Banking Brief

BANKING
BRIEFS
A Compendium of Readings of Relevance to Bankers
STATE BANK STAFF COLLEGE

DISTANCE LEARNING DEPARTMENT
HYDERABAD
MARCH 2006
(For Internal Circulation Only)
Banking Briefs
(For internal circulation only)
BANKING
BRIEFS
A Compendium of Readings of Relevance to Bankers
MARCH 2006
(Ninth Revised & Enlarged Edition)

Compiled by
N. GURUMURTHY
AGM (Faculty)
M.R. SATYANARAYANA
Chief Manager (Research)
STATE BANK STAFF COLLEGE

DISTANCE LEARNING DEPARTMENT
HYDERABAD
(For Internal Circulation Only)
Banking Briefs
NEW TOPICS ADDED IN THIS EDITION

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Name Of The Topic
Asset Revaluation Reserve

Banking Codes and Standards Board of India (BCSBI)
Banking Cash Transaction Tax
Biometrics
Burgeoning Foreign Exchange Reserves : Impact on Economy
Cheque Truncation
Clearing Corporation of India Ltd. (CCIL)
Clearing and Settlement Mechanism for Trades in
Indian Corporate Debt Market
Cooperative banking in india : focus areas
Computer Frauds and Crimes
Contract Farming
Credit Information Bureau (India) Limited (CIBIL)
Credit Card: New Guidelines
CRM In The Banking Sector
Credit Risk Management
Data Warehousing and Customer Relationship Management
in Banking
Debt Restructuring Mechanism for Small and Medium
Enterprises (DRSME)
Economy on a roll : Prospects in 2006
Economic Survey 2005-06
e-Governance
Empowerment
Emerging trends in Banking and Finance : Role of
New Generation Managers
Essentials of Liquidity Risk Management
Fair Lending Practices Code (FLPC) of SBI
Financial Inclusion
Fringe Benefit Tax
General Packet Radio Service (GPRS)
Gold Demat
Guidelines on purchase / sale of non performing financial assets
Guidelines on ownership and governance in private sector banks
IPO Scam
International capital flows - benefits and policy framework
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New Topics continued

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Name Of The Topic
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Liberalised Branch Authorisation Policy
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Learning organization
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35
MCA-21 project on e-governance
78
36
National Payment Corporation of India
220
37
National Electronics Funds Transfer System (NEFT)
67
38
Network security
70
39
National Rural Employment Guarantee Scheme
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40
Outsourcing by Banks
120
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Organisation Culture
315
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Oil Price Impact
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Operational Risk in Banks
160
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Payment and Settlement System in India Vision 2005-08
61
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Recent Overseas Acquisitions of SBI
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Railway Budget 2006
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Recommendations of the Twelfth Finance Commission
198
48
Road Map for presence of Foreign Banks
111
49
Recommendations of the internal Group on Rural Credit and

Micro - Finance
351
Report of the Working Group on Warehouse Receipts and

Commodity Futures
353
51
Report of the Working Group to Review Export Credit
354
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Rural Banking - Changing Paradigms
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Retail Loan - A Risk Management Perspective
170
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Retail Banking - Opportunities and Challenges
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Service Quality Management
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Stress Management
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SME Rating Agency of India Limited (SMERA)
216
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SMEs - Role, Policies and Issues
117
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Transformational Leadership
300
60.
The Right to Information Act, 2005
201
61.
The Dollar Deluge - Issues In Management
29
62.
Transformation of Indian Banks
63.
Venture Capital in India - Growth and Challenges
50
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CONTENTS
1.
PERSPECTIVES
1.
2.
3.
4.
Transformation of Indian Banks

Banking Industry : Vision 2010
Consolidation of Public Sector Banks
Emerging Trends In Banking And Finance : Role of New
Generation Managers
4.
Impact of Technology on Banking And Finance
5.
Economy on a Roll : Prospects in 2006
7.
Retail Banking - Opportunities and Challenges
8.
Rural Banking - Changing Paradigms
9.
Financial Inclusion
10. Burgeoning Foreign Exchange Reserves : Impact on Economy
11. International Capital Flows - Benefits and Policy Framework
12. The Dollar Deluge - Issues in Management
9
11
14
16
19
22
25
27
29
13.
31
Oil Price Impact
2.
BANKING
a.
STATE BANK OF INDIA

14. Know Your Bank
33
15.
State Bank of India An Overview
36
16.
17.
18.
19.
20.
21
Recent Overseas Acquisitions of SBI

Chairmans Policy Guidelines 2006-07
Loan Policy SBI
Business Process Re-engineering in SBI
Fair Lending Practices Code (FLPC) of SBI
Stressed Assets Review And Management
40
41
47
49
52
54
b.
TECHNOLOGY
22.
Information Technology Act, 2000
57
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
Payment And Settlement System

Payment And Settlement System in India Vision 2005 - 08
Internet Banking
Cheque Truncation
National Electronics Funds Transfer System (NEFT)
Real Time Gross Settlement - RTGS
Network Security
Enterprise Resource Planning (ERP)
Data Warehousing And Data Mining
Wireless Application Protocol (WAP)
General Packet Radio Service (GPRS)
Biometrics
MCA-21 Project on E-governance
Computer Frauds and Crimes
Disaster Recovery Plan
59
61
63
65
67
68
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83
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7
c.
d.
POLICIES AND ACTS

38. Basel - II
39. Camels Ratings For Banks
40.
Norms For Capital Adequacy
41.
42.
43.
44.
45.
46.
47.
48.
49.
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95
98
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104
106
107
108
50.
51.
52.
53.
54.
55.
56.
Know Your Customer (KYC) Guidelines

Money Laundering
US GAAP - Accounting Standards
SARFAESI Act
Guidelines on Purchase/ Sale of Non Performing Financial Assets
Asset Revaluation Reserve
Liberalised Branch Authorisation Policy
Norms For New Private Banks
Guidelines on Ownership And Governance
In Private Sector Banks
Road Map For Presence of Foreign Banks
Priority Sector
SMEs - Role, Policies and Issues
Outsourcing By Banks
Consumer Protection Act, 1986 (COPRA)
Banking Ombudsman Scheme
Credit Card: New Guidelines
57.
Universal Banking
129
110
111
112
117
120
122
124
126
130
CREDIT AND DERIVATIVE PRODUCTS

59. Infrastructure Financing
60. Securitisation
61. Factoring
62. Forfaiting
63. Commercial Paper
64. Credit Derivatives
65. Currency Swaps
132
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136
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141
66.
142
Currency Options
143
144
MANAGEMENT OF ASSETS & LIABILITIES

69. Risk Based Supervision of Banks
70. Risk Management Systems in Banks
145
148
71.
Asset liability Management
150
72.
73.
74.
75
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Credit Risk Management

Treasury Management In Banks
Portfolio Management
Operational Risk In Banks
Essentials of Liquidity Risk Management
Corporate Debt Restructuring
152
155
158
160
162
165
Banking Briefs
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58. Banking Cash Transaction Tax
67. Currency Futures

68. Interest Rate Swaps
e.
84
87
78
79
80
f.
Debt Restructuring Mechanism For Small and Medium

Enterprises (DRSME)
Retail Loan - A Risk Management Perspective
Value At Risk (VaR)
GENERAL
81 CRM in The Banking Sector
82 Data Warehousing And Customer Relationship Management
in Banking
83 Customer Centric Management
84 Cooperative Banking In India : Focus Areas
85 Contract Farming
86 IPO Scam
3.
ECONOMY & FINANCE
a.
POLICIES AND ACTS

87 Economic Survey 2005-06
88 Union Budget 2006-2007
89 Railway Budget 2006
90 Mid-term Review of Annual Policy For The Year 2005-06
91 Recommendations of The Twelfth Finance Commission
92 National Rural Employment Guarantee Scheme
93 The Right To Information Act, 2005
94 Micro Finance
95 Competition Act, 2002
96 Fringe Benefit Tax
97 Value Added Tax
98 Budget - An understanding
99 Credit Policy - An introduction
b.
INSTITUTIONS
100 Credit Information Bureau (India) Limited (CIBIL)
101 SME Rating Agency of India Limited (SMERA)
102 Banking Codes And Standards Board of India (BCSBI)
103 The Institute For Development And Research In Banking
Technology (IDRBT)
104 National Payment Corporation of India
105 Clearing Corporation of India Ltd. (CCIL)
106 ARCIL
107 India Mortgage Guarantee Company (IMGC)
108 National Internet Exchange of India (NIXI)
109 Multi Commodity Exchange of India(MCX, NCDEX & NMCEIL)
110 Regional Rural Banks
111 Non Banking Finance Companies (NBFCs)
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c.
d.
4.
CAPITAL AND SECURITIES MARKET

112 Debt Market In India
113 Call Money Market
114 Primary Dealers In Government Securities
115 Clearing And Settlement Mechanism For Trades in Indian
Corporate Debt Market
116 Global Depository Receipts (GDRs)
117 American Depository Receipts (ADRs)
118 Indian Depository Receipt (IDR)
119 Exchange Traded Funds
120 Mutual Funds (MFs)
121 Money Market Mutual Funds (MMMFs)
122 Gold Demat
123 Venture Capital In India - Growth and Challenges
124 Credit Rating In India
125 Book Building
126 Buy Back
127 Stock Index Futures
128 Employees Stock Option Plans (ESOPs)
129 Margin Trading
130 Internet Trading
131 Depository Participant Services
132 Repos
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INTERNATIONAL TRADE
133 National Foreign Trade Policy 2004-09
134 Overview of Indias Foreign Trade
135 Foreign Exchange Management Act (FEMA)
136 WTO And Liberalisation of Financial Services
137 Foreign Institutional Investors (FII)
138 External Commercial Borrowings (ECB)
139 Capital Account Liberalisation
273
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MANAGEMENT
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Corporate Governance
Balanced Score Card
Transformational Leadership
Learning Organization
Intellectual Capital
Knowledge Management
E-governance
Assessment Centre
Competency Mapping
Organisation Culture
Mentoring
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5.
360Degree Technique
Emotional Intelligence
Stress Management
Empowerment
Service Quality Management
Niche Market
Relationship Banking
Cross Selling
Six Sigma - For Quality
Total Quality Management (TQM)
Benchmarking
ISO 9001
ISO 14000
Quality Circles
Business Process Outsourcing Issues Involved
Financial Engineering
Economic Value Added (EVA)
Market Value Added (MVA)
Debacles, Crises And Lessons
Fall Of Global Trust Bank
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COMMITTEES
171 Recommendations of the internal group on Rural Credit
and Micro-finance
172 Report of The Working Group on Warehouse Receipts
and Commodity Futures
173 Report of The Working Group to Review Export Credit
174 Dr. Rakesh Mohan Committee on Savings Instruments
175 Sadasivan Working Group on DFIs
176 Tarapore Committee on Public Services
177 Vyas Committee on flow of credit to agriculture
178 Ganguly Working Group on SMEs
179 Chalapathy Rao Working Group on RRBs
180 Kumar Mangalam Birla Committee on Corporate Governance
181 Narasimham Committee - I on Financial Sector reforms
182 Narasimham Committee - II on Banking Sector reforms
183 Goiporia Committee on Customer Service
6.
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STATISTICAL PROFILE
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SBI : Performance as on 31.03.2005

Financial performance of State Bank Group as on 31.03.05
Financial performance of scheduled commercial banks
Consolidated Balance Sheet of Public Sector Banks
Consolidated Balance Sheet of Private Sector Banks
Consolidated Balance Sheet of Foreign Banks in India
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Important Financial Indicators - Bank Group-wise

Important Financial Indicators - Bank Group-wise
Select financial parameters of scheduled commercial banks
Sectoral Deployment of Gross Bank Credit
Progress of Co-operative Credit Movement in India
Advances to the Priority Sector by Public Sector Banks
Financial assets of Financial Institutions
Distribution of commercial bank branches in india - Bank group
and population group wise
Top Hundred Centres by size of aggregate deposits/
gross bank credit - Sep. 2005
Branches and ATMs of Scheduled Commercial Banks Public Sector Banks
Branches and ATMs of Scheduled Commercial Banks Private Sector Banks
Branches and ATMs of Scheduled Commercial BanksForeign Banks
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Briefcase
AMERICAN DEPOSITORY RECEIPTS (ADRs)
P - 247
ADRSs are dollar denominated instruments traded in US.

ADRs help companies in accessing funds from US; improve accounting and disclosure
practices; and get better valuation
ADRs can be cancelled and re-issued (i.e two-way fungibility is allowed)
ADR holders have no voting rights
ICICI, Satyam Infoway, Infosys are some companies which floated ADRs.
ARCIL
P - 223
ARCs act as debt aggregators. They perform like a bad bank making normal operations of banks good.
ARCIL was established in 2003. ICICI bank is the highest shareholder with 29.58%. SBI holds 19.95%
ARC acquires bad bank assets, reorganizes them and sell them to investors by separating NPAs from
the core banking system.
The loss on sale of asset can be offset against capital gains on another
Banks with weak capital base and low provisioning avoid selling bad loans
Post Basel II, banks will have to exploit the benefits of ARC to meet stringent Basel norms
ASSESSMENT CENTRE
P - 312
Assesses the adequacy of various critical attributes, functional expertise, aptitudes and skills
required in the job
Used for higher level executives
Some of the competencies assessed are leadership, teamwork, decision making capability,
communication skills and market orientation
ASSET REVALUATION RESERVE

P - 106
Most of the public sector banks own and possess large properties in prime locations.
The extent to which revaluation reserves can be relied on as a cushion for unexpected losses would
depend on level of certainty that can be placed on estimates of the market value of the relevant assets.
This is an accounting concept and represents a reassessment of the value of a capital asset as at a
particular date.
The reserve is considered a category of the equity of the entity.
ASSET-LIABILITY MANAGEMENT
P - 150
It involves management of banks assets and liabilities.
It essentially focuses on managing risks caused by changes in liquidity, interest rates and fluctuations in
foreign currency rates
Success of ALM depends on availability of information, existence of sound policies and risk management
system.
BANKING INDUSTRY : VISION 2010
P-5
The total assets of all scheduled commercial banks by end March 2010 is estimated at Rs 40,90,000
crore
Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking
large stakes and control over banking entities in the country
Some of the Indian banks may also emerge global players.
BANKING OMBUDSMAN SCHEME
Scheme effective from June 95 and recently amended in 2002
Covers scheduled commercial banks, RRBs and co-operative banks
Banking Briefs
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P - 124
Deals with: Delayed collection of cheques, non-issue of drafts, interest rate disputes, failure to honour
LC/guarantee commitments, delay in disposal of loan application
It promotes settlement through conciliation
BANKING CODES AND STANDARDS BOARD OF INDIA (BCSBI)

P - 217
RBI-promoted BCSBI registered as an independent society
Banks to be members and pay an annual subscription fee towards self-sustaining corpus
Relationship managers will act as an interface between compliance report filed by the bank and their field
report
BANKING CASH TRANSACTION TAX
P - 130
The Finance Act, 2005 has introduced a new levy, viz. the banking cash transaction tax (hereafter
referred to as BCTT) on certain cash transactions in banks.
The Act has two objectives of tracking down large transactions for better tax compliance and curbing
generation of black money in the economy
The BCTT is applicable in respect of all taxable banking transactions entered into on or after 1st June
2005
The rate of BCTT applicable is 0.1 percent (10 basis points) of the value of the taxable banking transaction.
BALANCED SCORE CARD
P - 298
Developed by Dr Robert Kaplan and David Norton of Harvard Business School

It is a performance measurement and monitoring tool
Through measurement monitors, it attempts to link the vision, mission and values of the
organisation for application by employees
Four perspectives namely business process, customer, financial and learning.
It helps to promote goal-oriented behaviour
BASEL - II
P - 84
Basel II consists of three-mutually reinforcing Pillars, viz. minimum capital requirements, supervisory
review of capital adequacy, and market discipline.
It requires banks to hold capital not only for credit and market risk but also for operational risk (OR).
Commercial banks in India will start implementing Basel II with effect from March 31, 2007
BENCHMARKING
P - 337
It means observing Best Practices in competitors or companies in other industries in some

activity, function or processes and comparing ones own performance to theirs.
In effect, it implies setting benchmarks for excellence and working towards it.
Normally the measurement is done along three components- Products/Services, Processs/
Procedure and People.
Being externally focused, Benchmarking leads to setting higher standards.
BIOMETRICS
P - 76
The security advantage of biometric technology is that it can authenticate an individual by measuring his
distinct physical characteristics or behavioural traits.
Physical characteristics measured by biometrics include: face, fingerprint, iris, hand geometry and retina.
Some of the Biometrics techniques are Signature technology, Fingerprint technology, hand geometry
technology, Voice technology, Iris technology.
BOOK BUILDING
Introduced in India in 1995

It is a process of determining price of shares based on market feedback
Under this, the offer price is not determined by the issuer but by the quotes given by the
Banking Briefs
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P - 261
prospective buyers. Hence, it is also called price discovery mechanism.

Benefits: Evaluation of the intrinsic worth of the shares; savings on issue expenses; investors
have a say in pricing; market determined pricing; reduction in lead time.
BUDGET - An understanding
P - 209
It is a statement of proposed expenditure and the means of financing it.
Contains 3 key documents: The Annual Financial Statement; Demand for Grants and The Finance Bill
Budgetary Deficit is the excess of total expenditure over total receipts. It is covered by borrowings from
market and from RBI.
Fiscal Deficit: Total Expenditure {(Total Receipts + market borrowings)}. In other words, it is equivalent
to borrowings from RBI.
BUY BACK
BUSINESS PROCESS OUTSOURCING ISSUES INVOLVED
P - 262
Buy Back is an arrangement by which shares issued to equity holders are bought back by the
company
Why done: To support market price; to acquire controlling interest; to deploy surplus funds
Funds for buy back should come from authorised sources
Effects: Buy back may affect companys liquidity; profits; EPS, Book Value and gearing ratio
of the Company.
P - 342
India is a leading destination for outsourcing of Information Technology Enabled Services

(ITES) and other related Business Process Outsourcing (BPO) activities
BPO activities encompass wide range of areas comprising services relating to manufacturing
, banking, insurance, HR etc.
BPO activities have benefited India by generating substantial job opportunities
BURGEONING FOREIGN EXCHANGE RESERVES : IMPACT ON ECONOMY

P - 25
Forex Reserves has crossed US$ 140 bn
Reasons for growth in Forex: Increase in exports, depreciation of other major currencies, higher interest
rate in India and higher economic growth
Impact of Forex: Forex reserves affect money supply, inflation and value of Indian currency, makes export
uncompetitive and import cheap
BUSINESS PROCESS RE-ENGINEERING IN SBI
P 49
BPR is the fundamental rethinking and radical redesign of business processes to bring about dramatic
improvement in performance.
Objective: to increase customer satisfaction and convenience, free branches to focus on sales and
marketing, simply processes and retain undisputed leadership
Some of the new roles/teams constituted are Grahak Mitra, Relationship Manager Personal Banking,
retail assets CPC, Small Enterprises Credit Centre, Currency Administration Cell, Micro Markets, Medium
Enterprises Relationship Manager (MERM), Outbound Sales Force (home loans), Multi Product Sales
Force, Cash Management of off-site ATMs by CACs, in-branch cash handling, Centralized Pension
Processing Centre, PPF settlement process redesign, Forex CPCs
SME City Credit Centre, Trade Finance CPC, Liability CPC, Clearing CPC and City Recovery Centre have
been launched as pilots at Mumbai Circle.
The other pilots at Mumbai circle are creation of Document Archival Centre, Govt. Business Centre,
Locker Centre, SBI Home Centre.
'CAMELS' RATINGS FOR BANKS
P - 87
Recommended by Padmanabhan Committee.
Deals with supervision of banks by RBI.
Banks to be classified into two: One, that needs annual supervision; other, on a larger time scale.
Banking Briefs
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Classification based on key parameters: Capital adequacy, Asset quality, Management, Earnings
performance, Liquidity and Systems (For foreign banks it is CACS- second C stands for Compliance
with regulatory guidelines).
Ratings on a scale of A to E
CALL MONEY MARKET
CAPITAL ACCOUNT LIBERALISATION
P - 289
Capital account transactions further liberalized

Resident individuals allowed to remit upto US$25000 freely per calendar year
Indian students studying abroad given facilities available to NRIs
AD s permitted to allow higher remittances
Facilities to Corporates, Exporters and Importers liberalized
Listed Indian companies permitted to disinvest their investment in JVs abroad
NRIs given additional investment avenues.
Residents allowed to book forward contracts and hedge risk in forex market
Non-residents permitted to enter into forward sale contracts with ADs in India to hedge currency
risk
CHALAPATHY RAO WORKING GROUP on Regional Rural Banks
P - 238
Call Money is money borrowed for shorter repayment period (1-14 days) to meet temporary
mismatch
Call market is generally a one day or an overnight market
Major Participants: Banks/FIs/PDs and Mutual Funds
Banks borrow/lend in call money to meet CRR
RBI intervenes in Call Money Market through STCI & DFHI to stabilize rate
Weighted Average Call rate presently rules around 5%
Non-banking entities to lend lesser in call money market.
P - 361
Capital adequacy norms, with due adaptation, needs to be introduced in RRBs

Prescribed minimum level of shareholding should be at 51 per cent for sponsor institutions.
The area of operation of RRBs need to be extended to cover all districts.
CHAIRMANS POLICY GUIDELINES 2006-07

P - 41
Greater thrust in lending to Retail, SME and Agriculture segments in NBG
National rollout of CBS based CPCs to fully transform the operating structure into the new model
Marketing of electronic-driven Payments products to be intensified.
Addition of 1000 ATMs during 2006-07
Be among top 50 Banks in the world by March 2008
CHEQUE TRUNCATION
Captures image of cheques and restricts their physical movement
Pilot project likely to commence from 1.4.06
The vendor for SBI is NCR Corporation
Point of truncation is at branch level for SBI pilot project
Uses Public Key Infrastructure to protect data and image flow
One year paper instrument retention recommended
8 years for electronic image retention recommended
P - 65
CLEARING CORPORATION OF INDIA LTD. (CCIL)

P - 221
CCIL was incorporated in 2001.
Countrys first clearing house for the Government Securities, Forex and other related market segments.
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Operates Collateralized Borrowing and Lending Obligation (CBLO) a repo variant with several unique
features for NDS Members.
CLEARING AND SETTLEMENT MECHANISM FOR TRADES IN INDIAN CORPORATE

DEBT
MARKET
P - 242
Capital Market helps in channelising scarce capital for economic development
Presence of well functioning clearing and settlement process is essential for any developed capital
market
Indian Corporate Debt market has been witnessing rapid growth. While there exists a well developed
Government Securities market, there is a need for a similar structure for Corporate Debt Market
FM in the recent Budget 2006 has proposed setting up of a national exchange for Corporate Debt Market
CONSOLIDATION OF PUBLIC SECTOR BANKS
P-7
There are 93 banks in India with PSBs 27 in number.
Though India is the 12th largest country in terms of GDP, we do not have a bank of international size. For
example, SBI ranks 26 in size among Asian banks.
Advantages of consolidation: Size, economies of scale, prospects of technological upgradation, elimination of redundancy, better bargaining power, cost reduction, financial strength and the strength to enter
into new markets.
Challenges: Need for legislative amendment, willingness of small banks to lose control, cultural factors
during integration
COMPETENCY MAPPING
P - 313
aims to match the competency of the employee with those of the job requirement.
Competency is a combination of knowledge, skill, behaviour and personal characteristics
There are different tools including psychometric tests used to map competency.
A formal implementation of the system will help organisations to save on costs and improve
performance.
CONSUMER PROTECTION ACT, 1986 (COPRA)

P - 122
Enacted in 1986
Deals with complaints regarding deficiency in service
Act provides three tier quasi judicial redressal machinery: District, State and National Tribunal with limits
upto Rs.20 lacs in district, 20 lacs-1 crore in State and above Rs.1 crore in national forum
Complaint to be filed in 2 years and appeal in 30 days
Penalty upto 3 years imprisonment
COMMERCIAL PAPER
P - 138
CP is an instrument issued by companies to borrow short-term finance from the market.
It can be issued for period ranging from 7 days to One year.
It is transferable by endorsement and delivery.
Generally blue chip companies are major players.
COOPERATIVE BANKING IN INDIA : FOCUS AREAS
P - 183
Cooperative Banks are affected by high levels of loan default, overlapping of regulators, inadequate
management strategies, deficient internal checks and controls and poor credit monitoring
Professionalism and Governance, Supervision and Regulation, prudential standards and risk management
practices would improve the condition of Cooperative Banks
RBI has introduced various measures such as Prudential norms, rating system for UCBs, guidelines on
corporate governance
CORPORATE DEBT RESTRUCTURING
P - 165
Introduced in August 2001
Enables restructure corporate debts which are viable and financed by multiple banks/FIs.
Provides a timely and transparent mechanism to restructure corporate debts outside the legal mechanism.
Applies to outstanding exposure of Rs.10.00 crore and above.
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COMPETITION ACT, 2002

P - 205
Objective: To help companies to increase their size and to guard consumers against anti-corruption
practices.
Some provisions: High limit for asset size and turnover size for mergers ; merger bench to deliver
judgement on approval within 90 days; domination to be determined based on market size, number of
players; stern action for anti-competitive practices.
COMPUTER FRAUDS AND CRIMES
P - 79
Cyberspace has become central to the operations of Financial Institutions and hence are increasingly
prone to attack
Types of Computer crimes: Data diddling, viruses, worms, Trojan horse, Hacking and Cracking, Spamming,
Salami Techniques, Trap Doors, Logic Bombs, Denial of Service, Asynchronous attack, Scavenging
and Dumpster diving, Wiretapping, Network packer sniffers, phishing and phaming and ATM skimming
CONTRACT FARMING
P - 186
Contract farming has considerable potential where small and marginal farmers are no longer competitive.
The farmer is contracted to plant the contractors crop on his land
He will harvest and deliver to the contractor a quantum of produce based upon anticipated yield and
contracted acreage at a pre agreed price
Towards these ends, the contractor can supply the farmer with selected inputs
CORPORATE GOVERNANCE
P - 294
Corporate Governance means monitoring the functions of a company to ensure enhancement

of shareholders value through ethical conduct of business
CG aims to provide positive effect on all stakeholders such as customers, employees,
suppliers, regulatory bodies and community at large
Essential elements of CG: Adequate disclosure, distribution of power; supervision and audit
of executive functions and performance; expertise of the Board
Birla Committee recommendations provide institutional framework for CG.
CREDIT DERIVATIVES
P - 140
As the term indicates, it is a financial contract derived from the performance of underlying securities.
It is a hedging mechanism.
It helps in risk management.
Swaps, options and notes are some of the methods in derivative trade.
CREDIT INFORMATION BUREAU (INDIA) LIMITED (CIBIL)
P - 214
CIBIL collects, collates and disseminates credit information pertaining to both commercial and consumer
borrowers.
Banks, Financial Institutions, Non Banking Financial Companies, Housing Finance Companies and Credit
Card Companies use CIBILs services.
Genesis : Rapid industrialization, expanding economy, growing aspirations, increased incomes, improved
lifestyles, availability of high quality products and services leading to rapid credit off take.
CIBIL is a composite Credit Bureau, which caters to both commercial and consumer segments
CREDIT CARD: NEW GUIDELINES
P - 126
Reserve Bank of India has framed following guidelines on credit card operations of banks. Each bank
/ NBFC must have a well-documented policy and a Fair Practices Code for credit card operations.
The guidelines cover issue of cards, interest rates and other charges, wrongful billing, use of DSAs /
DMAs and other agents.
In order to protect customers rights, the guideline outline the right to privacy, customer confidentiality
and fair practices in debt collection.
It also enumerates the mechanism for redressal of grievances.
Banking Briefs
16
Reserve Bank of India reserves the right to impose any penalty on a bank / NBFC for violation of the
guidelines.
CREDIT POLICY - An introduction
P - 212
Credit Policy of RBI aims to influence the amount of money and credit in the Indian economy.
It tries to even out the fluctuations between demand and supply of money and sets the longterm agenda on money
Open Market operations (OMOs), Reserve requirements, Bank Rate and Repo rate are the
four major weapons used by RBI to regulate money supply
CREDIT RATING IN INDIA
P - 259
The first credit rating Agency, CRISIL, was set up in India in 1987
Credit Rating provides a measure of credit risk associated with specific reference to the rated
instrument. In essence, the rating is done not for a company but for the instrument.
CRISIL, CARE, ICRA and Duff and Phelps are the credit rating agencies in India.
Major Credit Rating Agencies in the world 1. Moodys Investor service 2. Fitch Investor Service
3. Standard and Poors Corporation.
Rating is based on evaluation of CRAMEL- Capital Adequacy, Resources, Asset Quality,
Management Evaluation, Earnings and Liquidity.
CROSS SELLING
P - 331
it is selling additional products / services to an existing customer and it fosters brand loyalty.
it costs a bank five times less to cross sell an existing client than to acquire a new one
Cross selling helps banks to plan, implement and maintain better customer relationship
management programmes
The success of cross selling depends on offering at the right time, the relevant product to the
customer
CRM IN THE BANKING SECTOR

P - 175
Customer Relationship Management is the establishment, development, maintenance and optimization
of long-term mutually valuable relationship between consumers and organizations
CRM focuses on customer profitability, enhancing relationship through better service, customer analysis
and targeting
Indian Banks have started focusing on CRM and a few banks have implemented CRM software
Some implementation issues: General acceptance, cost of implementation, choice of information,
managing data across the organization
CREDIT RISK MANAGEMENT
P - 152
Credit Risk is the foremost of all risks in terms of importance
Major Credit Risks include risk of exposure, risk of default by the borrower, risk of deterioration in the
standing of the borrower
Credit risk is managed through use of covenants, collateralisation, managing concentration and Capital
allocation in relation to risk, risk return optimization
Credit risk models, stress testing, use of derivatives and securitisation help in managing credit risk
CURRENCY SWAPS
Currency swap is the exchange of one currency for the other.
It is used as a hedging mechanism to guard against adverse currency fluctuations
It is also used to obtain cheaper borrowings.
It helps in efficient management of currency exposure and cash flows
Banking Briefs
17
P - 141
CURRENCY OPTIONS
P - 142
Currency option means the option to buy or sell a specific quantity of currency at an agreed rate.
The party to the contract pays a premium upfront for the purpose.
It is better than forward contract since the decision to buy or sell is optional
Banks in India can write options.
CURRENCY FUTURES
P - 143
Currency future is a contract to buy or sell a standard quantity of one currency in exchange for the other.
The rate of exchange and the future date of delivery are agreed at the time of contract
It is a hedging as well as a speculative mechanism.
CUSTOMER CENTRIC MANAGEMENT (In Retail Banking)
P - 181
CCM is the integrated management of a company with the customer as its focus
It has three stages namely knowledge acquisition; behaviour modeling and Product/Service
delivery
All functions of the company are aligned towards customer needs
It disaggregates customers based on their contribution to profits and thus helps in focusing on
key client base
DATA WAREHOUSING AND DATA MINING

P - 72
Data warehousing seeks to centralize a variety of data and data mining attempts to dig into the data.
Its goal is to find out patterns of customer behaviour.
It helps in designing new products and cross-selling products.
CRM heavily draws on these.
DATA WAREHOUSING AND CUSTOMER RELATIONSHIP MANAGEMENT IN BANKING P - 178
Data Warehouse is a collection of integrated data to support decision making in the organization
Benefits: Facilitates data analysis, helps in MIS generation, faster access to information and consolidated
view of customer or functions
DWH helps in product innovation, costing and pricing of products and review and designing of business
strategies
CRM focuses on analyzing customers, transaction patterns and aims to develop predictive models.
Hence DWH supports CRM.
DEBT RESTRUCTURING MECHANISM FOR SMALL AND MEDIUM
ENTERPRISES (DRSME)
P - 168
Debt Restructuring Mechanism for SME formulated based on RBI guidelines.
All Corporate SMEs which total outstanding (FB+NFB) upto Rs. 10 Crore are eligible. Loss assets are
excluded.
Units must become viable in 7 years and repayment period for rescheduled debt not to exceed 10 years.
Restructuring process should be completed within 60 days of the receipt of application.
DEBT MARKET IN INDIA
Banking Briefs
18
P - 236
A well-developed debt market would help in financing the investment needs of infrastructure
and other essential sectors.
It helps in reducing the intermediation cost
It would provide scope for effective deployment of funds
Facilitate product innovation and better management of interest rate risk
Administered interest rate, cash credit facility and preference for shares affected its growth.
Present facilitating factors: Deregulation of interest rate; introduction of short term treasury
bills; phased reduction in SLR; introduction of PDs; credit rating
DEPOSITORY PARTICIPANT SERVICES
It is a bank for deposit of securities

Helps in holding securities in dematerialized form
Benefits: Eliminates risks of forgery and bad delivery; no stamp duty on transfers; reduction
in transaction costs; speedy transfer; reduction in paper work; no risk of loss of share certificate
in transfer
DEBACLES, CRISES AND LESSONS
P - 270
P - 347
Long Term Capital Management (LTCM) Fund in US failed due to excessive risk taking and
huge borrowings
Barrings Bank despite 225 years tradition failed due to reckless trading by Nick Leeson and
lack of internal control
Brazilian crisis was triggered by excessive reliance on foreign investments without proper
fiscal discipline
Mexican crisis was caused by low reserves accompanied by heavy imports
Asian Currency crisis was triggered off in Thailand. Reason: Huge current account deficit,
decline in export growth and large volatile flow
DISASTER RECOVERY PLAN

P - 83
Disaster Recovery Plan is essentially a pre-determined blue-print for disaster management.
It deals with the steps to be taken to restore a system to normalcy when a calamity or disaster takes
place.
It is a tool of operational risk management.
DR.RAKESH MOHAN COMMITTEE on the Administered Interest Rates and
Rationalisation of Saving Instruments
ECONOMIC VALUE ADDED (EVA)
P - 355
Report submitted in May 2004

Suggested appropriate benchmarking and spread rules for administered interest rate
rationalises existing saving schemes particularly in respect of tax treatment
designs a structure of the proposed Dada-Dadi (Senior Citizens) Scheme
recommended discontinuance of a few saving instruments viz., National Savings Certificates
(VIII Issue), Deposit Scheme for Retiring Employees and 6.5 per cent Gol (Tax Free) Savings
Bond (2003), Kisan Vikas Patra
P - 345
EVA helps to measure the extent of value created for shareholders

EVA= Net Operating Profit After Tax (NOPAT) (Cost of capital * Operating Capital)
Eg: If NOPAT is Rs. 100000/-; Capital employed is Rs.500000 and Cost of Capital is 12%
then EVA= {100000- (500000 * 12%)= 100000-60000= Rs.40000
Capital includes both equity and debt; and determining cost of equity is difficult
The speciality of EVA is that it takes into account Capital employed and the risk as measured
by cost of capital
ECONOMY ON A ROLL : PROSPECTS IN 2006

P - 11
GDP growth of 8% (second fastest growing economy in the world after China), strong macro economic
fundamentals, good growth in agriculture, service and manufacturing accompanied by benign inflation
indicate that Indian economy is on a roll
Banking Briefs
19
Foreign Investment over US$ 12 bn, containment of fiscal deficit, surging forex reserves are some of the
other positives
In this background, Government has launched 4 year Bharat Nirman Plan for rural infrastructure, National
Rural Employment Guarantee Programme, railway freight corridor project, investment in telecom, further
liberalization of FDI.
One of the key concern is the labour reform
ECONOMIC SURVEY 2005-06

P - 189
GDP growth projected at 8.1% for 2005-06
Inflation under control at less than 5%
Agriculture has posted 2.3% growth, Industry above 9%
Tax revenue showed an increase of 22%
Exports to exceed the target of US$ 92 bn
Power generation, investment in infrastructure, fiscal consolidation are major priorities.
E-GOVERNANCE
P - 310
E-governance is using Information Technology to improve the methods of governance
Select areas to make e-governance project successful: Local language support, Easy access to users,
extensibility and scalability, reuse of existing public infrastructure, standard interchange formats, technology
upgrades, documentation, continued training, endurance and flexibility.
EMOTIONAL INTELLIGENCE
Emotional Intelligence is the capacity to recognise ones own feelings and those of others.
It helps to motivate oneself, manage emotions of self and others; contribute to effective
performance in the job and developing satisfying relationship in life
Most leaders succeed because of EI
Four essential capabilities: Emotional self awareness; self-management; social awareness
and Social skill
EMPLOYEES STOCK OPTION PLANS (ESOPS)
P - 321
P - 266
Employee stock option plan gives the right to employees to purchase share of a company at
a set price
Under this, employees are offered shares in lieu of salary or other compensation
Advantages: Increased employee commitment; no drain on cash
Disadvantages: Stock options will not be attractive when share prices fall.
EMPOWERMENT
P - 325
Empowerment is the authority to make decisions within ones area of responsibility without first having to
get approval from someone else
Empowerment is a Motivational tool in the hands of the Organisation
It enables employees to use their talents and capabilities
EMERGING TRENDS IN BANKING AND FINANCE : ROLE OF NEW
GENERATION MANAGERS
P-9
The pace of changes in the world today calls for managers who have not just probity and prudence but
the capacity to handle competing priorities
5 significant trends: Balance sheet to Off-balance sheet intermediation, Capital adequacy to capital
efficiency, physical to virtual distribution, fragmentation to consolidation and data to knowledge through
information
New Generation Managers should have the capacity to manage transition
ENTERPRISE RESOURCE PLANNING (ERP)
ERP is a suite of software.

It facilitates total resource planning of an organization
Banking Briefs
20
P - 71
Baan, Peoplesoft, Oracle, SAP are examples of ERP packages

The benefits from ERP depend on how it is used.
ESSENTIALS OF LIQUIDITY RISK MANAGEMENT

P - 162
Liquidity Risk is the risk of loss resulting from lack of sufficient funds to meet immediate financial need
or obligation
Liquidity Risk may cause inability to raise funds at normal cost
Shortage of funds in the market, difficulty to sell the assets are the other forms of liquidity risk
Banks should effectively manage liquidity gaps and develop contingency funding
Best practices in liquidity management would include strategic direction, measurement and monitoring
EXCHANGE TRADED FUNDS
EXTERNAL COMMERCIAL BORROWINGS (ECB)
P - 249
ETFs are funds that are listed on stock exchanges and traded like individual stocks
ETFs are linked to some index
In this the underlying shares are not traded
The prices of ETFs are determined by market dynamics
Benefits: It provides the benefit of diversified index funds and brings trading flexibility of stocks.
The operating expenses are lower
The first ETF in India was launched in 2001
P - 286
ECB refers to commercial loans availed from non-resident lenders.

ECB can be accessed under two routes, viz., Automatic Route and Approval Route
ECB proceeds should be parked overseas until actual requirement in India
Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI
FACTORING
P - 136
Factoring involves purchase of receivables of the company for payment of cash.
In effect, the Company, which sells its goods on credit, gets cash payment immediately from a third party
called factor.
Factoring includes other functions such as account .maintenance, collection of debt and risk assumption.
FAIR LENDING PRACTICES CODE (FLPC) OF SBI
P - 52
FLPC contains 8 important declarations from the Bank.
The Code details the fair practices the Bank is adopting for information of its customers.
FALL OF GLOBAL TRUST BANK
P - 349
Established in 1994 and imposed moratorium in July 2004
High deposit rates, high cost of lending, lending to sensitive sectors, were some of the reasons for the
fall
Amalgamated to Oriental Bank of Commerce. Shareholders have lost their investment
Lessons: Need for strong systems and procedures, proper credit appraisal and credit management,
integrity of officials, well established norms and practices for high-risk exposure.
FINANCIAL ENGINEERING
Financial Engineering is a sophisticated management technique aimed to manage the risk

and return of financial transactions
It uses derivative instruments to hedge (counter balance) risks.
Advancement in IT and telecommunication has strengthened financial engineering
Increasing volatility of prices and interest rates underline the importance of financial engineering
Banking Briefs
21
P - 344
FINANCIAL INCLUSION
P - 22
Financial inclusion is delivery of banking services at an affordable cost to the vast section of disadvantaged
and low income groups
Financial exclusion may cause higher incidence of crime, decline in investment, difficulty in getting credit
or getting credit at higher interest rate, increased unemployment
Internationally countries like US, UK have framed laws towards financial inclusion
RBI in its Annual Policy (2005-06) urged banks to make available a basic no frill account. SBIs no frill
account is an attempt towards financial inclusion
FORFAITING
P - 137
Forfaiting, similar to factoring, involves discounting of export receivables.
Unlike factoring, in forfaiting, the forfaiting agency has no recourse to the seller in case of payment
default by the buyer.
It helps in upfront realization of credit sale, perhaps, at a discount.
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)
FOREIGN INSTITUTIONAL INVESTORS (FII)
P - 278
Enacted in 1999
It liberalises the dealings in foreign exchange and relaxes the punitive provisions in FERA
It attracts only civil and not criminal consequences
It introduces a new concept of Authorised Persons to include ADs/MCs/RMCs and OCBs
Some key measures: Clear definition of current and capital account; simple and transparent
rules;, fewer sections; reduction in number of forms; fewer occasions for RBI interventions;
increase in threshold limits for various transactions under the discretionary powers of the
Authorised Dealers; Alignment of NRI definition with IT act.
P - 285
FIIs entry into India began in 1993 in the wake of economic reforms
They provide much needed funds for development of the country
Unlike FDIs, FIIs bring in portfolio investment i.e investment in shares, debentures, bonds
etc.
Morgan Stanley, Templeton, Jardine Fleming are some examples of FIIs
Advantages: Provide funds; bring in international practices; promotes transparency; and bring
in venture capital.
During 2004-05 FIIs brought in around US$ 12 billion, the highest in 3 years
FRINGE BENEFIT TAX

P - 207
The sprit of FBT is to tax those benefits being provided by the employer in the nature of collective
enjoyment
FBT is payable irrespective of whether the employer has made profit or incurred a loss from its activities
The rate of FBT is prescribed at 30% of the value of the benefit.Different valuation norms ranging from 20
to 100% have been prescribed.
The payment of the tax has to be in full for every quarter on actual basis
GANGULY WORKING GROUP - On Small and Medium Enterprises Report
Submitted in 2004
Report submitted in 2004

SME classification to be based on
Turnover : Tiny - up to Rs. 2 cr, Small - Rs. 2 - 10 cr, Medium - Rs.10 - 50 cr
Major recommendations : measures to promote corporate linked clusters, proactive role by
CIBIL, setting up of dedicated SME development fund, technology bank for SMEs.
Banking Briefs
22
P - 360
GENERAL PACKET RADIO SERVICE (GPRS)

P - 74
GPRS is an efficient use of limited bandwidth and is particularly suited for sending and receiving data
and Web browsing.
Multiple users share the same transmission channel in GPRS.
Packet-switched data under GPRS is achieved by allocating unused cell bandwidth to transmit data.
GLOBAL DEPOSITORY RECEIPTS (GDRs)
GOIPORIA COMMITTEE (On Customer Service)
P - 246
GDRs are dollar denominated instruments traded in US or Europe or both.

GDRs represent a fixed ratio of Indian Shares
It helps in raising funds from international market.
It is freely tradable and can be cancelled any time. Cancelled GDRs can be re-issued
(i.e two-way fungibility is permitted)
GDR holders assume exchange risks and price fluctuation risk.
Holders entitled to receive dividends but have no voting rights.
P - 371
Purpose; To suggest measures to improve customer service

Some recommendations: Employees working hours to be 15 minutes earlier; extension of
business hours; nomination facility; passbook system for TDRs; introduction of bank order;
instant credit for outstation cheques; value dating of TTs; single window approach for consortium
finance; wearing Identity badges; optimum branch size; pay telephones in large branches.
GOLD DEMAT
P - 254
Commodity futures including gold are traded in commodity exchanges and online exchanges such as
MCX, NCDEX, NMCE and NBoT in India.
Gold and silver are highly traded on the MCX; Agri commodities are traded more on the NMCE and the
NCDEX.
The gold traded is required to meet certain pre-set quality specifications
MCX, in association with the World Gold Council, has launched a new product - a gold contract that is
settled in a week (T+7)
GUIDELINES ON PURCHASE / SALE OF NON PERFORMING FINANCIAL ASSETS
P - 104
NPAs may be purchased/ sold only on cash basis.
Valuation procedure to ensure that the economic value of financial assets is reasonably estimated
based on the estimated cash flows arising out of repayments and recovery prospects.
Delegation of powers of various functionaries for taking decision on the purchase/ sale of the f assets to
be defined.
GUIDELINES ON OWNERSHIP AND GOVERNANCE IN PRIVATE SECTOR BANKS
P - 110
Important Shareholders (with holding of 5% and above) and directors should be fit and proper
Banks to maintain a minimum net worth of Rs. 300 Crores
Shareholding or control in excess of 10% by any singly entity require RBI approval
Foreign Bank are not allowed to hold more than 5% of the equity capital of investee bank
Foreign investment (FDI, FII and NRI) should not exceed 74%
IMPACT OF TECHNOLOGY ON BANKING AND FINANCE
P - 11
Technology in banks is no longer a matter of choice
Globalisation, online revolution, internet banking and e-commerce, computer based technologies are
some of the factors that contribute towards this trend.
Information flow, ease of supervision, creation of new delivery channels, better customer service are
some of the advantages
Thus there is a strong need to align technology with business strategy to successfully compete in future.
Banking Briefs
23
INFORMATION TECHNOLOGY ACT, 2000

P - 57
IT Act was passed on 9th June 2000
The Act provides legal recognition to transactions carried out through any electronic medium The Act
facilitates growth of commerce.
The Act provides for amendments The Indian Penal Code, Indian Evidence Act
Bankers Books Evidence Act and the Reserve Bank of India Act
The Act does not apply to negotiable instruments, power of attorney and sale and purchase of immovable
properties
INFRASTRUCTURE FINANCING
P - 132
Infrastructure financing implies lending to sectors such as power and transportation
India needs more than 800000 Crores of investment in this area
Rakesh Mohan Committee recommended measures for commercialization of infrastructure projects
Two options to finance infrastructure: Concession and Strucuture option
Concession option: BOT, BOLT, BOOT, BOO, BOOS
Structure option: non-recourse, limited, recourse, escrow, cash flow, subordinated debt and take out
finance.
INTEREST RATE SWAPS
P - 144
Swap is simply an exchange of one for the other.
Interest rate swap involves the exchange of interest rates between two parties.
A simple example would be moving over to floating rate of interest in the place of fixed rate of interest
(and vice versa) during the currency of the loan.
This is done to align debt exposure with prevailing market conditions.
INDIA MORTGAGE GUARANTEE COMPANY (IMGC)
P - 226
The India Mortgage Guarantee Company will improve the efficiency of housing finance and protect mortgage
lenders such as banks and housing finance companies in cases of borrower default.
The company would help protect primary mortgage lenders HFCs and banks in case of borrower
default
The mortgage company would also provide guarantee support to the investors of the securitised instruments
INDIAN DEPOSITORY RECEIPT (IDR)
INTERNET TRADING
P - 305
Intellectual Capital is the product of commitment and competence. Both should exist in an
employee for organizational effectiveness
Competence should align with business strategy
Competence can be built, bought and borrowed by organizations
Commitment can be fostered by articulating vision and sharing power and resources with the
employees.
Banking Briefs
24
P - 269
Internet trading is buying and selling of securities through the Internet.

It helps in transparency, creates a fair and efficient market and reduces systemic risk.
SEBI has issued regulatory guidelines on internet trading.
ICICI, HSBC, ABN-Amro are some of the banks which provide internet trading facility.
INTELLECTUAL CAPITAL
P - 248
Indian version of ADR/GDR

helps foreign companies to access Indian funds
The issuing company should have pre-issue paid up capital and free reserves of min US $
100 million and turnover US $ 500 million
The issue in any financial year shall not exceed 15% of the capital.
Leaders should raise standards, set high expectations and demand more performance and
provide corresponding resources to meet high demands
ISO 9001
ISO 9001 is an international quality standard and adopted first in 1987

Latest version is in 2000 and is called ISO 9001:2000
The standard aims to promote quality and continual improvement in organizations
The certification is issued by Registrars
ISO 14000
P - 339
P - 340
ISO 14000 is a quality standard for environmental management

The standard is voluntary
It can be obtained for the whole company or a department
It helps in reduction of energy consumption, liability and risk and improves compliance to
legal and regulatory requirements
IPO SCAM
P - 187
The scam came to light during the investigation of Yes Bank IPO
By opening multiple demat accounts and submitting multiple applications fraudulently, huge chunk of the
issue was cornered by a few investors.
Non-adherence to KYC norms, lack of role-clarity, lack of coordination among intermediaries were
considered to be the reasons.
INTERNET BANKING
P - 63
Some functions performed through internet: Statement of account, request for issue of cheque book,
demand draft, stop payment of cheque, transfer of funds, payment of bills
Cost of transaction through internet banking is the cheapest of all channels
Internet banking lacks popularity due to security threat, lack of zeal and negative mindset
INTERNATIONAL CAPITAL FLOWS - BENEFITS AND POLICY FRAMEWORK
P - 27
Trade liberalization without free capital flows affects economy
Capital flows create jobs and stimulate productive growth
Crisis in Mexico, Thailand, Indonesia, Korea, Russia were due to fixed exchange rate regime
International capital flows accompanied by sound macro economic policies would foster growth
Countries need to decide the manner in which they like to calibrate the movement of capital
KNOW YOUR CUSTOMER (KYC) GUIDELINES
P - 92
Issued by RBI in August 02 to protect banks against financial frauds and money laundering
Objective: To properly identify individuals/Corporates; to monitor high value transactions and transactions
of suspicious nature; and establish procedure for due diligence and reporting of such transactions
Key provisions: Open account with proper introduction/identification; monitor cash transactions above
Rs.10 lac; route all remittances above Rs.50000/- through account (and not cash); watch transactions of
suspicious nature beyond a threshold limt.
KUMAR MANGALAM BIRLA COMMITTEE (On corporate governance)
submitted in March, 2000
Report submitted in Mar 2000.

Dealt with Corporate Governance aimed to protect investor interests.
Made 25 recommendations of which 19 are mandatory.
Some recommendations: Board to have atleast 50% non-executive directors; setting up of
audit committee; regular meeting of board and redressal of shareholders complaints.
Banking Briefs
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Report
P - 362
KNOWLEDGE MANAGEMENT
P - 307
HRM needs to develop Knowledge Management System due to changing customer trends, competitive
products and services and changing society
The Collective knowledge of the employees gives distinct competitive advantage
The integrated system of KMS should value collection of knowledge, react quickly to market changes
and facilitate faster decisions
Banks should specifically focus on finding, creating, sharing and applying knowledge that it is relevant to
its business
LOAN POLICY SBI
P - 47
SBI Loan Policy was first approved in Nov 96 and reviewed from time to time.
The policy lays down the banks approach to sanctioning, managing and monitoring credit risk.
It aims to make the systems and controls effective.?
Some of the chapters covered are Exposure levels, CRA, credit appraisal standards, documentation,
pricing, review and renewal, take over of advances, discretionary powers
LIBERALISED BRANCH AUTHORISATION POLICY
P - 107
The Liberalised Branch Authorisation Policy is applicable to all banks except RRBs.
Liberalised and rationalised the policy for authorisation of their branches in India, retaining the current
policy for authorisation of overseas branches of Indian banks.
Banks should have achieved the target prescribed by RBI for priority sector advances.
LEARNING ORGANIZATION
P - 302
A learning organisation is one which is skilled in creating, acquiring and transferring knowledge and
changing its behaviour to reflect new knowledge and insights
Learning provides competitive advantage and helps in organisational transformation
Some of the characteristics include openness, encouragement for creative ideas, sharing and constant
change.
MONEY LAUNDERING
P - 95
As the term implies, Money laundering is a process of converting (or cleaning) dirty/illegal money into
clean/legal money
This is done by using various channels to hide the source of income
Under/Over invoicing, investment by offshore companies and trusts, large transactions in cash, opening
of benami accounts are some examples
Money Laundering Act 2002 seeks to contain the menace.
MICRO FINANCE
P - 203
A microfinance institution (MFI) is a financial intermediary, which provides very small amounts to rural,
semi-urban and urban poor.
Its objective is to raise the income and standard of living of poor Measures taken in micro financing:
Opening up of large number of branches; stipulation of 10% bank credit to weaker sections; introduction
of several programmes such as SFDA, MFA, DPAP, IRDP.
By end-July 2005, as many as 16,53,047 SHGs were linked to banks and the total flow of credit to SHGs
was Rs.7,063 crore.
SHG has emerged as one of the successful instruments in Micro financing.
MCA-21 PROJECT ON E-GOVERNANCE
P - 78
A ministry of company affairs project, it aims to provide services to business, govt and citizens through
the new mca21 portal.
Project MCA-21, one of the largest e-governance projects, will cost Rs 345 crores.
This portal will be the entry point for online registration, filing of returns, reporting financial results and
requests for permissions by businesses.
The portal will also enable citizens to report investor grievances. It will also be a tool for the public to
report investor grievances.
Banking Briefs
26
MUTUAL FUNDS (MFs)
P - 250
UTI, the first mutual fund, in 1964. Public sector MFs in 1987. Private and Foreign Mutual
Funds in 1993
As at the end of Mar 05, there were 31 MFs and 462 schemes with total assets of Rs.1,49,601
Crores
Regulated by SEBI
MFs sell units in small sums to investors and deploy the funds so collected in the market as
per the investment objective of the individual schemes.
SBI MF manages asset over Rs. 6000 Cr.
MULTI COMMODITY EXCHANGE OF INDIA (MCX, NCDEX & NMCEIL)

P - 228
MCX an independent and de-mutulised multi commodity exchange for facilitating online trading, clearing
and settlement operations for commodity futures markets across the country
NCDEX is a professionally managed online multi commodity exchange.
National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized, Electronic
Multi-Commodity Exchange in India
MONEY MARKET MUTUAL FUNDS (MMMFs)
MARGIN TRADING
P - 346
MVA is defined as the excess of the market value of the Company over the value of investors
capital
Thus MVA= (Market value of debt and equity Book Value of debt and equity)
Book Value of equity is the equity plus retained earnings
Banking Briefs
27
P - 317
It is a process of making an employee more effective in his job through developing personal
working relationship.
Coaching, counselling, providing guidance, social and emotional support are some of the
ways.
Advantages: Higher performance of employees, building a better organisational climate,
generate positive feelings of pride and satisfaction
Institution of formal mentoring process would benefit organisations.
MARKET VALUE ADDED (MVA)
P - 268
Margin trading is an arrangement whereby an investor purchases securities by borrowing a

portion of the purchase value
SEBI has allowed member brokers to provide margin trading facility to their clients in the
cash segment since April 1, 2004
Only corporate brokers with net worth of at least Rs.3 crore would be eligible to participate
MENTORING
P - 253
Introduced in 1992
Objective: To provide depth, stability and maturity to money market; and to increase returns
on investment to individual investors
Enables individuals to invest in: Treasury bills, dated government securities, CPs, CDs, call
or notice money through MMMFs scheme.
Both public and private sector MFs offer MMMF scheme
MFs are allowed to offer cheque writing facility to investors for MMMF schemes.
MVA is similar to Price Earning Ratio except that MVA indicates an absolute figure while PER
is a ratio
MID-TERM REVIEW OF ANNUAL POLICY FOR THE YEAR 2005-06

P - 196
Bank Rate unchanged at 6%
Reverse Repo rate and fixed repo rate increased by 25 basis points to 5.25% and 6.25%
CRR remains unchanged at 5%
Banks allowed to issue guarantees or standby letter of credit in respect of ECBs raised by textile companies
for modernization
Banks aggregate capital market exposure restricted to 40% of its networth
Standard Assets general provisioning increased to 0.40%
NORMS FOR CAPITAL ADEQUACY
P - 89
Introduced in 1992
Capital Adequacy Ratio is the ratio of Capital to Risk Adjusted Asset
Objective: To strengthen the financial stability of banks.
Capital is divided into two tiers: Tier I and Tier II
Tier I: Paid up capital, statutory reserves, disclosed free reserves and capital reserves arising out of sale
of assets.
Tier II: Undisclosed reserves, revaluation reserves, general provisions, hybrid debt capital instrument
and subordinated debt
Risk Adjusted Asset: Assets assigned risk weight from 0-100 based on their risk.
Transition to the new capital adequacy framework (Basel II) scheduled for March 2007.
Minimum capital required for operational risk for All Schedule Commercial Banks (ASCBs) works out to
be around Rs.10,000 Cr.
Minimum CAR now is 9%
NORMS FOR NEW PRIVATE BANKS
P - 108
Preference in license for banks with their headquarters in a place where no other bank has its Head
Office.
Relaxations in priority sector norms for first 3 years
Free to open branches without prior RBI approval.
Banks should have a high powered customer grievance cell.
NATIONAL INTERNET EXCHANGE OF INDIA (NIXI)
P - 227
The operationalisataion of NIXI, has enabled the routing the domestic traffic through the national bandwidth.
The exchange help deliver better quality of services to users by reducing latency and delays.
Already about 50 ISPs have signed up across the India.
NON BANKING FINANCE COMPANIES (NBFCs)
P - 233
NBFCs are popular due to simple procedures, speed of service, higher rate of interest and timeliness in
meeting credit needs of clients
NBFCs are now subjected to Capital Adequacy, IRAC norms, reserve requirements
The number of reporting NBFCs (registered and unregistered) declined from 875 at end-March 2003 to
573 at end-March 2005
Some types: Leasing Company, hire purchase company, housing finance company, Loan company, Residual
non-banking finance company etc.
NATIONAL PAYMENT CORPORATION OF INDIA
P - 220
NPCI would be an umbrella organisation for undertaking retail payment and settlement systems
In line with the international practice where retail clearing in entrusted to a separate legal entity.
The company has been approved and registered as a Section 25 company, which means that equity
holders will not share company profits earned by the company
Banking Briefs
28
NATIONAL ELECTRONICS FUNDS TRANSFER SYSTEM (NEFT)

Started live from November 21, 2005
8 banks participated in the first phase
Single settlement at 12 noon every day
SEFT will be phased out in due course
Integrated with Structured Financial Messaging Solution
Uses end to end Public Key Infrastructure based security
NATIONAL FOREIGN TRADE POLICY 2004-09
P - 365

Purpose: To suggest measures for banking sector reforms
Some key recommendations: Reduction in SLR/CRR; deregulation of interest rate; introduction
of IRAC norms; creation of ARF; entry of private/new banks; abolition of branch licensing;
liberal opening of foreign offices; shift to syndicated lending; removal of dual control of RBI
and Govt.
NARASIMHAM COMMITTEE - II (On Banking Sector Reforms - 1998)
P - 329
A niche market is a group of potential customers who share common characteristics that
make them receptive to a particular produce or service
Launching a product into a niche market is far cheaper than launching a mass-market product
The Internet has features that make it ideal for niche marketing
NARASIMHAM COMMITTEE - I (On Financial Sector Reforms-1991)
P - 273
Introduced in 2004 and replaces EXIM policy

Objectives: To double our share in global trade (presently around 0.70%) by 2009 and to act
as an effective instrument of economic growth with thrust on employment generation particularly
in semi-urban and rural areas
Sectors with export prospects and potential for employment in rural and semi-urban areas are
identified as thrust sectors
A new scheme- Vishesh Krishi Upaj Yojana introduced to boost exports of fruits, vegetables,
flowers, minor forest produce
Target Plus, served from India scheme, removal of age of goods and decrease in cut off of
minimum depreciated value to Rs. 25 Cr for imported goods are other special features.
NICHE MARKET
P - 67
P - 368

To review the progress in Banking sector reforms
Major areas covered: Strengthening capital adequacy, Asset quality, Prudential norms &
disclosure requirements; Systems and methods in Banks and structural issues
Some recommendations: Marking government security to market; increase in CAR;
transferring NPA to ARC as a one time measure; reduction in transit time from sub-standard
to doubtful; provision for standard asset; bringing down government holding in nationalized
banks.
NETWORK SECURITY
P - 70
Network is a system of interconnected computers.
Networks are classified as LAN, WAN, CAN, MAN and HAN.
Some of the security threats include Eavesdropping, traffic analysis, masquerading, spam and spoofing
Banking Briefs
29
Security threats may cause loss of income, increased cost, loss of information, loss of trade secrets,
damage to reputation and legal and regulatory non-compliance
NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME

P - 199
The origin of this scheme is the NATIONAL RURAL EMPLOYMENT GUARANTEE ACT, 2004
Seeks to provide 100 days assured employment every year to every rural household in 200 districts.
The Centre has taken responsibility to provide financial assistance to the scheme and the States only
have to implement it.
A Central Employment Guarantee Council at the Central level and State Employment Guarantee Councils
at the State level in all States
Fund to be called National Employment Guarantee Fund to be set up for the purpose
Annual expenditure at Rs. 40,000 crores to Rs. 50,000 crores for expansion to the whole country in five
years.
The NREGS calls for rigorous resource planning, technical, managerial and administrative skills,
The NREGS does not provide a long-term solution to the pernicious problem of unemployment.
OUTSOURCING BY BANKS
P - 120
Key Risks in Outsourcing: Strategic risk, reputation risk, counterparty risk, country risk, contractual
risk, access risk, concentration risk and systemic risk. Banks have to manage these risks
Board of directors to provide direction and guidance to banks to adopt sound and responsive risk
management practices for outsourcing
Banks to have in place a management structure to monitor and control its outsourcing activities.
ORGANISATION CULTURE
P - 315
Organisation culture refers to the way we do things here
It is the easiest thing to comprehend but most difficult to define
It is unique and distinct for every organisation
The Johnson and Scholes cultural web model contains six inter related elements rituals and routines,
stories, organisation structure, symbols, power structures and control systems
OIL PRICE IMPACT
P - 31
The price of Crude oil hit an unprecedented high in 2004 and 2005.
Due to growing turbulence in the Middle East, the worlds largest oil producing region.
The war in Iraq, Irans nuclear programme, and questions about Saudi Arabias internal stability are also
atributed for it
Some feel that increase in price is due to oil speculation extending into the long term
Neither the stock markets nor the growth of the global economy have been noticeably affected.
Economists say that the substitution effect will spur demand for alternate energy sources, such as coal
or liquified natural gas.
The increased price of oil might also encourage greater fuel efficiency.
In India share of domestic production of crude oil was only 28.7% while 71.3% were imports and thus
witnessed inflationary pressure as international price of oil soared during 2004 and 2005.
Indian economy is bound to be vulnerable to oil price shocks
OVERVIEW OF INDIAS FOREIGN TRADE
Foreign Trade benefits an economy due to comparative advantage

Inflows and outflows of foreign exchange take place under two accounts- Capital and Current
Current Account: Import and Export of goods and invisibles (Services and remittance)
Capital Account: External borrowings or repayment; external investment/disinvestments;
foreign aid; grants etc
Indias share in total world trade is 0.67% in 2002-03.
Indias exports and imports during 03-04 was Rs. 2.91lac Crores and 3.53lac Crores
Banking Briefs
30
P - 276
OPERATIONAL RISK IN BANKS

P - 160
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events.
Some forms of Operational Risk: Control Risk, Process Risk, Legal Risk, Reputation Risk.
Basel II has made banks to focus on operational Risk due to its potential to cause liquidation of banks
PAYMENT AND SETTLEMENT SYSTEM
P - 59
The Payment System integrates the financial markets.
Payment system facilitates the exchange of goods and services between economic agents using an
accepted medium of exchange. Payment systems are subject to various systemic risks
PAYMENT AND SETTLEMENT SYSTEM IN INDIA VISION 2005-08
P - 61
Payment system policy goals are to foster a safe, secure, sound and efficient payment system for the
country.
Making all Payment Systems in India compliant to Core Principles for Systemically Important Payment
Systems (SIPS)
National Settlement System to cover all major clearing houses/ clearing organizations in the country
PORTFOLIO MANAGEMENT
P - 158
It is management of the clients fund in accordance with their needs based on mutual agreement
for a fee
It helps to tap the funds of High networth individuals who expect the banks to multiply their
wealth.
There are two types of portfolio managers- Discretionary and non-discretionary. Discretionary
managers exercise their discretion in investment
Portfolio Managers are to be registered with SEBI. As per SEBI directive, the minimum fund
per client is Rs. 5 lacs.
PRIORITY SECTOR
P - 112
Agriculture-both direct and indirect
SSI and SSI Ancilliary Investment in plant and machinery up to Rs.1 Crore.
Industry related service and business enterprises with investment up to Rs. 10 lakh in fixed assets,
excluding land and building will be given benefits of small scale sector.
Retail Trade
Advances to Business Enterprises and Professional and self employed
RTO s up to 10 vehicles
Housing in rural and semi urban areas up to Rs.5 lacs
Produce loans for agriculturists up to Rs.5 lacs
Overall target: 40% of net bank credit and sub-target of 10% to weaker sections
Priority sector target for foreign banks is 32%
PRIMARY DEALERS IN GOVERNMENT SECURITIES
Guidelines for PD announced in Mar 95

Purpose: To strengthen the infrastruture in Government securities market; and to make it
liquid and broad based
Benefits: Help place primary issues in government securities with committed participant in
auctions; active secondary market for Government Securities; conduit for open market
operations of RBI; provides signals to RBI for market intervention
SBI Gilts Limited is renamed as SBI DFHI Ltd. It posted a net profit of Rs. 174.09 Cr during
03-04
Banking Briefs
31
P - 240
QUALITY CIRCLES
P - 341
QC is a small group of employees in the same work area, who meet regularly to identify,
analyse and solve work related problems.
The members identify problems, prioritise the most important problem to be addressed, develop
solutions and implement them
Brain Storming, Pareto Analysis and Fish Bone Diagram are the key techniques used.
REAL TIME GROSS SETTLEMENT - RTGS

P - 68
Payment system operates on the basis of gross settlement.
Lessens settlement risk.
RTGS provides for transfer of funds relating to inter-bank settlements as also for customer related fund
transfers.
RISK MANAGEMENT SYSTEMS IN BANKS
P - 148
Risk is the potential loss of an asset due to different factors.
Risk management is concerned with identification, measurement and control of risks.
Risks in banks comprise Balance sheet risks, transaction risks; and operating and liquidity risks
REGIONAL RURAL BANKS
P - 230
There are 196 RRBs with 14475 branches
More than 160 RRBs make profits
Narasimham Committee proposed several reforms for RRBs including creation of separate subsidiary by
combining branches of commercial banks and RRBs.
Some key reforms in RRBs: Deregulation of interest rate, permission to finance big borrowers, handling
non-fund based business such as guarantees and lockers.
Few sponsor banks have so far amalgamated 27 RRBs into 9 RRBs in few states during the financial
year 2005-2006
RECENT OVERSEAS ACQUISITIONS OF SBI
P - 40
In February 2005, SBI acquired 51 per cent stake in the Indian Ocean International Bank Ltd.
On October 8, 2005, SBI acquired majority stake in Kenyas Giro Commercial Bank, at around $ 6-8
million.
SBI has merged its Nigerian subsidiary Indo Nigerian bank with a local bank, Nal Bank of Nigeria
after acquiring it.
SBI has also acquired 76% stake in PT IndoMonex of Indonesia.
SBI is also in the process of acquiring Rupali Bank of Bangladesh.
REPOS
RELATIONSHIP BANKING
P - 330
Relationship Banking means maintaining a long and enduring relationship with clients
It aims to have 100% of a clients business, both present and future, in one bank/one service
provider.
CRM integrates people, process and technology
CRM aims to optimize profitability through enhanced customer satisfaction
Relationship Banking helps in cost reduction, better use of data and increased opportunity for
cross-selling
Banking Briefs
32
P - 272
Repos means a contract to buy securities such as Treasury bills, gilts and sell them back at
an agreed future date and price
RBI uses it for open market operations to influence liquidity and short-term interest rate
The average daily turnover in repo market during Mar 04 was Rs. 13,378 Crores.
RAILWAY BUDGET 2006

P - 195
Gross traffic revenue (passenger and freight) estimated at Rs. 54,600 Cr
No rise in passenger fares
No across-the-board rise in freight rates
Reduction in first and second AC fares by 18% and 10% respectively
Upgradation of passengers to next higher class extended to all Rajadhani, Mail/express trains without
additional charges
E-tickets made cheaper
New schemes for freight such as non-peak season discount, Empty flow direction discount, loyalty
discount, Long-term freight discount
RECOMMENDATIONS OF THE TWELFTH FINANCE COMMISSION
12th Finance Commission is for the period 2005-06 to 2009-10.
The targets for fiscal and revenue deficit are 3% and 0%
The target for tax to GDP ratio is 17.6% and debt-GDP ratio is 75%
States to enact Fiscal Responsibility Legislation
System of on-lending by the Centre to States phased out
P - 198
ROAD MAP FOR PRESENCE OF FOREIGN BANKS

P - 111
The first phase of the policy is for the period Mar 05 to Mar 09
Foreign Banks can establish Wholly owned subsidiary with minimum capital of Rs. 300 Cr
Wholly owned subsidiaries will be given preference for branch expansion in under banked areas
Foreign banks with the permission of RBI can acquire those banks which qualify for restructuring
Second phase of the policy will commence from Apr 2009 based on experience
RECOMMENDATIONS OF THE INTERNAL GROUP ON RURAL CREDIT AND
MICRO-FINANCE
P - 351
Chaired by Shri. H.R.Khan and the report submitted in July 05
To enhance financial services in rural areas banks can use two models namely Business Facilitator
Model and Business Correspondent Model
Regulated Micro Finance Institutions (MFIs) may be refinanced by NABARD
Accounting Standards may be developed for SHGs and NGOs
Rural Kiosks and Village Knowledge Centres may be set up
MFIs may be rated.
REPORT OF THE WORKING GROUP ON WAREHOUSE RECEIPTS AND
COMMODITY FUTURES
P - 353
Chaired by Shri. Prashant Saran and report submitted in April 05
Task entrusted: To evolve guidelines, criteria, limits, risk management system and legal framework for
facilitating banks to participate in commodity (derivative) market and use of warehouse receipts in financing
agriculture
Major recommendations: Central Govt to notify permitting banks to deal in agricultural commodities; to
evolve a system for free transfer of warehouse receipts; creation of Closed User Group; banks may take
proprietary position in commodity derivatives; to introduce option trading in Agricultural commodities
REPORT OF THE WORKING GROUP TO REVIEW EXPORT CREDIT
P - 354
Chaired by Shri Anand Sinha and the report submitted in May 05
Major recommendations: Change in the attitude of officials towards export credit, posting of nodal officers,
timely disposal of application for export credit, simplified procedure for issue of Gold cards, priority for the
foreign currency requirements of exporters.
RURAL BANKING - CHANGING PARADIGMS
P - 19
The present Government has given a thrust to double agricultural credit in 3 years
Rural economy is characterized by low banking connection, lower lending, low credit-deposit ratio and
lesser impact by RRBs
Recent trends: Banks look at rural financing as profitable proposition. Their efforts include innovative
micro credit services, strategic alliances with MFIs, setting up of low technology networks
Banking Briefs
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RETAIL LOAN - A RISK MANAGEMENT PERSPECTIVE

P - 170
Retail Loan book constituted 21.5% of the outstanding advances as at the end of Mar 04
Risks in retail loans: Excessive borrowing, interest rate risk, credit risk, concentration risk and operational
risk
To control risk, RBI has limited the exposure of unsecured loans of banks to 20% of Gross Bank Credit,
increased provisioning for sub-standard asset to 20% and enhanced risk weight for housing loan to 75%
and Personal Loan to 125%
RETAIL BANKING - OPPORTUNITIES AND CHALLENGES
P - 16
Key Growth drivers of Retail Banking: Growth in Economy, more than 70% of population below 35 years,
technological growth and innovation, falling treasury income, attractive interest rate and the willingness to
borrow
Challenges: Customer retention, rising indebtedness, maintaining the uptime of technology infrastructure,
KYC and money laundering,
RISK BASED SUPERVISION OF BANKS
P - 145
Objectives: Optimise utilization of supervisory resources and minimise impact of crisis

situation in the financial system
Key elements: Risk profiling of banks; supervisory cycle; Monitorable Action Plan; Enforcement
process; and role of external auditors
Risk profiling of banks will be done for Business risks and Control risks.
Business risks are eight and are: Capital, credit, market, earnings, liquidity, business strategy
and environment, operational and group risks.
Control risks are four and are: Internal control, organisation, management and Compliance
risk
The overall risk of bank will be assessed as low, moderate, fair or high
Banks with lower risks will have longer supervisory cycle and lesser supervisory intervention
STRESSED ASSETS REVIEW AND MANAGEMENT

P - 54
Stressed Assets are Special Mention Account (Category I & II) & Sub-standard Assets.
Focus is an assets with outstanding Rs.10 Lac and above
Time-bound action plan for rehabilitation, restructuring and recovery.
No prior administrative clearance needed for holding - on operation.
SECURITISATION
P - 134
Securitisation means converting future cash inflows as securities and selling them in the market.
It helps in raising immediate funds against future cash.
It helps the issuer to reduce its exposure in the intended asset, which is sold
Securitisation Act provides legal framework to securitisation
SERVICE QUALITY MANAGEMENT
P - 326
Two well known approaches to improvement of quality are Bottom-up approach and Top-down approach
The quality service delivery results in customer satisfaction and their retention
Quality is a winning attitude and it always needs improvement
STRESS MANAGEMENT
P - 323
Stress is an integral part of life.
We need to manage our abnormal response to stress that cause disease and disability.
We have to identify the stressors and symptoms of stress.
There are three levels on which stress management techniques are focused: BODY, MIND and
BEHAVIOUR.
Exercise, diet and relaxation constitute our response at body level.
Positive thinking and attitude and prayer are coping techniques at mind level.
Banking Briefs
34
Self monitoring, change of life style, laughter and balanced life activities are our strategies at behaviour
level.
STOCK INDEX FUTURES
P - 264
Futures are standardized contracts and are tradeable

Standardisation implies that size, date of expiry and other features are standardized.
Stock Index represents an average price of various scrips
Advantages: Serves as a hedging mechanism; guards against price fluctuation caused by
FIIs investment strategy; preserves portfolio value during market stress.
SIX SIGMA - FOR QUALITY
P - 333
It is a quality tool.
It denotes tolerance of only 3.4 defects in 10 lakh operations.
Companies like Motorola and G.E have implemented this with success
Helps in customer satisfaction and retention, elimination of waste and reduction in cost
In our Bank, CAG has successfully implemented it for issue of LC.
SADASIVAN WORKING GROUP

on Development Financial Institutions Report submitted in May 2004
P - 357
Banks encouraged to extend high risk project finance

DFIs must convert to either a bank or a NBFC
DFIs which have been constituted as companies and are performing developmental roles
should be classified as a new category of NBFCs called Development Financial Companies
(DFCs)
SME RATING AGENCY OF INDIA LIMITED (SMERA)

P - 216
Joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), CIBIL and
several leading banks in the country
Takes into account the financial condition and several qualitative factors that have bearing on credit
worthiness of the SME.
Better rating from SMERA could lead to favorable credit terms such as lower collateral requirements and
interest rates and simplified lending
SMERA has signed a memorandum of understanding with State Bank of India for rating the SME clients
of the bank
SARFAESI ACT
P - 100
Enacted in 2002, the Act is intended to strengthen Banks and Fis to recover NPAs faster.
The Act empowers banks and Fis to seize the assets without Courts intervention and sell them off
The Act does not cover loans up to Rs. 1 lac, security interest created on Agricultural lands and where the
amount due is less than 20% of the principal and interest
The Act was amended in 2004 to relax certain provisions in the interest of borrowers.
SMES - ROLE, POLICIES AND ISSUES
P - 117
SMEs contributes to around 56% of manufactured products, 35.8% of the exports and ranks second in
providing employment next only to agriculture
Incentives: reservation of items, concessionary finance, simplification of procedures, imports under OGL,
duty free import of select items, simplified credit sanctioning system
Major issues: inadequate credit, delay in sanction, lack of transparency, lack of coordination among
financing agencies
TREASURY MANAGEMENT IN BANK
Treasury Management is concerned with efficient allocation of the banks resources.
Banking Briefs
35
P - 155
Some of its role includes optimizing balance sheet size, ensuring liquidity and matching the maturity
profile of assets and liabilities.
Treasury management includes risk management and advising clients on risk exposures.
THE INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING

TECHNOLOGY (IDRBT)
IDRBT was set up in 1996 at Hyderabad
It aims to promote technology solutions in banks and FIs
It has set up INFINET which provides connectivity to banks
INFINET helps in facilitating inter-bank transactions and settlements
IDRBT is now an authorised certifying authority for digital signatures
P - 218
TRANSFORMATIONAL LEADERSHIP
P - 300
Leadership is the ability to make followers do he wants them to do, willingly or on their own, towards
accomplishing an organizational goal.
Transactional leadership is based on the leader and the followers having transacted to do it characterized
by close direction, control and follow up. The focus is on behavioural compliance and outcome. The
inner state of thinking and feeling are not matters of concern.
Transformational leadership aims at transforming people by working with and through them on their
values, beliefs, attitudes and behaviour. It aims at emotionally connecting the followers to the vision of
the leader so that they are galvanized to achieve the vision.
THE RIGHT TO INFORMATION ACT, 2005
P - 201
Enacted on May 13, 2005
Deals with right to information for citizens to secure access to information under the control of public
authorities
To promote transparency and accountability in the working of every public authority
Central/State Information Commissions set up to secure compliance with the provisions of this Act
Penalty of Rs.250/- per day with maximum of Rs.25,000/TOTAL QUALITY MANAGEMENT (TQM)
TARAPORE COMMITTEE on Procedures and Performance Audit on Public

Services Report submitted in 2004
P - 335
TQM means ensuring error free functions all around in the organization
It aims to continually improve quality through employee and management participation.
It attempts to increase productivity through building teams.
The focus of TQM is to satisfy the needs and expectations of customers
Zero defects, Kaizen (continuous improvement), benchmarking are its key approaches
P - 358
Transparency in currency management

Currency Chest Agreement to be revised to incorporate a provision for monetary penalty for
non compliance with the Reserve Banks instructions
The Reserve Bank Note Refund Rules to be written in easily understandable language
THE DOLLAR DELUGE - ISSUES IN MANAGEMENT

P - 29
India in recent times is witnessing surge in forex reserves (now over US $ 140 bn)
The size of adequate forex reserve is influenced by the need for international confidence, to manage
seasonal factors, to defend against speculative attack and the capacity to hold
Based on import coverage and money based indicators India has more than adequate reserves
The forex reserves should be consistent with the rate of growth of economy, share of the external sector,
the size of risk adjusted capital flows and national security environment
Banking Briefs
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TRANSFORMATION OF INDIAN BANKS

P-1
Financial integration of banking, insurance and capital market and globalisation is transforming Indian
banks
Constraints in transformation: Limited computerization, need for higher investment, cost not justified by
volume, longer time frame for setting up Technology infrastructure, non-availability of expertise, size of
banks
Emerging Trends: E-banking, newer delivery channels, newer regulations, new financial institutions, universal
banking, declining customer loyalty
US GAAP - ACCOUNTING STANDARDS
P - 98
US GAAP stands for Generally Accepted Accounting Practices followed in United States
It is accepted as a global accounting standard
Adoption of US GAAP is not mandatory in India
US GAAP would help our bank in transforming to a global bank, access US capital market and enhance
transparency in reporting.
UNION BUDGET 2006-2007
No change in direct taxes
Reduction in peak rates of customs duty / excise duty
New services like ATM operations, event managements brought under service tax.
Plan expenditure - Rs. 1,72,728 crores up by 20.4%
Non-Plan expenditure - Rs. 3,91,263 crores up by 5.5%
Revenue deficit - Rs. 84,727 crores - 2.1% of GDP
Fiscal deficit - Rs. 1,48,686 crore - 3.8% of GDP
P - 191
UNIVERSAL BANKING
P - 129
Recommended by Narasimham and Khan Committees
Universal Banking means provision of all financial services by a bank under one umbrella
It is diametrically opposite to narrow banking
Examples of financial services include: Long-term loans to industries, venture capital, underwriting,
brokerage, corporate advisory services, insurance
Facilitating factors: Deregulation, fall in interest income and the wider business opportunities
Different models of universal banking such as holding company, subsidiary may be adopted
Indian banks already are moving towards universal banking.
VYAS COMMITTEE on Flow of Credit to Agriculture and Related Activities
the Banking System (Report submitted in June 2004)
f r o m
P - 359
A road map for public sector and private sector banks to reach a level of direct lending at 13.5
per cent of net bank credit - within the overall limit of 18.0 per cent of total agricultural lending
- within a period of four years
The share of small and marginal farmers in agricultural credit to be raised to 40 per cent of
disbursements
Reduction in cost of agricultural credit through enhancing the cost effectiveness of agricultural
loans
Non-performing asset (NPA) norms in agricultural credit to be attuned to the cash flow of the
farmer, coinciding with the harvesting/marketing of the crop.
VENTURE CAPITIAL IN INDIA - GROWTH AND CHALLENGES

P - 256
Venture Capitalist finance innovations or ideas, which have the potential for high growth with inherent
uncertainties.
VCs help in development of entrepreneurship, innovation and economic growth.
VCs provide finance, purchase equities, assist in the development of new products and have a long-term
orientation
Banking Briefs
37
Poor growth of VCs in India may be attributed to negative mindset, delay in issue of licence, problem in
scalability, regulatory issues and difficulty to exit
VALUE AT RISK (VaR)

P - 173
The assets of the bank are subjected to expected, unexpected and stress loss. Banks cover expected
loss through hedging while stress loss rarely occurs
VaR is the measure (amount) of unexpected loss by the bank.
Normally VaR is measured for a specific time duration at a given level of confidence
VaR ( 99%, 1 Week)= Rs.1,00,000 implies that the unexpected loss will be a maximum of Rs.1 lac in a
duration of 1 week; and the chance of it exceeding Rs.1 lac can happen only in 1% of the occasion (10099)
Some methods of measurement: Correlation Aggregation, historical simulation and Monte Carlo Simulation
VALUE ADDED TAX
P - 208
VAT avoids the system on tax on price, which contains an element of previously paid tax.
VAT is going to replace Sales tax, Work contract tax, Lease tax, Entry Tax, Purchase tax, Turnover tax,
and Luxury tax. Service tax should also be VATable. The states are also not empowered to levy service
tax.
The proposed system can now be called a Multi-Point Sales tax with input tax credit.
VAT has an in-built system of tax compliance.
A Unified VAT will centralise tax rates, thus robbing the state of tax flexibility.
WTO AND LIBERALISATION OF FINANCIAL SERVICES
P - 280
Word Trade Organisation came into being on Jan 1, 1995

Has 148 member countries
Provides forum for establishing an open and liberal global environment free from trade
restrictions
Objectives: Expand production and trade, optimize use of global resources, raise standard of
living and income and ensure full employment
Steps taken by India under WTO: Reduction in number of items under QR; amendment to
Patents Act, Copyrights Act, Trade Marks law; and relaxation in investment norms
WIRELESS APPLICATION PROTOCOL (WAP)

P - 73
WAP stands for Wireless Application Protocol
It is a data transmission standard (otherwise called protocol)
It helps in accessing Internet through mobile phones.
With advanced technology such as GPRS, G3 graphic transmission and speed are improved.
360DEGREE TECHNIQUE
Banking Briefs
38
P - 319
seeks to measure the performance of employees on the job from multiple stakeholders.
focuses more on intrinsic qualities and strengths than on achievements
promotes team work and voluntary self change.
creates an atmosphere of openness and improves inter-personal relations.
It is a perforated copy. You can use this as your Desktop
SBI- PERFORMANCE AS ON 31.03.2005

(Rs in Crore)
BUSINESS
31.03.2005
31.03.2004
31.03.2003
Global deposits
367047
318619
296123
Of which domestic
352798
309798
288866
Global Advances
Of which domestic
202374
178474
157934
142026
137758
123850
Global investments
Of which domestic
197097
192456
185676
181684
172347
167885
4304
3681
3105
Total Income
39548
38073
36827
Total Exp excl

Provisions & contingencies
28557
28519
33722
526
526
526
Reserves & Surplus
23545
19705
16677
Capital Adequacy(%)
12.45
13.53
13.50
32428
30460
31087
Non interest income
7120
7613
5740
Operating Expenses
10074
9245
7942
6685
5872
4670
18.10
18.19
18.05
125
110
85
Cost of deposits(%)
4.70
5.48
6.43
Yield on advances (%) domestic
7.68
8.17
8.97
Net Interest Margin
3,39
3.04
2.95
81.79
69.94
59
36.61
38.69
38
2.65
3.48
4.50
459882
407815
375876
Return on average assets (%)
0.99
0.94
0.86
Profit per employee (Rs in lacs)
2.07
1.77
1.48
243
210
191
RBI shareholding (%)
59.73
59.73
59.73
Market share of deposits (excl RIB/IMD/Interbank) (%)
16.78
17.33
17.60
Market share- Advances (%)
16.45
16.87
17.54
Net Profit
CAPITAL STRUCTURE
Capital
PROFITABILITY
Interest income

ROE(%)
Dividend(%)
EPS (for Rs.10 share) in Rs.

