Chapter 1 - Indian Banking Industry

Nationalized Banks and Public Sector Banks

Public Sector Banks (PSBs)
If the government holds majority stake, i.e,. more than 50 % stake of an enterprise, then it is known
as Public Sector Unit (PSU). Government is the owner of the PSU, and is responsible for the managerial
control of the enterprise.
Similarly, if the majority stake (>50 %) of a bank is held by the government (generally, central
government), then it is known as Public Sector Bank (PSB).

To know whether a bank (or any enterprise) is a public sector bank, just take a note on
the stake of government.

Nationalized Banks
If some private entity or individual holds the majority stake (>50 %) of a bank, then it is a Private Sector
Bank. Now if the government buys the majority stake of the private bank, and take the managerial
control of it, then it will be known as Nationalized Bank, and the process will be known as Nationalization.

Note that the bank earlier was a private bank, but after the nationalization process, it became a
Nationalized
Bank. Hence to know whether a bank is a nationalized bank, just take a note on the history of the bank
(private -> public) and the stake of government in it.

Nationalized Bank vs. PSB

Now it is evident that a nationalized bank is always a public sector bank (PSB), because
the government (in turn the public) owns it (>50 % stake), but a PSB may not be a nationalized bank (if
the government
History itself creates the bank, with majority stake).
of Nationalization

The Reserve Bank of India (RBI) was nationalized with effect from January 1, 1949, on the basis
of Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
The Central government entered the banking business with the nationalization of the Imperial
Bank of India in 1955 (60% stake bought by RBI), and renamed State Bank of India
(SBI) under State Bank of India Act, 1955. In 2008, government acquired RBI's stake in SBI to
remove any conflict of interest, because RBI is the banking regulatory authority.
The 7 other state banks became the subsidiaries of SBI, after
being nationalized on 1959, under State Bank of India (Subsidiary Banks) Act,
1959. Currently 2 SBI subsidiaries are merged, making total 5 SBI associate banks.
The major nationalization took place in July 19, 1969 under former PM Smt. Indira
Gandhi, under Bank Nationalization Act, 1969. 14 major banks were nationalized at that time,
making 84 % of total branches coming under government control. However, on February 10, 1970,
 the Supreme Court held the Act void on the grounds that it was discriminatory against the 14
banks and that the compensation proposed to be paid was not fair compensation.

A fresh Ordinance was issued on February 14, which was later replaced by Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970.
The next nationalization process took place in 1980, making 6 other banks nationalized. 91
% of total branches came under government control, through Banking Companies (Acquisition
and transfer of Undertakings) Ordinance, 1980.

Which banks are Nationalized Banks?

This is a debated topic. If we consider the definition of Nationalized banks, then the criteria is - the bank
need to be a private bank prior nationalization. This criteria is satisfied by RBI, SBI, SBI associates and all
other banks that are nationalized in 1969 and 1980 (total 14 + 6 - 1 = 19, '-1' because New Bank of India is
merged with Punjab National Bank in 1993).

But it is better not to call RBI, SBI, or SBI associates as a Nationalized Banks. Because, they draw power
from different Acts, like -

RBI - Reserve Bank of India (Transfer to Public Ownership) Act, 1948

SBI - State Bank of India Act, 1955
SBI Associates - State Bank of India (Subsidiary Banks) Act, 1959

Banks that are nationalized in 1969 and 1980 draw power from Banking Companies (Acquisition and
transfer of Undertakings) Act of 1969 and 1980, are known as Nationalized Bank.

These total 19 banks are designated as Nationalized Banks by RBI in their website too -
(Please refer - http://www.rbi.org.in/commonman/English/scripts/banksinindia.aspx)

Also note that IDBI Bank Ltd. is denoted as Other PSBs in the website.

Bharatiya Mahila Bank (BMB) is a government-owned bank from the beginning. So there is no process
of nationalization involved. Hence it is a Public Sector Bank.

Now we can calculate the total number of Public Sector Banks (PSB) as -

SBI and SBI Associates - 6 banks

Nationalized banks (both 1969 & 1980) - 19 banks
 IDBI bank - 1 bank
BMB bank - 1 bank

Total = 6 + 19 + 1 + 1 = 27 PSBs

Nationalization vs. Privatization

Nationalization is the process for a government to expand its economic resources and power,
whereas Privatization is the process where government-owned companies are spun off into
the private sector.
- See more at: http://www.bankoncepts.in/2015/02/nationalized-banks-and-public-
sector.html#sthash.vIRJstg0.dpuf
Public Sector Banks (H/Q, heads, taglines)
This is a list of Public Sector Banks (PSB) in India, along with their headquarters, heads, taglines, etc.

Note that this is a dynamic list, which will change throughout the year. If any changes occur, readers are
requested to notify by commenting or mailing us, so that this page is always updated for the benefit of
readers.

Last Updated - 08/03/15

1. Allahabad Bank (www.allahabadbank.in)

Founded - April 24, 1865
H/Q - Kolkata, West Bengal
CMD - Shri Rakesh Sethi
Tagline - A tradition of trust
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2. Andhra Bank (www.andhrabank.in)
Founded - Nov 20, 1923
H/Q - Hyderabad, Andhra Pradesh
CMD - Shri C.V.R.Rajendran
Tagline - Where India banks
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3. Bank of Baroda (www.bankofbaroda.com)
Founded - July 20, 1908
H/Q - Vadodara (Baroda), Gujarat
CMD - vacant
Tagline - India's International Bank
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4. Bank of India (www.bankofindia.com)
Founded - Sep 7, 1906
H/Q - Mumbai, Maharashtra
CMD - Shri Vijayalakshmi R.Iyer
Tagline - Relationship beyond banking
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5. Bank of Maharashtra (www.bankofmaharashtra.in)
Founded - 1935
H/Q - Pune, Maharashtra
CMD - Suhil Muhnot
 Tagline - One family one bank
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6. Bhartiya Mahila Bank (www.bmb.co.in)
Founded - 2013
H/Q - New Delhi, NCR
CMD - Smt. Usha Ananthasubramanian
Tagline - Empowering women
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7. Canara Bank (www.canarabank.com)
Founded - 1969 (Canara Bank Ltd. in 1910)
H/Q - Bengaluru, Karnataka
CMD - vacant
Tagline - Together we can
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8. Central Bank of India (www.centralbankofindia.co.in)
Founded - Dec 21, 1911
H/Q - Mumbai, Maharashtra
CMD - Shri Rajeev Rishi
Tagline - Central to you since 1911
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9. Corporation Bank (www.corpbank.com)
Founded - Mar 12, 1906
H/Q - Mangalore, Karanataka
CMD - Shri Sadhu Ram Bansal
Tagline - A premier public sector bank
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10. Dena Bank (www.denabank.com)
Founded - 1938
H/Q - Mumbai, Maharashtra
CMD - Shri Ashwani Kumar
Tagline - Trusted family bank
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11. IDBI Bank Ltd. (www.idbi.com)
Founded - July 1964
H/Q - Mumbai, Maharashtra
CMD - Shri M.S.Raghavan
Tagline - Banking for all / Aao sochein bada
--------------------------------------------------------------------
12. Indian Bank (www.indianbank.in)
Founded - Aug 15, 1907
H/Q - Chennai, Tamil Nadu
CMD - Shri T.M.Bhasin
Tagline - Your tech-friendly bank
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13. Indian Overseas Bank (www.iob.in)
Founded - Feb 10, 1937
H/Q - Chennai, Tamil Nadu
CMD - Shri R.Koteeswaran (earlier ED of Bank of India)
Tagline - Good people to grow with
--------------------------------------------------------------------
14. Oriental Bank of Commerce (www.obcindia.co.in)
Founded - Feb 19, 1943
H/Q - New Delhi, NCR (Gurgaon)
CMD - Shri Animesh Chauhan (earlier ED of Bank of India)
Tagline - Where every individual is committed
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15. Punjab & Sind Bank (www.psbindia.com)
Founded - June 24, 1908
H/Q - New Delhi, NCR
CMD - Shri Jatinder Bir Singh
Tagline - Where service is a way of life
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16. Punjab National Bank (www.pnbindia.com)
Founded - May 19, 1894 (founder - Lala Lajpat Rai)
H/Q - New Delhi, NCR
CMD - vacant
Tagline - The name you can bank upon
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17. State Bank of India (www.statebankofindia.com)
Founded - July 1, 1955 (earlier Imperial Bank of India)
H/Q - Mumbai, Maharashtra
CMD - Smt. Arundhati Bhattacharya
Tagline - Pure banking nothing else / The nation's banks on us / With you all the way
--------------------------------------------------------------------
18. Syndicate Bank (www.syndicatebank.in)
Founded - 1925
H/Q - Manipal, Karnataka
 CMD - vacant
Tagline - Faithful and Friendly / Viswasaneeya Hitheshi
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19. UCO Bank (www.ucobank.com)
Founded - Jan 6, 1943
H/Q - Kolkata, West Bengal
CMD - Shri Arun Kaul
Tagline - Honors your trust
--------------------------------------------------------------------
20. Union Bank of India (www.unionbankofindia.co.in)
Founded - Nov 11, 1919
H/Q - Mumbai, Maharashtra
CMD - Shri Arun Tiwari
Tagline - Good people to bank with
--------------------------------------------------------------------
21. United Bank of India (www.unitedbankofindia.com)
Founded - 1950
H/Q - Kolkata, West Bengal
CMD - Shri P.Srinivas (earlier ED of Bank of Baroda)
Tagline - The bank that begins with "U"
--------------------------------------------------------------------
22. Vijaya Bank (www.vijayabank.com)
Founded - 1931
H/Q - Bengaluru, Karnataka
CMD - Shri Kishore Kumar Sansi (earlier ED of Punjab and Sind Bank)
Tagline - A friend you can bank on
Cooperative Banks
In normal commercial banking, the banking business is owned or maintained by government (in case
of Public Sector Banks) or some private entity (in case of Private Sector Banks). In this case, banks, on
behalf of government or that private entity, lends to other individuals or business, i.e., borrowers. The sole
purpose of this commercial banking is profit.

