforceable. It is obtained in case of cash credit/OD where the balance of account frequency converts into debit and credit.

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FORMAL AND INFORMAL SECURITY Formal security is one in which a contract has been made between the borrower and the bank and which is formally handed over by the borrower to the banker. Pledge, hypothecation, mortgage and assignments are the example of formal security.

A security which comes in to the hands of bank while dealing with the customer is called an

informal security. Right of lien, right of set off are the example of informal security.

11.2 MAST CHARACTERSTICS OF GOOD TANGIBLE SECURITY

“Mast

acceptable to the bank. MAST consists of:

M: MARKETABILITY

A: ASCDERTAINABILITY

principle”

considered

important

in

identifying

the

good

and

tangible

security

S:

STABILITY

T:

TRANSFERABILITY

A

security obtain by the bank should posses the characteristic o0f marketability so that the

bank may realise it in case of default of repayment. The value of security should be ascertainable easily. There should be stability in the value of the security. Commodities, which values fluctuates frequently are not considered to be taken as a security. The transfer of title of security should not be difficult; otherwise bank would not be able to transfer its title if such needs arise.

11.3 5M’S FOR APPRAISAL OF LOAN/ADVANCE APPLICATION

MAN: man is the most important aspect of appraisal system. All other factors are less important than man because he is the person who borrows and utilise the money. Three C’s

namely

CHARECTER, COMPETANCE, AND CAPITAL ARE VITAL traits for evaluating man

MATERIAL: it is an important point to consider the unit which propose to start manufacturing will be able to procure enough raw material, labour power etc. Amenities essential for production.

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MARKET: whether the borrower who may be a trader or a manufacturer would be able to market the goods is an important point of examination. There for banker examine the total demand and supply of product in the market. Past trends of sale and inventory hold ups etc.

MACHIJNERY: what kind of machinery the borrower would be requiring, what would be its cost are important points to consider.

MONEY: examination of the monetary requirement of borrower and to apportion his credit limit in to various modes of finance like term loan, worki9ng capital loan and non fund based facilities etc. Is most crucial part of lending?

11.4 MARGIN

Afteracce3ssing the borrower’s need for bank finance the banker stipulates margin which the borrower himself contributes for his need. MARGIN is there for borrower’s contribution in total quantum of finance. \

MARGIN is stipulated by borrower with the following objective:

1.

It provides cushion against price level changes, intrest6 application and recovery in

future.

2.

It ensures a degree of stake of borrower in his enterprise.

3.

To regulate the level of finance especially in some selected commodities.

4.

To protect against the detritions in the value of the security.

11.5

INSURANCE

All properties whether movable or the immovable held as a security by the bankers. By way of hypothecation, pledge or mortgage must be ensured against like fire, theft, Natural calamities etc. So that the bankers is not put to any loss when such eventualities occurs.

If insurance policy taken by banker, it will be in banks name and borrowers name is added by way of description. Where policy is taken by the borrower in his name, it must be assigned in the bank favour and the assignment must be got registered with the insurance company.

All policies must bear the bank clause. The bank clause provides that in all matters related to insurance & its subject matters, notice shall be given to the bank by the insurance company and all claim related thereto shall be paid to the bank against its receipts which will be

52

accepted by the insurance company as valid and complete discharge of claim. Bank clause also enables a bank to compromise regarding its claim with the insurance without intervention of the borrower. It protects bank from any wrong done by the borrower to the prejudice of the bank rights. Due dates of insurance policies must be diarised properly and renewals must be obtain well in time.

11.6 TYPES OF CHARGES

11.6.1 LIEN Lien is the right of a person (usually the creditor) to retain the possession of goods and securities belonging to another person (the debtor) till the amounts due to him from such

owner are fully realised. Lien confers the right only to retain the possession of the goods but does not convey the property in them to lien holder. Two types of lien are recognised:

a) PARTICULAR LIEN

b) GENERAL LIEN

The general lien which is available to only to a selected class of people likes bankers, attorneys of high courts etc. Confers the right on the holder to retain the goods and securities

which comes in to the possession in the course of his dealings as a banker for a general balance due from the customer, provides there is no agreement inconsistent with the lien.

The creditor with particular lien can retain the possession of goods only till the dues from the debtors for a particular debt for which the securities were handed over have been satisfied. He cannot retain them for any dues from the debtors on other accounts. For example a tailor who has been entrusted with the work of stitching 2 shirts may refuse to deliver unless his charges are paid. However his charges for one shirt have been paid he has to deliver one shirt and he cannot retain it for the charges due on the other piece. Banker’s lien is not merely a general lien but is an implied pledge. It not only confuses on him the right to possess the securities but also converse the title in them to the banker. No agreement is necessary for the creation of the lien. It is a statutory privilege confront on the banker by section 171 of the Indian contact act. But certain condition must be fulfilled before the banker can exercise the right of lien over goods and securities.

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a) The securities should have come into his possession in the ordinary course of business

as a banker.

b) There should not be any agreement between the customer and the banker in consistent

with the lien. The presence of such an agreement takes prudent over the right of lien

c) The securities should not have been entrusted with the banker for a special purpose.

d) The securities should have come into the passion lawfully.

11.6.2 SET OFF Where there is more than one account of the customer with the bank, the accounts can be combined if there is an agreement to this effect between the banker and the customer precluding the necessity of issuing a notice. Even in the absence of such an agreement, the banker may desire the accounts to be combined, especially when one of the accounts is showing the debit balance. Such a right of a banker where he can adjust the debit balance in one account out of the balance available in another account of the same customer is known the right of set off. no notice of set off is necessary to the customer if there is an agreement with the customer to this effect otherwise, the banker should issued a sufficient notice to customer intimating his attention of combining the accounts. The banker should take certain precaution before proceeding to exercise to right set off:

1. He should ensure that sufficient notice is issued to the customer even if there is an

agreement. Such a precaution would guard in later against any claim of the customer for the

wrong full dishonoured cheque.

2. The accounts must belong to the same person and exists in the same capacity.

Accounts belonging to two the different person cannot be combined. Even if the accounts

belong to the same person they cannot be combined if they exist in the different capacities of the customer.

