Vous êtes sur la page 1sur 74

Compiled by: V.

Ranga Prasad, IOB, STC, Chennai

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

-1-

How to Face Bank Interviews?


Authored by : Sh. N S Toor The book contains study material on all such aspect of banking, finance and economy, about which the interview boards normally ask questions. It can be used by the candidates appearing in interview in their respective banks at various levels, particularly the Senior level positions. The book is available with the publishers M/s Skylark Publications, 1/5, Bhagat Singh Lane, Gole Market, New Delhi Phone 011 23361 966. The broader contents of the opening chapter are summerised as under: Interview is an opportunity for you to present your personality consisting of your attitude, views and awareness level before the Interview Board, so that the potential in `you' is appropriately judged by the members on the Interview Board, who are learned people in their own fields of specialisation. What is evaluated during the interview ? The interview board, in order to judge your POTENTIAL evaluates your Performance in the recent past, Operating style, Team building capabilities, Effectiveness, Neutral judgment level, Transparency in dealings, Initiatives, Attitude and Leadership qualities. Though the interview is not a new process for many of you, being already in job, but you have no way of knowing exactly what is going to be asked and how that would be tackled. The following general tips can help a candidate appearing for an interview, to face the questions confidently. Should you prepare pre-scripted questions? It is important that you must not venture to go for an interview with a predetermined script of exactly what you are going to say. What is actually required, is the tactics that enable you to navigate successfully through the interview. This author had the opportunity of being both, the interviewee and interviewer on several occasions during his banking career and was able to make use of the strategy suggested below. What you should prepare? You should spend enough time to make the choice of the contents relevant to your interview. These contents differ for interviews depending upon the level for which the interview is being held. Broadly these can be disintegrated into macro and micro aspects. At macro level you should have an understanding of: "Important events (economic and political) taking place globally and their bearing on the performance of your organisation. " Status of Indian economy and its impact on the banking system in India in terms of growth of business, quality of assets and profits. " Vision and mission of the bank and its strengths and weaknesses (in terms of quality of manpower, geographical spread, level of use of information technology, introduction of new customer oriented products, pricing in terms of interest rates offered and the effectiveness in terms of delivery), market share of the bank, the
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc -2-

challenges, your bank and banking industry is facing and the priorities and policies laid down by the top management of your bank.. At micro level you should have appropriate information about: " Your professional achievements during the recent 3-4 years; " Strength of your family background (including dislocation on promotion, problems of growing children, serving wife, old parents) and educational and professional background; " Some information about the subjects you studied in your last academic examination; " All important happening around your work place (frauds, shift of big accounts from your bank etc); " Your hobbies, leisure time activities; " Important development reported in the News-papers of recent weeks. Take full advantage of your speech and body language You should bear in mind that your employer or the members of the interview board want to get to know you and interview is a medium for interaction. Hence you should express yourself freely. Your expressions would flow through your speech, your gestures and your body language. Please remember that you would normally not get a 2nd chance, to improve your 1st impression. Project the positive attitude and avoid the display of aggression In the interview, your attitude, the confidence with which you communicate and the depth you have about what you know, is generally given importance. Hence, care should be taken for not reflecting your negative frame of mind or negative attitude or shallow knowledge or aggressive postures. Aggressive positioning in the interviews, in particular, is generally not appreciated by the members of the interview board and is taken as offending. Must understand your strengths Before going for an interview, you should draw a list of all your strengths. Your strengths should be projected whenever opportunity arises without making any member of the board to feel that it is self-appreciation. You should also have the clarity as to, in what way your strengths can be a source of gain to your organization. It is on the basis of your strengths alone that you can support your candidature for the promotion. Cover your weaknesses You must understand your weaknesses and prepare yourself to cover the weak points, particularly, by having ready answer regarding the steps initiated by you in the past to negate the impact of weaknesses. If asked to explain your weakness, you should choose a weakness that is not critical to the success on the job or assignment. The weakness should preferably relate to the knowledge content in few areas as opposed to lack of personal effectiveness. For instance, a weakness relating to lack of knowledge of a particular skill, say foreign exchange, is preferable to stating that one finds it difficult to manage people. Further, the weakness to be discussed should be the one which the members of the Interview Board are either already aware of or they will discover through the interaction process. While discussing the weakness, you should always concentrate on as to how you have been working on the problem, to find a solution. You must try to give a tangible account of the efforts you have
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc -3-

been making, to convert the weakness into a strength. Focus on your professional achievement rather than personal performance In the interviews 'Tell us about yourself' is a generally inquired question which requires much more preparation than other questions of factual nature, since a candidate is generally not very certain, as to from where to begin and how to complete. However, if a candidate structures the facts relating to himself carefully in advance, covering the highlights of one's current assignment, the past professional experience in brief and also the value you offer to the organization you serve, you can be comfortable with the Interview Board. It should be taken care that you focus on your professional achievements rather than personal performance. Do self evaluation as to how do you, deserve this promotion 'Why do you deserve this promotion' is a frequently asked question and is required to be handled carefully. To answer this question well, you should be aware of the requirement of your Organization and should have clarity about what you can offer to satisfy such requirement. The answer, you provide, should reflect the distinction which you have, compared to others, based on which you deserve the promotion. Putting answers such as having a good job knowledge or being a hard worker, really does not help as every one else would similar claims, under such circumstances. Structure your reactions for adverse situations On a number of occasions, the candidates are asked about `adverse happenings in the work place where he has been working till recently'. In such circumstances, you should reflect a positive attitude, be tactful and diplomatic in the way, you describe the situation. It is desirable that the problem is first defined to make sure that there was a breach of some system or some human failure. It may be concluded by stating as to what lesson did one learn from the incident. Hypothetical questions should be handled by reflecting positive attitude At times a hypothetical situation is given to the candidate for working out a strategy. For instance, if the candidate is asked as to how he would increase the profits of a branch, he should not start directly with the strategy. The candidate, instead, should first talk about the SWOT analysis required to be under, with a view to understand the potential available to make a strategy work. The strategy should be based on the potential available in a particular situation. Your hobbies are the reflection of your overall personality You should also be very specific about your hobbies, extra curricular activities and other activities and also as to how and why you pursue those hobbies or activities. How do you spend spare time and how do you manage your time. Additionally, you must be able to give proper account and thorough understanding of your recent assignment and your academic background.

All questions are important In an interview, all the questions are important and no question is less difficult than the other. Even simple questions like which news-paper you read and which TV channel you watch and what is interesting about that could be important to understand your commitment and your interests. Hence, only few questions should
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc -4-

not be singled out as the toughest or desirable or expected. It is the wording of a question being asked, which makes one question uncomfortable from the other. You should focus not on the actual wording of the question but on the spirit and context also in which the question has been asked. Effort should be made that the wording of a question is interpreted to your advantage. Avoid half-attempted responses Before answering a question, for a while, you should collect your thoughts, so that you are able to answer appropriately. A blurred or casual or half-attempted response does not help a candidate. Listen carefully and do not be in a hurry to answer Please listen very carefully, to what is being asked. You should not be in a hurry to answer the questions. Please be patient, stay fresh, enthusiastic and cooperative. You should not be evasive or hesitant in answering the questions. Even if a question makes you uncomfortable, make earnest effort to answer it. Please endeavor to answer all questions as not answering amounts to loss of opportunity given to you. However, where you do not have clarity, please humbly express your inability to answer, so that the process of interview continues. Be concise and take care of the interest of the members on the Board You should be concise, being careful that the point mentioned by you is not incoherent or boring, so that you do not lose the interest of the members of the interview board and give an impression that you cannot organize your thoughts. Practice before the interview Before appearing for an interview, you can practice interview by involving your family members or your colleagues. Seeking guidance from experienced persons or institutes engaged in providing such kind of guidance, can certainly bring the desired improvement in your performance in the interview. What if tough questions are asked or you are not able to answer a question? In spite of best of the practice and preparation, very often you may be asked questions which you consider tough and are unable to answer. Kindly do not try to give vague answers to such questions. It is better to let the interview board know that you are not able to answer the question, so that you are asked another question, which is one more opportunity for you to cover your position. Outside the interview room It is pertinent to add that you should avoid anxiety or doing something which you don't do on normal days. Kindly bear in mind that handling an interview is both an art and a science and each interview differs from the other, depending upon the members in the interview board, the time available with the board members, the no. of candidates called and the vacancies for which those candidates have been called. One has to look into these aspects also and prepare himself well, to come out successful.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

-5-

Make the experience of interview memorable Please remember, it is you and only you, who can make this experience memorable and rewarding for yourself and your organization. Please remember that being a wishful thinker and dreaming of an effortless win does not help. It is not your luck but the planning, preparation, continued effort and your belief that you can succeed, produces positive results. All the opinion given above are by the author Shri. N S Toor Wishing you, the best, in all your endeavours.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

-6-

ACCOUNTING STANDARDS RELATED TO BANKING In India, the Accounting Standards are formulated by Accounting Standards Board under the authority of the Council of the Institute of Chartered Accountants of India (ICAI), with a view to harmonize the diverse accounting policies and practices followed by various organisations including financial intermediaries. While formulating these Standards, consideration is given to the International Accounting Standards. It is expected by ICAI that the business organisations (including Banks) as well as the Accountants responsible for preparation of the financial statements, must prepare the same with prudence and taking into account the guidelines of ICAI. RBI Role: To ensure convergence of its supervisory norms and practices with the international best practices with a view to aligning standards adopted by the Indian banking system with global standards, RBI has issued guidelines to be taken into account by the banks. In order to identify gaps in compliance, with the Accounting Standards (AS) and eliminate / reduce the gaps, a Working Group was constituted under the Chairmanship of Shri N.D. Gupta, Former President of ICAI. Its recommendations have been accepted and RBI has issued detailed guidelines to banks on their recommendations. Applicability for banks: Presently, the Accounting Standards No. AS 1, AS 15, AS 17, AS 18, AS 21, AS 22, AS23, AS 24, AS 25. AS 26, AS27, AS 28,and AS29 Whenever specific difference in opinion arises among the auditors, the Statutory Central Auditors would take a final view. Persisting difference, if any, could be sorted out in prior consultation with RBI, if necessary. RBI has advised banks that any qualifications in the financial statements of banks for non compliance with any Accounting Standard will be viewed seriously by the Reserve Bank. Non-compliance : The Statutory Central Auditors report on banks' non-compliance with some of the Accounting Standards in the Auditors' Reports attached to the balance sheets and the qualifications could affect the confidence of the users of the financial statements, viz., counter party banks, host country regulators of foreign branches of Indian banks, national and international rating agencies etc., in the integrity of the published results.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

-7-

ASSET LIABILITY MANAGEMENT What is ALM ? ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximised within the overall risk-preference (present and future) of the institutions. Scope of ALM The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection. Residual maturity Residual maturity is the time period which a particular asset or liability will still take to mature i.e. become due for payment (once at a time, say in case of a term deposit or in instalments, say in case of term loan). Maturity buckets Maturity buckets are different time intervals (8 for the time being, namely 1-14 days, 15-28, 29-90, 91-180, 181-365 days, 1-3 years, 3-5 and above 5 years), in which the value of a particular asset or liability is placed depending upon its residual maturity. Mismatch position When in a particular maturity bucket, the amount of maturing liabilities or assets does not match, such position is called a mismatch position, which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement, such situation may turnout to be risky for the bank. The mismatches for cash flows for 1-14 days and 15-28 days buckets are to be kept to the minimum (not to exceed 20% each of cash outflows for those buckets). Role of ALCO Asset-Liability Committee is the top most committee to oversee implementation of ALM system, to be headed by CMD or ED. ALCO would consider product pricing for both deposits and advances, the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank. It will have to articulate current interest rates view of the bank and base its decisions for future business strategy on this view. Benefits of ALM - It is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amounts of financial assets and liabilities both mix and volume - with the complexities of the financial markets in which the institution operates.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

-8-

BANKING VISION 2010 An IBAs Committee prepared a vision report in the backdrop of globalisation of Indian economy, developments taking place in and around the globe and those that are expected as per the projections made in the Planning Commissions India Vision Document 2020 & 10th Five Year Plan, the on-going reforms measures, expected Basel II needs and the expected pace of expansion in the balance sheets of banks. Focus of banking: The focus of banking has to move in favour of cost control as that would be the key factor to higher profits in future. The cost will have to be determined as revenue minus profit which would necessitate efficient use of resources including manpower resources with proper reconfiguration of human minds, as the increase in productivity would determine the winners and laggards. Financial services system could see the emergence of highly varied financial products, tailored to meet specific needs of the customers in the retail as well as corporate segments. The advent of new technologies could see the emergence of new financial players doing financial intermediation (such as utility service providers offering bill payment services or supermarkets or retailers doing basic lending operations). Specialisation : Some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor. Growth with quality : The future growth of banking business has to focus on the qualitative aspects rather than quantitative only. Total assets of the Scheduled Commercial Banks by March 2010 would be at Rs.40,90,000 cr. Bank assets are expected to increase at annual compounded rate of 13.4% till March 2010 compared with 16.7% increase during 1995-2003 period. Deposits are expected to grow from Rs.1356000 cr to Rs.3500000 cr i.e. 14.5% CAGR and investments with a CAGR of 23.6%. Need for consolidation: Consolidation of banking institutions is expected through mergers and acquisitions, globalisation of their operations, development of new technology and universalisation of banking. There would be greater presence of international players in the Indian financial system. Some of the leading Indian banks, may emerge as global players since there are opportunities available to Indian banks abroad to expand their business. The market led mergers between private banks and also between public sector banks, are not ruled out This could see the emergence of 4-5 world class Indian Banks. Risk and reward : For success of banking transactions, the ability of the banking institutions to perceive risk and take suitable steps to manage the risk, will have to be ensured. The risk managers could prosper and the risk takers are likely to survive. The risk management has to be given substantial attention and this has to be initiated at the branch level instead of corporate offices. Information technology: Faster decision making and faster appraisal are likely to be in place with faster information and data flow. This could help banks to improve their credit management effectively in addition to reduction in transaction cost and improved revenues.
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc -9-

Credit delivery : The most significant challenge before banks is the maintenance of rigorous credit standards, especially in an environment of increased competition for new and existing clients. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash flow based analysis to borrower account behaviour, so that the state of readiness of Indian banks for Basle II regime improves. Retail lending and Social banking: Retail banking is expected to receive greater attention. The concept of social lending would undergo a change and instead of being seen as directed lending, the priority sector lending would be business driven. With rural market comprising big size of the population and disposable surplus, there is likely to be greater emphasis on rural and semi-urban areas for business growth. Regulatory framework: The expected integration of various intermediaries in the financial system would require a strong regulatory frame work. There have to be various legislative changes to enable the banking system to remain contemporary/competitive. However, the emphasis would be on self regulation instead of regulatory prescriptions based on putting in practice the best practices. Banks are likely to migrate to the global accounting standards which would require greater transparency, more disclosures and tighter norms for enlisting the confidence of global investors and international market players