OTHER INFORMATION
Priority Sec Advances as % of total advances
Net NPAs as % of total advances(%)
Balance sheet- total assets
Business per employee(Rs in lacs)
Banking Briefs
39
Branches (including foreign offices)
9156
9093
9033
No of ATMs installed
5217
3814
1305
No of Branches having Internet Banking
2225
1110
531
205
207
209
31.03.2005
31.03.2004
31.03.2003
6907
6447
5688
Officers
29.32
28.71
27.5
Clerical
45.65
46.17
47.1
Sub Staff
25.03
25.12
25.4
1093
40
260
94
4819
4215
210
156.85
128.70
- Deposits
24.51
26.05
27.40
- Advances
24.05
24.22
24.40
No of employees (in 000s)

New Additional Information
Staff Cost (in Crore)
Break up of Staff (%)
Core Banking Branches

Trade Finance Software (Branches)
SBI Connect (Branches)
- Group
Net Profit of Foreign Offices (in crores)
SBI Groups Market Share (%)
Banking Briefs
40
PERSPECTIVES
TRANSFORMATION OF INDIAN BANKS

Financial integration of banking, insurance and capital market and globalisation is
transforming Indian banks
Constraints in transformation: Limited computerization, need for higher investment,
cost not justified by volume, longer time frame for setting up Technology infrastructure,
non-availability of expertise, size of banks
Emerging Trends: E-banking, newer delivery channels, newer regulations, new
financial institutions, universal banking, declining customer loyalty
(c) Cost vis-a-vis Volumes Generated : The
IT initiative necessarily assumes accelerated
business volumes in future. Such a situation
makes it difficult to justify additional expenditure
on IT initiative.
Introduction
During the nineties and thereafter, Indian
banks have been subjected to financial sector
reforms on line with many developed and
developing countries. As a corollary, they have
been attuned to international practices and
standards. These include international
accounting standrads, RTGS (Real Time Gross
Settlement), Basel Accords, risk management,
e-payments, internet and mobile banking, etc.
As a response to the demanding situation, they
have adoped a variety of measures like
transformation in structure, systems, people,
processes and technology. The technology has
been the main faciliator in this process of
transformation. This is because of financial
integration of banking, insurance and capital
market on the one hand and globalization of
financial sector on the other. The process of
transformation in India has been at times slow
due to the following constraints.
(d) Time-Frame Needed for Setting-up

Technology Infrastructure : A systematic
implementation of new IT solution requires a
time-frame as it can cause disruption in ongoing
business as existing resources are deployed in
the implementation of new IT solution. Anything
between six months to two years are required
to fully computerize all the operations in a bank.
Many banks find the time-frame non-practicable.
(e) Non-Availability of Expertise Required :
Banks do need a large contingent of staff for
managing and maintaining these techological
innovations. The staff is required to be trained in
banking if the recruitment of non-banking
technical personnel is made. Alternatively, the
banking staff is needed to be exposed to IT
issues. But the trained staff has a tendency to
seek other job opportunities. In the process, the
banks are rarely blessed with expert staff to run
the IT departments.
Constraints of Indian Banks

(a) Limited Computerization of Branches :
But for the foreign banks and new generation
banks, the old private, public sector and
cooperative banks are in the midst of a situation
where the operations are computerized in a
limited way.
(f) Versions and Changes therein : The legacy

system in banks were generally obtained from
small time vendors or in some cases from
various vendors. In some cases, in the absence
of appropriate annual maintenance contracts, the
new versions are not made available on costfree basis to the banks.In case of smaller
vendors, at times they become technically
obsolete over years depriving the banks of postsales service. Compulsions of this kind require
the banks to examine other alternatives for
technology replacement or upgradation.
(b) Higher Investments by Way of Capital :

The acquisition of new software is required to
be supported by the purchase of appropriate
hardware. The cost benefit from new information
technology (IT) cannot always be fully computed,
resulting in seeing the IT upgradation as a high
investment area.
Banking Briefs
42
Outsourcing of business processes (OBP) is

one such affordable plausible option of banks.
or created out of traditional players, there will be

more stringent qualifications imposed on entry
of new players to the marketplace. This will be
true in retail banking, wholesale banking,
insurance and asset management. Moreover,
because of technology, a player in financial
sector is able to carry out a wide range of
banking, insurance and other financial services
simultaneously.
(g) Embracing the NET : The existing dynamic

nature of business warrants embracing the
Internet.
(h) Size of the Banks : Very size in terms of
branches, their spread across the country,
physical size of branches particularly in metros,
large number of employees (even after VRS)
and large categories of staff, constitute a big
constraint in transforming a bank particularly in
Indian public sector. Notwithstanding these
constraints, there is certainly a paradigm shift in
structure, business, people, culture and the like,
both nationally and globally.
Banks will be expected to respond to the

increased prosperity of their customers on one
hand, and also innovate new products and
services to encourage new enterpreneurs and
finance new schemes and projects brought in
by educated unemployed youths on the other.
Today, customers have less loyalty to their bank
than they ever had, and many have relationships
with several institutions. But they will continue
to shop with one or two where they will be able
to strike a better deal.
EMERGING TRENDS
Banks and customers are now receptive to new
ways and types of approaches to delivering
services and payment facilities remotely.
Electronic funds transfer at point of sales with
e-cards is catching up fast. Telebanking is
gaining popularity and soon mobile banking will
become the order of the day. This does not mean
the branch is dead. Indeed, in the future, the fate
of branch banking will be a most hotly debated
issue.
In short, banks in future will have competition

from both financial sector and non-banking
financial institutions due to distintermediation.
They will have to combat this by : (a) innovation
of new products and services and deliver them
with efficiency, speed and convenience; (b)
explore effective use of technology to integrate
it with business processes; and (c) extend their
activities in new areas of financial (say, insurance
via bancassurance route) and non-financial
sector (say, collaboration or acquisition of estate
agency). For this, there is need for banks to
undertake transformation on many fronts and it
is very important to realize that technology
facilitates such process of transformation.
People do not interact with their banks for fun.

They do so to obtain access to money and
payment facilities. But what customers have
started enjoying is being able to get their banking
chores done quickly and easily. However,
branches will remain popular with organizations
having corporate accounts, mainly because a
businessman likes to discuss things in person
with a banker in a branch.
To manage transformation from legacy

structure, business structure, systems,
procedures, processes, culture and ethos, one
of the important management tools, which
becomes handy is Business Process
Reengineering.
There is need for a good research to examine

whether older people are less adaptive to new
technology than younger ones. If so, in future by
natural process, the need for branches will start
to erode. The adoption of philosophies and
policies based on both at domestic as well as
international level. will have heavy impact on the
banking business, and will result in creation of
newer regulations as witnessed during the last
decade in the Indian banking industry.
Integration Process in Financial Services

World-over, financial services are expected to
be available at single window in efficient manner
coupled with a smile. This gives rise to the
following requirements for a bank:
While business opportunities would encourage

creation of new financial institutions either, afresh
Banking Briefs
43
Availability of real time transaction

processing through multiple channels.
Security and safety of funds and

confidentiality of information.
Efficiency through integration of systems

across the locations.
Minimization of transactional costs.
system is going to work, for example, single user

or multi-user environment, geographical spread,
whether system needs centralized processing
or distributed processing.
Before developing an information system
one should look into the following aspects:
A broader set of financial products such as

Internet access for bills payment, fund
transfers, accounts view and information
provision of statements, request for chequebook, wireless mobile banking, and facilities
to enable e-commerce.
To meet such expectations of customers on one

hand and policy guidelines from the central bank
and the owner on the other hand, the internal
changes needed are as follows:
Adoption of norms and standards prescribed

by international organizations, e.g. Basel
Committee.
Analysis of existing system.
Content of information needed.
Flow of information within the organization.
Arresting the growth in non-performing assets

Improvement of productivity and profitability
Reduction of resistance from workmen

unions to technology adoption
Recognition of limitations of branch

computerization
Realization of need to have core banking

centralized solution
Need for outsourcing of certain services
Structure and characteristics of information

needed (frequency of use, management
level, volumes, type, etc).
Information processing needs.
Identification of divisions at various
management levels and their classification
to match available information and gaps.
Information technology would be the

navigator of transformation process in any
bank. The bank management may not look
upon IT upgradation in isolation. With unique
customer id across the bank branches,
getting customer information is possible to
differentiate between profitable and nonprofitable customers. Similar would be the
case with regard to products and services.
Plans need to be put in place to utilize the
information so available.
The back office tasks such as end of day

(EOD) tasks would be run in a centralized
mode and operating staff at branches would
be relieved of this pressure. This is where
basic business process needs to be looked
into. The options could be to extend business
hours or to redeploy the staff for marketing.
Central depository of data would be available

for costing and pricing of products and
services . Individual banks with CBS can
innovate new products/services to match the
changing expectations of customers.
A systematic study of different demographic

and economic characteristics of targeted
customers should be useful. With customer
Redesigning of organizational structure

Redefining marketing strategy
For successfully managing such change, the
bank management would require access to
both internal as well as external databases.
Considering the status of IT in Indian banks
barring exceptions, massive number of
branches and its spread across length and
breadth of the country and legacy systems
(including processes and procedures)
prevailing in such banks, a framework for MIS
needs to be developed.
FOR
While developing an IT system one has to

consider the environment under which such
Banking Briefs
Origin of information and intended user, and

the very use of information at all the hierarchic
levels of the organization.
Key Areas for Consideration
Downsizing due to voluntary retirement

scheme
PREPARING
ORGANISATION
INFORMATION TECHNOLOGY
44
information system on one hand and online

access to his transactions on the other, the
management would be able to device an
early warning signal system for all types of
borrower accounts. Such information should
facilitate effective control to bring down nonperforming assets.
To enhance the non-fund based income,

institutional access to national and
international gateways and protocols in Core
Banking Solution will be very cost effective.
They can also provide suitable interfaces with
third party solutions. Understanding and
appreciating their utility for implementation
should be part of technology upgradation
effort.
For providing better customer service, the

bank shall have to weigh all the delivery
choices from cost-benefit prespective. Not
that all customers would choose the same
channel all the time. Changing customer
expectations need to be given due
consideration while getting into ATMs or POs
or debit/credit cards.
Implementing agency for CBS should have

international exposure, expertise and
experience in system integration with proven
implementation methodology and excellent
track record of project management. The
rollout of first few branches and the
transformation process from legacy to CBS
is very crucial from long term point of view.
Careful planning and teamwork with CBS
provider is very important. During the
implementation stage training to different
user and technology groups within a bank is
of crucial importance and can become a key
factor in determining the success of
transformation of technology, systems,
process and culture of the bank.
In the Indian context, the typical age profile

of clerical and managerial staff in public
sector banks is on the wrong side of 40 years
and that of top and senior management is
on the wrong side of 50 years. Similar is the
age profile of the customers. If these banks
have to attract new and young customers,
infusion of younger staff is necessary. If one
takes the comparative statistics pertaining
to this aspect in a new private bank, the
contrast stands out glaringly. The situation
may not be different in most developing
countries in Asia. The new players have
brought in systems, procedures, processes,
structure and technology that helped them
to position competitively in the new economy
PSBs have to re-engineer their methods and
processes to remain competitive.
When the manual systems are being

replaced by the computerized ones, a new
set of skills and knowledge would be
expected form existing employees including
clerks, officers, executives, and auditors
alike. Banks will have to recognize the risks
and provide security, audit and controls.
Some of such risk would be in payment
system. Frauds, robbery and malfunctions
constitute the main risks with credit cards
and ATM systems.
Electronic banking can affect individual privacy

in a number of ways and in different areas. A
bank owes to its customers a duty to exercise
proper skill and care in carrying out any business
in which it agrees to effect transactions on behalf
of the customer in a safe and secure way.
Therefore, there is need for continuous
improvement in security standards. Further,
development and acceptance of standards by
banks and financial institutions will clearly have
a positive inpact on the banks and the customers
alike. It is high time that the Indian banks move
in the direction of international standards in
banking set by Bank for International Settlement
on one hand and in terms of IT security, audit
and control on the other hand if they are staking
their business claims on the world of internet
and electronic commerce.
In the past, by and large, the things used to

be pretty well under control. However, the
banking was monopoly of an elite group
popularly known as class banking. The mass
or retail banking really brought in all
challenges and needed changes. The banks,
bankers and the customers have undergone
a change so also their expectation and
aspiration vis-a-vis others. The changes of
Banking Briefs
45
this kind should be recognized as important

ingredients in the implementation of core
banking solution.
BANKING INDUSTRY : VISION 2010
The total assets of all scheduled commercial banks by end March 2010 is
estimated at Rs 40,90,000 crore
Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the
country
Some of the Indian banks may also emerge global players.
S.C. Gupta committee appointed by IBA has

observed the following in its report on Banking
Industry : Vision 2010.
On the asset side, the pace of growth in both

advances and investments is forecast to
weaken.
Cost Control
Consolidation
In the future, as domestic and international

competition hots up, banks may have to shift their
focus to cost which will be determined by
revenue minus profit. In others words, costcontrol in tandem with efficient use of resources
and increase in productivity will determine the
winners and laggards in the future.
On the growing influence of globalisation on the

Indian banking industry, the financial al sec o
would be opened up for greater international
competition under WTO. Opening up of the
financial sector from 2005, under WTO, would
see a number of global banks taking large stakes
and control over banking entities in the country.
Qualitative growth
Multi National Banks would bring with them

capital, technology, and management skills
which would increase the competitive spirit in
the system leading to greater efficiency voting
rights of shareholders are pointer to these
developments.
The growth of banking in the coming years is

likely to be more qualitative than quantitative,
according to the report. Based on the projections
made in the India Vision 2020 prepared by the
Planning Commission and the Draft 10th Plan,
the report forecasts that the pace of expansion
in the balance-sheets of banks is likely to
decelerate.
The pressure on banks to gear up to meet

stringent prudential capital adequacy norms
under Basel II and the various Free Trade
Agreements that India is entering into with other
countries, such as Singapore, will also impact
on globalisation of Indian banking.
The total assets of all scheduled commercial

banks by end March 2010 is estimated at Rs
40,90,000 crore. That will form about 65 per cent
of GDP at current market prices s compared to
67 per cent in 2002-03.
Some of the Indian banks may also emerge

global players. As globalisation opens up
opportunities for Indian corporate entities to
expand their business overseas, banks in India
wanting to increase their international presence
could naturally be expected to follow these
corporate entities and other trade flows out of
India.
Banks assets are expected to grow at an annual

composite rate of growth of 13.4 per cent during
the rest of the decade against 16.7 per cent
between 1994-95 and 2002-03.
On the liability side, there is likely to be large
additions to capital base and reserves. As the
reliance on borrowed funds increases, the pace
of deposit growth may slow down.
Banking Briefs
46
Alongside, the growing pressure on capital

structure of banks is expected to trigger a phase
of consolidation in the banking industry. In the
5
intermediation. For example, we could see utility

service providers offering, say, bill payment
services or supermarkets or retailers doing
basic lending operations. The conventional
definition of banking might undergo changes.
past mergers were initiated by regulators to

protect the interest of depositors of weak banks.
In recent years, there have been a number of
market-led mergers between private banks.
This process is expected to gain momentum in
the coming years. Mergers between public
sector banks or public sector banks and private
banks could be the next logical development.
Consolidation could also take place through
strategic alliances or partnerships covering
specific areas of business such as credit cards,
insurance etc.
Social banking
All these developments need not mean banks
will give the goby to social banking. Rather than
being seen as directed lending such lending
would be business driven. Rural market
comprises 74 per cent of the population, 41 per
. cent of the middle-class, and 58 per cent of
disposable income. Going Rural would be the
new mantra of banks.
Risk and reward

The ability to gauge the risks and take appropriate
position will be the key to successful banking in
the emerging scenario. Risk-takers will survive,
effective risk mangers will prosper and riskaverse are likely to perish.
Consumer growth is taking place at a fast pace

in 17,000-odd villages with a population of more
than 5,000. Of these, more than 50 per cent are
concentrated in just seven states. Small-scale
industries would remain important for banks.
Risk management has to trickle down from the

corporate office to branches.
However, instead of the narrow definition of SSI

based on the investment in fixed assets, the
focus may shift to small and medium enterprises
(SMEs) as a group. Changes could be expected
in the delivery channel for small borrowers,
agriculturists and unorganised sectors also.
As audit and supervision shifts to a risk-based

approach rather than transaction oriented, the
risk awareness levels of line functionaries also
will have to increase.
The report also talks of the need for banks to
deal with issues relating to reputational risk to
maintain a high degree of public confidence for
raising capital and other resources.
Regulation
The expected integration of various
intermediaries in the financial system would
require a strong regulatory framework. It would
also require a number of legislative changes to
enable the banking system to remain
contemporary and competitive. Underscoring
that there would be an increased need for selfregulation, development of best practices could
evolve better through self-regulation rather than
based on regulatory prescriptions.
Technology
Technological developments would render flow
of information and data faster leading to faster
appraisal and decision-making. This would
enable banks to make credit management more
effective, besides leading to an appreciable
reduction in transaction cost.
To reduce investment costs in technology, banks
are likely to resort more and more to sharing
facilities such as ATM networks. Banks and
financial institutions will join together to share
facilities in the areas of payment and settlement,
back-office processing, date warehousing, and
so on.
For instance, to enlist the confidence of the global

investors and international market players, the
banks will have to adopt the best global practices
of financial accounting and reporting. It is
expected that banks would migrate to global
accounting standards smoothly, although it
would mean greater disclosure and tighter
norms.
The advent of new technologies could see the

emergence of new players doing financial
Banking Briefs
47
CONSOLIDATION OF PUBLIC SECTOR BANKS
There are 93 banks in India with PSBs 27 in number.
Though India is the 12th largest country in terms of GDP, we do not have a bank of
international size. For example, SBI ranks 26 in size among Asian banks.
Advantages of consolidation: Size, economies of scale, prospects of technological

upgradation, elimination of redundancy, better bargaining power, cost reduction, financial strength and the strength to enter into new markets.
Challenges: Need for legislative amendment, willingness of small banks to lose control, cultural factors during integration
Background
Key Drivers of Mergers
As at the end of Mar 03, there were 93 Banks in

India- 27 PSBs, 30 Pvt Sector Banks and 36
Foreign Banks. The total deposits and advances
of All banks in India as on 19th March 2004 were
respectively Rs. 15.04 Lac Crore and Rs. 8.40
lac Crores. The number of branches of All
scheduled commercial banks were more than
50,000. Besides this, there are 198 RRBs
having more than 14,000 branches. There were
1941 UCBs, 29 State Co-op banks and 343
District Co-op banks in India as at the end of
Mar 03. Thus the competitive landscape of the
banking industry is wide and distributed. The
case for merger in the Indian Banking sector has,
therefore, long existed.
To gain size and profit: Larger banks are

able to provide a fuller range of products
and services and have a greater ability to
access the local and international capital
markets in order to meet increasing capital
adequacy requirements, stemming from
natural growth and the demands of Basel
II. They are also able to compete
internationally and with international players
in the domestic market in India. With the
gradual fall in income from investments
due to hardening of yields, the Banks would
find the going tough unless they are able to
profitably deploy their funds elsewhere.
Mergers would automatically increase the
size and bottom line.
Favourable climate: The present

government is apparently in favour of
consolidation. Though the government may
not force mergers, it may consider creating
a favourable climate for market driven
mergers.
Advantage of economies of scale:

Increased efficiency would result from
economies of scale in technological
expenditure and reduction in intermediation
costs. The shared ATM network
arrangement among many banks is a case
of virtual consolidation to save on
technological cost while providing more
channels for customers. Economies of
scale and the ability to absorb the latest
technology would enable the consolidated
There are 27 banks in public sector, which

accounts for about 75% of bank deposits. These
are a homogeneous lot, offering the same
products and services to the same customers.
Most of the banks have their operations
concentrated in a particular state or region.
Despite the size of the economy, India has no
big banks with assets of over
Rs. 1, 00,000
Cr other than SBI and ICICI Bank though India
ranks 12th in the world in terms of GDP. Citibank,
the number one bank in U.S has 12 times the
asset base of SBI. ABN Amro bank, the sixth
largest in U.S is more than 1 times the size
of SBI. SBI with the asset base of more than US
$ 80 billion Rs. 4,10,000 Cr, in terms of asset
size, is ranked 26th among the Asian Banks and
over 90 in the Global ranking.
Banking Briefs
48
scale banks have announced their intent to

acquire banks. But any progress in consolidation
would hinge on the governments ability to push
through enabling legislation. The merger of
nationalized banks would require an amendment
of the Banking Regulation Act and the Bank
Companies (Acquisition and Transfer of
Undertaking) Act. As far as SBI group is
concerned the government would have to amend
the SBI Act and State Bank of India Associate
Banks Act. Then there are questions of control.
The smaller bank may not like to lose its identity.
The small banks also often excel in customer
service at the counter in niche areas. A large
consolidated entity may lack this extra edge in
giving value to the customers. One could
observe in most surveys that the largest banks
are not necessarily the best banks. Another
ticklish issue is the challenge in rationalization
of staff and offices after merger, which may be
met with resistance. Cultural integration of the
merged entity, which is one of the major issues
of poor post-merger experience, is another
foremost concern.
entity to offer world-class services to its

customers.
Technological penetration: Today, one of the

biggest expenses being incurred by public
sector banks is in the area of technology.
For example, SBI is investing more than Rs.
500 Crore in the latest platform. With rapid
technological obsolescence and the need
to provide superior technology to meet
customer demands, banks with lesser
resources may not have the funds to
upgrade technology. Consolidation in banks
would increase the penetration of banking
technology.
Better bargaining power & financial

strength: Size enables the bank to
command more respect in the international
markets. It provides better bargaining power
and increases the level of comfort for the
depositors. Size enables the bank to cut
its intermediation cost due to economies
of scale and consequently reduce the
lending cost.
Cost savings through rationalization: Size

can help to rationalize staff and offices.
Wide range of services: It can confer the

ability to provide a wider range of products
and services. Banks will be better placed
to become a one-stop financial services
shop for customers needs. Thus the
breadth of services will increase with
consolidation. The merger of ICICI and ICICI
Bank, IDBI and IDBI Bank are cases in point.
To gain entry into new markets/business:

Due to historical reasons, some banks are
concentrated in particular geographical
area, say, south-based, north based etc.
To gain entry into new markets, it may be
more sensible to acquire a bank which has
presence there instead of taking the
evolutionary process.
Way forward
Presently we witness consolidations in varying
formats such as virtual consolidation through
ATM sharing, opening of JVs abroad (SBI and
Canara Bank), floating subsidiaries for asset
recovery/information sharing etc jointly ( such
as ARCIL, CIBIL) and so on. In other words, the
current tendency seems to be consolidation in
the back office and competition in the front office.
The guiding theme is collaborate where it is
advantageous and compete where it is
necessary. S.C.Gupta Committee report on
Banking Industry: Vision 2010 projects that
there would be more consolidations in coming
years due to various advantages referred in this
article. Banks and employees should gear
themselves to adapt to the Banking industry
going for a shake out driven essentially by
business considerations.
Challenges
Sensing the favourable disposition of the
present government, several large and medium
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EMERGING TRENDS IN BANKING AND FINANCE :

ROLE OF NEW GENERATION MANAGERS
The pace of changes in the world today calls for managers who have not just probity
and prudence but the capacity to handle competing priorities
5 significant trends: Balance sheet to Off-balance sheet intermediation, Capital
adequacy to capital efficiency, physical to virtual distribution, fragmentation to
consolidation and data to knowledge through information
New Generation Managers should have the capacity to manage transition
environment. While some will, perhaps, choose
to migrate rapidly to off-balance sheet investment
or merchant-banking activities, others may
stress on volume origination which they can
securitize and then manage for a fee, and still
others may continue to position themselves as
traditional banking retail players focusing on
deposit intermediation. Nevertheless, the trend
towards offbalance sheet intermediation and the
complexities that it entails will demand that the
managers of the future be equipped with financial
skills in a significantly greater measure.
Building up an organizational architecture that

generates intellectual capital has been a huge
challenge for banks and financial institutions. It
is even more so today, when we are undergoing
a period of the most rapid acceleration of what
is alluded to as creative destruction in the history
of the financial sector. In the process of creative
destruction, new constructs emerge. It is here
that new generation managers may have a role
more demanding than that of the managers of
yesteryears. A role which calls for more than just
probity and prudence that characterized the
banker of yesteryears and increasingly focuses
on managing competing imperatives.
The Trend from Capital Adequacy to Capital

Efficiency
THE EMERGING TRENDS
Thirdly, there is the transition from capital

adequacy to capital efficiency.
First, there is the transition from banking to

financial services. Banks are uniquely poised to
broaden their product lines into the complete
offerings that would go under the rubric of
financial services. This would imply a new
founded emphasis on marketing; be it of
investment, insurance and other products that
consumers want. Banks have advantages in
their image of trustworthiness and their extensive
distribution systems. How they convert this into
a marketing advantage will determine how they
win market shares.
The Basel II prescriptions have already put us

on track for transition from the traditional
regulatory and market measures of capital
adequacy to an evaluation of whether a bank has
found the most efficient use of its capital to
support its new business mix. In effect, future
plans may, therefore, include the fluid use of
capital, an approach that has been called the
just -in time balance sheet management, in
which capital flows quickly to its most efficient
use. In this transition, how capital is used and
how much capital is needed will become a
significant factor in evolving return-on equity
strategy for years ahead and strategic plans may
be required to execute this kind of approach.
The Trend from Balance Sheet to OffBalance Sheet Intermediation

Then there is the trend from balance sheet to
off-balance sheet intermediation. Banking is no
longer confined to acceptance of deposits for
the purposes of lending - today it refers to
intermediating and managing risk. As the scope
of intermediation expands to incorporate market
risks, bankers are taking a view on how they will
strategically position themselves in this new
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The Trend from Physical to Virtual

Distribution
Perhaps the most visible and overt change in
banking in the eyes of the public has been the
trend for banks to move away from branch
9
banking to electronic, anywhere-anytime

distribution of financial services. If this has
triggered the death of distance, the Real Time
Gross Settlements (RTGS) System is
threatening to consign time lags in settlement of
financial transactions to history. In reality, delivery
systems like ATMs, online banking and phone
banking are a continuum of options from which
the consumer selects. Consumers select the
delivery system that is right for them. In other
words, distribution differentiates a bank when it
sets up a delivery system that attracts certain
customers. Distribution is the new way to
segment consumer markets and the transition
of distribution systems is in fact emerging as an
essential part of bank repositioning strategy.
to have low cost operations. But technologydriven information transformation is at the centre
of the even more important management,
marketing, and risk transitions that banks must
make. Information is only valuable if it can be
put to work and used for decision tools such as
programmed trading, target marketing, predictive
credit modeling and scoring, amongst others.
Most new financial services are in fact based on
technology. The transition from an old world of
data processing and information management
to a new world in which knowledge is being put
to work on competitive advantage will be a major
strategic preoccupation in the years ahead.
The Trend from

Consolidation
Managing these transitions well is the secret to

strategic execution. Organizations ultimately
stand or fall on the quality of the work and
decisions made by their people. So what sets
most successful organizations apart is how they
manage human resources. Increasingly, banks
all over are, therefore, adopting the sociotechnical approach to job design that recognizes
the productivity gains of optimum technological
arrangements as well as the importance of
workplace sociology. The new generation
managers on their part will have to learn how to
create and thrive in an environment that
embraces change not as a threat but as an
opportunity.
Fragmentation
ROLE OF NEW GENERATION MANAGERS
to
The forces of change today are favouring larger

entities which bring mergers and acquisitions
squarely into the strategic decision-making of
the banking sector. We are slowly moving from
a regime of a large number of small banks to a
small number of large banks. Every bank will,
of course, depending on its strategy, have to
migrate to its best position in this new structure.
Picking a market position and transitioning to it
is one of the most significant strategic decisions
a bank must make. All types of entities can be
highly profitable if they transition to the right
market position and right cost structure to
execute the strategy.
While leadership skills, the ability to multi-task

and manage competing impreatives will be the
necessary ingredients of the new generation
managers, the old-fashioned qualities of a desire
to learn, a strong sense of professional ethics,
an enquiring mind, a strategic view, the qualities
of humility and empathy, a willingness to
embrace practical experience, and an
eagerness to adapt to new experiences would
be critical.
The Trend from Data to Information to

Knowledge
Perhaps the most talked about, yet least
understood, transition ahead is in the area of
information technology and information
application. Distribution and processing
technology transitions are keys to the shift to
virtual banking which is prompted by the desire
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10
IMPACT OF TECHNOLOGY ON
BANKING AND FINANCE
Technology in banks is no longer a matter of choice

Globalisation, online revolution, internet banking and e-commerce, computer based
technologies are some of the factors that contribute towards this trend.
Information flow, ease of supervision, creation of new delivery channels, better customer service are some of the advantages
Thus there is a strong need to align technology with business strategy to successfully
compete in future.
Information Technology is no longer a matter

of choice. The question no longer is whether you
would be computerized or not. Those who do
not use IT will be out of business. Without
computerization one will not be able to do
business 10-15 years down the road. The need
of the hour is to use the modern means of
communication. What is more important from
the banking point of view is that the use of
Information Technology could produce
tremendous results, speed up processes and
eventually reduce costs. Banking and Financial
Services industry is changing rapidly and the
winners in the financial market place will be
those that adopt new technology. Technology will
be used not only as a channel to reach new and
existing customers, but also to provide a
structured framework for an efficient and
profitable business. The following few
paragraphs describe in brief the impact of IT in
the Banking and financial sector :
enterprise not only the way transactions are

made and processed but also the way
messages are sent and received, data is
managed and protected, systems are monitored
and maintained and information is gathered,
analysed and put to use.
Internet Banking and e-commerce: These are
the days of Internet banking and e-commerce
activities, wherein IT has greatly influenced the
entire banking and financial sector in a very big
way. As use of the Internet continues to expand,
more and more banks will be using the Web to
offer products and services or otherwise
enhance communications with consumers. The
Internet offers the potential for safe, convenient
new ways to shop for financial services and
conduct banking business, any day, any time.
On the other hand, using the same platform, any
form of business transaction in which the parties
interact electronically rather than by physical
exchanges or direct physical contact is the much
talked about e-commerce. The impact of
electronic commerce will be pervasive on banks
and financial sector and those that fully exploit
its potential, will benefit a lot; the electronic
commerce offers the possibility of breakpoint
changes - changes that so radically alter
customer expectations that they re-define the
market or create entirely new markets. The
ones, who try to ignore the new technologies,
will then be impacted by these changes in
markets and customer expectations. Equally,
individual members of society will be presented
with entirely new ways of purchasing goods,
accessing information and services, and
interacting with banks and financial
Globalization, the impact of the Internet: The

opening of the economy and competitionhave
forced banks and financial institutions to try and
cut operational costs and to manage more
information to re-engineer their business. This
re-engineering process is creating new
business opportunities for technology suppliers.
Technology offers the path to a sustainable
competitive advantage. No other industry is as
dependent on technology, which is the
foundation of every financial services product,
from analysis and planning through to
distribution and control.
The online revolution: On-line is the
buzzword today touching all facets of an
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organisations. Choice will be greatly extended,

and restrictions of geography and time
eliminated. Globally, many banks have offered
on-line querying of accounts for quite some time
and each one is vying with each other to offer
their services over the net. This is true of our
country too.
diversity of financial product choices facing

consumers and businesses is truly astonishing.
The complexity has provided consumers with
more choice but presented new challenges as
well. In modernizing our banking laws and
making them more consistent with marketplace
realities, financial services industry can expand
and innovate with far fewer artificial constraints.
Computer Based Technologies: The impact

of technology on banking has been spectacular
in the industrially advanced countries. Against
the background of growing volume of
transactions and the need to meet customer
needs expeditiously, technology upgradation has
become indispensable. To strengthen internal
control, to improve accuracy of records and to
facilitate provision of new products and services,
banks will have to rely increasingly on computerbased technologies. Apart from improving the
functioning of banks at various levels, technology
has a key role to play in developing a payments
system network through which funds can be
transmitted quickly and efficiently. It is expected
that, in India too VSAT satellite based network
will, facilitate this as RBI and banks have already
done much groundwork in this regard.
Consolidation and reorganization needs:

The banks in India, which grew by leaps and
bounds by increasing their branch network, have
to think on consolidation and reorganization of
such network by enforcing on stricter reporting
system and head office controls over the
branches. Control over such a large network of
branches would require extensive use of
Information Technology. If we recall, to bring in
better internal controls and monitoring standards
for sensitive transactions, the Central Vigilance
Commission had directed that at least 70% of a
banks business should be computerized by
January 1, 2001.
Asset Liability Management & Risk
Management: If we also look into the recent
guidelines issued by the RBI, IT infrastructure
upgradation along with early adoption of Asset
Liability Management system and Risk
Management guidelines would facilitate Indian
banking to migrate to better operational
standards on par with global ones, and enhance
their MIS capabilities for optimization of
earnings.
Changing with environment: It is widely
accepted worldwide that the banks and financial
institutions have to reorient their policies, practices,
procedures, products and clientele in tune with the
changing global environment without losing focus
on their core competencies. It is also a well known
fact that, globally the bank mergers are taking place
among equally strong institutions to expand the
reach and coverage through retail banking, in
pursuit of investment and wholesale banking,
treasury services and such other activities which
may not necessarily fit into the accepted tenets of
banking business in the traditional sense. Such
synergies aimed at maximizing profits and
expansion of assets will be possible only if such
institutions have an open mind towards reforms
and especially in the IT sector.
Information flow: With the computing and

telecommunications capabilities, the pace of
financial innovation does not appear to be
slowing. Technological advance has expanded
the scope and utility of our financial products
and increased the ability to unbundle risks. It has
also promoted the faster and freer flow of
information throughout the financial system. We
are able to quickly move to real-time systems,
not only with transactions but also with
knowledge.
Supervision and regulation: The speed of
transactions and the growing complexities of
financial instruments have required a focus more
on risk-management procedures. This is justified
by the recent technological innovations and
proposals attempting to harness and to simulate
market forces in the financial system. This
impact on financial services therefore
emphasizes on supervision and regulation,
which forms the critical issue that frames the
supervisory agenda as we move into the twentyfirst century. In todays more complex world, the
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Impact of developments in Information and

Communications Technology (ICT). It is a
subject that is of increasing interest to bankers
and central bankers around the world. There is
increasing recognition of the enormous potential
for these developments to transform the financial
industry in a manner that will bring tremendous
gains to businesses and consumers. There is
also mounting evidence that ICT is not only
creating new alternative delivery channels, but
is bringing about compelling changes to the
financial landscape that may threaten the very
existence of the traditional financial institutions.
Whether or not such developments do in fact
take place, it is of paramount importance that
financial institutions and central banks are well
placed to manage the challenges and
opportunities brought about by developments in
Information and Communication Technology.
Essentially, the potential benefits from the new
technology need to be exploited without
undermining the security and stability of the
financial system.
on advanced technology platforms on the WEB.

Banks are thus enabled to put to use this
advanced CBT technology and implement this
mode of training at all levels across diverse
locations in more than one way especially
considering the large scale human resource
employed by this sector. Popularly also referred
as e-learning, it will be possible to reach large
number of personnel at a lower cost providing
quality learning online, anytime anywhere
learning year around.
It is therefore very clear that, the need to align
technology with business strategy is a pillar of
Banks and financial institutions of 21st-century
strategy. The impact of IT on the financial sector
is so forceful that, our survival on the evolving
needs of businesses and consumers amidst the
process of change poses real challenges to
adapt to. Given the rapidity of innovation and
technological change it is impossible to predict
with any certainty about tomorrow. Accordingly,
developing an optimal model either for financial
services providers or for financial regulators is
extremely difficult.
Computer Based Training (CBT) or e

learning: Last but not the least IT has influenced
training in a radical way. Today learning is better
achieved through CBTs, regardless of whether
a person is trained at his/her workplace or in a
designated learning centre. In fact technology
oriented learning is the novel methodology of
distance learning across the globe today. It is
becoming an important option because it
imbibes the advantage of the same very
technology that businesses are using to gain
competitive advantage in the current competitive
scenario. However design of the course and the
intellectual matter/ contents thereof are critical
for such platforms to be successful. As far
banking system is concerned, in the area of
education and training substantial amount of
money is spent each year and resources have
been already spent to computerize major
branches and plans are in force to implement
and use VSAT technology in a big way. In this
connection, Computer Based Training (CBTs),
popular world wide, supports on-line education
in all areas that would facilitate reading and selfdevelopment through interactive process built
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If proceeded cautiously facilitating and

participating in prudent innovation the financial
sector can reap the maximum benefits out of
technological revolution allowing markets to
signal the winners and losers among competing
technologies and market structures. And this is
more so with the ability of an organisation to
adapt to the change happening in the IT sector.
The financial sector should learn how to use IT,
and use it sooner than later for its own survival.
The banks and financial sector in future may have
to be a lot more oriented to customer needs. In
India, RBI is implementing technology
upgradation in a big way and going ahead with
computerization of Public Debt Office, Real Time
Gross Settlement System (RTGS), electronic
clearing, VSAT related payment system etc.,
One can appreciate the initiatives of central bank
providing technological infrastructure required,
particularly in terms of externalities for banks.
Now the time has come for Banks to take the
full advantage of the IT infrastructure and its
positive impact on our country.
13
ECONOMY ON A ROLL : PROSPECTS IN 2006

GDP growth of 8% (second fastest growing economy in the world after China), strong
macro economic fundamentals, good growth in agriculture, service and manufacturing
accompanied by benign inflation indicate that Indian economy is on a roll
Foreign Investment over US$ 12 bn, containment of fiscal deficit, surging forex reserves
are some of the other positives
In this background, Government has launched 4 year Bharat Nirman Plan for rural
infrastructure, National Rural Employment Guarantee Programme, railway freight
corridor project, investment in telecom, further liberalization of FDI.
One of the key concern is the labour reform
The Indian Economy, whose prospects looked
bleak with Tsunami devastation and inflationary
pressure due to soaring oil prices at the
beginning of the year, is now on a roll providing
the necessary launch-pad to make the country
an economic powerhouse with over eight per
cent growth in the New Year.
double digit growth in services sector which

accounted for a little over 50 per cent of the
country's over 700 billion dollar GDP and the
buoyant Industrial sector at a little over nine per
cent growth.
But sectors like Mining and Energy have not
performed well so far this fiscal, causing some
anxiety and worry and signaling the need to push
power sector reforms, particularly toning up the
functioning of state electricity boards and
hastening the liberalization of coal sector to allow
large private players and foreign direct
investment into the crucial area in the new year.
Both Manmohan Singh and Chidambaram have
described the problems in these areas as
intractable but promised to take some immediate
steps to deal with them, failing which they could
become a drag on higher growth.
Surging stock market with Sensex over 10,000

points, Inflation at less than five per cent, interest
rates benign, merchandise exports likely to touch
100 billion dollars and over 8.1 per cent growth
in the first half of this fiscal the economic
prospects have never been so good with strong
macro-economic fundamentals enabling the
country to move on to the higher growth path of
over 8 per cent in 2006.
Thanks to compulsions of coalition politics and
pulls from Left parties, some of the reform areas
like disinvestment, FDI in retail, insurance,
pension and banking are addressed by the
present Government, the overall liberalization
process has moved forward silently especially
in infrastructure development like roads,
airports, ports and railways.
Expectations of growth have lured foreign funds

to invest more than record 10 billion dollars,
taking the benchmark stock index up by nearly
50 per cent in 2005 and what is significant is
that there is higher than expected growth in the
trade, hotel, transport and communication
segments in the first half of the current fiscal.
Economic pundits and market analysts are gung

ho about the economic outlook in the new year
and have joined Prime Minister Manmohan Singh
and Finance Minister P. Chidambaram in revising
upwards the growth prospects from about 7-7.5
per cent to now over eight per cent in the current
fiscal.
The progress on fiscal consolidation this year

has been by and large satisfactory with
encouraging signs in overall tax collections in
the first half of current year coupled with
reasonable success in expenditure control,
according to the Midyear Economic Review. But
economic analysts felt that fiscal and revenue
deficits of both States and the Centre were still
Their optimism stems from improved

performance in agriculture coupled with near
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million lines are added every month.
none too comfortable, requiring drastic measures

to set the house in order.
These are some of the gigantic plans that are

expected to get new thrust in the new year and
these would push up the country's growth rate
to 9-10 per cent in the next 2-3 years.
Though the trade deficit widened due to surging

imports mainly that of capital goods, the overall
external and balance of payments situation was
quite comfortable with surging foreign exchange
reserves at over 140 billion dollars, merchandise
exports expected to touch 100 billion dollars and
services exports at about 50 billion dollars this
fiscal.
One of the key areas for pushing up growth is

agriculture. Prime Minister has promised to
make India a granary of the world by bringing
about second green revolution.
Government has already embarked upon
national horticulture mission besides focusing
on technological breakthroughs for scaling up
yields. The new year may see efforts to liberate
Indian agriculture from controls that shackle its
potential.
Significantly the major development is that the

growth process has been made all inclusive.
Instead of restricting the growth process to
benefit only the top of the pyramid, the reform is
being attempted to have trickle down effect to
provide wealth of opportunity at the bottom of
the pyramid as well.
Many states, as Manmohan Singh says, have

been nudged into amending agriculture produce
marketing control acts and removing constraints
to farm trade.
To unlock the true potential of the Indian

Economy, the Government has embarked upon
the four-year business plan called Bharat Nirman
to create necessary infrastructure at a cost of
Rs.1,74,000 crore, to achieve identified goals in
six selected areas of rural infrastructure irrigation, water supply, housing, roads,
telephony and electrification.
An integrated Food Law, transferable warehouse

receipts and advanced forward market in
commodities, along with amendments to the
Essential Commodities Act are some of the
steps towards having a single integrated market
for the farm sector in the near future.
Bharat Nirman, taken together with the initiative

to guarantee rural employment through the
implementation of the National Rural
Employment Act, to improve rural health through
National Rural Health Mission and for rural
education through Sarva Shiksha Abhiyan, is
certainly going to be a new deal to Rural India
provided they are properly implemented.
There was no doubt some forward movement in

2005 in further liberalizing FDI regime and it has
been unshackled in telecom, publishing, real
estate and in asset reconstruction firms. But
there is still a lot more needed to be done.
The New Year may see rationalizing of the
current FDI regime on which Group of Ministers
is working. Besides, a positive outcome could
be expected on opening up retail sector to FDI
in next 5-6 months.
It is not that ambitious programmes have been

embarked upon only for rural India, The
Government is to spend Rs.60,000 crore in
Urban Renewal Mission, an additional
Rs.1,70,000 crore in highways programme. That
apart, a massive spending is expected in the
National Rural Employment Guarantee
programme.
Labour reform is yet another area which has

remained thorny. Labour markets would have
to be made more flexible for which consensus
has to be arrived at. This was necessary as 10
million jobs have to be created every year to
absorb growing demand for employment. The
country can attract investment in labour
absorbing technologies only if the labour
markets are made more flexible. There could
be forward movement in this area as well in the
current year in view of the momentum in the
calibrated liberalisation process.
Government also propose to spend Rs.25,000

crore on the railway freight corridor project to
connect Mumbai, Delhi and Kolkata and also on
modernization of Delhi and Mumbai, Chennai
and Kolkata ports as well as other major ports
of the country. There is a lot of investment taking
place already in the telecom sector in which two
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15
RETAIL BANKING - OPPORTUNITIES AND

CHALLENGES
Retail Banking constituted 21.5% of banks total outstanding advances as at the end
of Mar 04.
Key Growth drivers of Retail Banking: Growth in Economy, more than 70% of population
below 35 years, technological growth and innovation, falling treasury income, attractive
interest rate and the willingness to borrow
Challenges: Customer retention, rising indebtedness, maintaining the uptime of
technology infrastructure, KYC and money laundering,
Across the globe, retail lending has been a spectacular innovation in the commercial banking
sector in recent years. The growth of retail lending, especially, in emerging economics, is attributable to the rapid advances in information technology, the evolving macoreconomic environment, financial market reform, and several micro-level demand and supply side factors.
nomics - South Korea (55%), Taiwan (52%),

Malaysia (33%) and Thailand (18%). As retail
banking in India is still growing from a modest
base, there is a likelihood that the growth numbers seem to get somewhat exaggerated. One,
thus, has to exercise caution in interpreting the
growth of retail banking in India.
Drivers of Retail Business in India
India too experienced a surge in retail banking.

There are various pointers towards this. Retail
loan is estimated to have accounted for nearly
one-fifth of all bank credit. Housing sector is experiencing a boom in its credit. The retail loan
market has decisively got transformed from a
sellers market to a buyers market.
In recent past, retail lending has turned out to be
a key profit driver for banks with retail portfolio
constituting 21.5 per cent of total outstanding advances as on March 2004. The overall impairment of the retail loan portfolio worked out much
less then the Gross NPA ratio for the entire loan
portfolio. Within the retail segment, the housing
loans had the least gross asset impairment. In
fact, retailing make ample business sense in the
banking sector.
While 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. After all,
retail loans constitute less than 7% of GDP in
India vis-a-vis about 35% for other Asian ecoBanking Briefs
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First, economic prosperity and the consequent increase in purchasing power has
given a fillip to a consumer boom. During the
10 years after 1992, Indias economy grew
at an average rate of 6.8 per cent and continues to grow even higher - not many countries in the world match this performance.
Second, changing consumer demographics

indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35
years of age (young population). The BRIC
report of the Goldman-Sachs, which predicted a bright future of Brazil, Russia, India
and China, mentioned Indian demographic
advantage as an important positive factor for
India.
Third, technological factors played a major

role. Technological innovations relating to increasing use of credit / debit cards, ATMs,
direct debits and internet and phone banking
have contributed to the growth of retail banking in India.
Fourth, the Treasury income of the banks,

Reichheld and Sasser in the Harvard

Business Review, 5 per cent increase in
customer retention can increase profitability
by 35 per cent in banking business, 50 per
cent in insurance and brokerage, and 125
per cent in the consumer credit and market.
Thus, banks need to emphasise retaining
customers and increasing market share.
which has strengthened the bottom lines of

banks for the past few years, has been on
the decline during the last two years. In such
a scenario, retail business provides a good
vehicle of profit maximisation. Considering
the fact that retails share in impaired assets
is far lower than the overall bank loans and
advances, retail loans have put comparatively less provisioning burden on banks apart
from diversifying their income streams.
Second, rising indebtedness could turn out

to be a cause for concern in the future. Indias
position, of course, is not comparable to that
of the developed world where household debt
as a proportion of disposable income is much
higher. Such a scenario creates high
uncertainty. Exprersing concerns about the
high growth witnessed in the consumer credit
segments the Reserve Bank has, as a
temporary measure, put in place risk
containment measures and increased the
risk weight from 100 per cent to 125 percent
in the case of consumer credit including
personal loans and credit cards (Mid-term
Review of Annual Policy, 2004-05).
Third, information technology poses both

opportunities and challenges. Even with ATM
machines and Internet Banking, many
consumers still prefer the personal touch of
their neighbourhood branch bank.
Technology has made it possible to deliver
services throughout the branch bank network,
providing instant updates to checking
accounts and rapid movement of money for
stock transfers. However, this dependency
on the network has brought IT departments
additional responsibilities and challenges in
managing, maintaining and optimizing the
performance of retail banking networks.
Illustratively, ensuring that all bank products
and services are available, at all times, and
across the entire organization is essential for
todays retails banks to generate revenues
and remain competitive. Besides, there are
network management challenges, whereby
keeping these complex, distributed networks
and applications operating properly in support
of business objectives becomes essential.
Specific challenges include ensuring that
account transaction applications run
efficiently between the branch officers and
data centres.
Fifth, decline in interest rates has also contributed to the growth of retail credit by generating the demand for such credit.
Opportunities
Retail banking has immense opportunities in a
growing economy like India. As the growth story
gets unfolded in India, retail banking is going to
emerge a major driver. A. T. Kearney, a global
management consulting firm, recently identified
India as the second most attractive retail
destination of 30 emergent markets.
The rise of the Indian middle class is an important
contributory factor in this regard. The percentage
of middle to high income Indian households is
expected to continue rising. The younger
population wields increasing purchasing power
and as far as acquiring personal debt is
concerned, they are perhaps more comfortable
than previous generations. Improving consumer
purchasing power, coupled with more liberal
attiudes toward personal debt, is contributing to
growth in Indias retail banking segment.
The combination of the above factors promises
substantial growth in the retail sector, which at
present is in the nascent stage. Due to bundling
of services and delivery channels, the areas of
potential conflicts of interest tend to increase in
universal banks and financial conglomerates.
Some of the key policy issues relevant to the
retail banking sector are responsible lending,
access to finance, long-term savings, financial
capability, consumer protection, regulation and
financial crime prevention. Let us look at some
of the challenges.
Challenges
First, retention of customers is going to be a

major challenge. According to a research by
Banking Briefs
58
17
efficiency. While outsourcing does have

various cost advantages, it has the potential
to transfer risk, management and
compliance to third parties who may not be
regulated. A recent BIS Report on
Outsourcing in financial Services
developed some high-level principles. A basic
requirement in this context is that a regulated
entity seeking to outsource activities should
have in place a comprehensive policy on
outsourcing including a comprehensive
outsourcing risk management programme to
address the outsources activities and the
relationship with the service provider.
Fourth KYC issues and money laundering

risks in retail banking are also important.
Retail lending is often regarded as a low risk
area for money laundering because of the
preception of the sums involved. However,
competition for clients may also lead to KYC
procedures being waived in the bid for new
business. Banks must also consider
seriously the type of identification documents
they will accept and other processes to be
completed.
WAY FORWARD
How do we see the future of retail
banking?
First, customer service should be the be-all

and end-all of retail banking.
Second, sharing of information about the

credit history of households is extremely
important as far as retail banking is
concerned. Perhaps due to the confidential
nature of customers, banks have a traditional
resistance to share credit information on the
client, not only with one another, but also
across sectors. Globally, Credit information
Bureaus have, therefore, been set up to
function as a repository of credit information
- both current and historical data on existing
and potential borrowers. The database
maintained by these institutions can be
accessed by the lending institutions.
There is a need of constaint innovation

in retail banking. In bracing for tomorrow, a
paradigm shift in bank financing through
innovative producs and mechanisms involving
constant upgradation and revalidation of the
banks internal systems and process is called
for. Banks now need to use retail as a growth
trigger. This requires product development and
differentiation, innovation and business process
reengineering, micro-planning, marketing,
prudent pricing, customisation, technological
upgradation, home/electronic/mobile banking,
cost reduction and cross-selling.
While retail banking offers phenomenal
opportunities for growth, the challenges are
equally daunting. How far the retail bnanking is
able to lead growth of the banking industry in
future would depend upon the capacity building
of the banks to meet the challenges and make
use of the opportunities profitably. However, the
kind of technology used and the efficiency of
operations would provide the much needed
competitive edge for success in retail banking
business. Further more, in all these, customers
interest is of paramount importance.
Third, outsourcing has become an important

issue in the recent past. With the increasing
market orientation of the financial system and
to cope with the competition as also to
benefit from the technological innovations
such as, banking, the banks are making
increasing use of outsourcing as a means
of both reducing costs and achieving better
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59
CONCLUSION
18
RURAL BANKING - CHANGING PARADIGMS

The present Government has given a thrust to double agricultural credit in 3 years
Rural economy is characterized by low banking connection, lower lending, low
credit-deposit ratio and lesser impact by RRBs
Recent trends: Banks look at rural financing as profitable proposition. Their efforts
include innovative micro credit services, strategic alliances with MFIs, setting up of
low technology networks
1% of rural households take up loans from
financial intermediaries to finance unforeseen
expenses. Approval for such loans takes around
6 to 8 months.
Towards agriculture and rural development

With a planned allocation of Rs.2,600 cr towards
accelerated irrigation benefit programme,
Rs.8,000 cr for rural infrastructure development
fund and a commitment to double the agriculture
credit within three years, the government has
portrayed that agriculture remains an area of
prime concern.
The rural banks have 30.2% of the total number

of deposits in the banking system but muster
only 14% of the total deposit liability.
Appalling Credit Scene
However, all good policy measures aside, one

notable feature of the Indian economy has been
the flawed and lopsided implementation at
operational levels. The former Prime Minister,
Rajiv Gandhi, had once derisively remarked that
the rural sector received only 15 paise for every
rupee spent for its welfare and development
the rest was gobbled up by politicians,
bureaucrats and other intermediaries.
Investments require availability of sound credit

delivery mechanisms. The liberalization policies
since 1991 have fostered greater economic
activity and facilitated the availability and
expansion of credit for housing and consumption
purposes.
Institutional credit to the rural sector has
witnessed a very discouraging trend over the
years. There has been a post-reform decline in
the performance of banks, in lending credits to
agriculture and allied activities. The total lending
by commercial banks for agriculture falls below
even their outstandings in personal loans
portfolio comprising loans for housing, consumer
durables, etc.
Rural Banking An Analysis

The last five decades of economic pursuits have
not been able to bring about a remarkable change
in the lifestyle of the rural population. While the
rural sector drives the more productive
manufacturing and the services sector, its own
plight remains a prolonged and protracted
misery.
Rural centres have a low Credit / Deposit (CD)

ratio of 42% compared with that of 69% at urban
centers. The financial reforms have ensured a
relatively better credit availability rate in the
urban areas compared to the rural ones. The
CD ratio of the rural sector is still somewhere
around the figure it was at the time of
nationalization of banks (37.2%). The rural and
the semi-urban branches have been fairly
Low Banking Connection

The low quantum of rural savings highlight the
general disregard to the concerns of the rural
economy. While 48% of the public sector banks
are in rural India, 58% of the rural households
still do not have any bank account and only 21%
avail credit from a formal source. A little over
Banking Briefs
60
19
also depict the continued reluctance and apathy

towards improvement. Political infringements at
local levels, bureaucratic delays and redtapism,
directed and subsidized lending, cumbersome
procedures and lack of statutory backing for
recoveries have been the major impediments to
the growth of banking in the rural sector.
successful in mobilizing the rural populace

towards greater savings. However, several
flaws and loopholes still exit in providing them
with sound credit facilities. The low CD ratio of
the rural sector indicates that banks are not
playing a significant role in credit expansion in
this segment. Despite the widespread banking
network in the rural sector, there is a continued
migration of rural savings to the urban sector,
resulting in a palpable rural-urban imbalance.
The trends over the years have clearly shown

that the banking system in India finds a more
profitable business in the urban regions
compared to that in the rural ones. The failure of
the formal delivery channels in bridging the credit
gap has only spawned the well organized
informal delivery channels that lend at rates
ranging from 24%-36% per annum, depending
on the risk profile of the borrowers. A 1997
Pricewaterhouse Coopers study revealed that
78% of the rural households depend on nonformal financial sources like local money lenders,
chit funds, etc., due to better delivery
mechanisms offered by them, ease in purchase
and greater flexibility in repayment.
It would not be an exaggeration to acknowledge

the serious exclusion of the agriculture sector
from the general economic reforms initiated in
1991. The experience over the last five decades
underlines the vulnerability of Indian economny
to the whims of agricultural productivity. For
instance, a negative growth of 4.4% in the
agriculture sector affected the Indian economy
to an extent that economic growth fell to a low
3.7% in 2002-03 as against 5.6% during the
previous year.
Role of RRBs
The Changing Trends in Rural Banking
To encourage the development of formal financial

institutions in rural India and to ensure greater
participation of the rural populace in income
generation, the Narasimhan committee
recommended creation of Regional Rural Banks
(RRBs). The RRBs were set up under an act of
parliament in 1976 with the primary objective of
providing thrust to the rural economy by
promoting agriculture, trade and commerce and
extension of loans to poor farmers and small
entrepreneurs. However, in contrast to all
expectations, the RRBs failed to prove the
purpose of their formation. Inadequate funds,
biased policy measures, lesser attention to
agricultural development, poor infrastructure,
lack of sincere work culture were some of the
reasons that did not give the RRBs the thrust
they needed.
The last few years have seen an increasing

tendency among the urban banks and financial
institutions to switch focus to the rural sector.
The increased liberalization for private players,
lesser proportion of non-performing assets
(compared to other segments) low cost of
operations and cheaper labor are some of the
benefits that rural India has to offer.
The liberalization policies of 1991 and the
subsequent revolution in computing technologies
have made the market more vibrant and
sensitive to customer requirements. Competition
has seen an exponential increase with more and
more players entering the fray. With rising
number of foreign investments, use of
sophisticated tools for business development
and a concerted focus towards better profitability
and growth, a large number of banks are entering
the rural segment today.
The above facts not only underline the failure of

the organized financial sector of the country
which has all through been unsuccessful in
meeting the credit gap in the rural segment, but
Banking Briefs
61
A number of factors have contributed to

this phenomenon. First of all, there is
20
tremendous scope for infrastructure

development in the rural sector. The last five
decades of independence have not seen any
noticeable improvement in the village economy.
The credit-deposit ratio is low. As such, a huge
market exists for the promising banks to lend
credit at low rates. Although the overhead costs
would be high (due to lesser businesses per
head) but the sheer volume of transaction
would be a win-win situation for all the players
involved. Through better policy initiatives and
sound strategic planning, inroads could safely
be made into the rural sphere.
to be more effective in their expansion policies,

the banks are investing in low cost technology
networks that would help them keep the
operational costs low. Banks are purchasing the
high cost loans of existing MFIs and replacing
them with newer loans at lower interest rates.
To ensure repayment, banks have opened an
escrow account allowing the small borrowers the
flexibility to repay as per their convenience and
comfort.
The new policy measure ensures
profitability for all the parties involved. The
smaller borrowers are finding it convenient to
repay the loans at lower interest rates, the micro
finance institutions are economizing on
resources, while banks are finding in it a
profitable business opportunity to make inroads
into the rural segment without making
compromises on profitability, as full repayment
is assured.
New Strategies in Rural Finance

The last few years have witnessed a spate of
rural micro credit activities with more and more
institutions moving towards the rural segment in
search of new opportunities for revenue and
profit. Over the past few years, private banks
are active in delivering highly innovative micro
credit services to the rural populace. Banks have
come up with viable and promising strategies to
see a strong foray into the rural and semi-urban
sector.
In their endeavour to implement costcutting technologies in delivery of low-end

financial services, several other banks are
shifting their focus to the rural segment which
had hitherto remained unattended to. They are
now offering cheaper credit, better services and
more flexibble schemes through a proactive use
of technology. Apparently banks are looking at
'rural banking' as a profitable business
proposition.
In its pursuit to reach a larger rural populace,

the banks are currently engaged in forming
strategic alliances with existing Microfinance
Institutions (MFI). Besides, Banks are
encouraging local entrepreneurs to start up new
microfinance institutions as franchisees. In order
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62
21
FINANCIAL INCLUSION
Financial inclusion is delivery of banking services at an affordable cost to the vast
section of disadvantaged and low income groups
Financial exclusion may cause higher incidence of crime, decline in investment,
difficulty in getting credit or getting credit at higher interest rate, increased
unemployment
Internationally countries like US, UK have framed laws towards financial inclusion
RBI in its Annual Policy (2005-06) urged banks to make available a basic no frill
account. SBIs no frill account is an attempt towards financial inclusion
The banking industry has shown tremendous
growth in volume and complexity during the last
few decades. Despite making significant
improvements in all the areas relating to financial
viability, profitability and competitiveness, there
are concerns that banks have not been able to
include vast segments of the population,
especially the underprivileged sections of the
society, into the fold of basic banking services.
Internationally also efforts are being made to
study the causes of financial exclusion and
designing strategies to ensure financial inclusion
of the poor and disadvantaged. The reasons
may vary from country to country and hence the
strategy could also vary, but all out efforts are
being made as financial inclusion can truly lift
the financial condition and standards of life of
the poor and the disadvantaged.
example, the Community Reinvestment Act

and making it a statutory right to have bank
account in France).
(b) through voluntary effort by the banking
community itself for evolving various
strategies to bring within the ambit of the
banking sector the large strata of society.
When bankers do not give the desired attention
to certain areas, the regulators have to step in
to remedy the situation. This is the reason why
the Reserve Bank of India is placing a lot of
emphasis on financial inclusion.
In India, the focus of the financial inclusion at
present is confined to ensuring a bare minimum
access to a savings bank account without frills,
to all. Internationally, the financial exclusion has
been viewed in a much wider perspective.
Having a current account / savings account on
its own, is not regarded as an accurate indicator
of financial inclusion. There could be multiple
levels of financial inclusion and exclusion.
2. What is Financial Inclusion ?

Financial inclusion is delivery of banking
services at an affordable cost to the vast
sections of disadvantaged and low income
groups. Unrestrained access to public goods
and services is the sine qua non of an open and
efficient society. As banking services are in the
nature of public good, it is essential that
availability of banking and payment services to
the entire population without discrimination is the
prime objective of the public policy.
4. Consequences of Financial Exclusion

Consequences of financial exclusion will vary
depending on the nature and extent of services
denied. It may lead to increased travel
requirements, higher incidence of crime, general
decline in investment, difficulties in gaining
access to credit or getting credit from informal
sources at exorbitant rates, and increased
unemployment, etc. The small business may
suffer due to loss of access to middle class and
higher-income consumers, higher cash handling
costs, delays in remittances of money. According
3. The scope of Financial Inclusion

The scope of financial inclusion can be
expanded in two ways.
(a) through state-driven intervention by way of
statutory enactments (for instance the US
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63
22
sanction of Banking Law, the State of New York

Banking Department, with the objectiive of
making available the low cost banking services
to consumers, made mandatory that each
banking institution shall offer basic banking
account in the nature of low cost account with
minimum facilities.
to certain researches, financial exclusion can

lead to social exclusion.
5. International Experience in promoting
financial inclusion
An interesting feature which emerges from the
international practice is that the more developed
the society is, the greater the thrust on
empowerment of the common person and low
income groups. It may be worthwhile to have a
look at the international experience in tackling
the problem of financial exclusion so that we can
learn from the international experience.
6. India Scenario
Bank nationalisation in India marked a paradigm
shift in the focus of banking as it was intended
to shift the focus from class banking to mass
banking. The rationale for creating Regional
Rural Banks was also to take the banking
services to poor people. The branches of
commercial banks and the RRBs have
increased from 8321 in the year 1969 to 68,282
branches as at the end of March 2005. The
average population per branch office has
decreased from 64,000 to 16,000 during the
same period.
The Financial Inclusion Task Force in UK has

identified three priority areas for the purpose of
financial inclusion, viz., access to banking,
access to affordable credit and access to free
face-to-face money advice. UK has established
a Financial Inclusion Fund to promote financial
inclusion and assigned responsibility to banks
and credit unions in removing financial exclusion.
Basic bank 'no frills' accounts have been
introduced.
An enhanced legislative
environment for credit unions has been
established, accompanied by tighter regulations
to ensure greater protection for investors. A Post
Office Card Account (POCA) has been created
for those who are unable or unwilling to access
a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on
low-income employment $1 from the state for
every $1 they invest, up to a maximum of $25
per month. In addition, the Community Finance
Learning Initiatives (CFLIs) were also introduced
with a view to promoting basic financial literacy
among housing association tenants.
One of the benchmarks employed to assess the

degree of reach of financial services to the
population of the country, is the quantum of
deposit accounts (current and savings) held as
a ratio to the adult population. In the Indian
context, taking into account the Census of 2001
(ignoring the incremental growth of population
thereafter), the ratio of deposit accounts (data
available as on March 31, 2004) to the total adult
population was only 59%. Within the country,
there is a wide variation across states.
Compared to the developed world, the coverage
of our financial services is quite low. For
instance, as per a recent survey commissioned
by British Bankers' Association, 92 to 94% of
the population of UK has either current or
savings bank accounts.
A civil rights law, namely Community

Reinvestment Act (CRA) in the United States,
prohibits discrimination by banks against low and
moderate income neighbourhoods. The CRA
imposes an affirmative and continuing obligation
on banks to serve the needs for credit and
banking services of all the communities in which
they are chartered. In fact, numerous studies
conducted by Federal Reserve and Harvard
University demonstrated that CRA lending is a
win-win proposition and profitable to banks. In
this context, it is also interesting to know the other
initiative taken by a state in the United States.
Apart from the CRA experiment, armed with the
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64
7. Steps towards financial inclusion

In the context of initiative taken for extending
banking services to the small man, the mode of
financial sector development until 1980 was
characterised by :
a hugely expanded bank branch and
cooperative network and new organisational
forms like RRBs;
a greater focus on credit rather than other
financial services like savings and insurance,
although the banks and cooperatives did
23
together and the total credit in all the accounts

taken together is not expected to exceed rupees
one lakh (Rs.1,00,000/-) in a year.
provide deposit facilities;

lending targets directed at a range of 'priority
sectors' such as agriculture, weaker sections
of the population, etc;
interest rate ceilings;
significant government subsidies channelled
through the banks and cooperatives, as well
as through related government programmes;
a dominant perspective that finance for rural
and poor people was a social obligation and
not a potential business opportunity.
8. The Way Forward

The banks should come out of an inhibited feeling
that aggressive competition policy and social
inclusion are mutually exclusive. The mass
banking with no-frills, etc, can become a winwin situation for both. Basically banking services
need to be "marketed" to connect with large
population segments and these may be justifiable
promotional costs. The opportunities are plenty.
It is absolutely beyond any doubt that the

financial access to masses has significantly
improved in the last three and a half decades.
But the basic question is, has that been good
enough? The quantum of deposit accounts
(current and savings) held as a ratio to the adult
population has not been uniformly encouraging.
There is a tremendous scope for financial
coverage if we have to improve the standard of
livingof those deprived people.
In the context of India becoming one of the

largest micro finance markets in the world
especially in the growth of women's savings and
credit Groups (SHGs) and the sustaining
success of such institutions which has been
demonstrated by the success of SEWA bank in
Gujarat, low cost banking is not necessarily an
unviable venture / proposition.
The IBA may explore the possibility of a survey
about the coverage in respect of financial
inclusion keeping in view the geographical
spread of the banks and the extent of financial
services available to the population so as to
assess the constraints in extension of financial
services to hitherto unbanked sections and for
initiating appropriate policy measures.
With a view to enhancing the financial

inclusion as a proactive measure, the RBI in its
Annual Policy Statement for the year 2005-06,
while recognising the concerns in regard to the
banking practices that tend to exclude rather
than attract vast sections of population, urged
banks to review their existing practices to align
them with the objective of financial inclusion. In
the Mid Term Review of the Policy (2005-06),
RBI exhorted the banks, with a view to achieving
greater financial inclusion, to make available a
basic banking 'no frills' acount either with nil or
very minimum balances as well as charges that
would make such accounts accessible to vast
sections of the population. The nature and
number of transactions in such accounts should
be restricted and made known to customers in
advance in a transparent manner. All banks are
urged to give wide publicity to the facility of such
no frills account so as to ensure greater financial
inclusion.
It may be useful for banks to consider franchising

with other segments of financial sector such as
cooperatives, RRBs, etc., so as to extend the
scope of financial inclusion with minimal
intermediation cost.
Since large sections of low income groups
transactions are related to deposits and
withdrawals, with a view to containing
transaction costs, 'simple to use' cash
dispensing and collecting machines akin to
ATMs, with operating instructions and
commands in vernacular, would greatly facilitate
financial inclusion of the semi urban and rural
populace. In this regard, it is worthwhile to
emulate the example of 'e-Choupal' project
brought forth through private sector initiative.
Fur ther, in order to ensure that persons

belonging to low income groups both in urban
and rural areas, do not face difficulty in opening
bank accounts due to the procedural hassles,
the KYC procedure for opening accounts has
been simplified for those persons who intend to
keep balances not exceeding rupees fifty
thousand (Rs. 50,000/-) in all their accounts taken
Banking Briefs
65
In response to RBI's policy, public and private

sector banks have rolled out steps for financial
inclusion through offer of 'no-frill' accounts with
varying features. SBI's 'no-frill' account is a
step in that direction.
24
BURGEONING FOREIGN EXCHANGE RESERVES :

IMPACT ON ECONOMY
Forex Reserves has crossed US$ 140 bn
Reasons for growth in Forex: Increase in exports, depreciation of other major
currencies, higher interest rate in India and higher economic growth
Impact of Forex: Forex reserves affect money supply, inflation and value of Indian
currency, makes export uncompetitive and import cheap
Introduction
USA, Japan, Germany, etc. are undergoing the

recessionary phase. Foreign investors, with a
view to gaining attrative yields on their
investments, have now been attracted India.
Foreign Exchange Reserves (FER) of India

have crossed US$ 140 billion mark. The level
of FER has steadily been increasing from $ 5.8
billion in March 1991 to $ 74.8 billion in March
2003 and further to $ 107.7 billion as on
20.02.2004.
Ideal Level of FER

The traditional trade-based indicator for
measuring the adequacy of FER is import cover.
Normally, the level of FER, which covers imports
for six months' period, is said to be adequate.
Current FER is sufficient to cover more than 18
months' imports as against import cover of just
three weeks in December 1990, when there was
a Balance of Payment crisis in India. In terms of
money-based indicators too, the proportion of
RBI's net foreign exchange assets to currency
with the public, has sharply increased from 15
per cent in 1991 to 105 per cent in March 2002.
The proportion of net foreign exchange assets
to broad money (M3) has increased more than
six-fold from 3 per cent to 18 per cent. The
proportion of short-term debt to forex reserves
has also substantially declined from 147 per cent
in March 1991 to well below 10 per cent in March
2003. So it appears that FER in India is very
much at a comfortable level.
Some Important Reasons for Higher Growth

in FER
A substantial portion of the accretion to FER is
by way of merchandize and software exports,
private transfers (largely remittances) and nondebt creating capital including repatriation of past
export proceeds as well as advance export
receipts. The current account of the balance of
payment recorded a surplus during the year
2001-02 against deficit recorded continuously for
the last 23/24 years. Total exports also recorded
an impressive growth of 23.4 per cent during the
year 2004-05.
During the recent past, US dollar has
depreciated against other major currencies,
especially the Euro and Yen. As such, a part of
increase in foreign exchange reserves is the
result of a revaluation of the dollar value of nondollar foreign currency holdings.
Due to higher rates of interest prevailing in the
Indian money market, as compared to those
prevailing in developed countries, foreign
investors and NRIs are remitting more and more
funds to India with a view to earning higher rates
of interest on their funds.
If FER continues to increase at this pace, it will

have enormous impact on Indian economy,
particularly in areas like domestic money
market, inflation, value of rupee, exports and
imports, etc.
Recent economic growth in India has been quite

impressive; while some developed countries like
With the increase in foreign currency assets

through enhanced flow of US$, the level of
Banking Briefs
66
Impact of Burgeoning FER on Indian

Economy
Impact on Money Supply and Inflation
25
money supply in the country would also increase.