3. The amount of debts to be set off should be certain for example, if the customer is a

guarantor for a loan, his credit balance cannot be set off against the Dues from the borrower till the guarantors liabilities ascertained.

4. The set off can be applied only against debt actually due. The banker cannot set off

credit balance in the current account for the contingent liabilities on a bill discounted

5. If the customer has conveyed to the banker his intention to keep the accounts

separate, the banker cannot combine the accounts contrary to such instructions.

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11.6.3

PLEDGE

Pledge is a bailment of goods as security for payment of a debt or performance of a promise. Bailment is the delivery of goods by one person to another for some purpose upon a contract

that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. When the bank advances against pledge it becomes the pledge (Pawnee) and the borrower the pledger (pawneer) Essentials of pledge:

1. Pledge can be created in case of goods or any other movable property including share

and stocks. Immovable properties cannot be pledged; they can only be mortgaged.

2. Goods must be delivered to the pledge. Delivery is the essential of pledge. The goods

must be in the possessions of the pledgee. delivery can be effected in any one of the following way:

a) Actual delivery: the goods are physically handed over to the pledge by the pledger.

b) Symbolic delivery : the pledger hands over the keys of the store or the documents of

the titled goods dully endorsed to the pledgee

c) Constructive delivery: the goods are in the possession of the third party or the pledger

and they such third party or the pledger acknowledges that he holds goods as a baliee for the

pledgee.

3. The delivery of goods must be with the intension that the goods should serve as

security for a debt or performance of a promise.

4.

The pledge must be made by or on behalf of the debtors.

11.6.4

HYPOTHECATION

As defined by DR. HART, hypothecation is a “charge against property for an amount of debt where neither ownership nor possession is passed to the creditor.” In the hypothecations good are in the possession of the borrower, but are charged equitably to the banker. Usually the

hypothecation deed empowers the banker to require possession to be handed over to him. In such cases when possession is acquired by the banker, hypothecation is converted in to pledge.

The letter of hypothecation gives banker all the power available under the pledge. However the major difference is that the rights accrue to the bank only when the goods are taken in to0 the possession by it. The real difficulty in case of hypothecation is the acquisition of

55

possession of goods by the bank. “If possession is not given voluntarily it is not lawful to take possession forcefully even though such a power is included in the document. It may amount to breach of peace, wrongful entry, wrongful restrain etc. For which criminal complaint can be filled by the borrower against the lending bank officials. An agreement permitting commission of offence is itself unlawful and, therefore not enforceable in the court.

Unlike pledge hypothecation is attended with the risks. As the banker is not in the possession of the goods, effective supervision is not possible .Chances of the borrower charging the same goods to two or more banks is easy. The borrower may even sell the goods without even the knowledge of the banker. But hypothecation is unavoidable. Sometimes it may be the only mode of charge available. For example, advances may be made against goods in the showroom.

11.6.5 MORTAGAGE The rules relating to mortgage of immovable properties are governed by the transfer of property act 1882.it defines the term mortgage as “the transfer of interest in specific immovable property for the purpose of securing the payment of money advance or to be advanced by way of loan, an existing or future debt, or performance of engagement which may give rise to the pecuniary liabilities. The transferor is called mortgagor the transferee a mortgagee , the principal money and interest of which payment is secured for the time being are called mortgage and the instrument (if any) by which the transfer is effected is called a mortgage deed. “Immovable property includes land benefits that arise of Land and things attached to Earth.

TYPES OF MORTGAGES: the different type of mortgages recognized by law are given below they are governed by sections 58 (b) to 58 (g) of the transfer4 of property act 1882.

SIMPLE MORTGAGE:

Under a simple mortgage without delivering of the mortgage property, the mortgager binds him personally to pay the mortgage money. He agrees , expressly or impliedly, that in the event of his failing to pay according to his contract the mortgage shall have a right to cause the mortgage property to be sold and the proceed of sell to applied, so far as may be necessary in payment of the mortgage money . The words “cause the mortgaged property to e

56

sold” should be taken to, mean that the mortgage no power of sell but can sell the property after obtaining a decree from a court. Simple mortgage is very popular among banks the remedies available to the mortgage under a simple mortgage are

a) To obtain a personal decree of a court against the mortgager

b) To apply to court for a decree permitting sale of mortgaged property.

MORTGAGE BY CONDITIONAL SALE

The mortgager here ostensibly sales the mortgaged property on the conditions that:

1. In default of payment of the mortgage money on a certain date the sale shall become

absolute ; or

2. On such payment being made the sale shall become void ; or

3. On such payment being made t5he buyer shall transfer the property to the seller

It is essential that the transaction to be deemed to be a mortgage, the above condition should

be embodied in the same document whi9ch effects or purports to affect the sale. Otherwise it will become an absolute sale. The remedy available to the mortgage is that foreclosure

USUFRUCTUARY MORTGAGE In a usufructuary mortgage the mortgager delivers the possession or binds himself expressly or by implication to deliver possession of the mortgaged property to be mortgagee, an authorises him to retain such possession until repayment of the mortgage money, and to receive the rent and profit accruing from the property, or any part o0f such rents and profits and to appropriate same in lieu of interest or in payment of the mortgage money, or partially or both. The mortgager is not personally liable unless there is a special agreement on this point the mortgagee cannot sue for sale of foreclosure. He can o0nly retain the possession of the property and be utilising rents or profits accruing on it. Bank seldom advances against unsufructary mortgage.

ENGLISH MORTGAGE In this mortgage the mortgager binds himself the mortgage money on a certain date and transfer the mortgage property to the mortgage, subject to the proviso that the mortgagee will transfer it to the mortgager up[on repayment of the mortgage money as agreed. The word absolute does not mean that the mortgager transfer all his rights in the property to the

57

mortgagee. The mortgager can retain the property in his possession and enjoy the rents, etc., accruing from it. He retains with him the power to redeem the property on payment of the mortgage money. The mortgagee of an English mortgage can

a) Sell the property without the intervention of the court

b) a point a reviver of the income of the property

EQUITABLE MORTGAGE This is also known as mortgage by deposit of title deed. Where a person in any of the presidency towns, viz., the towns of Calcutta, madras and Bombay and in any other town which the state government concerned may,, by notification in the official gazette specify in this behalf delivers to the creditors or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called mortgage by deposit of title deeds .registration is not necessary for equitable mortgage. This is most popular type of mortgage among banker.