But in case of cooperative banking, some small private entities or individuals come together, and form a
small financial institution (by their own funds / member funds), and lend to the members of that
institution. Note that the banking business here is on cooperative basis, i.e., one member is helping / lending
to other member (now they do lend to non-member individuals or entities as normal banks). These financial
institutions are known as Cooperative Banks.

Purpose of Cooperative Banks

Initially, cooperative banks were set up to meet the credit needs in rural area, especially to prevent money
lenders, but now they have vast area of services as follows -

Agricultural and allied activities

Rural-based industries
Small trade and industry in Urban areas, etc.

Structure of Indian Cooperative Banks

Cooperative banks in India have a 3-tier structure -

Primary Credit Societies (village/town/urban centers)

Central Cooperative Banks (district-level)
State Cooperative Banks (state-level)

Urban Cooperative Banks (UCBs)

Primary (urban) Credit Societies that meet certain criteria can apply to RBI for a banking license to operate
as Urban Cooperative Banks (UCBs).
 Managerial aspects, like registration, management, recruitment, administration, etc. are controlled
by Registrar of Cooperative Societies (RCS) of the respective state governments (as per Co-
operative Societies Acts)
Banking aspects are governed by RBI (as per Banking Regulation Act, 1949)

These banks cater to the needs of small borrowers including retail traders, small entrepreneurs, professionals,
salaried persons, etc.

District Central Cooperative Banks (DCCB)

DCCBs are cooperative banks at the district-level. Each district generally will have only one DCCB.
Following the establishment of NABARD in 1982, the supervisory function of these banks has been passed on
to NABARD.

State Cooperative Banks (SCB)

SCBs are cooperative banks at the state-level. A number of DCCBs report to an SCB. NABARD has the
supervisory authority over these SCBs.

Note that DCCB and SCB has three supervisors - RCS, RBI and NABARD, whereas UCBs are controlled
by RCS and RBI.
Know Your Customer (KYC)
If you visit to a bank branch to open a bank account, you first need to let them know who you are,
and where do you live. Without knowing these information, a bank will not open your account.
This process of knowing about you (customer) is Know Your Customer (KYC).

Components
It is obvious now, that KYC process has 2 components -

1. Identity - Who are you?

2. Address - Where do you live?

Two more things are necessary - your photograph and your signature / thumb impression (These two are
the most important)

Documents
The government has notified 6 documents as 'Officially Valid Documents (OVDs) for the purpose of
proving your identity -

Passport
Driving License
Voters' Identity Card
PAN Card
Aadhaar Card issued by UIDAI
NREGA Card

If these documents also contain your address, then no separate proof of address will be required. Otherwise,
you need to provide another valid address proof.

Special case -
Suppose, you don't have any of the OVDs specified above to proof your identity. Then can
you open an account?
The answer is YES!
However, the account opened cannot be a normal account. It will be a limited facility account, termed
as 'Small Account'. Limitations such as -

Balance at any point of time, shouldn't exceed Rs. 50,000

1 year Total Credit shouldn't exceed Rs. 1,00,000
Total withdrawal and transfers shouldn't exceed Rs. 10,000 / month
 Foreign remittances cannot be credited

Such accounts remain operational initially for a period of 12 months (1 year), and thereafter, for a further 1
year (if the holder can prove that he has applied for any of the OVDs in respective office within 1 year of
opening the account).

Situational Question (asked in IBPS, SBI or other banking exams)

If a customer comes to your branch to open an account, but doesn't have any valid documents as proof of
identity, then would you open an account for him?

The answer is YES (as you already know now!)

Take his photograph and make him sign or provide thumb impression. And tell him you
are opening a 'Small Account' for him (also tell him about the limitations, and the need
to submit valid documents within 1 year)
Please note that KYC should be completed within 1 year of opening Small
Account, and KYC is mandatory.

Refer - RBI Press Release - Aug, 2014

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=31935

e-KYC
It is electronic KYC. As the term means, here KYC will be done electronically (online). Note that it
is possible only (or atleast for now) for those who have valid Aadhaar numbers with them.

You have to authorize the UIDAI (the issuer of Aadhaar card), by explicit consent, to release your identity
/ address through biometric authentication to the bank branches (or, business correspondents (BC)).

UIDAI then will transfer your data (that was taken from you when you applied for Aadhar card) to the bank,
and KYC will be done electronically.
MUDRA Bank
According to Budget 2015-16, the union government will set up Micro Units Development and Refinance
Agency (MUDRA) Bank with a capital of Rs. 20,000 crore to finance the micro-finance sector of India,
under Pradhan Mantri Mudra Yojana.

Purpose of MUDRA Bank

The Bank will regulate and refinance all Micro-Finance Institutions (MFIs) in India, which lends to /
finances the Micro, Small and Medium Enterprises (MSMEs) engaged in manufacturing,
trading and services activities.

Finance Minister said, "The measures would not only help in increasing access of finance to the unbanked but
also bring down the cost of finance from the last Mile Financers to the micro/small enterprises, most of which
are in the informal sector".

Budgetary allocation
Rs. 20,000 crore corpus is allocated to set up the MUDRA bank. Another Rs. 3,000 crore would be provided
to it, to create a Credit Guarantee corpus for guaranteeing loans to the micro finance sector.

Responsibility of MUDRA bank

Laying down policy guidelines for MSME financing business

Registration and regulation of MFI entities
Accreditation / rating of MFI entities
Formulating and running a credit guarantee scheme for providing guarantees to the loans which are
being extended to micro-enterprises
Creating a good architecture of last mile credit delivery to micro business under the scheme
of Pradhan Mantri Mudra Yojana, etc.

Priority Sector Lending

Finance Ministry also directed that MSME loans would be treated as Priority Sector Lending (PSL) and
a separate sub-limit of 7.5 % in PSL is being created for the Micro Enterprises.