This may result in higher inflation. With a view
to restricting the growth of money supply at the
genuine level, the RBI is sucking money from
the market through sterilisation operations, i.e.
by issuing Government securities to banks.
India in the hope that the rupee will appreciate

further.
Impact on Exports and Imports
Appreciation of local currency, i.e. Rupee, makes
expor ts from India to US uncompetitive.
However, appreaciation results in cheap imports.
In case of commodities, where raw materials are
imported and finished goods are exported after
processing, like in case of gems and jewellery
industry, uncompetitiveness of exports may be
arrested to some extent by importing raw
materials at lower price. But in case of
commodities where there is no import content,
the exports may really become uncompetitive.
Despite where there is no import content, the
exports may really become uncompetitive.
Despite strong rupee, expor ts from India
recorded an impressive growth chiefly owing to
tremendous efficiency gains made by most
sections of the Indian economy during the recent
past. This has resulted in reduction in cost of
production and made the products competitive
in the international market. Indian exporters may
have to learn to live with a strong rupee for atleast
some more time.
When local currency is appreciating, the

corporates are induced to import goods at low
prices, and this arrests the growth of inflation in
the country.
Impact on Value of Rupee
When foreign exchange reserves are piling up
with the Central Bank in a country, it generally
results in appreciation of local currency.
Following this trend, Indian Rupee is also
appreciating against US dollar. The nominal
value of the rupee to the dollar is now higher
than what it was more than a year ago, having
gone below Rs.46.15 to the US dollar only one
year ago it was the perception of the market that
the value of dollar would touch Rs.50. But today
there is little demand for forward cover among
importers and a great hurry among exporters to
bring in their dollars as quickly as possible. This
trend is further increasing the flow of dollar in
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67
26
INTERNATIONAL CAPITAL FLOWS - BENEFITS AND

POLICY FRAMEWORK
Trade liberalization without free capital flows affects economy
Capital flows create jobs and stimulate productive growth
Crisis in Mexico, Thailand, Indonesia, Korea, Russia were due to fixed exchange
rate regime
International capital flows accompanied by sound macro economic policies would
foster growth
Countries need to decide the manner in which they like to calibrate the movement
of capital
returns. Yes, much of that capital financed the
high-tech boom. But the increase in living
standards that Americans enjoyed also brought
a surge in demand for unskilled service jobs
demand so great that the US economy is now
also a large importer of labour.
Capital Flows
Free, or freer, movement of goods is only one
aspect of the globalization story, of course. The
free movement of capital and large-scale
movement at that is another feature of the
modern global economy. Indeed, it is not
possible to have trade liberalization without
relatively free capital flows at least not over an
extended period. Opening trade without opening
capital markets runs a high risk either under-orover invoicing as export and import activity is
used as cover for capital expor ts; or of
constraining the growth of trade as cumbersome
controls enforce capital account restrictions.
America might, just now, be exceptional among

industrial countries. But capital flows have
fuelled rapid growth in many other countries
around the world. Ireland's impressive growth
record in recent years owes much to the
deliberate efforts to attract foreign investment
capital.
And many emerging market economies have
benefited from capital inflows, especially during
periods of rapid growth : look at Singapore,
Taiwan, Korea, China. In every case their
experience has been positive they want more
investment capital, not less. Capital inflows from
other countries provided the resources needed
for expansion.
There is no doubt that sustained and rapid

growth is the best way to deliver lasting poverty
reduction. Economic growth is best achieved
through the expansion of trade. And the fewer
capital controls there are, the better the
opportunities for trade growth.
Private capital flows are beneficial for the world
economy. They underpin the expansion of trade.
They channel capital to where it can be most
productive and so where it can best enhance
economic growth. Despite what some argue,
capital flows do not destroy jobs, they create
them. They spur productivity growth and not
at the cost of rising unemployment.
A Sustainable Economic Framework

Capital account liberalization has to be
undertaken in a way that helps countries enjoy
the benefits of freer capital movements, not so
that it risks undermining economic progress
already made. Countries need to have in place
the right economic framework in order to exploit
capital flows in a way that generates growth.
Look at the recent experience of the United

States. It has been the world's largest importer
of capital, on any measure. It has also created
an enviably large number of new jobs, both
skilled and unskilled. Capital has flowed to the
US on such a large scale because of the high
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Above all, capital account liberalization must be

part of a sustainable macroeconomic strategy.
Economic stability is clearly important, and
cannot be delivered without sound monetary and
fiscal policies. It is clear from experience that
27
Capital account crises occur when the holders

of a country's debt lose confidence in its ability
to service that debt.
large unsustainable fiscal deficits and open

capital markets make uncomfortable bedfellows.
Large fiscal deficits pose increasing risks for the
financial sector as capital flows are freed up.
Deficits financed in large part by domestic
creditors can be especially dangerous. In such
cases, the onset of a crisis can have
catastrophic consequences for the domestic
banking system.
Indian government is in favour of greater capital

account liberalization through a policy of gradual
movement towards removing capital controls in
conjunction with the strengthening of the financial
sector. The Tarapore report, which the Reserve
Bank of India sponsored in 1997, set out several
important conditions which it said ought to be
satisfied before full capital account liberalization
could be contemplated. These conditions are a stronger financial sector, the adoption of
inflation targeting and bringing the fiscal deficit
under control. Though some progress has been
made on the on the first of these requirements,
India still has some way to go before the other
Tarapore conditions are fulfilled.
One result of persistent fiscal deficits is a large

debt build-up. This increases a country's
vulnerability to crises and makes any crisis
more painful. It is disturbing that the debt to GDP
ratios of many emerging market economies
continues to rise. Fiscal policies should aim at
reducing these debt burden especially when
economic activity is buoyant.
The role of the exchange rate is also important.
The Asian crisis of 1997-98 highlighted the fact
that fixed exchange rates can make the situation
far more difficult to handle in the event of troubles
on the capital account. Fixed exchange rates,
capital mobility and an independent monetary
policy are not a feasible policy regime over time.
Moreover, fixed exchange rates mean that in the
event of a crisis, and a consequent devaluation,
currency mismatches can seriously weaken a
hitherto sound banking system.
But this does not, and should not, detract from

the need to press ahead with economic reform.
Reducing fiscal deficits and reversing the buildup of public debt are desirable objectives. Such
steps are essential if sustained rapid economic
growth is to be achieved. They also pave the
way for capital account liberalization that could
do so much to foster growth, job creation and
poverty reduction in India.
So it is important to remember that a gradual
approach implies continuing progress towards
the desired goal. The appropriate response,
then, to the requirements of the Tarapore Report
is to seek to meet the conditions it laid out as
quickly as is reasonably possible. Misplaced
fear of the consequences of full capital mobility
should not be an excuse for postponing action
to meet the Tarapore conditions. Meeting those
conditions is in any case the best approach if
India is to continue to enjoy rapid growth and
poverty reduction.
And, as the capital account is liberalized, the

importance of a sound, competitive financial
system within an appropriate regulatory
framework increases. A well functioning financial
system is in itself important for growth, but it is
also essential for the most productive use of
capital inflows.
Economic reform, the development of
sustainable macroeconomic policies these are
essential conditions for rapid and sustained
economic growth. They are also a necessary
accompaniment to capital account liberalization
which will itself help accelerate growth. In other
words, the aim should be to create a virtuous
circle.
Capital mobility is a highly desirable aim,

essential for a country to reap the full benefits of
a more integrated global economy. The fact that
international capital flows, when accompanied
by misguided macroeconomic policies, can
wreak considerable havoc is not a reason to
reject liberalization. Rather it reinforces the need
for a proper macroeconomic framework : that
must include a strong, well-regulated financial
sector as well as sound, sustainable fiscal
policies.
Lessons from the Recent Past

The crises in Mexico, Thailand, Indonesia, Korea,
Russia, Turkey and Argentina were capital
account crises, and in every case, the country
involved had one form or another of a fixed
exchange rate regime.
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28
THE DOLLAR DELUGE - ISSUES IN MANAGEMENT

India in recent times is witnessing surge in forex reserves (now over US $ 140 bn)
The size of adequate forex reserve is influenced by the need for international
confidence, to manage seasonal factors, to defend against speculative attack and
the capacity to hold
Based on import coverage and money based indicators India has more than adequate
reserves
The forex reserves should be consistent with the rate of growth of economy, share of
the external sector, the size of risk adjusted capital flows and national security
environment
Planning Commissions proposal to use about
US$ 5 bn from the countrys forex reserve
annually for the next three years to partially
finance infrastructure projects has come in for
resistance from several quarters. It is argued that
the proposal would increase deficit further and
fuel inflation in the economy since it involves
monetizing a part of the fiscal deficit leading to a
increase in the overall money supply in the
economy. It is feared that such a move would
require the Government to revise the targets set
for reduction in fiscal deficit under the Fiscal
Responsibility and Budget Management Act.
RESERVES: HOW MUCH IS ADEQUATE

According to the High Level Committee on
Balance of Payments headed by Dr. C.
Rangarajan, the level of reserves should be
determined by the following factors:
The need to ensure a reasonable level of
confidence in the international financial and
trading communities about the capacity of the
country to honour its obligations and maintain
trade and financial flows;
The need to take care of the seasonal factors
in any balance of payments transactions with
reference to the possible uncertainties in the
monsoon conditions of India;
Given the size of our economy, it may not be

difficult to absorb or neutralize the impact of
US$5 bn annually. The economy has the
resources and resilience to withstand the impact
of such measures, particularly when we look for
an annual growth rate of 7%. While the
Government/RBI may continue with its present
market-based approach for neutralizing the
inflationary effect of such investment,
Government may also consider utilizing the
reserve only for those infrastructure projects
which have potential to earn foreign exchange
for the country in the long run.
The amount of foreign currency reserves

required to counter speculative tendencies or
anticipatory actions amongst players in the
foreign exchange market; and
The capacity to maintain the reserves so that
the cost of carrying liquidity is maintained.
The adequacy of reserves is traditionally
measured by the extent of the reserves available
in relation to the import cover required for 3 to 4
months. Going by this definition, today India has
forex reserves sufficient to cover nearly 18
months of imports. That is more than an
adequate ratio by any standards. However, this
ratio has limited application as it mainly focuses
on the current account. It may not be relevant to
a country whose reserve position is largely driven
by capital flows rather than current account
flows, as is the case now with India.
There has been persistent demand from the

banking community to 'on-lend a portion of the
forex reserves through the banks to residents
for productive domestic activities.It is argued that
if the reserves are used for 'on-lending', they lose
the characteristics of forex reserves. Besides,
the safety and liquidity considerations would also
be compromised if forex reserves are used for
on-lending to residents.
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However, with the changing pattern of global

trade, capital flows etc., the adequacy of
29
reserves is not only measured against import

cover but also measued increasingly against
several other benchmarks such as short-term
external debts, GDP, broad money, liquidity at
risk arising from unanticipated movements in the
interest rates, exchange rates etc., which are
more relevant for the emerging market economy
like India.
capital flight, it need not be necessarily be so in

case of those countries where money demand
is stable and confidence in the domestic
currency is high. The ratio also suffers from an
empirically weak relationship with the occurrence
and depth of international crises.
The more recent Liquidity at Risk theory tries
to explain the adequacy of the reserves in the
event of foreseeable risks the country could face
by taking into account the foreign exchange
liquidity position calculated under a host of
financial variables such as exchange rate,
commodity prices, credit spreads etc.,
associated with different types of components/
flows of the reserves. The Guidotti Rule tries
to establish a relationship between the sum total
of short-term debt and projected current account
deficit and the reserve held by the country and
suggests that the countries should hold external
assets sufficient to ensure that they could live
without access to fresh foreign borrowings upto
twelve months. Former Governor of RBI, Bimal
Jalan, in his statement on Monetary and Credit
Policy - April 2002, has stated that a sufficiently
high level of reserves is necessary to ensure
that even if there is prolonged uncertainty,
reserves can cover the liquidity at risk on all
accounts over a fairly long period.
COMPOSITION OF OUR RESERVES

The composition of our forex reserve, as at the
end of March 2004, indicates that major portion
of the reserve (i.e. over 96%) was held in the
form of Foreign Currency Assets (FCAs) while
the gold and the SDRs constituted less than 4%
of the total reserve of US$113 bn. The crucial
role played by the gold reserves was well
established when India pledged her gold
reserves in 1991 for raising resources. Thus,
the age-old practice of hoarding gold as hedge
against external crisis is still relevant in todays
circumstances. However, since then, gold has
played a passive role in the management of
reserves.
RESERVES AND INDICATORS
The debt-based indicator has shown remarkable
improvement over the last decade. The level of
external short-term debt in relation to the
reserves, which was at 146.5% in March 1991,
has significantly declined to about 4.2% as at
the end of 2003-04. So also the ratio of volatile
capital flows and short-term debt to reserves,
which was at 146.6% in end-March1991,
reduced to 36% as at the end of March 2004.
Recent studies have shown that the ratio of
reserves to short-term debt is a better indicator
of identifying financial crises and for gauging
risks associated with adverse developments in
international capital markets. The ratio provides
a measure of how quickly a country would be
forced to adjust in the face of capital market
distortion.
The above rule implies that the usable forex

reserve should always exceed the amortization
of foreign currency debts. As per the
assessment of RBI, the current level of reserves
is adequate to absorb the volatility of capital flows
that could arise from the global uncertainties in
the bond and currency markets.
By and large, the primary objective of holding
the reserve by a country is to support its
monetary policy and, with reference to emerging
economies in particular, to maintain international
confidence about its short-term payment
obligations. Given the present size of forex
reserve India has at present, these objectives
are broadly met. This is more than demonstrated
by the upgrading of the countrys credit rating by
S&P and Moodys recently. In the backdrop of
several uncertainties still persisting in the
international and domestic sectors, the quantum
of the forex reserves should be consistent with
the rate of growth of the economy, share of the
external sector in the economy, the size of riskadjusted capital flows and national security
environment.
In terms of money-based indicators, the net

foreign echange assets (NFAs) held by RBI to
the currency held with the public has
dramatically increased from 15% in 1991 to
nearly 109% by March 2002. So is the ratio
between NFAs and the broad money (M3), which
has increased by more than 6 times - from 3%
to 18%. However, money based indicators suffer
from a few setbacks. While they provide a
measure of potential for the resident based
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30
OIL PRICE IMPACT

The price of Crude oil hit an unprecedented high in 2004 and 2005.
Due to growing turbulence in the Middle East, the worlds largest oil producing region.
The war in Iraq, Irans nuclear programme, and questions about Saudi Arabias internal
stability are also atributed for it
Neither the stock markets nor the growth of the global economy have been noticeably
affected.
Economists say that the substitution effect will spur demand for alternate energy
sources, such as coal or liquified natural gas.
The increased price of oil might also encourage greater fuel efficiency.
In India share of domestic production of crude oil was only 28.7% while 71.3% were
imports and thus inflationary pressure was witnessed as international price of oil soared
during 2004 and 2005.
Indian economy is bound to be vulnerable to oil price shocks
There are a number of reasons for the recent

price rise in oil, as much as $60 a barrel. One of
the most important is growing turbulence in the
Middle East, the worlds largest oil producing
region. The war in Iraq, Irans nuclear
programme, and questions about Saudi Arabias
internal stability all could in the future lead to a
dramatic fall in the supply of oil. Outside the
Middle East, other oil producers have made
investors worried with strikes, political problems
in Venezuela and potential instability in West
Africa.
Crude oil prices behave much as any other

commodity with wide price swings in times of
shortage or oversupply. The crude oil price cycle
may extend over several years responding to
changes in demand as well as supply by OPEC
(Organization of Oil Exporting Countries) and
non-OPEC supply.
In 1972 the price of crude oil was about $3.00
per barrel and by the end of 1974 when Arab
nations curtailed production by 5 million barrels
per day following US support of Israel in the war
in 1973 the price of oil had quadrupled to over
$12.00. Events in Iran and Iraq led to another
round of crude oil price increases in 1979 and
1980. Iraq invaded Iran in September 1980 and
by November the combined production of both
countries was only a million barrels per day, i.e.
6.5 million barrels per day less than a year
before. Worldwide crude oil production was 10
percent lower than in 1979. The combination of
the Iranian revolution and the Iraq/Iran War
resulted in crude oil prices more than doubling
from $14 in 1978 to $35 per barrel in 1981. The
price of crude oil spiked in 1990 with the
uncertainty associated Iraqi invasion of Kuwait
and the ensuing Gulf War, but following the war
crude oil prices entered a steady decline until in
1994. The price of Crude oil hit an
unprecedented high in 2004 and 2005.
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In late August, 2005, Hurricane Katrina crippled

the supply-flow from off-shore rigs in the Gulf
Coast, the largest source of oil for the domestic
U.S. market. The short term price of oil is partially
controlled by the OPEC cartel and the oligopoly
of major oil companies.
Others believe that the price of oil is almost
entirely speculative, and that the increase in price
is due to oil speculation extending into the long
term. These people argue that speculators
foresee increasing demand, decreasing supply,
or both, leading to a long term increase in the
price of oil.
Global Impact of Price rise:
There is controversy regarding the potential
effects of oil-price shocks. Some see these
31
increases in the price of oil leading to a

recession comparable to those that followed the
1973 and 1979 energy crises or a potentially
worse situation such as a global oil crash. Most
economists see this as unlikely, partly because
all developed countries have high fuel taxes that
decrease as oil prices increase and can be
eliminated in the event of a dramatic price spike.
Oil-importing countries like India witnessed

inflationary pressure as international price of oil
soared during 2004 and 2005. As the country
imports close to three-fourth of its requirements
of crude oil, the Indian economy is bound to be
vulnerable to oil price shocks. The Reserve Bank
of India has estimated that every one US dollar
rise in the international price per barrel of crude
oil adds $600mn (around Rs28bn) to the
countrys oil import bill.
Despite the rapid increase in the price of oil,

neither the stock markets nor the growth of the
global economy have been noticeably affected.
Inflation has increased. Economists say that the
substitution effect will spur demand for alternate
energy sources, such as coal or liquified natural
gas. For example, China and India are currently
heavily investing in natural gas facilities. Nigeria
is working on burning natural gas to produce
electricity instead of simply flaring the gas. The
increased price of oil also makes previously
impractical sources of oil attractive to
businesses. The increased price of oil might also
encourage greater fuel efficiency.
The global oil scenario remains uncertain and

volatile. Iraqs future relationship with OPEC is
still not clear. Though Iraq had accounted for
barely 5 per cent of our total oil imports in recent
years, the Middle East in general and the
Persian Gulf in particular remains an important
area from which India imports oil even if
purchases are contracted out of Russia or faraway Venezuela. Industry experts estimate that
close to two-thirds of Indias total oil imports
come from the Middle East, simply because of
geographical proximity.
Indian Scenario:
At the root of the problem of high international

oil prices is a simple fact. The US currently
guzzles as much as one-fourth of the worlds
total consumption of various petroleum products
while possessing less than 5 per cent of the
earths proven reserves of fossil. The impact of
this policy is felt on the rest of the world, including
oil-importing countries such as India.
Share of oil in total energy consumption more

than doubled from 5.5% in 1960-61 to 13.4% in
1970-71. Share of oil in total energy consumption
went up slowly to 24.5% in the next two decades
and it is expected to stabilize close to that level
till 2011-12. Share of domestic production of
crude oil was only 28.7% while 71.3% were
imports.
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32
BANKING
STATE BANK OF INDIA
Banking Briefs
74
KNOW YOUR BANK

MISSION STATEMENT
community, to realize and activate his potential

so as to contribute to the achievement of Banks
goals and derive satisfaction thereof.
To retain the banks position as the Premier

Indian Financial Services Group, with world
class standards and significant global business
committed to excellence in customer,
shareholder and employee satisfaction and to
play a leading role in the expanding and
diversifying financial services sector while
continuing emphasis on its development banking
role.
TRAINING PHILOSOPHY
Training in State Bank is a proactive, planned
and continuous process as an integral part of
organisational development. It seeks to impart
knowledge, improve skills and reorient attitudes
for individual growth and organizational
effectiveness.
VISION STATEMENT
THE BANKS PHILOSOPHY ON CODE OF
GOVERNANCE
1. Premier Indian Financial Services Group

with global perspective, world class
standards
of
efficiency
and
professionalism and core institutional
values.
State Bank of India is committed to the best

practices in the area of corporate governance.
The Bank believes that proper corporate
governance facilitates effective management
and control of business. This, in turn, enables
the Bank to maintain a high level of business
ethics and to optimise the value for all its
stakeholders.
The objectives can be
summarized as:
2. Retain its position in the country as a

pioneer in development banking.
3. Maximise shareholder value through high
sustained earnings per share.
4. An institution with a culture of mutual care
and commitment, a satisfying and exciting
work environment and continuous learning
opportunities.
To enhance shareholder value
To protect interest of shareholders and

other stakeholders including customers,
employees and society at large.
To ensure transparency and integrity in

communication and to make available
full, accurate and clear information to all
concerned.
To ensure accountability for performance

and to achieve excellence at all levels.
To provide corporate leadership of

highest standard for others to emulate.
VALUES
1. Excellence in customer service.
2. Profit orientation.
3. Belonging and commitment to the bank.
4. Fairness in all dealings and relations.
5. Risk-taking and innovation.
6. Team-playing.
7. Learning and renewal.
8. Integrity.
9. Transparency anddiscipline in policies &
systems.
HRD PHILOSOPHY
CORPORATE
COMMITTEES
HRD in State Bank is a continuous movement

and direction to enable every individual as a
member of an effective team and the SBI
The Central Board has constituted five

committees of directors viz., Exceutive
Committee, Audit Committee, Shareholders/
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33
GOVERNANCE
investors grievance committee,

Risk
Management Committee and Special
Committee of directors for monitoring large
value frauds.
RISK MANAGEMENT COMMITTEE:

The Risk Management Committee oversees the
policy and strategy for integrated risk
management relating to credit risk, market risk
and operational risk. The committee has four
members viz., two Managing Directors and two
non-executive Directors.
AUDIT COMMITTEE BOARD (ACB)

Composition:
The ACB has six members of Board of
Directors, including two whole time Directors,
two official Directors and two non-official, nonexecutive Directors, one of whom is a Chartered
Accountant.
SHAREHOLDERS/INVESTORS
GRIEVANCE COMMITTEE:
This committee looks into the redressal of
shareholders and investors complaints
regarding transfer of shares, non-receipt of
balance sheet, non-receipt of interest on bonds/
declared dividends etc.
Functions:
1. ACB provides direction as also oversees
the operation of the total audit function
in the Bank. Total audit function implies
the organisation, operationalization and
quality control of internal audit and
inspection within the Bank and follow-up
on the statutory/external audit of the Bank
and inspection of RBI.
CUSTOMER SERVICE COMMITTEE OF

THE BOARD:
The Customer Service Committee of the Board
was constituted on the 26th August, 2004, to bring
about ongoing improvements on a continuous
basis in the quality of customer service provided
by the Bank.
2. ACB reviews the internal inspection/audit

functions in the Bank- the system, its
quality and effectiveness in terms of
follow-up. It reviews the inspection
reports of specialized and extra large
branches and all branches with
unsatisfactory ratings. It also specially
focuses on follow-up of Inter-branch
adjustment accounts, Unreconciled long
outstanding entries in inter-branch
accounts and nostro accounts, Arrears
in balancing of books at various
branches, Frauds and all other major
areas of housekeeping.
TECHNOLOGY COMMITTEE OF THE

BOARD:
The Technology Committee of the Board was
constituted on the 26th August, 2004, for tracking
the progress of the Banks IT initiatives.
SPECIAL COMMITTEE FOR MONITORING OF
LARGE VALUE FRAUDS. (RS.1.00 CRORE
AND ABOVE):
The major functions of the committee would be
to monitor and review all the frauds of Rs.1.00
crore and above with a view to identifying
systemic lacunae, if any, reasons for delay in
detection and reporting, monitoring progress of
CBI/Police investigation, recovery position,
ensuring that staff accountability exercise is
completed quickly, reviewing the efficacy of
remedial action taken to prevent recurrence of
frauds and putting in place suitable preventive
measures.
3. It obtains and reviews half-yearly reports

from the Compliance Department in the
Bank
4. Regarding statutory audits, ACB follows
up on all the issues raised in the Long
Form Audit Reports. It interacts with the
external auditors before the finalization
of the annual /semi-annual financial
accounts and reports.
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34
SUBSIDIARIES/JOINT
ASSOCIATES
VENTURES/
NON BANKING SUBSIDIARIES:
BANKING SUBSIDIARIES: (proportion of

ownership interest of SBI)
State Bank of Bikaner and Jaipur

(75.07%)
State Bank of Hyderabad (100%)
State Bank of Indore (98.05%)
State Bank of Mysore (92.33%)
State Bank of Patiala (100%)
State Bank of Saurashtra (100%)

SBI Capital Markets Ltd. (86.16%)
SBI DFHI Ltd. (65.95%)
SBI Factors and Commercial Services

Pvt. Ltd. (69.88%)
SBI Mutual Fund Trustee Company Pvt.

Ltd. (100%)
JOINT VENTURES:
SBI Cards and Payment Services Pvt.

Ltd. (60%)
State Bank of Travancore (75.01%)
GE Capital Business Process

Management Services Pvt. Ltd. (40%)
SBI Commercial & International Bank

Ltd. (100%)
SBI Life Insurance Co.Ltd. (74%)
SBI Funds Management Pvt. Ltd. (63%)
FOREIGN SUBSIDIARIES
State Bank of India (Canada) (100%)
Credit Information Bureau (India) Ltd

(CIBIL) (40%)
State Bank of India (California)

(100%)
Commercial Bank of India LLC, Russia

(60%)
SBI International (Mauritius) Ltd.

(98%)
Indo Nigerian Merchant Bank Ltd.

(51.59%)
Clearing Corporation of India Ltd.

(28.97%)
INMB BANK LTD, LAGOS
Nepal SBI Bank Ltd. (50%)
Bank of Bhutan (20%)
UTI Asset Management Company

Pvt.Ltd. (25%)
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77
OTHER ASSOCIATES:
35
STATE BANK OF INDIA AN OVERVIEW

State Bank of India is the premier commercial
bank of the country and, among its strengths,
the following would merit attention.
The aggregage deposits of the Bank stood

at Rs.363731.00 crores and advances stood
at Rs. 247673.00 crores as at 31.12.2005.
The Bank posted a Net Profit of Rs. 3553.38
cr for 9 month period ended 31st December
2005 compared to Rs. 3239.64 cr. in 9 month
period ended 31 st December 2004,
registering a growth of 9.68%
The largest commercial bank in the country

with branches spread all over India, besides
having presence in all the time zones of the
world covering several countries.
As the largest financial institution in India, SBI

is well positioned to capture growth in Indias
dynamic banking market and is seen as a
macro economic proxy for the Indian
economy.
Operating Profit (Profit before Provisions &

Contingencies) of the 9 month period ended
31st December 2005 stood at Rs. 8022.05
cr as against the figure of Rs 8066.28 cr in
corresponding period last year.
The bank along with its non-banking

subsidiaries has emerged as a financial
services supermarket offering the entire
gamut of financial services including
investment banking, housing finance,
factoring, project finance, asset
management primary dealership, securities
trading, credit card, gold banking, insurance,
etc. The subsidiaries have been built into
highly focused, efficient and tech-savy
organisation which works closely with the
customer relationship groups in order to
cross-sell products building on Group
synergy.
The Capital Adequacy ratio of the Bank stood

at 12.49% as at 31.12.2005. The Earnings
Per Share stood at Rs.21.19
The bank has long standing relationship with

80% of Indian Bluechip corporates.
Substantial part of the corporate business
of the bank is handled in five Strategic
Business Units (SBUs) - Corporate Accounts
Group, Leasing SBU, Project Finance SBU,
Mid Corporate Group (MCG) and Stressed
Assets Management Group (SAMG). The
Corporate Accounts Group (CAG) is a
dedicated service group catering to about
298 top corporates and constitutes about
10.46% total credit portfolio of the bank and
29.67% of the Banks Commercial and
institutional non-food credit with funded
exposure of Rs.26583.00 crores as at the
31st January, 2006 and offers our top clients
high quality relationship banking a broad
product portfolio, competitive pricing and
skilled credit expertise.
The bank has developed an excellent inhouse staff training infrastructure including
a College, an Academy, an Institute for Rural
Development and an Institute for Information
Management
and
Communication
Technology. Efforts are continuously made
SBI is an excellent brand name that is

synonymous with trust and security. SBI is
the only bank in India to be ranked among
the top 100 banks in the world and also
among the top 20 banks in Asia in the annual
survey by The Banker.
With a 16.00% market share for advances

and a 16.78% market share for deposits
(December 2005), SBI has a very strong
presence.
The Operating profit of the Bank crossed the

Rs.10000-crore mark in the year 2004-05.
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36
to improve the motivation and morale of the

banks employees through on-going training
and on-site initiatives.
meeting customer and market expectations and

facing competition. Our achievements are
summarized below:
Separate business units viz. Agri-Business

Unit, Government Business Unit, P-segment
business unit and SME Business unit
created for focused attention to respective
segments.
FULL BRANCH COMPUTERISATION

(FCBs): All the branches of the Bank are now
fully computerised. This strategy has contributed
to improvement in customer service.
The Bank has taken the initiative in

globalization and has plans for both organic
and inorganic growth globally. It has plans to
foreign offices from 52 to
increase its
more than 100 by March, 2007 and 125 by
March 2008. Two new branches at Sylhet
and Golders Green, London became
operational during the period AprilSeptember 2005 thereby taking the total
number of foreign offices to 54 in 28
countries. The Bank also opened its second
offshore banking unit at Kochi. Commercial
Bank of India Llc., Moscow a joint venture
with Canara Bank also commenced
commercial operations.
All foreign
branches of the Bank except two newly
opened ones at Sydney and Muscat ended
the half-year with a net profit. The Bank has
also plans to acquire controlling interest in
foreign banks in strategic locations. SBI
picked up a 51 per cent stake in Mauritiusbased Indian Ocean International Bank Ltd
(IOIB), in February 2005. In October, 2005,
SBI acquired 76 per cent stake in Giro
Commercial Bank of Kenya, as part of its
strategy to increase presence in African
continent and gradually emerge as a global
banking major. SBI has also acquired in
November, 2005, a small Indonesian bank PT Bank IndoMonex - for about $6 million, to
foray into Indonesia and expand presence
in the Asean region. SBI has been allowed
to start operations in Saudi Arabia and is the
first bank to get license from Saudi Arabias
Monetary Agency.
ATM SERVICES: There are 5542 ATMs on the

ATM Network in the State Bank Group comprising
of 3738 ATMs of SBI and 1804 ATMs of the
Associate Banks. These ATMs are located in
1891 centres spread across the length and
breadth of the country, thereby creating a truly
national network of ATMs with an unparalleled
reach. . In January 2006, the Bank recorded 3.3
crore ATM transactions and withdrawals of
around Rs 5,800 crore and the transactions are
growing at the rate of 15% month-on-month.
Value added services like ATM locator, payment
of fees for college students, multilingual
screens, voice over and drawal of cash advance
by SBI credit card holders have been introduced.
The Bank is planning to extend the BS7799
certification that it received for its data centre in
Mumbai and disaster recovery centre in Chennai
to its ATMs.
INTERNET BANKING (INB): This on-line
channel enables customers to access their
account information and initiate transactions on
a 24x7, boundary less basis. 3308 branches are
extending INB service to their customers. All
functionalities other than Cash and Clearing
have been extended to individual retail
customers. A separate Internet Banking Module
for Corporate customers has been launched and
available at 1070 branches. Bulk upload of data
for Corporate, Inter-branch funds transfer for
Retail customers, Online payment of Customs
duty and Govt. tax, Electronic Bill Payment, SMS
Alerts, E-Poll, IIT GATE Fee Collection, Off-line
Customer Registration Process and Railway
Ticket Booking are the new features deployed.
SBIs Information Technology Programme

aims at achieving efficiency in operations,
Banking Briefs
79
GOVT. BUSINESS : Software has been

developed and rolled out at 7785 fully
computerised branches. Electronic generation
37
of all reports for reporting, settlement and

reconciliation of Govt. funds is available.

STEPS : Under STEPS, the banks electronic
funds transfer system, the Products offered are
eTransfer (eT), eRealisation (eR), eDebit (CMP)
and ATM reconciliation. STEPS handles
payment messages and reconciliation
simultaneously.

SEFT: SBI has launched the Special Electronic

Fund Transfer (SEFT) Scheme of RBI, to
facilitate efficient and expeditious Inter-bank
transfer of funds. Many branches of our Bank in
various LHO Centres are participating in the
scheme. Security of message transmission has
been enhanced.
Debit
The card base of State Bank Group has grown

from 7.77m in September 04 to 12.43m in March
05 and 16.32m in September 05. Out of total
card base State Bank of India has major share
of 12.89m cards and remaining 3.43m cards of
Associate Banks. State Bank Debit Card with
affiliation to Master Card is the largest Maestro
debit card issued by any Bank in South Asia.
Our customers have access to the largest reach
and convenience of Anywhere Anytime
banking at over 10,200 ATMs. State Bank ATM
cum Debit cards are also acceptable at more
than 1,23,000 Points of Sale / Merchant
Establishments, which display Maestro logo.
The Card population of International Debit Card
as on March 05 was 13470. The number has
increased to 16451 as on September 2005.
Core Banking: The Core Banking Solution

provides the state-of-the-art anywhere anytime
banking for our customers. The facility is
available at 2704 branches of SBI covering 49%
of the Banks business at 612 centres and at all
the 4715 branches of the Associate Banks
covering 100% of their business at 2341 centres.
Trade Finance : The solution has been
implemented, providing efficiency in handling
Trade Finance transactions with Internet access
to customers and greatly enhances the banks
services to Corporates and Commercial
Network branches. This new Trade Finance
solution, EXIMBILLS, will be implemented at all
domestic branches as well as at Foreign offices
engaged in trade finance business during the
year.
The Bank has issued more than 6.20 lakhs

Kisan Credit Cards (KCC) and sanctioned
limits over Rs.2000.00 crores through KCC.
CREDIT CARD:
RTGS
The SBI Card has 2.3 million card holders at

present and it is targeting to cross 3 million mark
by December this year. SBI Card is now
available at 85 locations which is expected to
go up to 100 by December 2006. SBI Card has
launched three new co-branded credit cards
TATA Card, SBI Railway Card and SBI Vishal
Mega Mart Card in February 2006 aimed to
tap the niche segments. SBI Card has 19
products targeting various segments of the
2844 branches of State Bank of India have been

RTGS (Real Time Gross Settlement) enabled.
Other IT initiatives

OLTAS: Online payment of Direct Taxes

extended for payment over Internet.
EASIEST: Initiative by Government for
Excise and Service tax Electronic
reporting of Central Excise collection.
Banking Briefs
80
E-CBEC: Electronic payment of Central

Excise over internet.
E-Payment of C.B.D.T through
www.onlinesbi.com
Multi Remittance: Single debit-Multiple
credits across branches.
IT Refund-Electronic reporting.
E-Procurement
EDI-IAAI:Web based bill pay and
transaction handling.
Cyber Treasury M.P.Government.
Auto-Payment of Rail Freight (E-Freight)
Centralised pension processing cell
(CPPC)
Card:
38
society and issues over one lakh cards per

month. SBI Card has the widest distribution
network in the country through SBI and its
associate banks with over 13,600 branches and
6,000 ATMs.
The project has won the Technology Award 2005

- Outsourcing project of the Year, by The Banker.
MICR Centres: MICR Cheque Processing
systems are operational at 10 centres viz.
Mumbai, New Delhi, Chennai, Kolkata,
Vadodara, Surat, Patna, Jabalpur, Gwalior and
Jodhpur. New MICR Cheque Processing
Centres under implementation at Trichur,
Calicut, Bhubaneswar, Nasik and Raipur.
Marketing - Cross-selling
As at the end of September 2005, 2,200
employees were selling life insurance products
of SBI Life Insurance Company Ltd. In the first
half of the year our branches covered more than
92,000 lives with a premium of nearly Rs.67
crore under various group covers and 33,000
lives have been covered under various individual
schemes by the trained employees designated
as Certified Insurance Facilitators, garnering a
premium of Rs.32 crore. Overall, more than
1,25,000 lives have been covered and Rs.98.35
crore of premium mobilised during the first half
of the current financial year.
STATE BANK GROUP

The 16 Subsidiaries, 6 Joint Ventures and 49
Associates, along with SBI, the parent constitute
the State Bank Group.
Group assets have increased from Rs.
5,50,895 crores as on 31st March 2004 to Rs
6,28,576 crores as on 31st March 2005. The
Capital of the Group remained at Rs.526.29
crores. The total deposits of the group stood at
Rs.506105 crores and advances stood at
Rs.286986 crores, as at the 31st March 2005.
In mutual funds cross-selling, against a gross

mobilisation budget of Rs.849.50 crore, SBI
branches have mobilised Rs.1,072 crore during
the above period. 1223 AMFI trained staff from
our branches are engaged in selling various
mutual funds products.
Group net profit for the year 2004-05 stood at

Rs.5597.97 crores as against the figure of Rs.
5759.37 crores in FY 2003-04.
Cross selling general insurance products of New

India Assurance Company has commenced
across all Circles. The branches booked
Rs.44.19 crore premium during H1 thereby
earning commission of Rs.4.39 crore for the
Bank.
The Operating Profit for the same period stood

at Rs 8,229.74 crores as against the operating
profit of Rs 8,171 crores in FY 2003-04.
Performance Highlights of Associate
Banks :
SBI connect : The bank has set up a Wide Area

Network capable of carrying data, voice and
images on real time basis. It provides
connectivity to 4819 branches/offices of SBI
Group across 385 cities as at 31st March 2005.
This network provides across the board benefits
by providing nationwide connectivity for its
business applications. The project, enables SBI
and its seven associate banks to run corebanking, trade finance, ATM, internet banking and
treasury applications. All the associate banks,
and Kerala and Bangalore circles have been fully
networked. This will enable the bank to render
world-class service to its 100 million customers.
Banking Briefs
81
SBIs seven Associate Banks had a market

share of 7.73% in deposits and 7.60% in
advances as at 31.03.2005. The Associate
Banks recorded a growth rate of 21.95% in
deposits and a growth rate of 29.18% in
advances over the previous year.
The
incremental credit deposit ratio reached a level
of 77%. Gross NPA declined from 5.08% at
March 2004 to 3.74% as at March 2005.
39
RECENT OVERSEAS ACQUISITIONS OF SBI

In February 2005, SBI acquired 51 per cent stake in the Indian Ocean International
Bank Ltd.
On October 8, 2005, SBI acquired majority stake in Kenyas Giro Commercial Bank,
at around $ 6-8 million.
SBI has merged its Nigerian subsidiary Indo Nigerian bank with a local bank, Nal
Bank of Nigeria after acquiring it.
SBI has also acquired 76% stake in PT IndoMonex of Indonesia.
SBI is also in the process of acquiring Rupali Bank of Bangladesh.
1998 and is a closely-held bank based in Nairobi.
The acquisition occurred in the face of liquidity
crisis faced by small banks in Kenya.
State Bank plans to enhance the contribution of

its overseas operations to its profits (2004-05:
Rs4,304 crore) from 5 per cent to 25 per cent
within three years. This is in keeping with its aim
to be present in every continent, as enunciated
in its vision document, Operation Vijay, which
outlines plans to increase its global footprint.
Currently, SBI ranks 83rd among global banks
on the basis of its assets.
SBI will get management control through this

acquisition and have increased foothold in Africa
where the bank is already present in four other
countries. The strong skills in various aspects
of banking would be of relevance to Kenya. This
step has benefited not only the resident Indian
community but has also facilitated trade and
investment and also provided a platform for SBI
to participate in the growth and prosperity of a
friendly country.
The bank intends to open one overseas branch

every month it currently has 67 in countries
as diverse as London, Canada, Angola and
Bangladesh. The bank also plans for $1-billion
foreign acquisition.
As of now, Bank of India and Bank of Baroda

have a strong presence in Kenya. Recently,
Bank of India celebrated its 50 years of presence
in Kenya by holding its board meeting in Kenya.
In February 2005, SBI acquired 51 per cent

stake in the Indian Ocean International Bank
Ltd its first overseas acquisition. It is also
looking at acquiring one bank each in Asia and
Africa. The expansion would also boost SBIs
overseas assets base of $12 billion, or six per
cent of its total assets.
SBI has merged its Nigerian subsidiary Indo

Nigerian bank with a local bank, Nal Bank of
Nigeria after acquiring it.
SBI has also acquired 76% stake in PT
IndoMonex of Indonesia. This bank is a
closely held entity, a small profitable bank having
7 branches and sub-branches, located in
Jakarta, Bandung and Surabaya and is largely
in trade and retail banking. With this acquisition,
SBI will gain foothold in the ASEAN region
especially Singapore.
On October 8, 2005, SBI acquired majority stake

in Kenyas Giro Commercial Bank, at around
$ 6-8 million, by buying out the principal shareholders, who are of Indian origin holding 76%
stake. Giro has an asset base of $60 million as
on August 30, 2005, and is the 23rd largest bank
in Kenya in terms of asset size. The bank has
six branches in Nairobi and one each at
Mombassa and Kisumu.
SBI is also in the process of acquiring Rupali

Bank of Bangladesh, formed with the merger
of Muslim Commercial Bank, Australasia Bank
Ltd and Standard Bank. It is one of the leading
banks in Bangladesh.
Giro Commercial Bank was formed following the

merger of Giro Bank with Commercial Bank in
Banking Briefs
82
40
CHAIRMANS POLICY GUIDELINES 2006-07

Greater thrust in lending to Retail, SME and Agriculture segments in NBG
National rollout of CBS based CPCs to fully transform the operating structure into the new
model
Marketing of electronic-driven Payments products to be intensified.
Addition of 1000 ATMs during 2006-07
Be among top 50 Banks in the world by March 2008
(In percentage)
Efficiency Parameters
Benchmark 2005-06
Dec 05 (Actual)
ROA
ROE
Gross NPA Ratio
Net NPA Ratio
Expenses Ratio
Growth in Net Profit (YOY)
Growth in Other Income
NIM
NIM excluding one-time item
1.15
19.00
< 5.00
1.75
47.00
22.00
20.00
3.20
3.20
1.01
17.12
4.41
1.67
52.23
9.68
- 13.22
3.50
3.01
1. PRIORITY AREAS
and Savings Bank accounts.While some

increase in cost of deposits may be
unavoidable, each Circle/Business Groups
must contain the increase by March 2007
within 10 bps of its average cost of deposits
as on March 2006.
(a) PROFITABILITY
Interest Spread
Greater thrust in lending to Retail, SME and
Agriculture segments in NBG where yields
are higher.
Thrust on grant of loans at remunerative

pricing particularly by CBG.
Reduction of existing NPAs in absolute terms

should be given top priority and monitored
at every level. At the same time, proper
system of identification, follow up and
monitoring SMAs should be in place, so that
these do not become NPAs un-noticed/unfollowed and nullify the efforts of reduction
in existing NPAs.
Expeditious resolution of high value NPAs

and AUCAs should be ensured.
Share of no cost and low cost deposits to

aggregate deposits should be increased by
1.5% by aggressive marketing for Current
Banking Briefs
83
Overall Yield on Advances of each Circle/

Business Group must record an
improvement of at least 50 bps over March
2006 average yield by March 2007.
Other Income
41
Focussed attention on non-fund based

business particularly by CBG and other credit
intensive branches. Our share of derivative
products to corporates must improve.
Towards this end, CBG, Treasury and SBI
Caps need to work in close coordination.
Cross Selling, Bill Business and other fee

based business should be aggressively
marketed with the active participation of
Relationship Managers (PB), Relationship
Managers (ME) and Customer Relationship

Officers wherever posted.
BPR initiatives, CBS, other technological
innovations and improved ambience should
be the driving forces for aggressive
marketing.
Overheads
The operating units and other cost centres to
contain the growth in their overheads within 5%
of FY 2005-06 level.
Staff Expenses
Staff wage revision has taken place this year.

This will cause an increase of about 10% to 15%
in the total staff expenditure during the year
2005-06 compared to last year. This revision
must result in the higher productivity by the staff
and consequently higher profits for the Bank.
(b) CUSTOMER SERVICE

With the progress of implementation of BPR
initiatives including Single Window Delivery
System coupled with technological up gradation
like CBS, ATMs, Internet Banking etc., the inflow
of customers in the branch premises and back
office work is continuously getting reduced
releasing time for the branch staff for marketing
and providing excellent customer service.
Profitability and Cost control in Business

Groups / Circles
The need of the hour is to shift focus from
top-line growth to bottom-line growth.
Major portion of the profits of the Bank are
taken away by the loan loss and other
provisions and there is an urgent need to
contain these provisions thereby improving
profits of the Bank.
At least half of the Circles next year must
record net operating profit before TPM by
March 2007. The remaining Circles must
reduce their operating loss before TPM by a
minimum of 20%.
The NBG must reduce its operating loss
before TPM by 20% over March 2006 level.
The CBG must improve its operating profit
before TPM by 35% over March 2006 level.
In the era of fierce competition, the successful

execution of business initiatives depends on the
Bank being able to meet customer expectations
regarding service quality and this will have a
major impact not only on taking the new
business but also on retention of existing
business. Customer convenience and speed of
service should receive utmost attention at the
operating level.
c) BUSINESS PROCESS REENGINEERING
& TECHNOLOGY
BPR
Need to improve Cost adjusted Profits

(Allocation of centrally incurred costs)
The recommendation of the consultants in
regard to Business Performance
Management System project on budgeting,
performance evaluation and cost allocation
must be implemented across all the
business groups during 2006-07.
Cost adjusted profit budgeting should be
introduced for the year 2006-07.
The Business Groups while evaluating their
performance should now take into account
Banking Briefs
84
the effects of centrally incurred costs and

provisions, resulting in greater concern for
controlling costs for ensuring better profit
planning.
Allocation of centrally incurred costs for
judging the performances of the Business
Groups / Circles will reflect the true picture
of profitability of their operations and will
trigger conscious efforts to improve
profitability by cost control measures and
increasing interest / non-interest income of
the Bank.
Roll out of state-of-the-art IT-ALM Software
for MRFTP must be completed during 200607. This will ensure correct measurement
of profitability for all the business groups.
Various Centralised Processing Cells,

Outbound and other Sales Forces for loans and
liability Centres along with Relationship
Managers and Grahak Mitras at all major
business centres have been rolled out with the
further target of starting functioning of centralised
processing centres on CBS platform in all metro
centres by March 2006. These initiatives must
be extended to cover other cities also.
For the year 2006-07, we should aim for the
national rollout of CBS based CPCs so that SBI
42
would fully transform its operating structure into

the new model and become the most modern
and efficient public sector bank in India
committed to render excellent service to the
customers.
Management, Data Warehousing, etc. should be

put in place.
ATMs
Addition of 1000 ATMs during 2006-07.
ATM Availability including downtime factors
like Cash outs, Cash handlers problems,
Hardware problems & Supply out to be at
least 98%.
Average daily hits per ATM should be more
than 300.
Active cards to total Cards percentage to be
more than 75% by March 2007.
Monthly POS transactions for ATM network
to reach 4 lacs by March 2007.
All ATM related avenues for increasing
revenue, viz. Bill payments, Airline & Railway
ticketing, Insurance premiums etc. should
be explored and marketed.
The use of Internet Banking by both
Corporate and Retail should be popularised
to achieve a substantial growth in the coming
year. Circles and SBUs should designate
business owners to give the required impetus
to marketing efforts and operating staff
education.
Core Banking
Focus has to be on improving processes and
addressing scaling up and performance issues.
Products designed for different customer
segments should be planned / rolled out to
harness the power of a centralised processing
environment and to bring immense business
benefits to the organisation.
During the year 2006-07, our aim should be to
bring all the branches of the Bank under CBS.
All the BPR-driven initiatives should be fully in
place and Central Processing Centres for
various areas of business with the support of
CBS should drive high volume of business.
Range of innovative products directed at our
customers in different segments to be rolled out
and marketed aggressively. In order to take full
business benefits and customer experience to
the next level in a post-core scenario, Data
based marketing, Customer Relationship
(d)
EFFICIENCY PARAMETERS AND BUSINESS DEVELOPMENT
Efficiency Parameters for 2006-07

Parameters
Growth - Whole Bank
Cost of Deposits
Yield on Advances
Net Profit
Operating Loss before TPM (NBG)
Operating Profit before TPM (CBG)
Other Income
Overheads
< 10 bps
> 50 bps
> 20.00%
Reduction by 20%
Growth by 35%
20.00%
< 5.00%
Parameters
Expenses Ratio
Fresh NPAs as a % of opening balance of
Gross Advances
Gross NPA Ratio
Net NPA Ratio
Capital Adequacy Ratio
Return on Assets
Return on Equity
Banking Briefs
85
Target - Whole Bank

49.00%
< = 1.25%
< 4.00%
< 1.40%
10.50 -11.00%
> 1.00%
18.00%
43
Business Growth
(in percentage)
Deposits
Advances (Non-Food)
Forex Sales
Forex Purchases
Export Credit
NBG
CBG
15.50
27.00
35.00
35.00
30.00
20.50
30.00
40.00
40.00
35.00
Payment Systems Group (PSG)

Marketing of electronic-driven Payments
products, e.g., STEPS, RTGS, SEFT, FTC,
MICR-Clearing etc. should be intensified. Circles
should have targets for 2006-07 for maximising
revenue generation from the electronic payment
products and enhance market share.
2.
Efforts should be made to recover at least

50% of sub-standard/doubtful asset portfolio
in SME segment through debt restructuring
or cash recovery or OTS or sale to other
Bank/NBFCs etc.
Technology initiatives should be leveraged

by bringing more and more Corporate
Customers and HNIs to e-Payment of taxes
through internet banking facility for Excise,
Service Tax, Corporate Tax, Income Tax,
VAT, State Excise, etc.
A growth of 25% in Govt. Commission over

the level of 2005-06 should be our target for
the year 2006-07 with the assumption of no
increase in the present Agency Commission
of RBI next year.
SME and AGR Business Units should obtain

refinance of Rs.5,000 crores.
TARGETS FOR GROUPS
NATIONAL BANKING GROUP
The percentage of agriculture advances to

net bank credit is still below the benchmark
(18%). Due to non-achievement of the
benchmark, we are forced to invest the
shortfall in RIDF at a very low and unremunerative interest rate of 4% p.a.
Keeping in view the available potential in the
sector, 30% growth over the March 2006 level
should be targeted.
In PBBU, where BPR initiatives of RACPC
and OSF have been implemented, more
employees should be identified for marketing
and specific targets given.
Optimally leveraging the synergies with CAG
and MCG networks to establish tie-ups with
the corporates on an increasing scale. Our
share of wallet in their Retail Business
potential should be improved.
Cross selling of the products of SBI Life,

Mutual Fund, SBI Cards and General
Insurance business should be intensified to
ensure an increase of 100% in the
commission/fee earned by the branches.
Gross NPAs in the Agricultural Banking,

Personal Banking and SME segments
should be brought down to less than 4%, 3%
and 4% respectively.
Banking Briefs
86
CORPORATE BANKING GROUP
44
CBG has to focus on increasing profitability

and more particularly on other income. For
FY06-07, raising the yield of assets portfolio
by 50 bps and other income by 25% should
be targeted.
Relationship with the corporates/midcorporates should be utilized to cross sell a

wide range of products offered by the Bank
in close liaison with the circles and various
business units. Account Planning assumes
significance in this context. Innovation in our
products and services is another prerequisite.
Cash Management Product offering

payment solutions should be leveraged to
market non-fund products even to clients not
having a fund based relationship with the

Bank.
i)
Apart from given business growth, CBG

should focus on increasing the bottom line
and maintaining the quality of assets.
ii) new accounts - fresh limits
With CBS in place, steps for marketing

various technology related products like
RTGS/CINB/Multi-city Cheques etc. should
be further intensified.
Project Finance SBU to focus and
participate in funding of upcoming
infrastructure projects in the potential sectors
like Road, LNG transportation & Petroleum
Refineries, Power Plants, Sea Ports and
Airports etc.
SAMG will focus on resolution of NPAs/
AUCAs with more emphasis on high value
accounts by promptly finalising the strategy
to ensure quick recovery in these accounts.
Emphasis on cash recoveries in AUCAs/
Non-AUCA written off accounts should
continue.
SAMG should speed up the process of
disposing of the unwanted NPAs by sale of
assets to ARCIL/Banks/FIs/NBFCs with an
aim to realise maximum price for the asset.
Eligible NPA accounts should be considered
for restructuring under revised CDR
guidelines of RBI. Offering exit route should
also be the strategy for the NPAs and SMAs.
We should focus on increasing our market

share in IB business, both trade-related as
well as non-trade (invisibles) forex business.
We should target the growth of export credit
commensurate with the countrys exports
growth and to be in line with RBI benchmark
of 12%.
Our thrust on Global Loan syndication

business should continue to improve our Fee
earnings.
87
The NRI SBU in IBG must take full ownership

of NRI related business and target a growth
of at least 20% in NRI deposits.
While our foreign offices capture 30% of NRI

related business and domestic branches
capture 70% business, the ratio is reverse
in case of foreign banks and new private
sector banks. Our foreign offices must
capture a larger portion of NRI business.
Suitable strategies need to be put in place

to recapture the personal segment travel
related forex business which we appear to
have lost to exchange companies and other
Banks.
The branch expansion policy will continue.

We should aim at bringing the total number
of foreign offices to more than 100 by March
2007 and 125 by March 2008.
Foreign Offices to achieve growth of 40% in

deposits, 25% in advances, 40% in Other
Income and 40% in Net Profit.
Profit from trading to be Rs.1000 crores.
Profit from marketing to be Rs.400 crores.
Securitisation of assets of Rs.10,000

crores. Subject to these resources being
generated, NBG and CBG will arrange to
repay high cost bulk deposits to the extent
of Rs.6,000 crores and Rs.4,000 crores
respectively to bring down the cost of
deposits.
ASSOCIATE BANKS & NON-BANKING

SUBSIDIARIES
Business accretion in the Banks books

should be continuously monitored by
segregating it into three categories, as
under:
Banking Briefs
TREASURY OPERATIONS
INTERNATIONAL BANKING GROUP
existing customers - enhancement of

limits
45
Growth in net profit should be around 40%

over March 2006 level.
Stepping up dividend to SBI : Increase by 40%

minimum
Goals specific for Associate Banks
Minimum reduction of gross NPAs by 10%

in absolute level.
Gross NPA Ratio to be less than 3.00%.
Minimum reduction of net NPAs by 20% in

absolute level.
Net NPA Ratio to be less than 0.50%.
20% reduction in AUCA balance by recovery,

of which at least 7.50% should be in the first
half of 2006-07.
A & S Group to set up a Pension Funds

Subsidiary, a Real Estate Subsidiary with the
help of SBI CAP and an HR Subsidiary with
the help of SBI Cards Ltd.
model for Small and Medium size Agriculture

segment will be finalised and implemented
during the year 2006-07. The project for
implementation of Integrated Risk
Management (IRM) and Operational Risk
Management (ORM) in the Bank would be
completed during the financial year 2006-07.
d) Inter Office Reconciliation is a very critical
area for the Bank. While net debit balances
require the bank to make provisions on
quarterly basis, we have to maintain SLR
and CRR on the net credit balances. Hence,
all entries should be reconciled promptly.
e) GLIF and other System Suspense Account
entries should be reconciled on top priority
basis to avoid not only adverse remarks from
Statutory Auditors but also from the likely
liability of the Bank to make large scale
provisions for outstanding debit amounts.
Likewise Nostro account entries must also
be reconciled in shorter time possible.
3. OTHER IMPORTANT AREAS

a) Our staff is the most important resource for
the Bank. They have to feel elevated and
motivated at all times. The performance
measurement and reward and recognition
schemes of the bank should be redesigned
with an aim to reward large number of
employees. Redeployment of staff as per
Agreement must be implemented without
any delay. Corporate communication to
make staff fully aware of the changes that
have been brought about by BPR and Core
Banking initiatives should improve.
Innovation in the way we work must become
a culture.
f) Accurate and prompt reporting of

Government transactions by OLTAS for
Direct Taxes, ECS for payment of IT Refund
Orders, EASIEST for Customs and Excise
etc. should be ensured at all the levels to
avoid opportunity loss and/or penal interest
to the Bank.
g) There is scope for improvement in Inspection
& Audit ratings of the branches. A target is
set for all the circles to become free from B
and B branches by September 2006.
h) Branches/Circles and Business Groups
under CBG should not resort to negative
budgeting in the early part of the next year.
Build up of deposits and advances by March
2006 end must be controlled in such a
manner that only stable business accrues
to us.
b) Know Your Customer and Anti-Money

Laundering norms should be strictly followed.
More emphasis should be on prevention of
frauds which is a direct drain on our profits
and also affect our image. There is a need
to rededicate ourselves to follow the
established systems and procedures with a
view to protect the Bank.
4.
c) As per Basel II norms, reclassification of

various asset portfolios and other tasks have
to be undertaken and completed as per the
Road Map already in place. As regards risk
rating models, I expect that Credit Risk
Assessment System for Project Finance
exposures, separate model for Services
Sector and Basel II compliant scoring
Banking Briefs
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46
STATE BANK IN COMING YEARS

Be a world class institution by March 2008
Be among top 5 Banks in Asia by March 2008
Be among top 50 Banks in the world by
March 2008
Leverage its unique strengths
Have a performance culture worth emulating.
LOAN POLICY SBI

SBI Loan Policy was first approved in Nov 96 and reviewed from time to time.
The policy lays down the banks approach to sanctioning, managing and monitoring
credit risk.
It aims to make the systems and controls effective.?
Some of the chapters covered are Exposure levels, CRA, credit appraisal standards,
documentation, pricing, review and renewal, take over of advances, discretionary
powers
SBI Loan Policy, aimed at accomplishing its mission, is an embodiment of the banks approach
to sanctioning, managing and monitoring credit risk. It aims to make the banks systems and
controls effective. The policy applies to all domestic lendings. The Policy is laid down by
Credit Policy & Procedures Committee (CPPC) and deals with the following:
Revision in Exposure Levels:. The ceilings on exposure levels to various categories of
borrowers have been revised as under:
Category of Borrower
Exposure Ceiling
Individuals as Borrowers
Maximum aggregate credit facilities ( fund

based and non-fund based) of Rs 20 crore
(earlier Rs 10 crore) excluding loans against
specified securities for which there is no
restriction.
Non-corporates(Partnerships, JHF, etc.) Maximum aggregate credit facilities ( fund
based and non-fund based) of Rs 80 crore

(earlier Rs 50 crore) excluding loans against
specified securities for which there is no
restriction. The above ceiling will also be
applicable to the aggregate of all facilities
sanctioned to partnership firms that have
identical partners.
Corporates
Banking Briefs
89
Maximum aggregate credit facilities as per

prudential norms of RBI on exposures which
currently stand at 15% of Banks capital funds
for single borrower exposures and 40% of
capital funds for group exposures. Capital funds
include Tier-I and Tier-II capital.
47
Hurdle Rates:

No new connections are to be considered in

respect of accounts rated below SB4/
SBTL4, subject to certain exceptions
detailed in the circular.
No enhancements in credit limits are to be
considered in existing accounts rated below
SB4/SBTL4.
Deviations in hurdle rates as specified above
would need the approval of CCC-I for
sanctions of CCC-II and below. For
sanctions of CCC-I and above, the
sanctioning authority is empowered to
approve the deviations also.
Industry specific hurdle rates stand
withdrawn. Risk Management Department
(RMD) will no longer set CRA linked hurdle
rates for specific industries. RMD will only
issue advisories on the general outlook for
industry from time to time.

Letters of Credit (LCs), Guarantees and Bill

Discounting:
Bank will open LCs, issue Guarantees /

Acceptances and discount bills under LCs
only in respect of genuine commercial and
trade transactions of borrower constituents
who have been sanctioned regular credit
facilities by the Bank.
Bankable business from non-borrower
constituents such as Govt./Research/
Defence/Educational and other statutory
organizations who have no borrowing
arrangements with any other bank/FI, may
be accepted subject to compliance with KYC
norms.
Bank will not open LCs and purchase/
discount/negotiate bills bearing without
recourse clause.
While discounting bills of the services sector,
Bank will ensure that actual services are
rendered and accommodation bills are not
discounted.
Issue of guarantees favouring FIs/ other
banks and lending agencies for loans
extended by them is not proposed for
domestic operations.
Bank may extend fund based/non-fund based
credit facilities against guarantees issued by
other banks/FIs. The exposure assumed
against such guarantees will be deemed as
an exposure on the guaranteeing bank/FI and
would be subject to the Permissible Global
Exposure Limit (PGEL) on other banks/FIs
in place in the Bank. A sub-limit for such
exposures will be fixed within the PGEL as
part of the periodical review exercise
undertaken by Risk Management
Department.
Maturity of Advances:
The maturity of any term loan should

normally not exceed 8 years including
moratorium period (except cases under
CDR mechanism approved by the Bank,
Infrastructure Loans, Housing Loans,
Education Loans and Agricultural Term
Loans under approved schemes).
In cases where the maturity period exceeds
8 years and is upto 10 years (except in cases
of exempted categories mentioned above),
the loans should be administratively cleared
by ZCC. For sanctions by ZCC and above,
the sanctioning authority may approve the
tenor as part of the proposal in all cases.
In cases where the maturity period exceeds
10 years, the deviation may be permitted by
CCC-I for sanctions by CCC-II and below.
For sanctions by CCC-I and above, the
sanctioning authority may approve the tenor
as part of the proposal in all cases.
Take-over of advances:

Take over norms under SSI, C&I and Trade

& Services would remain unchanged.
Prior administrative clearance is to be
obtained in all cases of take-over proposals
other than for DGMs and above.
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90
For take-over of units not complying with any

one or more of the norms, prior
administrative clearance is to be obtained.
No deviation may be permitted in the
minimum CRA rating prescribed, i.e., SB3/
SBTL3.
Separate norms have been laid down for
refinancing of high cost term loans.
Take-over of advances under AGL segment
will be permissible selectively for which
suitable norms are being separately advised.
48
BUSINESS PROCESS RE-ENGINEERING IN SBI

BPR is the fundamental rethinking and radical redesign of business processes to bring
about dramatic improvement in performance.
Objective: to increase customer satisfaction and convenience, free branches to focus on
sales and marketing, simplify processes and retain undisputed leadership
Some of the new roles/teams constituted are Grahak Mitra, Relationship Manager
Personal Banking, retail assets CPC, Small Enterprises Credit Centre, Currency
Administration Cell, Micro Markets, Medium Enterprises Relationship Manager (MERM),
Outbound Sales Force (home loans), Multi Product Sales Force, Cash Management of
off-site ATMs by CACs, in-branch cash handling, Centralized Pension Processing Centre,
PPF settlement process redesign, Forex CPCs
SME City Credit Centre, Trade Finance CPC, Liability CPC, Clearing CPC and City
Recovery Centre have been launched as pilots at Mumbai Circle.
The other pilots at Mumbai circle are creation of Document Archival Centre, Govt. Business
Centre, Locker Centre, SBI Home Centre.
Business Process Reengineering (BPR)
launched in 2003 (Consultants- McKinsey) is
one more step in the direction of revamping our
processes to bring in world class capabilities in
our organisation and to respond to the 2 Cs ,
namely, Customer expectation and Competitive
pressure.
Objectives of BPR
BPR is the fundamental rethinking and radical

redesign of business processes to bring about
dramatic improvement in performance . The
following three key words set apart BPR from
other change initiatives:

Following are the major objectives of BPR:

Fundamental Rethinking: It questions the

validity and relevance of the existing
processes, structures, systems etc and
seeks to replace them by new processes
Radical Redesign: The redesign is not
evolutionary but revolutionary. It does not
propose incremental changes but brings in
new and untested changes which are totally
different from existing ones.
Dramatic improvement in performance:
Through radical redesign, it attempts create
capabilities for substantial increase in
performance.
The BPR model of the Bank proposes to create

world class capabilities in our organisation and
attempts to build performance and delivery
capability by redesigning/creating certain
elements which would enable us to serve our
customers better than competitors.
The initiatives taken by the Bank under BPR are
as under: (as at the 30th November, 2005)
In a way, BPR is a transformation as opposed

to change that alters the basic rhythm and
character of the organisation.
Banking Briefs
91
Increase customer satisfaction and

convenience
Free up time for branch and BMs to focus
on sales and marketing
Simplify processes
Define new processes and supporting
organisational structure
And finally retain undisputed leadership in
India and emerge as a world class financial
institution
49
Grahak Mitra, an Assistant, positioned in

customer area to welcome/ greet and guide
customers as also to educate them for
migration to alternate channels. Migration to
ATM and Internet Banking can be improved
at some Branches with Grahak Mitra. There
are Grahak Mitras at 1628 branches at 96

centres.
Relationship Manager Personal

Banking provides relationship management
based services to high-value customers,
including cross-sell, and makes efforts to
acquire new high-value customers for the
Bank.. 262 RM-PBs are posted at 64
centres who can step up new customer
acquisition and cross-selling efforts.
RETAIL ASSETS CPC : It is a centralized
unit set up at city level to appraise and
sanction Housing Loans, Car Loans,
Education loans, Mortgage and Rent Plus
loans. They are set up in 63 centres covering
1796 branches and Sanctions during 200506 upto November, 2005 has been Rs.3773
crores at an average of Rs.547 crores /
month.
SMALL
ENTERPRISES
CREDIT
CENTRE is centralized unit set up at city
level to process and sanction small
enterprise credit proposals. They are set up
in 69centres covering 1623 branches. Total
Sanctions has been Rs.1867 crores at an
average of Rs.324 crores/month upto
November 2005 during the current year.
CURRENCY ADMINISTRATION CELL is
a centralized unit handling all the logistics of
cash delivery and pick up from branches
thereby reducing cash balances held. 70%
CACs (40 out of 57) have achieved the
benchmark of 50% reduction. CACs are
rolled out in 57 centres covering 1016
branches.
MICRO MARKETS : A total of 182 micro

markets carved out at 23 centres in 14
Circles. Implementation process has begun
at Hyderabad, Mumbai, New Delhi and
Ranchi centres.
MEDIUM
ENTERPRISES
RELATIONSHIP MANAGER (MERM) - A

relationship management service role
designed to be the single-point contact at
branches for medium enterprise customers
to proactively target business from new and
existing borrowers. 31 MERMs are created
in 12 centres in Ahmedabad, Bangalore,
Banking Briefs
92
Chennai, Hyderabad, Mumbai and New Delhi

Circles.
50
OUTBOUND SALES FORCE (HOME

LOANS) is a sales force responsible for
selling home loans to targeted customers
at their doorsteps. 41 teams have been
constituted in 21 centres.
MULTI PRODUCT SALES FORCE is a

sales force responsible for selling products
to small enterprise businesses. 13 teams
have been constituted in 5 centres.
CASH MANAGEMENT OF OFF-SITE

ATMs BY CACs It is an initiative designed
to relieve the branches from cash
management of off-site ATMs at centres
where Currency Administration Cells have
been set up. So far 245 ATMs have been
covered in 15 centres. All off-site ATMs in
Bhopal, Chandigarh, Guwahati, Hyderabad,
Lucknow, Trivandrum and Pune are linked
to CACs. It is planned to link all remaining
off-site ATMs at Local Head Office centres
and 21 other centres to CACs by 31.03.06.
IN-BRANCH CASH HANDLING - A change

in process of handling cash to eliminate
delays in taking and handing over cash by
SWOs to facilitate start of cash transaction
at branches without delay. Introduced at 47
hand balance branches in Mumbai and
process for implementation at Currency
Chest branches also is being examined.
CENTRALIZED PENSION PROCESSING

CENTRE is an initiative designed to relieve
the branches of the back office functions
related to pension payment and on-line
credits to pensioners accounts and fund
settlement. Pilot CPPC has been rolled out
at all 14 LHO centres, using existing inhouse software covering 1.32 lac
pensioners. A new software with capabilities
to handle large volumes for national
coverage is being customized to meet BPR
design. Simultaneously, the Circles are
migrating pension calculations to in-house
software at individual branch level. All 8000
pension-paying branches of the Bank are
planned to be migrated to the new process
by 31.03.06.
PPF
SETTLEMENT
PROCESS
REDESIGN - The redesigned process
provides capabilities for fund settlement on
T+1 basis by eliminating the intermediary
Focal Point branches. Branches migrating
to CBS get automatically covered under the
new process.
and the details will be forwarded on-line to

IRC. On realization, IRC will convert and pay
to the customer
Pilot at Mumbai Circle : SME City Credit

Centre, Trade Finance CPC, Liability CPC,
Clearing CPC and City Recovery Centre
have been launched as pilots at Mumbai
Circle. The other Pilots initiated at Mumbai
Circle are :
FOREX CPCs
o Inward Remittance Centre (IRC) will receive

all
inward
remittances
received
electronically. No cheques or drafts will be
processed here. The converted amount will
be credited to beneficiarys account through
CBS or STEPS (in case of Bankmaster
branch). In case, the customer wishes to
have a draft issued in favour of the
beneficiary, it can be issued by IRC or have
the same printed at a CMP centre nearest
to the beneficiary.
Document Archival Centre provides

record management solution (storage,
retrieval and transportation) for branches and
CPCs using IT platform and free up space
in branches for customers.
Govt. Business Centre : The initiative is

aimed at delinking of fund settlement from
physical movement of vouchers and
duplication of data entry through centralized
accounting for T+1 settlement of funds.
Locker Centre provides state-of-the-art

locker services with alternate channel
facilities to (i) attract affluent customers, (ii)
cross-sell other products and (iii) enhance
value of business per customer.
Cash Management Product: The BPR

Project recommended acquisition of new
software capable of supporting full suite of
various products being offered by new
generation foreign banks.
SBI Home Centre is a special service unit,

which will provide all the services for real
estate to the visitors to the centre. The
services offered will include property search,
home loans and documentation assistance
for all pre and post-purchase formalities.
There will also be arrangement for panel
display of projects under construction.
Rupee Remittance Redesign envisages

redesigning of the process of issue of all
value-received instruments viz. Drafts,
Bankers Cheques, Gift Cheques and
Associate Banks Drafts on single stationery
(IOI Inter Office Instrument).
o FCNR / NR Centre will take care of the

transactions relating to FCNR / NR
remittances. The centre will carry out the
transactions and the accounts will be
maintained by branches as is being done
presently. It is proposed to have 1 such centre
across the country.
o FEX Cheque Collection Cells will take care
of all FEX cheques & drafts received by
branches. Branches will send the
instruments to the cell where these will be
processed and entered in CBS. The cheques
will be sent to foreign centre for realisation
Banking Briefs
93
51
FAIR LENDING PRACTICES CODE (FLPC) OF SBI

FLPC contains 8 important declarations from the Bank.
The Code details the fair practices the Bank is adopting for information of its
customers.
The Customer would be explained the
processes involved till sanction and
disbursement of loan and would be informed of
timeframe within which all the processes will be
completed ordinarily at our bank. The Customer
would be informed of the names and phone
numbers of branches and the persons whom
he can contact for the purpose of loan to suit
his needs. The Customer would be informed the
procedure involved in servicing and closure of
the loan taken.
FLPC contains 8 important declarations from

us, the spirit of which pervades the entire FLPC
provisions. The important declarations are:
The Bank declares and undertakes
To provide in a professional manner, efficient,
courteous, diligent and speedy services in
the matter of retail lending.
Not to discriminate on the basis of religion,
caste, sex, descent or any of them
To be fair and honest in advertisement and
marketing of Loan Products.
Interest Rates
Interest Rates for different loan products would
be made available through and in anyone or all
of the media. Customers would be entitled to
receive periodic updates on the interest rates
applicable to their accounts. On demand,
Customers can have full details of method of
application of interest.
To provide customers with accurate and

timely disclosure of terms, costs, rights and
liabilities as regards loan transactions.
If sought, to provide such assistance or
advice to customers in contracting loans.
To attempt in good faith to resolve any
disputes or differences with customers by
setting up complaint redressal cells within
the organization.
Revision in Interest Rates:

The Bank would notify immediately or as soon
as possible any revision in the existing interest
rates and make them available to the customers
through the media. Interest Rate revisions to the
existing customers would be intimated within 7
working days from the date of change through
notifications in the Banks Website/ media/ notice
board at branches.
To comply with all the regulatory

requirements in good faith.
To spread general awareness about
potential risks in contracting loans and
encourage customers to take independent
financial advice and not act only on
representations from banks.
Default Interest/Penal Interest:

The Bank would notify clearly about the default
interest/penal interest rates to the prospective
customers.
FAIR PRACTICES:
Product Information:
Charges:
A prospective customer would be given all the

necessary information adequately explaining the
range of loan products available with the Bank
to suit his / her needs. On exercise of choice,
the customer would be given the relevant
information about the loan product of choice.
Banking Briefs
94
The Bank would notify details of all charges

payable by the customers in relation to their loan
account. The Bank would make available for the
benefit of prospective customers all the details
52
relating to charges generally in respect of their

retail products. Any revision in charges would
be notified in advance and would also be made
available in the media.
notify in advance any change in accounting

practices which would affect the customer
before implementation.
Information Secrecy
Terms and Conditions for Lending:
All personal information of the customer would

be confidential and would not be disclosed to
any third party unless agreed to by customer.
The Bank would ordinarily give an

acknowledgement of receipt of loan request and
if demanded by the customer, a copy of the
application form duly acknowledged would also
be given, as soon as the customer chooses to
buy a product of or service of his choice.
Immediately after the decision to sanction the
loan, the Bank would show draft of the
documents that the customer is required to
execute and would explain, if demanded by the
customer, the relevant terms and conditions for
sanction and disbursement of loan. Reasons for
rejection of loan applications would be conveyed
to small borrowers seeking loans up to Rs. 2
lac. Before disbursement of loan and on
immediate execution of the loan documents, the
Bank shall deliver a copy of the documents to
the customers.
Financial Distress:
The Bank would sympathetically reckon cases
of customers financial distress. Customers
would be encouraged to inform about their
financial distress as soon as possible.
Grievance Redressal
The Bank would have in place a Grievance
Redressal Cell/ Department/ Centre. The Bank
would make available all details, namely, Where
a complaint can be made, How a complaint
should be made, When to expect a reply, Whom
to approach for redressal of grievance etc., to
the customers individually on demand and
through the media .
Accounting Practices:
Response to a complaint, whether positive or

negative or requiring more time for redressal,
would generally be given within a maximum
period of four weeks from the date of receipt of
complaint, unless the nature of complaint is such
that it requires verification of voluminous facts
and figures.
The Bank would provide regular statement of

accounts, unless not found necessary by the
customers. The Bank would notify relevant due
dates for application of agreed interest, penal
interest, default interest, and charges if they are
not mentioned in the Loan applications,
documents or correspondence. The Bank would
Banking Briefs
95
53
STRESSED ASSETS REVIEW AND MANAGEMENT

HIGHLIGHTS:
Stressed Assets are Special Mention Account (Category I & II) & Sub-standard Assets.
Focus is on assets with outstanding of Rs.10 Lac and above
Time-bound action plan for rehabilitation, restructuring and recovery.
No prior administrative clearance needed for holding - on operation.
STRESSED ASSETS are:
9) Incomplete documentation in terms of

creation / registration of charge / mortgage
etc.
Special Mention Accounts (SMAs), and

Sub-Standard Assets (SS)
10) Non-compliance of terms and conditions of

sanction.
What are SPECIAL MENTION ACCOUNTS

(SMAs) ?
SMAs are Standard Assets
PRIMARY INTENTION BEHIND THE

INTEGRATED APPROACH
in which interest & /or instalment is/ are

overdue > = 30 DAYS (Category I), or,
which show signs of sickness/ weakness

(Early Warning Signals) (Category II)
Initiation of appropriate, time-bound

corrective action, so that SMA does not slip
to SS, and SS does not slip to D/L, due to
lack of timely finance &/or reliefs /
concessions
Quick identification
Establishing intrinsic viability
Where restructuring feasible, to be

considered as first option
Else exit /recovery option
Each step to be taken quickly
Early Warning Signals (EWS) An illustrative

list
1) Delay in submission of stock statement /
other control statements / financial
statements.
2) Return of cheques issued by borrowers.
3) Devolvement of DPG instalments and
nonpayment within a reasonable period
Stressed Assets Review (SAR)
4) Frequent devolvement of LCs and

nonpayment within a reasonable period
Aim:
5) Frequent invocation of BGs and non

repayment within a reasonable period
To streamline the multiple review process
Integrate Banks approach towards

management of Stressed Assets & their
restructuring
Supersedes all existing instructions
Non BIFR/ non CDR
Review of problem loans/SMAs /NPAs /

AUCA
Two-pronged approach
6) Return of bills / cheques discounted

7) Non-payment of bills discounted or under
collection
8) Poor financial performance in terms of
declining sales and profits, cash losses, net
losses, erosion of net worth etc.
Banking Briefs
96
54
Reviewing Authority
Accounts with
Outstandings
Up to Rs.1cr
Reviewing authority
NBG
MCG
AGM (Region)/
DGM (Module)
DGM (Sales
Hub-Region)
ZCC
SMECC
All sanctions above Rs.5 cr
CCC-II
MCCC
All Corporate Centres sanctions
CCC-I
MCCC
Above Rs.1 cr to Rs.5 cr
Review of stressed assets with focus on

restructuring
3) Evaluate whether problems are of temporary

nature
Review of Doubtful /Loss assets with focus

on quick recovery action
4) Proactive action needed from bank to sustain

viability
Purpose: Examine viability
5) Revalidate assumptions at the time of

sanction
o Approve action plan to proceed with

restructuring
6) Verify completeness and correctness of

documentation, e.g.,
a. revival position
b. creation /registration of charge,
c. insurance cover
o Coverage: loan assets (SMAs, SS) which

have a potential for quick turnaround Assets
o Cut off: Rs 10 lacs & above (outstanding) report individually on prescribed format
7) Rectify deficiencies in documentation, if any,
o Strategy: Initiation of corrective action at

appropriate time
8) Identify primary and secondary sources of

cash flows.
o If not considered potentially viable, directions

for recovery effort to be given immediately.
9) Verify adequacy of cash accruals.