ANAMOLUS MORTGAGE A mortgage which does not come under any of above type but still satisfies the conditions of mortgage is considered as anomalous mortgage.

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CHAPTER 12 MANAGEMENT OF NON PERFORMING ASSETS

An asset of a bank turns into a non-performing asset (NPA) when it ceases to generate regular income such as the interest etc for the bank. In other words, when a bank which lends a loan does not get back its principal and interest on the time, loan is said to have turned into an NPA.

NPAs are natural fall-out of undertaking banking business and hence cannot completely avoided, high levels of NPAs can severely erode bank's profits, its capital and ultimately its ability to lend further funds to potential borrowers. Similarly, at macro level, a high level of the nonperforming assets means choking off credit to potential borrowers, thus lowering capital formation and economic activity. So challenge is to keep the growth of NPAs under control. Clearly, it is an important to have a robust appraisal of the loans, which can reduce the chances of loan turning into an NPA. Also, once a loan starts facing the difficulties, it is important for bank to take remedial action.

Level of Non Performing Assets The gross NPA of the banking segment were Rs. 68, 972 crores at the end of March 2009, and the level of net NPAs (after provisioning) was Rs.31, 424.5 crores. Although they appear to be very large amounts in the absolute terms, they are actually quite small in comparison to the total loans by banks. The ratio of gross NPA loans to gross total loans has fallen sharply over the last decade and is at 2.2 per cent as at end-March 2009. This ratio, which is an indicator of soundness of banks, is comparable with the most of the developed countries such as France and Japan. The low level of gross NPAs as a % of gross loans in India is a positive indicator of the Indian banking system.

Source: Report on Trend and Progress of Banking in India 2008-09, RBI and Report on Currency and Finance 2006-08.

12.1 CLASSIFICATION OF NON-PERFORMING ASSETS Banks have to classify their assets as performing & the non-performing in accordance with RBI's guidelines. Under these, an asset is classified as NPA if any amount of interest or

59

principal instalments remains overdue for more than the 90 days, in respect of T/L. In respect of overdraft or CC, an asset is classified as non-performing if the account remains out of order for a period of 90 days and in respect of bills purchased and discounted account, if the bill remains overdue for a period of more than that of 90 days.

All assets do not perform uniformly. In some cases, assets perform very well and the recovery of principal and the interest happen on the time, while in all other cases, there may be delays in recovery or the no recovery at all because of one reason or the other. Similarly, an asset may exhibit good quality performance at one point of time and poor performance at the some other point of time.

According to the guidelines, banks must classify their total assets on an on-going basis into the following four categories:

Standard assets: Standard assets service their interest and the principal instalments on time; although they occasionally default up to a period of the 90 days. Standard assets are also called performing assets. They will yield regular interest to the banks and return the due principal on the time and thereby help the banks earn the profit and recycle repaid part of the loans for further lending. The other 3 categories (sub-standard assets, doubtful assets and loss assets) are NPAs and are discussed below.

Sub-standard assets: Sub-standard assets are those assets which have very much remained NPAs (that is, if any amount of interest or principal instalments remains overdue for more than the 90 days) i.e for a period up to 12 months.

Doubtful assets: becomes doubtful if it remains a sub-standard asset for a period of 12 months and recovery of bank dues is of doubtful.

Loss assets: It comprise assets where a loss has been identified by the bank or the RBI. These are generally considered as uncollectible. Their realizable value is so low that their continuance as bankable assets is not being warranted.

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12.2

DEBT RESTRUCTURING

Once a borrower faces difficulty in the repaying loans or paying interest, the bank should initially address the problem by trying to verify whether financed company is viable in the the long run. If the compan or the project are viable, then rehabilitation is possible by restructuring the credit facilities. In a restructuring exercise, the bank can change the repayment or the interest payment schedule to improve the chances of recovery or even make some sacrifices in the terms of waiving interest etc.

RBI has a separate guidelines for proper restructured loans. A fully secured standard or the sub-standard/ doubtful loan can be restructured by rescheduling of principal repayments and/or interest element. The amount of sacrifice, in the element of interest, is either written off or provision is made to the extent of sacrifice involved. The sub-standard accounts or doubtful accounts which have been subjected to restructuring, whether in respect of principal instalment or the interest amount are well eligible to be upgraded to standard category only after a specified period.

To create an institutional mechanism for the restructuring of corporate debt, RBI has devised a Corporate Debt Restructuring system. The objective of this framework is to ensure a timely and transparent mechanism for restructuring of corporate debts of the viable entities facing sever problems.

12.3 OTHER RECOVERY OPTIONS

If rehabilitation of debt through restructuring is not at all possible, banks themselves make efforts to recover debts. For example, banks set up special asset recovery branches by help of RBI,which concentrate on recovery of bad debts. Private & foreign banks often have a collections unit structured along various product lines and that of geographical locations, to manage the bad loans. Very often, banks engage external recovery agents to collect past due debt, who make phone calls to customers or make visits to their residence. For making debt recovery, banks lay down their policy and procedure in conformity with RBI guidelines on recovery of debt.

The past due debt collection policy of the banks generally emphasizes on the following at ttime of recovery:

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• Respect to the customers

• Appropriate letter of authorizing agents to collect

• Due notice to the customers

• Confidentiality of the customers' dues

• Use of simple language in communication and maintenance of the records ofcommunication In difficult cases, banks have the option of taking recourse to filing the

cases in courts, Lok Adalats, Debt Recovery Tribunals (DRTs) and to the One Time Settlement (OTS) schemes, etc. DRTs have been established under Recovery of Debts due to Banks and Financial Institutions Act, 93 for expeditious adjudication and recovery of the debts that are owed to the banks and financial institutions.