Some points on MUDRA Bank

 It is to be set up as an apex refinancer, which will fund over 50 million entrepreneurs, who
generally do not have access to formal credit. These micro entrepreneurs also provide jobs to other
people, thus creating an opportunity of inclusive growth.
It will fund micro units which are more efficient and adds more value to the economy than the
corporates. According to the Economy Census 2014, the gross fixed assets of these (approx) 5.77
crore micro units is Rs. 11.5 lakh crore.62 % of these are owned by Scheduled Caste (SC),
Scheduled Tribes (ST) and Other Backward Castes (OBCs).
The MUDRA architecture is indigenously designed to fund the Indian non-formal sector.
Small and Payment Bank
Small Banks

The objectives of setting up of Small Banks are to further financial inclusion, by providing -

Provision of savings facilities to under-served and un-served sections of the population

Supply of Credit to small business units, small farmers, micro and small industries, and
other unorganized sector entities, in their limited area of operations, through high technology - low
cost operations

Activities of Small Banks -

1. The area of operations of the small bank will normally be restricted to contiguous districts in
a homogenous cluster of states/UTs so that the bank has the 'local feel' and culture.
Branch expansion for first 3 years, need RBI's prior approval.
2. Primarily undertake basic banking activities, like acceptance of deposits and lending to small
farmers, small businesses, micro and small industries and unorganized sectors.
3. It can also undertake other simple financial activities with the prior approval of RBI.
4. It cannot set up subsidiaries to undertake non-banking financial services (NBFC) activities.

Capital Requirements -
The minimum paid-up capital is Rs. 100 crore.

Funds Deployment -
In view of the inherent risk (since it can lend) of a small bank, it shall be required to maintain a minimum
Capital Adequacy Ratio (CAR) of 15 % of its Risk Weighted Assets (RWA) on a continuous basis.
However, as small banks are not expected to deal with sophisticated products, the CAR will be computed
under simplified Basel I standards.

Payments Bank
The objectives of setting up of Payments Banks are to further financial inclusion, by providing -

Small Savings accounts

Payments / remittance services to migrant labor workforce, low income households, small
businesses, other unorganized sector entities and other users.

Activities of Payment Banks -

 1. They can accept Demand Deposits, but will initially be restricted to hold a maximum balance of Rs.
1,00,000 per individual customer
2. Issuance of ATM / Debit Cards, but they cannot issue Credit Cards
3. Payments and remittance services through various channels
4. They can act as Business Correspondents (BC) of another bank (following RBI guidelines)
5. Distribution of non-risk sharing simple financial products, like Mutual Funds (MF) units
and insurance products, etc.
6. They cannot undertake lending activities (means cannot disburse loans)

Capital Requirements -
The minimum paid-up capital is Rs. 100 crore.

Funds Deployment -
Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, it will be required to invest
minimum 75 % of its demand deposits in Statutory Liquidity Ratio (SLR) eligible government securities
/ T-bills with maturity up to 1 year, and hold maximum 25 % in current and time/fixed deposits with
other Scheduled Commercial Banks (SCBs) for operational purposes and liquidity management.

Small Banks vs. Payment Banks

1. Small Banks can accept demand and time deposits from public as commercial banks do (Savings,
Current, Fixed, Recurring deposits, etc.)
But, Payment Banks can take only demand deposits (Savings and Current deposits), and cannot
issue Credit cards (however, can issue Debit cards)
2. Small Banks can give loans only to small business units, small farmers, micro and small
industries, and other unorganized sectors, but not to large industries.
But, Payment Banks cannot give any type of loans to public, but can invest in government
securities or T-bills.
3. The target of Small Banks is to supply credit to small business units, small
farmers, micro and small industries, and other unorganized sector entities, in their limited area of
operations. And provisions for savings for poor people.
The target of Payment Banks is payments / remittance services to migrant labor workforce, low
income households, small businesses, other unorganized sector entities, and savings for poor
people.
Deposit Insurance - DICGC
Customers deposit their money in banks to avail several services provided to them by their respective banks.
But what if the bank itself fails, or merges with another bank, or it becomes cease to exist? What will happen
to the valuable deposits of the customers?

Considering these, bank deposits are provided with insurance covers in most of the banking systems in the
world. India is no exception. However, the insurance cover may be in full or part.

Deposit Insurance in India

All the banks operating in Indian territory (with some exceptions) are covered under the deposit
insurance facility provided by Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully
owned subsidiary of RBI. It established on July 15, 1978 with Deposit Insurance and Credit Guarantee
Corporation Act, 1961.

DICGC insures all bank deposits (including saving, current, fixed, recurring) up to a maximum
limit of Rs. 1 lakh (principal with interest).

Banks insured under DICGC

Commercial banks - Public sector banks, Private Sector Banks, Foreign Banks operating in Indian
territory, Regional Rural Banks, Local Area Banks
Cooperative banks - State, Central and Primary Cooperative Banks (collectively called Urban
Cooperative Banks, or UCB) that have amended Cooperative Societies Act, empowering RBI to
control them

Currently approx. 2,130 banks are insured by DICGC.

Not covered under DICGC

Cooperative banks operating in Meghalaya, Chandigarh, Lakshadweep and Dadra & Nagar
Haveli
Primary Cooperative Societies

Insurance coverage
DICGC protects bank deposits that are payable in India, including savings, current, fixed, recurring,
etc. except the following deposits -

Foreign government deposits

Central and state government deposits
 Inter-bank deposits, etc.

Note that this insurance is aimed to cover individual customer deposits or small business with maximum
cover up to Rs. 1 lakh. Therefore the above exceptions are justified.

Insurance Premiums
Customers need not pay any premium to insure their deposits. DICGC charges a nominal premium from
the banks. Customer deposits are automatically (from the customer's point of view) insured when they open
any kind of deposits with the bank.

Insurance Claim
In case of a bank failure, customers need not make any claim under deposit insurance (in contrast to
other insurances, where insurance claim is needed).

The official liquidator would make a claim on customers' behalf to the DICGC. DICGC is bound to pay
the valid insurance claim within 2 months period from receipt of claim from the liquidator. The liquidator
then provides the claim amount to each customer.

When DICGC is liable to pay

If a bank goes into liquidation (fails)

If a bank is reconstructed or amalgamated / merged with another bank
Pradhan Mantri Jan-Dhan Yojana (PMJDY)

PMJDY Logo

Pradhan Mantri Jan-Dhan Yojana (PMDJY)

PMJDY is a National Mission for Financial Inclusion (to include excluded-population for financial/banking
services). A number of financial services is provided to the PMJDY account holder in anaffordable manner,
like -

Savings and Deposit Accounts

Remittances (transferring money to other accounts)
Credit
Insurance
Pension, etc.

PMJDY Slogan
'Mera Khata Bhagya Vidhata' (meaning in English - 'My Bank Account - The Creator of the Good
Fortune')

PMJDY Account opening procedure

PMJDY accounts can be opened in the followings with Zero balance -

Bank branch (Public sector, Private sector and Regional rural banks)
Business Correspondents / Bank Mitr outlets

Note that there is no minimum balance criteria for opening PMJDY accounts (without cheque book). But if
someone wants to avail the cheque book facility, he needs to maintain minimum balance criteria.
PMJDY Benefits

Deposits attract interests (you will get interest on your account balance)
Accidental Insurance cover of Rs. 1 lakh
Life Insurance cover of Rs. 30,000
After satisfactory operation of the PMDJY account for 6 months period, an Overdraft (OD) facility
will be permitted, upto Rs. 5,000 (only one account per household, preferably female account holder
of that household)
Beneficiaries of governmental schemes (like LPG subsidy, etc.) will get Direct Benefit Transfer
(DBT) in these accounts (subsidy amount will be directly credited to your bank account)
Access to Pension, Insurance products
Easy transfer of money across India (remittances)
No minimum balance criteria (unless you avail cheque book facility)
RuPay Debit Card will be provided

Note that RuPay Debit Card must be used at least once in 45 days

PMJDY Statistics (as on February 28, 2015)

1. Public Sector Banks - Total 10.7298 crore accounts

2. Private Sector Banks - Total 0.5702 crore accounts
3. Regional Rural Banks - Total 2.3804 crore accounts

Total 13.6804 crore PMJDY accounts has been opened in India (as on Feb 28,2015)

PMJDY Administrative Structure

Mission Head - Finance Minister Shri Arun Jaitley

Mission Incharge - Finance Secretary Dr. Hasmukh Adhia
Mission Director - Joint Secretary (Financial Inclusion) Shri Rajesh Aggarwal
Additional Mission Director - Director (Financial Inclusion) Dr. Alok Pande

PMJDY Guinness Book of World Records

PMJDY scheme of government recently recognized by Guinness Book of World Record for most bank
accounts opened (approx 1.8 crore) in 1 week (during August 23 - 29, 2014).
The Certificate states, "The most bank accounts opened in 1 week as a part of financial inclusion campaign
is 18,096,130 and was achieved by Department of Financial Services, Government of India (India) from 23
to 29 August 2014"
 Lending Money - Cash Credit and Overdraft

Lending money is one of the two major activities of any bank. Banks accept deposits from public for safe
keeping and pay interest to them. They then lend this money to earn interest on this money. In a way,
the banks act as intermediaries between the people who have the money to lend and those who need the
money to carry out business transactions.