Promoter related
For accounts below cutoff amount (above

Rs.1 lac but below Rs 10 lacs) -
Branches to formulate and pursue account

specific action plans with approval of
sanctioning authority
Discuss with B & G whether they have a plan

of action
Assess whether promoters /borrowers have

genuine intent to rehabilitate the unit
Report to be submitted monthly, on a

consolidated basis, to the controllers.
Obtain realistic and time bound commitment

from borrower / guarantor
Important parameters for branch level

review
Assess the ability of the management to

turnaround the unit
Account related
Holding on operations
1) Determine whether the unit is intrinsically

viable
2) Diagnose reasons for the deterioration in

asset quality
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97
55
To commence from the date branch

identifies SMA as potentially viable (No
Administrative Clearance / approval/
sanction needed. Only needs to be reported
as per report format)
Reviewing authority to give necessary

directions to the branch on the proposed
action plan
Where necessary, LC to be opened even if

earlier LC devolved, due to genuine cash
flow problems /mismatches
To continue for a maximum period of 3

months from date of identification as SMA &
for a maximum period of 1 month from date
of approval of rehabilitation package
No increase in margins may be sought.
Concessionary margins may be

considered as part of rehab package.
Outer limit- 4 months in larger accounts

Freezing the loans exposure at
Review of Doubtful / Loss Assets /AUCA
The sanctioned limit or, average daily

exposure during the previous one month prior
to date of reporting, which ever is higher
Restructuring to be examined as a first

option, if still viable, and security has not
deteriorated in quality.
Else, focus on various options of recovery
Full interchangeability between LC and CC

within the overall frozen exposure level, may
be permitted selectively
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98
Cut off: Rs.10 lacs & above.
Allowing operations within such frozen limit
Treatment of LCs
56
BANKING
TECHNOLOGY
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99
INFORMATION TECHNOLOGY ACT, 2000

IT Act was passed on 9th June 2000
The Act provides legal recognition to transactions carried out through any electronic
medium The Act facilitates growth of commerce.
The Act provides for amendments The Indian Penal Code, Indian Evidence Act
Bankers Books Evidence Act and the Reserve Bank of India Act
The Act does not apply to negotiable instruments, power of attorney and sale and
purchase of immovable properties
The IT Act enacted on the 9th June 2000,
provides legal recognition for transactions
carried out by means of electronic data
interchange and other means of electronic
communication, including the internet,
commonly referred to as electronic commerce
which involve the use of alternatives to paperbased methods of communication and storage
of information, to facilitate electronic filing of
documents with the Government agencies and
further to amend the Indian Penal Code, the
Indian Evidence Act, 1872, the Bankers Books
Evidence Act, 1891 and the Reserve Bank of
India Act, 1934 and for matters connected
therewith or incidental thereto. The IT Act
ensures that records can also be kept in an
electronic form. Before the IT Act, contracts
could only be enforced if documents were
signed. The law now recognises digital
signatures.
Digital signature means the authentication of

an electronic record by a person using electronic
means. The word electronic in the Act refers to
all kinds of computer systems.
Electronic governance With respect to

electronic governance, the Act provides for the
following:
100
Why was the Act needed?

In the absence of enforceable contracts ecommerce - commerce carried out over the
internet - could not have taken off. Suppose a
company wants to shift most of its procurement
to the internet. In the absence of the IT Act it
could not have taken its suppliers to court for
breach of contract if the original contracts were
entered into using e-mail. The enactment of the
law removes these difficulties. The IT Act is
therefore expected to boost e-commerce. The
Act also seeks to encourage electronic
governance by allowing government records to
be kept in an electronic form. It also permits
applications and forms to be filled up and bills to
be paid over the net.
Any information or other matter which the

law requires to be in writing or in printed form,
may be rendered or made available in
electronic form, in a manner so as to be
accessible and usable for subsequent
reference.
Such information or matter can be
authenticated by means of a digital signature
affixed in a manner prescribed by the central
government
Filing of any form, application or other
documents with any office, agency or
authority of the government or for the issue
or grant of any license or permit by means
Banking Briefs
of such electronic form, as may be

prescribed
Retention of documents, records or
information in electronic form, if (i) the
information contained therein remains
accessible so as to be usable for a
subsequent reference (ii) the electronic
record is retained in its originally generated,
sent or received format or in a format which
can be demonstrated to represent,
accurately, that format, (iii) the record bears
details which will facilitate the identification
of the origin, destination, date, time of
despatch or receipt of such record
All rules, regulations, notifications issued by
the government may be issued in electronic
form
57
Who verifies and issues digital signature

certificates?
the portal are not clear if somebody transmits

obscene material without the ISPs or the portals
knowledge.
This will be done by certifying authorities who

would authenticate and issue digital signature
certificates. The certifying authorities could be
private sector companies. The certifying
authorities are required to obtain a licence from
a new body called the Controller of Certifying
Authorities which the Act creates. The Controller
- who will head this body - will be appointed by
the Central government. The controllers job will
be to supervise the certifying authorities and
specify the standards which the certifying
authorities have to maintain.
Amendments to other Acts

The Act provides for amendments to:
The Indian Penal Code to provide for the
recognition of electronic records and
documents in court proceedings and to cover
offences in respect of documents in electronic
form
Indian Evidence Act to provide for recognition

and evidentiary presumptions in respect of
electronic records, for the admissibility of
electronic records in courts of law, for
evidentiary presumptions in respect of
secured electronic records and secured
digital signatures and for proof or verification
as to digital signatures
Bankers Books Evidence Act and the

Reserve Bank of India Act to facilitate
maintenance of banking records in electronic
form and the regulation of funds transfers
through electronic means, respectively
What is the regulatory structure which the Act

seeks to create?
The Controller of Certifying Authorities is part of
the regulatory structure. For the first time the
Act also defines cyber crimes, which includes
hacking into a computer network, creation of
viruses and forcibly taking over a computer
network. The Centre will appoint adjudicating
officers to decide whether or not a cyber crime
has been committed. The adjudicating officer
will have the right to award compensation not
exceeding Rs.10 lakh. The decisions of the
adjudicating officers can be challenged before
the Cyber Law Appellate Tribunal, a new body
created by the Act. Decisions of this appellate
tribunal can in turn be appealed against to the
high court.
Key exclusions
The Act excludes:
What are the punishments for hacking or other

cyber crimes?
The Act provides for a maximum imprisonment
for three years or a maximum fine of Rs.2 lakh
or both. Transmitting obscene material may also
be punished up to 10 years imprisonment.
Negotiable Instruments, namely cheques,

promissory notes and bills of exchange
Powers of attorney
Trusts, as defined under Indian law
Wills and other testamentary dispositions by

whatever name called
Contracts for sale or conveyance of

immovable property or any interest in such
property
Any such class of documents or

transactions, as may be notified by the
government
What are the problem areas of the Act?

There is a section of the act which allows an
officer of the rank or deputy superintendent of
police to search and arrest without a warrant.
This section has caused concern. Besides the
liability of service providers such as the ISP or
Banking Briefs
101
The passage of the IT Bill is a step in the right

direction to boost e-commerce.
58
PAYMENT AND SETTLEMENT SYSTEM

The Payment System integrates the financial markets.
Payment system facilitates the exchange of goods and services between economic
agents using an accepted medium of exchange. Payment systems are subject to
various systemic risks
Payment Systems encompass a set of
instruments and means generally acceptable in
making payments, the institutional and
organizational framework governing such
payments and the operating procedures and
communications network used to initiate and
transmit payment information from payer to
payee and to settle payments.
management, the pace of financial deepening

and the efficiency of financial intermediation.
Payment system facilitates the exchange of

goods and services between economic agents
using an accepted medium of exchange. A
modern payment system typically has a range
of specialized subsystems developed to serve
particular sets of customers; some of these
clear and settle small payments, some large
payments, while some cover both large and
retail settlements.
Payment systems can be subject to a range of

risks, including:
In essence, the payment systems are required

for protecting key existing assets of the banking
system, strengthening the customer base and
reducing existing costs and generating new
income:
Credit risk: the risk that a party within the system

will be unable fully to meet its financial
obligations within the system currently or at any
time in the future;
Liquidity risk: the risk that a party within the
system will have insufficient funds to meet
financial obligations within the system, as and
when expected, although it may be able to do
so at some time in the future;
The Core Principles for Systemically Important

Payment Systems, outlined by the Committee
on Payment and Settlement Systems of the
Bank for International Settlements, Basle, define
payment systems as a set of instruments,
procedures and rules for the transfer of funds
among system participants. The most
significant payment systems, which the Report
refers to as Significantly Important Payment
Systems(SIPS), are a major channel by which
shocks can be transmitted across domestic and
international financial systems and markets.
Legal risk: the risk that a poor legal framework

or legal uncertainties will cause or exacerbate
credit or liquidity risks;
Operational risk: the risk that operational factors
such as technical malfunctions or operational
mistakes will cause or exacerbate credit or
liquidity risks; and
Systemic risk: in the context of payment
systems this is the risk that the inability of one
of the participants to meet its obligations, or a
disruption in the system itself, could result in
the inability of other system participants or of
financial institutions in other parts of the financial
system to meet their obligations, as they
become due. Such a failure could cause
widespread liquidity or credit problems and, as
a result, could threaten the stability of the system
or of financial markets.
The Payment System has importance for the

functioning and integration of financial markets.
It influences the speed, financial risk, reliability
and cost of domestic and international
transactions. As a consequence, it can, among
others, act as a conduit through which financial
and non financial firms and other agents affect
overall financial system stability, with a potential
for domestic and cross border spill over effects.
The payment system also affects the
transmission
process
in
monetary
Banking Briefs
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The core principles apply to payment systems

which could trigger or transmit systemic
59
disruptions in the financial area because of the

size or nature of individual payments, which they
handle or because of the aggregate value of the
payments processed.
A system in which multilateral netting takes

place should, at a minimum, be capable of
ensuring the timely completion of daily
settlements in the event of an inability to settle
by the participant with the largest single
settlement obligation.
The core principles for payment system :

The system should have a well-founded

legal basis under all relevant jurisdictions.
The systems rules and procedures should

enable participants to have a clear
understanding of the systems impact on
each of the financial risks they incur through
participation in it.
Assets used for settlement should preferably

be a claim on the central bank; where other
assets are used, they should carry little or
no credit risk.
The system should ensure a high degree of

security and operational reliability and should
have contingency arrangements for timely
completion of daily processing.
The system should provide a means of

making payments which is practical for its
users and efficient for the economy.
The system should have objective and

publicly disclosed criteria for participation,
which permit fair and open access.
The systems governance arrangements

should be effective, accountable and
transparent.
The system should have clearly defined

procedures for the management of credit
risks and liquidity risks, which specify the
respective responsibilities of the system
operator and the participants and which
provide appropriate incentives to manage
and contain those risks.
The system should provide prompt final
settlement on the day of value, preferably
during the day and at a minimum at the end
of the day.
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60
PAYMENT AND SETTLEMENT SYSTEM IN INDIA

VISION 2005-08
Payment system policy goals are to foster a safe, secure, sound and efficient payment
system for the country.
Making all Payment Systems in India compliant to Core Principles for Systemically
Important Payment Systems (SIPS)
National Settlement System to cover all major clearing houses/ clearing organizations
in the country
Soundness, which indicates the well rooted
foundation for the payment and settlement
systems is another pillar in the payment systems
edifice. All the systems are required to be on
sound footing, with adequate legal backing, firm
operational procedures and transparency
norms.
Payment Systems Vision 2005-08 attempts

to carry forward the efforts to complete the
agenda of establishing a safe, secure, sound and
efficient payment system for India, matching
international standards and best practices.
The approach to be followed for payment and
settlement systems is best captured in the
Mission Statement which encompasses Safety,
Security, Soundness and Efficiency (the TripleS and E) as its vital components.
Efficiency is the key word for all the new

initiatives and this would be achieved by
leveraging the benefits of technology so as to
result in cost effective solutions, and optimal turn
around timings for the systems.
Safety in payment and settlement systems

relate to the avoidance of risks in these systems.
Payment Systems, by their nature are risk prone
and the need for addressing these risks
assumes significance. Sound designs, rules,
and risk-management practices promote the
safety of payments for financial institutions and
their users. Effective entry and exit criteria,
regular monitoring, guaranteed settlements
through introduction of central counter parties,
risk mitigation measures through clearly defined
and enforceable loss sharing procedures in the
unlikely event of default are the standard ways
to ensure safety of payment systems.
Thus the payment system policy goals will

continue to be to foster a safe, secure, sound
and efficient payment systems for the country.
Keeping this in view, for the period 2005-08, the
focus will be on the following major themes:
i.
ii. National Settlement System

iii. Sound legal base
iv. Continuation of risk mitigation efforts
Security pertains to the confidence among the

users of the payment and settlement systems.
Confidence in the integrity of the basic paper
payment instruments and payments systems in
India was built over a very long period of time.
New systems based on modern technology are
increasingly being implemented. Prudent users
will demand new systems to inspire confidence
with strong evidence that these systems will
meet their needs in both normal and exceptional
circumstances. The process of building
confidence can take years, and payment service
providers realize that confidence is an asset to
be guarded zealously.
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A new institutional structure for retail

payment systems
v. Efficiency enhancements
vi. Rural Sector facilitation ;and
vii. Customer facilitation and protection
Roadmap for Implementation
Within one year i.e. by March 2006
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Pursuing with IBA and major banks for setting

up of a national level entity which will operate
all retail payment systems in the country.
Operationalising National Settlement System

for all clearings at four metro centres
(Mumbai, New Delhi, Chennai and Kolkata)
Extension of MICR clearing to 14 additional

identified centres
MICRisation of every cheque every cheque

issued to follow MICR standards
EFT systems to be implemented at a national

level through the new retail payment
institution
Making all Payment Systems in India

compliant to Core Principles for Systemically
Important Payment Systems (SIPS)
Implementing image based Cheque

Truncation System (CTS) at the National
Capital Region on a pilot basis and preparing
ground work for extension of CTS System
to other metro centres.
Increasing the reach of payment services by

means of tie up and collaboration with other
large coverage entities such as the Post
Offices
Preparation of minimum standard of

operational efficiency at MICR Cheque
Processing Centre (CPC).
Government payments and receipts to be

facilitated through electronic mode. RBI will
participate in the E-Governance initiatives in
a pro-active manner
To be Implemented during the year 2007-08
Finalisation of the proposed EFT Regulations
Implementing Stage-2 of RTGS System i.e

IAS-RTGS Rollout during which all Inter-bank
transactions at all major centres would be
settled on RTGS platform. Paper-based
Inter-bank Clearing would be closed.
Pursuing with RTGS participants to cover all

their net-worked branches under RTGS
framework paving way for RTGS-based
customer related transactions at about ten
thousand branches in the country.
Making available Electronic Funds Transfer

facility at 500 capital market intensive centres
as identified by BSE and NSE. It would be
achieved by combination of RTGS/ SEFT/
NEFT/ NEFT(Extended) schemes.
Setting up Customer Facilitation Centre
(CFC) at RBI for various segments of
national payment systems ( RTGS, G-Sec
Clearing, Forex Clearing, MICR Clearing,
ECS and EFT )
Each payment service provider to disclose

publicly its standards, terms and conditions
under which the payment will be effected and
also compensation policy and procedure for
any deficiency in services including setting
up of CFC.
Drafting the Red Book on Payment Systems

in India.
Drafting comprehensive legislation on

payment system by way of a Payment
System Bill.
Banking Briefs
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To be Implemented during the year 2006-07
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Creating off-city back-up arrangements for

large value national payment systems like
RTGS system and G-Sec Clearing.
New organization for retail payment systems

to be fully functional with all retail payment
systems under its umbrella.
Regulations on various Payment Systems

(drawing authority from the proposed
Payment Systems Act)
National Settlement System to cover all major

clearing houses/ clearing organizations in the
country
INTERNET BANKING
Some functions performed through internet: Statement of account, request for issue
of cheque book, demand draft, stop payment of cheque, transfer of funds, payment of
bills
Cost of transaction through internet banking is the cheapest of all channels
Internet banking lacks popularity due to security threat, lack of zeal and negative
mindset
With technology advancements in computers
and communications, Banks have launched
Internet Banking product, which is an alternative
banking delivery channel. It aims to provide
anywhere and anytime banking.
A recent study by Meridien Research sums up

the landscape today: Internet banking is no
longer a competitive advantage but a competitive
necessity.
One of the major challenges faced by banks is
the impact of competition and the falling margins
in the transactions undertaken by them. With
hair thin profit margins being the order of the
day, the solution to this would perhaps lie in
increasing volumes so as to result in better
operating results for banks. This is best achieved
by exploiting the benefits of technology which
facilitates handling increased volumes at higher
levels of efficiency. A customer is no longer a
customer of a branch but a customer of the bank.
Functionalities: Various functionalities include,

basic services like obtaining account statement,
request for issuance of cheque book, demand
draft, stop payment of a cheque and transfer of
funds from one account to another account of
the account holder. Some of the other services
include, transfer of funds to third partys account,
payment of bills for various utility services like
electricity, telephone, water etc., booking of air
and rail tickets, transfer of funds across the
border etc. All the above services can happen
at a click of the mouse.
No innovation is without challenges - IT is no

exception to this rule. The most prominent
challenge arising from these innovations relates
to the concept of security. With the delivery
channels relating to funds based services - such
as movement of funds electronically between
different accounts of customers - taking place
with the use of technology, the requirements
relating to security also need to undergo
metamorphosis at a rapid pace. Various
concepts such as digital signatures, certification,
storage of information in a secure and tamperproof manner assume significance and have to
be part of the practices and procedures in the
day-to-day functioning of banks of tomorrow.
With strong competition Banks margins have

come down drastically, forcing it to cut down
oncosts. With advancement of technology,
penetration of internet to rural and semi-urban
areas is on the increase.
**Cost Comparison with other delivery
channels:
Name of the
delivery channel
Cost per
transaction (US$)
Teller
1.00
ATM
0.45
Phone
0.35
Debit Card
0.25
Internet
0.10
Reasons for not picking up: More than a lack

of regulatory framework, it is the lack of zeal and
a mindset attuned towards resisting any new
technology that is holding back the nationalized
banks. as per industrial analysts
* Source : India Research May 29 , 2000 , Kotak Securities

** This cost may be lesser in India due to lower labour cost.
Banking Briefs
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Other reasons are that the average customer,

comprising of senior citizen/50+ age group/
semi-urban/rural background, who is
comfortable with the traditional banking system,
and is not too keen on adopting an online model.
1. Brochure ware basic marketing material

with information about the financial institution and
its products and services via a Web site.
2. Basic Transactional providing basic
transactional services such as account
balances and bill payment, check image viewing,
fund transfer, and online statements.
Permissible e-banking transactions under IT

Act 2000
Submission of account opening forms
Issue of receipts in electronic form by banks

for amount deposited
Execution of security documents (except

trust/power of attorney/immovable property
documents)
Issue of digital cash to customers
Receipt of instructions from customers

regarding account operations (eg cheque
book issue, fund transfer, stop payment
request etc)
Issue of LC/bank guarantee/e-cheque book
Electronic fund transfer
3. Broad Transactional providing a broader

range of financial services online by adding
products such as brokerage, lending, cash
management, wireless and insurance. In Grant
Thorntons Eighth Annual Community Banking
Survey, bankers planning for the future cite key
success factors to their business, including
providing broker/dealer services, insurance
services, wireless access to accounts, and nontraditional services.
4. Strategically Transactional providing
sophisticated integrated products and services
to specific targeted segments of your customer
base; examples include push target marketing
opportunities via data mining, account
aggregation and wealth management services,
personal payment services, real-time customer
service with online chat and knowledge base
capabilities, and customer relationship
management.
The Four Phases of Online Delivery

In the future, online delivery will be just as
important as brick and mortar branch. As part
of their planning efforts, Banks need to take into
consideration the four phases of online delivery:
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CHEQUE TRUNCATION

Captures image of cheques and restricts their physical movement

Pilot project likely to commence from 1.4.06
The vendor for SBI is NCR Corporation
Point of truncation is at branch level for SBI pilot project
Uses highly secured network to protect data and image flow
One year paper instrument retention recommended
8 years for electronic image retention recommended
The Cheque is currently the most visible and

significant mode of payment in India. In view of
the large volume of cheques to be processed,
Magnetic Ink Character Recognition (MICR)
technology was introduced by the RBI. MICR
technology enabled the banking system to
handle the growth in volumes of cheques and
to provide faster and efficient clearing services
to customers and to do straight through
processing using MICR data. Over a period of
two decades, a number of MICR Clearing
Houses have evolved.
Some countries like Spain, Italy and Luxembourg

have a ceiling on the amount up to which
cheques can be truncated. Low value cheques
are eligible for truncation whereas high value
instruments still follow the traditional clearing
route. Cheque truncation has been less than a
complete success in larger countries. USA, for
example, is still a laggard in this respect despite
having the maximum number of cheques written
(237 per head in a year). Nonetheless, it is
making progress towards implementation of
cheque truncation.
The entire clearing cycle is dependent on the

movement of the physical paper Cheque from
the presenting bank to the drawee bank (branch)
as was mandated by the Negotiable Instruments
Act 1881 prior to its amendment in the last
quarter of 2002 to provide a legal framework for
the implementation of cheque truncation and echeques in India . This acted as a bottleneck to
bring about any improvement or reduction in
the cycle time for clearing.
Cheque Truncation Model for India
Cheque Truncation is one of the ways to

compress the clearing cycle to provide for faster
clearance of local and intercity cheques.
Cheque truncation is the process by which the
physical movement of Cheques within a bank,
between banks or between banks and the
clearing house is curtailed or eliminated, being
replaced in whole or in part by electronic records
of their content (with or without the images) for
further processing and transmission.
c) Preservation period of paper instruments
The Working Group set up by RBI deliberated

on the following issues;
a) Point of cheque truncation, whether to be at
presenting bank, clearing house or drawee
bank
b) Truncation of whole cheque or MICR code
only.
d) Storage of cheque images

e) Type of Images
f) Introduction of check digit in MICR line
g) Security over network
Their Recommendations :
I.
Truncation straddles many countries across the

globe. Denmark and Belgium were the pioneers
in the truncation process, having introduced
complete Cheque truncation in the early 1980s.
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The presenting banks may truncate at their

convenient location.
II. Payment to be based on cheque image ( NI

Act is amended).
65
III. Preservation of instruments scaled down to

one year from existing 8 years.
individual banks. The different cheque

truncation models generally adopted are :
IV. The storage can be at centralised agency

or at individual drawee banks.
Centralised Scanning at a Service Branch

(Service Branch Model)
V. Image capture using Grey scale technology

for finer features with relatively lesser storage
and network bandwidth required.
Decentralised scanning
branch(Branch Model)
Distributed scanning at multiple points for a

cluster of branches (Hybrid or cluster Model)
VI. Change in MICR line structure leads to delay

hence decision deferred.
The Pilot project for the Bankers Clearing House

of the National Capital Region of Delhi is slated
to commence from April 1, 2006. RBI has left
the decision to determine the points of cheque
truncation within their branch network, to
109
each
Depending on the level of technology, banks are

expected to adopt the best suitable model for
their implementation. The major vendors
providing the cheque truncation solution are NCR
Corporation, Unisys and BCSIS.
VII. Use Public Key Infrastructure for security

during image flow over the network.
Banking Briefs
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The vendor for SBI is NCR Corporation and has

adopted Branch Model for the pilot project.
66
NATIONAL ELECTRONICS FUNDS TRANSFER SYSTEM

(NEFT)
Started live from November 21, 2005
8 banks participated in the first phase
Single settlement at 12 noon every day
SEFT will be phased out in due course
Integrated with Structured Financial Messaging Solution
Uses end to end Public Key Infrastructure based security
The Reserve Bank of India had initiated several
measures to reduce risks, especially settlement
and systemic risks, in payment systems. After
the Electronic Funds Transfer (EFT) System and
Special EFT (SEFT), NEFT is a further initiative
in that direction. Unlike in SEFT, the transactions
in National Electronics Funds Transfer System
move electronically from end to end using more
robust security procedure (Public Key
Infrastructure) and integrated with Structured
Financial Messaging Solution (SFMS) of the
Indian Financial Network(INFINET).
RTGS is an electronic real time gross

settlement funds transfer product, NEFT would
be an electronic deferred net settlement funds
transfer product. In order to increase the
coverage of NEFT to a wider section of bank
customers in semi-urban and rural areas, an
enhancement of the NEFT called the NEFT-X
[National EFT (Extended)] is proposed.
For the time being there is a single settlement
per day at 12.00 noon. To begin with 8 banks
are participating in the live run. Subsequently
other banks will join the System in a phased
manner. Depending on their full technical and
other preparedness, eligible participants will join
the System at regular interval. It is expected that
all the banks participating in Special Electronics
Funds Transfer (SEFT) will be joining NEFT. It
will be the major clearing system for all retail
payments.
NEFT started live operation on November

21,2005. The objective is to establish an
Electronic Funds Transfer system to facilitate
an efficient, secure, economical, reliable and
expeditious system of funds transfer between
banks in the banking sector using Structured
Financial Messaging Solution (SFMS)
backbone.
The eight banks who are participating in the first

phase are : Canara Bank, Bank of Baroda,
Punjab National Bank, Dena Bank, ABN AMRO
Bank, HSBC, ICICI Bank and HDFC Bank.
The commencement of NEFT would lead to

discontinuation of SEFT. With the SFMS facility,
the bank branches can participate in both the
RTGS System and the NEFT System. While
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REAL TIME GROSS SETTLEMENT - RTGS

Payment system operates on the basis of gross settlement.
Lessens settlement risk.
RTGS provides for transfer of funds relating to inter-bank settlements as also for
customer related fund transfers.
b) Customer transactions
A payment system which operates as a gross

settlement system in which both processing and
final settlements of funds transfer instructions
can take place continuously (i.e. in real time) is
termed as Real Time Gross Settlement System.
c) Delivery versus Payment transactions

d) Own Account transfers Transactions
e) Multilateral Net Settlement Batches (MNSB)
Transactions The eligibility of a RTGS
member to undertake all or a subset of the
above transaction types will be governed by
its RTGS membership type.
The continuous settlement of payments on an

individual order basis without netting debits with
credits across the books of a central bank. This
system lessens settlement risk because
interbank settlement happens throughout the
day, rather than just at the end of the day.
Settlement of transactions:
A payment transaction is deemed to have been
settled when the Settlement Account or the
Current Account of the RTGS member (which
is to be debited through the transaction) has
been debited and the Settlement Account of the
RTGS member (who is to be credited through
the transaction) has been credited. A transaction
will be settled only if there is sufficient balance
in the Settlement Account, which has to be
debited. Otherwise, the transaction will be
rejected or placed in the RTGS members logical
payment queue in the RTGS System, depending
on the properties of the transaction type of the
payment message.
On settlement of
transactions, all the RTGS members, whose
Settlement Accounts have been debited/
credited; will be notified by the Central System.
On settlement, the settlement of a payment
transaction will be final and irrevocable,
excepting for un-clear credits in respect of the
MNSB transactions. All MNSB transactions will
be settled through the RTGS System. These
include net settlement batches arising from
Cheque Clearing Operations, Foreign Exchange
Clearings, Electronic Funds Transfer, Electronic
Credit and Debit Clearings, Government
Securities Clearings and any other MNSBs.
When payments are settled on a gross basis,
each transaction is settled individually. Each
payment instruction results in an immediate
Key elements of the system in brief are:

Orderly queuing of messages and their

disposal are intrinsic to the design of RTGS
system.
Avoidance of gridlock by providing for intraday liquidity to the participants. (Gridlock may
arise when series of interdependent
payment are stalled due to insufficient funds
to settle the primary transaction).
The risk inherent in net settlement system

namely settlement risk, principal (credit) risk
and systemic risk resulting in default by one
bank leading to knock on or domino effect
on the system is avoided.
RTGS environment leads to optimisation of use

of available resources in the banking sector in
addition to faster movement of funds and
information among various constituents of
financial sector.
The processing for settlement or otherwise, as
the case may be, of the following base
transaction types will involve the respective
Settlement Accounts/Current Accounts of the
RTGS members.
a) Inter-institutional transactions
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debit for the sender and credit for the receiver in

the settlement accounts with the clearing house.
to help overcome short-term requirements for

funds (during the RTGS business day) for
settlement of the transactions. The eligible
RTGS members will use the intra-day liquidity
facility only for overcoming genuine short term
funds requirements.
This may eliminate
liquidity risk but the credit risk is transferred from
the participants to the central bank.
With real-time gross settlement systems,

incoming funds are not used to offset outgoing
funds. Therefore, participants normally have
higher liquidity needs than in net settlement
systems. Payments are often bunched. The
settlement agent (usually Central Bank) bears
credit risk if it grants uncollateralised daylight
overdrafts facilities such as automatic
overdrafts. The systemic risk in gross
settlements can be reduced by developing
efficient inter-bank borrowing facilities or a
Central Bank borrowing facility, apart from
establishing procedures for smooth functioning
of payment system.
The coverage of Real Time Gross Settlement

(RTGS) system has increased significantly.
Connectivity is now available in 16,000 bank
branches at 700 cities. By end-March 2006, the
number of monthly transactions of the system
is expected to expand from one lakh to two lakh.
The National Electronic Funds Transfer (NEFT)
system for electronic transfer of funds would be
implemented in phases for all networked
branches of banks all over the country. The
clearing position of banks in various clearing
houses would be settled centrally through a
national settlement system (NSS) in order to
enable banks to manage liquidity in an efficient
and cost effective manner.
Gridlock Mechanism :
RBI may invoke the gridlock resolution
mechanism of the RTGS System to settle
queued transactions at periodic intervals though
it is not obligated to invoke this mechanism to
settle queued transactions and no member of
the RTGS System can claim any right to have
its payment transactions settled through the
gridlock resolution mechanism. RTGS
members, non-settlement of whose transactions
had led to the invocation of the Gridlock
Resolution Mechanism, may be penalized by the
RBI.
The Vision Document for Payment and

Settlement Systems, 2005-2008 envisages
establishment of an institutional structure owned
by banks and other financial institutions for retail
payment systems. The IBA constituted a
Working Group to study the proposal. The
Working Group has now recommended setting
up of a company under Section 25 of the
Companies Act, 1956 which would be owned
and operated by banks.
Intra-day Liquidity (IDL) Facility : RBI may

grant access to intra-day liquidity (IDL) facility
to the members for the settlement of their RTGS
transactions. The Bank will provide the intraday liquidity facility to the eligible RTGS members
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NETWORK SECURITY
Network is a system of interconnected computers.
Networks are classified as LAN, WAN, CAN, MAN and HAN.
Some of the security threats include Eavesdropping, traffic analysis, masquerading,
spam and spoofing
Security threats may cause loss of income, increased cost, loss of information, loss
of trade secrets, damage to reputation and legal and regulatory non-compliance
A computer network is a system of
interconnected
computers
and
the
communications equipment used to connect
them.
Brute-force attack: the intruder using many of

the password cracking tools attacks the
encrypted password to gain unauthorized
access to the network
There are many types of computer networks,

including:
Masquerading: an attack, in which the intruder

presents an identity other than the original
identity..
local-area networks (LANs) : The computers are

geographically close together (that is, in the
same building).
Packet replay: the intruder passively captures

a stream of data packets as it moves along an
unprotected or vulnerable network. These
packets are then actively inserted into the
network as if it were another genuine message
stream.
wide-area networks (WANs) : The computers

are far apart and are connected by telephone
lines or radio waves.
campus-area networks (CANs): The computers
are within a limited geographic area, such as a
campus or military base.
metropolitan-area networks (MANs): A data
network designed for a town or city.
Message modification: modification involves

the capturing of a message and making
unauthorized changes or deletions, changing the
sequence, or delaying transmission of captured
messages.
home-area networks (HANs): A network

contained within a users home that connects a
persons digital devices.
Denial of service: a type of attack on a network

that is designed to bring the network to its knees
by flooding it with useless traffic.
Network Security Threats:
e-mail spam: Electronic junk mail or junk

newsgroup postings. Some people define spam
even more generally as any unsolicited e-mail.
Communications and network security relates

to voice, data, multimedia, and facsimile
transmissions in terms of local area, wide area,
and remote access. The various network
security threats include:
e-mail spoofing: Forging an e-mail header to

make it appear as if it came from somewhere
or someone other than the actual source.
Network analysis: the intruder creates a

complete profile of an organizations network
security infrastructure
The impact of the threat to an organization

include,
Eavesdropping: the intruder gathers the

information flowing through the network with the
intent of acquiring and releasing the message
contents for personal analysis or for others
Traffic analysis: the intruder tries to guess the
type of communication taking place
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Loss of income
Increased cost of recovery
Loss of information
Loss of trade secrets
Damage to reputation
Legal and regulatory non-compliance
ENTERPRISE RESOURCE PLANNING (ERP)
ERP is a suite of software.
It facilitates total resource planning of an organization
Baan, Peoplesoft, Oracle, SAP are examples of ERP packages
The benefits from ERP depend on how it is used.
Enterprise Resource Planning (ERP) systems

have a suite of software modules that address
all the data requirements of an enterprise. They
are typically installed to improve business
processes or replace aging enterprise systems.
A complex set of tasks namely, selection,
system design, installation, tuning, maintenance,
and upgrades are involved in converting the
existing system to one of ERP.
Good reporting.
Ease of implementation and return on

investment.
Technology, client/server capabilities, webenabling, and database independence.
Availability of local support.
Ease of customisation and upgrade.
ERP was coined in early 1990 as a successor

to MRP II, which succeeded MRP. MRP (Material
Requirements Planning) systems resulted from
a requirement for control and efficiency in
manufacturing systems.
Excellent reference from other installations.
Excellent training programme.
On the other hand, ERP systems have modules

that integrate with one another easily. The
modules have the same user interface and
users have an easier time moving from one to
another. Whenever a change takes place in the
business process, the enterprise systems can
adjust to it immediately as the ERP systems
are more flexible and changes across the board
can be made more easily. Some of the existing
ERP system companies are Baan, Coda, D&B,
IBM, J.D. Edwards, Marcam, Oracle, Peoplesoft,
Ramco and SAP.
Therefore, ERP had its origins in manufacturing

and production planning. ERP then expanded
to include the back-office systems such as order
management, financial management,
warehouse management, distribution,
production, quality control, asset management,
and human resources management. It further
expanded to include front-office systems such
as sales force, marketing automation, electronic
commerce (e-commerce), and supply chain
systems. ERP helps plan the 4Ms of the
enterprise man, money, materials and
machines to their best.
A successful ERP implementation needs a

result-oriented team with representation from all
relevant business areas. The skills required of
the team members include: providing functional
requirements, business process reengineering,
mapping of requirements to module functionality,
report designing, ensuring business control,
customisation requirements, analysis and user
documentation. The hardware and software
technical skills are provided by the IT
department.
ERP systems are selected by the following

criteria:
Functionality fit with the companys

business processes.
The integration between the different

modules so that combination data can be
obtained easily.
Flexibility and scalability to keep up with the

growth of the company.
User-friendliness.
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An ERP consultant with experience in

implementing ERP systems can speed up the
implementation. An ERP installation can take
anywhere from 18 months to three years.
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DATA WAREHOUSING AND DATA MINING

Data warehousing seeks to centralize a variety of data and data mining attempts to
dig into the data.
Its goal is to find out patterns of customer behaviour.
It helps in designing new products and cross-selling products.
CRM heavily draws on these.
Data warehousing
Data Mining
Managers need quick, easy access to

information business intelligence - about the
company, customers, competitors, markets and
more. If they are to pursue the kind of initiatives
that translate into competitive and strategic
advantage, business managers need specific,
high -quality information. Herein lies the
importance of data warehousing.
Data mining, constitutes the discovery of

patterns in the data. Human beings tend to make
generalisations based on experience. Similarly
we would like the computer to make such
generalisations and provide us with some
patterns from the details available. This would
enable us to form multiple images (or models,
as they are called) about the different
characteristics of a given data. This is typically
used to establish profiles among the customers
to characterise them by their behaviour. We can
identify customers who are willing to go in for
risky products or customers who want only the
safest investments and so on. This profiling of
customers can then be used to market specific
products to them.
The idea behind data warehousing is to get all

the company data working together so that users
can see more, learn more and make the
organisation work better. The data warehouse
is an integrated store of information collected
from other systems, and becomes the
foundation for decision support and data
analysis.
There are different types of data mining. The

oldest and most traditional form is through
statistical analysis. More recent forms include
what is called association, which helps in
detecting patterns of combination items. This
would help, for example, in the identification of
product affinity. (If a customer prefers product
A, he is also likely prefer product Q).
The goal of data warehousing is to help users

identify trends, find answers to business
questions and derive meaning from historical and
operational data, all of which enhance decision
support in the enterprise. The practise of data
warehousing usually involves centralising a
variety of data sources or extending the value of
a central repository of doing more with the stored
data mining it, transforming it, analysing it or
depicting it visually.
A number of data mining tools are available in

the market now. However, data mining has not
yet reached a high level of maturity and only an
expert can work with the tool and interpret the
results.
Data warehousing allows organisations to run

more effectively and to act, react and adapt more
quickly to the everchanging environment they
operate in. It prepares a company to react to
unplanned events and helps close the gap
between a company and its customers. It lets
people focus on business, not technology, thus
delivering a competitive advantage.
Overall, the computer, which, till recently, was

considered a tool to churn out data and process
it, can now be used to interpret data and
understand some of the hidden patterns. This
would help all of us understand the environment
we live in and exploit that environment to the
maximum extent possible to further our
business.
Data marts have evolved due to the huge time

and cost investments required for constructing
data warehouses. Data marts are streamlined,
highly focused, smaller scale versions of the
enterprise data warehouse.
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Customer Relationship Management (CRM)

tools heavily depend on data warehousing and
data mining.
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WIRELESS APPLICATION PROTOCOL (WAP)

WAP stands for Wireless Application Protocol
It is a data transmission standard (otherwise called protocol)
It helps in accessing Internet through mobile phones.
With advanced technology such as GPRS, G3 graphic transmission and speed
are improved.
and the low-bandwidth constraints of a wirelesshandheld network.
What is WAP?
It is Wireless Application Protocol, a secure
specification that allows users to access
information instantly via handheld wireless
devices such as mobile phones, pagers, twoway radios, smartphones and communicators.
Although WAP supports HTML and XML, the

WML language (an XML application) is
specifically devised for small screens and onehand navigation without a keyboard. WML is
scalable from two-line text displays up through
graphic screens found on items such as smart
phones and communicators. WAP also
supports WMLScript. It is similar to JavaScript,
but makes minimal demands on memory and
CPU power because it does not contain many
of the unnecessary functions found in other
scripting languages.
WAP is the gateway to a new world of mobile

data-web-based interactive information services
and applications. The essence of todays
technology is first, mobility, then convergence.
Consequently, different jobs can be done by a
single electronic gadget.
Currently, one has to connect the ordinary mobile
phone to a laptop and dial from the latter to
access the Internet. WAP enables the mobile
phone itself to connect to the Internet through
the wireless network of the cellular operator. It
puts a relatively simple micro-browser into the
mobile phone and uses a new interface called
Wireless Markup Language (WML) as against
the Internets Hyper-Text Markup Language
(HTML) format thereby turning a mobile phone
into a network based smart phone.
How WAP works?

WAP content is available on the Internet. When
a mobile phone user requires some information,
he dials in. The required information is obtained
from the Internet and passed on to the Web
Server. At the web server, the information is
converted into WAP language. The message is
then put on the mobile phone operators WAP
gateway. Finally, the Mobile User receives the
message on his phone.
WAP supports most wireless networks. These

include CDPD, CDMA, GSM, PDC, PHS, TDMA,
FLEX, ReFLEX, iDEN, TETRA, DECT,
DataTAC, and Mobitex.
WAP has its limitations mainly in speed and

bandwidth. Also, the tiny device does not allow
a big display screen. Further, since the time
available to surf when one is on the move is
limited, content has to be minimal. WAPs nextgeneration technology, GPRS, has addressed
most of these issues. GPRS - General Packet
Radio Service - works more or less on the basis
on which e-mails work, send text and high-end
graphics data as packets at very high speeds.
WAP is supported by all operating systems.

Ones specifically engineered for handheld
devices include PalmOS, EPOC, Windows CE,
FLEXOS, OS/9, and JavaOS.
WAPs that use displays and access the Internet
run what are called microbrowsersbrowsers
with small file sizes that can accommodate the
low memory constraints of handheld devices
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GENERAL PACKET RADIO SERVICE (GPRS)

GPRS is an efficient use of limited bandwidth and is particularly suited for sending
and receiving data and Web browsing.
Multiple users share the same transmission channel in GPRS.
Packet-switched data under GPRS is achieved by allocating unused cell bandwidth
to transmit data.
General Packet Radio Service (GPRS) is a
mobile data service available to users of GSM
mobile phones. It is often described as 2.5G,
that is, a technology between the second (2G)
and third (3G) generations of mobile telephony.
It provides moderate speed data transfer, by
using unused TDMA channels in the GSM
network. GPRS is integrated into GSM
standards releases starting with Release 97 and
onwards. GPRS, which supports a wide range
of bandwidths, is an efficient use of limited
bandwidth and is particularly suited for sending
and receiving small bursts of data, such as email and Web browsing, as well as large
volumes of data.
setup by phones, the bandwidth available for

packet switched data shrinks. A consequence
of this is that packet switched data has a poor
bit rate in busy cells. The maximum data rates
are achieved only by allocation of more than one
time slot in the TDMA frame. Also, the higher
the data rate, the lower the error correction
capability. Generally, the connection speed
drops logarithmically with distance from the base
station. This is not an issue in heavily populated
areas with high cell density, but may become
an issue in sparsely populated/rural areas.
GPRS is packet based. When TCP/IP is used,
each phone can have one or more IP addresses
allocated. GPRS will store and forward the IP
packets to the phone during cell handover (when
you move from one cell to another). A radio noise
induced pause can be interpreted by TCP as
packet loss, and cause a temporary throttling in
transmission speed.
GPRS is packet-switched, which means that

multiple users share the same transmission
channel, only transmitting when they have data
to send. This means that the total available
bandwidth can be immediately dedicated to
those users who are actually sending at any
given moment, providing higher utilisation where
users only send or receive data intermittently.
Web browsing, receiving e-mails as they arrive
and instant messaging are examples of uses
that require intermittent data transfers, which
benefit from sharing the available bandwidth.
GPRS upgrades GSM data services providing:
Usually, GPRS data are billed per kilobytes of

information transceived (transferred) while
circuit-switched data connections are billed per
second. The latter is to reflect the fact that even
during times when no data are being transferred,
the bandwidth is unavailable to other potential
users.
Packet-switched data under GPRS is achieved
by allocating unused cell bandwidth to transmit
data. As dedicated voice (or data) channels are
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Point-to-point (PTP) service: internetworking

with the Internet (IP protocols) and X.25
networks.
Point-to-multipoint (PT2MP) service: pointto-multipoint multicast and point-to-multipoint

group calls.
Short Message Service (SMS): bearer for

SMS.
Anonymous service: anonymous access to

predefined services.
Future enhancements: flexible to add new

functions, such as more capacity, more
users, new accesses, new protocols, new

radio networks.
GPRS Data on pre-paid packages is usually

expensive, and limited to WAP and MMS. Full
internet access, allowing Web browsing, access
to POP/IMAP mail, FTP and other mainstream
Web applications is usually restricted to contract
packages, and are made available at lower cost.
Telephone operators have priced GPRS

relatively cheaply. Most mobile phone operators
dont offer flat rate access to the Internet. Instead
basing on their tariffs on data transferred, they
usually round off to 100 kilobyte.
The maximum speed of a GPRS connection is

the same as modem connection in an analog
wire telephone network, about 45 kB/s
(depending on the phone used).
In India, BPL Mobile (Bombay) offers unlimited

GPRS for Rs.500 (USD 11) per month. AirTel
offers nation-wide unlimited GPRS and EDGE
for Rs. 600 (USD 13.5).
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BIOMETRICS
The security advantage of biometric technology is that it can authenticate an individual
by measuring his distinct physical characteristics or behavioural traits.
Physical characteristics measured by biometrics include: face, fingerprint, iris, hand
geometry and retina.
Some of the Biometrics techniques are Signature technology, Fingerprint technology,
hand geometry technology, Voice technology, Iris technology.
Although not yet in general use, biometrics are
slowly being tested and adopted in the banking
sphere as a way of increasing security.
In Israel, several banking organisations, including

Bank Hapoalim, have adopted biometric
signature technology to verify customers for
secure payment transactions. Unlike other
biometrics, this approach is transparent to the
user. Consequently, acceptance has been high
because there is little difference in the way that
the consumer interacts with the bank compared
with pre-biometric days.
The average consumers reaction to biometrics

five years ago was generally either quizzical,
because they did not understand it, or
suspicious because they did not want to disclose
such personal information. All that has now
changed. Consumers are increasingly aware of
biometrics, with biometric passports and
numerous proposals for biometric ID cards
becoming a reality. What does this mean for the
banking sector?
At the fingertips
Signature technology is not the only biometric
that is being used more. Fingerprint technology
(which will be applied to many new e-passports
in the long-term) is also being used in the
payments market. Automated teller machine
(ATM) manufacturer Diebold has supplied
fingerprint-enabled ATMs to a bank in Chile as
part of a pilot project, and NCR has installed 400
fingerprint-enabled terminals at BanCafe in
Columbia. The ATMs, purchased at the end of
2002, have been established to improve security
customers do not need to carry ATM cards
and to encourage people to open accounts.
While there is still a general feeling that it is too

soon to adopt biometrics especially as
payment organisations are still trying to get to
grips with Europay Mastercard Visa (EMV)
requirements a steady flow of customer-facing
implementations and pilots has been taking
place, with surprisingly positive results.
Tight security
The security advantage of biometric technology
is that it cannot be borrowed, lost or stolen, and
it can authenticate an individual by measuring
his or her distinct physical characteristics or
behavioural traits.
Fingerprint technology is being applied to the

general payments arena through services such
as Pay By Touch. This allows users to pay for
purchases or to cash cheques with the touch of
a finger. Retail outlets that have piloted this
technology include the UKs Oxford, Swindon
and Gloucester branches of Cooperative Retail,
as well as Piggly Wiggly, a south-eastern US
grocery chain.
Physical characteristics measured by biometrics

include: face, fingerprint, iris, hand geometry and
retina.
Behavioural characteristics measured by
biometrics include: dynamic signature, gait
recognition, keystroke recognition and speaker
verification.
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The banking sector is now using hand geometry

technology, which has been used successfully
for border and access control for several years,
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for staff and customer access control. For

example, more than 300 banks in North America
have deployed Diebolds hand geometry system
to clear entry of customers into vaults so that
they can open their safe-deposit boxes.
any real impact on financial services. However,

products are now being aimed at the sector. For
example, one of Iridians latest cameras can
photograph a users iris from a distance of about
18 inches (46cm).
The use of biometrics has also been pioneered

in south-east Asia. For example, Japans Suruga
Bank has adopted an ATM system that verifies
customers by the pattern of the blood vessels
on the palms of their hands.
The confidence key

With interest in the technology starting to grow
and an increasing number of technologies on
the market, any payments organisation
considering deploying it needs to consider how
it will be used. Is it for staff access or for
consumer use? If it is for consumer use, the bank
must have confidence that the system will not
reject a genuine customer. Fingerprint is now
the most frequently used biometric for customerfacing applications. But iris is probably one of
the best from the inability-to-fool point of view.
However, usability is still a little tricky because
people need to be trained to use the system.
Voice technology is being used in some phone

banking applications. Brazils Banco Bradesco
uses speaker verification technology from
Nuance to enable customers to check bank
balances, make transactions, pay bills and
transfer funds via the phone.
Iris technology, which has attracted a lot of media
attention over the years, has so far failed to make
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MCA-21 PROJECT ON E-GOVERNANCE

A ministry of company affairs project, it aims to provide services to business, govt and
citizens through the new mca21 portal.
Project MCA-21, one of the largest e-governance projects, will cost Rs 345 crores.
This portal will be the entry point for online registration, filing of returns, reporting financial
results and requests for permissions by businesses.
The portal will also enable citizens to report investor grievances. It will also be a tool
for the public to report investor grievances.
The MCA-21 project portal (www.mca21.gov.in)
was launched in Coimbatore February 18, 2006.
This project of the Ministry of Company Affairs
(MCA), is expected to provide 21st century
services to business, government and the
citizens of India, hence the name.
portal. Online payments through credit cards/

debit cards may be made and payments can
also be made through bank drafts. Five banks
and 200 branches have been identified for offline
payment.
Online processing uses the forms feature of
Adobe PDF file, which permits data filling without
modifying the form itself; downloadable paperbased forms that can be filled offline may also
be used. Companies who wish to transact
online have to take digital certificates so that
authenticity and accountability are maintained,
in addition to security. The necessary Controller
of Certification Authority (www.cca.gov.in) has
already been put in place. Several Certification
Authorities have been licensed by CCA. The
legislation to allow e-filing was also provided
recently, through an ordinance in early 2006.
This portal will be the entry point for online

registration, filing of returns, reporting financial
results and requests for permission by
businesses. It will also be a tool for the public to
report investor grievances. It will help the
government to exercise control on erring
corporations who delay or deny information. In
fact, when fully operational, MCA-21 will usher
in a new phase in the history of corporate
governance in India.
Though administered by the government, this
project is executed in PPP (public-privatepartnership) mode. Tata Consultancy
Services(TCS) who won the bid through
competitive bidding will design, develop,
implement, manage and maintain the project
and transfer it to the government in a BOOT
(Build, Open, Operate and Transfer) mode.
This project is one of the largest e-Governance

projects being planned and monitored under the
National E-Governance Plan (NEGP) by the
National Institute of Smart Governance (NISG).
Some 60 million paper documents are getting
digitised, so that by the time when the project is
expected to go live, the MoA (Memorandum of
Association) of 6,50,000 companies and their
two-year annual statements will be available
online.
The first phase of the project is to be completed

by April 2006. TCS is expected to run the project
for six years. TCS will provide computers,
printers, scanners, servers, networks and
software. With a main data centre in Delhi and
a back-up business continuity server in Chennai,
all the 24 offices (four regional directorates and
20 RoCs (registrars of companies) will be
networked.
With due access control, such valuable

information will be available for use by the public,
leading to greater transparency. In the process,
it will improve the confidence of the citizens at
large. It will also create a healthy eco-system
for fair practices in the Indian business scenario.
With a similar system in place for income tax,
value added tax and customs duty collection,
there will be a fair, friendly and efficient tax
collection system in place.
53 facilitation centres, called PFOs (Physical

Front Offices) are planned where an authorised
facilitation personnel will help companies not
comfortable with e-filing to use the MCA-21
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COMPUTER FRAUDS AND CRIMES

Cyberspace has become central to the operations of Financial Institutions and hence
are increasingly prone to attack
Types of Computer crimes: Data diddling, viruses, worms, Trojan horse, Hacking
and Cracking, Spamming, Salami Techniques, Trap Doors, Logic Bombs, Denial of
Service, Asynchronous attack, Scavenging and Dumpster diving, Wiretapping,
Network packer sniffers, phishing and phaming and ATM skimming
The economic loss caused internationally by
computer related frauds and crimes is estimated
to run into large sums. Although this is not the
scenario in India at present, this is potentially a
high-risk area and all concerned have to address
this issue with care and in a timely manner.
Since banks would be one of the major targets
of computer frauds and crimes, it is necessary
for us to not only have an idea of the possible
methods of such activities but also of the
preventive mechanisms required to address the
problems that are targeted to endanger the
operating systems.
to anyone who has access to the process of

creating, recording, transporting, encoding,
examining, checking or transforming data that
subsequently becomes the input to a computer.
(b) Viruses
A computer virus (an acronym for Vital
Information Resources Under Siege) is a small
programme written to alter the way a computer
operates, without the permission or knowledge
of the user. A virus must meet two criteria :
It must execute itself. It will often place its own
code in the path of execution of another
programme.
Cyberspace is becoming more and more central

to the operations of the financial institutions and
their critical inrastructures. Cyberspace
comprises interconnected computers, servers,
routers, switches, fiber optic cables and satellite
links that make the critical infrastructure work.
The communications infrastructure, amongst all,
is most vulnerable to instructions. Intruders gain
access to computer systems and networks in
unauthorized ways and engage in security
incidents such as hacking, website
defacements, denial-of-service attacks, identity
theft, access to sensitive financial/ business data
with a view to cause financial frauds.
It must replicate itself. For example, it may

replace other executable files with a copy of the
virus infected file. Viruses can infect desktop
computers and network servers alike.
Some viruses are programmed to damage the
programmes, delete files, or reformatt the hard
disk. Others are not designed to do any damage,
but simply to replicate themselves and make their
presence known by presenting text, video, and
audio messages. Even these benign viruses
can create problems for the computer user. They
typically take up computer memory used by
legitimate programmes. As a result, they often
cause erratic behaviour and can result in system
crashes. In addition, many viruses are bugridden, and these bugs may lead to system
crashes and data loss.
Computer Crimes
(a) Data Diddling
This technique involves the changing of data or
the insertion of false data, before or during its
input into the computer, with the alteration
resulting in some benefit to the perpetrators after
the altered data has been processed. This
technique is a simple and common one available
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(c) Worms
Worms are programmes that replicate
themselves from system to system without the
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use of a host file. This is in contrast to viruses,

which require the spreading of an infected host
file. Although worms generally exist inside other
files, often in Word or Excel documents, there is
a difference between how worms and viruses
use the host file. Usually the worm will release
a document that already has the "worm" macro
inside the document. The entire document will
travel from one computer to the other.
Though this can be done through any from of

media, the most common are e-mail and SMS.
The main purpose for spamming is advertising.
Goods commonly advertised in spam include
pornography, computer software, medical
products, credit card accounts and
contemporary cult/rage/fad products. Spam is
also used to promote scams such as pyramid
schemes [send to next 10 persons], stock
schemes, and the money transfer frauds.
(d) Trojan Horse
A spammer sends identical or nearly identical

messages to thousands of e-mail addresses.
These addresses are often harvested from
Usenet postings or web pages, obtained from
databases, or simply guessed by using common
names and domains. Sometimes, the spammers
insert spyware similar to cookies. Cookies are
pieces of information generated by a web server
and stored in the users computer, ready for
future access which will give a regular feedback
to the on e-mail users tastes, preferences, the
sites normally visited by him/her, etc., so that
hopefully for the spammer, there would be a
positive response from the gullible user when
an e-mail spam is sent.
This is a generic name for a method that involves

the placement of computer instructions within a
programme so that unauthorized functions can
be performed while normal programmes are
allowed to perform their intended purposes.
Programmes are usually constructed loosely
enough to allow instructions to be inserted by
those skilled in programming including systems
analysts and operators as well as programmers.
Trojan horses trick the computer user by offering
something existing and useful. Once a Trojan
lose gets into a computer, it inserts a malicious
code and makes the computer do crazy things.
(e) Hackers and Crackers
Hacking is the process of getting into someone
elses computer or an application server without
permission. The art of hacking can be either
positive or negative, depending on the
personalities and motivations involved. There are
hackers who hack with a view to finding
loopholes and improve the security systems. But
the bad guys, who are called crackers, hack
with a view to commit crime ranging from petty
fraud of defacing a website or steal some
information or to manipulate data either just fun
or for ulterior pecuniary motives. Some of the
hacking attempts could be to endanger the
security of a nation too. Hackers may also
introduce malicious codes in the form of viruses,
worms or trojans and facilitate propagation of
these attacks over the Internet causing
disruption of servers.
(g) Salami Techniques

By taking a thin slice off financial transactions
and accumulating the resultant in a favoured account, a perpetrator can amass significant
amounts without arousing undue suspicion.
(h) Trap Doors
Programmers often deliberately leave breaks in
the code (of programmes) to enable the insertion of additional debugging code. The traditional
design of operating systems attempts to prevent
access to, insertion of, and modification of operating systems code. Consequently, systems
programmers will sometimes insert code that
allows a compromise of these requirements
during the debugging phase of system development and sometimes during system improvement. Such facilities are referred to as Trap
Doors and are normally removed after final
programme editing. When they are not removed,
they become methods of system compromise.
(f) Spamming
Spamming is the act of sending unsolicited, bulk
(and usually commercial) electronic messages.
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(i) Logic Bombs
duced from traffic analysis and obtained in a

manner which may not alert the victims.
Instructions are inserted to trigger an action of

the computer at a predetermined time. This
technique has usually been used in a destructive manner to wipe out files.
(n) Network Packet Sniffers

Network computers communicate serially where
large information pieces are broken into smaller
ones. These smaller pieces are called network
packets. Since these network packets are not
encrypted during the transmission, they can be
processed and understood by any application
that can pick them off the network. A network
protocol specifies how packets are identified and
labeled which enables a computer to determine
whether a packet is intended for it. The specifications for network protocols such as TCP/IP
are widely published. A third party can easily interpret the network packets and develop a
packet sniffer. A packet sniffer is a software application that uses a network adapter card in a
promiscuous mode (a mode in which the network adapter card sends all packets received
by the physical network wire to an application
for processing) to capture all network packets
that are sent across a local network. A packet
sniffer can provide its users with meaningful and
often sensitive information such as user account
names and passwords.
(j) Denial of Service Attack

This involves flooding a computer resource with
more requests than it can handle. This causes
the resource (e.g. a web server) to crash thereby
denying authorized users the service offered by
the resource.
(k) Asynchronous Attacks
Most operating systems function asynchronously, based on the services that must be performed for the various programmes. The allocation of system resources is carried out not in
the order in which they are received but according to the order in which resources become available to fit the request. There are highly sophisticated techniques for confusing the operating
system to allow it to violate the isolation of one
job from another and thus a perpetrator can gain
unauthorized access to files.
(i) Scavenging and Dumpster Diving
(o) Phishing and Pharming : Emerging Crimes

on the Internet
After the execution of a job, information may be

left in or around a computer that may be of value.
Not only waste paper bins but also buffer storage areas of main memory and old data left on
discs are all sources of scavenging. Instances
of removal of data from papers thrown as waste
in dustbins and reconstruction of data for undue
use is called dumpster diving.
Just when one thought everything was safe in

online banking, clever and potentially damaging
frauds are emerging on the internet. They are
called phishing and pharming.
Phishing is a term coined by computer hackers,
who use e-mail to fish the internet, hoping to hook
users into supplying them the logins, passwords
and / or credit card information. It involves impersonated fraudulent e-mails and web pages.
In a typical phishing attack, a user receives an
e-mail impersonated to be sent by a financial
institution. The e-mail will carry the spoofed
[Spoofing : creating a look alike / shadow/ mirror
copy] image or logo of the financial institution
and will attempt to convince the user to provide
personal and account details by means of asking him/her to visit a web-link (hyperlink) given in
(m) Wiretapping
Relatively cheap equipment is freely available to
allow the capturing of data. However, the case
books do not show this as a popular method
because of the fact that there are easier ways
to obtain or modify data. Related to this technique is traffic analysis, whereby someone examines how often particular people are contacted, the identity of contacted people, and what
time of the day or week contacts are made. Information about business activities can be deBanking Briefs
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the message. When the user clicks the weblink, a malicious web page, which is exact replica of the financial institution and actually hosted
by the fraudsters, is opened. A normal user unaware of such malicious activity in turn provides
his/her personal and account details to the
fraudsters. The fraudsters use this information
for fraudulent transactions causing huge financial losses to the individuals and financial institutions.
the cards and use the PIN numbers to withdraw

thousands from many accounts in a very short
time directly from the banks ATM. The unmanned
ATMs [without security guards] are vulnerable
to such attacks.
(q) Lebanese Loop - Another Kind of ATM Scam
A scam involving ATM machines in which thieves
insert clear plastic sleeves into the machines
card slot and wait for innocent users to fall prey.
When an unsuspecting customer inserts his or
her card and enters his / her PIN, a message
instructing the user to reenter the PIN is displayed
because the machine cannot read the cards
magnetic strip. After several unsuccessful attempts to reenter the PIN, the user finds that he
or she cannot remove the card and, in many
cases, leaves the machine mistakenly believing
that the machine has malfunctioned and retained
their card. In reality, the thief, posing as another
customer feigning aggravation over the malfunctioning machine, presents himself by piggybacking behind the user and pretends to help but incidentally, memorizes the users PIN following
the unsuccessful entries, before leaving the area.
After the user leaves, the thief (or an accomplice) returns to the machine, removes the plastic sleeve containing the users card, takes out
the card, reinserts it without the sleeve, enters
the users password and empties his account.
Pharming is the exploitation of a vulnerability in

the DNS server software that allows a hacker to
acquire the Domain Name for a site, and to redirect that websites traffic to another website.
DNS servers are the machines responsible for
resolving internet names into their real address
- the signposts of the internet.
(q) ATM skimming
Banks ATMs are being rigged to steal both the
ATM card number and the PIN. The criminal team
sits nearby in a car receiving the information
transmitted wirelessly over weekends and evenings from equipment they install in front of the
ATM. The equipment called Skimmer is
mounted to the front of the normal ATM card slot
that reads the ATM card number and transmits
it to the criminals sitting in a car nearby. At the
same time, a wireless camera is disguised to
look like a leaflet holder and is mounted in a position to view ATM PIN entries. The thieves copy
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DISASTER RECOVERY PLAN

Disaster Recovery Plan is essentially a pre-determined blue-print for disaster
management.
It deals with the steps to be taken to restore a system to normalcy when a calamity
or disaster takes place.
It is a tool of operational risk management.
case of their absence, the addresses and
telephone number of the persons to be intimated,
including the managers, fire brigade, police,
hospitals, ambulance, the location of escape
routes, fire fighting equipment etc. It would also
provide where to get cash if required.
Disaster recovery (DR) planning is the process

of developing advance arrangements and
procedures that enable an organisation to
respond to a disaster by resuming critical
business functions within a defined time frame,
minimising loss, and restoring affected areas.
The plan must be maintained and tested/
exercised regularly.
The Emergency Action team would deal with the

disaster situation. The Damage Assessment
Team assesses the nature and extent of the
damage. Then the Emergency Management
Team springs into action and retrieves whatever
is left of the assets. These teams are given
rigorous training including mock drills or
simulated attacks so that they are ready and
prepared when the disaster strikes.
Disaster Recovery Plan (DRP) covers the three

stages of action that follow when a disaster
occurs. The first stage, viz., confrontation of the
disaster is dealt with by the Emergency Plan.
Then the Back-up Plan deals with the
procurement of required materials. The
Recovery Plan restores the office to normalcy
to facilitate commencement of business. As a
basis for the preparation of the plan, the levels
of exposure of the organisation to different types
of risk are ascertained. A Risk Analysis and
assessment is undertaken which identifies
existing risks and the probability that they will
actually materialise. The risks are ranked in the
order of their severity and capacity to inflict
losses. Another type of evaluation called
Critically of the Assets is also undertaken
through which the assets that are likely to be
affected are identified and ranked in the order of
priority of attention required during disasters.
The Back-up Plan provides the procedures for

replacing the data and assets damaged in the
disaster. If the place of work is damaged it would
identify an alternate site where the work could
be carried out. It would lay down the procedure
to reach the material and resources like backup
data, standby equipment, backup programs,
documents, stationery, furniture etc. to the
alternate site. It would have standing
arrangements with the vendors for providing
hardware, software, power supply, airconditioning etc. in such emergencies.
The main part of the Disaster Recovery Plan
would provide for the procedures for recommencing the office activities. The plan is
based on the criticality of the recovery time
period which is the number of days beyond
which the company cannot survive without the
computer facilities. For companies using on-line
real time processing, (e.g., airlines, Hotel chains,
bankers, etc.,) even a day of systems failure
might spell a disaster.
When a disaster strikes the need is for rapid

action. The Contingency Plan is prepared for
achieving this objective. It describes the three
teams that would go into action and will contain
all information regarding them, including a list of
persons who would be involved in confronting
the disaster, their duties and responsibilities, the
persons who would be ready as standbys in
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83
BANKING
POLICIES AND ACTS
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BASEL - II
PRUDENTIAL GUIDELINES ON CAPITAL ADEQUACY- IMPLEMENTATION OF THE
NEW CAPITAL ADEQUACY FRAMEWORK
Basel II consists of three-mutually reinforcing Pillars, viz. minimum capital requirements,
supervisory review of capital adequacy, and market discipline.
It requires banks to hold capital not only for credit and market risk but also for operational
risk (OR).
Commercial banks in India will start implementing Basel II with effect from March 31,
2007
The Basel Committee on Banking Supervision
(BCBS) has come out with the document,
International Convergence of Capital
Measurement and Capital Standards: A Revised
Framework popularly known as Basel II. It builds
on the current framework to align regulatory
capital requirements more closely with
underlying risks and to provide banks and their
supervisors with several options for
assessment of capital adequacy.
which the accord combines under the title of

residual risk.
The Revised Framework.
These approaches for credit and operational

risks are based on increasing risk sensitivity and
allow banks to select an approach that is most
appropriate to the stage of development of
banks operations. The approaches available for
computing capital for credit risk are Standardised
Approach, Foundation Internal Rating Based
Approach and Advanced Internal Rating Based
Approach. The approaches available for
computing capital for operational risk are Basic
Indicator Approach, Standardised Approach and
Advanced Measurement Approach.
Pillar III
The third pillar greatly increases the disclosures
that the bank must make. This is designed to
allow the market to have a better picture of the
overall risk position of the bank and to allow the
counterparties of the bank price and deals
appropriately.
Basel II uses a three pillars concept - (1)

minimum capital requirements; (2) supervisory
review; and (3) market discipline - to promote
greater stability in the financial system.
The Basel I accord only dealt with parts of each
of these pillars. For example, of Pillar I the key
risk viz., credit risk was dealt with in a simple
manner and market risk was an afterthought.
Operational risk was not dealt with at all.
Pillar I
Why move to Basel II
The first pillar provides improved risk sensitivity

in the way that capital requirements are
calculated in three of the components of risk that
a bank faces: credit risk, operational risk and
market risk. In turn, each of these components
can be calculated in between two or three ways
of varying sophistication. Other risks are not
considered fully quantifiable at this stage.
Under Basel II the capital requirements are more

risk sensitive as these are directly related to the
credit rating of each counter-party instead of
counter-party category. Further, it requires banks
to hold capital not only for credit and market risk
but also for operational risk (OR) and where
warranted for interest rate risks, credit
concentration risks, liquidity risks etc.
Pillar II
Basel II has other advantages such as providing

a range of options for counter-party capital
requirements and in the process reducing the
gap between required capital and regulatory
capital. It recognises a wider range of collaterals
and provides incentives for improved risk
management practices. An interesting point to
The second pillar deals with the regulatory

response to the first pillar, giving regulators much
improved tools over those available to them
under Basel I. It also provides a framework for
dealing with all the other risks that a bank faces,
such as name risk, liquidity risk and legal risk,
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Encouraging banks to formalize their capital

adequacy assessment process (CAAP) in
alignment with their business plans and
performance budgeting systems. This,
together with the adoption of RBS, would
enable factoring in of the Pillar II
requirements under Basel II.
expanding the area of disclosures (Pillar III),
so as to have greater transparency in the
financial position and risk profile of banks.
Finally, we are trying to build capacity for
ensuring the regulators ability for identifying
and permitting eligible banks to adopt IRB /
Advanced Measurement approaches.
note here is that Basel II recognises the element

of diversification of risk in the SME sector and
has assigned a lower risk weight for retail SME
exposure under standardised approach. The
non-retail SME exposure would also attract a
lower risk weight where they have better external
ratings under the standardised approach.
Shifting to Basel II, therefore, could be
advantageous for economies whose banks have
significant SME exposure.
Indian Approach to Basel II
With the commencement of the banking sector
reforms in the early 1990s, the RBI has been
consistently upgrading the Indian banking sector
by adopting international best practices. The
approach to reforms is one of having clarity
about the destination as also deciding on the
sequence and pace of reforms to suit Indian
conditions. This has helped us in moving ahead
with the reforms without disruption. With the
successful implementation of banking sector
reforms over the past decade, the Indian banking
system has shown substantial improvement on
various parameters. It has become robust and
displayed significant resilience to shocks. There
is ample evidence of the capacity of the Indian
banking system to migrate smoothly to Basel II
norms.
Implementation of Basel II will require more

capital for banks in India due to the fact that
operational risk is not captured under Basel I
and the capital charge for market risk was not
prescribed until recently. Though the cushion
available in the system, which at present has a
CRAR of over 12 per cent, is comforting, banks
are exploring various avenues for meeting the
capital requirements under Basel II.
Implementation of Basel II will make
considerable demands on scarce resources in
terms of both economic resources and human
resources. Banks must take on the challenges
and convert these into opportunities.
The policy approach to Basel II in India is such

that external perception about India conforming
to best international standards is positive and is
in our favour. Commercial banks in India will
start implementing Basel II with effect from
March 31, 2007. They will initially adopt the
Standardised Approach for credit risk and the
Basic Indicator Approach for operational risk.
After adequate skills are developed, both by the
banks and also by the supervisors, some banks
may be allowed to migrate to the Internal Rating
Based (IRB) Approach.
Higher capital requirements The Basel

document prescribes the minimum capital
requirements and banks need to be encouraged
to hold more capital than the minimum. Banks
are expected to operate at levels above the
minimum to take care of the fluctuations in
capital requirements in response to the
fluctuations in the quality of risk exposures. It
will be necessary to ensure that all elements of
expected losses should be fully met by
provisioning and that capital is available
exclusively to support unexpected losses.
Higher capital requirements could pose
difficulties if there are state owned banks. This
may require consideration of options such as
preference shares and other innovative tier-I
instruments, hybrid tier-II capital instruments
and tier-III capital instruments.
Some of the regulatory initiatives taken by the

Reserve Bank of India relevant for Basel II are
as follows:
to ensure that the banks have suitable risk
management frameworks oriented towards
their requirements dictated by the size and
complexity of business, risk philosophy,
market perceptions and the expected level
of capital.
Risk Based Supervision (RBS) in 23 banks
has been introduced on a pilot basis.
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Improved IT architecture/MIS The basic

requirement for implementation of Basel II is
improved information systems for managing and
using data for business decisions. Banks should,
85
therefore, be encouraged to strengthen their IT

architecture and also improve their information
and reporting systems. This would also equip
banks to cope appropriately with the Pillar III
disclosure requirements.
Consolidation In the normal course of
operations banks would be constantly looking
for opportunities of inorganic growth. Banks
which operate with capital above the minimum
levels have an edge over the other banks to the
extent that they would be able to seize an
opportunity for merger / acquisition as and when
it is available without any loss of time. However,
it would be necessary for such banks to improve
their internal controls and risk management
systems before embarking on a path of
inorganic growth.
Basel II implementation would enable banks to
meet the above pre-requisites and place them
in a situation where they can take advantage of
opportunities as and when they arise.
Data issues Implementation of Basel II both
under Standardised Approach and IRB
Approaches, would involve utilisation of data for
computing capital requirements. While the
dependence on data under the Standardised
Approach would be largely similar to Basel I,the
data requirements are considerable under the
Advanced Approaches. Banks would require
adequate and acceptable historical data to
compute capital requirement under these
Approaches. At the minimum banks need to
have historical data for computing the probability
of default, loss given default and operational risk
losses. While building up this data base banks
also need to ensure purity and integrity of such
data.
External ratings In a situation where

countries do not have domestic rating agencies
or where the extent of rating penetration is low
the capacity of banks in these countries to relate
capital requirements to the actual underlying risk
will be seriously handicapped. It would be
necessary to develop domestic rating agencies
and look at methods for increasing the rating
penetration of the rating agencies.
Validating the concept of economic capital
The Basel II Framework will promote adoption
of stronger risk management practices by
banks which will address all major risks
comprehensively. Basel II, by being risk
sensitive, will enable banks to bridge the gap
between economic capital and regulatory
capital. Through the Pillar II requirements under
Basel II, banks are expected to have their own
internal methodologies for assessing the risks
and computing the capital requirements to
support those risks even for banks adopting the
standardised approach for credit risk. This
would aid the banks to move in the direction of
building their own economic capital models,
which can direct their business strategies. It is
possible that many of the banks in emerging
economies might not have developed their
internal capital adequacy assessment
processes (ICAAP). Implementation of Basel II
would now require these banks to have in place
an ICAAP which meets the Basel II
specifications.
Improving governance standards and
oversight The Basel II framework places
considerable emphasis on internal processes
for managing risk and for managing capital
requirements. This along with the Pillar III
disclosure requirements places tremendous
demand on the Governance and oversight
standards within a bank. Banks should therefore
focus their energies on raising their governance
and oversight standards to greater heights.
Capacity Building Banks would need to

focus on equipping their staff suitably to handle
the advanced risk management systems and
supervisors need to equip themselves with equal
skills to have effective supervision. Banks need
Basel II is expected to foster financial stability
to focus on motivating the skilled staff and
through its risk sensitive framework which will
retaining them. RBI has initiated supervisory
encourage banks to adopt improved risk
capacity-building measures in as many as 90
management practices; require supervisors to
scheduled commercial banks in India to identify
review the efficiency of banks risk management
the gaps and to assess as well as quantify the
practices and capital allocation methodologies;
extent of additional capital, which may be
and empower market participants to make
required to be maintained by such banks. The
informed judgements on the efficiency of banks
task is scheduled to be completed by December
and accordingly punish or reward banks.
2006.
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130
CAMELS RATINGS FOR BANKS