A/Cs with loan amount of 10 lacs and above are eligible for being referred to theb DRTs. OTS schemes and Lok Adalats are especially useful to the NPAs in smaller loans in different segments, such as small and marginal farmers and SME entrepreneurs. If a bank is unable to recover the amounts due within a reasonable period time, the bank may write off the loan. However, even in these cases, efforts should be continue to make the recoveries.

12.4 SARFAESI ACT, 2002 Banks utilize the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 02 (SARFAESI) as an effective tool for NPA recovery. It is possible where NPA are backed by securities charged to Bank by way of hypothecation or mortgage or assignment. Upon loan the default, banks can seize securities (except agricultural land) without intervention of court.

The SARFAESI Act, 2002 gives powers of "seize and desist" to the banks. Banks can give a notice in writing to defaulting borrower requiring it to discharge its total liabilities within 60 days. If the borrower fails to comply with the notice, Bank may take recourse to one or more of the following measures:

• Take possession of security for the loan

• Sale or lease or assign right over the security

• Manage the same or appoint any person to manage

The SARFAESI Act also provides for the establishment of all asset reconstruction companies regulated by RBI to acquire assets from banks and FI. The Act provides for sale of financial

62

assets by banks and FI to asset reconstruction companies (ARCs). RBI has issued proper guidelines to banks on the process to be followed for sales of financial assets to ARCs.

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CHAPTER 13 RELATIONSHIP BETWEEN BANK AND CUSTOMER In India, banks face a challenge of providing services to broad range of customers, varying from highly rated corporate and high NW individuals to low-end depositors and borrowers.

Banks usually place their customers into certain categories so that they sable to (a) develop suitable products according to customer requirements and (b) service customers efficiently. The bank-customer relationship is influenced dimensions, notably:

• While banks are competing with each other to attract the most profitable businesses,

financial inclusion is increasings. An important issue in India is that a large number of the

people, nearly half of the adult population, still do not have bank accounts. 'Financial Inclusion' would imply bringing s large segment of the population into the banking fold.

• Second, banks have started using innovative methods in approaching scustomers;

technology is an important component of such efforts.

• Finally, on account of security threats as well as black money circulating in the system, care has to be taken to the identify the customers properly, know sources of their funds and prevent money laundering.

13.1 SERVICES TO DIFFERENT CUSTOMER GROUPS Developing and properly categorising a customer data base forms part of core strategy of a bank. A typical bank with a widespread network of branches aims at the serving the following broad customer groups.

• Retail customers;

• Corporate customers;

• International customers;

• Rural customers.

A bank formulates its overall customer strategy to the increase profitable business keeping in

mind its strengths and weaknesses. key strategy components and trends in each of these customer groups are briefly discussed below.

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13.1.1

Retail Customers

With growing household incomes, Indian retail financial services has high growth potential. The key dimensions of retail strategy of a bank include customer focus, a wide range of products, customer convenience, distribution, strong processes and prudent risk management. fee income that banks earn while extending commercial banking services to the retail customers includes retail loan processing fees, credit card & debit card fees, transaction banking fees and fees from distribution of the third party products. Cross selling of the entire range of credit investment products and the banking services to customers is often a key aspect of retail strategy.

13.1.2 Retail Lending Activities

There is widespread acceptance by average consumer of using credit to purchases. Given this background, retail credit has emerged as a rapidly growing opportunity for the banks. Banks also focus on growth in retail deposit base which would include low cost current a/c and savings bank deposits. Retail deposits are usually more stable than corporate bulk deposits or

wholesale deposits.

Banks offer a range of retail products, including the home loans, automobile loans, commercial vehicle loans, two wheeler loans, personal loans, & credit cards, loans against time deposits & loans against shares. Banks also fund the who sell automobiles, 2 wheelers, consumer durables and commercial vehicles. A few of the banks have set up home finance subsidiaries in order to concentrate on this business in a more focused manner.

Personal loans are unsecured loans provided to the customers who use funds for various purposes such as higher education, medical expenses, social events and even for holidays. Personal loans include micro-banking loans, which are relatively small value loans to lower income customers in the urban and rural areas. Credit cards have become an important component of the lending to the retail segment in the case of a no. of banks. Indian economy develops, it is expected that the retail market will seek short-term credit for personal uses, and the use of credit cards will facilitate further extension of banks' retail business.

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Share of retail loans in total loans The share of retail loans in all olans and advances of (SCBs) was 21.35% at end-March 2009. The maximum share was accounted for by housing loans followed by 'personal loans', auto loans, credit card receivables, loans for commercial durables.

Source: Report on Trends and Progress of Banking in India, 2008-09, RBI.

13.1.3 Lending to small and medium enterprises

Most of the private and foreign banks have integrated strategy with regard to small and medium enterprises with their strategy for retail products and services. Hence, the retail focus

includes meeting the WC requirements, servicing deposit accounts and providing other banking products and services required by SME. Of late PSU banks are also very active in lending to this business segment. Banks often adopt a community based approach to financing of small enterprises, that is, identifying small enterprises that have a homogeneous profile such as apparel or jewellery exporters.

13.1.4 Corporate Customers

Corporate business covers project finance including infrastructure finance, cross border finance, working capital loans, non-fund based working capital products and other fee-based services. Banks often have to make special efforts to get the business of highly rated corporations. The recent emphasis on infrastructure in India, including projects being built on private-public partnership basis, is leading to profitable business opportunities in this area. Further, Indian companies are also going global, and making large acquisitions abroad. This

trend is likely to pick up momentum in future and banks which gear themselves up to meet such requirements from their customers will gain.

There is also a growing demand for the foreign exchange services from corporate customers. Banks offer fee-based products & services including foreign exchange products, documentary credits (such as letter of credit or LC) and guarantees to the business enterprises. Corporate customers are also increasingly demanding the new products and services such as forward contracts and interest rate and currency swaps.

66

International Presence Indian banks while expanding business to abroad have usually been leveraging home country links. The emphasis has been on to supporting Indian companies in raising corporate and project finance overseas for their investments purpose in India and abroad (including financing of overseas acquisitions by Indian companies), and extending trade and personal financial services (including remittance and deposit products) for NRI.