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 10 -

Basel II Capital Accord The Committee circulated the revised version during June 2004 (called Accord II), for adoption by the Central Banks in different parts of the world according to priorities of the respective central banks. The fundamental objective behind this revision is to further strengthen the soundness and stability of the international banking system. The committee expects its implementation, in stages, to commence from end 2006. Focus : A significant innovation of the new framework is the greater use of assessment of risk provided by banks' internal systems as inputs for capital calculation. Being more risk sensitive than the 1988 Accord, it is believed that this will lead to adoption of stronger risk management practices by the banking industry world over, which will be a major advantage for the financial markets. Capital requirement /ratio: Under the Accord, the capital requirement (called capital charge) is to be calculated for credit, market and operational risk. While the definition of regulatory capital remains same (Tier I and II), the measurement of risk assets has been modified for credit risk and operational risk but for market risk there is no change. The minimum requirement continues to be 8% calculated as : Capital Fund (Tier I & II) / (Credit risk + market risk + operational risk). Tier 2 shall continue to be maximum at 100% of Tier I capital. Three pillars The revised framework is based on three important aspects called three pillars which include (a) minimum capital requirement, (b) supervisory review and (c) market discipline. 1st pillar: Minimum Capital Requirement The first pillar relates to minimum capital requirement for credit risk, operational risk and trading book issues including market risk. CREDIT RISK : here are two approaches for providing capital against credit risk which include Standardised Approach and Internal Risk Based (IRB) Approach. IRB approach could be either foundation IRB approach or advanced IRB approach. MARKET RISK OR TRADING BOOK : For market/trading book risk, the external credit assessment-specific risk, the capital requirement would be rating and maturity based. OPERATIONAL RISK: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some factors for operational risk could be lack of competent management and/or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, non-compliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc. 2nd Pillar - Supervisory Review Process: Supervisory review process is intended to ensure that banks have adequate capital to support all the risk in their business and encourage them to develop and use better risk management techniques in monitoring and managing their risk. This process ensures that the bank managements develop internal risk capital assessment process and set capital target, commensurate with bank's risk profile and control environment. 3rd Pillar - Market Discipline : The objective of 3rd pillar is to complement the minimum capital requirement and supervisory review process through various kinds of disclosures (on semi-annual basis). Implementation in India
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 11 -

In India, RBI has desired the banks to submit their plan for implementation of the Basel II Accord, by December 2004. The majority of the banks in India are already having much higher level of capital adequacy and relatively comfortable level of NPAs, due to which the banking system on the whole, may not find it very difficult, to implement the new capital accord.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 12 -

BEST PRACTICES CODE The BPC relates to detailed procedural rules for entering into transactional relations within the banks. The main objective is that such procedures, especially those in all fraud-prone areas, should be well documented, compared with national and international best practices, experimented with, and improved upon in the light of the experience gained. What is essential for BPC ? : Preparation of BPC involves examination of all procedures, processes, products, activities and systems, existing and future (as and when a new product/process is introduced). It needs to be integrated with the overall risk management strategy of the bank and should be considered as a part of the strategy to mitigate all possible operational risk losses. RBI guidelines on compiling the BPC: Based on the recommendations of Mitra Committee, RBI issued the following guidelines (Mar 15, 2004) for keeping in view while preparing the BPC, so as to bring a certain minimum level of uniformity in content and coverage of BPC. Comprehensiveness : The BPC should be a comprehensive and homogenous document. The consolidation and incorporation of circulars issued by the banks by itself, does not constitute BPC. RBIs earlier instructions issued to banks relating to the common fraud prone areas and their prevention, to be observed. Recommendations of various committees : BPC should cover / highlight the recommendations of the Ghosh Committee, Mitra Committee, relevant recommendations of the Narang Committee (large value frauds), Narasimham Committee on Banking Reforms, recommendations of the Estimate Committee on Prevention of Frauds in public sector banks, etc. advised to banks for implementation. The BPC should also take into account the instructions of the CVC, if any, issued from time to time. Minimum coverage : The BPC should, at a minimum, cover all the functional areas like cash, safe custody of other valuables (DD/TT/LC/Guarantee forms, etc.), deposit accounts, investment portfolio, credit portfolio, foreign exchange transactions, treasury operations, bills portfolio, remittances, cash receipts and payments, issue/payment of demand drafts, clearing transactions, government transactions, LCs/ Guarantees, etc. Prevention of loss to customers : BPC may incorporate practices that would help prevention of losses to its customers and include suitable guidance to such customers. Banks should, codify the precautions to be taken by customers and the same should be publicised by placing on their website or through any other medium. Revision : The BPC should be periodically revised and updated in the light of the experience gained, fresh instructions from the Reserve Bank and suggestions made by internal/external auditors.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 13 -

BUSINESS PROCESS RE-ENGINEERING In the banking industry, the Business Process Re-engineering (BPR) means transforming the select processes and procedures with a view to empower the bank with contemporary technologies, business solutions and innovations that enhances the competitive advantage. BPR can be defined as the fundamental reconsideration and radical redesign of organizational processes, in order to achieve drastic improvement of current performance in cost, service and speed in the words of Michael Hammer and James Champy. To ensure survival in the changing global environment it is essential that banks respond to major trands reshaping the markets. Objective : The objective of a BPR initiate is to create and enhance the value of the bank for the customers. It takes into account 4 important aspects customer (to given him enhanced value), competition (to meet it successfully), change (to manage it) and cost (to reduce). The basic objectives of BPR are to reduce the transaction process time without sacrificing security aspects, quality and real time service to clients and extensive propagation of single window concept. BPR basically aimed at maintaining long term profitability and strengthening the competitive edge of banks in conforming with transforming market realities. Process : There are three key parameters for BPR i.e. customer service, product innovation and operational excellence. BPR envisages a number of activities such as procurement, order fulfillment, product development, customer service and sales. The process involves identification of the business processes to be redesigned, understanding and measuring the existing processes, identifying the information technology levers and designing and building a prototype of new process. Benefits : There is growing need for use of BPR to further the strategic goals of banks. BPR can benefit the customers through significantly reduced transaction time, flexibility in servicing and improved value. The banks can be benefited by increased volume of business and higher productivity, reduced operational cost leading to higher profits, improved employee loyalty and sense of belongingness and establishment of bank within a branch concept. Employees benefit through empowerment leading to higher job satisfaction, effective job rotation as an additional incentive and effective interface with customers as work load is evenly distributed.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 14 -

CERTIFICATE OF DEPOSITS This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest. The major features are: Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit. CRR/SLR Applicable on the issue price in case of banks Investors Individuals (other than minors), corporations, companies, trusts, funds, associations etc Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years). Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac Intt. rate Market related. Fixed or floating Loan Against collateral of CD not permitted Pre-mature cancellation Not allowed Transfer Endorsement & delivery. Any time Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June 30, 2002 Other conditions If payment day is holiday, to be paid on next preceding business day Issued at a discount to face value Duplicate can be issued after giving a public notice & obtaining indemnity

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 15 -

Capital Adequacy Ratio The Committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines on capital measures and capital standards in July 1988 which were been accepted by Central Banks in various countries including RBI. In India it has been implemented by RBI w.e.f. 1.4.92 Objectives of CAR : The fundamental objective behind the norms is to strengthen the soundness and stability of the banking system. Capital Adequacy Ratio or CAR or CRAR : It is ratio of capital fund to risk weighted assets expressed in percentage terms i.e. Minimum requirements of capital fund in India: * Existing Banks 09 % * New Private Sector Banks 10 % * Banks undertaking Insurance business 10 % * Local Area Banks 15% Tier I Capital should at no point of time be less than 50% of the total capital. This implies that Tier II cannot be more than 50% of the total capital. Capital fund Capital Fund has two tiers - Tier I capital include paid-up capital statutory reserves other disclosed free reserves capital reserves representing surplus arising out of sale proceeds of assets. Minus equity investments in subsidiaries, intangible assets, and losses in the current period and those brought forward from previous periods to work out the Tier I capital. Tier II capital consists of: * Un-disclosed reserves and cumulative perpetual preference shares: * Revaluation Reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital) * General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets: * Investment fluctuation reserve not subject to 1.25% restriction * Hybrid debt capital Instruments (say bonds): * Subordinated debt (long term unsecured loans: Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets. Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to offbalance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the credit conversion factor. This will then have to be again multiplied by the relevant weightage.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 16 -

Reporting requirements : Banks are also required to disclose in their balance sheet the quantum of Tier I and Tier II capital fund, under disclosure norms. An annual return has to be submitted by each bank indicating capital funds, conversion of off-balance sheet/non-funded exposures, calculation of risk -weighted assets, and calculations of capital to risk assets ratio

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 17 -

COLLATERALISED BORROWING & LENDING OBLIGATION (CBLO) CCIL launched a new money market instrument, the Collateralised Borrowing and Lending Obligation (CBLO). It is a variant of liquidity adjustment facility, permitted by RBI. It is a mechanism to borrow and lend funds against securities for maturities of 1 day to 1 year. It is a tripartite repo transaction involving CCIL as 3rd party, which functions as intermediary or common counter party to borrower as well as lender. Borrower will be able to repay back even before maturity, compared to payment on due date under the existing Repo system. CBLO is expected to meet the needs of banks, FIs, PDs, MFs, NBFCs and companies for deploying their surplus funds, which have been phased out of the call money market operations. CBLO is issued at a discount to face value. Under CBLO, securities of borrower will be held in their constituent SGL account opened with CCIL and will not be transferred to lender

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 18 -

CORE BANKING SOLUTIONS Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is completed in a centralized environment i.e. under which the information relating to the customers account (i.e. financial dealings, profession, income, family members etc.) is stored in the Central Server of the bank (that is available to all the networked branches) instead of the branch server. Depending upon the size and needs of a bank, it could be for the all the operations or for limited operations. This task is carried through an advance software by making use of the services provided by specialized agencies. Due to its benefits, a no. of banks in India in recent years have taken steps to implement the CBS with a view to build relationship with the customer based on the information captured and offering to the customer, the customised financial products according to their need. Advantages: The CBS process is advantageous both to the customers and the banks in the following manner: Customer: Transaction of business from any branch, ATM that offers him anytime anywhere banking facility. Lower incidence of errors. Hence accuracy in transactions. Better funds management due to immediate availability of funds. Banks: Standardisation of process within the bank. Better customer service leading to retention of customer and increased customer traffic. Availability of accurate data & Better use of available infrastructure Better MIS and reporting to external agencies such as Govt., RBI etc. Increased business volume with better asset liability management and risk management.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 19 -

CHANNEL FINANCING Forward and backward linkages in a business organization play a significant role in the success or failure of the business entity. For (say) a manufacturing or trading firm, while the suppliers of raw material are important as they provide input for production, equally important is the role of its distributors which sell products manufactured by the firm through retailers to the ultimate consumer. Channel financing relates to ensuring that integrated financial and commercial solution is available to the entire chain of supply and distribution, that could ensure the health of the firm, financed by the bank. How channel financing is different from conventional lending? Channel financing is different from the conventional lending since, in conventional lending, the financing banks are generally not concerned as to how the suppliers of the firm and dealers of the products of firm, are financing their activity. The weak financials of the supplier (leading to delay in supply and non-availability of market credit) or the dealers of the products (delay in receipt in payment leading to higher book debts) could adversely impact the top-line(sales) as well as bottom-line(profits) of the financed firm. In the channel financing the financing bank may have to find ways and means as to how the suppliers and buyers (dealers of the product) can be financed through various instruments/facilities. Hence, the channel financing adds value to the transaction for all the parties concerned, be it the manufacturer/trader, the supplier of the inputs or the dealer/buyer or the financing bank. Methodology : Through channel financing, the business firms can out-source a major part of their working capital needs thereby reducing their dependence on bank finance. For instance, it need not avail of credit from its bank to pay off the supplier if the supplier gets the finance in his own name from the bank for the raw materials supplied on credit in the form of say, drawee bills financing. The bank can also allow loan to the dealer for the credit term that has been fixed between the firm and the dealer in the form of receivable finance or finance against book debts or factoring of the receivables. This enables the manufacturing firm to get cash immediately for the finished goods supplied. This firm functions as the principal customer which suggests the names of its suppliers and dealers to the bank. Thereafter, the bank makes a due diligence assessment of the suppliers/dealers standing and credit worthiness and decides to provide finance on merit. Benefit to the financed concern, the supplier and the dealers/buyers : The pre and post sale working capital requirement of the manufacturing concern, would be scaled down. Such firms can concentrate more on their core competence area of production and marketing their products besides saving time and costs involved in arranging creditors and monitoring recovery. As regards the suppliers and dealers, the major benefit is that they get payments promptly, which improve their liquidity position and cost. This also helps them as well as the bank to cut level of counter party risks. Gains to banks : The banks also gain substantially from the process of channel financing which include increased customer base, effective due diligence and smoothness of lending activity and loan origination process. Besides, the banks will be able to ensure better credit discipline. Since the risk is diversified through finance to supplier, manufacturer and the dealers, the credit exposure norms are better observed. Hence channel financing is a very convenient tool in managing their assets portfolio. Why banks should adopt channel financing : Channel financing, due to its distinct advantages to the business firms as well as banks, has been suggested for
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 20 -

implementation in various forms, by various committees in India such as receivable financing by Tandon Committee, drawee bills financing by Chore Committee and through factoring by Kalyansundram Committee. Channel financing opens up manifold opportunities due to which the banks can make conscious efforts at popularizing this credit delivery mechanism

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 21 -

Corporate Governance & Banks In banking parlance, the Corporate Governance refers to conducting the affairs of a banking organisation in such a manner that gives a fair deal to all the stake holders i.e. shareholders, bank customers, regulatory authority, society at large, employees etc. Why corporate governance in Indian banks : The system of corporate governance is important for banks in India because, majority of the banks are in public sector, where they are not only competing with one another but with other players in the banking system as well as in financial services system including Financial Institutions, Mutual Funds and other intermediaries, in a new environment of liberalization and globalization. Further, with restrictive support available from the Govt. for further capitalization of banks, many banks may have to go for public issues, leading to transformation of ownership. Corporate Governance and day to day management: Corporate Governance is different from day to day management of a bank, which is the basic responsibility of the operating management i.e. team consisting of the Chief Executive & top management functionaries supported by the operating staff. Corporate governance on the other hand, is to create an environment to help the operating management to enhance the stake-holders' value. Scope of Corporate Governance : Corporate governance covers a variety of aspects such as protection of shareholders' rights, enhancing the shareholders' value, issues concerning the composition and role of the Board of directors, deciding the disclosure requirements, prescribing the accounting systems, putting in place effective monitoring mechanism etc. Present management structure of public sector banks in India : The present structure includes Board of Directors (having Govt., RBI and shareholders nominees), Management Committee (having Govt. and RBI nominees), Audit Committee of the Board (having responsibility of ensuring the efficacy of the entire internal control and audit functions) and other advisory committees constituted by the Board. The Chairman is assisted by one whole time director and both of them are appointed by the Govt. Parameters to judge the standard of corporate governance : There are a number of parameters on the basis of which the level of corporate governance can be judged for a banking organisation. It includes the suggested model code for best practices, preferred internal system, recommended disclosure requirements including the level of transparency, role of Board of directors and committees, reporting system to the Board of directors, policies formulated by the Board and monitoring of performance. Important aspects of corporate governance :The following aspects require special mention while judging the standard of corporate governance in a banking institution: a: Constitution of the Board of directors : b: Transparency c: Policy formulation d: Internal controls e: Committees of the Board Developments concerning Corporate Governance in Indian banking : By fixing prudential standards, the regulators can improve the corporate governance
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 22 -

and RBI has already taken a no. of steps during the recent years to enhance the usefulness of good corporate governance. However, there is lot, which the banks themselves have to do, since adherence to prudential norms is the minimum level of compliance and banks have to achieve higher standards for good governance. The success of corporate governance lies in minimising the regulatory norms and adoption of voluntary codes.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 23 -