Spread The difference between the rate at which the interest is paid on deposits and is charged on loans,
is called the spread.

Lending Activity Commodities, Debts, Financial instruments, Real Estate, Automobiles, Consumer durable
goods, Documents of title.

Apart from the above categories, the Banks also lend to people on the basis of their perceived personal
worth. Such loans are called clean and the banks are understandably cagey about extending such loans.
The credit card arms of the various banks, however, fill up this void.

a. CASH CREDIT (CC) ACCOUNT This account is the primary method in which banks lend money against
the security of commodities and debt. It runs like a current account except that the money that can
be withdrawn is not restricted to the amount deposited in the account. Instead, the account holder is
permitted to withdraw a certain sum called limit or credit facility in excess of the amount deposited in
the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of Demand Deposits of
the banks.

b. OVERDRAFT (OD) The word overdraft means the act of overdrawing from a bank account. In other
words, the account holder withdraws more money from a bank account that has been deposited in it.

Now try to understand about the differences between these two -

The primary differences between cash credit and over draft is how they are secured and whether the money
is lent out of a separate account.
 Cash Credit (CC)
More commonly offered
User
for businesses than individuals
Security can be a tangible
asset, such as stock,
Security
raw materials, or some
other commodity
A certain percentage of
Credit
the value of the commodities /
Limit
debts pledged by the a/c holder
Over Draft (OD)
Can be used for any
purpose, individual or business
Allowed against a host of
other securities including financial
instruments, like shares, units
of MFs, surrender value of LIC
policy and debentures etc. Some ODs are even
granted against the perceived worth of
an individual, known as clean ODs.
Acts more like a traditional loan. Money is
lent as with a cash credit account, but a wider
range of collateral can be used
to secure the credit.
Bill Discounting
If the drawer of the bill does not want to wait till the due date of the bill and is need of money, he
may sell his bill to a bank at a certain rate of discount. The bill will be endorsed by the drawer with
a signed and dated order to pay the bank. The bank will become the holder and the owner of the bill. After
getting the bill, the bank will pay cash to the drawer equal to the face value less interest ordiscount at an
agreed rate for the number of days it has to run. This process is known as discounting of a bill of exchange.

For example, a drawer has a bill of Rs. 10,000. He discounted this bill with his bank 2 months before its due
date, at 15 % p.a. rate of discount. Discount will be = Rs. 1,000 x 15/100 x 2/12 = Rs. 250. Thus
the drawer will receive a cash worth Rs. 9,750 and will bear a loss of Rs. 250.
The bank will keep this bill in possession till the due date. On maturity (due date) the bank will present the
bill to the acceptor and will receive cash from him (if the bill is honored). In case, the acceptor does not make
the payment to the bank, then the drawer or any person who has discounted the bill have to take
this liability and will pay cash to the bank.

N.B. Until the bill is honored on the due date, there is always a chance the drawer will become liable on
the bill. This is called a Contingent Liability a liability that will only arise if a certain event occurs the
acceptor does not honor the bill.
Non Performing Assets (NPA)
Bank Assets
Assets are something that you own, meaning you are the legal owner of the asset. Similarly, bank assets are
those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.)
or financial property.

Banks generally have four types of assets - Physical Assets, Loans/Advances, Reserves and Investments.
(Read the topic - Bank Assets and Liabilities for detail).

Among the above four types, loans or advances are the most important and risky asset of a bank. It is most
important because, it can generate maximum profit, and at the same time, it is the most risky because if the
borrower fails to repay the loan amount, then the bank will face loss.

Non-Performing Assets (NPA)

If the borrower (of a loan/advance from a bank) is unable to repay the interest and principal repayments to
the bank, for a considerable amount of time, then the loan/advance will be called non-performing.
Since loans/advances are assets of the bank, it will be known as Non-performing Assets (NPA).

In Indian context, if the borrower has failed to make interest or principal payments for 90 days (3
months), then the loan/advance is considered NPA.

(In layman's terms NPA refers to - you lend money, but you don't get it back when you expected)

Recovery/Non-recovery of NPA
Interests earned on loan repayments are the most important income of a bank. Therefore, due to default in
repayment, banks will suffer loss. Though, by selling the collateral securities (if any) against the loan -
banks could recover the loan amount, the process of selling the securities (with the help of Asset
Reconstruction Companies, and they will charge fee) is a tedious and long term job, and even
the seizure of mortgage or hypothecation, etc is difficult process.

Moreover, if the company or individual borrower becomes bankrupt, then the loss will be catastrophic for
the lender bank. Even in some cases, there could be some corrupted bank officials who would sanction
loan to uncreditworthy borrowers for bribes, or ministerial / political pressures!
Conditions to become NPA
An asset becomes NPA when it ceases to generate income for the bank -

1. Term Loan - Interest and/or installment of principal amount remain overdue for more than 90
days
2. Overdraft / Cash Credit - The account remains 'out of order' for 90 days
3. Bill - The bill remains overdue for more than 90 days in the case of bills purchased and discounted
4. Short duration crops - The installment of principal or interest remains overdue for 2 crop seasons
5. Long duration crops - The installment of principal or interest remains overdue for 1 crop season
6. Securitisation transaction - The amount of liquidity facility outstanding for more than 90 days
7. Derivative transaction - The overdue receivables representing positive mark-to-market value of
a derivative contract, if these remain unpaid for 90 days from the specified due date for payment.

NPA Classification
Banks are required to classify NPAs into the following 3 categories, based on the nonperforming period and
the realisability (recoverability) of the dues -

1. Substandard Assets - (90 days - 12 months)

Assets remained NPA for less than or equal to 12 months (1 year) are Substandard Assets.

Such an asset will have well defined credit weaknesses that jeopardise the liquidation of
the debt and are characterized by the distinct possibility that
the banks will sustain some loss, if deficiencies are not corrected.
2. Doubtful Assets - ( > 12 months)
Assets remained Substandard assets for 12 months (1 year) are Doubtful Assets.

Such an asset will have all the weaknesses inherent in substandard assets, with
the added characteristic that the weakness make collection or liquidation in full - on the basis of
currently known facts, conditions and values - highly questionable and improbable.
3. Loss Assets -
Assets where loss has been identified by the bank or internal/external auditors or the RBI
inspection, but the amount has not been written off wholly.
 Such an asset is considered uncollectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.

Upgradation of NPA to Standard

If arrears of interest and principal are paid by the borrower in case of loan accounts classified as NPAs,
the account should no longer be treated as nonperforming and may be classified as 'standard' accounts.

Current NPA status in India

According to Moody's analyst ICRA, the percentage of gross NPAs (GNPAs) for the banking sector (both
PSBs and private banks) is expected to worsen from 3.9 % of advances in fiscal 2013-14 to about 4 - 4.2
% in 2014-15.
SARFAESI Act, 2002
Before reading this article, go through the article on - Non-performing Assets (NPA)

SARFAESI Act, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act
(SARFAESI), 2002 was enacted to empower the banks and financial
institutions (lenders) to recover their bad loans / NPAs from the borrowers, without the intervention of
the court.

Applicability of the Act

Secured Loans - SARFAESI Act is applicable only for the secured loans (meaning loans backed
by underlying securities). In this case, banks or financial institutions
can seize and/or sell the underlying securities, like hypothecation, pledge, mortgage, etc and
recover the loan amount.
Unsecured Loans / Agricultural lands - For unsecured loans (not backed by underlying securities)
or agricultural loans (where agricultural land is the underlying security),
banks cannot seize or sell by itself. In these case, banks need to move to court and file Civil
case against the defaulters.