Rural Banking Customers Over 70% of India's citizens live in the rural areas. Hence, there is a need for the banks to formulate strategies for rural banking, which have to include the products targeted at various customer segments operating in rural. These customer segments include the corporate, SME and finally the individual farmers and traders. Primary credit products for rural retail segment include farmer financing, micro-finance loans, WCfinancing for agro-enterprises, farm equipment financing, and commodity based financing. Other services such as savings, investment and insurance products customised for rural segment are also offered by banks.

13.2 BANKING OMBUDSMAN SCHEME The Banking Ombudsman Scheme makes available an expeditious and inexpensive forum to bank customers for the resolution of complaints relating to certain services rendered by all banks. The Ombudsman Scheme was introduced under Section 35 A of the Banking Regulation Act 1949 with effect from 1995. All SCB, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under Scheme.

13.2.1 Appointment of Banking Ombudsman The Banking Ombudsman is a senior official appointed by RBI to receive and redress customer complaints against deficiency in the certain banking services (including Internet banking and loans and advances). At present, 15 Banking Ombudsmen have been appointed, with their offices located mostly in the state capitals.

67

13.2.2

Filing a Complaint to the Banking Ombudsman

One can file a complaint before the Banking Ombudsman if (a) the reply to the representation made by the customer to his bank is not received from the concerned bank within a period of

one month after the bank has received the representation, or (b) the bank rejects the complaint, or (c) if the complainant is not satisfied with the reply given by the bank. The Banking Ombudsman does not charge any fee for filing and resolving customers' complaints.

13.2.3 Limit on the Amount of Compensation as Specified in an Award

The amount, if any, to be paid by bank to the complainant by way of compensation for any loss suffered by the complainant is limited to amount arising directly out of the act or omission of the bank 10 lacs, whichever is lower. Further, the Ombudsman may award compensation not exceeding Rs 1 lacs to the complainant only in case of complaints relating to credit card operations for mental agony & harassment. The Banking Ombudsman will take into account loss of the complainant's time, expenses incurred by the complainant &harassment and mental anguish suffered by the complainant while passing such award.

13.2.4 Further recourse available If a customer is not satisfied with the decision passed by the Banking Ombudsman, he can approach the Appellate Authority against the Banking Ombudsman's decision. Appellate Authority is vested with a Deputy Governor of RBI. He can also explore any other recourse available to him as per the law. The bank also has the option to file an appeal before the appellate authority under the scheme.

13.3 KNOW YOUR CUSTOMER (KYC) NORMS Banks are required to follow Know Your Customer (KYC) RBI guidelines. These guidelines are meant to the weed out and to protect good ones and the banks. With the growth in organized crime, KYC has assumed the great significance for banks. RBI guidelines on KYC aim at preventing banks from being used, intentionally / unintentionally, by criminal elements for money laundering/ terrorist financing activities. They also enable banks to have better knowledge & understanding of their customers and their financial dealings. This in turn helps the banks to manage their risks better. The RBI expects all banks to have the comprehensive KYC policies, which need to be approved by their respective banks boards. Banks should frame their KYC policies incorporating the following four key elements:

a) Customer Acceptance Policy;

68

b) Customer Identification Procedures;

c) Monitoring of Transactions; and

d) Risk Management.

13.3.1 Customer Acceptance Policy

Every bank should develop a clear Customer Acceptance Policy laying down the explicit criteria for acceptance of customers. The usual elements of policy should include the following. Banks, for example, should not open an account in the anonymous or fictitious or benami name(s). Nor should any account be opened where bank's due diligence exercises relating to identity has not been carried out. Banks have to ensure that the identity of the new

or existing customers does not match with any person with known of criminal background. If a customer wants to act on behalf of the another, the reasons for the same must be looked into.

However, the adoption of the customer acceptance policy and its implementation should not become too restrictive and should not result in denial of the banking services to general public, especially to those who are financially or socially disadvantaged.

13.3.2 Customer Identification Procedures

Customer identification means identifying customer and verifying his/her identity by using reliable, independent source documents, data and information. For individual customers, banks should obtain sufficient identification data to verify the identity of the customer, his

address and a the recent photograph. For customers who are in legal persons, banks should scrutinize their legal status through the relevant documents, examine the ownership structures and determine the natural persons who control the entity.

Documents for opening deposit accounts under KYC guidelines

The Customer identification will be done on the basis of documents provided by the prospective customer as under:

a) Passport or Voter ID card or Pension Payment Orders (Govt/PSUs) alone, where on the

address is the same as mentioned in account opening form.

b) Any one document for proof of identity and proof of address, from each of the under noted

69

items:

Proof of Identity

i) Passport, if the address differs from the one mentioned in the account opening form

ii) Voter ID card, if the address differs from the one mentioned in the account opening form

iii) PAN Card

iv) Govt./ Defence ID card

v) ID cards of reputed employers

vi) Driving License

vii) Pension Payment Orders (Govt./PSUs), if the address differs from the one mentioned in

the account opening form

viii)

Photo ID card issued by Post Offices

viii)

Photo ID card issued to bonafide students of Universities/ Institutes approved by UGC/ AICTE

Proof of address

i) Credit card statement

ii) Salary slip

iii) Income tax/ wealth tax assessment

iv) Electricity bill

v) Telephone bill

vi) Bank account statement

vii) Letter from a reputed employer

viii) Letter from any recognized public authority

ix) Ration card

x) Copies of registered leave & license agreement/ Sale Deed/ Lease Agreement may be

accepted as proof of address

xi) Certificate issued by hostel and also, proof of the residence incorporating local address, as

well as permanent address issued by respective hostel warden of the aforesaid University/ institute where the student resides, duly countersigned by the Registrar/ Principal/ Dean of Student Welfare. Such accounts should be closed on the completion of education/ leaving the

University/ Institute.

xii) For students residing with the relatives, address proof of relatives along with their

70

identity proof, can also be accepted provided declaration is given by relative that the student is related to him and is to staying with him.

13.3.3 Monitoring of Transactions

Ongoing monitoring is an essential element of the effective KYC procedures. Banks can effectively control and reduce to their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have means of identifying the transactions that fall outside regular pattern of activity. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for the particular category of accounts and pay a particular attention to transactions which exceed these limits.