COUNTRY RISK MANAGEMENT GUIDELINES Banks are required to formulate appropriate, well documented and clearly defined Country Risk Management (CRM) policies which should address the issues of identifying, measuring, monitoring and controlling country exposure risks. For the time being, only in respect of a country, where wef March 31, 2005, a banks net funded exposure is 1% or more of its total assets, the bank is required to formulate the CRM policy for dealing with that country risk problems. The CRM policy should stipulate rigorous application of the Know Your Customer (KYC) principle in international activities which should not be compromised by availability of collateral or shortening of maturities. Scope Both the funded exposure (such as cash balances, bank balances, deposit placement, investments, loans and advances, trade creditors, receivables, over drafts in Vostro accounts etc.) and non-funded exposures (letter of credit, lines of credit, guarantee, performance bonds, bid bonds, warrantees, confirmations of LCs, etc) from their domestic as well as foreign branches is to be taken into account while identifying, measuring, monitoring and controlling country risks. Indirect country risk (say exposures to a domestic commercial borrower with a large economic dependence on a certain country) is also to be considered and is to be reckoned at 50 % of the exposure for the purpose of these guidelines. Exposures should be computed on a net basis i.e., gross exposure minus collaterals, guarantees, insurance etc. Netting may be permitted for cash collaterals, bank guarantees and credit insurance available in/ issued by countries in a lower risk category than the country on which exposure is assumed. Ratings The rating system should identify the full dimensions of country risk including links between credit and market risk. Banks should not rely solely on rating agencies or other external sources as their only country risk-monitoring tool. The frequency of periodic reviews of country risk ratings should be at least once a year. Till banks move over to internal rating systems, they may use the 7 category classification followed by ECGC for the purpose of classification and making provisions for country risk exposures. Exposure limits Bank Boards may set country exposure limits (to be reviewed periodically) in relation to the banks regulatory capital (Tier I + Tier II). RBI may, if it becomes necessary, prescribe a prudential aggregate country exposure limit for the higher risk categories. Monitoring of exposures Banks should monitor their country exposures on a weekly basis but exposures to high-risk categories should be monitored on a real-time basis. Banks should switchover to real-time monitoring of country exposures (all categories) by 31st March 2004. Boards should review the country risk exposures at quarterly intervals. Provisioning / Capital requirement Banks shall make provisions, with effect from the year ending 31 March 2003, on the net funded country exposures on a graded scale ranging from 0. 25 to 100 per cent, according to the risk categories (for the time being for the country, where a banks net funded exposure is 1 per cent or more of its total assets)
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 24 -

The provision for country risk shall be in addition to the provisions required to be held according to the asset classification status of the asset. In the case of loss assets and doubtful assets, provision held, including provision held for country risk, may not exceed 100% of the outstanding. Banks shall be allowed to treat provisions held for country exposures on par with provisions held for standard assets for being reckoned for Tier II capital, subject to the ceiling of 1.25 % of the risk weighted assets.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 25 -

CROSS SELLING Cross-selling stands for being able to offer to the existing bank customers, some additional banking products, with a view to expand banking business, reduce the per customer cost of operations and provide more satisfaction and value to the customer. For instance, when a bank is in a position to sell to a deposit customer (say saving bank or term deposit), a loan product such as housing loan, credit card, personal loan or vice-versa, this would result into additional business and lead to low per customer cost and higher per customer earning. Revived focus : In the present day context, the cross selling has come into focus, as some of the new private banks (ICICI Bank) have been able to offer to their customer a variety of products and thus generate more business through cross selling. But for most of the public sector banks, in particular, the concept in its new form, is still at its evolutionary stage. Scope of cross selling : The crossing selling may take place on the liability side (i.e. different kinds of deposit accounts) or on the asset side (i.e. loans for different requirements) or between the two. It could be either at the initiative of the customers or a bank can implement it as a well prepared strategy. Benefits from cross selling : The major benefit is in terms of cost reduction as for a bank, the cost of contracting a new customer is much higher than to serve an existing customer (may be up to 3-4 times). Further, through cross selling the benefits of economies are available to the bank, which reduce the cost further and increase the profits. Another additional advantage is that the cross selling helps in building brand value if the loyalty of the customer could be ensured for the brand, as in that case the likelihood of shifting the business dealings to another organisation/bank by the customer, is much less. Strategies for cross selling: The existing client base of the banks could be used by them for the purpose of cross selling after carefully charting the profile of the customers. For this purpose, the banks can undertake studies for various products and various geographical areas to understand the potential available for cross selling. The banks may undertake some of the following steps: Collection of data and preparation of data base of the customers, because the entire exercise of cross selling is based on such data base of the customers. Identification of customers and products that could be offered and then charting the strategy to offer the products. Imparting proper training to the staff to create team spirit and sharing with them the strategy for undertaking cross selling. Selecting target customers and narrowing down the product range, or even development of new products if necessary, to meet the specific needs of the group. Effective delivery. The bankers have to remember that Cross-selling is not a transaction based activity, it is primarily, a relationship building exercise.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 26 -

CUSTOMER RELATIONSHIP MANAGEMENT Customer satisfaction is the degree of happiness a customer realises with a product or service and is the most important driving force for retention of an existing customer which in turn results in growth of any business organisation including banks, since it determines the size of cash flows into the business. The satisfied customers always help in improving the toplines (i.e. business turnover) through referrals and positive publicity which lead to improvement in bottomlines. In order to maintain their position, while the business organisations have to retain their existing customers, but for better growth in future, fresh customers are also required to be added. New vis--vis old customer It needs to be borne in mind that to attract new customers involves huge cost in terms of set up costs, promotion costs, advertising cost, follow up cost etc. Due to these costs the operating cost for new customer is generally higher for new customers. As a result, the longer relationship of a customer brings better returns to the business. The defection by customers is a major factor for loss of revenue to the business and it should be appreciated that higher the rate of defection causing lower average length of relationship, higher would be the rate of reduction in profits. Emergence of CRM Hence, every deregulated market has to veer around to retaining existing customers besides identifying and attracting new customers. In US decreasing interest in traditional marketing was witnessed as early as 1980s when returns dipped to 3%, companies had to look for an alternative to mass marketing through ads and promos. This led to a finer segmentation of the market. The technological innovation like data warehouses and call centres allowed a micro approach i.e. a segment called customer relationship management or CRM and eCRM. With the size, location or past history not being that relevant which it used to be in the past and the market forces being in favour of the customer, the organisations caring for customers are likely to be the winners. The availability of information technology tools are arousing additional expectations of the customer which these organisation can think of ignoring. Customer Relationship Management (CRM) refers to the ability to understand, anticipate and manage the needs of the customer, interaction and relationship resulting in increased profitability through revenue and margin growth and operational efficiencies. eCRM can address other factors like personalisation, customization, one to many and many to many transactions. It permit business speed, agility and real time response to customers or markets through the new tools such as eMail, internet telephony, chat facility etc. It reduces the cost of customer contract.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 27 -

DEMATERIALISATION (DEMAT) An investors portfolio of paper securities is subject to problems that such as mutilation of share certificates to loss of certificates, forged certificates, bad delivery etc. These problems can be taken care of through the medium of Depository by providing paperless electronic or dematerialised security transactions. What is dematerialisation ? Dematerialisation is a process by which the paper certificates of an investor are taken back by the company/registrar and actually destroyed and an equivalent number of securities are credited in electronic holdings of that investor. What is depository and what is its role ? Depository is like a bank, where securities are held in electronic form, scrips are collected and receipts and record of the account are given, to the investor. What are depository participants (DPs) and what is their role ? DP are shareholders representative (like brokers on SEs) and provide a link between the depository and the client. The transactions for demat stock, with a depository are carried by opening an account with and through the depository participant. What is rematerialisation ? When the electronic holdings are converted back into paper certificates by printing new certificates with a new range of certificate numbers, the process is called rematerialisation.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 28 -

DERIVATIVES A derivative is a financial contract that derives its value from another financial product/commodity (say spot rate) called underlying (that may be a stock, stock index, a foreign currency, a commodity). Forward contract in foreign exchange transaction, is a simple form of a derivative. Objectives and instruments of derivates: The major purpose that is served by derivatives is to hedge the risk. Futures, forwards, options, swaps etc. are the common instruments of derivatives. The derivatives do not have any independent existent and are based on the underlying assets that could be a stock index, a foreign currency, a commodity or an individual stocks. Operators in the derivative market : There are various kinds of operators in the derivative market such as hedgers (which manage the risk), the speculators (who undertake risk for realization of profit) and the arbitrageurs (who make purchase and sales simultaneously but in different market to take benefit of price differentials). The players in option market include development finance institutions, mutual funds, institutional investors, brokers, retail investors. Components: The derivatives have components such as Options, Futures-forwards and Swaps. Option It is contract that provides a right but does not impose any obligation to buy or sell a financial instrument, say a share or security. It can be exercised by the owner. Options offer the buyers, profits from favourable movement of prices say of shares or foreign exchange. Variants of option: There are two variants of options i.e. European (where the holder can exercise his right on the expiry date) and American (where the holder can exercise the right, anytime between purchase date and the expiry date). It is important to note that option can be exercised by the owner (the buyer, who has the right to buy or sell), who has limited liability but possibility of realization of profits from favourable movement in the rates. Option writers on the other hand have high risk and they cover their risk through counter buying. Components of options: Options have two components i.e. call option and put option. The owners liability is restricted to the premium he is to pay. Call option : The owner i.e. the buyer, has the right to purchase and the seller has to obligation to sell, a specified no. of instruments say shares at a specified price during the time prior to expiry date. Put option : Owner or the buyer has the right to sell and the seller has the obligation to buy during a particular period. Futures and forwards The futures are the contracts between sellers and buyers under which the sellers (termed short) have to deliver, a pre-fixed quantity, at a pre-fixed time in future, at a pre-fixed price, to the buyers (known as long). It is a legally binding obligation between two parties to give/take delivery at a certain point of time in future. The main features of a futures contract are that these are traded in organised exchanges, regulated by institutions such as SEBI, they need only margin payment on a daily basis. The future positions can be closed easily. Futures contract are made primarily
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 29 -

for hedging, speculation, price determination and allocation of resources. The forward on the other hand is a contract that is traded off-the-stock exchange, is self regulatory and has certain flexibility unlike future which are traded at stock exchange only, do not have flexibility of quantity and quality of commodity to be delivered and these are regulated by SEBI, RBI or other agencies. Futures and options Futures can also be distinguished from options because in futures, both the parties have to perform the contract and no premium is required to be paid by either party, where as in case of option, only the writer has to perform while the buyers makes payment of the premium to the seller in consideration for his performance. In addition, in futures the contract is to be performed on the settlement date and not before that whereas in case of option the buyer can exercise the option any time prior to the expiry date. Credit derivatives Credit derivatives are over the counter financial contracts (i.e. off-balance sheet) through which the transferor can transfer the credit risk to another party without actually selling the asset. It can be defined as a contract on the basis of which one party has to make payment to another party on the basis of performance of a specified underlying credit assets. In a credit derivative there are two parties i.e. protection seller and protection buyer. Protection seller assumes the credit risk in consideration of premium that the protection buyer pays. Protection buyer on the other hand transfer the risk to the protection seller for a premium. Under the arrangement, the protection seller makes the payment to the protection buyer on credit event (such as failure to pay, insolvency, bankruptcy, repudiation, price decline etc. of the underlying asset) taking place

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 30 -

FACTORING The arrangement in which receivables created out of sale of goods or services are sold to an agency (known as a factor), is called the factoring. Presently two bank backed factoring companies i.e. SBI Factors and Canara Bank Factors are engaged in business of factoring, in association with SIDBI. It has been introduced in India during 1991 on the Report of Kalyanasundrama Committee. The factor performs the functions such as purchase of receivables, maintaining the sales or receivables ledgers, submitting sales account to the creditors, collection of debt on due dates, after collection, to return the reserve money to the seller and provide consultancy services to the customer in respect of marketing, finance and production. The advantages of factoring are: a: All the sales practically become cash sales to the seller b: Money blocked with sundry debtors becomes available for business. c: The seller also gets rid of collection of the receivables d: His working capital management becomes efficient which also reduce his cost and in turn improve the possibility of better profits. Process of Factoring The seller of goods sells on credit basis to a reputed buyer and gets the invoices accepted for payment from the buyer. These invoices are then assigned to a financial institution called factor, which discounts these invoices and makes payment to the seller of goods. On due date, the factor recovers the payment from the buyer of the goods. In case of non payment, the loss is borne by the factor in case of without recourse factoring

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 31 -

Global Depository Receipts & American Depository Receipts A GDR or ADR means any instrument in the form of a Depository receipt or certificate by whatever name it is called, created by the Overseas Depository Bank (ODB) outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company. These are negotiable instruments denominated in US $ representing a non-US companys publicly traded, local currency equity shares. The issue of such instruments involves the delivery of ordinary shares of an Indian company to a domestic custodian bank in India, which in turn instructs an overseas depository bank to issue GDR/ADR on a predetermined ratio. The GDR/ADR can be sold outside India in their existing form. The underlying shares (arising after redemption of GDR/ADR) can also be sold in India. While ADRs are listed on the US stock exchanges, the GDRs are usually listed on a European stock exchange. A GDR/ADR may evidence one or more GDS/ADS. Each GDS/ADS represent underlying share of Issuing company.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 32 -

INDIAN DEPOSITORY RECEIPTS (IDRs) As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs. The IDRs would have following features: Overseas Custodian : It is a foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI. Approvals for issue of IDRs : IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date. Listing : These IDRs would be listed on stock exchanges in India and would be freely transferable. Eligibility conditions for overseas companies to issue IDRs: Capital : The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million. Sales turnover : It should have an average turnover of $ 500 million during the last three years. Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period. Debt equity ratio : The pre-issue debt equity ratio of such company should not be more than 2:1. Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves. Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue. Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares. Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 33 -

INSURANCE BUSINESS BY BANKS With the opening up of insurance sector, the banks in India can undertake insurance business either on risk participation basis (called underwriting) by setting up insurance joint ventures OR undertake insurance business as agents of insurance companies on fee basis, without any risk participation by banks themselves or their subsidiaries (called bancassurance). Benefits : The insurance business offers an opportunity for banks to increase fee based business for improving their profits and make utilisation of their branch net work and customer base optimally, to increase the fee-based income. Insurance is an appropriate option since banks fulfill three major requirements for a successful insurance business i.e. asset management and investment skills, distribution and capital adequacy. Parameters As per RBI guidelines on insurance business (of March 16, 2000), the banks can undertake insurance business (of underwriting) where: 1 net worth is not less than Rs.500 crore 2 capital to risk weighted asset adequacy ratio of is not below 10% 3 there is a three year track record of continuous profits 4 non-performing assets are at reasonable level. 5 there is a satisfactory track record of existing subsidiaries. The activity should be undertaken by forming a subsidiary. Banks equity stake can be 50% of the insurance venture. BANCASSURANCE Bancassurance stands for distribution of financial products particularly the insurance policies (both the life and non-life), also called referral business, by banks as corporate agents, through their branches located in different parts of the country. Licence for bancassuranceBanks are required to obtain prior approval of the Insurance Regulatory and Development Authority (IRDA) for acting as composite corporate agent or referral arrangement with insurance companies. Banks need not obtain prior approval of RBI to undertake bancassurance. Benefits of bancassuranceBancassurance helps the banks to build synergies between the insurance business and bank branch network to sell insurance products through banking channels, as the bank branches have a ready customer in need of financial products/services. Since those customers are already having their dealings with the banking, they trust the branch staff, more than a private agent Accordingly not only large commercial banks but stronger RRBs and Urban/Distt. Central Banks are also allowed to under taken bancassurance business now.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 34 -