Why SARFAESI Act?

Earlier to recover the bad loans / NPAs, banks needed to move to the courts - Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunals (DRAT), which made the recovery a long-term process, and
there were several loopholes which could be misused by the borrowers.

Then Andhyarujina committee recommended to enact a new legislation for

the establishment of Securitization and Reconstruction companies and empower the banks and financial
institutions to take possession / seize the securities without moving to the courts.

Provisions of the Act

If any borrower fails to discharge his liability in repayment of any secured debt within 60 days (2
months) of Notice, the secured creditor is conferred with powers under the SARFAESI Act to -

Take possession of / seize / auction /sell the secured assets of the borrower
Takeover of the management of the business of the borrower
Appoint any person to manage the secured assets, etc.

Note that agricultural property is exempted from the provisions of the Act.

Some Securitization Companies and Reconstruction Companies in India

Asset Reconstruction Company (India) Ltd. (ARCIL)

Assets care & Reconstruction Enterprise Ltd. (ACRE)
ASREC (India) Ltd.
Pegasus Assets Reconstruction Pvt. Ltd.
Phoenix ARC Pvt. Ltd.
Priority Sector Lending
Banks try to do business on those sectors that could generate most profits for them, like corporate sector, etc.
There are several other sectors that might not get adequate credit supply (loans), if special dispensation is
not provided by RBI (because banks can ignore those sectors, as those will generate less profit for banks).

Therefore, RBI has mandated that all banks need to provide credit to those special category areas, (Financial
Inclusion), known as Priority Sector.

Priority Sectors
Priority Sector includes following categories -

1. Agriculture and Allied Activities (like dairy, fishery, animal husbandry, poultry, etc.)

a. Direct Finance -

Without limit - to individual farmers, SHGs, JLGs, small and marginal farmers, distressed
farmers indebted to moneylenders, etc.
With limit (up to Rs. 2 crore per borrower) - corporates in these activities, producer
companies, partnership firms, cooperatives, etc.

b. Indirect Finance -

If the loan limits per borrower is more than Rs. 2 crore, then it will be treated as Indirect Finance.

2. Micro and Small Enterprises

Bank loans to Micro and Small Manufacturing and Service Enterprises are considered Priority Sector
Lending. However, there are some upper limits -

a. Plant and Machinery Investment -

Micro Enterprises - < Rs. 25 lakh

Small Enterprises - > Rs. 25 lakh, but < Rs. 5 crore

b. Equipment Investment -
 Micro Enterprises - < Rs. 10 lakh
Small Enterprises - > Rs. 10 lakh, but < Rs. 2 crore

3. Education
Loans to individuals for educational purposes with the following limits -

Education in India - < Rs. 10 lakh

Education abroad - < Rs. 20 lakh

4. Housing
Loans to individuals with the following limits for construction / purchase of a dwelling
unit per family, excluding bank's own employees' loans -

Metropolitan areas (population above 10 lakh) - Rs. 25 lakh

Other than metropolitan areas - Rs. 15 lakh

Note - Bank's own employees get low interest Housing loan from that bank, so loans granted on them is not
considered as Priority Sector Lending.

5. Weaker Sections
The following borrowers are considered as Weaker Sections -

Small and marginal farmers

Artisans,village and cottage industries (max. credit limit Rs. 50,000)
Scheduled Castes (SC) and Scheduled Tribes (ST)
Beneficiaries of Differential Rate of Interest (DRI) scheme
Beneficiaries of some government schemes, like NRLM, SJSRY, SRMS, etc.
Self Help Groups (SHG)
Distressed farmers indebted to non-institutional lenders
Individual women beneficiaries upto Rs. 50,000 per borrower, etc.

6. Micro Credit
Loans upto Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or in
a group, will constitute micro credit.
PSL targets and sub-targets
The target for lending to the redefined priority sector is retained at 40 % of Adjusted Net Bank Credit
(ANBC) or credit equivalent of off-balance sheet exposure, whichever is higher, for all Scheduled
Commercial Banks (SCBs).

Target - Total PSL = 40 % of ANBC

Sub-target - Total Agriculture = 18 %

Sub-target - Advances to Weaker Sections = 10 %

Unused PSL fund to form MUDRA Bank

Unused PSL funds of commercial banks will be used to set up the Rs. 20,000 crore corpus of the
proposed MUDRA Bank (read previous post on MUDRA Bank).

The bank will use at least 65 % of its funds for lending to micro enterprises run by members of Scheduled
Castes and Tribes.

New proposals on PSL

To enhance credit to Small and marginal farmers, a separate sub-target of upto 8 %

Loans for Agri-processing and Agri-infrastructure would be included in PSL
Loans to Medium Enterprises would be included in PSL (Micro and Small Enterprises are currently
included)
A separate sub-target of 7.5 % to be created for the Micro Enterprises
Loans upto Rs. 5 crore for Social infrastructure, like schools, health cares, drinking water,
sanitation, etc. are being included under PSL, for towns of less than 1 lakh population
Renewable Energy sector is being added to PSL, upto Rs. 10 crore loans
Pledge, Hypothecation, Mortgage, Lien

Securities for loan

If you want a loan from a bank (or any other financial institution), you generally need to provide some kind
of security against the loan to the bank. There are several types of securities, against which a bank will offer
you a loan -

1. Pledge - It is used when the bank (or, lender, known as pledgee) takes actual possession of
the securities, such as goods, certificates, golds, etc, (you provide it to bank to avail loan) which are
generally movable in nature. Bank keeps the securities with itself, and provide loan to you.
Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after
you repay all the debts (i.e., loan) to the bank. In case you are unable to pay back, then the bank has
the right to sell the assets, and recover the loan amount (with interest).

Example - Gold loans, Jewellry loans, advances against NSC (National Saving Certificates),
or loans against any other assets.
2. Hypothecation - It is used when you (borrower) have the actual possession of the asset, for which
you have taken the loan. Generally, this is charged against loans for movable assets, like car, bus,
etc. (i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you
are hypothecated to the bank for the loan granted.
In case you are unable to repay the loan amount, then the bank has the right to sell the asset (bus,
car, etc.), (which is possessed by you) and recover the total amount (with interest).

Example - Car loans, Bus loans, etc.

3. Mortgage - It is used when you (borrower) have the actual possession of the assets, for which you
are granted loan (e.g., house loan), or against which you are granted loan (e.g., house
mortgaged). Mortgages are generally those assets, which are permanently attached with Earth
surface, like house, land, factory etc.
In case you are unable to repay the loan amount, the bank has
the right to seize and sell the mortgage, and recover the loan amount (with interest).
4. Lien - It is almost similar to Pledge, except that in case of lien, the lender can only
detain the asset/goods until the borrower repays the loan, but have no right to sell the asset,
unless explicitly declared in the lien contract. (For a pledge, the lender can sell the asset, if
the borrower is unable to pay the loan)

Note the followings -

Movable assets - Pledge, Hypothecation, Lien

Immovable assets - Mortgage

Possessed by lender - Pledge, Lien

Possessed by borrower - Hypothecation, Mortgage

Base Rate
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Base Rate System

Bank lends money to its customers by loans or advances or other credit facilities. It charges some interest on
thelending / credit. Does a bank need to follow any specific rules while providing money to its customers?

Yes, banks follow Base rate system, formulated by RBI. Base rate is the minimum chargeable interest for the
credit sanctioned to the customer (meaning, no bank can offer loans to its customers below this interest
rate).

Base rate system replaced the Benchmark Prime Lending Rate (BPLR) system on July 1, 2010.

Situational Question

Suppose you are an officer in a rural bank. A poor people comes in your branch seeking loan for his house
(or some other reason). Can you offer him a loan, bearing interest below the Base Rate?

The answer is YES, if he is eligible for DRI scheme. (criteria described below)
Exclusions

There are some few exclusions, where you can grant loan below base rate, as -

1. Differential Rate of Interest (DRI) Scheme beneficiaries

2. Loans to bank's own employees (including retired employees)
3. Loans to bank's depositors against their own deposits (e.g., granting loan on his own fixed deposit,
etc.)