Banks should ensure that any of remittance of funds by way of demand draft or mail/ telegraphic transfer or any of other mode and issue of travellers' cheques for the value of Rs 50,000 and above is effected by debit to the customer's account or the against cheques and not against for cash payment. Banks should further ensure that provisions of Foreign Contribution Act, 1976 as amended from time to time, wherever applicable, are strictly adhered to.

13.3.4 Risk Management

Banks should, in consultation with their boards of directors, devise procedures for creating the risk profiles of their existing and a new customers and apply various anti-money laundering measures keeping in the view the risks involved in a transaction, of account or banking/ business relationship. Banks should prepare a proper profile for each new customer based on risk categorisation. The customer profile may contain the information relating to customer's identity, social or the financial status, nature of business activity, information about his clients' business and their location etc. Customers may be categorised into the low, medium and high risk. For example, individuals (other than high net worth individuals) and entities whose identities,sources of wealth can be easily identified & transactions in whose accounts by and large conform to known transaction profile of that kind of customers may be categorised as low risk. Salaried ,government owned companies, regulators fall in this

71

category. For category of customers, it is sufficient to meet the just the basic requirements of verifying identity.

There are other customers who belong to medium to high risk category. Banks need to apply intensive due diligence for the higher risk customers, especially those for whom sources of funds are not clear. Examples of customers requiring higher due diligence include (a) non- resident customers; (b) high net worth individuals; (c) trusts, NGOs and organizations receiving donations; (d) companies having close family of shareholding or beneficial ownership; (e) firms with 'the sleeping partners'; (f) politically exposed persons (PEPs) of the foreign origin; (g) non-face-2-face customers and (h) those with dubious reputation as per the public information available etc.

Banks' internal audit and the compliance functions have an very important role in evaluating and ensuring adherence to the KYC policies and the procedures. Concurrent or Internal Auditors should specifically check and verify application of KYC procedures at the branches and comment on lapses observed in this regard.

13.4 PREVENTION OF MONEY LAUNDERING ACT (PMLA), 2002 The PMLA, 2002 casts certain obligations on banking companies in regard to the maintenance and reporting of the following types of transactions:

a) All cash transactions of value of more than Rs 10 lakh or its equivalent foreign currency;

b) All series of the cash transactions integrally connected to each other which have been

valued below 10 Lakh or its equivalent in foreign currency where such series of the

transactions have taken place within a month and aggregate value of such transactions exceed Rs 10 Lakh;

c) all cash transactions were forged or counterfeit currency notes or bank notes have been

used as the genuine and where any of forgery of a valuable security or of a document has taken place facilitating the transaction; and

d) All of the suspicious transactions whether or not made in cash

72

CHAPTER 14 RESEARCH METHODOLOGY

A) Statement of problem

In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms. The attempt here is to see how various ratios have been used to reveal a bank’s performance and how this particular model encompasses a wide range of parameters in making it a widely used and accepted model in today’s scenario of banking.

B) Research design

Here, we are under going to have descriptive research i.e. analysis of banks financial statements that will make us understand the position of one bank in comparison of another and their financial position.

C) Sample design

1) Sample unit Indian Commercial Bank. 2) Sample size Five banks including, both public & private sector bank. Banks are Bank of India, state bank of India, Punjab national bank, axis bank. 3) Sampling technique Convenience sampling which is a non probabilistic sampling techniques in which samples are chosen from the available sample element according to convince and there is no fixed probability of chosen from all the sample elements. 4) Area of survey The survey will be done for five banks. The study environment will be the Banking industry.

5) Plan of analysis Here, we will be using financial statements of all banks in order to calculate different ratios which will be required for camel rating system as it considers all areas of banking operations and considered to be the best available method for evaluation bank performance and health.

73

D)

Data Collection

Data source We have taken secondary data. Secondary data on subjectwill be collected from bank’s

prospectus, annual reports and other websites.

E) Data analysis

Statistical tool We have used CAMEL RATING technique for the comparative study of different public and private sector banks of India.

74

CHAPTER 15

ANALYSIS

BANK OF INDIA FINANCIAL STATEMENTS PROFIT & LOSS ACCOUNT

Profit & Loss account

------------------- in Rs. Cr. -------------------

 

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12

mths

12 mths

12 mths

12 mths

12 mths

Income

Interest Earned

 

7,028.70

9,180.33

12,355.22

16,347.36

17,877.99

Other Income

1,184.38

1,562.95

2,116.93

3,051.86

2,616.64

Total Income

8,213.08

10,743.28

14,472.15

19,399.22

20,494.63

Expenditure Interest expended

4,396.72

5,739.86

8,125.95

10,848.45

12,122.04

Employee Cost

1,328.13

1,614.00

1,657.01

1,937.41

2,296.07

Selling

and

Admin

858.15

957.63

1,122.39

1,120.62

2,334.80

Expenses Depreciation

 

96.73

96.73

73.13

69.37

101.29

Miscellaneous

831.91

1,211.89

1,484.26

2,416.02

1,899.36

Expenses Preoperative

Exp

0

0

0

0

0

Capitalized Operating Expenses

 

2,650.74

3,165.32

3,342.23

3,716.65

5,422.07

Provisions

&

464.18

714.93

994.56

1,826.77

1,209.45

Contingencies Total Expenses

7,511.64

9,620.11

12,462.74

16,391.87

18,753.56

 

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12

mths

12 mths

12 mths

12 mths

12 mths

75

Net Profit for the Year

701.44

1,123.17

2,009.40

3,007.35

1,741.07

Extraordinary Items

0

0

0

0

0

Profit brought forward

220

541.76

541.76

0

0

Total

921.44

1,664.93

2,551.16

3,007.35

1,741.07

Preference Dividend

0

0

0

0

0

Equity Dividend

166.73

196.69

245.77

491.54

428.65

Corporate Dividend

0

0

0

0

0

Tax Per share data (annualized) Earning Per Share (Rs)

14.39

23.04

38.26

57.26

33.15

Equity Dividend (%)

34

35

40

80

70

Book Value (Rs)