Recommended by Padmanabhan Committee.
Deals with supervision of banks by RBI.
Banks to be classified into two: One, that needs annual supervision; other, on a larger
time scale.
Classification based on key parameters: Capital adequacy, Asset quality,
Management, Earnings performance, Liquidity and Systems (For foreign banks it is
CACS- second C stands for Compliance with regulatory guidelines).
Ratings on a scale of A to E
During the normal course of conducting its
business, banks assume risks notably credit
and liquidity risks. If the risks are controlled
properly, banks create economic value by
attracting savings to finance investment. In cases
of mismanagement and misallocation of their
resources, banks fail. III effects of bank failures
are rapidly transferred through the entire financial
system of the economy.
discriminating as between banks, based on

defined parameters of soundness financial,
managerial and operational (related mainly to risk
management and internal control systems)
systems. It was recommended that intervals
between examinations in respect of banks
without known or reported problems be
wid-ened, while the weaker banks may be
subjected to frequent exami-nations by lessening
the intervals between two examinations.
Presently banks are subjected to Annual

Financial Inspections (AFI) by RBI with main
accent on the assessment of the banks financial
position and senior offi-cials of the RBIs
Department of Supervision (DoS) to look into the
non-financial aspects i.e. manage-ment and
systems.
For evaluation and rating of Indian Banks, the

committee has suggested six key parameters
viz Capital Adequacy, Asset Quality,
Management, Earnings performance, Liquidity
and Systems (CAMELS Acronym). This is on
the lines of rating model (CAMEL) em-ployed by
the Supervisory Authorities in U.S.A. Considering
growing supervisory concerns on the need for
adequate systems of risk management and
operational controls in banks operating in India,
especially with the increase of market risk in bank
port-folios, an additional parameter of systems
has been added to the CAMEL in India.
The system of inspection of banks by the RBI

was reviewed in 1991 by a Working Group
chaired by Shri S. Padmanabhan, former
Chairman of Indian Overseas Bank. The
Padmanabhan committee has suggested that
banks be placed in the following two categories,
for the purpose of examination, depend-ing on
the known and reported condition of the banks
in financial, operational and management and
compliance terms:
With regard to Foreign Banks operating in India

the committee considered that some parameters
like management, earnings, liquidity are not of
much significance and are clearly of lesser
concern in regard to branch operations from the
view point of a host country supervision and
excluded these factors for the evaluation
purpose. On the other hand, keeping in mind the
serious aberrations that surfaced in the
operations of some foreign banks in the recent
past, the commit-tee, recommended to include
compliance (Regulatory compliance) factor for
1) those that need to be examined on an annual

cycle and
2) those that may be examined on a wider time
scale say within two years from the date of
last examination.
In other words, the committee suggested that
supervisory examina-tions should be
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inclusion for evaluation. Therefore, for foreign

banks operating in India the factors for
examination would be
Composite Ratings
Once the component ratings are determined, a
composite (Camels or CACS) rating is assigned
as a summary and is used by the supervisors
as the prime indicator of bank condition.
Composite rating is not determined by
calculating an average of the separate
components but rather based on an independent
judgement of the overall condition of the bank.
1) Capital Adequacy 2) Asset Quality 3)

Compliance and 4) Systems (CACS-Acronym).
Component Ratings
Each of the six components in CAMELS (for
Indian Banks) or four components in CACS (for
foreign banks operating in India) are assigned a
rating on a scale of 1 to 5 in order of
performance.
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Composite ratings are assigned on a scale of A

to E. Composite rating of A indicates that an
institution is of least supervisory concern while
composite rating of E indicates an institution to
be a most supervisory concern.
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NORMS FOR CAPITAL ADEQUACY

Introduced in 1992
Capital Adequacy Ratio is the ratio of Capital to Risk Adjusted Asset
Objective: To strengthen the financial stability of banks.
Capital is divided into two tiers: Tier I and Tier II
Tier I: Paid up capital, statutory reserves, disclosed free reserves and capital
reserves arising out of sale of assets.
Tier II: Undisclosed reserves, revaluation reserves, general provisions, hybrid debt
capital instrument and subordinated debt
Risk Adjusted Asset: Assets assigned risk weight from 0-100 based on their risk.
Transition to the new capital adequacy framework (Basel II) scheduled for March
2007.
Minimum capital required for operational risk for All Schedule Commercial Banks
(ASCBs) works out to be around Rs.10,000 Cr.
Minimum CAR now is 9%
reserves representing surplus arising out of sale
proceeds of assets will also be reckoned for this
purpose. Equity investments in subsidiaries,
intangible assets, and losses in the current
period and those brought forward from previous
periods, will be deducted from Tier 1 capital.
Under the capital adequacy system, the Balance

Sheet Assets, non-funded items and other offBalance Sheet exposures would be assigned
weights according to the prescribed risk weights
and banks have to maintain unimpaired
minimum capital funds equivalent to the
prescribed ratio of the aggregate of the risk
weighted assets and other exposures on an
ongoing basis. Banks are now required to
maintain capital for market risks in addition to
credit risks.
Tier 2 Capital This will consist of the following:

1. Undisclosed reserves and cumulative
perpetual preference shares.
2. Revaluation reserves. It was considered
prudent to consider revaluation reserves at
a discount of 55% when determining their
value for inclusion in Tier 2.
The risk weighted assets ratio approach to

capital adequacy measurement is equitable as
it requires those institutions with higher risk
assets profile to maintain a higher level of capital
funds. Such an approach, incorporating both OnBalance Sheet and Off-Balance sheet
exposures of a bank into its capital ratio
according to the level of perceived risk would
encourage the banks to be more risk-sensitive
and to structure their Balance Sheets in a more
prudent manner.
3. General provisions and loss reserves. This

will be restricted up to a maximum of 1.25%
of risk weighted assets.
4. Hybrid debt capital instruments.
5. Subordinated debt. The instrument should
be fully paid up, unsecured, subordinated
to the claims of other creditors, free of
restrictive clauses, and should not be
redeemable at the initiative of the holder or
without the consent of the banks
supervisory authorities. Instruments with an
Capital Funds
Tier 1 Capital in the case of Indian banks would
mean paid-up capital, statutory reserves and
other disclosed free reserves, if any. Capital
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initial maturity of less than 5 years or with a

remaining maturity of one year should not
be included. Subordinated debt instruments
will be limited to 50% of Tier 1 Capital.
6.
guaranteed by Central Govt. and State

Government carry a risk weight of 2.5%.
Loans guaranteed by Govt. of India and
guaranteed by State Govts.carry a risk weight of
0%. However, loans granted to Central/state
Governments public sector undertakings as well
as other assets carry 100 % risk weight.
Advances against term deposits, Life policies,
NSCs, IVPs and KVPs where adequate margin
is available carry 0 % risk weight. Loans and
Advances granted to staff of banks which are
fully covered by superannuation benefits and
mortgage of flat/house carry 20 % risk weight.
The Reserve Bank has hiked the risk weight
assigned to banks foreign exchange open
positions to 100 percent.
Investment Fluctuation Reserve (IFR) would

be treated as Tier II capital but would not be
subject to the ceiling of 1.25 percent of the
total risk weighted assets.
Tier II elements should be limited to a maximum

of 100 percent of total Tier I elements for the
purpose of compliance with the norms.
Capital charge for market risk :
Market risk is defined as the risk of losses in onbalance sheet and off-balance sheet positions
arising from movements in market prices. The
market risk positions subject to capital charge
requirement are the risks pertaining to interest
rate related instruments and equities in the
trading book; and Foreign exchange risk
(including open position in precious metals)
throughout the bank (both banking and trading
books). As an initial step towards prescribing
capital requirement for market risks, banks were
advised to:
i)
Off-Balance Sheet Items : The credit risk

exposure attached to off-Balance Sheet items
has to be first calculated by multiplying the face
value of each of the off-Balance Sheet items by
the given credit conversion factor which will then
have to be again multiplied by the weights
attributable to the relevant counter-party.
Separate Risk weights and Provisioning norms
for SSI Advances Guaranteed by Credit
Guarantee Fund Trust for Small Industries
(CGTSI) has also been put in place.
assign an additional risk weight of 2.5 per

cent on the entire investment portfolio;
Further Developments
ii) assign a risk weight of 100 per cent on the
open position limits on foreign exchange and
gold; and
Reserve Bank of India has in January came out

with guidelines to banks for raising capital funds
through the issue of Innovative perpetual debt
instruments (innovative instruments), debt
capital instruments, perpetual non-cumulative
preference shares and redeemable cumulative
preference shares.
iii) build up Investment Fluctuation Reserve up

to a minimum of five per cent of the
investments held in Held for Trading and
Available for Sale categories in the
investment portfolio.
With the transition to the new capital adequacy

framework (Basel II) scheduled for March 2007,
banks would need to further shore up their capital
funds to meet the requirements under the revised
framework, which is not only more sensitive to
the level of risk but also apply to operational risks.
Thus banks would need to raise additional capital
on account of market risk, Basel II requirements,
as well as to support the expansion of their
balance sheets. Banks may augment their
capital funds by issue of the following additional
instruments:
Banks should maintain capital for market risks

on securities included in the Available for Sale
category also by March 31, 2006.
Cash, balances with RBI carry 0 risk weight.
Balances in current account with other banks
as well as claims on other banks such as
Certificate of Deposits carry a risk weight of 20%.
Investments in other approved securities
guaranteed by Central/ State Government and
Investments in other securities where payment
of interest and repayment of principal are
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(a) Innovative Perpetual Debt Instruments

(innovative instruments) eligible for inclusion
as Tier 1 capital;
Calculated based on the maturity profile of

investment, advances, and deposits reported
by RBI for the entire banking industry.
(b) Debt capital instruments eligible for inclusion

as Upper Tier 2 capital (Upper Tier 2
instruments);
Some implications of Basel II

With Basel II implementation, the capital
adequacy ratio of banks/FIs will have a direct
hit. From 2007, minimum risk weights on past
due loans as per Basel II will be as under:
(c) Perpetual non-cumulative Preference shares

eligible for inclusion as Tier 1 capital - subject
to laws in force from time to time; and
The unsecured portion of any loan (other than

a qualifying residential mortgage loan) that
is past due for more than 90 days, net of
specific provisions (including partial write
offs), will be risk-weighted as follows:
(d) Redeemable cumulative Preference shares

eligible for inclusion as Tier 2 capital - subject
to laws in force from time to time.
While equity is the purest form of capital, the
Basel prescriptions recognise other instruments
as eligible for inclusion as capital for capital
adequacy purposes. The instruments that are
generally recognised as capital have various
features of equity built into them which take them
closer to equity in substance and gives the
regulator the comfort that these will be available
to absorb losses, when required. At the same
time, the features of debt present in these
instruments like maturity, call option, coupon,
etc., helps the issuer to raise capital funds
through these instruments at a cost lower than
the cost of equity. The advantage with these
instruments is that these are non-dilutive and are
cost effective.
o 150% risk weight when specific

provisions are less than 20% of the
outstanding amount of the loan;
provisions are no less than 20% of the
outstanding amount of the loan;
provisions are no less than 50% of the
outstanding amount of the loan, but with
supervisory discretion to reduce the risk
weight to 50%.
As per Basic Indicator Approach of Basel II
Accord, minimum capital to be maintained
by a bank for operational risk is 15% of the
average gross total income (Net Interest
Income and Other Income) of three previous
years. Minimum capital required for
operational risk for All Schedule Commercial
Banks (ASCBs) works out to be around
Rs.10,000 Cr. The above coupled with
additional capital required for credit risk and
trading book (market risk) will require
additional capital of the banks.
Capital at Risk (CaR) of the Indian banking

system
Risk Weights on overall exposures in India
is 57% against 100% indeveloped
economies. If we factor this, capital adequacy
ratio will stand reduced from 12.8% to 7.3%.
Risk Adjusted Core capital works out to 7%
as against international benchmark of 10%.
Banks are vulnerable to high interest rate risk.
Entire core capital base of banks will be
eroded to absorb the shock of interest rate
hike by 3%.
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Unlocking value from NPAs will help to banks to

contain the same.
91
KNOW YOUR CUSTOMER (KYC) GUIDELINES

Issued by RBI in August 02 to protect banks against financial frauds and money
laundering
Objective: To properly identify individuals/Corporates; to monitor high value
transactions and transactions of suspicious nature; and establish procedure for due
diligence and reporting of such transactions
Key provisions: Open account with proper introduction/identification; monitor cash
transactions above Rs.10 lac; route all remittances above Rs.50000/- through account
(and not cash); watch transactions of suspicious nature beyond a threshold limt.
OBJECTIVES:
The Governors of supervising bodies of G 10

countries, at a meeting held in Basel, Switzerland
evolved a set of principles to effectively curb
money laundering so that banks can protect
themselves against it.
To establish procedures to verify the bonafide

identification of individuals/corporates
opening an account.
To establish processes and procedures to
monitor high value transactions and
transactions of suspicious nature in
accounts
Besides Money laundering, financial frauds are

committed with frightening regularity using a
variety of means and more often banks end up
losing heavily in the process.
To establish systems for conducting due

diligence and reporting of such transactions.
Know Your Customer Standards

The objective of KYC guidelines is to prevent
banks from being used, intentionally or
unintentionally, by criminal elements for money
laundering activities. KYC procedures also
enable banks to know/understand their
customers and their financial dealings better
which in turn help them manage their risks
prudently. KYC, the principal means of identifying
the customer, is the platform on which banking
system operates to control financial frauds,
identify money laundering and suspicious
activities, and for scrutiny and monitoring of large
value transactions. The guidelines are also
applicable to foreign currency accounts/
transactions.
KYC Policy
(i) Know Your Customer (KYC) procedure
should be the key principle for identification
of an individual/corporate opening an
account. The customer identification should
entail verification through an introductory
reference from an existing account holder/a
person known to the bank or on the basis of
documents provided by the customer.
(ii) The Board of Directors of the banks should
have in place adequate policies that establish
procedures to verify the bonafide identification
of individual/corporates opening an account.
The Board should also have in place policies
that establish processes and procedures to
monitor transactions of suspicious nature in
accounts and have systems of conducting
due diligence and reporting of such
transactions.
Banks should frame their KYC policies

incorporating the following four key elements:
i.
Customer Acceptance Policy;
ii. Customer Identification Procedures;
1. Know Your Customer procedures for

existing customers
iii. Monitoring of Transactions; and

iv. Risk management.
Banks are expected to have adopted due

diligence and appropriate KYC norms at the time
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92
of opening of accounts in respect of existing

customers in terms of extant instructions.
However, in case of any omission, the requisite
KYC procedures for customer identification
should be got completed at the earliest.
2. Ceiling and
transactions
monitoring
of
transactions will be permitted until the full

KYC procedure is completed. In order not to
inconvenience the customer, the bank must
notify the customer when the balance
reaches rupees forty thousand (Rs. 40,000/
-) or the total credit in a year reaches rupees
eighty thousand (Rs. 80,000/-) that
appropriate documents for conducting the
KYC must be submitted otherwise the
operations in the account will be stopped
when the total balance in all the accounts
taken together exceeds rupees fifty thousand
(Rs. 50,000/-) or the total credit in the
accounts exceeds rupees one lakh ( Rs.
1,00,000/-) in a year.
cash
The banks are required to keep a close watch

of cash withdrawals and deposits for Rs.10
lakhs and above in deposit, cash credit or
overdraft accounts and keep record of details
of these large cash transactions in a
separate register.
Issuance of travellers cheques, demand
drafts and telegraphic transfers for
Rs.50,000 and above only by debit to
customers accounts or against cheques and
not against cash. The applicants for these
transactions for amount exceeding
Rs.50,000 should affix their PAN on the
application forms.
3. Transactions of suspicious nature and

Reporting
Branches of banks are required to report all cash
transactions of Rs.10 lakhs and above as well
as transactions of suspicious nature with full
details in fortnightly statements to their
controlling offices. Besides, controlling offices
are also required to appraise their Head offices
regarding transactions of suspicious nature.
Repayment of deposits of Rs.20,000/ and

above should be through the accounts or
crossed DD/Cheques.
The guidelines apart from laying emphasis

on record keeping, Training of Staff and
Management for strict adherence to KYC norms
also stipulates Banks to lay down a policy for
adherence to the above requirements
comprising:
In case of foreign organizations, among other

documents, a certificate to the effect that the
organization is registered with the GOI to
adhere to Foreign Contributions Regulation
Act (FCRA 1976) has to be obtained at the
time of opening of accounts.
a. Internal Control Systems
KYC procedure is further simplified for

opening accounts for those persons who
intend to keep balances not exceeding
rupees fifty thousand (Rs. 50,000/-) in all their
accounts taken together and the total credit
in all the accounts taken together is not
expected to exceed rupees one lakh (Rs.
1,00,000/-) in a year.
b. Terrorism Finance
c. Internal Audit / Inspection
d. Identification and Reporting of Suspicious
Transactions
e. Adherence to Foreign Contribution
Regulation Act (FCRA), 1976
While opening accounts as described above,

the customer should be made aware that if
at any point of time, the balances in all his/
her accounts with the bank (taken together)
exceeds rupees fifty thousand (Rs. 50,000/) or total credit in the account exceeds
rupees one lakh (Rs. 1,00,000/-), no further
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4. Threshold Limit:
At the time of opening the account based on
customer s profile, a threshold limit of
transactions is to be determined. As it is
proposed to report all the transactions of
93
Controllers should periodically monitor the

implementation levels of KYC norms.
Rs.10.00 lakhs and above to the controlling

authorities, under no circumstances, the
threshold limit should exceed the limit of
Rs.10.00 lakhs. The threshold limit should be
25% of the annual income in case of individuals
and one months turnover in the case of business
enterprise.
7. Conclusion:
The KYC guidelines impose greater responsibility
on different functionaries in the bank. Money
laundering done through bank would not only
affect its image but also the officials who were
used as instruments in the process. Properly
followed, KYC guidelines would provide sufficient
protection to banks against financial frauds and
money laundering. However, we need to ensure
adherence to KYC guidelines without
inconveniencing the customer and by convincing
them that these are well intended in their longterm interests.
5. Record Keeping:
All financial records, which have been reported
to the controlling authorities under suspicious
transactions list, should be retained for atleast
10 years after the date of transaction.
6. Internal Control System:
Ensure to train all the staff of KYC norms
Strengthening the internal audit system
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94
MONEY LAUNDERING
As the term implies, Money laundering is a process of converting (or cleaning) dirty/
illegal money into clean/legal money
This is done by using various channels to hide the source of income
Under/Over invoicing, investment by offshore companies and trusts, large transactions
in cash, opening of benami accounts are some examples
Money Laundering Act 2002 seeks to contain the menace.
Money laundering is called what it is because
that perfectly describes what takes place-illegal,
or dirty money is put through a cycle of
transactions, or washed, so that it comes out at
the other end as legal, or clean, money. In other
words, the source of illegally obtained funds is
obscured through a succession of transfers and
deals in order that those same funds can
eventually be made to reappear as legitimate
income.
true depositor. Smurfing is one way of

minimising the risk of getting caught and this
occurs when the sum to be laundered is broken
up into smaller amounts and introduced into the
legiti-mate system in this way.
The next is the layering or agitation stage. The
object of this stage is to prevent the tracing of
illegal proceeds by disrupting any paper trail that
may have been started at the placement stage.
Some methods used are under and overinvoicing and in-vestments by offshore
companies and trusts in the international
markets.
It is stated that the amount laundered through

western financial markets is estimated to be
anywhere between US $750 billion to a trillion
dollars, large enough to dwarf the G.D.P. of many
nations and destroy their economies.
The last stage of making, the dirty money clean

is generally referred to as integration and this
occurs when placement and layering have been
successfully achieved. It is the means by which
the criminal enjoys the proceeds of his crimes.
To do this, the integration process achieves the
appearance of total legiti-macy for the funds,
thereby ensuring safety from enquiry as to their
true source. At the end of this stage, the money
will appear to have been acquired utterly lawfully.
Common Factors
There are four factors common to all money
laundering operations. To begin with, the true
ownership and the real source of the money is
concealed. Next, the form it takes is changed.
The launder-ers change the form of the proceeds
in order to shrink the huge volume of cash
generated by the initial unlawful activi-ty. Thirdly,
the trail left by the process is obscured so as to
make it difficult to follow the money from
beginning to end. And finally, constant control is
maintained over the money.
The facilitators of money laundering are often

lawyers, accountants, financial advisors and
bankers.
Some Methods
Three Stages of the Process
As already stated, there is no one method of

laundering money. The British Banker s
Association has made an attempt to list out the
most basic ways by which money may be
laundered.Some of the basic kinds of suspicious
transactions are:-
The money laundering process can be divided

into three stages. The placement stage is the
first introduction of dirty money into the
legitimate world. It is done, at the simplest level
by placing the illicit funds to purchase goods and
services for the criminal. More sophisticated
placement involves using the banking and
financial system but this will involve disguise of
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95
Frequent exchange of cash into other

currencies.
Customers transferring large sums of

money to or from overseas locations with
instructions for payment in cash.
Large cash withdrawals from previously

dormant or inactive account, or from an
account which has just received an
unexpected large credit from abroad.
Use of letters of credit and other methods of

trade finance to move money between
countries where such trade is not consistent
with the usual business of the customer.
Building up of large balances not consistent

with the known turnover of the business of
the customer, and subsequent transfer to
accounts held overseas.
Frequent paying in of travellers cheques or

foreign currency drafts particularly if
originating from overseas.
Any apparently unnecessary use of an

intermediary in the trans-action.
Customers who deposit cash by means of

numerous credit slips so that the total of each
deposit is unremarkable but the total of all
the credits is significant.
Customers who seek to exchange large

quantities of low denomi-nation notes for
those of higher denomination.
Customers who appear to have accounts

with several banks within the same locality.
Large number of individuals making

payments into the same account without an
adequate explanation.
The Bill aims at prevention and punishment of

offences relating to money laundering and
connected activities, confiscation of proceeds
of crime, disclosure of such transactions by
financial institutions, setting up agencies and
mechanisms for co-ordinating measures
necessary for controlling money laundering and
the like.
Offence of money-laundering has been defined
in an exhaustive manner in the bill. Whoever
acquires, owns, possesses or transfers any
proceeds of crime; or knowingly enters into any
transaction which is related to proceeds of crime
either directly or indirectly; or conceals or aids
in the concealment of the proceeds of crime will
be treated as committing the offence of moneylaundering. Strict punishment for offence of
money-laundering has been proposed viz.,
rigorous imprisonment for a period of not less
than 3 years and not more than 7 years and fine
up to Rs. Five lakh. In certain cases even higher
rigorous punishment has been proposed.
Responsibilities of Banks:
Banks have been advised to put in place a policy
framework and to be fully compliant with the
provisions of the Money Laundering Act to ensure
that systems and procedures were put in place
and instructions had percolated to the operational
levels. Banks have also been advised to appoint
a Principal officer and put in place a system of
internal reporting of suspicious transactions and
cash transactions of Rs.10 lakh and above.
Maintenance of records of transactions
How Banks can prevent it
Banks should introduce a system of maintaining

proper record of transactions, as mentioned
below:
In order to arrest money laundering, where banks

are mostly used in the process, it is imperative
that banks should know its customers, more
particularly those dealing with foreign exchange.
Banks should make reasonable efforts to
determine the customers true identity and have
effective procedure for verifying the bonafides
of new customers.
(i) all cash transactions of the value of more than

rupees ten lakh or its equivalent in foreign
currency;
(ii) all series of cash transactions integrally
connected to each other which have been
valued below rupees ten lakh or its equivalent
in foreign currency where such series of
transactions have taken place within a month
and the aggregate value of such transactions
exceeds rupees ten lakh;
Government Initiative
The prevention of Money Laundering Act 2002
has the following provisions:
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96
(iii) all cash transactions where forged or

counterfeit currency notes or bank notes
have been used as genuine and where any
forgery of a valuable security has taken
place;
the client, all necessary records of transactions,

both domestic or international, which will permit
reconstruction of individual transactions
(including the amounts and types of currency
involved if any) so as to provide, if necessary,
evidence for prosecution of persons involved in
criminal activity.
(iv) all suspicious transactions whether or not

made in cash and by way of as mentioned
in the Rules.
Banks should ensure that records pertaining to

the identification of the customer and his address
(e.g. copies of documents like passports,
identity cards, driving licenses, PAN, utility bills
etc.) obtained while opening the account and
during the course of business relationship, are
properly preserved for at least ten years after
the business relationship is ended. The
identification records and transaction data
should be made available to the competent
authorities upon request.
Information to be preserved
Banks are required to maintain the following
information in respect of the following
transactions:
(i) the nature of the transactions;
(ii) the amount of the transaction and the
currency in which it was denominated;
(iii) the date on which the transaction was
conducted; and
Reporting to Financial Intelligence Unit-India

Banks are required to report information relating
to cash and suspicious transactions to the
Financial Intelligence Unit-India, Government of
India. The banks should ensure electronic filing
of cash transaction report (CTR). The
Suspicious Transaction Report (STR) should be
furnished within 7 days of arriving at a conclusion
that any transaction, whether cash or non-cash,
or a series of transactions integrally connected
are of suspicious nature. Banks may not put any
restrictions on operations in the accounts where
an STR has been made and ensure that there
is no tipping off to the customer at any level.
(iv) the parties to the transaction.

Maintenance and Preservation of records
Banks should take appropriate steps to evolve
a system for proper maintenance and
preservation of account information in a manner
that allows data to be retrieved easily and quickly
whenever required or when requested by the
competent authorities. Further, banks should
maintain for at least ten years from the date of
cessation of transaction between the bank and
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97
US GAAP - ACCOUNTING STANDARDS

US GAAP stands for Generally Accepted Accounting Practices followed in United
States
It is accepted as a global accounting standard
Adoption of US GAAP is not mandatory in India
US GAAP would help our bank in transforming to a global bank, access US capital
market and enhance transparency in reporting.
It would help us in tapping funds in US capital
markets.
What is US GAAP
US GAAP-Generally Accepted Accounting
Principles in the United States, is a set of rules,
conventions, standards and procedures for
reporting financial information. The Financial
Accounting Standards Board (FASB) in US
primarily establishes GAAP, which is an
independent agency like the Institute of
Chartered Accountants in India (ICAI).
Increasingly, many companies across the world
are adopting US GAAP to tap funds from US
market.
To become a global player, we need to speak

a global language. Adhering to US GAAP
would be a step forward in our endeavour to
transform into a world-class bank.
Since US GAAP has stringent standards, its
adoption would help in increased
transparency resulting in increased
credibility
Wider acceptance amongst international
investors/analysts as this provides a
comparable base for benchmarking
What is the position in India

In India, the Accounting Standard Board (ASB)
was set up in 1977 by the Institute of Chartered
Accountants of India to lay down accounting
standards. The ASB has so far formulated 28
accounting standards to be complied with by
companies in India. The ASB has continuously
introduced new Accounting Standards (AS) to
ensure greater disclosure and transparency in
the accounting system. In recent times, there is
a growing convergence between Indian
Accounting Standard and US GAAP.
Indian Accounting Standards (AS) Vs US

GAAP
Some instances of varying accounting treatment
under Indian and US GAAP are given below:
The disclosure requirements are more under
US GAAP
The determination of goodwill and its
subsequent accounting are substantially
different under Indian and US GAAP.
While companies in India are governed by the

accounting standards laid down by ASB, the
reporting under US GAAP is optional.
Under US GAAP revaluation of fixed asset

to reflect current market value is not
permitted
Why US GAAP
As mentioned earlier, Indian companies need not
adopt US GAAP for reporting. Despite this,
companies adopt US GAAP mainly to tap
resources from US market where large funds
are available.
As regards our Bank, reporting under US GAAP

would impact, mainly, the following areas:
SBI has decided to adopt US GAAP mainly for

the following reasons:
Valuation of investments
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Provision for NPAs

Consolidation of accounts of subsidiaries
Depreciation
98
Foreign Currency translations (changes)

Retirement benefits
Leases
current practice, we debit charges account only

when the leave encashment is availed, though
the liability to pay the employee accrues every
year. US GAAP expects the bank to account for
this accrual every year in their profit and loss
statement.
Current Practice Vs US GAAP in our Bank

Advances :
Current Practice: Provisioning is made as per
RBI norms
Foreign Currency Translations

Current Practice: Differences due to exchange
fluctuations are accounted in case of losses,
but ignored in case of profits.
Under US GAAP: A stratified approach to

provisioning for large loans and other loans
should be adopted.
Under US GAAP: Differences in exchange

fluctuations are to be accounted as expense/
income in the year it is incurred.
Investments :
Current Practice: Entire investment portfolio is
treated as Current and all unrealized losses
are provided for. Excess provision for
depreciation is written back while unrealized
gains are ignored. Unrealized gains/losses do
not form part of income statement.
What needs to be done

We need to rework our assets and liabilities
based on Financial Accounting Standards (FAS)
laid down under US GAAP. Some of the
important items to be reworked are loans,
investments, deferred tax, valuation of fixed
assets and retirement benefits. All our
subsidiaries, associates and RRBs (49 in
number) are to be US GAAP compliant and
hence their accounting system has to be
reworked. This requires a lot of effort in branches
and group companies for proper statement of
our assets and liabilities. The balance sheet to
be drawn as per the requirement of US GAAP
would that be of the consolidated State Bank
Group.
Under US GAAP: Unrealised loss or gain in the

investment portfolio should form part of income
statement in some cases.
Depreciation
Current Practice: Depreciation is provided at
rates prescribed by IT rules, 1962.
Under US GAAP: Bank has to estimate the useful
life of each asset and depreciate it in such a
manner that the cost of the asset is allocated
over the useful life thereof.
Retirement Benefits- Leave encashment
A separate team for implementation of US GAAP.

Pricewater coopers(PwC) is identified as the
auditor for the purpose. Since it is mandatory to
report the accounts in Indian standard, the
banks financial statements would appear both
as per Indian and US standards.
Current Practice: Accounted for on cash basis

Under US GAAP: The current service cost
should be recognised as expense in the current
period. This will require provisioning based on
actuarial valuation of the leave encashment
liability every year. To elaborate further, in the
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99
SARFAESI ACT
Enacted in 2002, the Act is intended to strengthen Banks and Fis to recover NPAs
faster.
The Act empowers banks and Fis to seize the assets without Courts intervention
and sell them off
The Act does not cover loans up to Rs. 1 lac, security interest created on Agricultural
lands and where the amount due is less than 20% of the principal and interest
The Act was amended in 2004 to relax certain provisions in the interest of borrowers.
Today the biggest problem faced by the
entire banking industry in India is the NonPerforming Assets (NPAs), i.e. the loans, where
the principal and interest cannot be recovered,
thus the assets stop earning any income. The
unbearable level of NPAs has led to lower
interest income and loan loss provisioning
requirements which has destroyed the
profitability of the banks to a great extent.
Besides this, the recycling of funds is restricted,
thus leading to serious asset liability
mismatches. The load of NPAs, amounting over
Rs.110000 crores on the Indian economy is
devastating. The supply of credit to potential
borrowers have been blocked which is having a
harmful effect on the capital formation and
hampering the economic activity of the country.
So the NPA problem is an issue of public debate
and of national priority.
Purpose of the Act

This Act empowers banks and financial
institutions (FIs) to seize the assets charged to
banks without intervention of the courts and sell
them off to realize their loans, which have
become NPAs. But the option of approaching
the DRT, in case the banks or financial
institutions do not recover the dues by
themselves will always remain open.
Salient Features of the Act
1. In case borrower of an NPA account fails to
pay the dues of the bank within 60 days from
the date of the notice sent by the bank, the
bank can exercise any of the following rights
under sub-section 13(4) to recover his
secured debt.
(a) Take possession of the secured assets
of the borrower and transfer the same by
way of lease, assignment or sale for
releasing the dues without intervention of
the DRT / Court.
Background of the Act

In 1993, Recovery of Debts Due to Banks and
Financial Institutions Act was enacted with a
view to recover huge amount of NPAs at a faster
pace than through the Civil Courts. The Debt
Recovery Tribunals (DRTs) were set up under
this Act and the banking institutions filed cases
against the borrowers in these tribunals. But this
Act could not live upto its high expectatitions.
So, the banking sector wanted to recover their
NPAs on their own without taking the lengthy
judicial route. This led to the enactment of The
Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act).
Banking Briefs
144
(b) Take-over the management of the

borrower's concern.
(c) Appoint any person as a Manager to
manage the secured assets.
(d) Send notice to a third person who has
acquired the assets from the borrower
without the consent of the bank to pay
the dues of the bank which are related to
the assets acquired by him. Such a
payment is a valid discharge to the said
borrower.
100
2. In case NPA account is a consor tium

account or under multiple finance, the right
to enforce securities can be exercised by
the Banks/ FIs, only when secured creditors
representing not less than three-fourth in
value on the amount outstanding are
agreeable as laid down in sub-section 13(9).
meaning of section 172 of the Indian

Contranct Act, 1872.
(e) Andy conditional sale, hire purchase or
lease, or any other contract, in which no
security interest has been created.
(f) Security created in any aircraft under the
Aircraft Act, 1934.
3. After acquiring the possession of the asets

charged to the bank and selling the same
and appropriation of sale proceeds towards
the dues of the bank, then the bank can
appraoch DRT for recovering the balance
amount, if any, from the borrowewr /
guarantor as laid down in sub-section
13(10).
4. If the bank feels that there can be resistance
for acquiring the assets charged to the bank
from the borrower, in such cases the bank
can approach the concerned Chief
Metropolitan Magistrate or the District
Magistrate by filing a written request for
taking possession of the said assets. On
receipt of such a request, the said magistrate
shall take necessary steps to take
possession of the assets and other related
documents and same would be handed over
to the bank (Section 14).
5. After issuance of 60 days notice by the bank
to the borrower, the borrower shall not deal
with the assets which are charged to the
bank. However, dealing with the said assets
in the ordinary course of business of the
borrower is permitted.
6. The provisions of the Act are not applicable
to the following transactions :
(a) Any security interest created for
repayment of financial assets not
exceeding Rs.1 lakh.
(g) Security created in a vessel under

Merchant Shipping Act.
(h) Any rights of unpaid seller under Section
47 of the Sale of goods Act, 1930.
(i) Any proper ties exempted from
attachment under Section 60 of CPC.
7. This Act has permitted to float asset
reconstruction companies which will
purchase the NPA accounts from the banks
at a discounted price. they will also take over
the assets charged by the bank for he
particular account for necessary recovery
action through reconstruction of the assets
or otherwise.
8. Under section 17, any person including the
borrower may approach DRT by filing an
appeal before the DRT within 45 days from
the date on which steps have been taken by
the bank. But such an appeal shall not be
entertained by the DRT unless a sepcified
amount of the outstanding dues of the bank
is deposited in the DRT. The right to appeal
before DRAT (Debts Recovery Appellate
Tribunal) within 30 dyas is given under
Section 18 to any person aggrieved by the
order of DRT. the Act ousts the jurisdictioon
of the Civil Courts and declares that no
injunction shall be granted in respect of any
exercise of rights conferred by this Act.
After the publication of this Act, several
borrowers and filed writ petitions in the
Supreme Court of India, challenging the
validity of the Act. In the landmark case of
Mardia Chemicals Ltd. & Others vs. Union
of India & Others (2004) 120 Comp. Cas 373
(SC), the Supreme Court has upheld the
validity of the Act.
(b) Any security interest created over

agricultural lands.
(c) Any case in which the amount due is less
than 20 per cent of the principal amount
and interest therein.
(d) Pledge of movable assets within the
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145
101
Some of the salient features of the

judgement are :
banks and securitization companies to

initiate action.
(a) The Court directed that the banks should

evolve appropriate internal mechanism to
thoroughly resolve the contentions raised
by the borrower. The bank should apply
its mind to the objections and
communicate its reasons to the borrower.
this will be an act of fairness on the part
of the bank.
2. In case of enforcement of their claims by

banks / FIs under this Act, they do not
examine the validity of the charge nor are
they empowered to do so. Therefore, in the
rarest case of defective charge also the
recovery shall take place.
(b) The Court held that banks and financial

institutions have been provided with
guidelines by the Reserve Bank of India
laying down the terms, conditions and
circumstances in which the debt is to be
classified as non-performing assets.
Hence, there is no arbitrary powers
vested in the bank.
(c) The Court has held that according to
section 17(2), the condition of pre-deposit
is bad which will render the remedy
illusory. It is also unreasonable and
violative of Article 14 of the Constitution.
(d) Section 34 of the Act lays down that Civil
Courts have no jurisdiction to entertain
any suit in respect of any matter which
DRT or DRAT (Debts Recover y
Appellate Tribunal) is empowerned to deal
with. The Court has upheld the validity
of this provision.
Accordingly, the Supreme Court upheld
the whole of the Act excluding Section
17 (2).
Limitations of the Act
1. The legislation empowers one party to the
dispute, i.e. the creditor to take action without
due judicial process against the other party,
i.e. the borrower, may lead to misuse of
power by the creditor. The banks and FIs in
their eagerness to recover NPAs may violate
the fundamental rights of the borrowers. The
borrowers can appraoch the DRTs in case
of grievances, but it amounts to postcorrective measure as the Act allows the
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146
3. The main object of the Act is fast recovery

of debts. But the Act provides for appeal and
appeal over appeal, which is a lengthy judicial
process and leads to delay in execution
proceedings.
4. It will be difficult for banks to sell distressed
assets as there are few takers for such
assets.
5. The Act empowers the banks to take-over
the management of defaulting companies.
Banks are not skilled enough to run any
business activity with guaranteed success.
6. In case of enforcement of claim in
consortium advances the creditors can
enforce only on the consent of the other
creditors having minimum 75 per cent share
in the loan whereas enforcement of claim
through DRT / Civil Court can be initiated by
a single creditor by impleading the other
creditors as respondents in the case.
7. In case of sale of seized assets, the seller
and the beneficiary will be the same. The
sale of secured assets by banks at a value
enough to cover their dues would be
adequately self serving, but it my appear to
be unfair to the stakeholders.
8. The Act provision in the to take help from
the district administrative machinery for
enforcement of security interest is an
impratical stipulation.
Our district
administrative machinery is unable to
provide assistance even to the DRTs for their
recovery works.
9. Valuation of assets and binding process can
trigger legal cases. There may be lack of
unanimity among lenders, as all lenders
102
holding atleast 75 per cent stake in

outstanding dues are required to agree to sell
the assets of defaulters.
10. The appointment of a Manager for the
management of acquired assets, in
consultation with the borrower, whose
assets have been seized by the banks is an
utopian idea.
communicate within one week of receipt of

such representation to the borrower.
(b) Amendment in Section 17 : The borrower
may make an application to the DRT if the
secured creditor have not accepted his
representation or objection.
Any application made by the borrower shall
be dealt with by DRT, as expeditiously as
possible and to be disposed of within 60 days
from the date of such application. If the
application is not disposed of by DRT within
the period of 4 months, any party to the
applicant may make an application to the
DRAT for directing the DRT for expeditious
disposal of the application.
SERFAESI (Amendment) Ordinance - 2004

In the light of the Supreme Court judgement
in the Mardia Chemicals vs. ICICI Bank Ltd.,
the Government promulgated the Ordinance
to amend certain sections of the Act, which
has been passed by the Parliament in
December, 2004.
Highlights of the changes are as under :
(a) Amendment in Section 13 : On receipt of the
notice if the borrower makes any
representation or raises any objection, the
secured creditor shall consider such
representation or objection and shall
Banking Briefs
147
(c) Amendment in Section 18 : No appeal shall

be enter tained by DRAT iunless the
borrower has deposited with it 50 per cent of
the amount of debt due from him, as claimed
by the secured creditor or determined by the
DRT, which ever is less. DRAT may reduce
the amount upto 25 per cent of the debt.
103
GUIDELINES ON PURCHASE/ SALE OF NON

PERFORMING FINANCIAL ASSETS
NPAs may be purchased/ sold only on cash basis.
Valuation procedure to ensure that the economic value of financial assets is reasonably
estimated based on the estimated cash flows arising out of repayments and recovery
prospects.
Delegation of powers of various functionaries for taking decision on the purchase/
sale of the f assets to be defined.
The guidelines are applicable to banks, FIs and
NBFCs purchasing/ selling non performing
financial assets, from/ to other banks/FIs/
NBFCs (excluding securitisation companies/
reconstruction companies).
ii. The estimated cash flows are normally

expected to be realised within a period of
three years and not less than 5% of the
estimated cash flows should be realized in
each half year.
Financial assets, including assets under

multiple/consortium banking arrangements,
would be eligible for purchase/sale in terms of
these guidelines if it is a non-performing asset/
non performing investment in the books of the
selling bank.
iii. A bank may purchase/sell non-performing

financial assets from/to other banks only on
without recourse basis.
Procedure for purchase/ sale of non

performing financial assets, including
valuation and pricing aspects
i.
A bank which is purchasing/ selling nonperforming financial assets should ensure

that the purchase/ sale is conducted in
accordance with a policy approved by the
Board. The Board shall lay down policies and
guidelines covering, inter alia,
a) Non performing financial assets that may
be purchased/ sold;
b) Norms and procedure for purchase/ sale
of such financial assets;
c) Valuation procedure to be followed to
ensure that the economic value of
financial assets is reasonably estimated
based on the estimated cash flows
arising out of repayments and recovery
prospects;
d) Delegation of powers of various
functionaries for taking decision on the
purchase/ sale of the financial assets etc.
e) Accounting policy
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148
iv. Each bank will make its own assessment of

the value offered by the purchasing bank for
the financial asset and decide whether to
accept or reject the offer.
v. A non-performing asset in the books of a
bank shall be eligible for sale to other banks
only if it has remained a non-performing
asset for at least two years in the books of
the selling bank.
vi. Banks shall sell non-performing financial
assets to other banks only on cash basis.
vii. A non-performing financial asset should be
held by the purchasing bank in its books at
least for a period of 15 months before it is
sold to other banks. Banks should not sell
such assets back to the bank, which had
sold the NPFA.
viii. Banks are also permitted to sell/buy
homogeneous pool within retail nonperforming financial assets, on a portfolio
basis provided each of the non-performing
financial assets of the pool has remained as
non-performing financial asset for at least
2 years in the books of the selling bank. The
pool of assets would be treated as a single
asset in the books of the purchasing bank.
104
ix. The selling bank shall pursue the staff

accountability aspects as per the existing
instructions in respect of the non-performing
assets sold to other banks.
Prudential norms for banks for the
purchase/ sale transactions
(A) Asset classification norms
(i) The non-performing financial asset
purchased, may be classified as standard
in the books of the purchasing bank for a
period of 90 days from the date of purchase.
Thereafter, the asset classification status of
the financial asset purchased, shall be
determined by the record of recovery in the
books of the purchasing bank with reference
to cash flows estimated while purchasing the
asset which should be in compliance with
requirements in Para 5 (iii).
(ii) The asset classification status of an existing
exposure (other than purchased financial
asset) to the same obligor in the books of
the purchasing bank will continue to be
governed by the record of recovery of that
exposure and hence may be different.
(iii) Where the purchase/sale does not satisfy
any of the prudential requirements
prescribed in these guidelines the asset
classification status of the financial asset in
the books of the purchasing bank at the time
of purchase shall be the same as in the
books of the selling bank. Thereafter, the
asset classification status will continue to be
determined with reference to the date of NPA
in the selling bank.
(iv) Any restructure/reschedule/rephrase of the
repayment schedule or the estimated cash
flow of the non-performing financial asset by
the purchasing bank shall render the
account as a non-performing asset.
(B) Provisioning norms
Books of selling bank
i)
When a bank sells its non-performing

financial assets to other banks, the same
will be removed from its books on transfer.
ii) If the sale is at a price below the net book

value (NBV) (i.e., book value less provisions
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149
held), the shortfall should be debited to the

profit and loss account of that year.
iii) If the sale is for a value higher than the NBV,
the excess provision shall not be reversed
but will be utilised to meet the shortfall/ loss
on account of sale of other non performing
financial assets.
Books of purchasing bank
The asset shall attract provisioning requirement
appropriate to its asset classification status in
the books of the purchasing bank.
(C) Accounting of recoveries
Any recovery in respect of a non-performing
asset purchased from other banks should first
be adjusted against its acquisition cost.
Recoveries in excess of the acquisition cost can
be recognised as profit.
(D) Capital Adequacy
For the purpose of capital adequacy, banks
should assign 100% risk weights to the nonperforming financial assets purchased from
other banks. In case the non-performing asset
purchased is an investment, then it would attract
capital charge for market risks also. For NBFCs
the relevant instructions on capital adequacy
would be applicable.
(E) Exposure Norms
The purchasing bank will reckon exposure on
the obligor of the specific financial asset. Hence
these banks should ensure compliance with the
prudential credit exposure ceilings (both single
and group) after reckoning the exposures to the
obligors arising on account of the purchase. For
NBFCs the relevant instructions on exposure
norms would be applicable.
7. Disclosure Requirements
Banks which purchase non-performing financial
assets from other banks shall be required to
make disclosures in the Notes on Accounts to
their Balance sheets on details of non-performing
financial assets purchased and details of nonperforming financial assets sold.
The purchasing bank shall also furnish all
relevant reports to RBI, CIBIL etc. in respect of
the non-performing financial assets purchased
by it.
105
ASSET REVALUATION RESERVE

Most of the public sector banks own and possess large properties in prime locations.
The extent to which revaluation reserves can be relied on as a cushion for unexpected
losses would depend on level of certainty that can be placed on estimates of the market
value of the relevant assets.
This is an accounting concept and represents a reassessment of the value of a capital

asset as at a particular date.
The reserve is considered a category of the equity of the entity.

Unlocking Real Estate Value:
The properties of most of the public sector banks
have been historically owned by them and their
revaluation would considerably add to the
reserves. The extent to which revaluation
reserves can be relied on as a cushion for
unexpected losses would depend on level of
certainty that can be placed on estimates of the
market value of the relevant assets.
Asset revaluation reserve is an accounting
concept and represents a reassessment of the
value of a capital asset as at a particular date.
The reserve is considered a category of the
equity of the entity. An asset is originally recorded
in the accounts at its cost and depreciated
periodically over its estimated useful life as a
measure of the amount of the assets value
consumed in that period. In practice, the actual
useful life of an asset can be miscalculated or
an event can cause a change to the useful life.
Consequently, assets occasionally need to be
revalued in order to reflect a more close
approximation to their worth in the accounts.
When the asset is revalued, the offsetting entry
(in a double entry accounting system) would be
either made to the profit or loss accounts or to
the equity of the entity.
The Reserve Bank of India has confirmed that
the tier II Capital of a bank would include
Revaluation Reserves.
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150
These reserves often serve as a cushion against

unexpected losses, but these are less
permanent in nature and cannot be considered
as Core Capital. Revaluation reserves arise
from revaluation of assets that are undervalued
in the banks books. The typical example in this
regard is bank premises and marketable
securities. The extent to which the revaluation
reserves can be relied on as a cushion for
unexpected losses depends mainly upon the
level of certainty that can be placed on estimates
of the market value of the relevant assets, the
subsequent deterioration in values under difficult
market conditions or in a forced sale, potential
for actual liquidation of those values, tax
consequences of revaluation, etc. Therefore, it
would be prudent to consider revaluation
reserves at a discount of 55 % when determining
their value for inclusion in Tier II Capital i.e. only
45% of revaluation reserve should be taken for
inclusion in Tier II Capital. Such reserves will
have to be reflected on the face of the balance
sheet as revaluation reserves.
Reserves, if any, created out of revaluation of
fixed assets or those created to meet outside
liabilities should not be included in the Tier I
Capital, while the amounts held under the head
Building Fund will be eligible to be treated as
part of free reserves. However, as and when
bank sell these properties, the entire gain would
be realized and hence would shore up Tier I
capital.
106
LIBERALISED BRANCH AUTHORISATION POLICY

The Liberalised Branch Authorisation Policy is applicable to all banks except RRBs.
Liberalised and rationalised the policy for authorisation of their branches in India, retaining
the current policy for authorisation of overseas branches of Indian banks.
Banks should have achieved the target prescribed by RBI for priority sector advances.
basic banking activity viz., acceptance of deposits
and provision of credit and quality of customer
service as, inter alia, evidenced by the number of
complaints received and the redressal mechanism
in place in the bank for the purpose.
RBI has declared the Liberalised Branch Authorisation

Policy under Section 23 of the Banking Regulation
Act, 1949. This policy is applicable to all banks except
RRBs.
The opening of new and transfer of existing places of
business by the banks is governed by the provisions
of Section 23 of the Banking Regulation Act, 1949. In
terms of the statutory provisions, the banks cannot,
without the prior approval of the RBI, open a new place
of business in India or abroad or change, otherwise
than within the same city, town or village, the location
of the existing places of business. Before granting
any permission, RBI may require to be satisfied by
an inspection under Section 35 or otherwise, as to
the financial condition and history of the company,
the general character of its management, the adequacy
of its capital structure and earning prospects and that
public interest will be served by the opening or, as
the case may be, change of location, of the place of
business. RBI has so far been processing the requests
and granting licenses to banks for each place of
business on a case-to-case basis.
Retaining the current policy for authorisation of
overseas branches of Indian banks, RBI has liberalised
and rationalised the policy for authorisation of their
branches in India. Consistent with the medium term
corporate strategy of banks and public interest, a
framework for a branch authorisation policy has been
put in place. The new branch authorisation policy
framework has the following elements:
(a) The RBI will, while considering applications for
opening branches give weightage to the nature
and scope of banking facilities provided by banks
to common persons, particularly in underbanked
areas, actual credit flow to the priority sector,
pricing of products and overall efforts for promoting
financial inclusion, including introduction of
appropriate new products and the enhanced use
of technology for delivery of banking services.
(b) Such an assessment will include policy on
minimum balance requirements and whether
depositors have access to minimum banking or
no frills banking services, commitment to the
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151
(c) The need to induce enhanced competition in the

banking sector at various locations.
(d) Regulatory comfort will also be relevant in this
regard. This would encompass:
Compliance with not only the letter of the

regulation but also whether the banks
activities are in compliance with the spirit and
underlying principles of the regulation.
The activities of the banking group and the

nature of relationship of the bank with its
subsidiaries, affiliates and associates.
Quality of corporate governance, proper risk

management systems and internal control
mechanism.
Regarding procedural aspects, the existing system

of granting authorisations for opening individual
branches from time to time would be replaced by a
system of giving aggregated approvals, on an annual
basis, through a consultative and interactive process.
Banks branch expansion strategies and plans over
the medium term would be discussed by the RBI with
individual banks. The medium term framework and
the specific proposals would, to the extent possible,
cover the opening/ closing/ shifting of all categories
of branches/ offices including the ATMs. The
authorisations given on an annual basis would be valid
for one year from the date of communication.
The above policy parameters will be applicable to
foreign banks, in addition to the criteria which are
specific to foreign banks, as detailed in the relevant
circular. While the branch expansion of foreign banks
would be considered keeping in view Indias
commitments at WTO, ATMs will not be included in
the number of branches for such computation.
It is also proposed to rationalise the extant categories
of branches and simplify other procedures relating to
authorisation of branches.
107
NORMS FOR NEW PRIVATE BANKS

Preference in license for banks with their headquarters in a place where no other
bank has its Head Office.
Relaxations in priority sector norms for first 3 years
Free to open branches without prior RBI approval.
Banks should have a high powered customer grievance cell.
any other banking company, or of companies
which among themselves are entitled to
exercise voting rights in excess of 20 percent
of the total voting rights of all the
shareholders of the banking company, as
laid down in the Banking Regulation Act,
1949.
Recognizing the need to introduce greater

competition which can lead to higher productivity
and efficiency in the banking system, the
Reserve Bank of India has allowed opening of
new private sector banks. While permitting new
private banks, RBI prescribes that,
a) they sub-serve the underlying goals of
financial sector re-forms which are to provide
competitive, efficient and low cost financial
intermediation services to the society:
b) they are financially viable;
c) they result in upgradation of technology in
the banking sec-tor.
d) they avoid the shortcomings, such as unfair
preemption and concentration of credit,
monopolization of economic power,
crossholdings with industrial groups, etc.,
which beset the private sector banks prior
to nationalization, and
e) freedom of entry in the banking sector is
managed carefully and judiciously.
Some of the guidelines issued by RBI in this
regard are:
a. While granting a licence, preference may be
given to those banks the headquarters of
which are proposed to be located in a center
which does not have the headquarters of any
other bank.
b. Large industrial houses will not be allowed
to set up a bank, but would be permitted to
acquire stake in private sector banks, not
exceeding 10% of the paid up capital of that
bank.
c. The new bank will not be allowed to have as
a director any person who is a director of
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152
d. The minimum paid-up capital for such a bank

should be Rs. 100 crore. The minimum net
worth should be Rs.300.00 crores.
e. A single entity or a group of related entities
shall have shareholding control, directly or
indirectly to a maximum of 10% of the paid
up capital of that bank
f.
Voting rights of an individual shareholder will

be governed by the ceiling of one percent of
the total voting rights as stipulated by Section
12(2) of the Banking Regulation (BR) Act.
g. The shares of the bank should be listed on

stock exchanges.
h. Any private sector bank including foreign bank
with presence in India, will be allowed to hold
shares in any other private sector bank only
upto 5%.
i.
Aggregate foreign investment in private

banks from all sources i.e., Foreign Direct
Investment (FDI), Foreign Institutional
Investors (FIIs) and non resident Indians
(NRIs) should not exceed 74%.
From November 2000, certain changes have

been made in the licensing of new generation
private sector banks. They are :
The minimum capital raised to Rs.100.00
crores. The Banks which do not have the
108
revised capital shall bring additional capital

within a period of next 3 years;
Promoters contribution shall be a
minimum of 40% of the paid up capital with
lock-in period of 5 years.
Minimum capital adequacy of 10% to be
maintained
Private Sector Banks to achieve priority
sector target of 40% of net bank credit.
Operations
i)
Such a bank will also have to comply with

such directions of the RBI as are applicable
to existing banks in the matter of export
credit. To facilitate this, such a bank may be
issued an authorized dealers licence to deal
in foreign exchange, when applied for.
ii) A new bank will not be allowed to set up a

subsidiary or mutual fund for at least three
years after its establishment.
iii) As regards equity holding by these banks in
other companies the existing provisions will
be applicable.
iv) The bank will have to observe priority sector
lending targets as applicable to other
domestic banks. However, in recognition of
the fact that new entrants may require some
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153
time to lend to all categories of the priority

sector, some modification in the composition
of this sector may be considered by the RBI
for an initial period of three years.
v) Such a bank will have to lay down its loan
policy within the overall policy guidelines of
RBI.
vi) Such a bank will make full use of modern
infrastructural facilities in office equipments,
computer, telecommunications, etc. In order
to provide good customer service, the bank
should have a high powered customer
grievances cell to handle customer
complaints.
vii) Such other conditions as the RBI may
prescribe from time to time.
Opening of Branches
Branch opening in the case of new banks will
be governed by the existing policy on branch
opening. These banks are free to open branches
at various centers including urban/metropolitan
centers without prior approval of the RBI
provided they satisfy the capital adequacy and
prudential accounting norms. However to avoid
over-concentration of their branches in
metropolitan areas and cities, a new bank will
be required to open rural and semi-urban
branches also, as may be laid down by the RBI.
109
GUIDELINES ON OWNERSHIP AND GOVERNANCE IN

PRIVATE SECTOR BANKS
Important Shareholders (with holding of 5% and above) and directors should be
fit and proper
Banks to maintain a minimum net worth of Rs. 300 Crores
Shareholding or control in excess of 10% by any singly entity require RBI approval
Foreign Bank are not allowed to hold more than 5% of the equity capital of
investee bank
Foreign investment (FDI, FII and NRI) should not exceed 74%
The broad principle underlying the guidelines on
ownership and governance in private sector
banks is to ensure that the control of private
sector banks is well diversified to minimise the
risk of misuse or imprudent use of leveraged
funds. The guidelines require that: (i) important
shareholders (i.e., with shareholding of 5 per
cent and above) are fit and proper as per the
Reserve Banks guidelines on acknowledgement
for allotment and transfer of shares; (ii) the
directors and the Chief Executive Officer who
manage the affairs of the bank are fit and proper
and observe sound corporate governance
principles; (iii) banks have minimum capital/net
worth for optimal operations and systemic
stability; and (iv) policy and processes are
transparent and fair.
Some additional requirements are that : (a)
banks maintain a net worth of Rs. 300 crore at
all times; (b) shareholding or control in any bank
in excess of 10 per cent of the paid up capital by
any single entity or group of related entities
requires the Reserve Banks prior approval; (c)
banks (including foreign banks having branch
presence in India)/ financial institutions are not
allowed to exceed equity holding of 5 per cent of
the equity capital of the investee bank; (d) large
industrial houses are allowed to acquire shares
not exceeding 10 per cent of the paid-up capital
of the bank subject to the Reserve Banks prior
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154
approval; (e) the Reserve Bank would permit a

higher level of shareholding on a case-by-case
basis for restructuring of problem/weak banks
or in the interest of consolidation in the banking
sector; and (f) if the shareholding exceeds the
prescribed limit or if the net worth is below
Rs.300 crore in any bank, a time-bound
programme to reduce the stake or to augment
the capital should be submitted to the Reserve
Bank.
On the issue of aggregate foreign investment in
private banks from all sources (FDI, FII, NRI),
the guidelines stipulate that it cannot exceed 74
per cent of the paid-up capital of a bank. If FDI
(other than by foreign banks of foreign bank
groups) in private banks exceeds 5 per cent, the
entity acquiring such stake would have to meet
the fit and proper criteria indicated in the share
transfer guidelines and get the Reserve Banks
acknowledgement for transfer of the shares. The
aggregate lilmit for all FII investments is restricted
to 24 per cent which can be raised to 49 per
cent with the approval of the board/ shareholders.
The current aggregate limit for all NRI
investments is 24 per cent, with the individual
NRI limit being five per cent, subject to the
approval of the board/shareholders.
110
ROAD MAP FOR PRESENCE OF FOREIGN BANKS

The first phase of the policy is for the period Mar 05 to Mar 09
Foreign Banks can establish Wholly owned subsidiary with minimum capital of Rs.
300 Cr
Wholly owned subsidiaries will be given preference for branch expansion in under
banked areas
Foreign banks with the permission of RBI can acquire those banks which qualify
for restructuring
Second phase of the policy will commence from Apr 2009 based on experience
Under the road map, during the first phase
between March 2005 and March 2009,
foreign banks satisfying the eligibility criteria
prescribed by the Reserve Bank will be
permitted to establish presence by way of
setting up a wholly owned banking subsidary
(WOS) or converting the existing branches
into a WOS, which should have a minimum
capital of Rs.300 crore and sound corporate
governance. The WOS will be treated on par
with the existing branches of foreign banks
for branch expansion with flexibility to go
beyond the existing WTO Commitments of 12
branches in a year and preference for branch
expansion in under banked areas. The
Reserve Bank would also prescribe market
access and national treatment limitation
consistent with WTO commitments as also
other appropriate limitations consistent with
international practices and the countrys
requirements. Permission for acquisition of
shareholding in India of private sector banks
Banking Briefs
155
by eligible foreign banks will be limited to

banks identified by the Reserve Bank for
restructuring. The Reserve Bank would
consider permitting such acquisition if it is
satisfied that such investment by the foreign
bank concerned will be in the long term
interest of all the stakeholders in the investee
bank. Where such acquisition is by a foreign
bank having presence in India., a maximum
period of six months will be given for
conforming to the one form of presence
concept.
The second phase will commence in April
2009 after a review of the experience gained
and after due consultation with all the
stakeholders in the banking sector. Extension
of national treatment to WOS, dilution of stake
and permitting mergers / acquisitions of any
private sector banks in India by a foreign bank
would be considered., subject to the overal
investment limit of 74 per cent.
111
PRIORITY SECTOR
Agriculture-both direct and indirect
SSI and SSI Ancilliary Investment in plant and machinery up to Rs.1 Crore.
Industry related service and business enterprises with investment up to Rs. 10 lakh in
fixed assets, excluding land and building will be given benefits of small scale sector.
Retail Trade
Advances to Business Enterprises and Professional and self employed
RTO s up to 10 vehicles
Housing in rural and semi urban areas up to Rs.5 lacs
Produce loans for agriculturists up to Rs.5 lacs
Overall target: 40% of net bank credit and sub-target of 10% to weaker sections
Priority sector target for foreign banks is 32%
Detailed classification containing the list of
items in different segments of priority sector
advances is given below.
Loans to Electricity Boards for reimbursing

the expenditure already incurred by them for
for energising their wells
1. AGRICULTURE
Loans to SEBs for Systems Improvement

Scheme.
Direct Finance to Farmers for Agricultural

Purposes
Short-term loans for raising crops i.e. for crop
loans.
Advances upto Rs.10 lakh to farmers against
pledge/hypothecation of agricultural produce
(including warehouse receipts) for a period
not exceeding 12 months.
Medium and long-term loans for Purchase
of agricultural implements and machinery,
Development of irrigation potential through
Reclamation and Land Development
Schemes, Construction of farm buildings
and structures, etc. Construction and
running of storage facilities, warehouses,
godowns, silos, Loans granted to farmer for
establishing cold storages used for storing
own produce, Production and processing of
hybrid seeds for crops.
Indirect Finance to Agriculture
Credit for financing the distribution of
fertilisers, pesticides, seeds, etc., Loans up
to Rs. 40 lakh granted for financing
distribution of inputs for the allied activities
such as, cattle feed, poultry feed, etc.,
Banking Briefs
156
Loans to farmers through PACS, FSS and

LAMPS.
Deposits held by the banks in Rural
Infrastructure Development Fund (RIDF)
maintained with NABARD.
2. Small Scale Industries
Small scale industrial units are those
engaged in the manufacture, processing or
preservation of goods and whose investment
in plant and machinery (original cost) does
not exceed Rs. 1 crore. These would, inter
alia, include units engaged in mining or
quarrying, servicing and repairing of
machinery.
In the case of ancillary units, the investment
in plant and machinery (original cost) should
also not exceed Rs. 1 crore to be classified
under small-scale industry.
The investment limit in plant & machinery of
Rs.1 crore for classification as SSI has been
enhanced to Rs.5 crore in respect of certain
specified items under hosiery, hand tools,
112
drugs & pharmaceuticals, stationery items

and sports goods.
Investment made by banks in securitized
assets representing direct lending to the SSI
sector would be treated as their direct
lending to SSI sector under priority sector,
provided it satisfies certain conditions.
Tiny Enterprises
All small scale units whose investment in
plant & machinery is up to Rs. 25 lakh,
irrespective of the location of the unit.
Deposits placed with SIDBI by Foreign

Banks in fulfilment of shortfall in attaining
priority sector targets.
Bank finance to HUDCO for on-lending to
artisans, handloom weavers, etc. under tiny
sector may be treated as indirect lending to
SSI (Tiny) Sector.
advances to KVI sector, irrespective of their
size of operations, location and investment in
plant and machinery
3. SMALL BUSINESS FINANCE:
Small Scale Service & Business

Enterprises (SSSBEs):
Small road & Water Transport Operators

(SRWTO)
Industry related service and business

enterprises with investment up to Rs. 10 lakh
in fixed assets, excluding land and building
will be given benefits of small scale sector.
For computation of value of fixed assets, the
original price paid by the original owner will
be considered irrespective of the price paid
by subsequent owners.
Advances to small road and water transport

operators owning a fleet of vehicles not
exceeding ten vehicles, including the one
proposed to be financed.
Indirect finance in the small-scale industrial

sector:
Advances to handloom co-operatives.
Funds provided by commercial banks to
SIDBI/SFCs by way of rediscounting of bills
of SSIs
Agencies supplying inputs and marketing
of outputs of artisans, village and cottage
industries.
Government sponsored Corporation/
organisations providing funds to the weaker
sections in the priority sector.
Credit provided by banks to KVIC.
Term finance/loans in the form of lines of
credit made available to SIDCs/SFCs for
financing SSIs.
Professional & Self-Employed Persons

Loans to professional and self-employed
persons include loans for the purpose of
purchasing equipment, repairing or
renovating existing equipment and/or
acquiring and repairing business premises
or for purchasing tools and/or for working
capital requirements to medical practitioners
including Dentists, Chartered Accountants,
Cost Accountants, Lawyers, Engineers,
Architects etc.,
Advances to accredited journalists and
cameramen who are freelancers, i.e. not
employed by a particular newspaper/
magazine for acquisition of equipment by
such borrowers for their professional use.
Advances to NBFCs for on-lending to truck
operators and SRWTOs other than truck
operators satisfying the eligibility criteria.
Retail Trade:
Advances granted to :
Subscription to bonds issued by NABARD

with the objective of financing exclusively nonfarm sector.
o retail traders dealing in essential

commodities (fair price shops) and
consumer co-operative stores,
New loans granted by banks to NBFCs and

other intermediaries for on-lending to SSI
sector/ tiny sector.
Banking Briefs
157
o private retail traders with credit limits not

exceeding Rs. 10 lakh.
113
Small Business:
Small Business would include individuals
and firms managing a business enterprise
established mainly for the purpose of
providing any service other than professional
services whose original cost price of the
equipment used for the purpose of business
does not exceed Rs. 20 lakh. Banks are free
to fix individual limits for working capital
depending upon the requirements of different
activities.
Only such professional and self-employed
persons whose borrowings (limits) do not
exceed Rs. 10 lakh of which not more than
Rs. 2 lakh should be for working capital
requirements, should be covered under this
category.
However, in the case of professionally
qualified medical practitioners, setting up of
practice in semi-urban and rural areas, the
borrowing limits should not exceed Rs. 15
lakh with a sub-ceiling of Rs. 3 lakh for
working capital requirements.
Advances granted by banks to professional
and self-employed persons for acquiring
personal computers for their professional
use, may be classified in this category,
provided the ceiling of total borrowings of Rs.
10 lakh of which working capital should not
be more than Rs. 2 lakh per borrower, is
complied with in each case for the entire
credit inclusive of credit provided for
purchase of personal computer.
State Sponsored Organisations
Scheduled Castes/ Scheduled Tribes
for
Advances sanctioned to State Sponsored

Organisations for Scheduled Castes/
Scheduled Tribes for the specific purpose
of purchase and supply of inputs to and/or
the marketing of the outputs of the
beneficiaries of these organisations.
Education
Educational loans should include only loans
and advances granted to individuals for
educational purposes up to Rs. 7.5 lakh for
studies in India and Rs. 15 lakh for studies
Banking Briefs
158
abroad, and not those granted to institutions

and will include all advances granted by
banks under special schemes, if any,
introduced for the purpose.
Housing
Direct Finance:
Loans up to Rs. 15 lakh in rural/ semi-urban
areas, urban and metropolitan areas for
construction of houses by individuals, with
the approval of the banks Boards, excluding
loans granted by banks to their own
employees.
Loans given for repairs to the damaged
houses of individuals up to Rs.1 lakh in rural
and semi-urban areas and to Rs.2 lakh in
urban areas.
Loans granted by banks up to Rs. 5 lakh to
individuals desirous of acquiring or
constructing new dwelling units and up to
Rs. 50,000/- for upgradation or major repairs
to the existing units in rural areas under
Special Rural Housing Scheme of NHB.
Indirect Finance
Assistance given to any governmental
agency for construction of houses or for slum
clearance and rehabilitation of slum dwellers,
subject to a ceiling of Rs. 5 lakh of loan
amount per housing unit.
Assistance given to a non-governmental
agency approved by the NHB for the purpose
of refinance for reconstruction of houses or
for slum clearance and rehabilitation of slum
dwellers, subject to a ceiling of loan
component of Rs. 5 lakh per housing unit.
Consumption Loans
Pure consumption loans granted to the
weaker sections of the community under the
Consumption Credit Scheme should be
included in this item.
Loans to NGOs / Self-Help Groups (SHGs) /
MICROCREDIT
Loans provided by banks to NGOs/SHGs for
on-lending to SHG/members of SHGs/
discrete individuals or small groups which
114
are in the process of forming into SHGs will

be reckoned as priority sector lending.
Food and Agro-based Processing Sector
Food and agro-based processing sector
would be eligible for classification as priority
sector for lending by banks.
Software Industry
Loans to software industry with credit limit
up to Rs. 1 crore from the banking industry
to be included under this item.
Venture Capital
Investment in Venture Capital will be eligible
for inclusion in priority sector, subject to the
condition that the venture capital funds/
companies are registered with SEBI.
LEASING AND HIRE PURCHASE
Para-banking activities such as leasing and
hire purchase financing undertaken
departmentally by banks will be classified as
priority sector advances, provided the
ultimate beneficiary satisfies the criteria laid
down by RBI for treating such advances as
advances to priority sector.
Certain types of funds deployment eligible
as priority sector advances
Investments made by the banks in special

bonds issued by SFCs, sidcs, REC,
NABARD, SIDBI, NHB, HUDCO etc. could
be reckoned as part of priority sector
advances
Investment by banks in securitised assets

representing direct (indirect) lending to
agriculture would be treated as their direct
(indirect) lending to agriculture under priority
sector and Investments made by banks in
securitized assets representing direct
lending to the SSI sector would be treated
as their direct lending to SSI sector under
priority sector.
Lines of Credit : Term finance/loans to the
extent granted for/to the small scale
industrial (ssi) units, will be treated as priority
sector lending, subject to the observance of
certain conditions.
Banking Briefs
159
Bills Rediscounting : Funds provided by

commercial banks to SIDBI/SFCs by way
of rediscounting of bills of SSIs which are
originally discounted by a commercial bank
and rediscounted by SIDBI will be eligible for
inclusion under the priority sector as indirect
finance to SSI.in Special Bonds
Deposits in Rural Infrastructure
Development Fund (RIDF)
Targets for priority sector lending by
scheduled commercial banks (excluding
RRBs)
Main Targets for All Scheduled Commercial
Banks excluding Foreign Banks
The scheduled commercial banks are expected
to enlarge credit to priority sector and ensure
that priority sector advances constitute 40 per
cent of net bank credit and that a substantial
portion is directed to the weaker sections. Within
the overall main lending target of 40 per cent of
net bank credit, it should be ensured that:
18 per cent of net bank credit goes to
agricultural sector,
10 per cent of net bank credit is given to
the weaker sections and
1 per cent of previous years total
advances is given under the Differential
Rate of Interest (DRI) scheme.
SUB-TARGETS FOR ALL SCHEDULED
COMMERCIAL BANKS EXCLUDING
FOREIGN BANKS
Direct/Indirect Agricultural Lending:
The lendings under the direct and indirect
categories of agricultural advances will be
clubbed for the purpose of computing
performance of banks vis--vis the subtarget of 18 per cent.
The lendings under the indirect category
should not exceed one-fourth of the
agricultural sub-target of 18 per cent, i.e. 4.5
per cent of net bank credit.
Advances under the indirect category in
excess of 4.5 per cent of net bank credit
would not be reckoned in computing
115
performance under the sub-target of 18 per

cent.
industries with investment in plant and

machinery up to Rs. 5 lakh;
However, all agricultural advances under the

categories direct and indirect will be
reckoned in computing performance under
the overall priority sector target of 40 per cent
of the net bank credit.
(b) 20 per cent of the total credit to small scale

industry goes to SSI units with investment
in plant and machinery between Rs. 5 lakh
and Rs. 25 lakh; and
Weaker Sections: 25 per cent of priority sector

advances or 10 per cent of net bank credit.
The weaker sections under priority sector shall
include the following:
(i) Small and marginal farmers with land holding
of 5 acres and less, and landless labourers,
tenant farmers and share croppers.
(ii) Artisans, village and cottage industries
where individual credit limits do not exceed
Rs. 50,000/-.
(iii) Beneficiaries of Swarnjayanti Gram
Swarojgar Yojana (SGSY).
(iv) Scheduled Castes and Scheduled Tribes.
(v) Beneficiaries of Differential Rate of Interest
(DRI) scheme.
(vi) Beneficiaries under Swarna Jayanti Shahari
Rojgar Yojana (SJSRY).
(vii)Beneficiaries under the Scheme for Liberation
and Rehabilitation of Scavangers (SLRS).
(viii)Advances to Self Help Groups.
DRI Advances
(a) not less than 40 per cent of the total advances
granted under DRI scheme go to scheduled
caste/scheduled tribes.
(b) At least two third i.e. 662/3 per cent of DRI
advances should be granted through rural
and semi-urban branches
Small Scale Industries
(a) 40 per cent of the total credit to small scale
industry goes to the cottage industries, khadi
& village industries, ar tisans and tiny
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160
(c) The remaining 40 per cent goes to other SSI

units with investment exceeding Rs. 25 lakh.
Targets for Foreign Banks
minimum lending to priority sector by the
foreign banks shall be 32 per cent of their
net credit.
the composition of priority sector advances
in their case will be inclusive of export credit
provided by them.
Within the overall target of 32 per cent to be
achieved by foreign banks, the advances to
small scale industries sector should not be
less than 10 per cent of the net bank credit
and the export credit should not be less than
12 per cent of the net bank credit.
In the event of failure to attain the stipulated
targets and sub-targets, the foreign banks
will be required to make good the shortfall in
the achievement of the targets / sub-targets
by depositing for a period of three years, an
amount equivalent to the shortfall with the
Small Industries Development Bank of India
(SIDBI) at rates of interest ranging from Bank
Rate to Bank Rate minus 3 percentage
points depending on the percentage of
shortfall in achievement of priority sector
lending target/sub-targets .
Contribution by banks TO Rural
Infrastructure Development Fund (RIDF)
Domestic scheduled commercial banks having
shortfall in lending to priority sector / agriculture
are allocated amounts for contribution to the
Rural Infrastructure Development Fund (RIDF)
established with NABARD.
116
SMES - ROLE, POLICIES AND ISSUES

SMEs contributes to around 56% of manufactured products, 35.8% of the exports
and ranks second in providing employment next only to agriculture
Incentives: reservation of items, concessionary finance, simplification of procedures,
imports under OGL, duty free import of select items, simplified credit sanctioning
system
Major issues: inadequate credit, delay in sanction, lack of transparency, lack of
coordination among financing agencies
Small Scale Industries (SSI) sector comprises
small scale units, tiny enterprises and small
service and business enterprises. The official
(Government of India) definition of SSI is as
under :
(a) Small scale industrial units which are
engaged in the manufacture, processing and
preservation of grades and whose
investment in plant and machinery does not
exceed Rs. 10 crores.
(b) Tiny enterprises where investment in plant
and machinery is upto Rs.25 lakhs.
(c) Small scale service and business
enterprises with an investment upto Rs. 10
lakhs in fixed assets including land and
building.
Over the years, the process of graduation of
several SSI units into medium enterprises has
been witnessed. Therefore, the Working Group
on Flow of Credit to SSI Sector, appointed by
the Reserve Bank of India, recommended for
the creation of a separate category of Medium
Enterprises (ME). While ME may not qualify for
priority sector lending, they must be seen as
contiguous with SSI.
As per the
recommendation of the Group, Small and
Medium Enterprises (SME) comprising tiny,
small and medium enterprises, are defined as
under :
(a) Tiny : Turnover being upto the financial limiit
of Rs.2 crores.
(b) Small : Turnover being above Rs. 2 crores
but less than Rs. 10 crores.
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161
(c) Medium : Turnover being between Rs. 10

crores and Rs. 50 crores.
The relative importance of the SSI in the national
economy can be gauged from the fact that
registered SSI units increased from 7.90 lakh
units in 1990-91 to 15.54 lakhs in 2003-04; the
level of production achieved was of the order of
Rs. 351427 crores (at current prices) in 200304; goods worth of Rs.86013 crores were
expor ted (in 2002-03) and the level of
employment was 271.36 lakhs in 2003-04 which
is next only to agriculture. It contributes around
56 per cent of the manufactured products and
35.8 per cent of the exports of the country. The
unregistered units have increased from 59.97
lakhs in 1990-91 to 98.41 lakhs in 2003-04. Thus,
total units in operation in 2003-04 were 113.95
lakhs.
Policy Support
The Government policy provides for special
incentives to the SME units, by way of
reservation of items exclusively for the
manufacture of SSIs, supply of raw materials
through SIDCs, provision of finance on
concessional terms to micro and tiny units, fiscal
reliefs in terms of excise duty, and assistance
in marketing. Recognizing the role of the small
scale sector in providing employment, and
increasing production and expor ts, the
government has streamlined procedures for
imports and reduced points of control. Import of
a number of new items of raw materials,
components / machinery and equipment has
been brought under OGL. The threshold limit
117
for zero duty export promotion of capital goods