DRI Scheme

As per RBI guidelines, for lending under DRI scheme, banks are required to grant loans at concessional
rate of interest to the eligible beneficiaries -

Family income ceiling per annum in rural and urban area should be less than Rs. 18,000 and Rs.
24,000 respectively
Borrower should not be benefited under any subsidy-linked schemes of government
Max. limit of loan - Rs. 15,000. For housing loan, it could be up to Rs. 20,000
Banks are required to lend 1 % of their total outstanding advances under DRI Scheme every year.

Automated Teller Machine (ATM)

By: Bankoncepts on 5:38 PM

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Automated Teller Machine (ATM) is a computerized machine (specialized computer) that provides
the customers of banks the facility to access their accounts for dispensing cash and to carry out
other financial (e.g., remittances) as well as non-financial (e.g., balance check) transactions, without visiting
the bank branch.

Services / Facilities provided by ATMs -

 Cash Withdrawal
Account Information
Cash Deposit (not permitted at WLAs)
Regular Bill Payment
Purchase of Vouchers
PIN change
Mini / Short Statement
Cheque book request
Loan Account Enquiry, etc.

Classification

ATMs can be classified depending on the owner and operator -

1. Bank-owned ATM

These are owned and operated by individual banks.

2. White Label ATM (WLA)

These type of ATMs are set up, owned and operated by non-bank entities (e.g., NBFCs). WLAs are authorized
under Payments and Settlement Systems Act, 2007 by RBI. These have following features -

Logo displayed on the machine or premises will be of WLA Operator's. However, customers can use
these ATMs, as of using other bank ATMs (bank other than card issuing bank)
Cash deposit is not permitted in the WLA machine (as of now).

3. Brown Label ATM (BLA)

These type of ATMs are set up and owned by a Service provider, but cash management (operation)
and connectivity is provided by a sponsor bank (brand of this bank is used on the ATM).

By using BLAs, banks have the opportunity to cut the huge cost of setting up of an ATM (bank-owned ATM)
Note -

ATMs - bank (owner), bank (operator)

WLAs - non-bank (owner), non-bank (operator)

BLAs - non-bank (owner), bank (operator)

Cards - Debit, Credit, Prepaid Cards

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Instead of carrying and using cash, you can use cards for all your financial transactions. Hence, these are
known as Plastic Money.

According to the issuance, usage and payments, Cards can be classified into 3 types -

1. Debit Cards - These are issued by banks, which are linked to a bank account (meaning you need a bank
account (savings, current, etc.) before having a Debit card). Debit cards are also known as ATM cards.

Note that you need to have balance in your account, before you make any financial transaction. These can
be used for several purposes like -

withdraw cash from an ATM

purchase goods and services at Point of Sale (POS) / E-commerce (online - domestic & international;
however for international transaction, it needs to be enabled by bank)
fund transfer / remittances (only domestic), etc.

2. Credit Cards - These are issued by banks or other institutes approved by RBI. There is a credit limit on
transactions. These may or may not be linked to a bank account.

Note that you can make transactions, even if you don't have balance in your account (if linked with bank
account), subject to a credit limit approved by the issuer of the credit card. This can be thought as a loan /
advance from the issuer, which you need to pay back after a certain period of time. Use of Credit cards are
same as that of the Debit cards.

3. Prepaid Cards - These are issued by banks or non-banks, where value is paid in advance. There are
several forms of prepaid cards, like Smart cards or Chip cards, Internet wallets, Mobile wallets, etc.

Prepaid cards can be further classified into two types -

Issued by banks - also known as Open System Prepaid Cards, which are issued by banks. These are
similar to Debit cards in usage, but you don't need a bank account to get this type of card. You just
need to pay in advance, with a maximum limit of Rs. 1 lakh (previous limit Rs. 50,000)
Issued by authorized non-bank entities - also known as Semi-Closed System Prepaid Cards, which
are issued by authorized non-bank entities. There are some restrictions on the usage of these cards -
can be used only for purchase of goods and services at POS / E-commerce (online) and for domestic
remittances, but cannot withdraw money from ATMs.
Also, you don't need a bank account, but need to pay in advance to the non-bank entity, with a max.
limit of Rs. 1 lakh.

# Reader's Question

Can Credit Card be issued without bank account?

(Now after reading the article, you already know the answer)

Credit cards may or may not be linked with a bank account, meaning you don't need to have a bank account,
to be issued with a Credit Card. However, before issuing you a Credit card, the issuing bank or other RBI
approved institutions (e.g. NBFCs) will verify your credibility.
Non Banking Financial Corporations (NBFC)

Non Banking Financial Companies (NBFC)

NBFCs are financial institutions that provides almost similar banking services (like providing loans and
credits) but doesn't possess banking license. So there are some limitation / restriction in its services.
NBFCs are registered under the Companies Act, 1956, whereas banks are regulated under Banking
Regulation Act, 1949.

Differences between a Bank and an NBFC

It cannot accept Demand Deposits from public. If someone want to invest in an NBFC, it could have
some maturity (like happens in time deposits). Though some special permission is given
to LIC and GIC by RBI. These two NBFC can take demand deposits.
It is not a part of the Payments and Settlement System of India.
It cannot issue cheques drawn on itself.
Deposits are not insured or covered under Deposit Insurance and Credit Guarantee Corporation
(DICGC), which generally covers the bank accounts.

White Label ATM (WLA) - NBFC ATMs

Most of the ATMs belong to banks, but the cash dispensing machines that
are owned and operated by NBFCs are called White Label ATMs. Surely they charge extra money for
providing this service, and generally operates in semi-urban and rural areas (tier III to VI areas)

NBFCs that provides WLA - Tata Communications Payment Solutions, Prizm Payment Services Pvt. Ltd,
Muthoot Finance Ltd, Vakrangee Ltd, BTI Payments Pvt. Ltd., Srei Infrastructure Finance Ltd, RiddiSiddhi
Bullions Ltd. (total 7 as of May 2014)

NBFC businesses -

loans and advances

acquisition of shares, stocks, bonds
insurance, etc.
Letter of Credit
Letter of Credit (L/C)
It is a guarantee in the form of a letter, issued by a buyer's bank. Suppose you want
to buy or sell some goods from or to a foreign country. It is very much possible that you don't know
the seller or buyer. And also the laws regulating the trade may be different. Therefore, both the seller and
the buyer need some kind of guarantee to seamlessly perform the trade. Here Letter of Credit comes into
action.

The steps involved is very much as follows -

Step 1 - First a contract is signed between the buyer and the seller.
Step 2 - The buyer comes to his bank, and the bank issues a Letter of Credit, on behalf of the buyer, to
the seller.
Step 3 - After getting the Letter of Credit, seller knows that he will be paid surely. So
he consigns the goods to a Carrier, in exchange of a Bill of Lading (Carrier provides it to the Seller)
Step 4 - Seller takes the Bill of Lading and provide it to his bank (i.e., seller's bank), who eventually transfers
it to buyer's bank, who then provides it to the buyer.
Step 5 - Buyer takes the Bill of Lading, and gives it to the Carrier. The Carrier then getting his own Bill of
Lading, delivers the goods to the buyer.
Step 6 - Carrier then asks his payment from the Seller, by providing his Bill of Lading, that he has
actually delivered the goods.
Step 7 - Seller then asks his bank (i.e., sellers bank) for payment, who eventually asks the buyers
bank. The buyers bank settles the payment.

Now you can see that the risks involved is much minimized by using the Letter of Credit, as
the seller is guaranteed to be paid by the buyers bank upon delivery of goods.

Even in case, if the buyer doesn't pay the full amount to his bank (buyers bank), the buyers bank is obliged
to pay the amount to the sellers bank. The buyers bank can later settle the amount with his buyer, as
happens in loans or advances.

Since bank guarantee also provides a type of guarantee. Then what is the difference between a Letter of
Credit and Bank Guarantee?
 Letter of Credit Bank Guarantee

Paid only if the contract is breached, i.e.,

Nature Paid only if the contract is satisfied
notsatisfied

Ensures a transaction proceeds as Insures a buyer or seller from loss or damagedue

Use
planned to non-performance by the other party

Bank Assets and Liabilities

Bank Assets
Assets are something that you own, meaning you are the legal owner of the asset. Similarly, bank assets are
those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.)
or financial property.