99.03

117.89

168.06

224.39

243.75

Appropriations Transfer to Statutory Reserves

-76.79

405.6

795.78

1,518.33

686.86

Transfer to Other Reserves

289.74

520.88

1,509.61

997.48

625.56

Proposed

166.73

196.69

245.77

491.54

428.65

Dividend/Transfer to Govt Balance c/f to Balance Sheet

541.76

541.76

0

0

0

Total

921.44

1,664.93

2,551.16

3,007.35

1,741.07

Table 7: profit & loss account

76

BALANCE SHEET

Balance Sheet

------------------- in Rs. Cr. -------------------

 

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Capital

and

Liabilities:

 

Total

Share

Capital

488.14

488.14

525.91

525.91

525.91

Equity

Share

Capital

488.14

488.14

525.91

525.91

525.91

Share

Application

 

Money

0

0

0

0

0

Preference

 

Share Capital

0

0

0

0

0

Reserves

4,338.39

5,257.75

8,300.38

11,258.72

12,275.46

Revaluation

 

Reserves

157.35

149.48

1,763.10

1,710.29

1,428.62

Net Worth

4,983.88

5,895.37

10,589.39

13,494.92

14,229.99

Deposits

93,932.03

119,881.74

150,011.98

189,708.48

229,761.94

Borrowings

5,893.91

6,620.83

7,172.45

9,486.98

22,399.90

Total Debt

99,825.94

126,502.57

157,184.43

199,195.46

252,161.84

Other

Liabilities

&

 

Provisions

7,464.44

9,239.05

11,056.16

12,811.39

8,574.63

Total

Liabilities

112,274.26

141,636.99

178,829.98

225,501.77

274,966.46

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

77

 

12 mths

12 mths

12 mths

12 mths

12 mths

Assets

Cash

&

Balances

with

RBI

5,588.42

7,196.89

11,741.85

8,915.28

15,602.62

Balance

with

Banks, Money

 

at Call

5,857.57

10,208.65

5,975.54

12,845.97

15,627.51

Advances

65,173.74

84,935.89

113,476.33

142,909.37

168,490.71

Investments

31,781.75

35,492.76

41,802.88

52,607.18

67,080.18

Gross Block

1,674.00

1,733.50

3,448.44

3,578.23

3,790.81

Accumulated

 

Depreciation

874.71

955.61

1,049.28

1,156.75

1,504.07

Net Block

799.29

777.89

2,399.16

2,421.48

2,286.74

Capital

Work

In Progress

10.68

11.41

26.92

110.45

65.07

Other Assets

3,062.83

3,013.50

3,407.32

5,692.02

5,813.63

Total Assets

112,274.28

141,636.99

178,830.00

225,501.75

274,966.46

Contingent

 

Liabilities

57,844.12

54,811.58

100,486.14

107,155.08

118,535.87

Bills

for

collection

12,086.74

17,116.16

20,181.00

11,490.74

28,372.75

Book

Value

(Rs)

99.03

117.89

168.06

224.39

243.75

Table 8: Balance Sheet

78

Highlights of the Banks performance in the year 2009-2010 as compared to the previous year and the performance for the quarter-ended march 2010 as against March 2009 are

given below

(Rs. In Crores)

BOI COMPARATIVE STUDY OF 2009 AND 2010

 

Annual

Annual

Qua. Ended

Qua. Ended

 

March 10

March 09

March 10

March 09

Net Profit

 

1741.07

3007.35

427.91

810.37

Operating Profit

 

4704.77

5456.80

1275.39

1408.06

Gross NPA (%)

 

2.85

1.71

2.85

1.71

Net NPA (%)

 

1.31

0.44

1.31

0.44

Capital

adequacy

       

ratio

Basel 1

12.63

13.21

12.63

13.21

Basel 2

12.94

13.01

12.94

13.01

Return on avg. asset

0.70

1.49

0.65

1.50

Cost to income ratio

43.81

36.18

43.94

36.14

Total business

 

401079

334440

401079

334440

Total Deposits

 

229762

189708

229762

189708

Gross credit

 

171317

144732

171317

144732

CASA ratio

 

32.00

31.00

32.00

31.00

Avg. cost of deposits

5.16

5.76

4.79

6.07

Avg.

yield

on

8.42

9.78

8.12

9.68

deposits

Credit deposit ratio

74.56

76.29

74.56

76.29

Net interest margin

2.51

2.97

2.57

2.98

Business

per

10.11

8.33

10.11

8.33

employee (Cr.)

Earning

per

share

33.15

57.26

8.15

15.43

(Rs.)

Table 9: BOI comparative study 2009-10

79

BRANCHES & ATMS (BOI COMPARISION WITH OTHER BANKS)

Sr.

Name of the Bank

Branches

 

ATMs

no.

 
 

Rural

Semi-

Urba

Metrop

Total

On-

Off-

Total

Urban

n

olitan

site

site

1

Bank

of

1,231

603

542

559

2935

3000

200

500

India

2

Punjab

1,881

895

849

702

4327

1541

609

2150

National

Bank

3

State

Bank

4,366

3311

2022

1773

11472

5229

3319

8548

of India

4

ICICI Bank

138

461

400

410

1409

1863

2850

4713

Ltd.

5

Kotak

14

37

48

121

220

212

175

387

Mahindra

Ltd.

Table 10: Branches & ATMS

INTERPRETATION As we can interpret from the table that: - 1) In terms of highest branches, SBI is the leader, which is having more than twice the branch of PNB. That’s the reason they possess highest amount of low cost deposits. 2) In private sector ICICI is having close competition in terms of (approx. 1408) branches. ICICI is prevalent in rural & semi urban area while HDFC is having strong position in urban & metropolitan area. 3) In no of ATM, SBI leading all other banks with 8548 ATMS. And no competition has been provided by other PSUS. ICICI is at second position with 4713 ATMS.

80

CONCLUSION 1) Reach With the no of branches the reach of any bank increases, as they will be able to serve more & more customer. So SBI can be considered having best reach in Indian bank.

2) Better services Can deliver better services than others e.g. outward, jet clearing cheque procedure, Deposit & withdrawal facility on comparatively more no of branches than others.