INITIAL PUBLIC OFFERING (IPO) There are two types of public issues i.e. one where the company and lead manager fix a price (called a fixed price) and other where the company and the lead manager stipulate a floor price or a price band and leave it to market forces, to determine the final prices (price discovery through book-building process). Fixed price issue: An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses, in detail, about the qualitative and quantitative factors justifying the issue price. The issuer company can mention price band of 20% (cap in the price band should not be more than 20% of the floor price) in the draft offer document filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROC. Book building stands for a process by which demand for the securities proposed to be issued is elicited/ build up and price for securities is assessed on the basis of the bids obtained from the quantum of securities offered for subscription. This provides an opportunity to the market to discover price for the securities. The red herring prospectus used in Book building process, does not contain a price. Instead, the prospects contains either the floor price or a price band along with a range, within which the bids can move. The applicants bid for the shares, quoting the price and the quantity that they would like to bid at. Only the retail investors have the option of bidding at cut-off. After completion of the bidding process, the cut off price is arrived at on the lines of Dutch auction. The basis of allotment is then finalized and letters of allotment or refund is undertaken. The final prospectus with all the details are filed with RoC to complete the issue process. Price band The red herring prospectus may contain the floor price for the securities or the price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. The price band can have a revision and such a revision shall be widely disseminated. Reservation : A company can reserve some shares for allotment on firm basis for some categories. Allotment of firm basis indicates that allotment to the investor is on firm basis.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 35 -

LIQUIDITY ADJUSTMENT FACILITY Liquidity Adjustment Facility (LAF) was introduced by RBI during June, 2000 in phases, to ensure smooth transition and keeping pace with technological upgradation. On recommendations of an RBIs Internal Group RBI has revised the LAF scheme on March 25, 2004. Further revision has been carried wef Oct 29, 2004. The revised LAF scheme has the following features: Objective : The funds under LAF are used by the banks for their day-to-day mismatches in liquidity. Tenor :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions (for injection of liquidity) are conducted on a daily basis (except Saturdays). 7-days and 14-days Repo operations have been discontinued wef Nov 01, 2004. Eligibility : All commercial banks (except RRBs) and PDs having current account and SGL account with RBI. Minimum bid Size : Rs. 5 cr and in multiple of Rs.5 cr Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated securities and treasury bills. Rate of Interest : The reverse repo rate will be fixed by RBI from time to time (presently 5.25%). The repo rate (presently 6.25% wef Oct 26, 2005) will continue to be linked to the reverse repo rate and the spread between the repo rate and the reverse repo rate which was reduced to 150 basis points with effect from March 29, 2004 has been reduced further to 100 basis points. Discretion to RBI : Under the revised Scheme, RBI will continue to have the discretion to conduct overnight reverse repo or longer term reverse repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. RBI will also have the discretion to change the spread between the repo rate and the reverse repo rate as and when appropriate. (As per an IMF 1997 publication, the sale and repurchase transactions (reverse repo), are sales of assets by the central bank under a contract providing for their repurchase at a specified price on a given future date; they are used to absorb liquidity. On the contrary, prior to above change, in the Indian context, repo denotes liquidity absorption by the Reserve Bank and reverse repo denotes liquidity injection).

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 36 -

MARKET STABILISATION SCHEME On the recommendations of an RBIs Internal Working Group on Instruments of Sterilisation, on February 23, 2004, the Reserve Bank had announced the launching of the Market Stabilisation Scheme and formally signed a Memorandum of Understanding with Govt. The main features of the MoU are: Effective date : The scheme is effective from April 2004. Objectives : The Government would issue Treasury Bills and/or dated securities under MSS for absorbing liquidity from the system. MSS Instruments : The Treasury Bills/dated securities issued under the MSS have all the attributes of existing Treasury Bills and dated securities; specifically, these would be issued and serviced like any other marketable government securities. These are eligible securities for Statutory Liquidity Ratio, repo and Liquidity Adjustment Facility. How these are to be issued : By way of auctions to be conducted by the Reserve Bank. Extent up to which these are to be issued: The Government, in consultation with the Reserve Bank, will fix an annual aggregate ceiling for Treasury Bills and / or dated securities under the MSS. This ceiling will hold good till further revision during the course of the year. For 2005-06, the ceiling shall be Rs.80,000 crore (raised from Rs.60000 as per Oct 26, 2004 policy). The actual outstanding under the MSS would not exceed the ceiling or the revised ceiling at any point of time. Accounting for MSS : The amounts would be held in a separate identifiable cash account titled the Market Stabilisation Scheme Account (MSS Account) to be maintained and operated by RBI. The amounts credited into this a/c would be appropriated only for redemption and / or buy back of the Treasury Bills and / or dated securities issued under the MSS. Impact on fiscal/revenue balances of Govt.: Treasury Bills/ dated securities issued for MSS would be matched by an equivalent cash balance held by the Government with the Reserve Bank. Thus, there will only be a marginal impact on revenue and fiscal balances of the Government to the extent of interest payment on Treasury Bills and/or dated securities outstanding under the MSS.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 37 -

MONEY LAUNDERING & ROLE OF BANKS Money laundering means acquiring, owning, possessing or transferring any proceeds (of money) of crime or knowingly entering into any transaction related to proceeds of the crime either directly or indirectly or concealing or aiding in the concealment of the proceeds or gains of crime, within or outside India. It is a process for conversion of money obtained illegally to appear to have originated from legitimate sources. Essential elements of money launderingThese are that a crime is committed, there are gains from the crime, proceeds have been received from crime and there is some transaction in respect of these proceeds or the gains. Legal set up in India Indian Parliament passed `The Prevention of Money Laundering Act 2002 during December 2002 for prevention of money laundering. The Act also provides for confiscation of property derived from or involved in money laundering. Role of banks In India all banking companies including cooperative banks are covered under the Act. The money launderers may open deposit accounts with banks in fake names and banks will be required to be vigilant for not becoming a party to such transactions. Similarly they have to observe the norms regarding record keeping, reporting, account opening and monitoring transactions. Banks may also have to train their staff appropriately to check such activities. The Act has made various provisions regarding money laundering transactions which include maintenance of record of all transactions relating to money laundering. Records relating to such transactions shall be preserved for 10 years from date of cessation of the transactions between the clients and the banking company. Govt. has set up Financial Intelligence Unit to track and curb money laundering offences. Banks, financial institutions, stock brokers etc. are to report non-cash transactions (cheques/drafts) totaling to over Rs.1 cr a month and cash transactions of Rs.10 lac a month, to FIU. Offences and punishment: Offences are cognizable/non-bailable. Punishment would be rigorous imprisonment for not less than 3 years but up to 7 years and fine up to Rs.5 lac. Enforcement Directorate has been made the designated authority to track cases of money laundering, which will have far more powers than what was available to ED under FERA.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 38 -

MONEY MARKET It is a centre in which financial institutions join together for the purpose of dealing in financial or monetary assets, which may be of short term maturity or long term maturity. The short term means, generally a period upto one year and the term near substitutes to money, denotes any financial asset which can be quickly converted into money with minimum transaction cost. Terms relating to Money Market Money Market Refers to the market for short-term requirement and deployment of funds. Call Money Money lent for one day Notice Money Money lent for a period exceeding one day Term Money Money lend for 15 days or more in Inter-bank market Held till maturity Securities which are not meant for sale and shall be kept till maturity Held for trading Securities acquired by the banks with the intention to trade by taking advantage of the short-term price/ interest rate movements will be classified under held for trading. Available for sale The securities which do not fall within the above two categories i.e. HTM or HFT will be classified under available for sale. Yield to maturity Expected rate of return on an existing security purchased from the market Coupon Rate Specified interest rate on a fixed maturity security fixed at the time of issue. Treasury operations Trading in government securities in the market. An investor Bank can purchase these securities in the primary market. Trading takes place in the secondary market. Gilt Edged security Government security that is a claim on the government and is a secure financial instrument which guarantees certainty of both capital and interest. These securities are free of default risk or credit risk, which leads to low market risk and high liquidity. CALL/NOTICE MONEY MARKET OPERATIONS IN INDIA The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. Banks borrow in this money market for the following propose. To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks Participants Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 39 -

market. But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001. In case any eligible institution has genuine difficulty in deploying its excess liquidity, RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case-by-case basis. Effective from Aug 06, 2005 non-bank participants except Primary Dealers are to discontinue participate, to make the call money market pure inter-bank market. Prudential norms of RBI Lending of scheduled commercial banks, on a fortnightly average basis, should not exceed 25 per cent of their capital fund. However, banks are allowed to lend a maximum of 50% on any day, during a fortnight. Borrowings by scheduled commercial banks should not exceed 100 per cent of their capital fund or 2 per cent of aggregate deposits, whichever is higher. However, banks are allowed to borrow a maximum of 125 per cent of their capital fund on any day, during a fortnight. Interest Rate Eligible participants are free to decide on interest rates in call/notice money market.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 40 -

NARROW BANKING In India, the concept of narrow banking came into discussion after submission of the report by the Committee on Capital Account Convertibility (Tarapore Committee). It was suggested as a solution to the problem of high NPAs and related matters. The Committee proposed that incremental resources of these narrow banks should be restricted only to investments in govt. securities. What is narrow banking ? A Narrow Bank in its narrow sense, can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets. What are advantages : Such an approach can ensure the regular deployment of funds in low risk liquid assets. With such pattern of deployment of funds, these banks are expected to remove the problems of bank failures and the consequent systemic risks and loss to depositors. What is status of narrow banking in India ? The concept is practically being implemented by the Indian banking system partly, as a large part of the deposits mobilised (i.e. more than 46%) by the banks, has been deployed in Govt. securities (against a prescription of 25% in the form of SLR) as it provides a safe avenue of investment but at a very low return. This keeps the level of non-performing assets (rather than advances) low and the requirement of capital adequacy ratio also low, as the risk weight allotted to such securities is only 2.5% compared to 100% in loan assets.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 41 -

Negotiated Dealing System Objectives: The system which became operational during Feb 2002, facilitates the submission of bids/applications for auctions/floatation of govt. securities through pooled terminal facility located at Regional Offices of Public Debt Offices across the country and through member terminals. The system can be used for daily Repo and Reverse Repo auctions under Liquidity Adjustment Facility. Members : Banks, Primary Dealers and Financial Institutions having Subsidiary General Ledger and Current Accounts with RBI are eligible to become members. Instruments ; Govt. dated securities, Treasury Bills, Re-purchase Agreements (Repos), call/notice/term money, commercial paper, certificate of deposit, forward rate agreements/interest rate swaps, etc. will be eligible instruments. Who does operate ? RBI operates the system and it is integrated with Securities Settlement System of PDO of RBI to facilitate settlement of deals done in govt. securities and treasury bills. It facilitates dissemination of information relating to primary issuance through auction/sale on tap and underwriting, apart from secondary market trade details to participants. Who benefits from the system ? It provides an electronic dealing platform for primary and secondary market participants in govt. securities and also facilitate reporting of trades executed through exchanges for information dissemination and settlement, in addition to deals done through the system.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 42 -

PROMPT CORRECTIVE ACTION It is a system under which RBI can initiate a corrective action in case of a bank which is found to be having low capital adequacy ratio, low profits or high NPAs (called trigger points) The system has been implemented under authority from Board for Financial Supervision (BFS) and the Govt. of India. TRIGER POINTS : Means a happening when the initiation of taking corrective action becomes necessary. There are three areas i.e. capital adequacy ratio, net NPAs and return on assets. Capital Adequacy Ratio less than 9% & equal or more than 6%, less than 6%, but equal or more than 3% and less than 3% Non-performing assets Net NPAs over 10% but less than 15% and Net NPAs 15% and above. Return on assets Below 0.25% STRUCTURED & DISCRETIONARY ACTIONS For low capital adequacy ratio: The structured actions include: submission and implementation of capital restoration plan by the bank; restriction on expansion of risk-weighted assets; not to enter into new lines of business; not to access / renew costly deposits/CDs and reduce / skip dividend payments. recapitalisation by RBI; not to increase its stake in subsidiaries; reduce exposure to sensitive sectors like capital market, real estate, non-SLR securities; restrictions by RBI on the bank on borrowings from inter bank market; and bank to revise its credit / investment strategy and controls For High NPAs : The action points are: special drive to reduce the NPAs and contain generation of fresh NPAs; review its loan policy; take steps to upgrade credit appraisal skills and systems; strengthen follow-up of advances including loan review mechanism for large loans; follow-up suit filed / decreed debts effectively; put in place proper credit-risk management policies / process / procedures / prudential limits; reduce loan concentration - individual, group, sector, industry, etc. not to enter into new lines of business; reduce / skip dividend payments; not increase its stake in subsidiaries. For lower Return on Assets : Where the return on assets less than 0.25%, the structured actions include that the bank will not access / renew costly deposits and CDs; take steps to increase feebased income; take steps to contain administrative expenses; launch special drive to reduce the NPAs and contain generation of fresh NPAs..

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 43 -

RATING OF BANKS RBI had set up a working group headed by Sh. S Padmanabhan to take a fresh look at banking supervision during 1995. It suggested method for on-site and off-site supervision and subsequent rating banks by RBI. Rating criteria. The committee suggested that supervision of banks should focus on defined parameters of soundness, financial, managerial and operational efficiency. Accordingly, it recommended that the banks should be rated on a 5 point scale of A to E, widely on the lines of international CAMELS rating model.

CAMLES rating criteria CAMELS stands for six important parameters: C Capital adequacy ratio A Asset quality M Management Effectiveness E Earning (i.e. profitability) L Liquidity (asset-liability management) S System and controls Parameters for rating of a bank Each of these 6 components is weighed on a scale of 1 to 100 and contains several sub-parameters with individual weightage. Rating symbols Domestic Banks The rating symbols A to E indicate as under: A Basically sound in every respect. B Fundamentally sound but with moderate weaknesses. C Financial, operational or compliance weaknesses that give cause for supervisory concern. D Serious or immoderate finance, operational and managerial weaknesses that could impair future viability E Critical financial weaknesses that render the possibility of failure high in the near term. RATING PARAMETERS FOREIGN BANKS: C Capital adequacy ratio A Asset quality C Compliance S System and

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 44 -

RETAIL BANKING The emergence of middle class with substantial purchasing power in India during the last one decade or so and its desire to spend according to the changing life style, has offered to the Indian banking system, a ready market, for mobilization and deployment of their funds. Given the rising purchasing power of this class, there is huge untapped potential for business. Basic characteristics: Retail banking sector is characterized by three basic characteristics: a: multiple products (deposits, credit cards, insurance, investments etc.); b: multiple delivery channels (call centre, branch, Internet and kiosk); and c: multiple customer groups (consumer, small business, and corporate). Retail banking in IndiaWhile new generation private sector banks have been able to create a niche in this regard, the public sector banks have not lagged behind. Leveraging their vast branch network and outreach, public sector banks have aggressively forayed to garner a larger slice of the retail pie. By international standards, however, there is still much scope for retail banking in India. Drivers of retail business in India The emergence of middle class (with very high proportion - 70%, of the population below 35 years of age) having substantial purchasing power in India during the last one decade or so and its desire to spend according to the changing life style, has offered to the Indian banking system, a ready market, for mobilization and deployment of their funds. Given the rising purchasing power of this class, there is huge untapped potential for business. Besides, the technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking, ....... has contributed to the growth of retail banking in India. In addition, the decline in interest rates has also augmented the growth of retail credit by generating the demand for such credit. Need for emphasis on retail banking With the large corporate borrowers having diversified their sources to fund their financial requirements, frequent reduction in cash reserve ratio resulting in pumping in of liquidity, declining bank rate leading to decline in spreads, un-attractive yields on government securities etc. have all forced banks to be in search of alternative opportunity to deploy their funds. In fact, retail banking is not a new concept. Rather it has come in to focus only in the recent times. Retail banking objectivesThe objective of retail banking is to increase penetration by providing increasing level of services and increased access, by offering value added services to customers by packing them with retail banking products and services. The retail banking offers considerably better spread of 3-4 % compared to very thin spread available to banks in case of corporate clients. Various segments in retail banking Basically there are three important segments in retail banking which include deposit products (convenient deposit schemes such as flexi-deposits), loan products (such as housing loans, education loans, conveyance loans, personal loans for diverse purposes such as medical expenses, travel abroad) and other products. Besides there are a number of value added services such as free collection of outstation instrument, concession in service fee in case of remittances, issue of free ATM cards, waiver of fee on credit cards and utility services such as payment of water, electricity and phone bills. Banks have excellent opportunity to cross sell various retail products like credit cards, insurance policies, funds investment services (including mutual funds), ancillary services like dematerialization, portfolio management, safe custody etc.
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 45 -