(EPCG) scheme has been brought down from
Rs.20 crores to Rs.1 crore for chemicals,
plastics and textiles, enabling these sectors to
upgrade themselves technologically and become
globally competitive. The policy has also enabled
duty free import of consumables upto certain
limits for gems and jewellery, handicrafts and
leather sectors. In the budget of 1998-99, the
limit for working capital has been enhanced from
Rs. 2 crores to Rs.5 crores on the simplified
basis of 20 per cent of the projected annual
turnover. With a view to providing inducement
for increasing production, the budget of 199899 had raised the exemption limit on turnover
for levy of excise duty on SSIs and tiny units
from Rs.30 lakhs to Rs. 50 lakhs and further
enhanced to Rs.100 lakhs in 2000-01.
To accelerate further the pace of growth in the
small scale sector, the Government of India
initiated certain important measures through the
budgets of 1999-2004, which include :
Increasing the limit of composite loan scheme

from Rs.2 lakhs to Rs.50 lakhs to ease the
operational difficulties of the small borrowers
by providing term loans and working capital
through a single window.
Reckoning of lending by the banks to nonbanking financial companies or other

financial intermediaries for the purposes of
lending to the tiny sector as priority sector
lending.
Devising a new credit insurance scheme for

small scale units to provide adequate
security to banks and improve recovery.
Enabling flow of funds to the micro

enterprises through the coverage of at least
50,000 SHGs at the behest of SIDBI and
NABARD.
Credit linked scheme for technology

upgrading.
Rationalization of custom duty.
Increase in project limit under NEF to Rs. 50

lakhs.
Banking Briefs
162
Enhancement of investment limit to Rs.5

crores in hi-tech and export oriented sector.
Scheme for upgrading industrial estates.
Market Development Assistance (MDA)

scheme for SSI.
Task Force for strengthening factoring and

bill culture.
The government has also taken various steps

for the promotion of the tiny enterprises. The
policy stipulates that out of the total funds
available to all segments of SSIs, 40 per cent
should be earmarked for units with an investment
in plant and machinery upto Rs. 5 lakhs, 20 per
cent for units with investment of above Rs. 5
lakhs but less than Rs. 25 lakhs, and the
remaining 40 per cent for the others. Through
the Union Budget 2003-04, Indian Banks
Association (IBA) has advised the banks to
adopt the interest rate band of 2 per cent above
and below their prime lending rates (PLRs) for
advances to SSI. Over the years, the
Government of India and the RBI have been
constantly endeavouring to strengthen the credit
delivery system for the SSIs. In order to increase
the credit to the SSI sector, as recommended
by the Nayak Committee Report, 379 specified
SSI branches have been set-up by the
commercial banks as of December, 2004. The
Committee appointed by the RBI under the
Chairmanship of Shri S.L. Kapur, former
Secretary to the Government of India, in its
repor t submitted in 1998, has made 126
recommendations of which 40 have been
accepted for implementation. Subsequently,
banks were advised by the RBI to delegate more
powers to the branch manager for sanctioning
the ad-hoc limit upto 20 per cent of sanctioned
loaned limit, to meticulously implement the Nayak
Committee recommendations on working capital,
to open more specialized SSI branches, to
dispose of the loan application upto Rs. 25000
within a fortnight, above Rs.25000 within 8-9weeks, etc.
SMEs are financed by banks and Development
Financial Institutions [both National and State
level]. Banks offer various facilities, incentives
118
and special schemes. DFIs have set up SME

Fund and Credit Guarantee Fund Trust [CGTSI]
besides financing SMEs.
Major Issues
In this section, an attempt is made to identify
various issues relating to institutional credit
based on :
(a) Recommendations of the major committees
appointed by the Government of India /
Reserve Bank of India. These include the
Nayak Committee, the Kohli Committee, the
Kapur Committee and the Ganguly
Committee.
(b) Practical experience of the authors in
handling projects in SME sector at SIDBI and
interactions held with practicing bankers
attending training programmes at NIBM.
(c) A survey conducted at NIBM on Financing
of Small Scale Industries in 2004.
Non-availability of bank credit to the SSI sector
is a major issue. This relates to (a) inadequate
credit sanction, and (b) delays in credit sanction.
Inadequate sanction takes place due to (i) lack
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163
of understanding of business and requirements

of genuine needs, (ii) lack of transparency on
the part of borrowers, (iii) lack of information made
available by borrowers to banks for credit
appraisal, (iv) lack of appreciation on the part of
the borrower regarding bank formalities, (v)
diversion of funds by borrowers which prevents
bankers from being liberal in credit sanction, (vi)
lack of coordination between banks and financial
institutions in carrying out a joint appraisal, (vii)
lack of skills in appraising hi-tech projects, and
(ix) inadequate support from controlling office
and legal / technical cells in banks. Similarly,
delays in credit sanction include (i) asking
information from borrowers in piecemeal, (ii)
appraisal being done in parts, (iii) ineffective
arrangements of loan consor tium, (iv)
inadequate organizational arrangements to carry
out speedy appraisal, and (v) lack of cooperation
on the part of the borrower to comply with
banker's requirements. Along with bank credit,
lack of coordination between SFCs and banks,
which has resulted in the lack of flow of working
capital to the SMEs leading to industrial sickness
and lack of finance for marketing, is another
major issue.
119
OUTSOURCING BY BANKS
Key Risks in Outsourcing: Strategic risk, reputation risk, counterparty risk, country
risk, contractual risk, access risk, concentration risk and systemic risk. Banks have
to manage these risks
Board of directors to provide direction and guidance to banks to adopt sound and
responsive risk management practices for outsourcing
Banks to have in place a management structure to monitor and control its outsourcing
activities.
Outsourcing may be defined as use of a third
party (either an affiliated entity within a corporate
group or an entity that is external to the corporate
group) to perform activities on a continuing basis
that would normally be undertaken by the bank
itself. Third party or service provider refers to the
entity that is undertaking the outsourced activity
on behalf of the bank. There are some key risks
in outsourcing such as strategic risk, reputation
risk, counterparty risk, country risk, contractual
risk, access risk, concentration risk and
systemic risk. It would be imperative for the bank
outsourcing its activities to ensure effective
management of these risks.
The failure of a service provider in providing a
specified service, a breach in security/
confidentiality, or non-compliance with legal and
regulatory requirements by either the service
provider or the outsourcing bank can lead to
financial losses for the bank and could also lead
to systemic risks within the entire banking system
in the country. Hence, its board of directors and
management of bank need to provide direction
and guidance to banks to adopt sound and
responsive risk management practices for
effective oversight, due diligence and
management of risk arising out of such
outsourcing activities.
Some outsourcing arrangements, if disrupted,
have the potential to significantly impact banks
business operations, reputation or profitability.
Such arrangements are considered material
outsourcing. Banks should use qualitative
judgement to assess whether or not an
outsourcing arrangement that is in existence or
Banking Briefs
164
being planned, is to be considered material

outsourcing or not.
Before entering into, or significantly changing,
an outsourcing arrangement, a bank should (i)
analyse how the arrangement will fit into its
organisation and reporting structure; (ii) consider
whether the agreement establishing the
outsourcing arrangement will allow it to monitor
and control its operational risk exposure relating
to the service provider: (iii) conduct appropriate
due diligence of the service providers financial
position and expertise; (iv) consider how it will
ensure a smooth transition of its operations from
its current arrangements to a new or changed
outsourcing arrangement (including what will
happen on the termination of the contract); and
(v) consider any concentration risk implications
such as the business continuity implications that
may arise if a single service provider is used by
several banks.
The bank should require its service providers to
develop and establish a robust framework for
documenting, maintaining and testing business
continulty and recovery procedures. Outsourcing
often leads to the sharing of facilities operated
by the service provider. The bank should ensure
that service providers are able to isolate the
banks information, documents and records, and
other assets. This is to ensure that in adverse
conditions, all documents, records of
transactions and information given to the service
provider, and assets of the bank can be removed
from the possession of the service provider in
order to continue its business operations, or
deleted, destroyed or rendered unusable.
120
The bank should have in place a management

structure to monitor and control its outsourcing
activities. A bank that has entered into or is
planning material outsourcing, or is planning to
vary any such outsourcing arrangements, should
adhere to the regulatory and supervisory
requirements. It is imperative for the bank, when
performing its due diligence in relation to
outsourcing, to consider all relevant laws,
regualtions, guidelines and conditions of
approval, licensing or registration. The
engagement of service providers in a foreign
Banking Briefs
165
country exposes a bank to country risk economic, social and political conditions and
events in a foreign country that may adversely
affect the bank. Such conditions and events
could prevent the service provider from carrying
out the terms of its agreement with the bank. To
manage the country risk involved in such
outsourcing activities, the bank should take into
account and closely monitor government
policies and political, social, economic and legal
conditions in countries where the service provider
is based.
121
CONSUMER PROTECTION ACT, 1986 (COPRA)

Enacted in 1986
Deals with complaints regarding deficiency in service
Act provides three tier quasi judicial redressal machinery: District, State and National
Tribunal with limits upto Rs.20 lacs in district, 20 lacs-1 crore in State and above Rs.1
crore in national forum
Complaint to be filed in 2 years and appeal in 30 days
Penalty upto 3 years imprisonment
The Consumer Protection Act was enacted in
1986 with the object of better protection of the
consumers and for the settlement of consumer
disputes.
any beneficiary of such service other than the

one who actually hires the service for
consideration and such services are availed with
the approval of such person.
Objects of the Consumer Protection Act, 1986
Complaints can be filed by (i) Consumer(s), (ii)

Voluntary Organizations (Regd. under the
Societies Regn. Act 1860 or the Companies Act,
1956 or under any other law for the time being
in force (iii) Central or State Government or
Union Territory Administrations and (iv) Petty
traders
The basic rights of consumers that are sought

to be promoted and protected are:a)
the right to be protected against marketing

of goods and services which are
hazardous to life and property;
b)
the right to be informed about the quality,

quantity, potency, purity, standard and price
of goods, or services so as to protect the
consumer against unfair trade practices;
c)
the right to be assured, where possible,

of access to variety of goods and services
at competitive prices;
d)
the right to be heard and to be assured

that consumers interests will receive due
consideration at appropriate forums;
e)
the right to seek redressal against unfair

trade practices or restrictive trade
practices of unscrupulous exploitation of
consumers; and
f)
the right to consumer education.
The Act defines a consumer as :

One who buys any goods for consideration, paid
partly or in full or promised to be paid partly or in
full or under any system of deferred payment. It
includes any one who hires any service for a
consideration under terms mentioned above and
Banking Briefs
166
Redressal Machinery under the Act

The Act provides for a three-tier quasi-judicial
redressal machinery at the District, State and
National levels for redressal of consumer
disputes and grievances. The District Forum has
jurisdiction to entertain complaints where the
value of goods/services complained against and
the compensation, if any claimed, is less than
Rs. 20 lakhs, the State Commission for claims
exceeding Rs. 20 lakhs but not exceeding Rs.
1.00 crore; and the National Commission for
claims exceeding Rs. 1.00 crore.
Limitation period for filing of Complaint
Section 24A provides that the District Forum,
the State Commission, or the National
Commission shall not admit a com-plaint unless
it is filed within two years from the date on which
the cause of action has arisen. However, where
the complainant satisfies the Forum/
Commission as the case may be, that he had
sufficient cause for not filing the complaint within
two years such complaint may be entertained
122
by it after recording the rea-sons for condoning

the delay.
Nature and scope of remedies under the Act
Under Section 14(1) of the Act, where the goods
complained against suffer from any of the
defects specified in the complaint or any of the
allegations contained in the complaint about the
services are proved, the District Forum/State
Commission/National Commission may pass
one or more of the following orders;
a)
to remove the defects pointed out by the

appropriate laborato-ry from the goods in
question;
b)
to replace the goods with new goods of

similar description which shall be free from
any defect;
c)
to return to the complainant the price, or,

as the case may be, the charges paid by
the complainant;
d)
to pay such amount as may be awarded

by it as compensation to the consumer
for any loss or injury suffered by the
consumer due to the negligence of the
opposite party;
e)
to remove the defects or deficiencies in

the services in question.
f)
to discontinue the unfair trade practice or

the restrictive trade practice or not to
repeat them;
g)
to withdraw the hazardous goods from

being offered for sale;
h)
to provide for adequate costs to parties.
The remedies that can be granted by the

redressal agencies are therefore wide enough
to cover removal of defects/deficiency in goods/
services, replacing defective goods with new
Banking Briefs
167
goods, refunding price/charges paid by the

complainant, payment of compensation for loss
or damage suffered, providing costs to parties
and issuing prohibitory orders directing the
discontinuance of unfair trade practice, sale of
hazardous goods etc. However, the redressal
agencies have not been granted power to order
injunctions.
Procedure for filing an appeal under the Act
Appeal can be filed within 30 days against the
decision of a
-
District Forum
Commission.
before
the
State
State commission before the National

Commission and
National Commission before the Supreme

Court
The appellate authority may entertain an appeal

after the laid down period of 30 days if it is
satisfied that there was suffi-cient cause for not
filing it within the stipulated period.
Penalties
Failure or omission by a trader or other person
against whom a complaint is made or the
complainant to comply with any order of the
District Forum, State Commission or the
National Commission shall be punishable with
imprisonment for a term which shall not be less
than one month but which may extend to three
years, or with fine of not less than Rs. 2,000 but
which may extend to Rs. 10,000 or with both.
Additional Remedy
The provisions of the Consumer Protection Act
are in addition to and not in derogation of any
other law for the time being in force. It has not
taken away the jurisdiction of the Civil Courts.
123
BANKING OMBUDSMAN SCHEME

Scheme effective from June 95 and recently amended in 2002
Covers scheduled commercial banks, RRBs and co-operative banks
Deals with: Delayed collection of cheques, non-issue of drafts, interest rate disputes,
failure to honour LC/guarantee commitments, delay in disposal of loan application
It promotes settlement through conciliation
The scheme, which came into effect from June
14, 1995 and amended recently in 2002 provides
the public, a system of redressal of grievances
against banks and to approach Banking
Ombudsman for grievances against a bank
which are not resolved within a period of two
months provided their complaints pertain to any
of the matters specified in the scheme. The
Scheme sought to establish a system of
expeditious and inexpensive resolution of
customer complaints. The Scheme is in
operation since 1995 and was revised during
the year 2002. The Scheme is being executed
by Banking Ombudsmen appointed by RBI at
15 centres covering the entire country. The
scheme covers all scheduled commercial
banks, Regional Rural Banks and all Scheduled
Primary Co-operative Banks having a place of
business in India whether incorporated in India
or outside India. The scheme is not a
substitution for Consumer Protection Act but an
additional grievance settle-ment mechanism
available to the banks consumers.
Powers of the Banking Ombudsman
Banking Ombudsmen have been authorized to
look into complaints concerning (a) deficiency
in banking service (b) sanction of loans and
advances as they relate to non-observance of
the Reserve Bank directives on interest rates,
delay in sanction or non-observance of
prescribed time schedule for disposal of loan
applications or non-observance of any other
directions or instructions of the Reserve Bank
His authority also includes matters referring to
all complaints concerning,
i)
non payment/inordinate delay in the payment

or collection of cheques.
Banking Briefs
168
ii) non acceptance, without sufficient cause, of

small denomina-tion notes tendered for any
purpose.
iii) non issue of drafts to customers and others
and non adherence to prescribed working
hours.
iv) failure to honour guarantee/letter of credit
commitments by banks.
v) complaints pertaining to operations in SB/
CA/NRI accounts and interest rates.
vi) non observance of RBI instructions
regarding time schedule for disposal of loan
applications.
Procedure for Redressal
The complaint has to be in writing duly signed
by the complainant or his authorised
representative containing name and address of
the complainant and name and address of the
bank against which the complaint is made. It
should also contain facts giving rise to the
complaint supported by documents where
necessary. Finally, it should also mention about
the relief sought from the ombuds-man.
Action by the Ombudsman
For the purpose of carrying out his duties under
this scheme, a banking ombudsman may
require the bank named in the complaint to
provide information or furnish copies of any
document relating to the complaint.
Upon scrutinizing the relevant particulars, the
ombudsman calls for a meeting with both the
parties and endeavours to promote a settlement
through conciliation or mediation. If that is not
achieved within a period of one month from the
124
date of the com-plaint, he makes a

recommendation to the complainant and the
bank concerned. The recommendations of the
ombudsman will be open for acceptance by the
complainant only if he accepts all terms in full
and final settlement of his claim within 2 weeks
from the date of receipt of the recommendations.
A copy of this recommendation will also be
forwarded to the bank. The bank will have 2
weeks time to accept the recommendations.
Otherwise it should inform the ombudsman
within two weeks.
If the complaint is not settled by agreement or
recommendation within a period of two months
from the date of receipt of com-plaint, the
ombudsman will pass an award after affording
both the complainant and the bank reasonable
opportunity to present their case. An award is
not binding on the bank against which it is passed
unless the complainant furnished to it within a
period of one month from the date of the award,
a letter of acceptance of the award in full and
final settlement. Within 15 days of the receipt of
the acceptance of the award by the complainant,
the bank has to comply with it and intimate the
banking ombudsman. The ombudsman can
award compensation for an amount upto Rs.
10 lacs.
The BOS 2002 additionally provides for the
institution of a Review Authority to review the
Banking Ombudsmans Award, when
warranted. The bank can request for such a
review only when the Award appears to be
patently in conflict with the Banks instructions
and/or the law and practice relating to banking.
The Banking Ombudsman has also been
authorised to function as an Arbitrator on
reference to him of disputes either between
Banking Briefs
169
banks and their customers or between banks.

The value of the subject matter of individual
disputes under arbitration will not exceed
Rupees 10.00 Lakhs.
Further Developments:
The Reserve Bank of India (RBI) has further
enlarged the scope of its Banking Ombudsman
Scheme, giving customers a forum to seek
redressal for most of their common complaints
against banks, including those relating to
customer complaints on certain new areas,
such as, credit card complaints, deficiencies in
providing the promised services even by banks
sales agents, levying service charges without
prior notice to the customer and non adherence
to the fair practices code as adopted by
individual banks. Applicable to all commercial
banks, regional rural banks and scheduled
primary cooperative banks having business in
India, the revised scheme will come into effect
from January 1, 2006.
In order to increase its effectiveness, the revised
scheme will be fully staffed and funded by the
RBI instead of the banks. The complainants will
now be able to file their grievances in any form,
including online. Customers would also be able
to appeal to the RBI against the ruling given by
the banking ombudsman. They would now be
able to complain about non-payment or any
inordinate delay in payments or collection of
cheques towards bills or remittances by banks,
as also non-acceptance of small denomination
notes and coins or commissions charged for
accepting them.
The revised scheme has come into effect
from January 1, 2006.
125
CREDIT CARD: NEW GUIDELINES

Reserve Bank of India has framed following guidelines on credit card operations of
banks. Each bank / NBFC must have a well-documented policy and a Fair Practices
Code for credit card operations.
The guidelines cover issue of cards, interest rates and other charges, wrongful
billing, use of DSAs / DMAs and other agents.
In order to protect customers rights, the guideline outline the right to privacy,
customer confidentiality and fair practices in debt collection.
It also enumerates the mechanism for redressal of grievances.
Reserve Bank of India reserves the right to impose any penalty on a bank / NBFC
for violation of the guidelines.
Reserve Bank of India has framed following
guidelines on credit card operations of banks
based on the recommendations of the RBIs
Working Group as also the feedback received
from the members of the public, card issuing
banks and others. RBI has advised that each
bank / NBFC must have a well-documented
policy and a Fair Practices Code for credit card
operations.
Guidelines for Implementation
1. Issue of cards
Banks / NBFCs should independently assess
the credit risk while issuing cards to persons,
specially to students and others with no
independent financial means. Add-on cards may
be issued with the clear understanding that the
liability will be that of the principal cardholder.
As holding several credit cards enhances the
total credit available to any consumer, banks /
NBFCs should assess the credit limit for a credit
card customer having regard to the limits
enjoyed by the cardholder from other banks on
the basis of self declaration/ credit information.
The card issuing banks / NBFCs would be solely
responsible for fulfillment of all KYC
requirements, even where DSAs / DMAs or
other agents solicit business on their behalf.
While issuing cards, the terms and conditions
for issue and usage of a credit card should be
mentioned in clear and simple language
(preferably in English, Hindi and the local
language) comprehensible to a card user. The
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170
Most Important Terms and Conditions (MITCs),

duly highlighted must be sent to the customers.
2. Interest rates and other charges
Card issuers should ensure that there is no
delay in dispatching bills and the customer has
sufficient number of days (at least one fortnight)
for making payment before the interest starts
getting charged. Card issuers should quote
annualized percentage rates (APR) on card
products separately for retail purchase and for
cash advance, if different. The annual fee and
late payment charges should be prominently
indicated in the Welcome Kit and the monthly
statement. The bank / NBFC should not levy any
charge that was not explicitly indicated to the
credit card holder at the time of issue of the card.
However, this would not be applicable to charges
like service taxes, etc. which may subsequently
be levied by the Government or any other
statutory authority. The terms and conditions for
payment of credit card dues, including the
minimum payment due, should be stipulated so
as to ensure that there is no negative
amortization. Changes in charges (other than
interest) may be made only with prospective
effect giving notice of at least one month.
3. Wrongful billing
The card issuing bank / NBFC should ensure
that wrong bills are not raised. In case, a
customer protests the bank / NBFC should
provide explanation and, if necessary,
documentary evidence to the customer within a
126
maximum period of sixty days. To obviate

frequent complaints of delayed billing, the credit
card issuing bank / NBFC may consider
providing bills and statements of accounts
online.
receive unsolicited calls / SMS for

marketing of its credit card products. Do
Not Call Registry (DNCR) information
should be put in public domain through
the website maintained by the bank /
NBFC. Banks / NBFCs/ their agents
should not resort to invasion of privacy
viz., persistently bothering the card
holders at odd hours, violation of do not
call code etc.
4. Use of DSAs / DMAs and other agents

When banks / NBFCs outsource the various
credit card operations, they have to ensure
quality of the customer service, manage credit,
liquidity and operational risks and ensure
confidentiality of the customers records, respect
customer privacy and adhere to fair practices
in debt collection. Banks / NBFCs to formulate
their own codes for the purpose and ensure that
the DSAs scrupulously adhere to their own Code
of Conduct for credit card operations. The bank
/ NBFC should have a system of random checks
and mystery shopping to ensure that their agents
have been properly briefed and trained to handle
customers, particularly in respect of soliciting
customers, hours for calling, privacy of
customer information, conveying the correct
terms and conditions of the product on offer, etc.
(ii) Customer confidentiality

The card issuing bank / NBFC should
not reveal any information relating to
customers obtained at the time of opening
the account or issuing the credit card to
any other person or organization without
obtaining the customers specific consent.
In case of providing information relating
to credit history / repayment record of the
card holder to a credit information
company (specifically authorized by
RBI), the bank / NBFC may explicitly
bring to the notice of the customer that
such information is being provided in
terms of the Credit Information
Companies (Regulation) Act, 2005.
Before reporting to the Credit Information
Bureau of India Ltd. (CIBIL) or any other
credit information Company authorized
by RBI, banks / NBFCs may ensure that
they adhere to a procedure, duly
approved by their Board.
5. Protection of Customer Rights

Customers rights in relation to credit card
operations primarily relate to personal privacy,
clarity relating to rights and obligations,
preservation of customer records, maintaining
confidentiality of customer information and fair
practices in debt collection. The card issuing
bank / NBFC would be responsible as the
principal for all acts of omission or commission
of their agents (DSAs / DMAs and recovery
agents).
i.
(iii)Fair Practices in debt collection

In the matter of recovery of dues, banks
/ NBFCs may ensure that they, as also
their agents, adhere to the extant
instructions on Fair Practice Code for
lenders (as also IBAs Code for
Collection of dues and repossession of
security. In case banks / NBFCs have
their own code for collection of dues it
should, at the minimum, incorporate all
the terms of IBAs Code.In case of
appointment of third party agencies for
debt collection, it is essential that such
agents refrain from action that could
damage the integrity and reputation of the
bank / NBFC. Banks / NBFCs / their
agents should not resort to intimidation
Right to privacy
Unsolicited cards should not be issued.
Unsolicited loans or other credit facilities
should not be offered to the credit card
customers. The card issuing bank /
NBFC should not unilaterally upgrade
credit cards and enhance credit limits.
The card issuing bank / NBFC should
maintain a Do Not Call Registry (DNCR)
containing the phone numbers (both cell
phones and land phones) of customers
as well as non-customers (nonconstituents) who have informed the
bank / NBFC that they do not wish to
Banking Briefs
171
127
or harassment of any kind, either verbal

or physical, against any person in their
debt collection efforts.
6. Redressal of Grievances
Generally, a time limit of sixty (60) days may be
given to the customers for preferring their
complaints / grievances. The card issuing bank
/ NBFC should constitute Grievance Redressal
machinery within the bank / NBFC and give wide
publicity about it through electronic and print
media. If a complainant does not get satisfactory
response from the bank / NBFC within a
maximum period of thirty (30) days from the date
of his lodging the complaint, he may approach
the concerned Banking Ombudsman for
redressal of his grievance/s. The bank / NBFC
shall be liable to compensate the complainant.
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172
7. Internal control and monitoring systems

The Standing Committee on Customer Service
in each bank / NBFC may review on a monthly
basis the credit card operations including
reports of defaulters to the CIBIL, credit card
related complaints and take measures to
improve the services. Banks/NBFCs should put
up detailed quarterly analysis of the Credit Card
complaints to their Top Management.
8. Right to impose penalty
The Reserve Bank of India reserves the right to
impose any penalty on a bank / NBFC under the
provisions of the Banking Regulation Act, 1949
for violation of any of these guidelines.
128
UNIVERSAL BANKING
Issued by RBI in August 02 to protect banks against financial frauds and money
laundering
Recommended by Narasimham and Khan Committees
Universal Banking means provision of all financial services by a bank under one
umbrella
It is diametrically opposite to narrow banking
Examples of financial services include: Long-term loans to industries, venture capital,
underwriting, brokerage, corporate advisory services, insurance
Facilitating factors: Deregulation, fall in interest income and the wider business
opportunities
Different models of universal banking such as holding company, subsidiary may be
adopted
Indian banks already are moving towards universal banking.
In general, universal bank is a name given
to banks engaged in diverse kind of banking
business, which in the Anglo-Saxon tradition
would be handled by different types of banking
institutions. According to one school of thought
there are four different types of universal banks
in the world:
i. Fully integrated universal bank: One
institutional entity offering the complete range
of services.
ii. Partly
integrated
financial
conglomerates: One which offers range of
services, but some of the range (for example,
mortgage banking, leasing and insurance)
are provided through wholly owned or
partially owned subsidiaries.
iii. Bank subsidiary structure: one which
focuses essentially on commercial banking
and other functions, including investment
banking and insurance, which are carried out
through legally separate subsidiaries of the
Bank.
iv. Bank holding company structure: One
financial holding company owns both
banking and non-banking subsidiaries that
are legally separate and individually
capitalised in so far as financial services
other than banking are permitted by law.
Rise of Universal Banking
Earlier clear demarcation lines used to exist
between the functions of different institutions
within the financial system. This situation existed
Banking Briefs
173
on account of two reasons: (i) restrictions in the

regulatory framework, and (ii) technical and
economic barriers to entry like ownership and
minimum equity restrictions. But with the
introduction of deregulation in most of the
developed countries and the increasing
disintermediation in both the domestic as well
as international capital markets, the banks
became very vulnerable to interest income i.e.
intermediation income. Therefore, banks started
placing more emphasis on new sources of non
- interest income which led to the diversification
in activities in financial sector. Some of these
players later came to be known as universal
banks and their activities included activities like:
practice of making loans and advances on
a longer term : for example financing of fixed
investment in industrial enterprises;
intermediation in domestic and international
financial markets through new financial
innovations in loan and liability products
induced by the customer derivatives;
underwriting new debt and equity issues;
venture capital;
brokerage;
corporate advisory services, including
mergers and acquisition advice;
insurance;
holding equity of non-financial firms in the
banks portfolio.
Indian banks are already moving in the direction
of Universal Banking i.e., undertaking all financial
services under one cover.
129
BANKING CASH TRANSACTION TAX

The Finance Act, 2005 has introduced a new levy, viz. the banking cash transaction tax
(hereafter referred to as BCTT) on certain cash transactions in banks.
The Act has two objectives of tracking down large transactions for better tax compliance
and curbing generation of black money in the economy
The BCTT is applicable in respect of all taxable banking transactions entered into on or
after 1st June 2005
The rate of BCTT applicable is 0.1 percent (10 basis points) of the value of the
taxable banking transaction.
HUF or Rs. 1,00,000 in case of any other
person.
Objectives:
The Act has two objectives of tracking down
large transactions for better tax compliance and
curbing generation of black money in the
economy.
Applicable Transactions:
A cash withdrawal would fall within the scope of
a taxable banking transaction if it satisfies the
following conditions:
(i) The cash withdrawal (by whatever mode) is
from an account other than a savings bank
account.
(ii) The account is maintained with any
scheduled bank.
(ii) The amount of cash withdrawn on a single
day from the same account should exceed
Rs. 25,000 in the case of an individual or a
HUF or Rs. 1,00,000 in the case of any other
person.
Similarly, receipt of cash on encashment of term
deposits would fall within the scope of a taxable
banking transaction if it satisfies the following
conditions:
(i) The cash is received on encashment of a
term deposit or deposits.
(ii) The term deposit or deposits are in any
scheduled bank.
(iii) The amount of cash received in a single day
exceeds Rs. 25,000 in the case of a deposit
or deposits in the name of an individual or a
Banking Briefs
174
Amount of Tax:
The rate of BCTT applicable is 0.1 percent (10
basis points) of the value of the taxable banking
transaction.
Multiple withdrawals:
Multiple withdrawals of cash from the same
account or multiple receipts of cash
onencashment of a term deposit or deposits in
the name of the same person on any single day
shall be treated as a single taxable banking
transaction. Therefore, if an individual were to
withdraw Rs.80,000 in a single day in multiples
of Rs. 20,000 from one account, he would be
liable to pay BCTT on the aggregate cash
withdrawal of Rs. 80,000. However, if the
individual maintains two or more accounts in a
bank and withdraws upto Rs. 25,000 from each
account in a single day, he would not be liable
for BCTT.
Benefit in respect of exemption limit:
For transactions in excess of these limits, no
benefit is available in respect of the exemption
limit. For example, in respect of a transaction of
cash withdrawal of Rs.30,000/- on any single
day from a current account maintained by an
individual with a scheduled bank, BCTT is
leviable on the amount of Rs. 30,000 and not
only on the excess of Rs. 5,000 over the
exemption limit.
130
Who is liable to pay:

The banking cash transaction tax is payable by
every person as defined in Clause (31) of
Section 2 of the Income-Tax Act. The Act in its
original form was also applicable to Government
transactions which was later amended to
exempt such transactions from the provisions
of BCTT.
Territorial jurisdiction
BCTT is applicable to the whole of India except
the State of Jammu and Kashmir Thus, BCTT
shall not be charged in respect of transactions
in an account maintained in any branch of a
scheduled bank if such branch is situated in the
State of Jammu and Kashmir. Similarly, if a term
deposit has been made in a branch of a
scheduled bank and if such branch is situated
in the State of Jammu and Kashmir, the receipt
in cash on encashment of such deposit will not
attract the BCTT. However, even if the scheduled
bank is incorporated in the State of Jammu and
Kashmir, its banking transactions will be liable
to BCTT if the account is maintained or the
deposit is made, in a branch of such bank
situated outside the State of Jammu and
Kashmir.
If a person withdraws cash outside India but the
debit for such withdrawal is in an account in
India, such withdrawal will attract the provisions
of BCTT. However, if the withdrawal is in India
but the account is maintained outside India, the
provisions of BCTT will not be applicable.
When Tax is to be collected:
The tax is to be collected by the bank at the time
of the transaction. For example, when cash is
Banking Briefs
175
withdrawn in excess of the specified limit, the

bank will debit the amount of cash withdrawn
and also the amount of BCTT payable thereon
to the concerned account. Similarly, in the case
of receipt of cash on encashment of term
deposit, the bank is required to deduct the
amount of BCTT payable thereon from the
proceeds and pay the balance to the person
encashing the term deposit.
The responsibility for collecting the BCTT rests
with the bank where the transaction takes place.
In the event of failure to do so, the amount of
BCTT, which was otherwise collectible, is
required to be paid by that bank to the credit of
the Central Government.
Remittance of tax:
The BCTT collected by a scheduled bank during
a calendar month will have to be paid by the bank
to the credit of the Central Government by the
last day of the month immediately following that
month.
Further, it is clarified that the scheduled bank
will have to pay to the Central Government the
tax collected by all its branches. The branches
are not required to directly remit the tax collected
by them to the account of the Central
Government. For example, if a bank has ten
branches, a single remittance of the aggregate
collection is required to be made and not ten
separate remittances to the account of the
Central Government.
Commencement
The BCTT is applicable in respect of all taxable
banking transactions entered into on or after 1st
June 2005.
131
BANKING
CREDIT AND DERIVATIVE
PRODUCTS
Banking Briefs
176
INFRASTRUCTURE FINANCING
Infrastructure financing implies lending to sectors such as power and transportation
India needs more than 800000 Crores of investment in this area
Rakesh Mohan Committee recommended measures for commercialization of infrastructure
projects
Two options to finance infrastructure: Concession and Strucuture option
Concession option: BOT, BOLT, BOOT, BOO, BOOS
Structure option: non-recourse, limited, recourse, escrow, cash flow, subordinated debt
and take out finance.
Need for efficient infrastructure services are
increasingly recognised as a sine qua non of
high and sustainable economic growth. So far,
the provision of infrastructure services in India
is largely in the Government sector. Budgetary
allocation has been the principal source of
financing capacity additions in infrastructure. As
budgetary resources to support capacity
additions have become scarce, development
and financing of infrastructure was opened up
to private/foreign participation.
The Expert Group on the Commercialisation of
infrastructure Projects (Chairman: Dr. Rakesh
Mohan), in its report submitted in June 1996, (for
more details please see under committees)
has argued that the total fund requirement of the
infrastructure sector over the next five years is
expected to be of the order of Rs.4,000 - 4,500
billion. The new approaches to finance
infrastructure projects can be broadly classified
as (i) Concession Approach and, (ii) Structured
Financing Option.
The Concession Approach
In the concession approach, the concessionaire
builds the project which is thereafter granted a
franchise period during which the costs and
returns can be recovered.
The projects may be executed on principles of
Build- Own-Operate-Transfer (BOOT), BuildOperate-Transfer (BOT), Build-Own-Lease-andTransfer (BOLT) and Build-Own-Operate-Shareand- Transfer (BOOST) and other variants. The
projects could typically be promoted by
consortiums comprising private and public
sector companies, financial institutions and
multinationals.
The brief explanations of various modes of
financing are:
Banking Briefs
177
i.
BOT-Build, Operate and Transfer : This

is one of the methods adopted for attracting
private sector funds for infrastructure
development and is known as build-operatetransfer agreement. Here, the private
investor builds, operates and transfers the
facility back to the government at the end of
a specified period call the Concession
Period.
Build : Set-up the facility and infrastructure,
staff the development center, and establish
knowledge transfser
Operate : Manage the offshore organization:
Program Management, Development, QA,
maintenance, enhancements, and product
support
Transfer : Register a new offshore subsidiary
for the customer, transfer assets, and
handover operations
ii) BOLT - Build, Operate, Lease and

Transfer: Here the private investor builds by
taking the project on lease and after the lease
period, transfers it back to the government.
iii) BOO - Build, Own and Operate: Here the
private sponsor builds, owns and operates
the infrastructure facility for the entire life of
the project.
The other variants are:
iv) BOOT - Build, Own, Operate and
Transfer:
v) BOOS - Build, Own, Operate and Sell:
This is better from the view point of risk
reduction as well as equitable distribution of
risks).
vi) BOOST - Build-Own-Operate-Shareand- Transfer
132
Structured Financing Option

Structured Financing Option (SFO) generally
assumes two forms: (a) Non-recourse financing
and (b) limited recourse financing.
i)
Non-recourse financing: Under this option,

the debt instrument is secured by the cashflows generated by the project or the
collateral value of the specified assets
financed by the instrument. In the event of
default on the structured instrument, the debt
holders recourse would be limited to the
underlying assets only and would not extend
to general reserves and assets of the
company. Panvel (Mumbai) By-Pass is the
first example of SFO in India.
Escrow mechanism
ii) Limited Recourse Financing: Under this

variant, in addition to project assets, the
parent company attaches other assets/
revenue-streams for servicing the instrument
to improve its credit-worthiness. Thus
lenders have limited recourse to the assets
of a company sponsoring the project.
The escrow mechanism has been developed

for independent power projects (IPP) which are
built by private parites out of private funds and
electricity supplied to state electricity boards
(SEB). Essentially, it ensures that out of the
revenues of the SEB, the debt obligations of the
financing institutions will be paid first. This is
done by having some identified revenues being
passed through a separate account called the
escrow account to which the lenders also have
a right to appropriate the funds in case the SEB
defaults in making payments. This gives added
comfort to the lender and allows the IPP to raise
financial assistance.
Take-out Financing
Subordinated debt financing
Take-out financing structure is essentially a

mechanism designed to enable banks to avoid
asset liability maturity mismatches that may
arise out of extending long term loans to
infrastructure projects. Under the arrangements
banks financing the infrastructure projects will
have an arrangement with IDFC or any other
financial institution for transfering to the latter the
outstandings in their books on a pre-determined
basis.
Institutions have also talked about funding

infrastructure projects through a quasi-equity
instrument called subordinated debt which may
have flexible maturity and payment terms.
Though these loans will be more expensive than
secured debt, they will at least ensure that a
project starts up.
Govt. and Bank Participation
Bankability
Another way out could be the government

issuing long-dated bonds at subsidised rates to
fund infrastructure. The government may
consider classifying these securities as
approved securities for the statutory liquidity ratio
(SLR) purposes. Banks have been permitted to
issue guarantees to loans provided by other
banks and lending institutions to infrastructure
projects subject to certain conditions. Under the
revised norms, a bank would be permitted to
issue the guarantee in favour of loans extended
by other banks or financial institutions, provided
it also takes a funding share in the project.
Further, the amount allowed for guarantee by
the bank should not exceed twice the funding
share assumed by it.
Some of the main concerns which lenders wish

to see adequately catered for are: project
completion, assured cash flows, security, stepin rights, termination payments, experience and
technology. In a nutshell for a project to be
bankable it must be financially viable, structured
so that risk is distributed on an appropriate basis
and the documentation provides mechanisms
to make the risk distribution work.
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178
Cash Flow Financing

In cash-flow financing, the lenders estimate the
cash flows of a project over its lifetime to see
what kind of debt burdens it can support and at
what rates. Then, the amount of debt, financing
rate and the way of repayments can be tailored
to fit the cash flows of the project. This helps
both the lender and the project promoter.
Infrastructure, being long gestation projects with

considerable risks, require innovative financial
solutions to tackle them.
Status of infrastructure financing in SBI

During 2004-05, Project Finance SBU of the
Bank entered into an MOU with LIC for jointly
financing big-ticket infrastructure projects in the
country. It also facilitated formation of InterInstitutional Group with other major lenders in
Power Sector for achieving financial closure of
the projects at the earliest.
133
SECURITISATION
Securitisation means converting future cash inflows as securities and selling them in
the market.
It helps in raising immediate funds against future cash.
It helps the issuer to reduce its exposure in the intended asset, which is sold
Securitisation Act provides legal framework to securitisation
Securitisation means to convert (an asset,
specially a loan) into marketable securities,
typically for the purpose of raising cash,
according to the Concise Oxford Dictionary.
Securitisation is a process by which the forecast
future income (the money that is due to come
in) of an entity is transformed and sold as debt
instruments, such as bonds, with a fixed rate of
return. Securitisation allows the company to get
cash upfront which can be put to productive use
in the business. Securitisation is done by
suitably repackaging the cash flows or the free
cash generated by the firm thats issuing these
bonds. The assets securitized will go out of the
books of the finance company once they are
securitized and the risk from its books are
removed.
Securitisation has emerged globally as an
important technique of debt financing. Over the
last 20 years, securitisation has become one of
the largest sources of debt financing in the US
and is enjoying a very strong growth across
Europe and Asia. In India, securitisation
transactions have been taking place for some
time now. However, the participation of the banks
and financial institutions in the securitisation
activity, but for a few major players, is very
minimal. This activity is however, picking up.
A high-powered, Andhyarujina Committee was
constituted to suggest changes in banking laws
comprising of officials from RBI, ministry of
finance, ministry of law and ICICI. The
Committee
which
submitted
its
recommendations in February 2000, suggested
the enactment of a new Securitisation Bill that
would provide the legal framework for
securitisation.
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179
What can be securitised?

All assets that generate funds over time can be
securitised. These include repayments under
car loans, money from owners of credit cards,
airline ticket sales, total collections from roads
or bridges, and sales of petroleum based
products from oil refineries.
Securitisation works well if the securitised asset
(say, the pool of car loans) is homogenous (the
same kind) with regard to credit risk (how sound
the borrower is) and maturity. Ideally, there
should be historical data on the portfolios
performance and that of the issuing company
with regard to credit quality and repayment
speed.
How is it beneficial to the Issuer?
1. The issuer can raise funds of longer
maturities than he would have been able to
through the conventional routes such as
bonds or term loans.
2. The process of securitisation allows the
borrower to raise funds against future cash
flows rather than existing assets.
3. Moreover, if a company decides to raise a
conventional loan, it has an impact on its
debt: equity ratio. Securitising as a means
of raising funds does not have any impact
on the debt: equity ratio as the assets are
taken out of the issuers books.
What are the components of a securitisation
transaction?
The entities involved in the securitisation
transaction are the originator or the seller (the
entity raising funds), the issuer (special purpose
vehicle which issues the securities), the servicer
134
(which manages the portfolio on behalf of the

special purpose vehicle and ensures timely
payments), the trustee and the credit rating
agency.
Other entities involved are credit enhancement
providers and the investors.
What is the role of each of these players?
The originator is the party which has a pool of
assets which it can offer for securitisation and
is in need of immediate cash.
The Special Purpose Vehicle (SPV) is the entity
that will own the assets once they are
securitised. Usually, this is 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 will manage the
asset portfolio and ensure 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.
Partial Securitisation: An originator may transfer
only a part of the asset in a securitisation
transaction instead of transferring the complete
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180
asset. Such transfer may occur in two ways.

One way is where a proportionate share of the
asset is transferred. For example, the originator
may transfer a proportionate share of loan
(including right to receive both interest and
principal), in such a way that the originator and
the SPV will share all future cash flows from the
loan in the agreed ratio. A second way of
transferring a part of a financial asset arises
where the asset comprises the rights to two or
more benefit streams, and the originator
transfers one or more of such benefit streams
while retaining the others. For example, the
originator may securitise the principal strip of
the loan while retaining the interest strip and
servicing asset.
If the originator transfers a part of a financial
asset while retaining the other part, the part of
the original asset, which meets the true-sale
criterion, should be derecognised in the books;
whereas the remaining part should continue to
be recognised in the books. In case the asset
comprises the rights to two or more benefit
streams and one or more of such benefit
streams are transferred while retaining the
others, the carrying amount of such financial
asset should be apportioned between the part(s)
transferred and the part(s) retained on the basis
of their relative fair values as on the date of
transfer.
135
FACTORING
Factoring involves purchase of receivables of the company for payment of cash.
In effect, the Company, which sells its goods on credit, gets cash payment immediately
from a third party called factor.
Factoring includes other functions such as account .maintenance, collection of debt
and risk assumption.
The term factor has its origin in the Latin word
Facere meaning to make or do, i.e., to get things
done. The International Institute for the Unification
of Private Law in 1988 defined Factoring means
an arrangement between a Factor and his Client
which includes at least two of the following
services to be provided by the Factor: (1)
Finance, (2) Mainte-nance of Accounts, (3)
Collection of Debts and (4) Protection against
Credit Risks.
Factoring has also been defined as a continuous
relationship between a financial institution (the
factor) and a business concern selling goods
and/or providing service (the client) to a trade
customer (customer) on an open account basis,
whereby the factor purchases the clients book
debts (accounts receivables) with or without
recourse to the client thereby controlling the
credit extended to the customer and also
undertaking to administer the sales ledgers
relevant to the transaction.
Factoring refers to management of receivables
of a company by a financial intermediary (factor)
for a fee. The need for factoring arose on account
of the inordinate delays faced by suppliers for
realising their bills from their customers.
Factoring could be with or without recourse to
the supplier, on whose behalf this service is
undertaken. While with recourse factoring is like
our usual bill discounting facility where the
money is recovered on the return of the bill, in
without recourse factoring the factor takes the
risk of non-payment of bills. Factoring business
is characterised by low margin and high risk.
A factoring transaction takes place along the
following lines:
Upon a sale taking place, the seller (client)
forwards invoices on buyer (customer) to factor.
The Factor sends copy of invoice and notice of
assignment to buyer (customer) and makes a
prepayment of say, 75 to 80 percent of invoice
Banking Briefs
181
value to the seller and the balance is retained as

margin.
On the due date, the buyer (customer) makes
payment to the factor who settles the account
and releases the margin retained by him after
recovery of all other charges/out of pocket
expenses.
A factor is thus another financial intermediary
between the seller and the buyer; but unlike a
bank, the unique selling proposition of a factor
lies in its strength in handling and collecting
receivables in a more efficient, effective and
purposive manner.
Benefits
1) Normally, margin on book debts is high.
Under factoring, such margins could get
reduced and availability of funds will
increase.
2) Beneficial to client operating in buyers
market.
3) Advantageous to SSI and medium scale
units - delayed payments by large scale
industries can be got over and cash flow will
improve.
4) Clients can concentrate on production and
selling activities.
5) Time and cost of collection of debts are
reduced.
SBI has a subsidiary viz., SBI Factors and
Commercial Services Ltd. Which was
incorporated in February, 1991. It is jointly
promoted by SBI, State Bank of Indore, State
Bank of Saurashtra, SIDBI and Union Bank of
India. For the period ended September 2005, SBI
factors had a business turnover of Rs.1601.13
crores. As at March 2005, the number of clientele
had increased to 341 and the company had
registered a profit( before tax and provisions) at
Rs.9.63 crores.
136
FORFAITING
Forfaiting, similar to factoring, involves discounting of export receivables.
Unlike factoring, in forfaiting, the forfaiting agency has no recourse to the seller in
case of payment default by the buyer.
It helps in upfront realization of credit sale, perhaps, at a discount.
The term forfaiting has been drawn from French
language and means give up our right. It is a
mechanism of financing of exports by
discounting export receivables evidenced by bills
of exchange or promissory note, without
recourse to the seller (exporter), on a fixed rate
basis (discount) upto 100 per cent of the
contract value.
Simply put, forfaiting is the non-recourse
discounting of export receivables. In a forfaiting
transaction, the exporter surren-ders, without
recourse to him, his rights to claim for payment
on goods delivered to an importer, in return for
immediate cash payment from a forfaiter. As a
result, an exporter in India can convert a credit
sale into a cash sale, with no recourse to him or
to his banker. It helps the exporters to
concentrate on the export front without bothering
about collection of export bills.
In a forfaiting transaction, Bills of Exchange or
Promissory Notes backed by co-acceptance (or
avalisation) from the buyers bank are endorsed
by the exporter, without recourse, in favour of
the forfaiting agency in exchange for discounted
cash proceeds.
The operating mechanism for an Indian Exporter
in a forfaiting transaction, is as follows.
1. Indian exporter initiates negotiation with the
foreign import-er.
2. Exporter approaches Exim Bank to obtain
indicative quote from a forfaiting agency.
3. Exim Bank obtains indicative quotes of
discount,
commitment
fees
and
documentation fees, if any, and
communicates these to the exporter.
4. Exporter finalises the contract with the
foreign buyer.
5. Exim Bank is informed of the final contract
and the exporter requests the Exim Bank to
obtain a firm quote from the forfaiting agency.
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182
6. Exim Bank obtains the firm quote and

conveys the terms and conditions of the
forfaiting agency and asks for exporters
acceptance.
7. Contract is finalised with the forfaiting
agency.
8. Exporter ships the goods/sends the bills of
exchange.
9. The overseas buyer accepts the bills of
exchange and sends it to exporter.
10. Exporter endorses the avalised bills/
Promissory Notes in favour of the forfaiting
agency without recourse to him.
11. The forfaiting agency effects the payment of
the discounted value.
12. On maturity of the Bill of Exchange/
Promissory Note, the forfaiting agency
presents the instruments to the aval
(Import-ers Bank) for payment.
The Discount fee, documentation fee, and any
other costs levied by a forfaiter must be passed
on to the overseas buyer. Commit-ment fee
should also be passed on to the overseas buyer
to the extent possible.
Forfaiting was introduced in India by EXIM Bank
in 1994.
One would think that a large emerging economy
like India would hold sizeable potential for
forfaiting and factoring and it does but that
potential has not yet been realised it might be
soon. Lack of awareness, unwillingness on the
part of exporters to pay for risk, reluctance on
the part of the banks to promote forfaiting (as it
obviates the need for postshipment credit) are
some of the reasons why this method of
realisation of export proceeds has not picked
up in India.
137
COMMERCIAL PAPER
CP is an instrument issued by companies to borrow short-term finance from the market.
It can be issued for period ranging from 7 days to One year.
It is transferable by endorsement and delivery.
Generally blue chip companies are major players.
It is an unsecured, short-term debt instrument
issued by a corporation, typically for the financing
of accounts receivable, inventories and meeting
short-term liabilities. The debt is usually issued
at a discount, reflecting prevailing market interest
rates.
It has emerged as a popular instrument for
financing working capital requirements of
corporate borrowers of commercial banks.
Commercial Paper (CP) is an unsecured
money market instrument issued in the form of
a promissory note. This instrument was
introduced in India in 1990 so as to enable the
highly rated corporate borrowers of commercial
banks to diversify their sources of short-term
borrowings. Besides, it was an additional
instrument for investment provided to the
investing community.
Commercial paper issued by corporates was
initially marketed as a privately placed
instrument. Subsequently, the instrument
received a wider connotation from the point of
view of both the issuers as well as the investors.
The CP market is largely controlled by FIMMDA
(Fixed Income Money Market and Derivatives
Association of India) which has also laid down
standard procedures in this regard in
consonance with the standard best practices
and the RBI guidelines.
One of the main reasons for the growing
popularity of CP as an instrument of financing
working capital requirements is that the rate of
interest underlying a CP transaction is
substantially lower than the interest charged by
commercial banks against fund based working
capital limits provided by them. The difference
is substantial and many of the large corporates
with a good credit rating take advantage of this
situation.
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183
A company is eligible to issue commercial paper

if it satisfies the following condition :
The Tangible Net Worth of the company, as
per the latest audited balance sheet, is not
less than Rs.4 Cr. (TNW is the aggregate
of Capital & Free Reserves less intangible
assets, if any).
The company has been sanctioned working
capital limit by commercial banks / financial
institutions.
The borrowal account of the company is
classified as a Standard Asset by the
financing banks/institutions.
The issuing company has to obtain beforehand
the specified minimum credit rating for issuance
of Commercial Paper from Credit rating
agencies identified by the Reserve Bank of India.
Presently, these agencies include CRISIL, ICRA,
CARE and the FITCH Ratings India Pvt. Ltd. The
prescription for minimum credit rating is P-2 in
the case of CRISIL or such equivalent rating by
other agencies. Besides, these ratings should
be the current ones and not due for review. The
Credit rating agencies also specify the size of
the CP proposed to be issued.
Commercial papers may be issued in
denominations of Rs.5 lakh or in multiples. Thus,
the amount invested by a single investor should
not be less than Rs.5 lakh (face value).
CPs can be issued for maturities between a
minimum of 7 days and a maximum upto one
year from the date of issue. The maturity date
of the CP should not go beyond the date up to
which the credit rating of the issuer is valid.
Commercial Papers are now issued only in the
dematerialized form. Further, the maximum
138
period for subscription to an issue of CP is two

weeks from the date of opening of the issue.
CPs may be issued on a single date or in part
on different dates. CPs issued on different dates
but pertaining to the same issue should have
the same date of maturity.
Before issuing CP, it is necessary for a company
to appoint a scheduled commercial bank to act
as an Issuing and Paying Agent (IPA) for the
issue. The commercial bank then makes its own
assessment about the FBWC requirements of
the company and the extent to which the CP
issue is linked with the credit limit provided by
the bank. After the agreement is reached
between the bank and the issuing company, the
potential investors are given a copy of the IPA
certificate. An initial investor in CP pays the
discounted value of the amount of CP
subscribed by him. In a dematerialised
environment, the issuing company then makes
arrangements for crediting the CP to the
investors account with a depository (this is
equivalent to issue of a physical certificate by
the company).
When a commercial bank agrees to act the role
of an IPA, it is making a promise to redeem the
amounts covered under the CP issued by the
company. In view of this, lending banks generally
carve an amount equal to the CP size out of the
FBWC credit limit, so that the segregated limit
can be utilised at the time of redemption of CPs.
The effective FBWC credit limit available to the
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184
borrowing company is reduced correspondingly.

This ensures that even after redemption of CP,
there is no increase in the overall short-term
borrowing facilities provided to the company. The
amount of Commercial Paper issued by a
company can be adjusted either against the
cash credit or the loan component or both the
components taken together.
Commercial Paper may now also be issued as
a stand-alone product. While acting as IPA, a
commercial bank may provide for CP without
necessarily carving out the CP limit from the
FBWC limit. However, it is necessary that extra
caution is exercised in such cases and the facility
should be made available to the corporate
borrowers with the highest credit ratings
awarded.
When the CP limit is carved out of the FBWC
limit provided by a lending bank, restoration of
the credit limit after redemption of the CP is
usually a routine affair. This exercise should not
be considered as an enhancement of the limit.
A credit analyst should view the unredeemed
portion of the CP against which a limit has
already been carved out, as a contingent liability
in the financial statements of the issuing
company. This is similar to a situation where an
LC or DPG has been issued on behalf of the
company but the bills against these have not
reached the company for payment.
139
CREDIT DERIVATIVES
As the term indicates, it is a financial contract derived from the performance of
underlying securities.
It is a hedging mechanism.
It helps in risk management.
Swaps, options and notes are some of the methods in derivative trade.
A credit derivative is a financial contract outlining
an exchange of payments in which at least one
leg of the cash flows is linked to the performance
of a specified under-lying credit-sensitive asset
or liability. The underlying markets or reference
assets include bank loans, corporate debt, trade
receivables, emerging market and municipal debt,
and convertible securities, as well as the credit
exposure generated from other derivatives-linked
activities. The performance of such credit reflects
perceived risk and the cost of a potential default.
As in other more traditional derivative markets,
swap, note, and option-based products form the
foundation for all credit derivative products. For
example, a credit option or credit-linked note can
be structured to pay the purchaser in the event
of default or credit downgrade. Credit derivatives
can also take the form of financial swaps in which
counter-party exchanges the total return of a
certain in return for some spread over a specified
benchmark, such as LIBOR.
Why Use Credit Derivatives?
Credit derivatives provide users such as banks
or other financial institutions with an efficient,
tailor-made, on-or off-balance-sheet means of
attaining or hedging credit risk. Credit derivatives
offer tremendous flexibility in terms of tailoring a
structure to meet end users individual
specifications, thereby enabling users to
overcome a variety of market and non-market
impediments and achieve their investment and
hedging objectives. By potentially reducing capital
requirements and greatly easing back office
administrative burdens, credit derivatives are
often a more efficient, lower cost alternative to
the underlying cash markets for the banks. Users
also can choose the degree of leverage, if any,
that best suits their particular investment and risk
management style.
From a hedging standpoint, credit derivatives are
powerful, innovative credit risk management tools.
Credit derivatives represent the first broad-based
products designed specifically for the
Banking Briefs
185
management of credit risk. Popular methods to

hedge credit risk have typically been the
incorporation of covenants into the agreements,
collateralization, portfolio diversification, or the
outright sale of the underlying exposure. While
effective to varying degrees, all, with the exception
of the outright sale, are limited and fail to fully
protect the creditor.
Users of Credit Derivatives
The universe of potential users of credit
derivatives is as vast as the number of institutions
that are exposed to or that seek exposure to
credit risk. The universe includes commercial
banks, insurance companies, corporations,
money managers, mutual funds, hedge funds,
and pension funds. These institutions may use
the innovative products for either investment or
risk management applications.
Conclusion
The credit derivatives market provides clean,
efficient access to underlying credit-sensitive
markets, thereby providing an effec-tive means
by which users can attain their investment and
risk management objectives. These derivatives,
whether in the form of swaps, notes or options,
provide banks with a more cost-effective means
of reaching their investment goals through
reduced cash and capital and back office
requirements, as well as increased lever-age
potential, if desired. In addition, credit derivatives
offer the portfolio credit manager powerful new
hedging tools that are capable of isolating credit
risk from other market risks.
Because credit derivative structures encompass
a variety of markets, they will almost certainly
contin-ue to develop rapidly for the foreseeable
future. However, its long-term prospects hinge on
the development in terms of capital requirements,
accommodative accounting treatment with respect
to hedging transactions, and a better
understanding among partici-pants of the
advantages and versatility of these products.
140
CURRENCY SWAPS
Currency swap is the exchange of one currency for the other.
It is used as a hedging mechanism to guard against adverse currency fluctuations
It is also used to obtain cheaper borrowings.
It helps in efficient management of currency exposure and cash flows
There are two main applications of a currency
swap. These are:
Efficient management of currency exposure

and cash flows
fully locking-in or hedging a future stream of

cash-flows denominated in a currency other
than the currency used for ac-counting
purposes. An example might be where a UK
company re-ceives a fixed return in Swiss
franc, semi annually, and wishes to remove
all future foreign exchange exposure by
locking-in the current exchange rate for the
life of the income stream.
Facility to re-structure debt capital to align

with prevailing market views/conditions.
Flexibility allows the swap to accommodate

any desired struc-ture.
Market depth and liquidity facilities swap

reversals.
Off-balance sheet financing/lack of publicity.
a well-known US company would like to raise

funds in the UK, but would suffer adverse
borrowing terms as it is little known in
Europe. The US company therefore borrows
US dollars domestically, where it enjoys
favourable borrowing conditions, and then
currency swaps US$ into Sterling at a saving
versus direct access to the UK financial
markets.
DISADVANTAGES
As with interest-rate swaps, a borrower uses

his borrowing strengths to advantage, for funding
in less accessible preferred markets and types
of debt.
ADVANTAGES
-
Indirect access to a market, via a swap, can

be cheaper than the direct borrowing route
where no borrowing advantage is avail-able.
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186
Possible capital adequacy requirements to

be imposed in the near future. Unknown extent
of counterparts liability to other swaps with
regard to default possibilities. Legal
and
administrative costs.
With recent global volatility of exchange
rates, Currency Swap usually generate a larger
exposure than interest rate movements.
CONCLUSION
As with interest rate swaps, rapid growth in
volumes of CSs - one of the cornerstones of
global banking, has particularly contributed to
deregulation of international markets. It has
helped in greater use of foreign exchange in
short and long term asset liability management.
141
CURRENCY OPTIONS
Currency option means the option to buy or sell a specific quantity of currency at an
agreed rate.
The party to the contract pays a premium upfront for the purpose.
It is better than forward contract since the decision to buy or sell is optional
Banks in India can write options.
A foreign exchange (or currency) option gives
the buyer the right, but not the obligation, to buy
or sell a specific quantity of a currency at an
agreed rate, and for a specified period. The
option buyer pays the seller a premium for the
privilege of being able to buy or sell the currency
at a fixed price without actual-ly being committed
to do so.
forward exchange contract. The advantage of

an option over a forward contract lies in the
choice of not exercising the option if the spot
exchange rate moves in the holders favour
before the exercise date. The option holder could
then buy or sell the required currency in the spot
market at this better rate, allow-ing the option to
lapse.
In the options market

- The option buyer becomes the HOLDER and
the option seller is called the WRITER.
- A CALL gives the holder the right to buy a
specified quantity of a currency at an agreed
rate over a given period.
- A PUT gives the holder the right to sell a
specified quantity of a currency at an agreed
rate over a given period.
- The PREMIUM is the price paid for the option
by the buyer of an option to the seller (the
option writer). It is usually paid up-front. The
amount of the premium for an option will
depend on the option writers perception of
the risk of making a loss and a higher
premium is charged when the risk seems
greater.
- The EXPIRY DATE is the final date on which
the option may be exercised.
- A EUROPEAN option can be exercised only
on the expiry date whereas an AMERICAN
option can be exercised on any date before
and including the expiry date (These terms
have no geographical connotation).
Currency options might be a suitable method of

hedging a currency exposure for the option
buyer who can (i) lock in a worst possi-ble
exchange rate to avoid the risk of an adverse
rate movement and at the same time (ii) benefit
from any favourable rate move-ment by
choosing not to exercise the option and instead
buying or selling the currency at the spot rate
on expiry.
If currency options are bought to hedge a

currency exposure, the buyer must feel that the
risk reduction justifies the premium cost and that
an option is preferable despite its cost compared
to other alternatives, such as the (zero-cost)
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187
The Reserve Bank has issued cer-tain

instructions to Authorised Dealers for offering
currency options to their customers. Impor-tant
among those are
ADs can sell options only on a fully covered
basis.
ADs can only sell currency options to their
customers.
ADs can buy currency options from
customers only if it is in cancellation of the
original currency option sold by the AD.
Currency options could be made available
only against cross currencies.
Customers are allowed to cancel currency
options only once in respect of a particular
forex exposure. This would mean that when
the customer buys an option the second
time for the same exposure (after cancelling
the first option), he has a choice of
exercis-ing the option or allowing it to expire.
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CURRENCY FUTURES
Currency future is a contract to buy or sell a standard quantity of one currency in
exchange for the other.
The rate of exchange and the future date of delivery are agreed at the time of contract
It is a hedging as well as a speculative mechanism.
A currency future is a contract for the sale or
purchase of a standard quantity of one currency
in exchange for another currency at a specified
rate of exchange, and for delivery at a specified
future time. They are bought and sold on a
futures exchange, the largest being the
International Monetary Market division (IMM) of
the Chicago Mercantile Exchange (CME), and
can be used to hedge currency exposures.
subsequently goes up before the March

deliv-ery date, the buyer of the future will benefit.
If the market price falls, the seller of the future
will gain.
Most currency futures are for a major currency

against the US dollar. On the CME, there are
futures contracts in Sterling, Australian dollars,
Canadian dollars, Deutsche Marks, Yen, Swiss
franc and French francs.
A buyer of a future can unwind his position

by selling a future for the same delivery date,
taking a cash gain or loss on the difference
between the buying and selling price.
Similarly, a seller of a future can unwind the
position by purchasing a future for the same
delivery date, taking a cash gain or loss on
the difference between the selling and buying
price.
A buyer of a sterling future is contracting to buy

sterling in exchange for dollars. The seller of a
sterling future is contracting to sell sterling in
exchange for dollars. When a futures contract
is bought and sold, the price is the agreed
exchange rate. For example, when X buys a
March sterling future from Y at $ 1.75000, this
rate is both the agreed rate for the exchange of
sterling into dollars in March and also an
expression of the current market price of the
futures contract. If the market price
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188
Although currency futures can be held until

delivery date, when the currencies are
exchanged, futures positions are normally
unwound before delivery.
Futures can be used for hedging currency

exposures, as an alter-native to a forward
contract. Such hedging usually involves the
purchase or sale of futures to cover a future
currency transaction and unwinding the futures
position when the transaction occurs and buying
or selling the currency at the spot rate.
143
INTEREST RATE SWAPS

Swap is simply an exchange of one for the other.
Interest rate swap involves the exchange of interest rates between two parties.
A simple example would be moving over to floating rate of interest in the place of
fixed rate of interest (and vice versa) during the currency of the loan.
This is done to align debt exposure with prevailing market conditions.
Definition
An interest rate swap is the transfer, contractually
agreed, between two counterparties of their
respective interest rate obligations.
Interest rate swaps are commonly used as a
means of converting fixed-rate to floating rate
debt and vice versa. The swap involves no
exchange of principal, but re-structures the
interest rate flows of existing assets and
liabilities.
The following are the advantages/disadvantages
of interest rates swaps.
ADVANTAGES
Indirect access to a market, via a swap, can be
cheaper than the direct borrowing route where
no borrowing advantage is avail-able. Efficient
management of interest-rate exposure and cash
flows, facility to re-structure debt capital to align
with prevailing market views/conditions, ability
to overcome balance sheet restrictions are
some of the advantages.
DISADVANTAGES
Possible capital adequacy requirements,
unknown extent of counterpartys liability to other
swaps with regard to default possibilities and
legal and administrative costs.
SWAP APPLICATIONS
Interest rate swaps have been adapted and
applied in a number of ways including
Commercial Paper; Expensive debt swaps
designed to reduce interest expense on highinterest debt; Zero-coupon swaps for tax
purposes;
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189
The fixed to floating or vanilla swap still remains

the most commonly transacted of the interest
rate swap product range because of its simplicity
and flexibility.
The RBI has allowed the market to evolve the
benchmark rate for Forward Rate Agreements
(FRAs) and Interest Rate Swaps (IRS). Banks,
primary dealers and FIs are free to adopt any
domestic money or debt market rate for FRAs
and IRS provided the computing of the rate is
objective, transparent and mutually acceptable
to counterparties.
The RBI Guidelines does not lay down any
restriction on the minimum or maximum size of
the notional principal amounts of FRAs and IRS.
The guidelines stipulate separate capital
adequacy norms for banks/FIs and PDs.
Second, the adjusted value shall be multiplied
by the risk weightage allotted to the counterparty.
For banks/FIs, the risk weightage is 20 per cent
and for all others (except Governments) it is 100
per cent.
In case of banks and FIs, the exposure on FRAs/
IRS together with other credit exposures should
be within single/group borrower/counterparty
limits prescribed by RBI. While dealing with
corporates, banks, FIs and PDs should exercise
due diligence to ensure that the corporates are
undertaking FRAs/IRS only for hedging their own
balance sheet exposures.
The RBI believes the financial players should not
over extend themselves and there is need to put
a limit on open swap positions. Banks will have
to place various components of assets, liabilities
and off-balance sheet positions (including FRAs,
IRS) in different time buckets and fix prudential
limits on individual gaps.
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BANKING
MANAGEMENT OF
ASSETS & LIABILITIES
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190
RISK BASED SUPERVISION OF BANKS

Objectives: Optimise utilization of supervisory resources and minimise impact of crisis

situation in the financial system
Key elements: Risk profiling of banks; supervisory cycle; Monitorable Action Plan;
Enforcement process; and role of external auditors
Risk profiling of banks will be done for Business risks and Control risks.
Business risks are eight and are: Capital, credit, market, earnings, liquidity, business
strategy and environment, operational and group risks.
Control risks are four and are: Internal control, organisation, management and
Compliance risk
The overall risk of bank will be assessed as low, moderate, fair or high
Banks with lower risks will have longer supervisory cycle and lesser supervisory
intervention
BACKGROUND
CURRENT APPROACH
With globalisation and liberalization the stability

of the financial system has become the central
challenge to bank regulators and supervisors all
over the world. In the last decade, Indian banking
scene has witnessed progressive deregulation,
institution of prudential norm and an emulation
of international supervisory best practices. Over
a period of time RBI has consistently tightened
the exposure and prudential norms of banks and
enhanced the disclosure standards in phases
in order to strengthen the efficiency of its
supervisory processes. The growing diversities
and complexities in banking business, the spate
of product innovation, the Contagion effects
that a crisis can spread to the entire financial
systems are causing pressures on supervisory
resources and calls for further streamlining of
supervisory processes.
Supervisory process is applied uniformly to

all supervised institutions
It is essentially on-site inspection driven (i.e

direct inspection of bank branches by RBI)
supplemented by off-site monitoring.
The on-site inspections are conducted to a

large extent with reference to audited
balance sheet dates.
Supervisory follow-up commences with the

detailed findings of annual financial
inspection.
The process of inspection is based on

CAMELS/CALCS (Capital adequacy, asset
quality, management aspects, earnings,
liquidity and systems; and control)
Risk Based Supervision announced is an

initiative in the direction of strengthening the
supervisory processes of banks by RBI. Put
simply, RBS is the approach to the supervision
of banks by RBI based on their risk exposures.
Pricewaterhouse Coopers (PwC), London was
engaged by RBI for introduction of RBS. The
current move of RBS approach represents a
further stage in the regulation and supervision
of banks in the light of earlier Padmanabhan and
Narasimham Committee reports.
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191
RBS- THE NEW APPROACH

The objectives of RBS are two fold:
Optimise utilization of supervisory

resources (i.e the time, manpower and
efficiency of RBIs supervision) And
Minimise impact of crisis situation in the

financial system.
RBS process essentially involves continuous

monitoring and evaluation of the risk profiles of
the supervised institutions (i.e. banks) in relation
145
to their business strategy and exposures. This

assessment will be based on construction of a
Risk Matrix for each institution. The efficiency
of the RBS would clearly depend on banks
preparedness in certain critical areas such as
quality and reliability of data, soundness of
systems and technology, appropriateness of risk
control mechanism, supporting human
resources and organizational back-up.
ADVANTAGES OF RBS APPROACH OVER
THE PRESENT CAMELS APPROACH
Effective use of supervisory resources
Systemic improvement
Cushion against risks
Flexibility of timing the on-site inspections
Reduction of vulnerabilities by varying

inspection cycles
Focused attention on weak banks
Improvement in quality of internal audit
Focused follow up
MAJOR ELEMENTS OF RBS APPROACH
Banks have to make an assessment of the risk

against all the 12 areas( 8 under Business and
4 under control risk) by means of identifying
positive and negative factors. Besides assessing
the risk, banks also are expected to assess the
direction of the risk based on past trend and
current judgment. Finally, banks have to
determine whether the overall level of risk is low,
moderate, fair or high and the direction of risk is
increasing, decreasing or stable.
1.
Risk Profiling of banks
ASSESSMENT AREA: CREDIT RISK
2.
Supervisory cycle
3.
Supervisory programme
MAJOR COMPONENT
Negative factors
4.
Inspection process
COMPOSITION OF CREDIT PORTFOLIO
5.
Review, evaluation and follow-up
Credit concentration
6.
Monitorable Action Plan (MAP)
Credit quality
7.
Supervisory organisation
8.
Enforcement process and incentive

framework
Other credit risk-off balance sheet items,

country risk, trading book Adequacy of
provisions
9.
Role of external auditors in banking

supervision
10. Change Management implications

Risk Profiling of banks: Risk Profile is a
document, which would contain various kinds
of financial and non-financial risks faced by a
banking institution. Risk profiling is the backbone
of RBS system.
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192
RBI has identified two classes of risks namely

Business risk and Control risk. Business risks
are those risks that are considered inherent in
the activities undertaken by a bank irrespective
of whether the controls are in place or not. The
assessment areas of Business risk are eight in
number and they are : Capital, Credit risk, Market
risk, Earnings, Liquidity risk, Business strategy
and environment risk, operational risk and Group
risk. Control risks arise out of inadequacy in the
control system, absence of controls or possibility
of failures/breakdowns in the existing control
process. The assessment areas of Control risks
are four in number and are: Internal control risks,
Organisation risk, Management risk and
Compliance risk.
Positive factors
DIRECTION OF RISK
A specimen of Risk Assessment template for a
sample assessment area is furnished below for
understanding:
RBI, for the purpose of risk profiling, besides
using CAMEL rating, would draw upon a range
of sources of information such as off-site
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surveillance and monitoring (OSMOS), market

intelligence reports, ad-hoc data from external
and internal auditors, information from other
domestic and overseas supervisors, on-site
findings, sanctions applied etc. The formal
assessment of the risk profile of each bank would
be done on a regular basis.
disincentives has been contemplated under the

RBS to serve attainment of RBS objectives. The
incentive is longer supervisory cycle and lesser
supervisory intervention. The disincentives are
more frequent supervisory examination and
higher supervisory intervention including
directions, sanctions and penalties.
Supervisory Cycle: The supervisory process

would commence with the preparation of the
bank risk profile and on the data from other
sources. The supervisory cycle would normally
be 12 months and may be shorter or longer
depending upon whether the bank is of low or
high-risk.
Role of external auditors in banking supervision:

RBI would look forward to make more use of
external auditors as a supervisory tool by
widening the range of tasks and activities, which
external auditors perform at present. This, it
would arrange on entering into dialogue with the
Institute of Chartered Accountants of India and
the bank management.
Supervisory Programme: The supervisory

programme would be tailor made to suit individual
banks depending upon their risk profile and would
focus on high-risk areas.
Inspection process: The inspection procedure
would focus on identified high-risk areas to
evaluate the effectiveness of the banks
mechanism in capturing, measuring, monitoring
and controlling various risks. The transaction
testing would also be done though the extent
would vary depending on the need.
Review, evaluation and follow-up: The
evaluation, review and follow up would attempt
to ensure whether supervisory programme has
indeed been completed and whether it has
improved the risk profile of the bank concerned.
Monitorable Action Plan (MAP): In the MAP,
RBI would set out the improvements required in
the areas identified during the current on-site and
off-site supervisory process. Key individuals at
the bank would be made accountable for each
of the action points. Besides this, RBI would
consider imposing sanctions and penalties to
banks for not meeting the MAP.
Supervisory Organisation: Under RBS, there
would be a focal point of contacts for all banks
at the Central office of RBI and its Regional
Offices.
Enforcement process and incentive
framework: A system of incentives and
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193
Change management implications: In order

to ensure a smooth change over to RBS banks
should have clearly defined standards of
corporate governance and documented policies
in place. Some of the organizational issues and
preparations that banks have to make are given
below:
Setting up of risk management architecture
Adoption of Risk focused internal audit
Strengthening of Management Information

System and Information Technology
Addressing HRD issues such as

reorientation of staff, skill formation and
placements in appropriate positions,
creation of dedicated risk management
team.
Setting up of compliance unit headed by a

Chief Compliance Officer of the rank of not
less than a General Manager who will be
accountable for timeliness and accuracy of
compliance
CONCLUSION :
Adoption of RBS would enable banks to be ready
for implementation of the Second Capital Accord
of Basel Committee on Banking Supervision,
which will be implemented by 2007. As
mentioned earlier, Banks have to undertake
suitable change initiatives to ensure smooth
transition to RBS.
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RISK MANAGEMENT SYSTEMS IN BANKS

Risk is the potential loss of an asset due to different factors.
Risk management is concerned with identification, measurement and control of risks.
Risks in banks comprise Balance sheet risks, transaction risks; and operating and
liquidity risks
Risk is inherent and absolutely unavoidable in
banking. Risk is the potential loss an asset or a
portfolio is likely to suffer due to a variety of
reasons. As a financial intermediary, bank
assumes or restructures risks for its clients. A
simple example for this would be acceptance of
deposits. A more sophisticated example is an
interest rate swap. A bank while operating on
behalf of the customers as well as on its own
behalf, has to face various types of risks
associated with those transactions. Prudent
banking lies in identifying, assessing and
minimising these risks. In a competitive market
environment, a banks rate of return will be
greatly influenced by its risk management skills.
(ii) PRICE RISKS which include the risks of loss

due to change in value of Assets and
Liabilities. The factors contributing to price
risks are:
(a) Market Liquidity Risk: This is the risk of
lack of liquid-ity of an instrument or asset
or the loss one is likely incur while
liquidating the assets in the market due
to the fluctua-tions in prices.
(b) Issuer Risk: The financial strength and
standing of the institution/sovereign that
has issued the instrument can affect price
as well as realisability. The risk involved
with the instruments issued by corporate
bodies would be an ideal example in this
context.
RISKS IN BANKING
Risks in banking are many. These risks can be
broadly classi-fied into three categories. They
are:
(III) Operating and Liquidity risks.
(c) Instruments Risks: The nature of

instrument creates risks for the investor.
With many hybrid instruments in the
market, and with fluctuation in market
conditions, the prices of various
instruments may react differently from
one another.
The Balance Sheet Risks generally arise out of

the mismatch between the currency, maturity
and interest rate structure of assets and
Liquidities resulting in,
(d) Changes in commodity prices, interest

rates and exchange rates may affect the
realisable value or yield of many assets
when transactions take place.
(I) Balance sheet risks.