Banks generally have four types of assets -

1. Physical Assets - These are relatively minor assets of banks, that generally doesn't earn money for
bank. Physical assets include land, furniture, equipment, buildings, etc.
2. Loans / Advances - These are the most important assets of bank, because these are the primary
source of their earning. Banks get interest from the loans / advances they lend to customer.
3. Reserves - Banks need to maintain some reserves, so that they can meet the demands of their
customers and facilitate daily transactions (e.g., a customer comes to a bank,
and demands to withdraw money, or encash a cheque. Banks need to maintain reserve in
its vault to meet these).
4. Investments - Banks invest some of its money in government securities, or other investment
instruments (like, buying shares, etc.). Investments are less riskier than loan (loans can
become NPA), and have less return (loans bear high interest return) for a bank.
Bank Liabilities

Liabilities are something that you owe, meaning assets (of some other person) you hold, which you need
to return to its original owner. Similarly, bank liabilities are those things that a bank owes to its customers,
or investors. It includes financial property and debts (for electricity, office supplies, employee wages, etc.)

Banks generally have several type of liabilities. (Note that this is not exhaustive list)

1. Customer Deposits - These are the most important liabilities of a bank. These are the assets for
customers, but liabilities for banks. Banks need to return the money on demand or after
a maturity period.
2. Certificate of Deposits (CD) - Banks issue Certificate of Deposits to the general public to raise
money. These are also liabilities of a bank, because banks need to return the amount invested by
the investor.
3. Borrowings - Banks can borrow from other banks or financial institutions, including External
Commercial Borrowings (ECB), which need to be returned. These are also liabilities of a bank.
4. Other liabilities - There are several other type of liabilities, like wages, taxes, leases, pension
obligations, etc.

Capital and Assets

# Readers' Question
What is the difference between capital and asset?

Assets
Assets are those tangible and intangible things that you own. You can sell them in the market to
get money, or you can retain those for your personal enjoyment. Also, there are some assets which you
cannot directly sell to get the money, or the value of the asset cannot be properly assessed.

Tangible Assets - land, building, machinery and equipment, goods, raw materials, factory, cash in
bank accounts, etc.
Intangible Assets - patents, copyrights, goodwill, etc. Monetary value of these intangible assets
is hard to assess.

Assets can also be classified depending on liquidity -

 Fixed assets (property, plant and equipment, i.e., PP&E, which cannot be easily converted into cash)
Current assets (liquid assets like cash or bank accounts, which are easily convertible into cash)

Capital

Capital is the fund that is required to run a business, like buying machinery and equipment, etc., to
produce goods and services. Generally, funds are arranged from the investors and the lenders.

Only those assets, which are used to make money, or to run business, or to produce goods and services, are
considered as Capital.

Now, consider the following example -

Suppose you have bought a van which is used in your business to make profit, then this asset can be
considered as Capital Asset, whereas if you have bought a luxury car, which is for your personal use only, but
of no-value for your business, then it will be your Asset, not a Capital Asset.

Now, don't confuse Capital Assets with Capital. Capital is only fund, taken from the investors or lenders to
run business. Funds taken as loans from banks or bonds from investors will be liabilities of the business,
which need to pay back, but is the Capital for the business. Funds taken from shareholders are also Capital,
but is not a liability for the business.

Mutual Funds (MF)

Suppose you have surplus money after your monthly expenses. Now you want to invest those money to earn
a good profit. But the problem is you don't know where and how much to invest, and you don't know
the risks involved in buying shares. Even you may not know which company is better than other and less
riskier to invest. In general, you may not have sufficient expertise in investment.

So it is better to seek help of some expert, than taking risk of self investment. Here comes the job of
a Mutual Fund (MF). MFs are managed by professionals, who know very well where and how
much to invest (as they are experienced in this field, but you are not, your expertise is elsewhere).

Mutual Fund pools money from several investors and then invests those money categorically to
several investment securities, like stocks, bonds, short-term money market instruments, precious metals
(e.g., gold), etc.

You will invest in a Mutual Fund (MF), and will forget about it. Professionals will manage the investments,
and you will get your return after a certain period of time. You don't require to pay constant attention, you
just let the portfolio manager (professional) make essential decisions for you.

Also, note that there is another reason for you to invest in MF - you have tax saving options on return
amount, if you invest in a Mutual Fund.

MF structure
An MF is set up in the form of a trust that has a Sponsor, Trustees, Asset Management Company (AMC).

Sponsor - The trust is established by a sponsor (you can think it, like a promoter of a company).
The Trust needs to be registered with SEBI (regulator of Capital Market).
Trustees - Trustees hold property of MF for the benefit of unit holders (you are one of those unit
holders)
Asset Management Company (AMC) - AMCs manage the fund and makes investment in various
types of securities (you don't need to take decisions, they will). AMCs should be approved by SEBI.

Note that, the trustees have the authority to provide direction over the AMC, and
they monitor the performance and compliance of SEBI rules and regulations by the mutual fund.

Net Asset Value (NAV)

NAV is the total value of fund assets, excluding liabilities, per unit of the fund, which is calculated by
the Asset Management Company (AMC) after every business day. This is also known as bid value. It
represents an MF's per share market value. Investors buy fund shares at this price (bid price, or NAV).

NAV = (Current market value of all Assets - all Liabilities) / no. of unit outstanding shares

For an example, suppose an MF has assets of Rs. 100 lakh and liabilities of Rs. 20 lakh, and has total 4
lakh shares outstanding. Then the NAV or bid price (price per share value) would be

(100 - 20) / 4 = Rs. 20 per share

Kisan Credit Card - KCC
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Kisan Credit Card (KCC)

KCC is a Credit Card (exclusively) for the farmers of India. It allows farmers to have cash credit
(CC) facility without visiting bank repeatedly to ask for bank loans for agricultural activities.

KCC scheme was announced in Budget speech of Mr. Yashwant Sinha (FM in 1998-99)
and introduced in 1998 by Government of India, RBI and NABARD. It is to be implemented by Commercial
banks, RRBs and Co-operatives.

Key Benefits -

It made the credit facility process much simpler for the farmers, who are generally illiterate or
poorly educated.
Earlier farmers needed to apply for loan facility every year, but KCC removed
the redundant process, by providing hassle-free and on-time credit facility.
Repayment is allowed after the harvest period. This made it easier for the farmers, because they got
the time to sell their produce to the market, and then repay the debt of the bank.
As KCC is a credit card, withdrawal of funds became much easier (e.g., from ATMs)

Eligibility -

Farmers (Individuals / Joint borrowers), who are owner cultivators

Tenant Farmers, Oral Lessees, Share Croppers
Self Help Groups (SHG), Joint Liability Groups (JLG), etc.

Activities covered under KCC -

to meet the short-term requirements for cultivation of crops

post harvest expenses
produce marketing loan
consumption requirements of farmer households
working capital for maintenance of farm assets and agriculture-allied activities, like dairy animals,
inland fishery, etc.
investment credit requirement for agriculture and allied activities, like pump sets, sprayers, dairy
animals, etc.
General Credit Card - GCC

While Kisan Credit Card (KCC) is aimed to provide credit facility for agricultural / farm activities, General
Credit Card (GCC) is aimed to cater to the non-farm entrepreneurial credit needs of individuals.

Note that GCC is not intended for the consumption needs of individuals (normal Credit Cards), but this
scheme is made for the entrepreneurial credit needs of individuals under the priority sector.

People who are qualified for Priority Sector Lending (PSL) can avail this facility. This GCC scheme is brought
under RBI's Financial Inclusion Plan (FIP).

Int'l Development Banks - ADB, WB, IMF, NDB, AIIF

There are several development banks in the world with the principal goal of development among others.
From India's point of view, the most notable among those development banks are the followings -

Asian Development Bank (ADB)

World Bank (WB)
International Monetary Fund (IMF)
New Development Bank (BRICS-NDB)
Asian Infrastructure Investment Bank (AIIF), etc.

Here we shall discuss each of them in brief. Note that NDB (click me) and AIIF (click me) were already
discussed in previous articles.