Various delivery channels of retail bankingThe delivery of these products and services can be through branch banking, internet banking or automated teller machines. These can be called home banking, internet banking, mobile banking, credit cards, etc. Other advantages of retail bankingBanks have excellent opportunity to cross sell various retail products like credit cards, insurance policies, funds investment services (including mutual funds), ancillary services like dematerialization, portfolio management, safe custody etc.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 46 -

RISK BASED SUPERVISION (RBS) OF BANKS Stability of the financial system has become the central challenge to bank regulators and supervisors throughout the world in the recent years including in India. The adoption of the CAMELS approach to supervisory risk assessments and rating and the tightening of exposure and prudential norms and enhancement in disclosure standards in phases, has more closely aligned the Indian banking system to international best practices. The RBS process involves continuous monitoring and evaluation of the risk profiles of the supervised institutions (i.e. banks and FIs) in relation to their business strategy and exposures based on a risk matrix for each institution. The objective of RBS is to : to optimize utilisation of supervisory resources and minimize the impact of crisis situation in the financial system. Elements of Risk Based Supervision process: Risk profiling of banks. Supervisory cycle and supervisory program. Inspection process. Review, evaluation and follow-up. Monitorable action plan (MAP) Supervisory organization Enforcement process and incentive framework Risk profiling of banks : Risk profiling is designed for assessing business risks and control risks. Business risks have been classified into 8 categories (capital, credit, market, earnings, liquidity, business strategy and environment, operational and group risks). Control risks have been classified into 4 categories (internal control, organization, management and compliance risk). Overall risk of banks is to be assessed as low, moderate, fair or high. The banks with low risks will have longer supervisory cycle and lesser supervisory intervention. Supervisory cycle: The supervisory process would commence with the preparation of the bank risk profile and will vary according to risk profile of each bank, the principle being the higher the risk the shorter will be the cycle. The supervisory program is to be planned for individual banks that would focus on the highest risk areas. It would identify various supervisory such as greater off-site surveillance, targeted on-site inspection etc. Inspection process : The inspection would target identified high-risk areas from the supervisory perspective and would focus on the effectiveness of mechanism in capturing, measuring, monitoring and controlling various risks. Review, evaluation and follow-up : The evaluation will be undertaken to ensure that the supervisory program has been effective in improving the risk profile of the bank concerned. The risk profile document of the bank will be accordingly updated in the light of new information. Monitorable action plans (MAP) : For ensuring that corrective action is taken by banks in time to remedy/mitigate any significant risks, identified during the supervisory process, MAPS are used by RBI to set out the improvements required in the areas identified during the current on-site and off-site supervisory process. If actions and timetable set out in the MAP are not met, RBI would consider issuing further directions to the defaulting banks and even impose sanctions and penalties. The mandatory and discretionary actions in the Prompt Corrective Action framework
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 47 -

are a part of the supervisory enforcement action. Preparation at the level of banks : Individual banks required to initiate the steps such as setting up of risk management architecture, adoption of risk focused internal audit, strengthening of management information system, reorientation of the staff and setting up of compliance unit. Risk focused internal audit : The internal audit function is a part of the ongoing monitoring of the system of internal control and assists the staff in effective discharge of their responsibilities.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 48 -

RISK MANAGEMENT Risk defined Banks being financial intermediaries channelise funds through the process of mobilisation and deployment of funds and in this process, they get exposed to different kinds of risks such as liquidity risk, interest rate movement risk, credit risk, foreign exchange risk etc. Risk can be defined as the potential loss from a banking transaction (in the form of a loan, or investment in securities or any other kind of transaction undertaken by the bank for itself or for customers), which a bank can suffer due to variety of reasons. Why risk management ? The basic objective of risk management is to stake holders' value by maximizing the profit and optimizing the capital funds for ensuring long term solvency of the banking organisation. Process of credit risk management The process of risk management, broadly comprise the following functions: Risk identification, Risk measurement or quantification, Risk control or risk mitigation, Monitoring and reviewing. Risk identificationThe risk identification involves the understanding of the nature of various kinds of risk, the circumstances which lead a situation to become a risk situation and causes due to which the risk can arise. In order to have effective identification system in place, it is important that the risks should be categorised in various categories, so that while formulating the risk management strategies, the focus should be on the exact risk factor. Risk Quantification Risk quantification is an assessment of the degree of the risk which a particular transaction or an activity is exposed to. Though the exact measurement of risk is not possible but the level of risk can be determined with the help of risk rating models, which could be developed or ready made models could be adopted by suitably modifying them according to requirement of the organisation. Risk control Risk control, risk mitigation and risk aversion is the stage in risk management where the bank or institutions take steps to control the risk with the help of various tools. There are different tools to control different kinds of risks. Risk Monitoring In monitoring, the bankers have to fix up the parameters on which the transaction is to be tested to be sure that there is no risk to viable existence of the financed unit or investment of the bank. Risk pricing Fixation of price based on the degree of risk, is a fundamental tenet of risk management. Pricing of the risk can be adjusted in such a way that potential loss could be taken care without burdening the capital.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 49 -

ASSET SECURITISATION Securitisation of assets is an addition to the existing channels for recycling of funds by business entities. What is securitisation? It is a process through which the future income or receivables (the money that is to become due in future) of an organisation, are transformed and sold as debt instruments (such as bonds with a fixed rate of return). In respect of banks, a part of their loan portfolio can be packed together and off-loaded in the form the debt instruments (called pass-through certificate) to the prospective investors with the provision that the inflow of cash in the form of recoveries shall be distributed amongt the investors. This allows the securitising organisation/bank to get funds upfront, which can be put to more productive use in the business. Intermediaries in the securitisation transaction There are various entities involved in the securitisation transaction which include the Originator (the party/bank which has a pool of assets which it can offer for securitisation and is in need of immediate cash). Special Purpose Vehicle (SPV - the entity that will own the assets once they are securitised), usually, in the form of a trust. It is necessary that the assets should be held by the SPV as this would ensure that the investors interest is secure even if the originator goes bankrupt. The servicer is an entity that manages the asset portfolio and ensures that payments are made in time. The credit enhancer can be any party which provides a reassurance to the investors that it will pay in the event of a default. This could take the form of a bank guarantee also. The other parties include he credit rating agencies, the credit enhancement providers and the investors. Process of Securitisation Original lender (bank or FI) selects and then sells various types of loans to another institution (which may promote a subsidiary for this purpose called Special Purpose Vehicle, which is a sort of Trust); The special purpose vehicle- SPV (called issuer also) makes the payment to the original lender for the loans purchased under the arrangement; These loans are converted into a pool of securities like debentures (called Pass Through Certificates) by SPV. These PTCs are then sold to individual or institutional investors, who are willing to make investments; The original lender may keep on getting recoveries from the original borrowers; He passes on these recoveries to the SPV. The issuer in turn passes on these recoveries to the individual/institutional investors as per the arrangement made.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 50 -

TAKE-OUT FINANCING Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by banks by sanctioning medium term loans (say 5-7 years). It is understanding that the loan will be taken out of books of the financing bank within pre-fixed period, by another institution thus preventing any possible asset-liability mismatch. After taking out the loans from the banks, the institution could off-load them to another bank or keep it. Under this process, the institutions engaged in long term financing such as IDFC, agree to take out the loan from books of the banks financing such projects after the fixed time period, say of 5 years, when the project reaches certain previously defined milestones. On the basis of such understanding, the bank concerned agrees to provide a medium term loan with phased redemption beginning after, say 5 years. At the end of five years, the bank could sell the loans to the institution and get it off its books. Benefits - This ensures that the project gets long-term funding though various participants. Process of Take Out Financing The original lender participates in a long term project (say 15-20 years) by granting a medium term loan (of say 5-7). On completion of the pre-decided period, this loan is taken over by another institution subject to fulfillment of the conditions stipulated in the orignal arrangement Original lender receives the payment from the 2nd lender who has taken over the loan

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 51 -

TREASURY BILLS AND DATED SECURITIES Treasury Bills are the instruments of short term borrowing by the Central/State govt. They are promissory notes issued at discount and for a fixed period. These were first issued in India in 1917. Objectives These are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors. Investors Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Denomination Minimum amount of face value Rs.1 lac and in multiples there of. There is no specific amount/limit on the extent to which these can be issued or purchased. Maturity : 91 days and 364 days. Rate of interest Market determined, based on demand for and supply of funds in the money market. Other features These are highly liquid and safe investment giving attractive yield. Approved assets for SLR purposes and DFHI is the market maker in these instruments and provide (daily) two way quotes to assure liquidity. RBI sells treasury bills on auction basis (to bidders quoting above the cut-off price fixed by RBI) every fortnight by calling bids from banks, State Govt. and other specified bodies. DATED SECURITIES These are those instruments which have tenure over one year. The returns on dated securities are based on fixed coupon rates akin to corporate bonds. These are considered risk free.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 52 -

UNIVERSAL BANKING Universal banking means allowing FIs and banks to undertake all kinds of activity of banking or development financing or activity associated with that, subject to compliance of statutory and other requirements prescribed by RBI, Govt. and related legal Acts. These activities may include accepting deposits, granting loans, investing in securities, credit cards, project finance, remittances, payment systems, project counseling, merchant banking, foreign exchange operations, insurance etc. Objective The basic objective is to help bring harmony in the role of FIs/Banks, offer world class financial services to the clients by using information technology and cross selling, reduce per customer cost and increase per customer revenue, take benefit of economies of scale and compete with international banks by expanding business beyond the boundaries of the countries. R H Khan Committee had recommended the concept of Universal Banking. RBI guidelines on Universal BankingAs per RBI guidelines of April 2001, FIs have an option to transform into a bank provided they ensure compliance with the following: Reserve requirements (CRR/SLR) - Compliance with the cash reserve ratio and statutory liquidity ratio requirements would be mandatory for an FI after its conversion into a universal bank. Permissible activities - Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank. Disposal of non-banking assets - Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act. Composition of the Board - Composition of the Board of Directors to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 53 -

US GAAP Accounting practice: The financial statements prepared by the business organization reflect the results of their operations during a specified period and also the state of financial affairs as at the end of the financial year. These statements are used by the investors, lenders and others for their decisions making. Generally Accepted Accounting Principles (GAAP) is an accounting term that represents the conventions, rules and procedures and accepted accounting practices and includes broad guidelines of general application and detailed practices and procedures. GAAP are the ground rules for financial reporting. These principles provide the general framework in determining what information is presented in the financial statements and how the information is to be presented. US Accounting practice: US GAAP refers to accounting principles, which are generally accepted accounting practices in USA and were set in the year 1973. US Securities Exchange Commission (SEC) is the authority to promulgate US GAAP. The principles have evolved from experience, reason, custom, usage and practical necessity and are contained in different pronouncements such as issued by the board of the Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA). Over the years, the SEC has, for the most part, relied on FASB for carrying out the standard setting process. Need for adoption of US GAAP: With increasing cross-border dealings, more and more Indian corporates and financial institutions are realizing the need of adopting internationally accepted accounting standards with the objective of improving the quality of corporate governance. Several well-known Indian Corporates such as Infosys Technologies, and financial institutions like ICICI Bank have adopted US GAAP in the recent years. Advantages : The adoption of these norms gives to an Indian Corporate, a number of benefits including enabling the corporate to raise funds at competitive rates from the US Capital market and other international markets. Transparency in transactions and disclosure standards are integral part of corporate governance in almost all organizations.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 54 -

WAYS & MEANS ADVANCES These are temporary advances (overdrafts) extended by RBI to the govt. Section 17(5) of RBI Act allows RBI to make WMA both to the Central and State Govt. Objective - to bridge the interval between expenditure and receipts. They are not a sources of finance but are meant to provide support, for purely temporary difficulties that arise on account of mismatch/shortfall in revenue or other receipts for meeting the govt. liabilities. They have to be periodically adjusted to enable use of such financing for future mis-matches. When did it start ? On March 26, 1997, Govt. of India and RBI signed an agreement putting the ad hoc T-bills system to end w.e.f April 1, 1997. Interest rate The interest rate on WMA is at or around bank rate (with small adjustment for different kinds of WMA for State Govt.) and overdrawing if any carries 2% higher interest. Duration 10 consecutive working days for Central Govt. and 14 days for State Govt. Amount ceiling Limits on WMA are fixed at the beginning of a fiscal year by RBI. For 2005-06, Central Govt. limit is Rs.10000 cr for Apr-Sept and Rs.6000 cr for OctMar. Minimum balances The minimum balance required to be maintained by Govt. on Fridays and at the close of the Govt.s or RBIs financial year shouldnt be less than Rs.100 cr and on any other working day not less than Rs.10 cr. Further when 75% of WMA is utilised, the RBI may consider fresh flotation of market loans depending on the market conditions

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 55 -

Glossary of Banking Terms

AER - Annual earnings rate on an investment. Annuity - A life insurance product which pays income over the course of a set period. Deferred annuities allow assets to grow before the income is received and immediate annuities (usually taken from a year after purchase) allow payments to start from about a year after purchase. APR - The annual percentage rate of interest, usually on a loan or mortgage, usually displayed in brackets and representing the true cost of the loan or mortgage as it shows any additional payments beyond the interest rate. Account agreement An agreement which you sign and which lists your rights and responsibilities and the bank's rights and responsibilities for the bank account. . Accounts payable Money owed by a business for goods and services received. Accounts receivable Money owed to a business by purchasers of goods and/or services. Affinity Card A credit card (usually Visa or MasterCard) that has a promotion arrangement with an affiliated organization (often a charity or non-profit group). The logo of the group appears on the card and the group usually gets a percentage of the sales made on the card. Angels Private individuals with capital to invest in business enterprises. Assets Things that you own which have value in financial terms. Automated Banking Machines (ABMs) Terminals that allow customers to perform many everyday banking tasks, e.g., deposits, withdrawals, bill payments and transfers between accounts.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 56 -