SUGGESTION To increase the low cost margin, and interest income, which is very low in case of BOI, they should increase the no. of customer. And in today’s world deposit can be increased by providing good service of easy withdrawal and deposits with the help of services like ATM facility through large network of ATMS all over world.

HIGHLIGHT OF BANK’S PERFORMANCE

Parameters

 

Units

31.3.07

31.3.08

31.3.09

31.03.10

Branches

 

Nos.

2725

2883

3021

3207

Overseas

   

25

26

27

29

No. of staff

 

Nos.

41511

40616

40155

39676

Deposits

 

Rs.in

119882

150012

189708

229762

Crores

Inc.

over

previous

year

%

27.63

25.13

26.46

21.11

March 31

 

Advances (Gross)

 

Rs.

in

86791

114792

144732

171317

Crores

Inc.

over

previous

year

%

30.19

32.26

26.08

18.37

March 31

 

CD ratio

 

%

72.39

76.52

76.29

74.56

81

Investments (net)

Rs.

in

35493

41803

52607

67080

Crores

Capital and reserves (net)

Rs.

In

5895

10589

13495

14230

Crores

Interest income

Rs.

In

8936

12355

16347

17878

Crores

Interest Expenditure

Rs.

In

5496

8126

10848

12122

Crores

Non Interest income

Rs.

In

1563

2117

3052

2617

Crores

Non interest Expenditure

Rs.

In

2608

2645

3094

3668

Crores

Total income

Rs.

In

10499

14472

19399

20495

Crores

Total Expenditure

Rs.

In

8104

10771

13942

15790

Crores

Operating profit

Rs.

In

2395

3701

5457

4705

Crores

Table 11: Bank’s performance comparison

82

3.6) BRANCHES PROFITABILITY RATIO

BANK

TOTAL

BRANCH

ADVANC

DEPOSIT

DPB

APB

BPB

BUSINES

E

RATIO

RATIO

RATIO

S

BOI

401079

3207

171317

229762

71.64

53.41

125

SBI

1284576.3

11472

542503.20

742073.13

64.6

47.28

111.97

3

ICICI

436658.67

1408

218310.85

218347.82

155

155.05

310.12

PNB

364463.49

4327

154702.99

209760.50

48.47

35.75

84.23

KMB

32270.27

220

16625.34

15644.93

71.11

75.56

146.68

Table 12:Branches Profitability ratio

A) DEPOSIT PER BRANCH RATIO This is the productivity ratio to measure and compare the productivity of different banks. Deposit per branch ratio= Total deposits/No. Of Branch =229762/3207=71.64 Crores

Interpretation ICICI is having highest deposit per branch ratio, which shows their branch efficiency in attracting and dealing with the customer. That is the reason that in spite of having fewer branches as compared to SBI they are giving tough competition to all bankers.

Conclusion PSU Banks like SBI, BOI are attracting more deposits but they are not as efficient as private sector banks. Suggestion Public sector bank should try to increase branch efficiency by improving 1) Employee efficiency 2) Hiring techno savvy employees

83

3) By reducing the time needed in documentation process. 4) By providing better services like efficient net banking, ATM services.

B) ADVANCE PER BRANCH RATIO Advance per branch ratio= Total advance/No. of branches =171317/3207=53.41 Crores Interpretation At the same time ICICI is having best advance per branch ratio utilizing the deposits to the maximum. Means no ideal money.

Conclusion BOI is far behind than private sector bank in terms of utilizing available fund. Reason can be service oriented rather than money oriented nature of private bank.

Suggestion To compete with the competitors like ICICI bank, PSU should invest the available ideal deposits.

C) TOTAL BUSINESS PER BRANCH Total business per branch= Total Business/ no. of branches =401079/3207=125.06 Crores

Interpretation With less number of branches as compared to public sector banks, private sector banks are giving more business. ICICI is having 310 Crores of business as compared to 125 Crores of BOI.

84

EMPLOYEE PROFITABILITY RATIO

BANK

TOTAL

EMPLO

ADVANC

DEPOSI

DPE

APE

BPE

NPPE

BUSINE

YESS

E

T

RATI

RATIO

RATI

RATI

SS

O

O

O

BOI

401079

39671

171317

229762

5.79

4.31

10.11

.04

SBI

1284576.

231038

542503.20

742073.1

3.21

2.34

5.56

.05

33

3

ICICI

436658.6

37833

218310.85

218347.8

5.7

5.77

11.54

1.1

7

2

PNB

364463.4

55643

154702.99

209760.5

3.76

2.78

6.55

.06

9

0

KMB

32270.27

9300

16625.34

15644.93

1.68

1.78

3.47

.03

 

Table 13: Employee profitability ratio

 

1)

BUSINESS PER EMPLOYEE

 

Business per employee=Total Business/ no. of employees

401079/39676=10.10 Crores

2) NET PROFIT PER EMPLOYEE Net profit per employee=net profit/ no of employee =1741/39676=. 043 Crores

3)

CREDIT DEPOSIT RATIO

It

is the credit to deposit ratio =Total Credit/ Total Deposits

=171317/229722=74.56%

CASA ratio=low margin deposit (Current a/c+ SB a/c deposit)/Total deposit

B) IMPORATANCE OF CASA RATIO

A higher CASA ratio means higher portion of the deposits of the bank has come from current

and savings deposit, which is generally a cheaper source of fund. As many banks don’t pay interest on the current account deposits and money lying in the

85

savings accounts attracts a mere 3.5% interest rate. Hence, higher the CASA ratio betters the net interest margin, which means better operating efficiency of the bank.

C) BOI’s CASA RATIO CASA ratio of BOI has increased from 31 % to 32 % . The higher casa ratio higher will be net interest margin because higher portion of the bank deposits comes from cheaper source.

TABLE OF CASA RATIO OF DIFFERENT BANKS

NAME

OF

ADVANCES

DEPOSITS

CD RATIO

CASA

CA+SA

BANK

RATIO

DEPOSIT

BANK

OF

171317

229762

74.56

32

73523

INDIA

SBI

542503.20

742073.13

73.1

39.29

291560.53

ICICI

218310.85

218347.82

99.98

28.7

62665.82

PNB

154702.99

209760.50

73.75

39

81806.59

KMB