Asian Development Bank (ADB)

ADB is a regional development bank, headquartered in Metro Manila, Philippines. It was established
on Aug 22, 1966, to facilitate economic development in Asia, with the motto 'Fighting poverty in Asia and
the Pacific'.

President - Takehiko Nakao

Membership - 67 countries
ADB invests in -

Infrastructure
Health care services
Financial system
Public administration system
Preventing Climate change
Managing natural resources, etc.

Devices for ADB's assistance -

Loans
Grants
Policy Dialogue
Technical assistance
Equity Investments, etc.

ADB recently released its Asian Development Outlook (ADO) with the title 'Financing Asia's Future
Growth'. It forecasted that India will overtake China in terms of growth rate in fiscal years 2015 and 2016.

Below is a comparative chart published by ADB -

World Bank (WB)
World Bank is a financial institution of United Nations (UN), established on July 1944, headquartered
in Washington D.C., USA. It provides loans to developing countries for their capital programs. The official
goal of WB is the reduction of poverty,
poverty and the motto is 'Working
Working for a World Free of Poverty'
Poverty'.

President - Jim Yong Kim

Membership - IBRD (188 countries), IDA (172 countries)
Note that World Bank is a component of World Bank Group (WBG),, which is a family of 5 international
organizations that make leveraged loans to poor countries -

International Bank for Reconstruction and Development (IBRD) - lends

to governments of middle-income
income and creditworthy low-income countries
International Development Association (IDA) - provides interest-free loans,, called credits,
and grants to governments of the poorest countries
International Finance Corporation (IFC) - is the largest global development institution focused
exclusively on the private sector (not governments)
Multilateral Investment Guarantee Agency (MIGA) - promotes foreign direct investment
(FDI) into developing countries to support economic growth, reduce poverty and improve people's
lives. It fulfills this mandate by offering political risk insurance (guarantees)) to investors and
lenders.
International Center for Settlement of Investment Disputes (ICSID) - provides international
facilities for conciliation and arbitration of investment disputes.

Note that, together, IBRD and IDA make up the World Bank, whereas all these 5 institutions form the World
Bank Group.

International Monetary Fund (IMF)

IMF is an international financial organization, established on December 27, 1945, headquartered
in Washington D.C., USA.

President - Christine Lagarde

Membership - 188 countries
IMF work area -

promotes international monetary cooperation

promotes exchange rate stability
facilitates balanced growth of international trade
provides resources to help members in balance of payments (BOP) difficulties
assist with poverty reduction

Devices of IMF's assistance -

Keeps track of the economic health of member countries, it alerts them to risks on the horizon
provides policy advice
lends to countries in difficulty
provides technical assistance
training to help countries improve economic management

BRICS vs. Fragile Five

BRICS Nations
BRICS acronym is given to 5 major emerging economies of the world - Brazil, Russia, India,
China and South Africa, which was formerly known as BRIC (excluding South Africa). In 2010, South
Africa is added to the group.

These 5 major emerging economies have the following characteristics in common -

developing countries, or newly industrialized countries

large and fast-growing economies
have significant influence on their regional and global affairs

Some statistics (as of 2014)

Combined GDP - USD 16.039 trillion (approx. 20 % of combined GDP of world)

Population - approx 3 billion (41.4 % of world population)
Combined Forex reserve - USD 4 trillion
 Land area - more than 1/4th of world land

BRICS summit
Since 2010, BRICS summit is being held annually. Russia will host 7th BRICS summit in July, 2015. 6th
BRICS summit was held in Brazil in 2014.

New Development Bank BRICS (NDB BRICS)

In 2014 BRICS summit, member countries came together to form a multilateral development bank as
an alternative to World Bank and IMF (which are US-dominated).

Each member country will have single vote and there will be no Veto power* for the members (In
contrast, World Bank assigns votes based on capital share, meaning voting power is proportional to capital!).

Some points regarding NDB BRICS (will start lending in 2016) -

Initial Capital - USD 100 billion (China USD 41 billion, Brazil + Russia + India = 3 x USD 18 billion
= USD 54 billion, South Africa USD 5 billion)
Reserve Currency Pool - USD 100 billion (apart from the initial capital)

Headquarter - Shanghai, China

Regional Center - Johannesburg, South Africa
First President - from India
First Chairman of the Board of Directors - from Brazil
First Chairman of the Board of Governors - from Russia

(Note that each member country got something!)

Fragile Five
In contrast to the 5 major emerging countries (BRICS), Mr. Jim O'Neil, a research analyst from Morgan
Stanley, has coined the term 'Fragile Five'. As the name suggests, these are 5 developing countries, which
are much dependent on foreign investment (into their economies) to finance their growth ambitions.

The Fragile Five economies are -

Turkey
Brazil
 India
South Africa
Indonesia

Latest situation of Fragile Five (as of March 2015)

Morgan Stanley had identified the 5 major emerging markets with the most vulnerable currencies.

India - inflation halved since the end of 2013; Current-Account Deficit

(CAD) shrunk; investor friendly policies of PM Shri Narendra Modi; Governor Shri R.Rajan won
a legal mandate for RBI to target inflation; Rupee 1 % gained versus Dollar this year, etc.
Indonesia - scrapping gasoline subsidies by new President Joko Widodo; target to cut budget
deficit to 1.9 % of GDP

According to Morgan Stanley economists, India has completed 85 % of the necessary adjustment,
whereas Indonesia has completed 65 %.
Other countries - Turkey 10 %, Brazil 15 % and South Africa barely anything of recommended reforms.

(It seems Fragile Five came down to Fragile Three!)

*Veto power - It gives power to stop changes, or not to adopt them. For an example, in UN Security Council
(UNSC), permanent member countries have veto power, meaning if any of them wants to stop
any resolution, they can use their veto power.
Asia Infrastructure Investment Bank (AIIB)
The Asian Development Bank Institute (ADBI) published a report in 2010 pointing out that the Asia-
Pacific region requires approx. USD 8 trillion from 2010 to 2020 for its infrastructure and economic
development. For the very purpose of development, Chinese government has proposed Asia Infrastructure
Investment Bank (AIIB), which will look after the developmental requirements specifically for this region.

Why AIIB?
The other international financial institutions, like World Bank, International Monetary Fund
(IMF) and Asian Development Bank (ADB) - are dominated by US, Europe and Japan (according
to China) with their own interests. Also, the long demanded (by developing countries, like BRICS
nations) voting rights and quota reform has been pending in IMF, which also helped in the creation of
an alternate solution.

Therefore, China proposed the bank (AIIB) with authorized capital of USD 100 billion , with initial
subscribed capital of USD 50 billion

Establishment and Member countries

A signing ceremony was held in Beijing on October 24, 2014, where 21 countries signed the bill
for establishment of the bank -

China, India, Thailand, Malaysia, Singapore, Pakistan, Bangladesh, Philippines, Brunei, Kazakhstan,
Kuwait, Cambodia, Laos, Myanmar, Nepal, Vietnam, Mongolia, Oman, Qatar, Sri
Lanka and Uzbekistan.

In 2015, more countries have joined - Jordan, New Zealand, Saudi Arabia, Tajikistan, United Kingdom
(UK), etc.

Founding members
China's Finance Ministry said, "any country that signs and ratifies the articles can still officially become
a 'founding' member", though they need to be accepted by the existing members first. In that sense, all
the signatories before March 31, 2015 deadline will be considered as "founding" members.

India in AIIB
Smt. Usha Titus, Joint Secretary of Economic Affairs division of Ministry of Finance, signed the MoU on
behalf of India at the signing ceremony on October 24, 2014.

Secretary-General of AIIB
China's Vice Finance Minister Jin Liqun has been appointed as the Secretary General of Asia
Infrastructure Investment Bank (AIIB).

Headquarter of AIIB
The bank is to be headquartered in Beijing, China, and is to be operational from end of 2015.
Note the bank will be backed by China, as it will hold the majority stake of the bank.

Voting rights
The AIIB will have voting rights based on benchmarks, which will be
a combination of GDP and Purchasing Power Parity (PPP). Based on these China and India will be
the largest stakeholders of the bank.

US pressure on some states

However, due to the pressure of USA, some countries like Australia, South Korea and Japan are yet to join
the bank.