Bank Statements - This is a statement from the bank giving details of transactions in the relevant account. It can be requested at any intervals required, usually monthly. Bear Market - A bear is somebody who believes that the market is falling and a bear market is a falling market. See bull market for the opposite. Bounced Cheque - when the bank has not enough funds in the relevant account or the account holder requests that the cheque is bounced (under exceptional circumstances) then the bank will return the cheque to the account holder. The beneficiary of the cheque will have not been paid. This normally incurs a fee from the bank. Bonds - These are securities which pay interest at specified intervals and the principle amount of the loan is paid at maturity. Bull Market - A bull is somebody who believes that the market is rising and a bull market is a rising market. See bear market for the opposite. Cashback Mortgages - This is when the mortgage provider lends the money for the mortgage and, in addition, a lump sum to pay for, for example, building work to be carried out. Central Clearing Time (in England and Wales) - This is the time that it takes for the monies from a cheque to be taken out of the payee's account and put into the payer's account. This is three working days in England and Wales, as long as the cheque was paid in before 16.30. Certified Documents - These are photocopies of original documents that have been signed by a professional i.e. a solicitor, accountant, teacher, doctor or bank official. The professional also states, on the document, "original seen" since they must be able to verify that these are genuine copies and therefore have to have seen the original, they also date the document and put their full name, profession and their address. Charges - This is the money paid to the bank for services rendered. Charges include overdraft fees, charges for bouncing cheques, interest on overdraft and any charges that a business account might normally incur. Charge Cards - Cards which can be used like a credit card but the charge has to be paid off on the due date. They usually have a high limit or no limit. Cheque Book - A small, bound booklet of cheques. A cheque is a piece of paper produced by your bank with your account number, sort-code and cheque number printed on it. The account number distinguishes your account from anyone elses, the sort-code is your bank's special code which distinguishes it from any other bank. In times gone by, anything with the correct details and a verifiable signature could act as a cheque. Even an elephant was once used! Cheque Clearing - This is the process of getting the money from the chequewriter's account into the cheque receiver's account. CHIP and PIN - A Chip is a small electronic insert placed into a cheque or credit card. The PIN is a four digit personal identification number which is used with the card by the card-holder.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 57 -

Clearing Bank - This is a bank that can clear funds between banks. For general purposes, this is any institution which we know of as a bank or as a provider of banking services. Contract Hire - This is a way of hiring an item of large capital value where the maintenance is the responsibility of the company that hires out the item. A fixed monthly figure is paid and the item can be sold, usually to an unconnected third party. Credit Rating - This is the rating which an individual (or company) gets from the credit industry. This is obtained by the individual's credit history, the details of which are available from specialist organisations (Equifax and Experian are the two big operators in the U.K. www.equifax.co.uk and www.experian.co.uk). Credit Scoring - This is the process of assessing an individual's credit-worthiness. The process involves taking information from an individual on an application form (for example when applying for a store card) and weighting the answers given. Certain responses will attract higher scores than others and the total score will determine whether or nor the organization wants to do business with the individual, or if they represent too high a credit risk. Credit-Worthiness - This is the judgement of an organization which is assessing whether or not to take a particular individual on as a customer. An individual might be considered credit-worthy by one organisation but not by another. Much depends on whether an organization is involved with high risk customers or not. County Court Judgement - This is when a judge at a county or small claims court finds against an individual and they have a county court judgement made against them. This is recorded nationwide (and by the credit tracking organizations Experian and Equifax) so anyone wanting to know the credit-worthiness of an individual will know that the county court judgement exists. Once it is paid off then the record remains but it is shown as being paid which reduces the credit risk associated with the person with the county court judgement. Direct Debit - An amount of money taken from a bank account, set up by the recipient and can vary in amount and exact time that it is taken from an account. Mortgages are usually direct debits. Endowment Mortgage - Interest only is paid over the term of this sort of mortgage and the capital is repaid at the end of the term by using the monies from an endowment policy. Factoring - This is when a business sells its invoices to a specialist company or bank which chases payment and pays a percentage of the invoice back to the original business. The business can then continue with its work and problems from cash-flow are reduced by having money from unpaid invoices up-front. Hire Purchase - When an item of large capital value is bought over time by paying a deposit and fixing a period over which the loan will run (usually between 12 and 60 months) and then paying fixed and equal repayments over this period. Identity Theft - This is when criminals use an innocent person's details to open or use an account to carry out financial transactions. It is very easy to do with an individual's personal details, which is why shredding confidential information is so important.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 58 -

Identity Verification - This is often used by financial institutions to verify the customer and usually takes the form of a pass-word and the answer to an obscure personal question such as the customer's mother's maiden-name. Interest - The amount paid or charged on money over time. If you borrow money interest will be charged on the loan. It you invest money, interest will be paid (where appropriate to the investment). Interest rates usually bear a close relationship to the Bank of England's base rate. It is expressed in percent. ISAs - This stands for Individual Savings Accounts. These are available to all UK residents over 18 (mini ISAs are available to 16 and 17-year-olds). Investment limits apply to the total contributions made in any tax year, not to the total in the ISA itself. ISAs can be cash, stocks and shares or life insurance. Lease Purchase - This is an agreement made on an item of high capital outlay (for example, a car) where the ownership is transferred to the person who is leasing the item at the end of the contract, providing all the terms and conditions of the purchase have been fulfilled. Money Laundering - This is when money gained from crime is put into a bank so that it can be accessed safely by the criminals and terrorists. It makes the proceeds of illegal activities easier to get to. Money Transfer - This is the movement of money from one account to another. Money Transfer Abroad - This is the movement of money from one account to another, the second being in a different country from the first. Offsetting - This is when the credit balances in a current and savings account are netted off against the account holders borrowings (typically a mortgage) so that the rate paid on the borrowing is reduced as a result of the credit held in other accounts, which reduces the amount that is being borrowed. Overdraft - This is when a person has a minus figure in their account. It can be authorized (agreed to in advance or retrospect) or unauthorized (where the bank has not agreed to the overdraft either because the account holder represents too great a risk to lend to in this way or because the account holder has not asked for an overdraft facility). Payee - The person who receives a payment. This often applies to cheques. If you receive a cheque you are the payee and the person or company who wrote the cheque is the payer. Payer - The person who makes a payment. This often applies to cheques. If you write a cheque you are the payer and the recipient of the cheque is the payee. PEP - Personal Equity Plans have been replaced by ISAs. Existing PEPs can be retained but, since April 1999, no new ones can be opened. Phishing - This is when a criminal uses the internet to try to fraudulently obtain details of peoples accounts so that they can use these accounts themselves, usually to take money out of. Repayment mortgage - This is a mortgage where the sum borrowed is paid off by the end of the mortgage term. It involves monthly repayments which consist of the interest on the loan plus some of the capital borrowed.
D:\Prasadh\Promotion 2008\Banking Topics of interest.doc - 59 -

Security for Loans - Where large loans are required the lending institution often needs to have a guarantee that the loan will be paid back. This takes the form of a large item of capital outlay (typically a house) which is owned or partly owned and the amount owned is at least equivalent to the loan required. Standing Order - A regular payment made out of a current account which is of a set amount and is originated by the account holder. Tessas - Tax Exempt Special Savings Accounts.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 60 -

Recent Banking & Financial Developments in India JANUARY 08 TO MARCH 08 o o US-FED BENCHMARK RATE : The Federal Reserve US, lowered its Benchmark interest rate by 0.75% 2.25%. E-PAYMENT OF DIRECT TAXES MANDATORY: The Finance Ministry has said that for the Corporate Sector in the country, electronic payment of direct taxes has become mandatory from April 1. This payment norm would also apply to tax audit assesses. MF ENTRY-EXIT LOADS: SEBI has scrapped loads (entry as well as exit) charged by Mutual Funds on bonus units and units allotted on reinvestment of dividend with effect from April 1. The logical argument made against such loads is that it is investors money that has contributed to the earnings and that investors are not entering the scheme afresh, so charging an entry load does not make any sense. WAIVER FOR KISAN CREDIT CARDS: Government has clarified that farmers who took loan through Kisan credit cards will also be eligible in the scheme announced in the Budget. INSTITUTIONAL INVESTORS : SEBI has said that Institutional Investors will have to pay margin on their share transactions in the cash segment from April 21, in the same way as applicable to other investors. SEBI has also operationalised short selling and securities lending and borrowing from the same date. RBI GROUP FOR MONTHLY, FIXED BASE INFLATION RATES: The RBI Study Group suggested introduction of monthly and fixed base inflation rates, in addition to the annual rate, to fully capture price rise and the impact on seasonal factors on prices of goods and commodities. MEDICLAIM FOR SENIOR CITIZENS: IRDA has asked all Public Sector General Insurance Companies to ensure that the renewal premiums charged to the Senior Citizens on Mediclaim Policies should not be Exorbitant. Renewal premium chares should not exceed 50-75% of the premiums charged prior to the revision. RBI FIAT TO URBAN CO-OP BANKS ON ATM: RBI has said that users of ATM card of Urban Co-operative banks will have free access to ATMs of other banks with effect from April 1, 2009. ATM Card users could be charged a maximum of Rs.20 per transaction for cash withdrawal from ATMs of other Banks. SUPREME COURT RULING ON ARBITRATION AGREEMENTS: The Supreme Court has ruled that if the parties to a contract agree on the Arbitrator, the place of arbitration and the court for deciding disputed questions, these should be adhered to. SUPREME COURT-RETIREMENT WAGE NOT THE CRITERIA: The Supreme Court has ruled that while computing the financial loss due to the death of a bread winner in a motor vehicle accident, the Tribunal should not consider his income at the time of his future retirement, but the income at the time of mishap. RAJAN COMMITTEE ON FINANCIAL SECTOR REFORMS: Mr. Raghuram Rajan, Chairman of Rajan Committee said that while there is a case for separate sectoral regulators like RBI, IRDA, PFRDA, logically both corporate and
- 61 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

Government Bond Markets should come under SEBI. A single Regulator will encourage the growth of currency, bond and interest rate derivative markets, none of which are present in India. o SUPREME COURT RULING ON DEGREE-DIPLOMA: Setting aside the Maharashtra High Court order, the Supreme Court has ruled that a Diploma is a lower qualification than a Degree. Once a candidate possesses a Degree, then he has to be given preference as against a candidate who possesses a Diploma. RBI SUPPORTS FARM LOAN WAIVER SCHEME: RBI has supported the Loan Waiver Scheme and implementing it in a manner that would strengthen the Banking System rather than weaken it. RBI, Govt and the Banks will work together in a manner that the goals and objectives of the Scheme are achieved. FRAUD REPORTING NORMS TIGHTENED: RBI has tightened the fraud reporting norms for Deposit-Taking Non- Banking Financial Companies. In the case of cash shortage of more than Rs.10,000, such NBFCs will have to report it as a fraud even if the fraudulent intention is not detected. SUPREME COURT VERDICT ON CLAIM REVIVAL: The Supreme Court has said that even after signing a discharge voucher for an insurance amount, the claim can be revived if the agreement is proved to be under coercion or against free will. BANKS, CO-OPS TO SUBMIT DETAILS OF OVERDUE FARM LOANS: RBI has asked all Public Sector banks to submit by March 14 comprehensive lists of dues fro Small and Marginal Farmers and other borrowers of Agricultural loans. NABARD has also asked all Co-ops and RRBS to submit similar lists by March 14. SUPREME COURT-SEBI BOARD TO DERCOGNISE BOURSES: The Supreme Court has upheld SEBIs powers to delegate withdrawal of recognition of the Stock Exchanges to its members. RBI OBJECTS TO BILATERAL TRADE AGREEMENTS: After political opposition to bilateral trade agreements, RBI has also objected to it and their concerns are grounded in the need for a more liberal regime for the Banking and Financial Sector. FRAUDS COST BANKS: Union Finance Minister has said that Banks in India lost about Rs.1, 078 Crore due to frauds, including on Credit Cards, during the last year. Although the number of bank frauds have gone up from 12,374 in 2005 to 22,280 in 2007, the total amount involved in frauds declined from Rs.1,395.91 Crore to Rs.1,077.84 Crore during the same period. SAARC : INDIA PRUNES NEGATIVE LIST TO 500 ITEMS: India announced the pruning of negative list from 744 items to around 500 items for the least developed country members of the South Asian Association for Regional Cooperation (SAARC), thereby enlarging the scope of Duty-free entry to the export items from these countries. LIC HOUSING TO OFFER REVERSE MORTGAGE LOANS: LIC Housing Finance Ltd. will now offer Reverse Mortgage loans for senior citizens above 60 years. The property evaluated for the loan should have at least 20 years of residual life. The maximum loan balance will be restricted to 90% of the value of the property and loan balance will include interest till maturity. PAN MUST FOR ALL MARKET OPERATIONS: The Union Finance Minister said that for all types of transactions in the Financial Market, Permanent Account
- 62 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

Number (PAN) would henceforth be mandatory. However this would be applicable subject to suitable threshold exemption limits. o TAX CLARIFICATIONS ON REVERSE MORTGAGE FOR SENIORS: Union Finance Minister clarified that income received from Reverse Mortgage would not be treated as income. Similarly it would not amount to Transfer under the provisions of Income Tax Act. Thus the sum received from the scheme will be exempted from Income Tax. RBI TO DIVEST STAKE IN NABARD: RBI has decided to divest its entire stake of 72.5% in NABARD to the Centre. RBI has been gradually divesting its stake in Public Sector Banks to avoid a conflict of interest. It has also been said that RBIs stake is unlikely to have any impact on rural credit delivery or on NABARDs monitoring mechanism. SENSEX, NIFTY AMONG WORLDS WORST PERFORMERS: Indian Equities are among the Worst Performers in the Global Markets since January 2008. Among the major markets only Hong Kong markets have seen as much negative growth this year as the benchmark indices Nifty and Sensex. SMALL SAVINGS TURN NEGATIVE : According to data collected by the Controller General of Accounts, for the first time perhaps, net collections of small savings have become negative at Rs.10,587.40 Crore against the budget estimate of Rs.41100 Crore. It means that the fresh collections from small savings this fiscal were not adequate enough to make good the repayment of investments which matured and then ensure a surplus in the National Small Savings Fund (NSSF) which administers small savings scheme. HDFC BANK, CBOP SEAL LARGEST BANKING MERGER: HDFC Bank approved the acquisition of Centurion bank of Punjab (CBOP) for Rs.9, 510 Crore in the largest merger in the financial sector in India. However the merged entity would still be two-fifth the size of the countrys second largest lender, ICICI Bank. CBOP shareholders will get one share of HDFC Bank for every 29 shares held by them. WORLD BANK APPROVES HP ROAD TUNNELS: The World Bank has approved 6 new road tunnels in Himachal Pradesh. The DPR of the Road Tunnel Projects is expected to be complete by April this year. Besides, the World bank has also sanctioned Rs.1,365 Crore to widen some two lane roads into to fourlane ones. FCEBs INTO SHARESMETHOD TO CALCULATE ACQUISITION COST: The Govt has spelt out the method for calculating acquisition cost under the Foreign Currency Exchangeable Bonds (FCEB) Scheme. The Finance Bill 2008 has provided that the cost of acquisition of shares received upon conversion of the Bond would be the price at which the corresponding bond was acquired. It has also been provided that conversion of FCEBs into shares would not be treated as Transfer within the Income Tax Law. LOAN WAIVER: The Union Finance Minister has said that whatever loans are written off, an equivalent liquidity will be provided to the Banks concerned. WORLD BANK AND JAPAN BANK TO GIVE ASSISTANCE: The World Bank and Japan Bank of International Cooperation will provide financial assistance to the tune of about Rs.380 Crore for the different forest related projects in the Haryana. As per the Forest survey, Forest cover in Haryana had increased from 6.2% to 7.4%. POSITION OF EXPORTS, IMPORTS AND TRADE DEFICIT: Cumulatively, value of Exports for April 2007 to January 2008 at $124.19 billion was 21.62 % higher than $102.11 billion during the corresponding months of the previous
- 63 -