(II) Transaction risks, and
1) Interest Rate mismatch risk
The Operating and Liquidity Risk encompasses

two types of risks, viz.,
2) Liquidity Risk, and

3) Foreign Exchange Risk,
(i) Risk of loss due to technical failure to

execute or settle a transaction, and
The Transaction Risks essentially involve two

types of risks. They are:-
(ii) Risk of loss due to adverse changes in the

cash flows of transactions.
(i) CREDIT RISK which is the risk of loss on

lending/investment, etc. due to counter party
default.
RISK MANAGEMENT : OBJECTIVES
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194
148
The objectives of risk management for any

organisation can be summarised as under:
steps, viz., Risk identification,

meas-urement and Risk Control.
a) Survival of the organisation,
RISK CONTROL
b) Efficiency in Operations,
After identification and assessment of risk

factors, the next step involved is risk control. The
major alternatives available in risk control are:
c) Identifying and achieving acceptable

levels of worry,
i)
d) Earnings stability,
Avoid the exposure
e) Uninterrupted operations,
ii) Reduce the impact by reducing

frequency of severity
f) Continued growth, and
iii) Avoid concentration in risky area
g) Preservation of reputation.
iv) Transfer the risk to another party
RISK MANAGEMENT: COMPONENTS

Risk management may be defined as the
process of identifying and controlling risk. It is
also described at times as the respon-sibility of
the management to identify, measure, monitor
and control various items of risks associated with
banks position and transaction. The process of
risk management has three clearly identifiable
Banking Briefs
195
Risk
v) Employ risk management instruments

to cover the risks.
Good risk management is good banking. And
good banking is essen-tial for profitable survival
of the institution. A professional approach to
identification, measurement and control of risk
will safeguard the interests of the banking
institution in the long run.
149
ASSET-LIABILITY MANAGEMENT
It involves management of banks assets and liabilities.
It essentially focuses on managing risks caused by changes in liquidity, interest rates
and fluctuations in foreign currency rates
Success of ALM depends on availability of information, existence of sound policies
and risk management system.
In liberalised financial markets, banks assets
and liabilities variations are considerably
influenced by interest rate and exchange rate
volatility. The competitive environment in the
banking system due to removal of various
barriers in their operations has added pressure
to the importance of financial management.
Banks have to manage not only credit risk but a
variety of other financial risks including interest
rate, exchange rate, liquidity, settlement, and
transfer risks to maximise profit and minimise
risks. The complexity of financial risks requires
that a strong and dedicated risk management
system is put in place covering: (1) assets,
liabilities and off-balance sheet risks, (2)
information and scientific risk management
techniques and (3) dedicated asset-liability
managers or committee (ALCO). Asset-Liability
management as a mean of risk management
technique is an important function in a bank. It
primarily focuses on how various functions of
the bank are adequately co-ordinated, essentially
covering planning, directing, and controlling of
the levels, changes and mixes of the various
balance sheet accounts.
In Asset-Liability management (ALM), a bank is
strategically concerned with management of
market risk consisting of (a) interest rate risk,
(b) foreign exchange risk, (c) equity price risk
and (d) commodity price risk. Also ALM function
covers liquidity management and capital
planning. Broadly, the ALM objectives are to
control the volatility of net interest income and
net economic value of a bank. In order to achieve
these results, the asset-liability managers or
ALCO must be guided by policies that
specifically address the banks overall assetliability management goals and risk limits, and
by information that relates directly to its assetliability positions.
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196
Asset-Liability Management Structure involves

management of Assets and Liabilities. The
financial management structure consists of
managing balance sheet on the one side and
income and expenditure on the other.
The banking industry, to compete in a free
market conditions, has to give utmost priority
for managing and minimising risks inherent in
banking operations. Across the world, it was
observed that failure of risk management and
control systems were significant factors for bank
failures. The success of asset liability
management depends on the effective existence
of (1) Information and Policies, and (2) Risk
Management System.
1. Information and Policies
The primary objective of ALM is to ensure that
there are asset-liability managers and an assetliability committee (ALCO) that manages the
banks balance sheet in such a manner as to
minimise volatility in its earnings, liquidity, and
equity to changes in market conditions as
manifested in such results as stable net interest
margins, optimal earnings, adequate liquidity,
and effective control of financial risks. To reach
these objectives, the information base in a bank
has to be strong and sound. The information
required for ALM are (1) historical, current and
projected data on the banks assets-liability
portfolios, including any projected additions,
maturities, and repricing; (2) interest rates and
yields of its current and projected portfolios; (3)
market limitations on the banks ability to adjust
its product prices; and (4) changes in the banks
balance sheet caused by customers decisions
to prepay their loans, wihdraw their deposits
before maturity, and transfer their business to
150
other banks that relates directly to its assetliability position.
discounted value or the present value of all

cash flows (e.g. principal and interest) can
be recovered by an asset holder including
that of banks depositor. The concept can
be used for all assets, liabilities and offbalance sheet items. Another concept which
is also used is the Value at Risk (VaR) model.
VaR estimates the maximum potential loss
in a position over a given holding period for a
given confidence level.
2. Risk Management System

In view of the increasing market risks in banking
operations, banks should be able to accurately
measure and adequately control market risk.
Banks should have in place a well-structured
risk management system. A risk management
process that includes measuring risks,
controlling risks ad monitoring risks will help
banks to attain these goals.
a) Measuring Risk
Due to difficulty in measuring interest rate
risks and also the controversies present in
the understanding of the concept,
measurement of interest rate risks assumes
greater importance in the ALM function. It has
been observed that banks risk exposure
depends upon volatility of interest rates and
asset prices in the financial market, the
banks maturity/gaps, the duration and
interest rate elasticity of its assets and
liabilities and the ability of the management
to measure and control the exposure. In the
management of banks assets and liabilities,
interest risk management lays the foundation
for a good ALM.
b) Risk Analysis and Management
Interest rate risk can be analysed in the
following four methods:
1. Gap analysis
2. Duration analysis
3. Value at Risk (VaR)
4. Simulation
Gap analysis is the most important basic
technique used in analysing interest rate
risk. It measures the difference between a
banks assets and liabilities and off-balance
sheet positions which will be repriced or will
mature within a predetermined period. (Gap
is the difference between rate-sensitive
assets minus rate sensitive liabilities) The
duration analysis estimates the average
amount of time required before the
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197
Policy Issues
Strengthening of information technology in
commercial banks would be an important
prerequisite to implement effectively ALM
system in banks. The data base of banks has
to cover all operations of branches for a detailed
analysis of assets and liabilities and for
forecasting a comprehensive projection of
liquidity conditions under various scenarios. The
software packages used must be well tested
and have extensive computing power to analyse
the massive amount of Asset/Liability data under
alternative interest rate scenarios.
It is well understood that every financial
transaction or commitment has implications for
a banks liquidity. A proper liquidity management
would help the management in formulating
business strategy. A schedule of liquidity reviews
with depth should be provided for. These reviews
provide the opportunity to re-examine and refine
a banks liquidity policies and practices in the
light of a banks liquidity experience and
developments in its business. For banks with
an international presence, the treatment of
assets and liabilities in multiple currencies adds
yet another layer of complexity. In the event of a
disturbance, a bank may not always be able to
mobilise domestic liquidity to meet foreign
currency funding requirements. Hence, better
liquidity management becomes an important
concern when banks undertake business in
multi currency transactions.
The ALCO at SBI is engaged in evolving optimal
asset/liability structure for the Bank on an ongoing basis with a view to containing
mismatches, optimizing profits and ensuring risk
management. The Bank is using Risk Manager
module to strengthen the processes of Risk
Management.
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CREDIT RISK MANAGEMENT

Credit Risk is the foremost of all risks in terms of importance
Major Credit Risks include risk of exposure, risk of default by the borrower, risk of
deterioration in the standing of the borrower
Credit risk is managed through use of covenants, collateralisation, managing
concentration and Capital allocation in relation to risk, risk return optimization
Credit risk models, stress testing, use of derivatives and securitisation help in
managing credit risk
Lack of appropriate lending discipline and
inadequate systems of control generally result
in setback to banks. Banks have also suffered
from poor transaction management, incomplete
credit information, poor documentation and gross
inadequacy in pricing risks.
For banks, credit risk is the foremost of all the
risks, in terms of importance. Default risk, a major
source of loss, is the risk that customers fail to
comply with their obligation to service debt.
Default triggers a total or partial loss of any
amount lent to a counter party.
Credit risk for traded instruments raises a

number of conceptual and practical difficulties :
(a) What is the value subject to loss, or
exposure, in future periods? (b) Does the
current price embed already the credit risk,
since the market prices normally anticipate
future events and to what extent ? (c) Will it be
easy to sell these instruments when signs of
deterioration get stronger? and (d) Will the bank
hold these instruments longer than under normal
conditions?
Decline in the credit standing of an obligor of the

issuer of a bond or stock, is also a type of credit
risk. Such deterioration does not imply default,
but the probability of default increases. In the
market, a deterioration of the credit standing of a
borrower does materialize into a loss because it
triggers an upward move of the required market
yield to compensate the higher risk and triggers
a value decline.
Modelling default probability directly with credit

risk models remains a major challenge.
The major credit risks are exposure, likelihood

of default, or a deterioration of the credit standing,
and the recoveries under default. Scarcity of data
makes the assessment of these components a
challenge. Ratings are traditional measure of
credit quality of the debts. Because ratings are
ordinal measures of credit risk, they are not
sufficient to value credit risk. Portfolio models
show that portfolio risk varies across banks
depending on the number of borrowers, the
discrepancies in size between exposures and
the extent of diversification among types of
borrowers, industries and countries.
The banks may use covenants effectively as a

pre-emptive device before credit standing
deteriorates or losses occur. the rationale
behind use of convenants is an under :
There are various challenges of credit risk

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198
measurement, enumerated as under :
152
Another challenge of credit risk measurement

is capturing portfolio effects. Due to scarcity of
data, quantifying the diversification effects
poses a great challenge.
Managing Credit Risk
Use of Covenants as a Pre-emptive Device
They help to protect the banks fromany

significant deterioration in ths risk profile of the
borrower transactions without prior agreement.
They allow banks to do restructuring of the loans
in such instances.
Covenants make it costlier for the borrower to
default, because he loses the value of continuing
operations.
Covenants are incentives against moral hazard,

since they restrict borrowers from taking
additional risk that would increase bank's risk.
Collateralization in Credit Risk Mitigation
A prudent collateralization practice can be
effectively used to mitigate credit risk. Collaterals
also act as an incentive for the borrower to fulfill
debt obligations effectively. Collaterals may be
in the form of real assets, securities, goods,
receivables and margin borrowing the value
of the collaterals vis-a-vis the loan amount,
would depend upon the credit worthiness of the
borrower and the level of risk associated with
the credit facility.
In case the borrower fails to perform the debt
obligations, the original credit risk turns into a
recovery risk plus an asset value risk, which
could be : (a) accessibility risk (difficulty to
effectively seize the collateral), (b) integrity risk
(the risk of damage to the collateral), (c) legal
risk (risk of disputes arising from various laws
in connection with asset seizure), and (d)
valuation risk (the liquidation value of a collateral
depends on the existence of secondary market
and the price volatility of such a market). These
aspects need to be examined while deciding on
the nature and extent of the collaterals.
Managing Concentrations
Credit concentations (as per Basel Committee)
can be grouped into two categories : (a)
conventional credit concentrations which include
concentrations of credits to single borrowers or
counter par ties, a group of connected
counterparties and sector or industries, and (b)
concentrations based on common or corelated
risk factors to reflect subtler or more situation specific factors can only be uncovered through
analysis. Overlooking the dangers in such
situations results in susceptibility to
concentration risk.
Capital Allocation and Risk Contributions
The risk management framework of the Indian
banks needs to lay emphasis on prudent capital
allocation system. Risk contributions are the
foundation of the capital allocation system and
of the risk-adjusted performance measurement
system. Capital allocation defines meaningful
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keys for tracing back the overall risk to its

sources. The capital allocation system allows
us to break down and aggregate risk
contributions according to any criteria as long
as individual transaction risk contributions are
available. The capital allocation system provides
the risk contributions for individual facilities for
both credit risk and market risk.
The goal of risk-based pricing is to ensure a
minimum target return on capital, in line with
shareholders' requirements. A hurdle rate
serves as a benchmark for risk-based pricing
and for calculating creation or destruction of
value.
Risk Return Optimization
Risk return optimization shows how to trade-off
risk across exposures to enhance the overall
por tfolio return. There is a potential for
enhancement because income is proportional
to size while risk is not. Portfolio optimization
under global funding constraint means :
reducing risk, at a constant return, and
increasing revenue, at the same time.
Indian banks need use models as these

provide valuable insights for restructuring and
expanding, or contracting, some portfolio
segments or individual exposures. In fact,
without such models there is no way to compare
various 'what if' scenarios and rank them in
terms of their risk-return profiles.
Further, Indian banks need to develop their own
exper tise and put sustained effor ts for
developing internal models, through focused
approach, evidenced by internal research and
developmental activities. This would help Indian
banks to be Basel II compliant, in the very near
future.
Effective Use of Credit Risk Models
Credit risk events, defaults and migrations result
in changes in value of credit facilities. The Indian
banks need to make effective use of various
credit risk models, depending on the size of
portfolio.
Progression Towards Stress Testing
Stress tests make risks more transparent by
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estimating the potential losses on a portfolio in

abnormal markets. They complement the internal
models and management systems used by
banks globally for capital allocation decisions.
Simply speaking, stress testing is a way to
produce alternative scenarios using sensitivity
analysis.
The New Base Capital Accord uses more
quantitative approaches methods where
assumptions can be empirically evaluated.
Stress testing should be able to link dramatic
changes in the economic environment to the
bank's portfolio. There are, however, issues
such as data availability, portfolio diversity and
standardization of model inputs and outputs,
which need to be addressed.
Effective Use of Derivatives
Derivatives help to customize the term structure
of credit risk, independent of the underlying
assets, bonds or loans. Credit derivatives allow
better utilization of the current credit capacity,
even though there are no cash deals meeting
eligibility and maturity criteria.
Securitization in Credit Risk Management
off-loading credit risk to free capital for new

operations, and
to modify the risk-return profile of the loan

portfolio.
The issue, when off-loading risks, is whether

freeing up capital in this way is economically
acceptable. The solution lies in finding out
whether this makes the risk-return profile of the
banking portfolio more efficient (higher return for
the same risk or lower risk for the same return).
Analyzing the economics of the securitization
transaction requires reviewing all costs and
benefits resulting from the specific values of each
of the various parameters at the time of
securitization.
Conclusion
The increasingly complex and competitive
banking warrants sophisticated models for credit
risk management. It is important to put in place
an agile and dynamic Credit Risk Management
System, which addresses the challenges of
contemporary banking scenario and strengthens
them in their progression towards meeting global
benchmarks.
The motivation for banks in securitization lies

in the following potential benefits :
arbitraging the cost of funding in the market

with funding on-balance sheet.
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TREASURY MANAGEMENT IN BANKS

Treasury Management is concerned with efficient allocation of the banks resources.
Some of its role includes optimizing balance sheet size, ensuring liquidity and matching
the maturity profile of assets and liabilities.
Treasury management includes risk management and advising clients on risk
exposures.
Treasury Management in banks involves an
effective internal and external interface. It
performs a myriad of functions ranging from
balance sheet management, liquidity
management, reserves and investment, funds
management, management of capital adequacy
to transfer pricing, risk management, trading
activities and offering hedge products. It has to
work on arriving at an optimal size of the balance
sheet, interface with various liability and asset
groups internally, give correct pricing signals
keeping in mind the liquidity profile of the bank.
On the external front, it has to provide active
trading support to the market, make two way
prices, add to the liquidity and continuously strive
to provide the customers with value added
solutions to their specific financial needs.
Balance Sheet Management
The ongoing reforms have provided the banks
freedom to price most of their assets and
liabilities within a broad band specified by RBI.
This implies that the balance sheet
management should be a dynamic and
proactive process. It requires continuous
monitoring, analysis of market changes and
controls. Demand and supply forces have to be
reckoned to determine the optimal balance sheet
size and its growth rate.
Liquidity Management
Liquidity essentially means the ability to meet
all contractual obligations as and when they
arise, as well as the ability to satisfy funds
requirement to meet new business
opportunities. Liquidity planning involves an
analysis of all major cash flows that arise in the
bank as a result of asset and liability transactions
and projecting these cash flows over the future.
Liquidity analysis involves an analysis of the
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maturity profile of existing assets and liabilities

over which superimposed is the impact of
trans-actions that are planned for the future.
Effective liquidity management requires careful
attention to balance sheet growth and structure.
A balance sheet that is growing rapidly needs
careful scrutiny to determine whether the
liquidity of the bank is being adversely affected.
Very often banks put up excessive assets in the
form of cash credit lendings or investment in
securities without having matching source of
funds of similar tenors. This mismatch in the
maturities of assets and liabilities results in the
bank being subjected to liquidity risk, because
the bank starts depending chronically and
excessively on the most easily accessible
source of funds i.e. the inter-bank call money
markets. Thus, the bank ends up funding long
term assets through overnight borrowings on an
ongoing basis.
Funds Management
Funds management by the treasury involves
providing a balanced and well diversified liability
base to fund the various assets in the balance
sheet of the bank. Quality of well diversified
assets and optimal return are very critical for
any bank. Similarly diversified liabilities imply
raising funds from a variety of sources, using a
variety of instruments and for a variety of tenors.
Consumer deposits are often the most stable
source of funds for a bank. At the other end of
the spectrum are the funds obtained from the
inter-bank money market which are very short
term in tenor and volatile with regard to rate and
availability. Banks, therefore, have to decide on
an optimal mix of funds from various sources,
to ensure that there is no excessive dependence
on any single category. It is also advisable that
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the maturity profile of assets conforms broadly

to that of the liabilities, so that there is no large
structural mismatch in the balance sheet that
can lead to liquid-ity problems.
Capital Adequacy
The treasury also has the responsibility for
setting targets for balance sheet size and key
ratios, in consultation with all business groups.
Asset and liability levels need to be monitored
and managed periodically to iron out any
structural imbalances. The ALCO (Asset and
Liability Committee) should meet at regular
intervals for this aspect of strategic business
planning. The size of the balance sheet has now
acquired great importance for a bank, in the light
of capital adequacy guidelines. A bank cannot
afford to be driven just by volume goals which
aim at a certain percentage growth in credit and
deposits year after year. This is because balance
sheet growth will mean the requirement of
additional capital in accordance with BIS
guidelines. Therefore, the focus has now to shift
to the quality of assets, with return on assets
being a key criterion for measuring the efficiency
of deployment of funds.
Transfer Pricing
Treas-ury has to ensure that the funds of the
bank are deployed in the most appropriate
manner without sacrificing either yield or liquidity.
This is done very effectively through the means
of a transfer pricing mechanism administered
by the treasury, which can provide correct signal
to various business groups as to their future
asset and liability strategy. Benchmarking of
rates provides a ready reference for business
groups about the correct business strategy to
adopt given the balance sheet structure of the
bank as well as the conditions prevailing in the
money mar-kets and the treasurys forecast
about expected rate movements in the future.
The treasury is ideally placed for this function
since it has an idea of the banks overall funding
needs as well as direct access to the external
markets.
Reserve Management & Investments
In the Indian banking sector, almost half the asset
base of a bank consists of statutory reserves.
Since such a large proportion of funds is
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deployed in the form of statutory reserves,

management of these reserves is a very
important factor in the overall profitability of the
bank. Banks should ideally take into account both
liquidity as well as yield considerations. Even
though the longer maturity securities offer the
higher yields, they are also the most susceptible
to fall in price due to changes in the yield curve.
On the other hand, short dated secu-rities have
low price risk but they also give lower returns.
Therefore choice of an appropriate mix of
maturity patterns in the SLR portfolio is a very
important objective of the treasury manager.
Along with this, the market risk of the portfolio
as well as its price sensitivity to interest rate
changes need to be quantified and periodically
monitored by means of analytical tools such as
duration analysis.
Customer Needs
With the growing liberalisation and the opening
up of the economy to international financial
markets and investors, the treasury
departments of various banks would have to
function in a multi-product, multi-currency
environment and cater to the multiple needs of
its customers. There will be pressure on the
treasury to offer various rupee based and crosscurrency hedge products to their clients who
have foreign curren-cy exposures on their
balance sheets. In fact, the recent changes in
the regulations would, over a period of time,
ensure the con-vergence of local currency and
foreign currency yield curves and enable the
clients to manage their foreign currency assets
and liabilities in a more profitable manner through
the use of foreign exchange derivatives both in
the area of currency and interest rates. While
these products provide the client with the much
desired interest savings, these are not without
inherent risk. It is imperative for the banks to
clearly define and explain these risks to their
corporate clients and to help them effec-tively
manage these risks keeping in mind the dynamic
nature of the foreign exchange markets. This
brings us to an important aspect of treasury i.e.
risk management.
Risk Management
One of the major responsibilities of a successful
treasury is to manage the risk arising out of the
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financial transactions entered into by the

treasury. The two most important risks which it
has to manage are liquidity risk and price risk in
addition to counterparty risk and issuer risk.
These risks should be evaluated by an
independent risk manager and the reports
highlighting the limits, their usage and excesses,
if any, should be gener-ated by an independent
system, monitored and managed by
technolo-gy and operations.
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Conclusion
In conclusion it is worth reiterating that in todays
fast changing market environment, treasury
management is inevitably acquiring a greater
degree of complexity and sophistication. The
success of any treasury thus depends a great
deal on strong risk management, independent
back-office operations and first rate technology.
These become all the more important as
profita-bility and commercial viability become key
criteria for assessing performance. And, it is
these very fundamentals that make a successful
treasury that can sustain efficient allo-cation of
internal resources on one hand and accelerate
the globalisation of our financial markets on the
other.
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PORTFOLIO MANAGEMENT
It is management of the clients fund in accordance with their needs based on mutual
agreement for a fee
It helps to tap the funds of High networth individuals who expect the banks to multiply
their wealth.
There are two types of portfolio managers- Discretionary and non-discretionary.

Discretionary managers exercise their discretion in investment
Portfolio Managers are to be registered with SEBI. As per SEBI directive, the minimum
fund per client is Rs. 5 lacs.
Portfolio Management is one of the emerging

opportunities for tapping the business of High
Networth Individuals (HNIs). Many banks in India
are offering Portfolio Management services as
a high-end product. The service besides offering
opportunities for fee-based income helps to
retain loyalty of high networth customers through
specialized services. No longer, customers are
park their money in the bank for safe- keeping.
HNIs expect banks to increase their wealth and
those banks, which have got the professional
expertise in this business, are highly sought
after. In such a market, there is a need for the
functionaries of our bank to develop expertise in
this area. The readers besides reading books
on Portfolio Management can enroll in courses
offered by professional institutions in India on
Certified Portfolio Managers (CPM).
Portfolio Managers are registered by SEBI as

per the guidelines framed by it. SEBI has
mandated certain Capital requirements and
other infrastructure availability for eligibility. For
example, the minimum capital requirement is
Rs. 50 lac. The applicant should be a body
corporate with the Principal officer having
qualifications in finance, accounting or general
management.
Obligations and Responsibilities of Portfolio
Managers
The minimum amount required for Portfolio

Management per client as stipulated by SEBI
is Rs. 5 lacs.
There should be mutual agreement between

the client and the PM regarding their mutual
rights and obligations.
What is Portfolio Management

It is the management of the funds of each client
in accordance with the needsof the client. The
client entrusts certain sum of money to the
Portfolio Manager (PM) who manages the fund
in accordance with the mutual agreement
between the client and the PM.
The agreement between the client and the

Portfolio Managers should contain the following:
the investment objectives and the services

to be provided
areas of investment and restrictions, if any,

imposed by the client with regard to the
investment in a particular company or
industry
type of instruments and proportion of

exposure
tenure of portfolio investments
Terms for early withdrawal of funds or

securities by the clients
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Kinds of Portfolio Managers

Portfolio Managers are of two types namely
discretionary and Non-discretionary Portfolio
Managers. Discretionary PMs will independently
manage the funds in accordance with the needs
of the client, while Non- discretionary PMs shall
manage the funds in accordance with the
directions of the client.
Registration of Portfolio Managers
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Attendant risks involved in the management

of the portfolio
Period of the contract and provision of early

termination, if any
The portfolio manager shall not accept from

the client, funds or securities worth less than
five lacs rupees.
Amount to be invested subject to the

restrictions provided under these regulations
The portfolio manager shall act in a fiduciary

capacity with regard to the clients funds.
The portfolio manager shall keep the funds

of all clients in a separate account to be
maintained by it in a Scheduled Commercial
Bank.
The portfolio manager shall transact in

securities within the limitation placed by the
client himself with regard to dealing in
securities under the provisions of the
Reserve Bank of India Act, 1934 (2 of 1934);
The portfolio manager shall not derive any

direct or indirect benefit out of the clients
funds or securities.
The portfolio manager shall not borrow funds

or securities on behalf of the client.]
The portfolio manager shall not lend

securities held on behalf of clients to a third
person except as provided under these
regulations
The portfolio manager shall ensure proper

and timely handling of complaints from his
clients and take appropriate action
immediately.
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Procedure of settling clients account

including form of repayment on maturity or
early termination of contract
Fees payable to the portfolio manager
The quantum and manner of fees payable

by the client for each activity for which
service is rendered by the portfolio manager
directly or indirectly (where such service is
out sourced)
Custody of securities;
In case of a discretionary portfolio manager

a condition that the liability of a client shall
not exceed his investment with the portfolio
manager;
The terms of accounts and audit and

furnishing of the reports to the clients as per
the provisions of these regulations; and
Other terms of portfolio investment subject
to these regulations.
General Responsibilities of Portfolio

Manager
Portfolio Managers have to discharge the
following responsibilities:
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OPERATIONAL RISK IN BANKS

Operational Risk is the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
Some forms of Operational Risk: Control Risk, Process Risk, Legal Risk, Reputation
Risk.
Basel II has made banks to focus on operational Risk due to its potential to cause
liquidation of banks
The Basel committee defines operational risk
as the risk of loss resulting from inadequate or
failed internal processes, people and systems
or from external events. Since the original Basel
Accord on capital adequacy of 1988, the banking
world has undergone a series of important
changes. For the purpose of operational risk,
there are two key elements. The first is the shift
by some banks away from traditional banking
towards a more trading-oriented environment.
This has meant that new types of operational
risks have emerged, and the likelihood of
extensive losses has increased. The second
major change is the increasing concentration of
processing risk in some banks. This is caused
partly by outsourcing some functions outside the
bank, and partly by economies of scale created
by new technology.
These two key
developments may mean that banks may be
more vulnerable to sudden, extreme losses than
before. Several recent well-known cases, where
banks have experienced large operational
losses - including Barings in 1995 and Sumitomo
in 1996 - attest to this.
What is Operational Risk
When a loan is granted, there is reasonable
probability that the borrower may fail to pay in
time or may not pay at all. The loan may become
bad due to lack of proper assessment of the
credit proposal also. In these two cases the risk
can be called credit risk. However, if the credit
officer has exceeded his authority in sanctioning
the loan or the credit officer is bribed to sanction
the loan and subsequently the loan becomes
bad, then the risk involved is called operational
risk. A computer breakdown involving huge loss
to the bank can be ascribed to operational risk.
Any financial loss that may occur to the bank
due to the fraudulent activity of its staff member
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or an outsider is to be categorized under the

head operational risk. Basel committee has
already advised the banks to make provision for
operational risk in the balance sheet from March
2007.
Types of Operational Risk
Operational risks can be broadly divided into
operational strategic risk and operational failure
risk. Strategic risk includes political, taxation,
regulation, government and competition. It
per tains to the prevailing environmental
conditions. The latter arises out of the failure
related to people, process and technology with
operational failure risk. Operational risk can arise
before, during and after a transaction is
processed. Risk exists before a potential
transaction is designed. A firm is exposed to
several risks during the processing of the
transaction. First, the sales person may not fully
disclose the various pros and cons of the
transaction to the potential client. He may
persuade a client to enter into an agreement
which is totally inappropriate for him (client). This
is called people risk. Second the sales person
may depend on sophisticated models to price
the transaction, which creates what is commonly
called model risk. It is due to the inherent defect
in the model. Once a transaction is negotiated
and a ticket is written, several errors may happen
afterwards. For example, an error may result in
delayed settlement giving rise to heavy penalty.
It may be mis-classified in the risk reports,
understating the exposure. In turn it may lead to
some other sets of transaction which otherwise
would not have been performed. These are
some of the examples of process risk. If any of
the systems are outsourced then the risk that
arises out of it is called external dependency risk.
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Broad Classification of Operational Risk

(a) Control risk : Any unexpected loss which
arises due to lack of an appropriate control.
Is bifurcated into inherent risk and control
risk. Inherent risk is associated with the
specific type of business. For example,
derivative trading process is understood by
only a few key people.
(b) Process Risk : This is the risk that occurs
due to the business process being inefficient
causes unexpected losses.
(c) Reputation Risk : This is the risk of an
unexpected loss in share price or revenue
due to the impact of the reputation of the firm.
(d) Human Resources Risk : The organization
has a major role in selection of the right type
of people, developing them and retaining
them. The hiring procedure and the
termination procedure should be foolproof to
ensure that the firm does not face any
unexpected loss.
(e) Legal Risk : The risk of suffering legal claims
due to product liability or employee action.
The risk that a legal opinion on a matter turns
out to be incorrect in a court of law.
(f) Takeover Risk : It is highly strategic but can
be controlled by making it uneconomical for
a predator to take over the firm. This could
be done by attaching the golden parachute
clause to the director's contract. It means
that the severance payment to the director
should be at a high price, which makes the
acquirer to think twice before taking the
plunge.
(g) Marketing Risk : The product may fail due
to wrong marketing strategy. The benefit
claimed about the product is misrepresented
in the marketing material.
(h) Technology Risk : The risk that may arise
due to various new developments that may
take place in the technology front by making
the older technology redundant.
(i) Tax Changes : If tax changes are made,
particularly with retrospective effect, they
may make the business unprofitable.
(j) Regulatory Changes : A change in
percentage of charge in terms of risk
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207
weighted assets can have impact on the

business.
(k) Business Capacity : If the existing IT
intrastructure cannot support a growing
business, the risks of major system failure
are high.
(l) Project Risk : Project failure including delay
in execution is one of biggest causes of risk
in most firms.
(m) Security : The firm's assets need to be
secured from both external and internal theft.
(n) Supplier Management Risk : If the business
is exposed to the performance of third
parties, then the firm is exposed to this type
of risk.
(o) Natural Catastrophe Risk : Past history is
analyzed to assess such type of risk.
Operational risk manager should see
whether the firm is likely to be affected by
flood, earthquake or any other natural
disaster.
(p) Man-made Catastrophe risks : If the firm
is situated near defence installation, prison,
airport or nuclear plant, then this type of risk
is expected. It also includes possible terrorist
threat to such types of establishments.
(q) Technology Issues in Banks : Due to
increasing dependency on technology, the
chances of IT related operational risks have
increased. The type of controls required in a
computerized environment is different from
that of the manual system.
Conclusion
Operational risk is an old problem with a curcial
new significance. Globalization, increasing
reliance on technology, use of exotic financial
products and a more stringent regulatory
environment mean that the opportunities for - and
consequences of - operational risk have
proliferated. The future will be determined by the
extent to which banks allocate capital to market,
credit and business strategic risks. Now there
is increasing focus on operational risk aspect
as this may cause liquidation of some banks if
timely action is not taken.
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ESSENTIALS OF LIQUIDITY RISK MANAGEMENT

Liquidity Risk is the risk of loss resulting from lack of sufficient funds to meet immediate
financial need or obligation
Liquidity Risk may cause inability to raise funds at normal cost
Shortage of funds in the market, difficulty to sell the assets are the other forms of
liquidity risk
Banks should effectively manage liquidity gaps and develop contingency funding
Best practices in liquidity management would include strategic direction,
measurement and monitoring
Liquidity risk refers to multiple dimensions such
as (a) inability to raise funds at normal cost, (b)
market liquidity risk, and (c) asset liquidity risk.
The Market liquidity risk arises out of illiquidity
in the market while asset liquidity risk is caused
by inability to sell the asset immediately. Funding
risk depends on how risky the market perceives
the issuer and its funding policy. The cost of
funding is a critical profitability driver. The cost
of the funds depends on the bank's credit
standing. In addition, the rating drives the ability
to do business with other banks/ financial
institutions and to attract investors. The liquidity
risk of the market relates to liquidity crunches
because of lack of volume. In such a scenario,
the prices become highly volatile, sometimes
embedding high discounts from par, when
counter parties are unwilling to trade. Market
liquidity risk materializes as an impaired ability
to raise money at a reasonable cost. Asset
liquidity risk results from the lack of liquidity
related to the nature of assets rather than to the
market liquidity. In fluctuating market liquidity,
holding a pool of liquid assets acts as a cushion
to meet short-term obligations.
When a bank gets into trouble, massive
withdrawals of funds by depositors and closing
of credit-lines by institutions results in brutal
liquidity crisis, ending up in bankruptcy of bank.
There are challenges to liquidity risk
measurement. The practices rely on empirical
and continuous observations of market liquidity.
Liquidity risk models appear too theoretical to
permit instrumental applications. The time profiles
of projected uses and sources of funds, and their
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208
'gaps' or liquidity mismatches, capture the

liquidity position of a bank.
Ten Essentials of Liquidity Risk Management
Liquidity risk, resulting from size and maturity
mismatches of assets and liabilities, makes
banks vulnerable to market liquidity risk. Liquid
assets protect banks from market tensions
because they are an alternative source of funds
for facing the near-term obligations. Controlling
liquidity risk implies spreading over time
amounts of funding, avoiding unexpected market
funding and maintaining a cushion of liquid shortterm assets, so that selling them provides
liquidity without incurring losses. The present
day market scenario necessitates that Indian
banks keep in view the following 10 essentials
of liquidity risk management :
1. Liquidity
gaps
generate
funding
requirements, or investments of excess
funds, in the future. Such financial
transactions occur in the future at interest
rates not yet known, unless hedging them
today. Liquidity gaps generate interest rate
risk because of the uncertainty in interest
revenues or costs generated by these
transactions.
2. Cash matching is a basic concept of liquidity
risk, implying thereby that the time profiles
of amortization of assets and liabilities are
identical. The nature of interest applicable
and maturities also match, i.e., fixed rates
with fixed rates and floating rates revised
periodically with floating rates revised at the
162
same dates using the same reference rate.

With cash matching, liquidity gaps are equal
to zero.
In general, deposits do not match loans, as
these results from the customers' behaviour.
However, it is feasible to structure the
financial debt in order to replicate the assets'
time profile.
3. The cost of liquidity for banks often refers to
another concept : the cost of maintaining the
liquidity ratio at a minimum level. The liquidity
ratio is the ratio of short-term assets to shortterm liabilities, and it should be above one.
When a bank initiates a set of transactions
such as borrowing short and lending long,
the liquidity ratio deteriorates because the
short-term liabilities increase without a
matching increase in short-term assets.
4. Excessive funding concentrations severely
reduce the bank's ability to survive a liquidity
crisis. Banks need to take advantage of
good economic times to diversify their
funding requirements.
5. Banks need to develop a contingency funding
plan, adequacy of projected funding sources
and development of common contingency
scenarios.
6. Banks need to progress towards stress
testing their funding plans, using various
interest rate shocks and adverse economic
and competitive scenarios to ascertain their
impact on both the funding portfolio and
market access.
of off-balance sheet items needs to be

statistically analysed. Incorporating this into
calculations of future funding requirements
enhances the accuracy of funding
projections.
9. Selection of funding source must integrate
with the bank's interest rate sensitivity, risk
appetite, profit planning, diversification and
capital management objectives.
10. A rating services view on the bank's liquidity
position needs to be taken periodically and
deficiencies corrected in early stages.
Best Practices in Liquidity Management
The Indian banks vary widely in their funding
needs and their appetite for risk. The following
strategies are essential for the banks to manage
their liquidity risk effectively.
(a) Strategic Direction : The bank management
must articulate the overall strategic direction
of the bank's funding strategy by determining
what mix of assets and liabilities will be
utilized to maintain liquidity. This strategy
should address the inherent liquidity risks
which are generated by the bank's core
businesses.
(b) Integration : The bank's asset and liability
management policy should clearly define the
role of liquid assets along with setting clear
targets and limits. Liquidity management
should be integrated into the day-to-day
decision-making process of core
businessline managers.
(c) Measurement Systems : The bank
management needs a set of metrics with
position limits and benchmarks to quickly
ascertain the bank's true liquidity position,
ascertain trends as they develop and provide
the basis for projecting possible scenarios
rapidly and accurately. The models may be
based on :
7. Communication lines between treasury

functioning and operational units need to be
significantly enhanced. Reporting systems
need to be more effective.
ALCO (Asset - Liability Committee) of the
banks must have appropriate risk
management policies and procedures, active
MIS repor ting, limits and oversight
programmes.
Cash capital : This model has a general limit,

which is frequently expressed in terms of a
management set limit on the percentage of
the discounted value of the bank's asets to
8. A historical funding pattern of various types

Banking Briefs
209
163
total short-term funding; this general limit is

then broken down more finely with sub-limits
set on different types of short-term funding.
assuring management that naturally

occurring contingent liabilities will not strain
the funding process.
Liquidity barometers : This model calculates

the length of time a bank can survive by
liquidating its balance sheet using just two
assumptions - that the bank continues to
operate under normal operating conditions
or that the bank has suffered a complete loss
of access to the money market.
(g) Funds Management : The funding sources

could be deposits, capital and purchased
funds. The various factors that must be
considered in funding source selection
include integration with the bank's interest
rate sensitivity, risk appetite, profit planning,
diversification and capital management
objectives.
(d) Monitoring : Banks must be able to track and

evaluate their current and anticipated liquidity
position and capacity. A monitoring system
must be developed, consisting of guidelines,
limits, and trend development, that enables
management to monitor and confirm that
compliance is within the approved funding
targets and if not, to pinpoint the variances.
(e) Balance Sheet Evaluation : Both the bank's
balance sheet and market access trends
should be periodically evaluated for
emerging patterns that could adversely affect
liquidity, and as the banks are becoming
more reliant on credit sensitive funding, it is
vital that the bank be perceived by third party
funding sources as being both profitable and
managed in a safe and sound manner.
(f) Off-Balance Sheet Management Practices :
It is considered a best practice to periodically
supplement with statistical analysis of
historical funding patterns of various types
of off-balance sheet items. It enhances the
accuracy of future funding projections -
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210
(h) Contingency Liquidity Plan Preparation :

Banks should have a formal contingency
plan of policies and procedures to use as a
blueprint in the event the bank is unable to
fund some or all of its activities in a timely
manner and at a reasonable cost.
Conclusion
The Indian banking system has to respond
to the new needs of the liberalized financial
environment. Each bank will have to graduate
to the complexities of changing risk profile in
banking business.
A comprehensive
contingency funding plan can provide a useful
framework for meeting both temporary and longrange liquidity disruptions. A good plan should
emphasize a reliable but flexible administrative
structure, realistic action plans, ongoing
communications at all levels, and a set of metrics
backed by adequate management information
systems. Availability of timely MIS reports for
rapid decision making is inevitable for periodic
testing of contingency plans.
164
CORPORATE DEBT RESTRUCTURING

Introduced in August 2001
Enables restructure corporate debts which are viable and financed by multiple banks/
FIs.
Provides a timely and transparent mechanism to restructure corporate debts outside
the legal mechanism.
Applies to outstanding exposure of Rs.10.00 crore and above.
Background
Corporate Debt Restructuring System is an
institutional mechanism for restructuring of
corporate debt and was evolved and detailed
guidelines were issued by Reserve bank of India
on August 23, 2001 for implementation by
financial institutions and banks.
Objective

To ensure timely and transparent

mechanism for restructuring the corporate
debts of viable entities facing problems,
outside the purview of BIFR, DRT and other
legal proceedings.
To preserve viable corporates affected by
certain internal and external factors
To minimize the losses to the creditors and
other stakeholders through an orderly and
coordinated restructuring programme.
Eligibility for restructuring

The scheme does not apply to loan accounts

involving only one financial institution or one
bank
It covers only multiple banking accounts/

syndication/consortium accounts
It covers both banks and Financial

Institutions.
The outstanding exposure should be Rs. 10

Crore and above.
There are two categories of CDR System.

Under Category 1, Standard and Sub
standard accounts are eligible while under
Category 2 Doubtful accounts are eligible.
Only potentially viable accounts are eligible.
Banking Briefs
211
Corporates indulging in willful default and

fraud are not eligible.
Accounts where recovery of suits have been

filed are also eligible as per the conditions
set out under the guidelines.
Who can make reference to CDR system?

Any one or more of the creditor having

minimum 20% share in either working
capital or term finance.
By the concerned corporate, if supported by

a bank or FI having minimum 20% share in
either W.C or T.L
Structure
CDR system will have a three tier structure
namely CDR Standing Forum and its Core
Group, CDR Empowered Group and CDR Cell.
CDR Standing Forum: The top tier of the CDR
Mechanism in India, A self-empowered general
body having representatives of all FIs and banks
participating in CDR system. The forum lays
down policies and guidelines, monitors the
progress of Corporate Debt Restructuring, and
provides a platform for creditors and borrowers
to evolve mutually beneficial policies. The
Standing Forum monitors the progress of the
CDR Mechanism. The Forum meets at least
once every six months.
CDR Core Group: It is a sub-committee of the
CDR Standing Forum to assist the latter in
convening the meetings and taking decisions on
behalf of the standing forum on matters relating
to policy. It consists of CEOs of IDBI, SBI, ICICI
Bank Ltd, BOB, BOI, PNB, IBA, Deputy
Chairman of IBA representing foreign banks in
165
India. The Core Group lays down the policies

and guidelines to be followed by the CDR
Empowered Group and CDR Cell for debt
restructuring.
CDR Empowered Group: This Group (EG)
decides individual cases of Corporate Debt
restructuring. Representatives of the Group are
at the Executive Director level to ensure that
concerned banks/FIs abide by the necessary
commitments including sacrifices made
towards Corporate Debt Restructuring. The
Group should approve (or decide on) the
restructuring package within 90 days or at best
within 180 days of reference to it. The EG
decides on the acceptable viability benchmark
levels on the following illustrative parameters,
which are applied on a case-to-case basis,
depending on the merits of each case:
Break-even Point(Operating & Cash)
Return on Capital Employed
Debt Service Coverage Ratio
Internal Rate of Return
Cost of Capital
Loan Life Ratio
Extent of Sacrifice
In order to enhance the efficacy of CDR

Mechanism a realistic time schedule has been
prescribed by the CDR Standing Forum. Once
the final restructuring plan is approved and
confirmed by the Empowered Group, CDR Cell
issues a Letter of Approval (LOA) for the
Restructuring package to all the concerned
lenders within 10 days. The individual lenders
are required to sanction the restructuring
package within 45 days from the date of issue
of LOA and thereafter fully implement it in the
next 15 days.
CDR Cell: This Cell assists CDR Standing
Forum and CDR Empowered Group in all their
functions. All references for Corporate Debt
Restructuring by lenders or borrowers are made
to this cell. The CDR Cell makes initial scrutiny
and places for consideration of the CDR EG
within 30 days to decide whether restructuring
is prima facie feasible.
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212
Special Points for consideration

CDR is a voluntary, non-statutory

mechanism. Debtor- Creditor Agreement
(DCA) and Inter- Creditor Agreement (ICA)
provide the legal basis to the CDR
mechanism. For reference to CDR, all
borrowers are required to execute the DCA.
If 75% of the lenders by value and 60% of

creditors by number agree to a restructuring
package, the same would be binding on
remaining creditors.
Stand-Still clause: Under this clause, both

the debtor and creditors shall legally agree
to stand still whereby they commit
themselves not to take any legal course
during the stand still period (normally 90 to
180 days).
During the pendency of the case with the

CDR system, the usual asset classification
norms would continue to apply.
Exit option: The creditors outside the

minimum 75 and 60 per cent who have
agreed for restructuring would have the
option to sell their existing share and exit
the package by mutual agreement.
Banks should disclose in their published

annual Balance Sheets under Notes on
accounts information in respect of CDRs
undertaken during the year.
Linking the restoration of asset classification

prevailing on the date of reference to the
CDR Cell to implementation of the CDR
package within four months from the date of
approval of the package.
restricting the regulatory concession in asset

classification and provisioning to the first
restructuring where the package also has
to meet norms relating to turn-around period
and minimum sacrifice and funds infusion
by promoters.
convergence in the methodology for

computation of economic sacrifice among
banks and FIs
RBI to limit its role and provide broad

guidelines for CDR mechanism
166
enhancing disclosures in the balance sheet

for providing greater transparency
pro-rata sharing of additional finance

requirement by both term lenders and
working capital lenders
allowing OTS as a part of the CDR

mechanism to make the exit option more
flexible and
regulatory treatment of non-SLR instruments

acquired while funding interest or in lieu of
outstanding principal and valuation of such
instruments.
Cases Referred, Approved, Rejected, Withdrawn and Net cases under CDR
(Status as on October 31, 2005)
Sl. No.
Proposals
Number
Total Debt(Rs. crore)
Total cases referred
175
81716
Cases approved
OF WHICH :-
138
75756
(a)
Cases withdrawn
12
1651
(b)
Cases exited
9517
(c)
Cases merged
(330)*
(d)
Net Cases under CDR
121
64588
* Debt involved in respect of the merged entity computed in the aggregate total.
Banking Briefs
213
167
DEBT RESTRUCTURING MECHANISM FOR SMALL

AND MEDIUM ENTERPRISES (DRSME)
Debt Restructuring Mechanism for SME formulated based on RBI guidelines.
All Corporate SMEs which total outstanding (FB+NFB) upto Rs. 10 Crore are eligible.
Loss assets are excluded.
Units must become viable in 7 years and repayment period for rescheduled debt not
to exceed 10 years.
Restructuring process should be completed within 60 days of the receipt of application.
Background :
Exclusions:
At present there is a mechanism for Corporate

Debt Restructuring while there is no such for
Small and Medium Enterprises. A need has there
fore arisen to establish a suitable mechanism
for SMEs. In the above background, our bank
has introduced Debt Restructuring Scheme for
SMEs keeping in view the following:
Accounts involving fraud and malfeasance

or diversion of funds with malafide intent
Accounts classified by our Bank as Loss

Assets
RBI guidelines on Debt Restructuring

Scheme for SME,
Banks extant guidelines on restructuring and
CDR scheme of RBI (which cover multiple /

consortium accounts of Rs.10 cr. & above),
The salient features of the scheme are as under:
II. Wilful Defaulters: May be considered for

restructuring with the approval of the Banks
Board only, on a review of the reasons for
classification of the borrower as wilful
defaulter (especially in old cases where the
manner of classification of a borrower as a
willful defaulter may not have been
transparent), provided the borrower is willing
to rectify the wilful default.
III. Viability Criteria
Definition of SMEs: - SME sector includes all

units in the Tiny and SSI sector and also those
industrial units whose investment in plant and
machinery is up to Rs.10 cr.
The unit must become viable in 7 years and

the repayment period for restructured debt
will not exceed 10 years.
i.
I. Eligibility:
The following entities, which are viable or
potentially viable:
a) Sole banking: All corporate / non-corporate
SMEs irrespective of the level of dues.
b) Multiple/consortium banking: All corporate
SMEs, which have FB+NFB outstanding up
to Rs. 10 crore.
c) BIFR cases: Branches must obtain approval
from BIFR before implementing the package.
d) Wilful defaulters, in exceptional cases, may
be considered as advised in para II below.
Banking Briefs
214
Average DSCR > 1.25, and > 1.00 in any

year.
ii. The Break Even analysis should be carried

out, and operating and cash Break Even
Point should be worked out.
iii. The companys past performance for 3-5
years and future projections for the period
of proposed repayment would be examined.
iv. Promoters sacrifice and additional funds
brought by them should be a minimum of
15%of creditors sacrifice.
IV. Prudential Norms for restructured accounts:
168
i. Treatment of standard accounts subjected to

restructuring
the asset should continue to be treated

as substandard/ doubtful.
(a) On reschedulement of the instalments

of principal alone, a standard asset will
continue to remain Standard, provided the
outstanding is fully covered by tangible
security. (*)
V. Additional finance, if any, will be treated as

Standard asset for the specified period. If
the restructured asset does not qualify for
upgradation at the end of the above period,
additional finance shall be placed in the
same asset classification category as the
restructured debt.
(b) On reschedulement of the interest

element, a Standard asset will not be
downgraded, provided the amount of
sacrifice, if any, in the element of interest,
measured in present value terms is either
written off or provision is made to the
extent of sacrifice involved.
VI. Upgradation of restructured Assets

The sub-standard/doubtful accounts, which
have been subjected to restructuring,
whether in respect of principal instalment or
interest, by whatever modality, would be
eligible to be upgraded to the standard
category after the specified period.
ii) Treatment of sub-standard /doubtful

accounts subjected to restructuring
(a) On reschedulement of the instalments
of principal alone, a sub-standard /
doubtful asset will continue to remain
substandard / doubtful for the specified
period, that is, for a period of one year
after the date when first payment of
interest or of principal, whichever is
earlier, falls due under the rescheduled
terms, subject to satisfactory
performance during the period, provided
the borrower s outstanding is fully
covered by tangible security. (*)
(*) The condition of tangible security may
not be made applicable for outstanding
up to Rs. 5 lakh, as the collateral
requirement for loans up to Rs. 5 lakh
has been dispensed with for SSI/ Tiny
sector.
(b) On reschedulement of the interest
element, a sub-standard / doubtful
asset will continue to remain
substandard/ doubtful category for the
specified period, subject to the condition
that the amount of sacrifice, if any, in the
element of interest, measured in present
value terms is either written off or
provision is made to the extent of
sacrifice involved.
VII. Asset Classification Status

During the specified period, the asset
classification status of rescheduled
accounts will not deteriorate if satisfactory
performance of the account is demonstrated
during the period. If not, the asset
classification of the restructured account
would be governed as per the applicable
prudential norms with reference to the prerestructuring payment schedule.
VIII.Repeated Restructuring: Not generally
envisaged as the special dispensation for
asset classification as available in terms of
paragraphs IV, V and VI above, shall be
available only when the account is
restructured for the first time.
Procedure :
The whole process of restructuring must be
completed within 60 days of the receipt of the
application, keeping in view the 90-day
delinquency norms.
Reliefs and Concessions :
The applicant is eligible for reliefs and
Concessions as provided in the guidelines.
(c) Even in cases where the sacrifice is by

way of write off of the past interest dues,
Banking Briefs
215
169
RETAIL LOAN - A RISK MANAGEMENT PERSPECTIVE

Retail Loan book constituted 21.5% of the outstanding advances as at the end of
Mar 04
Risks in retail loans: Excessive borrowing, interest rate risk, credit risk, concentration
risk and operational risk
To control risk, RBI has limited the exposure of unsecured loans of banks to 20% of
Gross Bank Credit, increased provisioning for sub-standard asset to 20% and
enhanced risk weight for housing loan to 75% and Personal Loan to 125%
Retail Loan - Risk Management Perspectives
The retail loan book of banks in the past few years
has grown very fast (CAGR over 30%) and it
now constitutes about 21% of the total loan portfolio. The credit expansion has shifted from
metros to tier 2 and tier 3 cities also. The high
growth in retail loan has started inviting the concern of various interested parties such as bankers. Are Indians borrowing beyond their means?
Whether retail loan book is growing by
broadbasing retail credit to a larger customer
base or by over-leveraging the existing customers? Is the average customer leveraged too
much beyond his capacity? Whether the growth
is too high to cause concentration risk? Whether
asset quality is compromised in volume-led retail lending? Whether the portfolio may deteriorate with aging? And whether it is likely to crowd
out industrial credit?
Retail Loan - Systemic Risk out of Macroeconomic Shock
Basel Committee II has cautioned that over exposure to housing and other retail sectors could
create bubbles in the market as a consequence
of overspending by the salaried class followed
by defaults, and cautioned the banks against limitless financing. It is being argued that a large
number of Indian households are over-leveraged
and while their salaries are not inflation-linked, a
high inflation situation, may increase loan default.
When this happened in the UK and the US in the
1980s, the negative effect was exacerbated by
a sharp fall in the real estate prices. The demand
for housing dropped as interest rates rose and
Banking Briefs
216
defaults in previous loans also shot up. Credit

Rating Information Services of India Limited
(CRISIL) conducted a study on Variable home
loan market (ET 24.11.04) and observed that
close to 90% loans are under variable rate and
150-200 bps rise in interest rate will adversely
affect the repayment capacity of the borrowers
who opted for tenure of 15 years and above. It
has made a forecast that NPA may rise if interest rises by 200 bps or more as about one-fourth
of the borrowers are already using more than
50% of their salary to repay loans.
Retail Loan - Credit Risk Management
Retail loans are basically consumption loans and
are largely unsecured (excepting housing loans).
They run the risk of becoming bad as repayment
depends upon the discretion of the customer
with no security in the hands of the bank to fall
back, wpon and time-consuming and prohibitive
legal process. While economists and bankers
differ on the impact of rising inflation on the future growth of retail loans, they are all concerned
that rising interest rate in consequence of rising
inflation may impair asset quality.
The effective credit risk management necessitates that various risks arising out of deficiency
in lending policy, incorrect product structuring,
inadequate loan screening and documentation,
ineffective post-sanction monitoring and followup and weak collection/recovery mechanism are
addressed adequately and in time. And like traditional lending, the bankers while taking lending
decisions of retail loans, should strictly adhere
to the five Cs of credit i.e., character, capacity,
credit, covenants and collateral. As a risk-miti170
gating measure, the RBI has recently advised

banks:
match, interest rate risk management is the most

important aspect of retail lending.
Retail Loan and Operational Risk
To keep the exposure of unsecured loans/

guarantees within safe limits [generally 20%
of Gross Bank Credit (GBC)
To increase provisioning of unsecured NPAs

under sub-standard category from 10% to
20% and
To increase risk weight on home loan from

50 to 75% and personal and consumer loan
from 100% to 125%
Further NHB is promoting a separate company

as Mortgage Guarantee Corporation (MGC) to
guarantee payment of principal and interest of
housing loan with a view to mitigate default risk.
Retail Loan and Concentration Risk
The retail loan as a percentage of GBC
[GROSS BANK CREDIT] now constitutes about
21% and is largely concentrated in urban and
metro centres and banks are aggressively seen
increasing their lending not only to the corporate
sector but also to other sectors like agriculture.
Further, banks (particularly PSBs) are taking
steps to diversify retail loans in rural and semiurban areas to leverage their strength of semiurban and rural branches where opportunities
are more and competition is less. The increase
in risk weight of retail loan and cap on unsecured
loan are other measures initiated by the regulator to counter exponential retail credit growth.
Retail Loan and Interest Rate Risk
Interest Rate Risk is another area to address.
In the past two-three years, banks have built up
housing loan portfolio, which carry 7.5% to 9.5%
interest. Since 10% to 15% of these loans are
on fixed rate basis, any increase in interest rates
may cause loss to banks. To mitigate interest
rate risk, banks are now putting force majeure
clause in the home loan agreement to reset interest rate in case of extreme volatility in interest rates. Banks have also started offering products with interest reset clause after every 5
years. Since housing loans are for large tenures
say 15 to 25 years and cause asset/ liability misBanking Briefs
217
Operational risk is another area of concern

as fraud/forgery in retail loan are on the rise.
Cases of multiple financing are also common.
The competition in retail loan segment is very
fierce and there is acute pressure on the retail
managers to perform. The retail is volume-driven
business and while there can be genuine mistakes, there are instances of misuse of authority by the retail managers. To obviate these happenings, banks have to put in place rigid due diligence standard on customer identification and
acceptance system. It is essential that only officers of proven intelligence and integrity are
selected/assigned this responsibility. The establishment of Credit Information Bureau India Limited (CIBIL), which has developed database of
credit history/report of the borrowers, will go a
long way in mitigating operational risk.
Retail Loans - Monitoring is the Essence of
Risk Management
Retail loans are volume-driven business and
require close monitoring/follow-up. The Bank
should take timely steps for issuing demand
notice, reminders, Inspection/insurance of assets, etc. Further, where loans backed by assets turns NPA; immediate action for seizure and
sale of assets should be taken under provision
of The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) ACT 2002.
Retail Loan and Preventive Vigilance
Of late, fraud and forgeries in retail loans are
on the rise. Even in the housing segment where
banks draw comfort by way of security, there
are instances of multiple financing against fake
title deeds and impersonation. The fabrication
of income documents, balance sheets etc., are
common modus operandi to defraud banks. Another common modus operandi is misuse of
loan in connivance with builders/ dealers.
The preventive vigilance is an important tool
171
to check such fraud and forgeries. The preventive vigilance helps banks to put in place the system of internal control and to create alertness,
foresightedness and a sense of responsibility
among employees for observing systems and
procedures meticulously.
Summing Up
Emerging markets are following developed
markets in consumer revolution. The consumer
is being leveraged through mortgages, auto
loans, credit lcards, personal loans and other
loans. This has become the focus of all banksboth in the public and private sectors. The retail
loan market in India is in the nascent stage. The
retail loan has contributed significantly to credit
Banking Briefs
218
growth of the banks in the past few years. It has

also fueled overall economic growth. Assets
impairment in retail loans, in India, so far is much
less than the other sectors and there is no systematic finance bubble as such.
Since retail loans are a different ball game
and banks have no previous experience in handling them, it is necessary that banks put in place
the required risk management system so that
credit is given to the right person and default is
kept to a minimum. With the setting up of CIBIL,
credit history of the borrower will come handy to
manage operational risks. Any overreaction to
stop retail credit will cost the banks as well as
the economy dearly: We need to put out weeds,
not dig up the garden.
172
VALUE AT RISK (VaR)

The assets of the bank are subjected to expected, unexpected and stress loss. Banks
cover expected loss through hedging while stress loss rarely occurs
VaR is the measure (amount) of unexpected loss by the bank.
Normally VaR is measured for a specific time duration at a given level of
confidence
VaR ( 99%, 1 Week)= Rs.1,00,000 implies that the unexpected loss will be a
maximum of Rs.1 lac in a duration of 1 week; and the chance of it exceeding Rs.1
lac can happen only in 1% of the occasion (100-99)
Some methods of measurement: Correlation Aggregation, historical simulation
and Monte Carlo Simulation
The phrase, value at risk, is of fairly recent origin
and the science behind it owes largely to the
excellent developments in IT. When several
assets of fluctuating value, such as securities
shares, financial derivatives, loan portfolios,
foreign currency positions, and so on, are dealt
with in an organisation, an awareness of the
risks of the basket of assets is relevant for
decision-making as well as in correcting any
over-exposure.
What is value at risk?
On the myriad balance-sheet risks that banks
face today credit and interest rate risks mostly
account for their business risks. These and other
risks expose a banks business to certain
potential losses. These losses are of three types
viz., expected, unexpected and stress loss. The
expected loss is always insurable by the myriad
hedges and therefore, forms part of banks cost
of operation. There is the unexpected loss under
adverse conditions which cannot be predicted.
It is this unexpected loss that is defined as value
at risk (VaR). Then there is also a third type of
loss the bank may be prepared to face under
extreme conditions which occur rarely but
possibly. It is called stress loss.
Value at Risk
Value at risk technically is defined as the Loss
amount, accumulated over a certain period that
is not exceeded in more than a certain
percentage of all time. For example, VaR (99
percent, 1 week) is equal to the loss amount,
Banking Briefs
219
accumulated over one week, that is not

exceeded in more than one percent of all time.
For measuring VaR one relies on a model of
random changes in the prices of underlying
instruments - interest rate changes, changes in
foreign exchange rates etc. - and a model for
computing sensitivity of derivatives prices
relative to the prices of underlying instruments.
In all these, one has to remember that A VaR
measure is merely a benchmark for relative
judgments, such as the risk of one portfolio
relative to another etc. Even if accurate,
comparisons such as these are specific to a
time horizon and the confidence level with which
VaR is chosen.
It is usually known as potential loss amount or
the estimated potential for loss-making for a set
of assets in an organisation. It is the measure
of risk to be applied to all the products/assets in
the portfolio. The distribution of profits and losses
of a portfolio, resulting from fluctuation in a
market for a day is calculated and the value at
risk is the expression of the worst loss at a
confidence level of percentage (usually above
95 per cent) as may be decided in an
organisation. It is normally computed using a
global database of Market Factor Volatility and
Correlations or from any other reliable source.
The first is the identification of market factor,
which is any price or rate used directly to value
financial instrument. Market factors include
interest and foreign exchange rates fixed income
173
bonds, equity and commodity prices, and all their

implied volatility.
Against one unit of change for each of these
market factors, as relevant to the total portfolio
of the individual organisation accounting for risk
at value, factor sensitivity limits are also fixed
depending on the policy of risk-bearing capacity
assessed by a conscious decision making
process. As the next step, the factor sensitivity
is calculated for the positions taken for various
assets in the portfolio and the defeasance factor
worked out (again, based on historical volatility).
The value at risk is obtained by multiplying factor
sensitivity by the defeasance factor.
VaR is evidently a probability of occurrence
expressed mathematically and quantified in
rupees for the total portfolio of trading assets at
a given time. It will vary in magnitude depending
on the methodology.
Probability methods
There are three broad approaches asset
managers use.
Correlated aggregation: Also known as the
variance and covariance method, it provides a
first hand estimation where there has been no
previous study of estimate of VaR. This is
effective when there is a normal distribution
function; and applies the standard deviation
estimates. But even definite price-based nonoption products too do not have normal
distribution functions thus limiting the
techniques applicability despite its simplicity.
The observed behaviour of market variables
normally begin in the following patterns:
Greater frequency of small changes occurring
within a standard deviation of the mean:
Lower frequency of changes that are quite
manifest between the two standard deviations
of the mean:
Greater frequency of changes that measure
more than the two standard deviations from the
mean that elude road-rolling and averaging
assumptions in respect of market movements.
This is also Known as the fat tail phenomenon
in technical analysis.
Banking Briefs
220
Easy historical simulation

This technique applies the historical price
movements directly. Depending on the products
and the system in vogue, 100 or more trading
days data is used. In the historical simulation
approach, the hypothetical profit and loss
portfolio of current positions is estimated for
every day in the data sample. The correlation
among the exposures and the volatility are
implicit in the historical price movements. From
the P&L values series so arrived at, the biggest
gain and the worst loss limits are determined to
fix values for the desired percentage in a day in
the historical sample of 100 days, will be used.
While it is normally 100 days for simulations,
there are always interesting debates and much
depends on the particular product and the
market.
Monte-Carlo simulation
This is the most popular method. It is used for
blind-landing and hence has applicability even
in the case of rocket firing. The advantage of
using this technique is that the distribution is not
assumed to be following a set pattern (such as
the bell-shaped normal distribution or the pattern
of past 100 days), as in the previous two cases.
Monto-Carlo can deal with any pattern of market
movements be they humps or kinks or tails.
Hence its higher efficacy. Once the particular
distribution is identified, the simulation can take
care of the scientific treatment. The method is
flexible and has the best of the techniques
narrated earlier.
For instance, Monte-Carlo simulation does not
have the problems of covariance analysis for
options, as it deviates from the co-variance
approach and tends towards the historical
approach when it comes to question of patterns.
Management tool
Management accounting is a tool and VaR is a
sharper one in the kit. It can be a guide for
decision-making and provide a figurative insight
into risk. Nonetheless, taking decisions based
on VaR calculations would be similar to getting
into a pond of water on knowing the average
depth. A constant vigil on market movements
and a good grasp of market sentiment is vital
for efficient decision-making in financial
derivatives and other assets and portfolios.
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BANKING
GENERAL
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221
CRM IN THE BANKING SECTOR

Customer Relationship Management is the establishment, development, maintenance
and optimization of long-term mutually valuable relationship between consumers and
organizations
CRM focuses on customer profitability, enhancing relationship through better service,
customer analysis and targeting
Indian Banks have started focusing on CRM and a few banks have implemented
CRM software
Some implementation issues: General acceptance, cost of implementation, choice
of information, managing data across the organization
Earlier, banks, insurance companies and car
shop retailers used to develop close
relationships with customers by offering
personalized service. This, however, was a
costly and inefficient system. Today, through
effective use of Information and Communication
Technology (ICT), organizations can offer large
variety, low prices and personalized service, all
at the same time. This approach to marketing.
which uses continually refined information about
current and potential customers to anticipate and
respond to their needs, is the practice of
Customers Relationship Management (CRM).
CRM is the new buzzword in business circles.
As per definition, CRM is the establishment,
development, maintenance and optimization of
long-term mutually valuable relationship between
consumers and organisations. Successful CRM
focuses on understanding the needs and desires
of the consumer and is achieved by placing
these needs at the heart of the business by
integrating them with the organizations strategy,
people, technology and business processes.
1. Why should a Financial Institution
Implement CRM?
While customer retention is vital for banks
seeking to maintain market share, understanding
customer profitability is an important factor if a
banks profits are derived from a relatively small
percentage of customers and a significant
number of customers are actually making losses
over the course of their relationship with the bank.
As a commercial reality in todays economy,
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222
banks need to be in a position to identify profitable

customers and improve levels of service for
these customers, while wasting less sales,
marketing and customer service resources on
unprofitable customers.
Post the implementation of CRM, a bank learned
that 20% of their customers contributed to 150%
of their profits and 40 to 50% of the banks
customers eliminate 50% of the profits. The
remainder contribute nothing to the profit picture.
CRM can help identify who the profitable
customers are and also help figure out strategies
to convert more customers to profitability.
Banks need dynamic, not just static, information
about the client base to achieve even the
simplest objectives of CRM. Appropriate CRM
technology helps by delivering tools for
rationalizing information, working smarter,
sharing information and retaining the intellectual
capital of the organization.
Intellectual capital is a functional asset in banking
and finance today and influences what to sell.
Client knowledge can no longer be contained
solely in the heads of employees, so that if an
employee leaves that knowledge does not leave
too.
There are problems in putting it in place
effectively. Defining the correct data parameters
for business and market is crucial, but often done
incorrectly, diminishing the effectiveness of the
solution. CRM costs are high and companies
are not necessarily being successful in providing
175
return on investment. Instead of being a quick

fix, CRM is a long-term effort, and thats why deep
management support is crucial. Along with smart
execution and buy-in from both investors and
employees, such projects require strong
leadership. But theres just no getting around the
fact that CRM ultimately requires far-reaching
organizational change. To echieve the holistic
perspective that CRM demands, the entire sales
management system has to be aligned around
it.
2. CRM in the Indian Banking Scenario
Indian banks have now started to recognize
superior customer care and maintenance of
well-greased relationship with customers as
important tools of profitability. With the growth of
awareness and rapid imbibing of the internet
culture, the common man is not ready to accept
anything less than the best. On one level, CRM
simply refers to organizing the bank around the
needs of its most valuable assets, i.e. profitable
customers. That is a straightforward concept and
just about eveyone in the marketing community
will agree that it is a sound business strategy for
any bank to follow. CRM represents a new way
of doing business for banks. It incorporates such
seminal concepts as the sales culture, one to
one marketing, data warehousing, data mining,
customer segmentation, loyalty programmes,
and cross-selling.
To the large banks and other financial service
forms, who are spending tens of crores of rupees
to perfect these strategies, CRM is a state of
mind, a behaviour an amalgam of strategies.
Quite simply, it puts the customer at the centre
of the universe. It emphasizes profitability and
is technology enabled. These initiatives have
gathered such a lot of momentum today that
even chronically dormant banks have suddenly
become very customer savvy. Indian
nationalized banks, which are largely governed
by RBI norms, are facing stiff competition from
foreign banks that have entered India sometime
ago. In the wake of such serious competition,
Indian banks are left with no choice but to take
adquate steps to protect themselves.
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223
3. The Opportunity
Today, the competition in the banking industry
has forced every bank to opt for this novel tool to
inveigle the customer. The time is not far away
when these very Indian banks will take on their
foreign counterparts on the global scene. There
is a big scope for change and improvement. In
fact, this is a very dynamic tool without any thumb
rule of operation. As a result, it is very flexible
and each bank designs its own formulations, best
suited for its own customers, for its own
environment and for its own people.
4. Present Status of CRM Software in Bank
Only three foreign banks have installed CRM
packages for maintaining customer details and
the packages used are: Citibank-Seibel;
American Express-Seibel; ABN Amro-People
soft. The Citibank system is equipped with the
Sales module for providing customers readily
available information about their assets and
liabilities with the bank. It also enables the
Citibank relationship managers in maintaining a
history of contacts with their customers, thus
assisting them in serving better. Though the other
banks have started implementing CRM, they
have not implemented any technology or CRM
software. Among the private banks, ICICI and
IDBI have installed CRM software for managing
customer details and services. The remaining
banks surveyed have also initiated CRM in
various forms, i.e., providing efficient services
to customers through mobile telephony or the
internet, but still have to adopt a technology or
software for the same.
Among public sector banks, Bank of India is
already in the process of fast adopting a software
package, either Seibel or SAP. SBI uses a
software developed by the BK Systems of
Hyderabad, which covers its corporate and NRI
clients. The central bank uses a software SWIFT,
but it is used only for managing its foreign
accounts and transactions. The other banks in
this category, who are still far from implementing
any technology or software package, are
venturing into providing internet and mobile
services to their customers.
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5. Some of the implementation issues are:
Ensuring general acceptance of the CRM

concept at all levels in the organization and
that eCRM should be the main driving force
underlying
all
future
e-business
developments.
Potential costs
implementation.
Privacy-what information is needed for CRM,

how to gather it, and how it can be used
without infringing on peoples rights.
involved
in
CRM
E-mail campaigns focus-Do they provide an

offer the customer cannot refuse? How are
these tied in with the relevant website so that
the customer enjoys a seamless
experience?
Managing data across all sales and

marketing.
E-marketing efforts-How well they combine

with the online selling operation.
6. Recommendations and Implications

All organizations have not reaped equal
benefits from the same technology. Certain
factors should be taken care of when
implementing CRM. The following direction can
be recommended for CRM adoption.
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224
Getting first-hand feedback from the

customers-preferably through an unbiased
party-will help vastly in identifying problem
areas in the customer relationship cycle, a
key for any CRM implementation exercise,
i.e., a customer rather than managementled approach to business should be adopted.
Winning commitment to the CRM concept

at all levels in the organization is critical.
Short-term business innovations should

focus on high value customers rather than
on mass marketing.
Customer mapping must begin immediately,

covering
customer
identification,
differentation, interaction and customization.
Successful CRM implementation needs a wellplanned CRM infrastructure in place that allows
capture, storage and analysis of customer data.
Organizations must select a CRM software
based on the incremental ROI it will bring to the
organisation.
There is an increasing need for CRM training
programmes as this could save enormous cost
and time for organizations on learning and
implementing the same.
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DATA WAREHOUSING AND CUSTOMER

RELATIONSHIP MANAGEMENT IN BANKING
Data Warehouse is a collection of integrated data to support decision making in the
organization Benefits: Facilitates data analysis, helps in MIS generation, faster
access to information and consolidated view of customer or functions
DWH helps in product innovation, costing and pricing of products and review and
designing of business strategies
CRM focuses on analyzing customers, transaction patterns and aims to develop
predictive models. Hence DWH supports CRM.
What is CRM
Customer Relationship Management (CRM) is
a business strategy that focuses on maximizing
shareholder value by winning customers. In an
era of growing competition, it is very important
to identify the market segment of the customer
and his needs in terms of products and services
that the bank offers or are already offered by
the competitors in the market. The classification
of customer segmentation needs to be done on
certain parameters such as economic strata, age
profile, gender type, occupation, geographical
location such as metros, urban towns, semiurban and rural areas.
The banking offerings can be broadly classified
as "traditional branch banking" where products
and services such as savings deposits, current
accounts, time deposits, loans both retail and
corporate, bills, bank guarantees, safe deposit
lockers, remittance facilities such as mail
transfer, demand drafts, telegraphic transfers,
etc. are offered.
The second classification can be "management
of wealth" products and services in terms of
investment banking avenues in bonds, shares,
equities, mutual funds, and insurance products
for individuals as well as institutions.
The third classification can be in terms of "new
electronic banking" products and services such
as ATMs, EFT, debit, credit and smart cards,
internet, mobile and telephone banking, Wireless
Application protocol (WAP) based banking,
kiosks and so on.
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225
Today customer satisfaction is a fast changing

concept, as so called "customer loyalty" has
disappeared. Even the measures of customer
satistaction are undergoing changes. Fast,
accurate, diligent, cost effective, multi-channel,
multi-language, multi-currency, consistent, real
time, on-line, any time, any where and any type
products and services are expected by many
customers. However, for desinging marketing
strategy based on the actual transactional data
of a par ticular class of customers, the
management needs to have meaningful
information.
The present state of both Information System /
Information Technology architecture and
marketing strategy design in most Indian public
sector or old private sector or cooperative banks
is good enough for branch level business
improvement which is typically looked into
annually and reviewed half yearly or quarterly.
The information base for the business
development strategy by and large is past
historical data or personal knowledge of
managers at branches, regional / zonal office of
the bank.
The absence of information depicting channels,
products, service specific customer preferences
based on information system limits the
management from designing marketing
strategies to combat competition by designing
innovative products and services.
Growing Customers
The purpose of business is to create and keep
178
OLTP
Data Warehousing
Typical user
Clerical
Professional
Usage of the system
Run business
Analyze business
User interaction
Pre-determined
Ad-hoc
Unit of work
Transaction
Query
Work characteristics
Read / write
Mostly read
Records accessed
Tens
Millions
Number of users
Thousands
Hundreds
Focus
Data in
Information out
Data storage
Stores detailed data
Stores detailed / summarized data
Contents
Limited historical contents
Rich historical contents
Accuracy
Total transactional accuracy Is optimized for flexibility and ease of use
customers retaining customers. The

management needs to have database on "which
customers need to be retained" and "which
customers need to be let go". This can best be
done when there is information available about
customer level profitability. For positioning the
bank in a particular region with a given set of
products and services in a particular market
segment, management needs to assess the
business potential in that area. Personal
information has its value but also limitations,
particurlarly in a country with a size equivalent
to a continent on one hand and average tenure
of a manager in a given area limited to 3 to 4
years due to transfers and promotions on the
other hand. In such a situation, centralized data
warehousing capability can be of immense
value.
A 'Data Warehouse' is a collection of non-volatile,
subject-oriented, time variant, integrated data
stored and maintained for decision support within
an organization.
Online Transaction Processing Systems,
commonly used and known as OLTP systems,
are transactional in nature. This system permits
users to concurrently access a database in order
to insert, update and delete individual records.
The primary function of the OLTP system is to
support day-to-day business operations.
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226
Benefits of DWH (Data Warehousing)
Standard data analysis across countries.

MIS report generation can be country specific
/ region specific.
Fast access to information.

Information available at the desktop of the
end user (middle level manager).
Ad-hoc MIS requirements served efficiently.

Consolidate inventory, sales, purchasing and
market information.
Applications of DWH and CRM in Banking
and Finance
The World Bank uses it to perform complex

statistical analysis on a mass of worldwide
economic data.
In Barelays Bank a sophisticated OLAP

application allows risk on loan to be managed
to maximize profit.
ASB Bank in New Zealand uses it for

strategic planning purpose, for improving
customer service by offering excellent
service and retain customers over the long
term.
Bank of America uses it in corporate treasury

operations. Bank of Montreal uses it to
combat competition pressure in credit card
179
services market; it has implemented knowledgebased business management. It helped

inestablishing infrastructure for scalability,
reliability and helped server consolidation
with the credit card line of business. It
enabled development of marking campaigns
by creating analytical data mart.
Scotia Bank is one of Canada's premier

financial institutions having more than 2000
branches and offices in more than 50
countries. A key enabler to bank's vision is
data mining capabilities. Bank's data mining
algorithm provides predictive models to
forecast future customer behaviour and
needs for several years. Such algorithm can
offer individual to evaluate 26,000 different
alternatives for each of millions of customers
for each campaign.
A financial services company in US, when
facing failure in 1990, started using data
warehousing capabilities to focus more on
customers rather than on existing products.
The data warehouse had all bank related
transactions data and demographic data for
each customer; it also had customer
behavioural data, revenue and cost data to
understand bank's products and customers.
The users of data warehouse included
financial analysts, marketing analysts,
managers and front-office personnel,
bankers and tellers. One Bank U.S. used
distributed management system to design
channels that meet customers' needs and
preferences in a way that is profitable to the
bank. In this bank data warehouse was an
integral part of corporate strategy. In 1998,
this bank acquired another bank.
There are many areas of banking where data
warehousing and data mining technologies
can be used by the bank management
depending on scale and scope of operations
of a given bank.
CRM
Innovation and development of new
products and services
Costing and pricing of products and
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227
services
Reviewing and designing business
strategies
Effective monitoring
productivity.
Analysis of customer profitability.
Online auditing of business transactions

through creation of patterns and habits of
customer preferences.
For launching new products and services in

new / existing markets.
Designing DSS / EIS for numberable areas

of management concerns such as
management of credit, investment, treasury,
asset-liability, profitability, business planning
and development, audit and inspection, and
so on.
of
employees
Summary
Thus, one can see a clear relationship between
IT architecture and Customer Relationship
Management based on the concept of data
warehousing. The limitations of prevailing stateof-the-art IT is felt by majority of banks in India.
The need to have core banking solution is
identified by the committee appointed by the
Reserve Bank of India and is being pursued by
many banks to meet the emerging challenges
particularly in the area of customer service,
innovations and improvement.
It is now a well-established fact that it is not
possible to meet the future challenges by old
methods and branch level marketing efforts any
more. What is needed is integration of business
development planning with clearly defined IT road
map. Only enhancement in business quality and
volumes through customer satisfaction will
justify the investment in IT because sooner than
later every bank will have level playing ground
in terms of Core Banking Solution. What will
matter is how innovative the bank management
becomes with new products and services on
one hand and how the workforce supports them
to add value to technological platforms by giving
excellent service to excite the customers on the
other hand.
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CUSTOMER CENTRIC MANAGEMENT

(In Retail Banking)
CCM is the integrated management of a company with the customer as its focus
It has three stages namely knowledge acquisition; behaviour modeling and Product/
Service delivery
All functions of the company are aligned towards customer needs
It disaggregates customers based on their contribution to profits and thus helps in

focusing on key client base
Retail banking is faced with major external

challenges, which will completely restructure the
industry. These include customer lifestyle
changes, deregulation, globalisation, the
emergence of new competitors, the impact of
technology, and convergence in the market
place between banks and other service
providers such as insurance companies.
Competitors are entering from unexpected
fields, with supermarkets such as Sainsburys
and direct organisations like Virgin chipping away
at traditional participants market share.
New distribution channels have proved to be a
mixed blessing. The cost per transaction has
declined as full service branches have been
replaced in part by telephone service, ATMs and,
increasingly, the internet. But overall transaction
volumes have soared, making it more expensive
for banks to meet customer demand and giving
them more distribution channels to manage.
Market research shows that many customers
crave a relationship with their bank based on
convenience, trust and intelligent proactivity on
the part of qualified, accountable staff who know
and value the customer. Many banks are failing
to deliver this: they appear uninterested in the
customer, and under pressure to sell, and fail to
provide any sense of personal contact.
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228
At the same time, upto half of banks customers

may be destroying shareholder value, with the
top 20 percent of a banks retail customer base
often delivering 80 percent of its profits. Despite
this, banks tend to treat all customers equally,
regardless of their degree of profitability.
So far, the banks have adopted a fragmented
approach to improving customer service,
drawing on everything from psycho-demographics to branch redesign, loyalty schemes,
personal banking, segmentation modelling,
customer value management, cross selling,
data warehouses, data mining, call centres and
internet delivery. However, these approaches
have tended to be scatter-gun: banks have tried
any or all of these approaches in an unstructured
manner. By contrast, Customer Centric
Management (CCM) is an integrated model for
the retail banking industry.
In this model the integrated management and
use of customer information is key. CCM
focuses on knowledge acquisition (the
acquisition and storage of customer data
covering static, dynamic, financial and external
data feeds), behaviour modelling (managing
customer data to acquire new business and
influence customer behaviour) and delivery
(meeting customer expectations through
product service proposition, delivery channel
181
management and relationship management).