o o

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

fiscal. Imports during first ten months at $191.60 billion showed a growth of 29.63% over the level of $147.81 billion during corresponding period of the previous fiscal. Trade Deficit during the first 10 months zoomed to $67.41 billion which was higher than which was higher than the deficit of $45.70 billion during April-January 2007 o CREDIT DERIVATIVES EXPOSURE DETAILS REQUIRED: While the actual losses of Indian banks on account of Sub-Prime impact are yet to be ascertained, RBI have sought more details on their overseas transaction and investments. According to banking sources, the Banks may face a problem if their individual Overseas units suffer losses due to the fall in the value of the investments. This may force the Banks to provide for additional capital. WORLD BANK LOAN FOR BIHAR: The World Bank has decided to give Rs.400 Crore, first instalment of $225 million (Rs.877 Crore) of its development policy loan, which is likely to be credited in the Bihar Governments account by March 31. CAPITAL GOODS PRODUCTION GROWTH RATE SLUMPS: After growing a healthy rate of 24.5% in November 2007 and a good turn out at 16.6% in December, the Capital Goods Sector growth slumped to just 2.1% in January 2008. Economists believe that industry could be running into a capacity constraint as far as machinery and equipment are concerned. FARMERS DEBT RELIEF FUND: A sum of Rs.10,000 Crore out of Rs.60,000 Crore farm loan waiver has been included in the third and final batch of supplementary demands for grants for the current fiscal.Rs.10,000 Crore would be utilized for the creation of Farmers Debt Relief Fund towards the Debt waiver and Debt Relief Schemes for farmers to cover all agricultural loans disbursed by Scheduled Commercial banks , RRBs and Cooperative Credit Institutions up to March 31,2007 and remained unpaid till February 29,2008. FARM DEBT WAIVER-BANKS TOGET TWO-THIRD IN CASH: The financial package is largely frontloaded. As much as Rs.25, 000 Crore will be disbursed in July-August 2008 and another Rs.15, 000 Crore in June-July 2009. In terms of the lending institutions, an estimated 55% of the package would be to borrowers from Cooperative Institutions, 35% from Scheduled Commercial banks and 10% from RRBs. FOREX RESERVES CROSSES $300 BILLION MARK FIRST TIME: Forex Reserves rose by $2.225 billon for the week ended March 7,2008 to $303 billion and thus crossed the $300 billion for the first time mainly due to the upward movement in major global currencies such as Euro and Yen. SBI LOSS ON CREDIT DERIVATIVES: The Govt has said that State Bank of India has suffered a loss of Rs.1 Crore in the Overseas Credit Derivatives market. FED OPENS LENDING WINDOW TO WALL STREET FIRMS: The Federal Reserve, acting urgently over the weekend to stabilize financial markets, approved a cut in its emergency lending rate to 3.25% from 3.50% -a new lending facility immediately available to Wall Street Firms. The Central bank took the extremely rare step to calm panicked markets by offering to provide cash to financially squeezed Wall Street Investment Houses basically becoming a lender of last resort for them. ICICI SELLS RETAIL ASSETS TO IDBI TRUSTEESHIP: ICICI Bank has sold Retail Assets worth Rs.4,895.90 Crore to the Special Purpose Vehicle

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 64 -

Investment Vehicle for Structured Transaction 1508 floated by IDBI Trusteeship Services Ltd. o NO UNCOVERED FOREX EXPOSURE-YES BANK: Yes Bank Ltd, partly owned by Rabobank Group of the Netherlands has no uncovered exposure in the foreign exchange derivative business because there have been unfounded rumours on this issue. INFRASTRUCTURE INDUSTRIES GROWTH SLUMPS: The cumulative growth rate in the 6 Core Infrastructure Industries during April-January 2008 declined to 5.5% as against 8.9% in the same period last fiscal. BANK OF BARODA's BAHARIN BRANCH: Bank of Baroda, which established offshore Banking Unit in Bahrain in 1980 and closed it in 1993 due to foreign exchange crisis in India, has been issued licence by the Central Bank of Bahrain. ASSISTANCE HIKED FOR HOUSING UNDER INDIRA AWAAS YOJANA: The Union cabinet gave its nod for hiking the unit assistance provided to the Rural BPL Households for construction of a dwelling unit under the Indira Awaas Yojana. The Unit assistance for an IAY house in plain areas would be increased to Rs.35, 000 fromRs.25, 000.For difficult/hilly areas, the assistance would go up from Rs.27, 500 to Rs.38, 500. For up gradation, assistance will go uptoRs.15,000 from Rs.12,500 across the country. DECEMBER 2007 o US-FED BENCHMARK RATE : The Federal Reserve US, lowered its Benchmark interest rate by a quarter point to 4.25%. The Bank also pared the discount rate by a quarter point to 4.75% PROMISED BENEFITS CAN NOT BE DENIEDSUPREME COURT: The Supreme Court has ruled that the Govt. can not withdraw benefits given to the entrepreneurs while inviting investments for industrial development of specific areas. Unless it is in public interest, such withdrawal is unfair and arbitrary. RBI SETS UP PANEL TO REVIVE SICK MSMEs: The RBI has constituted a working group for the revival and rehabilitation of sick Micro, Small and Medium Enterprises (MSME). The Working Group, to be headed by PNB CMD (Chakraborty), would primarily look at units which turned sick because of credit related problems. CERTIFICATION MUST FOR MARKET ADVISORS : In a bid to improve the quality of services available to investors, SEBI has made Certification mandatory for all market participants handling investors money and acting as advisors. SEBI ALLOWS SHORT SELLING : SEBI has allowed short selling of shares by all classes of investors, both institutional and retail. Short selling had been banned by SEBI in the wake of the Ketan Parekh scam in 2001. CRIMINAL CASE OF BOUNCED CHEQUE : Setting aside the conflicting rulings among the High Courts, the Supreme Court has declared that a criminal case of bounced cheque under the Negotiable Instruments Act could normally be compromised and the accused person need not be punished. HABITUAL ABSENTEEISM RULING : The Supreme Court has ruled that habitual absenteeism from work is a gross violation of discipline justifying dismissal. ENCASHMENT NORMS FOR JOINT TERM- DEPOSIT : The Finance Ministry has relaxed encashment norms for joint holder type term deposits under the Tax
- 65 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

Saving Bank Term Deposit Scheme. In the event of the death of the first holder, CBDT has allowed the joint holder to encash the term deposit before its maturity. Hitherto, the scheme did not permit any encashment of term deposits before the expiry of five years. o NORMS FOR CORPORATE BONDS: SEBI has relaxed guidelines for issue of corporate bonds through the public issue route. The new norms permit companies to come out with bonds with below investment grade popularly known as junk bonds. RBI FOR DIFFERENTIAL REALTY LOAN CAPS : RBI has asked banks to set separate limits for lending to residential and commercial real estate within their overall exposure to the sector, while specifying norms to be followed for lending to the realty sector. Banks were also told to explicitly state in their Loan Policy the minimum internal rating required for builders and developers. SERVICE CHARGES NOT WAGES : The Supreme Court has ruled that tip or service charge paid by customers to the hotel staff did not amount to Wages and could not be taken into account for payment of premium to the Employees State Insurance (ESI) Corporation by the Industrial Establishment. SIDBI STOPS REFINANCE FACILITY TO 3 SFCs: - Following the recent guidelines of RBI, directing that no refinance should be provided to State Financial Corporations unless they improve their Capital Adequacy Ratio, SIDBI has stopped refinance facility to Punjab, Haryana and Himachal Pradesh Financial Corporations. The CAR of the PFC, HPFC and HFC for the year 2006 stood negative. 5 PSBs TO HAVE MAJORITY STAKE IN PAYMENT CORPORATION : 5 Public Sector Banks SBI, PNB, Canara Bank, BOB and Union Bank of India will have the majority stake in a new company to be incorporated to undertake the payment and settlement work, currently being done by RBI. Initially, the proposed company, National Payments Corporation of India will take over the RBI-run Clearing Houses in the 4 Metros- Delhi, Calcutta, Mumbai and Chennai. WORLD BANK SUPPORT FOR CGFTMSE : The Credit Guarantee Fund Trust for Micro and Small Enterprises has started a risk sharing fund with $5 million support from World Bank. The proposed guarantee fee for the World Bank supported scheme would be 0.75% of the loan amount as against existing guarantee fee of 1.5% and annual service fee of 0.75%. IDENTIFICATION NUMBER NECESSARY FOR DIRECTORS : The Union Ministry of Corporate Affairs has said that possession of Directors Identification Number (DIN) is necessary for any person to become a director in a company, a step intended to ease tracking of office holders of firms that close overnight. CBEC GIVEN POWERS TO APPOINT STANDING COUNSELS : In a move that may help fast-track Govt response to Indirect Tax litigations, the Central Board of Excise and Customs (CBEC) has been given powers to appoint standing counsels to handle litigation of Indirect Taxes before various High Courts. Hitherto, the standing counsels appointments were decided by the Law Ministry. INTEREST FREE LOANS EXTENDED TO SUGAR MILLS: The Central Govt. decided to give interest free loans to sugar mills that are facing a crisis after prices of the sweetener fell following a record output, for helping them pay dues to sugarcane farmers. Mills will have to repay the loans in 4 years, including a moratorium of 2 years.
- 66 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

NDS FOR NON-DEPOSIT NBFCs : RBI allowed the systematically important Non-deposit taking NBFCs to be recognized as Qualified Entities for accessing the Negotiated Dealing System, using the constituent subsidiary general ledger route. CIBIL MEMBERS CAN HAVE CREDIT SCORE OF BORROWERS: CIBIL and TransUnion, a US-based analytics firm, have created a generic credit score for the Indian Borrower. While this score is currently used only by lenders, borrowers may also soon be able to use this to bargain for better rates, once the Credit information Act is passed. RBI CUTS PRIORITY SECTOR TARGETS FOR UCBs : RBI has slashed the priority sector lending target for Urban Cooperative Banks (UCBs) to 40% from 60%of adjusted bank credit to bring regulatory norms for them on a par with that for commercial banks. The revised target norm will come into effect from April 01, 2008. CA FIRM CANNOT GET TAX DEDUCTION : The Supreme Court has ruled that a firm of Chartered Accountants could not claim income deduction for depreciation of the buildings providing residential accommodation for its employees as they are professionals and not doing business. PF INVESTMENT IN STOCKS : The Pension Fund Regulatory and Development Authority (PFRDA) has given its nod for investments upto 5% of the funds under the new pension System (NPS) in stock markets and another 10% in equity linked mutual funds. CCEA NOD FOR HANDLOOM DEVELOPMENT SCHEME : The Cabinet Committee on Economic Affairs (CCEA) has given approval for implementing the Integrated Handlooms Development Scheme as a Centrally Sponsored Plan Scheme in the 11th Plan. The total cost involved is Rs.790 crore. SBI STOPS HONOURING IRANIAN LETTERS OF CREDIT: - Buckling under US pressure, SBI has stopped honoring Iranian LCs hurting trade between India and the West Asian Nation. Earlier this year, many Banks from Japan, Switzerland and other European countries had withdrawn from Iran after US sanctions on Iranian Banks. SBI says that all international banks operating in the US are subject to certain regulations and India is no exception. URBAN COOP. BANKS CAN LEND AGAINST GOLD : According to RBI Notification, Urban Cooperative Banks can now sanction gold loan not exceeding Rs.1 lakh with bullet repayment option. The period of loan should not exceed 12 months from the date of sanction and the interest would be charged to the account at monthly rests. NO CURB ON FOREIGN BANK EXPANSION : The share of Foreign Banks as a percentage of the assets of Indias Banking Sector currently stands at a higher level against the mandated World Trade Organization (WTO) requirement of just 15%. However the country has not put any restriction on the entry of new foreign banks, since it wants a reciprocal gesture as Indian Banks increasingly are planning to expand overseas. RBI RULES FOR FOREIGN VCs : RBI has spelt out that foreign venture capital funds will get registration to invest in India only if they chip in a part of the investment upfront. Till date, the Regulator has been insisting on end-use restrictions. This only meant that foreign funds have to give undertakings that they will not invest in the Indian property market. The condition now being laid down relates to some credible capital commitment before a formal registration can be obtained.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 67 -

PANEL MOOTS FAST TRACK COURTS FOR LOAN DEFAULT DISPUTES : Banks may have access to a new means of loan recovery if the recommendations of a Working Group appointed by IBA are accepted by RBI and the Govt. The IBAs suggestions include setting up of Fast Track Courts on the lines of Lok Adalat to facilitate the speedy recovery of loans and repossession of property within the existing legal framework. ULTRA MEGA POWER DEVELOPERS NOT TO BID FOR ANOTHER PROJECT : A Parliamentary Committee has suggested that developers of Ultra Mega Power Projects (UMPP) who have already bagged one Project should not be allowed to bid for another on the basis of the same balance sheet on which the earlier Project was won. A Project having a capacity of 4,000 MW or more is called an Ultra Mega Power Project. NABARD WORKING GROUP ON TRAINING NEEDS OF RRB PERSONNEL: NABARD has constituted a Working Committee under the Chairmanship of its ED, Sh.Amresh Kumar on capacity building requirements of Personnel of Regional Rural banks. The Group will identify the areas of improvement, prioritise the training and capacity building exercise for RRB Staff. NO PLAN TO RAISE GOVT. STAKE IN PSBs: - The Govt. has no plans to raise its stake in Public Sector Banks to74% across the Board, as it would require large infusion of funds. The Govts Equity holding is currently below 74% in most of PSBs. It is above 74% only in respect of Bank of Maharashtra(76.77%), CBI (80.21%), UCO(74.98%), Indian Bank(80%), United Bank of India and Punjab & Sindh Bank(100% respectively). BANKS KEY FINANCIALS : According to RBI, Gross NPAs as a percentage of gross advances declined to 2.5% from 3.3% at the end of March2006. The CRAR (at 12.3%) was placed significantly above the stipulated minimum of 9%. Hence in terms of two crucial soundness indicators, capital and asset quality, the Indian Banking Sector remained comfortably placed at the end of March 2007. BANKS PREFER G-SECS : Banks have invested more money in Govt. Bonds than they have lent to corporates, individuals and farmers this financial year. According to the latest figures with RBI, bank investment in govt. bonds and other approved securities during April-November9,2007 was Rs.1,57,915 crore against loans at Rs.1,35,267 crore. As against this, during the same period of last year, banks invested Rs.42,520 Crore in bonds and gave loans worth Rs.1,64,694 Crore. LOSS MAKING RRBs DECREASED : Net profits of RRBs declined to Rs.596 Crore during 2006-07 against Rs.617 Crore during 2005-06. The Profit making and Loss making RRBs also declined to 81(111) and 15(22) respectively. The number of total RRBs stood at 96(133) during 2006-07. LARGEST SECURITIZATION DEAL : ICICI Bank has carried out the largest rated securitization transaction for an amount of Rs.1, 929.90 Crore. The securities are backed by the ICICI banks new and used car loan receivables and have been issued by Indian Retail ABS trust under the banks securitization programme. BANKS REFUSE DOLLAR LOANS TO EXPORTERS: Banks have stopped giving dollar loans to exporters. According to Banking Industry Officials, they can no longer afford to offer dollar loans as their own foreign currency credit lines have dried up. Indian banks have been drawing foreign currency credit lines from international banks to lend to local exporters.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 68 -

SYNDICATE BANK PUTS MTN ISSUE ON HOLD: The Global Sub-prime meltdown has cast its shadow on Syndicate Banks planned cross-border capital raising through Medium Term Notes (MTN) for $125 million. URBAN CO-OPS GETTING MORE DEPOSITS: According to RBI Report, the deposits of Urban Co-operative Banks started to rise from 2005-06 onwards, reversing the declining trend of 2004-05. The deposits increased from Rs.1,14,060 crore in 2005-06 to Rs.1,20,983 Crore the following year, compared to the slip from Rs.1,10,256 Crore in 2003-04 to Rs.1,05,021 Crore in 2004-05. SBI INSTANT REMMITANCE FACILITY: State Bank of India has launched an Instant Transfer Facility that it claims is the fastest way for members of the Indian Community in Singapore to remit funds back to their Homeland. Remittance services offered by banks usually take between 15 minutes and a few working days. PSU BANKS STAKE NOT AS INDIRECT FOREIGN HOLDING: In a move that comes as a relief for companies in which public sector banks or financial institutions hold stake, the Govt is planning of exempt investment by PSU Banks and FIs with foreign equity holding from calculation of indirect foreign equity holding in an Indian Company. POSITION OF EXPORTS, IMPORTS AND TRADE DEFICIT: Exports during AprilOctober 2007 rose 20.89% to $85.58 billion, while imports were up 25.31% at $129.99 billion. Trade deficit for April-October was estimated at $44.40 billion. STATUTORY AUDITORS FOR PSU BANKS: - RBI will continue to appoint Statutory Auditors for Public Sector Banks for the current fiscal year. There were some doubts about empanelling of Statutory Auditors this year as some Banks have been demanding autonomy in the appointments. UNUSED LOANS TO COST FIRMS DEAR: From this year, banks are required to set aside capital for unused portion of loans under the New Capital Adequacy Guidelines. So far, only amount of loans drawn attracted capital adequacy norms. Now banks plan to charge a levy on unutilized portion of credit. SEBI ABOLISHES LOAD ON BONUS, REINVESTED UNITS : In a major victory for investors who have been losing a part of their legitimate earnings for no reason, SEBI has said that as per decision taken by AMFI (Association of Mutual Funds in India) not to charge entry/exit loads for Units given as bonus or against reinvested dividends. RBI FINES CO-OPERATIVE BANK : RBI has imposed a penalty of Rs.1,00,000 on Shri Parola Co-operative Bank Ltd based in Jalgaon, Maharashtra for violating the directive on credit exposure limits for individual and group borrowers and loans to directors and their relatives.

November 2007 o 13TH FINANCE COMMISSION : The former Finance Secretary and Advisor to the Finance Minister, Dr. Vijay Kelkar has been appointed as the Chairman of the 13th Finance Commission. FAST TRACK COURTS FOR LOAN DEFAULT DISPUTES : Banks may access a new means of loan recovery if the recommendations of a Working Group appointed by the Indian Banks Association are accepted by RBI and the Government. The IBAs suggestions include setting up of Fast Track Courts on the lines of Lok Adalat to facilitate the speedy recovery of loans and repossession of property within the existing legal framework.
- 69 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

GOVT. INFUSION IN PSU BANKS : The Govt. may infuse about Rs.10,000 Crore as equity capital in Nationalized Banks in addition to an identical amount in the countrys Largest Lender, SBI. Nationalized Banks with the Govt. holding closer to the floor of 51% are likely to receive the capital infusion support. BANKS CAN ACT AS LINK BETWEEN FARMERS AND FUTURE MARKETS: Banks, Agriculture Universities, NGOs and other organizations can act as an interface between farmers and future trading market. RBI WEB SITE FOR YOUNG : RBI has launched a Financial Education Web-site which is aimed at teaching the basics of banking, finance and central banking to children of different age groups. SUPREME COURT EASED SECURITY DEPOSIT NORMS :- The Court has stated that even if a State Electricity Board promises to pay interest on Security Deposits to Corporate Customers, it can change terms in case of budgetary or financial constraints. RESIDENT INDIANS MAY GET TO TRADE IN CURRENCY FUTURES: A Panel appointed by RBI has recommended trading in currency futures on dedicated exchanges by Residents. A exchange future is an exchange-traded derivative that allows investors to sell or buy a currency at a fixed price on a future date. To begin with, future trading would be allowed only in Rupee-dollar contracts. NO RIGHT TO BANK ACCOUNT INFO : Noting that agreements entered into by Banking Enterprises with its customers were matters of Commercial Confidence, the Central Information Commission (CIC) has ruled out disclosure of information pertaining to bank account details under the Right to Information Act. SEC SCRAPS ACCOUNTING RULE FOR FOREIGN COS : The US Securities and Exchange Commission scrapped a requirement that foreign companies reconcile financial statements with US accounting rules, part of an effort to increase cross border investing. PENSION SCHEME FOR SENIOR CITIZENS : The Govt. formally launched an Old Age Pension Scheme which is expected to benefit around 16 million citizens above the age of 65 and living below the poverty line (BPL) The Indira Gandhi National Old Age Pension Scheme seeks to provide Rs.200 per month as the Central Govts contribution and matching amount by the State to each beneficiary. SEBI MOOTS SEPARATE EXCHANGE FOR SMEs: SEBI has cleared the proposal for a separate stock market for listing Small and Medium Enterprises (SMEs). SEBI would select one Entity which would satisfy its eligibility criteria. NORMS FOR SHORT SALES RELAXED: In a bid to increase participation in and impart greater liquidity to the Govt security markets, RBI has extended short sale and when issued transactions to platforms other than the Negotiated Dealing System Order Matching (NDS-OM) platform. The relaxation now allows the participation of brokers and direct trades between bank or primary dealers. TUFS EXTENDED FOR ENTIRE 11TH PLAN PERIOD : The Govt has announced the continuation of the Technology Up-gradation Fund Scheme (TUFS) for the entire period of the 11th Five Year Plan(2007-12) The decision is expected to help the textile sector in achieving the targeted growth rate of 16% and make an investment of Rs.1,50,600 Crore in the plan period.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 70 -

NO FIIs ON COMMODITY EXCHANGE BOARDS: Foreign Institutional Investors (FIIs) will not be allowed to get a berth on the Boards of Commodity Exchanges. The Govt has proposed that FIIs can pick up 24% stake in commodity exchanges. The Foreign Direct Investment (FDI) ceiling for commodity exchanges would be 25% -short of the minimum stake required for veto power. Therefore the overall foreign investment in commodity exchanges would be capped at 49%. US FED's BASEL-II RULES :The US Federal Reserve has approved final rules for implementing the Basel-II International Banking Accord, which will require the Nations largest Banks to tie their capital reserves closer to their risks. RBI WARNS BANKERS ON EXCESSIVE CHARGES: RBI has threatened the bankers to extend the Usurious Loans Act (ULA) if RBI receives customer complaints about unreasonably high interest rates. The ULA was enacted to prevent the civil courts from being used to enforce loans that carry excessively high rates. Banks are currently exempt from the ULA because of an overriding clause in the Banking Regulation Act that put interest rates charged by banking companies outside judicial scrutiny. WORKING GROUP ON FARM DEBT : RBI has constituted an Internal Working Group under the Chairmanship of Mr. V.S.Das, Executive Director of RBI, in order to examine the recommendations of the Radhakrishana Expert Group on Agricultural Indebtness. CHINA RAISES BANK RESERVE RATIO AGAIN : Chinas Central Bank has raised 0.5 percentage point in banks reserve ratios and bring the ratio for big banks to 13.5%. This hike is 9th this year and took effect on Nov 26.China has also raised benchmark interest rates 5 times this year in an effort to keep bank deposit rates from lagging far behind inflation. BANKS ALLOWED PREF. SHARE ISSUE: RBI has allowed the Banks, facing pressure on their capital due to the increasing demand for credit, to raise Tier-I and upper Tier-II capital through Preference Shares. Perpetual Noncumulative Preference Shares (PNCPS) will be treated on par with Equity and the coupon payable on these instruments will be treated as dividend. All other types of Preference Shares will be treated as liabilities and the coupon payable will be treated as interest. NORMS ISSUED FOR STOCK OPTIONS VALUATION: The Finance Ministry has brought out guidelines for computation of fair market value (FMV) of employee stock options (ESOPs) for the purpose of levy of fringe benefit tax (FBT). In case of shares of companies not listed in recognized stock exchange, the FMV would be the value of the share in a company as determined by a merchant banker on the Specified date (Date of vesting of option or any date not more than 180 days earlier than the vesting date). In case of shares of a listed companies, the FMV would be the average of the opening price and closing price of the share on the vesting date on that Stock Exchange. BANKS' INVESTMENT CATEGORISATION : Banks have sought status quo for categorization of investments in their portfolios. Currently, investments are categorized as Held-to maturity(HTM), Available for-sale (AFS) and Held-for Trading (HFT). Under current guidelines of RBI banks are allowed to hold up to 25% of their Demand and Time Liabilities in the HTM category. Investments are valued on the basis of acquisition costs. BANK OF BARODA LAUNCHES GOLD COIN SALES : Bank of Baroda launched the selling of gold coins at its branches.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 71 -

RBI WANTS BAN ON AUTOMATIC FDI IN REALITY: RBI has asked the Govt to allow FDI into the sector only after clearance from the Foreign Investment Promotion Board (FIPB). SBI EASY CARD PAYMENT OPTION: SBI Card announced Pay-cash payment option for its customers through Easy Bill payment outlets in India. NEW BASE YEAR FOR INDUSTRIAL PRODUCTION : A new set of indices for measuring growth in industrial production, SSI sector performance and calculation of consumer prices in urban areas is likely to be the first off the block and may cover over 800 item groups with a new base year of 19992000. The current IIP has 1993-94 as its base year and covers about 400 items. NEW EXECUTIVE DIRECTORS OF RBI: The RBI has two new Executive Directors Mr. G.Gopalakrishna and Mr. H.R.Khan (Previously Chief General Managers of RBI). Their appointment has come into effect from October 26, 2007. STERLISATION TAX TO STEM ECB FLOWS : RBI and Finance Ministry are working on a concept paper that will look at the feasibility of levying a sterilization tax on External Commercial Borrowings (ECB).The paper will also look at auctioning the limited foreign loans quota to help moderate ECB inflows, which are currently running at over $25 billion a year. NCAER RAISES GDP GROWTH ESTIMATES :- The National Council of Applied Economic Research (NCAER) has revised its projection of Gross Domestic Product (GDP) growth for the current fiscal to 8.9% from its earlier estimates of 8.5%. SBI TO HIRE RECOVERY OFFICERS: SBI would hire 3000 marketing and recovery officers whose job profile would include recovery of loans. POSITION OF EXPORTS, IMPORTS AND TRADE DEFICIT: Growth in Indias exports-valued at $72.2 billion in the first half of the fiscal-decelerated to 18.52% compared to a sharp 27% to $60.8 billion recorded in the comparable period of the previous fiscal. Cumulative value of imports during April-Sept 07 was $109.2 billion against $87 billion(growth 25.51%). Trade Deficit for AprSep.07 was estimated at $36.92 billion ($26.02 bn last half Year). LOAN AGREEMENTS WITH WORLD BANK : The World Bank has signed 3 loan agreements with India for total assistance of $944 million towards 3 projects in the critical areas of rural finance, vocational training and restoration of water bodies. FIRST POWER TRADING EXCHANGE LAUNCHED: Power Trading Corporation and Financial Technologies, promoter of the Multi Commodity Exchange, have launched the Countrys First Power Trading Platform Indian Energy Exchange(IEX) with an initial investment of Rs.25 Crore. LACK OF AWARENESS HAMPERS E-PAYMENT: As per suggestions in the first Review of Payment and Settlement Systems in India 2006-07 released by RBI, lack of awareness of the payment products is one reason for slow progress. CORPORATION BANK IN TIE-UP FOR MONEY TRANSFER: UAE Exchange & Financial Services and Corporation Bank will facilitate money transfer between the 2 countries through Money Gram services to tap the Indian population. RBI CANCELS REGISTRATION OF 12 COS. RBI has cancelled the certificate of registration of 12 companies, so far, this year.

o o

o o

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 72 -

SBI BOARD OKAYS PENSION BENEFIT TO SBS EMPLOYEES: SBI has decided to provide pension benefit to employees of State Bank of Saurashtra. This third benefit is in addition to gratuity and provident fund for SBS employees. ICICI BANK SELLS 45% BAD HOME LOANS TO ARCIL: ICICI Bank has sold roughly 45% of its sticky home loans to the Asset Reconstruction Company India Ltd. (ARCIL) in a first step towards creating a market for retail loans that have turned bad. The Bank has sold Rs.360 Crore of Non-performing home loans at a price around the book cost. ICICI BANK FINED RS.55 LAKH BY HIRING GOONS: In a judgment that reinforces RBIs recent warning to banks on the strongarm tactics of their collection agents, the State Consumer Commission has slapped a fine of Rs.55 Lakh on ICICI Bank for trying to recover a vehicle loan by hiring Goons. SBI BEGINS SALE OF GOLD CONS: - SBI had launched a pilot project for sale of the gold coins in September at 24 branches in Ahemdabad, Chennai and Hyderabad circles. MARKET SHARE OF PSBs IN DEPOSITS : Over the past 8 years, the share of Private Banks in deposits has little more than doubled from 12.6% to 26.7%. The market share of PSBs in majorcentres fell from 54.5% to 46.4% between 1999 and 2007. During the same period, the share of SBI and its associates fell from 18.7% to 17.1% in the Metros. HSBC WINS MALAYSIAN ISLAMIC BANK LICENCE: The Malaysian Unit of HSBC Holdings Plc. has won a licence to set up a standalone Islamic Banking unit in the country and is the First Foreign Bank to have done so. ICICI LOMBARD BAGS AWARD: ICICI Lombard has bagged the General Insurance Company of the Year at the 11th Asia Insurance Industry Awards 2007 in Singapore. ICICI Lombard is a 74.26 Joint Venture between ICICI Bank and Canada based Fairfax Financial Holdings Ltd. 7 GMs ELEVATED AS EXECUTIVE DIRECTORS: The Govt has elevated 7 General Managers from various Public Sectors Banks to the post of Executive Directors, filling up top level vacancies in certain banks. TOP 3 US BANKS AGREE ON $75 BILION BACK UPFUND: The top 3 US Banks, Bank of America, CitigroupInc and JPMorgan Chase & Co. have agreed on the structure of a backup fund of at least $75 billion to stabilize credit markets. FOREX FOR INFRASTRUCTURE GETS IN-PRINCIPLE RBI NOD: RBI has given an in-principle nod to invest 5 billion dollars of Foreign Exchange Reserves annually in infrastructure projects through two subsidiaries of India Infrastructure Finance Company Ltd.(IIFCL). Approval has been given in respect of the Special Purpose Vehicle (SPV) to be established to borrow funds from the RBI and lend to Indian Companies implementing Infrastructure projects in India or to co-finance their ECBs for such projects solely for expenditure outside India. BARTERCARD : The dated barter system, where products and services used to be traded in cashless transactions, is set to get a new lease of life in India with Worlds Largest Exchange for such trade, foraying in the country. Australia-based Barter card said that it would commence India operations early in 2008 and the licence for the country has been already sold. NEW AUCTION NORM FOR PDs:- RBI has said that primary Dealers will have to make a minimum bid equal to the minimum underwriting commitment for the additional competitive underwriting auction. Currently, such dealers are
- 73 -

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

required to bid for 3% of the notified auction amount for the additional competitive underwriting auction. o US FED RESERVE's QUARTERLY ECONOMIC REPORTS: Federal Reserve has announced sweeping changes to the way it communicates with investors and the markets, by moving to a Bank of England style Quarterly Report of economic prospects. SYNDICATE BANKS ONLINE LOAN SCHEME :- Syndicate Bank has become the First Bank in the country to launch a new facility for online submission of requests seeking credit facilities by the Small and Medium Enterprises (SMEs), students for higher education loan under the Syndvidya Scheme and others.

Disclaimer: The information furnished is collected from various sources / websites. Though to the best of our knowledge and belief, the contents are correct, the author, accepts no responsibility for authenticity or accuracy. The reading material has been provided to serve as a reference guide while preparing for exams and promotion. Readers are requested to refer the relevant Circulars, guidelines and Book of instructions for a detailed view and for Job Knowledge/Work applications.

D:\Prasadh\Promotion 2008\Banking Topics of interest.doc

- 74 -