The bank must then be reshaped around
customer priorities. Business strategy and
financial management must flow from
knowledge acquisition. Business strategy
ensures the integration of the customer in
corporate strategy and communication of that
strategy. Financial management focuses on the
depth and quality of financial information needed,
feeding information through to appropriate areas
of the bank and the technical platforms
supporting information flow.
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229
For top performers, customer service quality is

an obsession. Banks need to ask themselves
what trapped value they are losing, why they are
losing it, how they intend to capture it and how
they should set about building a sustainable
customer centric organisation. Overall, they
should address the key question of the size of
the lost opportunity, why the bank is not tapping
that lost value and what it must do to get there.
Only then can banks start delivering true
customer service.
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COOPERATIVE BANKING IN INDIA : FOCUS AREAS

Cooperative Banks are affected by high levels of loan default, overlapping of regulators,
inadequate management strategies, deficient internal checks and controls and poor
credit monitoring
Professionalism and Governance, Supervision and Regulation, prudential standards
and risk management practices would improve the condition of Cooperative Banks
RBI has introduced various measures such as Prudential norms, rating system for
UCBs, guidelines on corporate governance
Financial Sector Reforms and Cooperative
Banks
Although the quantitative expansion of
cooperative banking in India till nineties has been
commendable, during the recent years
particularly after the extension of prudential
standards to cooperative banks, the
performance of both urban as well as agricultural
credit cooperatives has been rather far from
satisfactory. While cooperatives enlarge the
reach of banking, both geographically and socioeconomically, their conduct of banking business
often poses a number of challenges, especially
in terms of high levels of loan delinquency. their
large number also poses a challenge to
regulation. This is compounded further by
regulatory overlaps among several supervisors,
including the Reserve Bank, the State
Governments and the National Bank for
Agriculture and Rural Development (NABARD).
As on March 31,2003, 5 out of 30 SCBs, 102
out of 367 DCCBs, 43,511 out of 98,247 PACS,
10 out of 20 SCARDBs and 469 out of 768
PCARDBs incurred losses which together
amounted to Rs.7,734 crores (NABARD Annual
Report 2003-04). The gross NPAs of SCBs and
DCCBs as percentage of their loans outstanding
worked out respectively to be 13.4 and 19.7 per
cent as on March 2002 (RBI, Report on Trend
and Progress 2003). A quick inspection of 10
SCBs and 88 DCCBs by NABARD during 200304 revealed that some of the weaknesses that
continued to affect the functioning of these banks
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230
were improper application / implementation of

income recognition and asset classification
norms, inadequate risk management strategies,
deficient internal checks and controls and poor
credit monitoring.
The performance of the Urban Cooperative
Banking (UCBs) segment, which was
considered as one of the robust and fast
expanding segments of the banking system in
early nineties, has now become one of the
weakest with intermittent cases of failures /
irregularities. Some of the factors that may be
responsible for this include increasing
competition, tightening prudential standards and
supervision and regulatory standards, multiple
control, etc. today there are apprehensions as
to whether these entities will be able to survive
in the increasingly competitive environment.
Based on the new classification, the number of
UCBs classified as "weak" stood at 944 as on
March 31, 2003 and 142 of these could not
comply with the stipulated minimum capital
requirements. The scheduled UCBs as a
segment recorded negative net profit during the
last three years. During 2003-04 alone,
liquidation proceedings have been initiated in
respect of 23 UCBs, apart from descheduling
two scheduled UCBs. The rate of growth of
deposits was just 3.3 percent (as against 10.6
per cent for the previous year) during the first
half of 2003-04. Credit growth, in tandem,
declined by 6.1 per cent in sharp contrast to an
increase of 2.8 per cent last year. The relatively
183
low deposit growth also speaks of the falling

public confidence of the general public in
cooperative banks, particularly UCBs due to the
recent untoward incidents. However, nearly 45
per cent of the UCBs accounting for 55 per cent
of the deposit base of the sector are considered
financially sound (Mid-term Review of Annual
Policy, 2004).
whether a cooperative or a commercial bank

(irrespective of its size), the human resource
comprising of paid staff and elected management
has to be highly competent. It is, therefore,
imperative that credit cooperatives evolve sound
personnel policies and ensure scientic staffing
to be able to service and grow in the present
environment.
Strengthening co-op Banks - Focus Areas
The recent initiatives of RBI regarding the

appointment of at least two directors on the
boards of newly constituted UCBs with suitable
banking experience or chartered accountancy
qualifications with bank audit experience is a
positive step in this direction. The UCBs may
amend their bye-laws to incorporate the above
at the earliest. Further, UCBs have also been
advised that the Audit Committee of their Board
of Directors should review the internal audit /
statutory audit / the Reserve Bank inspection
reports and monitor the action taken to rectify
the deficiencies pointed out in such reports.
Although cooperative banking organizations

have survived, the available trends suggest that
they are unable to deliver the expected results.
In the present competitive environment, it is
imperative that cooperative banks should be
encouraged to initiate the process of operational
restructuring to ensure their financial soundness,
so that they will be able to not only withstand
the competition but also survive and grow. It is
important to note that cooperative banks (and
their movement) will be able to discharge their
larger responsibilities having societal dimensions
only when they are financially strong. Against
this backdrop, the following three aspects of
critical importance need to be considered on
priority basis by the policy makers, regulator/s
and cooperators to ensure the survival of
cooperative banking in India.
(a) Professionalism and Governance
Good corporate governance is critical to efficient
functioning of an entity and more so for a financial
intermediar y. The improved corporate
governance practice would also provide an
opportunity to accord greater freedom to the
banks' boards and move away from micro
regulation to macro management. Banks in India
are custodians of depositors' monies, monies
of millions of depositors who are seeking safe
avenues for their hard-earned savings, and
hence, banks must accept and perform an
effective fiduciary role. The need for professional
management and healthy governance practices
in credit cooperative societies in the present
competitive environment needs no emphasis.
Thus, for managing a financial intermediary,
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231
(b) Supervision and Regulation

At present, credit cooperatives in India are
subjected to duality / multiplicity of control,
meaning that the administration related aspects
are being supervised and regulated by the State
Government and the banking operations are
supervised and regulated by the central bank of
the country. In addition to these two, the
refinancing agency also plays its role in this
regard. This has, understandably, resulted in
overapping jurisdiction of the State Government
and the Central Bank of the country. Moreover,
a clear-cut demarcation of the financial and
administrative areas for regulation is almost
impossible and even if it is possible it surely acts
as an impediment in effective supervision. Given
the number of credit cooperatives, the central
bank of the country finds it quite difficult to ensure
effective supervision.
To remove the overlapping of controls as also
for better regulation and endowing functional
autonomy to cooperatives, there is an urgent
need to redefine the roles and responsibilities of
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all the players, viz., central bank, refinancing

bank, State Government and apex level
cooperative bodies. The underlying objective of
this exercise is to ensure the convergence of
regulation and supervision. As cooperation is a
state subject, there is an urgent need to
incorporate the essential features of Model
Cooperative Societies Act in the respective state
cooperative Acts so as to reflect the spirit of
democratization and self-reliance. In the
Monetary and Credit Policy of 2001-02, the RBI
had mooted a proposal for setting up a separate
supervisory body for UCBs, to take over the
entire function of inspection / supervision of
UCBs in view of the adverse consequences of
the present multiplicity of authorities involved in
supervising UCBs.
In so far as UCBs are concerned, a number of
steps have been initiated to strengthen the
regulatory / supervisory framework by RBI
particularly after 2002 and one of them is OffSite Surveillance (OSS). This apart, RBI has
also set in motion a special initiative called
Technical Assistance Programme for
Strengthening MIS in Cooperative Banks on the
direction of the Board for Financial Supervision.
A system of supervisory rating for UCBs, under
the Capital Adequacy, Asset Quality,
Management, Earnings, Liquidity and Systems
(CAMELS) model, has been introduced by RBI.
The rating system has been implemented for
scheculed UCBs commencing from the year
ended March 31, 2003. A simplified rating
system was made applicable to non-scheduled
UCBs with effect from March 31, 2004. While
these steps help the regulator in ensuring better
regulation and supervision, cooperative banks /
UCBs need to realize that these initiatives are
aimed at improving the internal controls /
systems and are therefore, beneficial to them.
(c)
Prudential Standards and Risk
Management Practices
of agriculture / allied activities with its attendant

features puts the rural cooperative banks in a
more risky position than commercial banks.
While the risk associated with agricultural (and
rural) lending in a country like India needs no
discussion, it is urgent and important to assess
as to whether the credit cooperatives can
continue to carry such risks and still function as
commercial entities. Although the regulator has
extended the prudential standards in a phased
manner to cooperative banks, the awareness
amongst cooperatives in this respect is rather
low. The need and urgency for better risk
management in cooperatives assumes greater
importance against the backdrop of highly
competitive and somewhat 'free for all' situation
as it prevails today. In view of the weak
recycling of funds, high levels of loan
delinquencies and inability of the decisionmakers
(boards) to read the financial markets, credit
discipline should form the centerpiece of the
strategies for survival and growth of credit
cooperatives. It is, therefore, imperative that
credit cooperatives are facilitated to adopt
suitable risk management practices through
education and training of board members and
staff.
Risk management systems in UCBs needs to
be strengthened so that they can not only
withstand the competition and survive as
commercial entities, but also are able to comply
with prudential standards as stipulated by RBI.
The rating of borrowers, loan pricing and
investment portfolio are some of the important
areas which require immediate atention of the
management of UCBs. In order to facilitate UCBs
in this regard, RBI has already issued risk
management / ALM guidelines and UCBs are
also allowed to take advantage of SARFASESI
Act. The best practices followed by some of the
well-managed banks needs to be considered
seriously by other UCBs.
In the deregulated environment, like other

players, cooperative banks are also exposed to
various types of risks. Perhaps the very nature
Banking Briefs
232
185
CONTRACT FARMING
Contract farming has considerable potential where small and marginal farmers are
no longer competitive.
The farmer is contracted to plant the contractors crop on his land
He will harvest and deliver to the contractor a quantum of produce based upon
anticipated yield and contracted acreage at a pre agreed price
Towards these ends, the contractor can supply the farmer with selected inputs
The main feature of contract farming is that
farmers grow selected crops under a buy back
agreement with an agency engaged in trading
or processing. Contract farming has been
prevalent in various parts of the country for
commercial crops like sugarcane, cotton, tea,
coffee, etc.
Contract farming helps when markets do not
exist or are underdeveloped; conversely,
contracts diminish in importance with
development of competitive markets. Contract
farming works when specific quality
requirements must be met. Contracts are
effective when there is no zero-sum game (one
partys gain at the expense of the other). They
are ideal for win-win situations, since they
represent a natural mutual dependency.
Contracts succeed when they contain fair risk
transfer or coverage measures and trust
relationships built over long periods.
The advantages of Contract Farming :
Farmer gets exposure to world class agro

technology, Planting materials/healthy
disease free nursery, Crop monitoring
technical advice free at his doorstep,
Agricultural implements
The farmer obtains an assured up front price

& market outlet for his produce
Focus shifts from prices to returns per acre

- driven by productivity increases
The private sector gets requisite quality

material regularly at predetermined prices
Promotes long
investments
term
planning
and
There are many success stories on contract

farming such as potato, tomato, groundnut and
chilli in Punjab, Safflower in Madhya Pradesh,
oil palm in Andhra Pradesh, seed production
Banking Briefs
233
contracts for hybrid seed companies in

Karnataka, cotton in Tamil Nadu and
Maharashtra etc. which helped the growers in
realization of better returns for their produce.
In our country, contract farming has
considerable potential where small and marginal
farmers can no longer be competitive without
access to modern technologies and support.
The contractual agreement with the farmer
provides access to production services and
credit as well as knowledge of new technology.
Pricing arrangements can significantly reduce
the risk and uncertainty of market place.
Small-scale farmers are frequently reluctant to
adopt new technologies because of the possible
risks and costs involved. In contract farming,
private agribusiness will usually offer improved
methods and technologies because it has a
direct economic interest in improving farmers
production to meet its needs. In many instances,
the larger companies provide their own extension
support to contracting farmers to ensure that
production is according to the specification. Skills
the farmer learns through contract farming may
include record keeping, improved methods of
applying chemicals and fertilizers and knowledge
of the importance of quality and of the demands
of export markets.
Model law on marketing has been formulated
keeping the requirements of the farmer which
inter-alia provides for an institutional
arrangement for registration of sponsoring
companies, recording of Contract Farming
Agreement, indemnity to farmers land and lays
down a time bound dispute resolution
mechanism. Several State Governments have
already initiated legal amendments to APMC Act.
Haryana and Gujarat are among the first States
to take steps in establishing an institutional set
up for supporting contract farming in these
States.
186
IPO SCAM
The scam came to light during the investigation of Yes Bank IPO
By opening multiple demat accounts and submitting multiple applications fraudulently,
huge chunk of the issue was cornered by a few investors.
Non-adherence to KYC norms, lack of role-clarity, lack of coordination among
intermediaries were considered to be the reasons.
THE buoyancy in the secondary market has had
a cascading impact on the primary market as
well. Most of the recent issues are quoting at a
premium to the issue price, which has attracted
newer investors into the market. But quick
money brings with itself a host of problems, The
one that has gained prominence recently is the
phenomenon of investors opening multiple demat
accounts and making multiple applications to
subscribe to IPOs in the hope of getting
allotment.
In the recent Yes Bank IPO, SEBI found that
about 7,630 benami applications were used to
corner about 11,44,500 equity shares of the 175
crore equity shares on offer for retail investors.
Current regulations prohibit multiple bids or
applications by a single person. The depository
system, however, has been subverted by
creating a large number of benami demat
accounts to corner shares, thereby affecting
genuine retail investors.
SEBI has ordered depository NSDL to look into
the operations of its depository participants
(DPs). The latter have dug out 14,000 benami
demat accounts, including 7,630 already traced
by SEBI. These were used to subscribe to the
Yes Bank IPO. But the manipulation in the Yes
Bank IPO has proved to a tip of the iceberg. On
12 January 2006, SEBI unearthed another
45,000 benami demat accounts floated by 39
entities to corner shares meant for retail
investors in the IPO of IDFC.
Shares in an IPO under retail category are
allotted on a proportionate basis. However, if
there is heavy over subscription, not all the
applicants will get the minimum allotment. For
Banking Briefs
234
instance, in the case of Yes Bank IPO, there were

37,176 applications for the minimum category
of 150 shares. But only 3,846 applications got
150 shares allotted at a ratio of 3:29 (that is, 3
out of 29 applicants got allotment). Thus fewer
the applications by an investor, lower the
probability of his getting an allotment. Hence
manipulators used benami accounts to apply for
the IPOs to increase the probability of their getting
allotment in the retail segment.
To make the applications eligible for the retail
category, the benami applications are of small
value (below Rs. 50000). After getting allotment,
these fictitious / benami allottees transfer them
to their principals before the shares are listed.
These shares are then sold on the first day of
listing, thereby realising windfall gain from the
difference between the issue and listing price.
The recent IPO allotment scam proves that even
a highly automated system can't prevent
malpractices if there is laxity. The primary market
has intermediaries between the issuing company
and investors such as bank, DPs, brokers,
depositories, registrars and investment bankers.
Lack of coordination among the intermediaries
and clarity of their roles can give rise to serious
deficiency. A weak link will affect the entire chain.
Not only the investment bank, but even the DP
(Karvy) and the depository (NSDL) failed to
detect the large number of demat accounts
opened with the same address but in different
names. Opening of large-scale benami demat
accounts would have been averted if the
concerned DP had strictly enforced the knowyour-client (KYC) norms, not just relying on bank
documents and verification of brokers. Frequent
187
audits by the depository would also have led to

the benami demats.
NSDL found though bank documents, as
required by SEBI norms for opening the demat
account were obtained, there was a lapse on
the part of the DP in processing of accountopening applications.
Banks played their part by opening accounts
and providing a pro-tempore loan to the fictitious/
benami entities with the objective of earning
interest and other charges.
The Reserve Bank of India (RBI) in exercise of
powers vested in it under the provisions of
Section 47 A (1)(b) of the Banking Regulation
Act, 1949 has imposed monetary penalties
ranging from Rs 5 lakh to Rs 15 lakh on seven
scheduled commercial banks - Bharat Overseas
Bank, Citi Bank, HDFC Bank, Indian Overseas
Bank, Standard Chartered Bank, ICICI Bank and
Vijaya Bank - for violation of RBI regulations on
KYC norms, for breach of prudent banking
practices and facilitating misuse of IPO finance
by ineligible borrowers.
RBI had issued show-cause notices to all these
banks. In response, the banks had submitted their
written responses and CEOs had also sought
personal hearing with RBI, which was granted.
Following the scam, SEBI has mandated that
all demat accounts should have PAN number.
SEBI has also directed that the officials of DP
Banking Briefs
235
should personally verify the identity and address

when opening demat accounts and also certify
the same, as part of KYC guidelines.
One way to prevent the sprouting of benami/
fictitious demat accounts at DPs is to check the
allotment. Though there are genuine cases of
more than one demat account coming from the
same address on account of undivided family,
DPs should insist on office address, strict
adherence to KYC norms with personal
inspection of documents rather than relying on
someone elses reference. NSDL has mooted,
through its letter to SEBI, that additional
documents over and above bank accounts
should be made mandatory for opening demat
accounts. This is to ensure that any fraud in the
banking system does not seep into the securities
market. It further suggested that all new demat
accounts should be authenticated by the staff of
DPs, leaving behind a proper audit trail. Subbrokers should not be the only verification point
for opening demat accounts.
The benami application scandal has the potential
to adversely affect the confidence of retail
investors in the capital markets, whose
participation in both the primary and secondary
markets is vital. SEBI, as a regulator, has to put
in place a system that is alert and vigilant against
unjust gains. Fixing clear role and responsibility
among market participants should be given the
highest priority.
188
ECONOMY & FINANCE

POLICIES AND ACTS
Banking Briefs
236
ECONOMIC SURVEY 2005-06

GDP growth projected at 8.1% for 2005-06
Inflation under control at less than 5%
Agriculture has posted 2.3% growth, Industry above 9%
Tax revenue showed an increase of 22% Exports to exceed the target of US$ 92 bn
Power generation, investment in infrastructure, fiscal consolidation are major priorities.
Highlights
th
Economic Survey 2005-06 (presented on 27

Feb 06) indicates a rosy picture of the Indian
economy. The highlights are as under:
-
GDP growth for 2005-06 projected at 8.1%

(previous two years at 8.5% and 7.5%
respectively)
Savings growth pegged at 29.1%
Bank credit to Industry skyrocketed to 45.7%
Inflation below 5%
The growth trend for the past 3 years indicate

a new economic upswing
E-tickets to be made cheaper
Agriculture
Agricultural sector is projected to grow at 2.3%
in 2005-06 compared to less than 1% growth in
2004-05. Food grain production is expected to
increase by more than 5 mn tons with total output
crossing 209 mt.
Industry and Services
Industrial sector is projected to grow over 9%
during the current year. Within Industrial sector,
manufacturing is set to grow by 9.4% during
2005-06. However there is a deceleration in the
growth of mining and quarrying. Services sector
has shown robust growth. Industry and Services
have acted as twin engines of growth. Between
2001 and 2006, on an average Service sector
had a share of 52% of GDP and contributed to
65% of GDP growth. Industrial sector during the
Banking Briefs
237
same period had a share of 25.8% and

contributed to 28% of GDP growth.
Public Finance
The average annual growth in tax revenue
projected at 22% on the back of high growth in
economy, tax reforms, withdrawal of tax
exemptions, moderate rates, taxpayer
facilitation, reliance on voluntary compliance,
effective and fast penal mechanism and
simplification and digitalization of tax
administration.
Bank Lending
Non-food credit expanded by Rs.2, 21,802 cr
during 04-05. Upto Jan 06 during the current
year, NF credit increased by Rs. 2,66,857 Cr
(up by 25.2% over the corresponding period).
Industrial credit grew by 45.7% during Oct 04Oct 05. Lending to priority sector increased by
49.4% during the same period. Against a
targeted lending of Rs. 1,41,000 Cr to agricultural
sector during 2005-06, 84% is achieved up to
end Dec 05. As on Mar 05, a total of 16.18 lakh
SHGs were credit linked by banks covering 242
lakh poor families. As against a target of credit
linking to additional 3 lakh SHGs during the
current year, 2.11 lakh new SHGs covered up to
Dec 05.
Other Indicators
Inflation in most parts of the world showed rising
tendency due to increase in oil prices. However,
189
in India, economic growth has been maintained

without undue increase in prices. The Wholesale
Inflation rate declined to 4.1% in Feb 06 as
against 5% in Feb 05. Consumer Price Index
Industrial Labourer (CPI-IL) in Dec 05 was at
5.6%.
Call rate which was at 4.94% on Apr 05 touched
7.71% on Jan 20, 06. It came down to 6.88% on
Feb 16, 2006. As regards forex reserves, though
there was an accretion of US$ 28.5 bn in the
current year until Feb 10, 2006, the reserves
were less at US$ 140.4 bn (compared to
US$141.5 bn in Mar 05) due to three important
factors, namely an outgo of US$ 7.1 bn for IMD
redemption, valuation losses due to weakened
dollar and a widening deficit in current account
of the BOP. In the first ten months of 2005-06,
Indian rupee strengthened against all major
Banking Briefs
238
currencies. This is in contrast to 2004-05, when

Indian currency appreciated against dollar and
weakened against the Euro, Pound and
Japanese Yen. The appreciation against dollar
during the current year is around 2.1%.
The exports are on the way to reach US$ 92 bn
target set for 2005-06. During Apr 05 - Jan 06,
exports grew by 18.9% (lower than the previous
year). During April 05 to Jan 06, imports grew
by 26.7%. ECB was at US$ 2.7 bn during the
first half of the current year as compared to US
$1.5 bn in the previous year. At the end of Sep
05, Indias external debt stood at US$124.3 bn.
The overall investment in infrastructure
continues to be far below the requirement. The
growth in power generation actually faced a
decline compared to previous year. The outlook
for 2006-07 appears bright.
190
UNION BUDGET 2006-2007

No change in direct taxes
Reduction in peak rates of customs duty / excise duty
New services like ATM operations, event managements brought under service
tax.
Plan expenditure - Rs. 1,72,728 crores up by 20.4%
Non-Plan expenditure - Rs. 3,91,263 crores up by 5.5%
Revenue deficit - Rs. 84,727 crores - 2.1% of GDP
Fiscal deficit - Rs. 1,48,686 crore - 3.8% of GDP
AN OVERVIEW OF THE ECONOMY
2004-05: Growth rate was 7.5 per cent, with the
manufacturing sector at 8.1 per cent ; gross
domestic saving at current market prices
increased to 29.1 per cent of GDP and the rate
of gross capital formation to 30.1 per cent of GDP.
2005-06: GDP growth likely to be 8.1 per cent
with the manufacturing sector at 9.4 per cent ;
agricultural growth bounced back to 2.3 per cent
; inflation, as on February 11, 2006 was 4.02 per
cent ; non-food credit growing by over 25 per
cent.
Focus on agriculture: output of foodgrains
expected to be 209.3 million tonnes, 5 million
tonnes more than the previous year.
Promoting employment: National Rural
Employment GuaranteeScheme launched;
in the current year, Rs.11,700 crore to be
spent to create rural employment.
Enhancing investment: investment rate
increased from 25.3 per cent in 2002-03 to
30.1 per cent in 2004-05.
Augmenting infrastructure: during the Tenth
Plan period the total addition estimated at
34,000 MW; Golden Quadrilateral (GQ) and
the North-South, East-West Corridors - 96
per cent of the GQ to be completed by June
2006 and the Corridors by end 2008.
AGRICULTURE:
Irrigation: Command Area Development
Programme to be revamped to allow
participatory irrigation management through
water users associations; 20,000 water bodies
with a command area of 1.47 million hectares
identified in the first phase for repair, renovation
and restoration.
BHARAT NIRMAN : Against Rs.12,160 crore

in the current year, Rs.18,696 crore to be
provided in 2006-07 for the programme, increase
of 54 per cent.
Credit: Farm credit to increase to Rs.175,000

crore in 2006-07 with addition of 50 lakh farmers;
banks asked to open a separate window for selfhelp groups or joint liability groups of tenant
farmers; a one time relief to be granted to farmers
who have availed of crop loan from scheduled
commercial banks, RRBs and PACS for Kharif
and Rabi 2005-06. An amount equal to two
percentage points of the borrowers interest
liability on the principal amount up to
Rs.100,000, to be credited to his/her bank
account before March 31, 2006; Rs.1,700 crore
provided for this purpose. With effect from
Kharif 2006-07 farmers to receive short-term
credit at 7 per cent, with an upper limit of
Rs.300,000 on the principal amount subvention
for which to be given by NABARD.
FLAGSHIP PROGRAMMES: Allocation for eight

flagship programmes to increase by 43.2 per
cent from Rs.34,927 crore in 2005-06 to
Micro Finance: 801,000 SHGs credit-linked in

two years with credit of Rs.4,863 crore disbursed
to these SHGs; another 385,000 SHGs to be
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239
Rs.50,015 crore.
The eight flagship
programmes are North Eastern Region (NER),
Sarva Siksha Abhiyan, Mid-day Meal Scheme,
Drinking Water and Sanitation , National Rural
Health Mission, Integrated Child Development
Services, National Rural Employment Guarantee
Scheme and Jawaharlal Nehru National Urban
Renewal Mission.
191
credit- linked in 2006-07; NABARD to open a line

of credit for financing farm production and
investment activities through SHGs; Committee
to be appointed on Financial Inclusion.
Horticulture and Fisheries: terminal markets
to be setup on Public Private Participation (PPP)
model - Rs.150 crore earmarked for this in 200607 under National Horticulture Mission; Central
Institute of Horticulture to be established in
Nagaland; National Fisheries Development
Board to be constituted.
MANUFACTURING
Employment: Five industries with employment
opportunities identified in manufacturing sector,
textiles, food processing, petroleum, chemicals
and petro-chemicals, leather and automobiles;
in services, tourism and software can offer large
number of jobs.
Textiles: allocation for Technology Upgradation
Fund (TUF) enhanced to Rs.535 crore; Jute
Technology Mission to be launched; a National
Jute Board to be established.
Food Processing Industry: food processing to
be a priority sector for bank credit; NABARD to
create a refinancing window with a corpus of
Rs.1,000 crore, especially for agro-processing
infrastructure and market development; National
Institute of Food Technology Entrepreneurship
and Management to be setup; Paddy Processing
Research Centre, Thanjavur to be developed
into a national- level institute.
Petroleum, Chemicals and Petro-chemicals:
a Task Force setup to facilitate development of
large PC&P Investment Regions; three such
Investment Regions expected to be developed
in 2006-07.
Information Technology: India Infrastructure
Finance Company Limited to provide equity and/
or viability gap funding to new ventures.
Small and Medium Enterprises: to give
impetus to lending by SIDBI, SMEs to be
recognised in the services sector and small
scale enterprises in services sector to be treated
on par with small scale enterprises in
manufacturing sector; ten schemes drawn up
under a five-year National Manufacturing
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240
Competitiveness Programme, including

promotion of ICT, mini tool rooms, design clinics
and marketing support for SMEs.
SERVICES SECTOR
Tourism: 4 new institutes of hotel management
to be established in Chhattisgarh, Haryana,
Jharkhand and Uttaranchal.
Foreign Trade: share in world exports to be
doubled by 2008-09.
INFRASTRUCTURE
Telecommunication: to reach 250 million
connections by December 2007, more than 50
million rural connections to be rolled out in three
years.
Power: five ultra mega power projects of 4,000
MW each to be awarded before December 31,
2006; 10,000 village s in 2005-06 and 40,000
more villages in 2006-07 to be electrified.
Coal: reserves of 20 billion tonnes to be deblocked for power projects; definition of captive
consumption to be amended to allow mining by
producers with firm supply contracts with steel,
cement and power companies; capacity of
Central Mines Planning and Development
Institute Limited to drill in order to prove reserves
to be expanded.
Petroleum: under NELP VI, 55 blocks and area
of 355,000 sq kms offered; investment of
Rs.22,000 crore expected in the refinery sector,
in the next few years.
Road Transport: Budget support for NHDP
enhanced ; special accelerated road
development programme for the North Eastern
region; 1,000 kms of access-controlled
Expressways to be developed on the Design,
Build, Finance and Operate (DBFO) model.
Maritime Development: National Maritime
Development Programme (NMDP) approved;
work is in progress in 101 projects covering,
inland waterways, shipping and ports including
deepening of channels in Kandla, JNPT &
Paradip. study to identify a suitable location for
a new deep draft port in West Bengal to be
carried out . National Institute of Port
Management, Chennai, renamed as National
192
Maritime Academy, to be upgraded into a Central

University with regional campuses at Mumbai,
Kolkata and Visakhapatnam. India Infrastructure
Finance Company Limited incorporated.
for Plan in 2004-05; revenue deficit for 2005-06

to be 2.6 per cent and fiscal deficit 4.1 per cent.
FINANCIAL SECTOR
Plan Expenditure: estimated at Rs.172,728

crore, up by 20.4 per cent;
Banking, Insurance and Pensions: Net capital

support to banking sector standing at Rs.22,808
crore, to be restructured to facilitate increased
access of banks to additional resources for
lending to the productive sectors; Bill on
insurance to be introduced in 2006-07.
Capital Market: Limit on FII investment in
Government securities increased to $2 billion
and the limit on FII investment in corporate debt
to $ 1.5 billion; an investor protection fund to be
set up under the aegis of SEBI.
OTHER PROPOSALS
Research and Development: National
Agricultural Innovation Project for research at
frontiers of agricultural science to be launched
in July 2006; National S&T Entrepreneurship
Board has setup Technology business
Incubators, enabling concessions to be provided
to incubate entrepreneurs.
Institutions of Excellence: Universities of
Calcutta, Mumbai and Madras to get a grant of
Rs.50 crore each to mark the beginning of their
150th year celebrations, with another Rs.50
crore each to be given at the conclusion of the
year; Punjab Agricultural University, Ludhiana. to
get grant of Rs.100 crore; status of an
autonomous National Institute to be accorded to
Rajiv Gandhi Centre for Biotechnology,
Tiruvananthapuram, Kerala.
e-Governance: National e-Governance Plan to
be approved shortly; 25 projects, in mission
mode, to be launched in 2006-07.
Subsidies: consensus sought on the issue of
subsidies.
Gross Budgetary Support and Gross Fiscal
Deficit: Centres gross tax- GDP ratio: 9.2 per
cent in 2003-04, 9.8 per cent in 2004-05, 10.5
per cent in 2005-06 (Revised Estimates), 11.2
per cent in 2006-07 (Budget Estimates); Gross
Fiscal Deficit less than Gross Budgetary Support
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241
BUDGET ESTIMATES FOR 2006-07
Non-Plan Expenditure: Rs.391,263 crore, up

by 5.5 per cent.
Revenue Deficit and Fiscal Deficit: revenue
deficit estimated at Rs.84,727 crore, 2.1 per cent
of the GDP; fiscal deficit estimated at Rs.148,686
crore, 3.8 per cent of the GDP.
TAX PROPOSALS
Indirect Taxes:
Customs peak rate for non-agricultural products,
duty on alloy steel and primary and secondary
non-ferrous metals, mineral products, ores and
concentrates, refractories, cyclic/acyclic
hydrocarbons and their derivatives, major bulk
plastics, anti-AIDS, anti-cancer drugs, certain life
saving drugs reduced
Customs duty on vanaspati to be increased to
80 per cent.
The excise duty on small cars slashed by 8%.
Excise duty on all man-made fibre yarn and
filament yarn , import duty on all man-made fibres
and yarns reduced; import duty on raw materials
such as DMT, PTA and MEG, paraxylene
reduced. Customised software and software
packages downloaded from the internet to be
exempt; DVD Drives, Flash Drives and Combo
Drives to be fully exempt from excise duty.
Condensed milk, ice cream, preparations of
meat, fish and poultry, pectins, pasta and yeast
to be fully exempt; duty on ready-to-eat packaged
foods and instant food mixes, like dosa and idli
mixes, to be reduced. Excise duty on cigarettes
incrased.
Excise duty on computers re-imposed to enable
domestic manufacturers to take CENVAT credit;
price not to be impacted as duty to be eligible for
full input tax credit, duty of 16 per cent to be levied
on set top boxes with reduction in customs duty
from 15 per cent to nil. exemption for the SSI
sector will remain.
193
Service tax
New services to be covered including ATM
operations, maintenance and management;
registrars, share transfer agents and bankers
to an issue; sale of space or time, other than in
the print media, for advertisements; sponsorship
of events, other than sports events, by
companies; international air travel excluding
economy class passengers; container services
on rail, excluding the railway freight charges;
business support services; auctioneering;
recovery agents; ship management services;
travel on cruise ships; and public relations
management services. coverage of certain
services now subject to service tax to be
expanded. leasing and hire purchase to be
treated on par with loan transactions, interest
and instalment of principal amount to be abated
in calculating value of the service.
GST: Proposal to set April 1, 2010 as the date
for introducing national level Goods and Service
Tax .
Direct Taxes
No change in rates of personal income tax or
corporate income tax; one-by-six scheme will
stand abolished. marginal revision in certain
tax rates in the quest for equity- Minimum
Alternate Tax (MAT) rate increased from 7.5 per
cent of book profits to 10 per cent which is only
one-third of the normal rate; long-term capital
gains arising out of securities included in
calculating book profits; period to take credit for
MAT increased from five years to seven years.
section 80C of the Income tax Act; limit of

Rs.10,000 in respect of contribution to certain
pension funds removed in section 80CCC
subject to overall ceiling of Rs.100,000.
exemption under section 10(23G) removed.
Benefit of section 54ED (long-term capital gains)
withdrawn with effect from April 1, 2006.
IT department empowered to issue PAN suo
motu in certain cases and to direct persons to
apply for PAN in certain cases;
Banking Cash Transaction Tax (BCTT) to
continue for some more time until the Annual
Information Reporting (AIR) system is able to
capture all significant financial transactions.
Fringe Benefit Tax (FBT) certain modifications
effected.
Modernizing Tax Administration: The
Departments of Income Tax and Customs and
Central Excise to undergo Business Process
Reengineering (BPR); nationwide networks to
connect 745 income tax offices in 510 cities and
550 customs and central excise offices in 245
cities, creating national databases; national data
centres, data warehousing facilities and disaster
recovery sites being set up ; jurisdiction-free filing
of returns, online tracking of status of accounts
and refund of income tax to be possible ;
introduction of a risk management system and
Electronic Data Interchange (EDI) in the
Customs Department to reduce dwell time for
cargo; E-payments of customs and excise
duties to be possible; both Departments to have
fully computerised networks by end 2006.
Investments in fixed deposits in scheduled banks

for a term of not less than five years included in
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242
194
RAILWAY BUDGET 2006

Gross traffic revenue (passenger and freight) estimated at Rs. 54,600 Cr

Reduction in first and second AC fares by 18% and 10% respectively
Upgradation of passengers to next higher class extended to all Rajadhani, Mail/express
trains without additional charges
E-tickets made cheaper
New schemes for freight such as non-peak season discount, Empty flow direction
discount, loyalty discount, Long-term freight discount
The Railway Budget was presented to the
Parliament on 24th Feb 06, four days before Union
Budget. The highlights of the Railway Budget
are as under:
Reduction in first and second AC fares by

18% and 10% respectively
Upgradation of passengers to next higher

class extended to all Rajadhani, Mail/
express trains without additional charges
The low price airlines like Air Deccan have forced

the Railways to reduce fares for the first and
second AC fares to retain and gain passengers.
This is a very interesting paradigm taking place
in the travel industry. Not many years ago,
Railways would never have imagined that Airlines
would be its competitors. Like Telecom, travel
is another industry where competition is
benefiting consumers through lower price, value
added products and services.
Other salient features
55 pairs of new trains are introduced. Superfast
charges on monthly and quarterly season
tickets is reduced. To cater to the aam adami,
50% concession in fare introduced for farmers
and milk producers traveling for training
purposes. A novel scheme of Air-conditioned
Garib Rath service introduced on select routes
with fares 25% less than normal fares for AC- III
tier. To provide employment to rural youth and
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243
to widen booking services, Grameen ticketbooking service is launched.

On the freight side, rates have been rationalized
and a special off-peak season discount of upto
30% and 20% in peak season with conditions
for incremental freight in empty free flow
direction introduced.
Proposals
It is proposed to make more than 200 trains
superfast. More trains with 150 Km speed to be
started on Delhi-Kanpur-Lucknow route. It is
proposed to provide world-class amenities in 4
popular trains and ATMs and Cybercafes at
major stations. The minister has proposed to
allow private container trains before March 31,
2006. It is proposed to set up dedicated freight
corridors at a cost of Rs. 22,000 Crores. To
increase income, it is proposed to increase the
number of coaches in passenger trains.
Financials and Traffic
Despite reducing or retaining fares in the last
budget, the Gross traffic revenues (freight and
passenger fares) increased during the current
year by 16% to Rs. 54,600 Cr, which is 7% over
the budgeted estimates. The Railways expects
to achieve 668 mt of freight traffic as against
the budgeted target of 635 mt. Operating ratio
has increased by 3%. Plan outlay for 2006-07 is
Rs. 23,475 Cr. More than 1.60 Cr passengers
travel on Indian Railways everyday and around
10,000 tickets are issued every day through
internet.
195
MID-TERM REVIEW OF ANNUAL POLICY FOR THE

YEAR 2005-06
Bank Rate unchanged at 6%
Reverse Repo rate and fixed repo rate increased by 25 basis points to 5.25%
and 6.25%
CRR remains unchanged at 5%
Banks allowed to issue guarantees or standby letter of credit in respect of ECBs
raised by textile companies for modernization
Banks aggregate capital market exposure restricted to 40% of its networth
Standard Assets general provisioning increased to 0.40%
1. Monetary Measures
and ECBs raised by such entities would be

considered under the approval route.
Bank Rate left unchanged at 6.0 per cent.

Reverse repo rate and the fixed repo rate under
the Liquidity Adjustment Facility (LAF) increased
by 25 basis points each to 5.25 per cent and
6.25 per cent. respectively effective October 26,
2005. Accordingly, the spread between reverse
repo rate and the repo rate under the IAF
maintained at 100 basis points.
The cash reserve ratio (CRR) kept unchanged
at 5.0 percent.
2. Interest Rate Policy
Indian Banks Association to review the
benchmark prime lending rate (BPLR) system
and issue transparent guidelines for appropriate
pricing of credit.
3. Government Securities Market
Intra-day short selling in Government securities
proposed to be introduced.
NDS-OM module to be extended to all insurance
entities which are mandated to invest in
Government securities.
4. Foreign Exchange Market
Special purchase vehicles (SPVs) or any other
entity, notified by the Reserve Bank, which are
set up to finance infrastructure companies/
projects would be treated as financial institutions
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244
Banks allowed to issue guarantees or standby

letters of credit in respect of ECBs raised by
textile companies for modernisation or
expansion of textile units.
5. Credit Delivery Mechanisms
As announced by the Finance Minister, banks
were advised to take necessary action with
regard to a policy package for stepping up credit
to small and medium enterprises.
The Micro Finance Development Fund (MFDF)
set up in the NABARD re-designed as the Micro
Finance Development and Equity Fund (MFDEF)
and its corpus increased from Rs. 100 crore to
Rs.200 crore. The modalities with regard to the
functioning of the MFDEF are being worked out.
The report of the Internal Working Group set up
to examine issues relating to rural credit and
micro-finance is under examination.
An Internal Working Group proposed to be set
up in regard to relief measures to be provided in
areas affected by natural calamities.
6. Prudential Measures
Banks aggregate capital market exposure
restricted to 40 percent of its net worth on a solo
and consolidated basis; consolidated direct
capital market exposure modified to 20 per cent
of the banks consolidated net worth. Banks
196
having sound internal controls and robust risk

management systems can approach the
Reserve Bank for higher limits.
The pilot project for Cheque Truncation System

is expected to be implemented in New Delhi by
end-March 2006.
General provisioning requirement for standard

advances increased from the present level of
0.25 per cent to 0.40 per cent; banks direct
advances to agricultural and SME sectors
exempted from the additional provisioning
requirement.
National Settlement System (NSS) to enable

banks to manage liquidity in an efficient and cost
effective manner to be introduced in the four
metropolitan centres by end-December 2005.
The Reserve Bank is examining various types

of capital instruments that can be permitted
under the New Capital Adequacy Framework for
the banks.
Supervisory review process to be intiated with
select banks having significant expousure to
some sectors such as real estate, highly
leveraged NBFCs, venture capital funds and
capital markets, in order to ensure that effective
risk mitigants and sound Internal controls are in
place.
With a view to achieving greater financial
inclusion, all banks advised to make available a
basic banking no frills account either with nil or
very low minimum balance as well as charges
that would make such accounts accessible to
vast sections of population. All banks urged to
give wide publicity to the facility of such a nofrills account so as to ensure greater financial
inclusion.
A new company for retail payment systems

proposed to be set up under Section 25 of the
Companies Act 1956 to be owned and operated
by the banks. The proposed company is likely to
get operational from April 1,2006.
Banks urged to test their business continuity
plans periodically and ensure continuous
service.
8. Urban Co-operative Banks
Currency chest facility and licence to conduct
foreign exchange business (authorised person
licence) extended to scheduled lUCBs registered
under the Multi-State Co-operative Societies Act
and under the State Acts where the State
Governments concerned have assured
regulatory coordination by entering into MoU with
the Reserve Bank.
Acquirer UCB permitted to amortise the loses
taken over from the acquired UCB over a period
of not more than five years, including the year of
merger.
General permission to banks to issue debit cards

in tie-up with non-bank entities.
9. Computation of Exchange Rate Indices New Series
7. Payment and Settlement Systems
The Reserve Bank has recently updated its

nominal effective exchange rates (NEER) and
real effective exchange rates (REER) indices.
The new 6-currency indices and the revised 36country indices of NEER and REER would be
published in the Reserve Bank of India Bulletin
of December 2005.
By end-March 2006, 15,000 branches are

proposed to be covered by Real Time Gross
Settlements (RTGS) connectivity and the
number of monthly transactions of the system
is expected to expand from one lakh to two lakh.
The National Electronic Funds Transfer (NEFT)
system would be implemented in phases for all
networked branches of banks all over the
country.
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197
RECOMMENDATIONS OF
THE TWELFTH FINANCE COMMISSION
12th Finance Commission is for the period 2005-06 to 2009-10.
The targets for fiscal and revenue deficit are 3% and 0%
The target for tax to GDP ratio is 17.6% and debt-GDP ratio is 75%
States to enact Fiscal Responsibility Legislation
System of on-lending by the Centre to States phased out
The major recommendations of the Twelfth Finance Commission (TFC) (Chairman: Dr. C.
Rangarajan) of the period 2005-06 to 2009-10
pertain to restructuring of public finances, resource transfers from the Centre to States
through tax devolution, grants and debt relief.
Under the TFCs recommendations, the targets
for the fiscal and the revenue deficit (relative to
GDP) for the Centre and States are placed at
three per cent and zero, respectively. The targets for the revenue deficit and the fiscal deficit
are to be achieved by 2008-09 and 2009-10, respectively. The targets for the combined (Centre and States) tax-GDP ratio and the debt-GDP
ratio are set at 17.6 per cent and 75 per cent,
respectively, to be achieved by 2009-10. Enactment of Fiscal Responsibility Legislation (FRL)
by States is recommended. Furthermore, the
system of on-lending by the Centre to the States
is to be phased out.
Correction of vertical and horizontal imbalances
is sought to be achieved by increasing States
share in the divisible pool of taxes to 30.5 per
cent from 29.5 per cent recommended by the
Eleventh Finance Commission (EFC), implying
transfer of an estimated Rs. 6,13,112 crore to
the States during the award period. Furthermore,
in case of enactment of any legislation on service tax, the revenue accruing to a State should
not be less than the share that would accrue to
it had the entire service tax proceeds been part
of the shareable pool. Tax devolvement among
the States has been based on weights to facBanking Briefs
246
tors like per capita income, population, area, tax

effort and fiscal discipline, i.e., similar to that
adopted by the EFC [with some variation in
weights assigned to the different parameters].
The TFC also recommends that Central Plan
Assistance to States as a combination of loans
and grants be discontinued and only grants made
with few conditionalities. Total grants are placed
at Rs. 1,42,640 crore which is about 2.5 times
the amount recommended by the EFC.
A two-pronged approach to debt relief was
adopted by the TFC in place of the Fiscal Reform Facility, viz: (i) a general Scheme of debt
relief by consolidating and rescheduling outstanding central loans and (ii) a writeoff scheme
linked to fiscal performance. Enactment of FRL
would be a necessary pre-condition for availing
debt relief with the benefit accruing prospectively.
The TFC also recommended the provision of a
sum of Rs. 25,000 crore to augment the consolidated fund of the States to supplement resources of local bodies. The enhancement of
Calamity Relief Fund (CRF) for the period 200510 is also recommended. Other important suggestions include institutional reforms regarding
constitution of Loan Council to supervise State
borrowings, setting up of sinking funds, guarantee redemption funds and sharing profit.
198
NATIONAL RURAL EMPLOYMENT GUARANTEE

SCHEME
The origin of this scheme is the NATIONAL RURAL EMPLOYMENT GUARANTEE ACT,
2004
Seeks to provide 100 days assured employment every year to every rural household in
200 districts.
The Centre has taken responsibility to provide financial assistance to the scheme and the
States only have to implement it.
A Central Employment Guarantee Council at the Central level and State Employment
Guarantee Councils at the State level in all States
Fund to be called National Employment Guarantee Fund to be set up for the purpose
Annual expenditure at Rs. 40,000 crores to Rs. 50,000 crores for expansion to the whole
country in five years.
The NREGS calls for rigorous resource planning, technical, managerial and administrative
skills,
The NREGS does not provide a long-term solution to the pernicious problem of
unemployment.
The National Rural Employment Guarantee
Scheme was launched on the 3rd February 2006.
Background:
The origin of this scheme is the NATIONAL
RURAL EMPLOYMENT GUARANTEE ACT,
2004 - An Act to safeguard the right to work by
providing guaranteed employment at the
statutory minimum wage to at least one adult
per household who volunteers to do casual
manual labour in rural areas.
The Parliament approved the National Rural
Employment Bill, 2005 seeking to provide 100
days assured employment every year to every
rural household in 200 districts. The Bill drafted
after wide consultations fulfills a major promise
of the UPAs National Common Minimum
Programme.
Salient features:
The Centre has taken responsibility to provide
financial assistance to the scheme and the
States only have to implement it. The minimum
wage as applicable in various States under the
Minimum Wages Act 1948 would apply to the
programme. However, the Centre would step in
to ensure a minimum rate of not less than Rs.
60 a day in States where it is lower.
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247
The State Government shall, in such rural areas

in the State and for such period as may be
notified by the Central Government, provide to
every household guaranteed wage employment
in unskilled manual work at least for a period of
one hundred days in a financial year in
accordance with the provisions made in the
legislation.
A Central Employment Guarantee Council at the
Central level and State Employment Guarantee
Councils at the State level in all States where
the legislation is made applicable will be
constituted for review, monitoring and effective
implementation of the legislation in their
respective areas. The Standing Committee of
the District Panchayat, District Programme
Coordinator, Programme Officers and Gram
Panchayats have been assigned specific
responsibilities in implementation of various
provisions of the legislation at the Gram
Panchayat, Block and District levels.
The Central Government shall establish a fund
to be called National Employment Guarantee
Fund for the purposes of this legislation.
Similarly, the State Governments may constitute
State Employment Guarantee Funds. Provisions
for transparency and accountability, audit,
establishment of grievance and redressal
199
mechanisms and penalty of non-compliance are

also envisaged.
Unique Programme:
The key to this legislation lies in the word
guarantee. India abounds in schemes for the
poor all too often instruments for the State to
display its munificence whenever political
expediency demands it. The Employment
Guarantee Scheme will be different from the
many employment generation programmes. It
is because they were implemented as
programmes, subject to budgetary constraints
and rules and regulations to suit implementing
authorities. They were not statutorily assured
and judicially enforceable rights/entitlements of
free citizens of the country. With the present Bill,
the state fulfils the right of the poor to a livelihood.
Some of the challenges:
The implementation of an employment guarantee
will require money, but it saves social and
economic costs of poverty. Most official
estimates place the annual expenditure at Rs.
40,000 crores to Rs. 50,000 crores for expansion
to the whole country in five years.
In a democracy, the poor majority can justifiably
demand a one per cent share of the GDP, of a
country which has a six to seven per cent growth
rate. With one of the lowest tax to GDP ratios in
the world, the question of whether we can afford
it is almost farcical.
There is a genuine fear of large scale corruption
in such programmes. At the same time thuis
argument is often citied as reason for not
implementing programmes for the poor.
The Bill would have to be seen against the
background of the improved Right to Information
Act, which would enable social audits and
greater public scrutiny of the programmes. It will
ensure greater accountability of panchayat
bodies and the district administration as well. For
example, muster rolls will no longer be secret,
and budget and works will be public knowledge.
All this will ensure that only those who really need
work will be employed, and only those schemes
required by the community are taken up.
credit granted by financial institutions, the poor

have not benefited because of ineffective delivery
systems and mismanagement. Wellestablished monitoring-cum-concurrent
evaluation and ex-post evaluation techniques for
such programmes are available and should have
been utilised to restructure the programme to
suit the needs of the really poor.
According to an evaluation by the Planning
Commission and the National Sample Survey,
out of every one rupee spent on anti-poverty
programmes by the government, only 15 paise
reaches the beneficiary. For every new
programme new agencies are created but none
of them has been made responsible to the
people for whom the programmes are meant.
Panchyati Raj institutions would implement a
scheme and the Gram Sabhas would decide the
type of work and how to use the funds.
The NREGS calls for rigorous resource planning,
technical, managerial and administrative skills,
which the Panchayati Raj institutions do not
possess. Who will be responsible for capacity
building of the members of these institutions?
The NREGS does not provide a long-term
solution to the pernicious problem of
unemployment. A solution that will reduce the
pressure on land and create large-scale selfemployment opportunities in the secondary and
tertiary sectors in the rural areas has to be found.
Investment in agriculture (which has declined
from 1.92 per cent of GDP in 1991 to 1.32 per
cent in 2003-04) and rural infrastructure is the
need of the hour.
Also, employment generation and poverty
alleviation
programmes
should
be
comprehensive and integrated with backward
and forward linkages so that the target group
receives good quality assets (land, livestock, rural
industries and so on).
They must be given a full package of services,
which includes training, inputs, raw materials,
equipment, storage, transport and marketing
credit facilities.
A critical assessment:
Despite a large number of programmes and
schemes subsidised by the government and
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200
THE RIGHT TO INFORMATION ACT, 2005

Enacted on May 13, 2005
Deals with right to information for citizens to secure access to information under the
control of public authorities
To promote transparency and accountability in the working of every public authority
Central/State Information Commissions set up to secure compliance with the provisions
of this Act
Penalty of Rs.250/- per day with maximum of Rs.25,000/The Right to Information Act, 2005 extends to
the whole of India except the State of Jammu
and Kashmir.
Right to information and obligations of
public authorities
The Act envisages that every public authority
shall maintain all its records duly catalogued and
indexed in a manner and form which facilitates
the right to information and shall ensure that all
records that are appropriate to be computerised
are, within a reasonable time and subject to
availability of resources, computerised and
connected through a network all over the country
on different systems so that access to such
records is facilitated.
An applicant making a request for information
shall not be required to give any reason for
requesting the information or any other personal
details except those that may be necessary for
contacting him.
Information shall ordinarily be provided in the
form in which it is sought unless it would
disproportionately divert the resources of the
public authority or would be detrimental to the
safety or preservation of the record in question.
The Central Information Commission
The Central Government shall, by notification in
the Official Gazette, constitute a body to be
known as the Central Information Commission
to exercise the powers conferred on, and to
perform the functions assigned to, it under this
Act.
The State Information Commission
known as the ......... (name of the State)

Information Commission to exercise the powers
conferred on, and to perform the functions
assigned to, it under this Act.
Powers and functions of the Information
Commissions, appeal and penalties
Any person who does not receive a decision
within the time specified or is aggrieved by a
decision of the Central/ State Public Information
Officer, as the case may be, may within thirty
days from the expiry of such period or from the
receipt of such a decision prefer an appeal to
such officer who is senior in rank to the Central/
State Public Information Officer as the case may
be, in each public authority.
Where the Central/ State Information
Commission, as the case may be, at the time
of deciding any complaint or appeal is of the
opinion that the Central/State Public Information
Officer, as the case may be, has, without any
reasonable cause, refused to receive an
application for information or has not furnished
information within the time specified under Subsection (1) of Section 7 or malafidely denied the
request for information or knowingly given
incorrect, incomplete or misleading information
or destroyed information which was the subject
of the request or obstructed in any manner in
furnishing the information, it shall impose a
penalty of two hundred and fifty rupees each day
till application is received or information is
furnished, so however, the total amount of such
penalty shall not exceed twenty-five thousand
rupees.
Every State Government shall, by notification in

the Official Gazette, constitute a body to be
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201
Miscellaneous
The provisions of this Act shall have effect
notwithstanding anything inconsistent therewith
contained in the Official Secrets Act, 1923, and
any other law for the time being in force or in
any instrument having effect by virtue of any law
other than this Act.
No court shall entertain any suit, application or
other proceeding in respect of any order made
under this Act and no such order shall be called
in question otherwise than by way of an appeal
under this Act.
The Central/State Information Commission, as
the case may be, shall, as soon as practicable
after the end of each year, prepare a report on
the implementation of the provisions of this Act
during that year and forward a copy thereof to
the appropriate Government.
right to information is now recognized as a

fundamental right and is co-related to right to
life.
The collective human rights, therefore, include,
right to information. The effectiveness of Right
to Information Act, however, would depend
substantially on how the State government
implements it both in letter and spirit. The new
law requires government officials to adapt
themselves to a new reality and they no longer
have discretionary power over providing
information. However, right of access to
information would be meaningless if
government records are chaotic. If it cannot be
found, then it cannot be made available to
citizens. This would have a serious impact on
the capacity of government to discharge its
duties effectively. Therefore, it is essential to
adopt record management with latest technology
as laid down in the Act.
Conclusion
Human rights are all about rights of lives, liberty,
freedom, justice, equality, dignity and security
of men, women, youth and children. Therefore,
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202
MICRO FINANCE
A microfinance institution (MFI) is a financial intermediary, which provides very small
amounts to rural, semi-urban and urban poor.
Its objective is to raise the income and standard of living of poor Measures taken in
micro financing: Opening up of large number of branches; stipulation of 10% bank
credit to weaker sections; introduction of several programmes such as SFDA, MFA,
DPAP, IRDP.
By end-July 2005, as many as 16,53,047 SHGs were linked to banks and the total
flow of credit to SHGs was Rs.7,063 crore.
SHG has emerged as one of the successful instruments in Micro financing.
According to the Asian Development Bank, one
of the biggest donors for micro-finance, the
provision of financial services, such as
deposits, loans, payment services, money
transfers & insurance to the poor and lowincome households and their micro-enter-prises
are broadly called micro-financing. The term
micro-finance came into greater currency since
the early 1990s and has largely supplanted the
term micro-credit.
A microfinance institution (MFI) is a financial
intermediary, which provides credit to the rural
populace. This most often are NGOs, but can
also be some other bodies like the panchayats,
anganwadi teachers, etc. This MFI then sets up
Self-help Groups (SHGs) which comprise about
20 people (mostly women) who deposit (save)
a certain amount each week/month. Then the
MFI puts in an equal amount (or upto four times
the amount) and the loan is given to individual
members of the SHGs. The loans are given
individually but the liability is the collective
responsibility of the SHG. In turn, the MFIs are
re-financed by commercial banks.
The origin of SHGs can be traced to 1976, when
Professor Mohammud Yunus of Bangladesh
started womens group in Bangladesh. This
group later developed into the Bangladesh
Grameen Bank. In India, the pioneer in this field
was Self Employed Womens Association
(SEWA). Although it started as a trade union for
women in the unorganised sector almost 40
years ago, today it boasts of running the first
womens bank in the country. In southern India,
organisations like Pradan, Myrada, Asseefa,
Malar etc. have entered this rural credit system.
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All these are high-profile NGOs getting vast funds

from the imperialist countries.
Following the emergence of NGO sector in the
country and their endeavour to provide microcredit and support to micro-entrepreneurs,
several agencies and departments of the
Central and State Government like NABARD,
SIDBI, HUDCO, HDFC, Ministry of Agriculture/
HRD/Rural Development started using NGOs
for reaching out credit and other welfare services
to the rural, particularly women.
In fact, there is a diversity of approaches to
microfinance involving banks, NGOs and cooperatives. In each of these models, the group
usually assumes joint liability for loans taken by
its members. SHGs of 15-20 members, for
instance, may rotate their savings as internal
loans within the group as well as access loans
from the MFI or from a bank. The group usually
has weekly, fortnightly or monthly meetings, in
which the members deposit a regular savings
amount and make any loan repayments. In these
meetings, a definite sum of Rs. 10, Rs. 20 etc
is deposited by each member and these
deposits are used for internal loans. After being
satisfied about savings and repayments, banks
give loans to the groups
Microfinance has come a long way from linking
a few SHGs in the early 90s and launching of
the NABARDs SHGbank linkage programme.
Microfinance services now cover approximately
28 lakh poor households with the SHG model
account-ing for 64% of MFI clients. There is a
pronounced regional tilt with 90% of the clients
in the South and Western parts of India. Also,
203
nearly 93% of SHG clients are women, and

therefore, the talk of empower-ment of women.
Repayment rates range, on an average, from
87% to 97% of all loans! NABARD had already
given loans of Rs. 1,192 crore to 11 lakh SHGs
till March 2004. The finance minister, in his
budget speech this year has asked NABARD
and SIDBI to increase the number of SHGs in
India significantly.
In pursuance of the Union Budget, 2005-06, the
Micro Finance Development Fund (MFDF) set
up in the NABARD has been re-designated as
the Microfinance Development and Equity Fund
(MFDEF) and its corpus has increased from
Rs.100 crore to Rs.200 crore. The modalities
in regard to the functioning of the MFDEF are
being worked out.
The Corporate Interest
Of late, the big corporate sector and the
multinational firms are exhibiting an increasing
interest in microfinance. The impressive roll-call
of corporates in funding SHGs, directly or by
partnerships, and supporting NGOs, includes,
ICICI, Citibank ABN Amro, Hindustan Lever Ltd.
(Stree-Shakti project), ITC (e-chaupal), Mahindra
& Mahindra (Subha Labh), Tata Group (Kisan
Sansar), HDFC, Max New Life Insurance, etc.
In fact, ICICI is aggressively moving both by
setting up a network of SHGs like in Tamilnadu
or in partnership with local NGOs to form the
SHGs. While it lent out at least Rs 240 crores to
the SHGs in the first case, in the second, at least
40 NGOs are in partnership with it in Kerala, AP,
Karnataka, Orissa, WB, Jharkhand, UP &
Rajasthan.
Cashphor India is into microfinance in Gazipur,
Mirzapur, Chandauli, Mau, Balia (all in UP). What
started as a company with small funds of
approxi-mately 4 lakhs in 1997, grew to a big
enterprise with funds of Rs.16 crore by
November 2003. On 1 December 2003, the
micro-credit business was sold to CMC. Indeed,
microfinance has become a profitable business!
CFTS has taken financial help from NABARD,
ICICI, UCO bank, UTI Bank, Deutsche Bank,
Mumbai, Grameen Foundation USA etc. at 6 to
12% interest rate and disbursed loans to
villagers at 20% interest rate. It disbursed its first
loan in Mirzapur in September 1997.
MNCs are getting interested in SHGs as
consumers of their products. They are doing
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252
marketing surveys through SHGs. In 2001,

FMCG major, Hindustan Lever Ltd. (HLL)
launched Project Shakti, a rural direct to home
distributor model, which utilizes networks of
women from SHGs as rural direct-to-home
distributors.
With the objective of ensuring greater financial
inclusion and increasing the outreach of the
banking sector, RBI has enabled banks to use
the
services
of
Non-Governmental
Organisations/ Self Help Groups (NGOs/ SHGs),
Micro Finance Institutions (MFIs) and other Civil
Society
Organisations
(CSOs)
as
intermediaries in providing financial and banking
services through the use of Business Facilitator
and Correspondent models for providing
facilitation services like identification of
borrowers and fitment of activities, collection and
preliminary processing of loan applications
including verification of primary information/data,
creating awareness about savings and other
products and education and advice on managing
money and debt counseling, processing and
submission of applications to banks, promotion
and nurturing Self Help Groups/ Joint Liability
Groups, post-sanction monitoring, monitoring
and handholding of Self Help Groups/ Joint
Liability Groups/ Credit Groups/ others; and
follow-up for recovery.
The programme of linking self-help groups
(SHGs) with the banking system continues to
be the major micro-finance programme in the
country and is being implemented by
commercial banks, RRBs and co-operative
banks. By end-July 2005, as many as 16,53,047
SHGs were linked to banks and the total flow of
credit to SHGs was Rs.7,063 crore.
SBI has been very active in SHG-Bank Credit
Linkage programme and has made exponential
growth. During 2004-05, the Bank financed
1,69,025 SHGs with aggregate disbursements
of Rs.696.58 crores with the cumulative number
of SHGs credit-linked to 3,43,691 with a
cumulative disbursement of Rs.1,311.45 crore.
SBI is the first commercial bank to be assigned
the status of Self Help Promoting Institution
(SHPI) by NABARD. SHG programme has
resulted not only in economic development but
also women empowerment, lessening of social
tensions and eradication of social evils like
illiteracy.
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COMPETITION ACT, 2002

Objective: To help companies to increase their size and to guard consumers against
anti-corruption practices.
Some provisions: High limit for asset size and turnover size for mergers ; merger
bench to deliver judgement on approval within 90 days; domination to be determined
based on market size, number of players; stern action for anti-competitive practices.
The Competition Act, 2002, which was passed
by both Houses of Parliament during the Winter
Session of 2002-03, will in due course
supersede and replace the Monopolies and
Restrictive Trade Practices Act, 1969 (MRTP
Act). The Competition Act has been designed
as an omnibus code to deal with matters relating
to the existence and regulation of competition
and monopolies.
This is an Act to provide, keeping in view of the
economic development of the country, for the
establishment of a Commission to prevent
practices having adverse effect on competition,
to promote and sustain competition in markets,
to protect the interests of consumers and to
ensure freedom of trade carried on by other
participants in markets, in India, and for matters
connected there.
The apex body under the Competition Act which
has been vested with the responsibility of
eliminating practices having adverse effect on
competition, promoting and sustaining
competition, protecting the interests of
consumers, and ensuring freedom of trade
carried on by other participants in India, is known
as the Competition Commission of India the
successor to the Monopolies and Restrictive
Trade Practices Commission (MRTPC). The
Competition Commission is a body corporate
and independent entity possessing a common
seal with the power inter alia to hold and dispose
of moveable and immovable property, to enter
into contracts and to sue in its name.
The intent of the legislation is not to prevent the
existence of a monopoly across the board. There
is a realisation in policy-making circles that in
certain industries, the nature of their operations
and economies of scale indeed dictate the
creation of a monopoly in order to be able to
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operate and remain viable and profitable. This is

in significant contrast to the philosophy which
propelled the operation and application of the
MRTP Act, the trigger for which was the
existence or impending creation of a monopoly
situation in a sector of industry.
The Act declares that a person and enterprise
are prohibited from entering into a combination
which causes or is likely to cause an
appreciable adverse effect on competition
within the relevant market in India. Such
combinations would be treated as void. A system
is provided under the Act wherein at the option
of the person or enterprise proposing to enter
into a combination may give notice to the
Competition Commission of India of such
intention providing details of the combination.
The Commission, after due deliberation, would
give its opinion on the proposed combination.
However, entities which are not required to
approach the Commission for this purpose are
public financial institutions, foreign institutional
investors, banks or venture capital funds which
are contemplating share subscription, financing
or acquisition pursuant to any specific stipulation
in a loan agreement or investor agreement.
Notwithstanding that the Act is not exclusivist and
operates in tandem with other laws, it is
categorically stated that civil courts or any other
equivalent authority will not have any jurisdiction
to entertain any suit or proceeding or provide
injunction with regard to any matter which would
ordinarily fall within the ambit of the Commission.
Some of the important Provisions of the Act:
A high threshold limit asset-wise, turnoverwise is prescribed so that most mergers will
be outside the ambit of Combinations
Regulation. There is no obligation at all for
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merging parties below threshold limit for

mandatory pre-merger notification.
The Merger Bench of the Competition
Commission of India (CCI), the regulatory
body under the new dispensation, has to
deliver its judgement on the approval of a
merger within 90 days. If no such judgement
is forthcoming, the merger will be deemed
to have been approved.
The combination will go through unless it is
established that it will have an appreciable
adverse effect on competition.
The dominance of a company is determined
not in terms of fixed percentage of market
size or asset but by size of market, number
of players, the financial capacity, tariff
barriers and competition from outside the
country.
The proposed law would detail all the anticompetitive practices such as cartelisation,
under-pricing, sharing of territories,
restricting sources of supplies and collusive
bidding by companies. Stern action is
proposed in the Bill to deter this.
It would be open for the merging companies
to seek the opinion of the proposed
Competition Commission whether the
merger would be a valid one as per the
proposed law. This was intended to give the
corporates to test the water before going
ahead.
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Competition Forum : To build and further

strengthen the capacity of the functionaries of
the Commission, the Competition Commission
of India has since established a Competition
Forum whereat eminent personalities in various
fields interact on competition issues for
developing expertise on the intricacies and
complexities of Competition Law and Policy.
The Indian Experience so far
Indian experience with the competition regime
so far has vindicated it. In India, the European
and American models may not work, as India
has a unique chemistry and very different sociopolitical and economic conditions. There are a
number of reasons which may be equally true in
any developing economy. Besides all those
reasons, India is facing the unique challenge from
Judiciary. Indian judicial system is one of the
strongest and most powerful judicial systems in
the world.
Challenges and the Task Ahead
For the last more than a year, the CCI has been
working without the Chairperson. However, due
to uncertain future of the CCI, earlier because of
a petition pending in the Supreme Court and later
due to the expected amendment in the
Competition Act, the existing CCI has not been
able to do what was envisaged.
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FRINGE BENEFIT TAX

The sprit of FBT is to tax those benefits being provided by the employer in the
nature of collective enjoyment
FBT is payable irrespective of whether the employer has made profit or incurred a
loss from its activities
The rate of FBT is prescribed at 30% of the value of the benefit.Different valuation
norms ranging from 20 to 100% have been prescribed.
The payment of the tax has to be in full for every quarter on actual basis
The Fringe Benefit Tax (FBT) was introduced
during the budget 2005 as part of the direct
taxes.The new Chapter XII-H inserted in the
Income Tax Act with effect form April 01,2005
incorporates sections 115 W to 115 WL to
impose / administer this new levy. The FBT at
30% is levied on the employer on the value of
fringe benefits provided or deemed to have been
provided to the employees during the accounting
year. The term employer includes a company, a
firm, and association of persons or body of
individuals whether incorporated or not, a local
authority and every artificial juridical person.
However entities eligible for exemption form IT
would be exempt from IT. This is an expenditure
tax and not a tax on income. FBT is payable
irrespective of whether the employer has made
profit or incurred a loss from his activities.
e. Employee welfare
The fringe benefit is defined as any consideration

for employment provided by way of-
o. Gifts and
a. any privilege , service, facility or amenity,

directly or indirectly provided by the employer;
The employer is required to file return of FBT

within the due date which is similar to the date
for filing Income Tax Returns. The Institute of
Chartered Accountants of India have suggested
that the FBT should be disclosed as a separate
item after determining profit before tax on the
face of the P&L Account for the period in which
the related fringe benefits are recognised. The
amount of FBT, outstanding if any, at the year
end, should be disclosed as a provision in the
Balance sheet.
b. any free or a concessional ticket provided

by the employer for private journeys of his
employees or their family members; and
c. any contribution by the employer to an
approved superannuation fund for
employees.
Fringe benefits are deemed to have been
provided by the employer to his employees if the
employee has, in the course of his business or
profession or incurred any expense on or made
any payment for the following purposes
a. Entertainment
b. Provision of hospitality
c. Conference
d. Sales promotion including publicity
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f.
Conveyance , tour and travel
g. Use of hotel, boarding and lodging facilities

h. Repair, running , maintenance of motor cars
and the amount of depreciation thereon
i.
Repair, running , maintenance of air craft and

the amount of depreciation there on
j.
Use of telephone other than expenditure on

leased telephone lines
k. Maintenance of any accommodation in the

nature of guest house other than
accommodation used for training purpose
l.
Festival celebrations
m. Use of health club and similar facilities

n. Use of any other club facilities
p. Scholarships
The introduction of FBT had taken away the

burden of perquisite tax on some minor items
from the shoulders of the employees. But this
levy is adding to the cost of employment.
Following representations from Corporates and
considering the need for equity the FM has
retained FBT in the current Budget 2006 with
certain amendments.
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VALUE ADDED TAX

VAT avoids the system on tax on price, which contains an element of previously paid
tax.
VAT is going to replace Sales tax, Work contract tax, Lease tax, Entry Tax, Purchase
tax, Turnover tax, and Luxury tax. Service tax should also be VATable. The states are
also not empowered to levy service tax.
The proposed system can now be called a Multi-Point Sales tax with input tax credit.
VAT has an in-built system of tax compliance.
A Unified VAT will centralise tax rates, thus robbing the state of tax flexibility.
VAT or Value Added Tax is a new system of
indirect taxation, in which a trader will buy goods
after paying tax on the goods at the prescribed
rate, and claims refund of tax already paid by
the seller in buying his raw materials, which is
called the input tax credit. When goods are
manufactured in one state, and exported to
another, the exporting state will give 100% credit
for the taxes paid within the state. Also, tax paid
on capital goods by both manufacturers and
traders would be available as immediate credit.
VAT or value added tax is working successfully
in over 150 nations, including our neighbours,
and is going to be introduced here soon. This
new system moves from the present origin
based tax to destination based. VAT avoids the
system on tax on price, which contains an
element of previously paid tax. But for a few
reasons, it is opposed by both the political class
at the state level, traders and industry, though
surprisingly, nobody has spoken about the
consumers, who will be at the receiving end.
It being a destination based tax, non
manufacturing states like Delhi would be net
gainers, and manufacturing states like
Maharastra and Gujarat would be net losers.
Most states have framed their VAT legislation,
on line with the model VAT law, framed by the
empowered committee of state finance
ministers, with the help of the National Institute
of Public Finance and Policy.
note that if all new products are VATed at 12.5%,

they will not be manufactured, but only imported.
VAT is equitable. If farm produce is not VATted,
as it is difficult to collect VAT from millions of
small and marginal farmers, food consumption
will be tax free, and thus the poor do not need to
pay any tax.
Presently, it is going to be implemented in all
states. Else, if states with high sales tax rates
do not implement VAT, people can just cross the
border, and buy products at lower prices.
VAT is going to replace Sales tax, Work contract
tax, Lease tax, Entry Tax, Purchase tax, Turnover
tax, and Luxury tax. It will not replace Octroi or
Central Sales tax. The VAT at the State level is
only levied on the value added at the trade level,
not on manufacture, advertising, transport or
importation. A proper VAT, however needs to
cover the full chain of economic activity.
VAT has an in-built system of tax compliance. A
seller will claim the offset due to him only by
collecting taxes and remitting them to the
government. Everyone has an incentive to buy
only from registered dealers. Invoice based
transactions makes it impossible to hide ones
actual income, and this should result in a boom
in income tax collection. VAT should be a major
blow to tax evaders, both manufacturers who
evade excise duty, and traders who evade sales
tax. State and the Central Government will gain
in terms of revenue.
Apart from the exempt list, VAT has a three rate

structure, 1%, 4% and 12.5%. It is interesting to
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208
BUDGET - An understanding
It is a statement of proposed expenditure and the means of financing it.
Contains 3 key documents: The Annual Financial Statement; Demand for Grants and
The Finance Bill
Budgetary Deficit is the excess of total expenditure over total receipts. It is covered
by borrowings from market and from RBI.
Fiscal Deficit: Total Expenditure {(Total Receipts + market borrowings)}. In other
words, it is equivalent to borrowings from RBI.
Whats in the Budget?
The presentation of the Union Budget is an
annual exercise looked forward to with
considerable anticipation by the financial
community. No other event generates as much
debate, analysis or comment as the proposals
contained in the Budget. Yet, the Budget is not
the preserve of accountants, financial analysts,
economists and others with a pathological affinity
to numbers.
Purpose
A Budget is a statement of financial position for
a future period, setting out proposed expenditure
and the means of financing it. The Union Budget
lays down the statement of the estimated
receipts and expenditure of the government of
India for the coming financial year. It sets out
exactly how the government proposes to allocate
financial resources among the various agencies
that make claims on it and how it proposes to
raise the finances for this.
Components
The Budget is made up of three key documents.
The Annual Financial Statement - setting out
the estimated revenue and capital account
of the government for the financial year.
Demands for grants - detailing the requests
for funds made by different government
departments and ministries.
The Finance Bill - containing the proposals
for the levy of new taxes and modification of
the existing tax structure.
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As the Budget documents have to conform to

certain legal and procedural requirements, other
documents are usually appended to them for
easy comprehension of the Budget. These
usually include.
Budget at a Glance - presenting a snapshot
of the state of the governments finances for
the year. The document details plan and nonplan outlays apart from the revenue, primary
and fiscal deficits.
Receipts Budget - detailing tax, non-tax
revenues and capital receipts
Expenditure Budget, detailing revenue and
capital expenditure, presented ministry wise.
Explanatory Memorandum - providing a
detailed item-wise break-up of the receipts
and expenditure.
For the lay-person, the Budget at a glance and
the explanatory Memoranda suffice for an understanding of the state of the governments
finances.
How the Budget is made
Its compilation is a process spanning several
months before the key Budget documents are
finally presented in Parliament. The Budget tries
to match the forecast expenditure for a particular
year (based on the assessment of the funds
required by various arms and departments) with
receipts (from taxes, non-tax revenues, capital
receipts). The shortfall, if any, between the
receipts and the expenditure forecast for the
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Budget speak
Revenue receipts: receipts by way of direct
and indirect taxes, interest, dividends and
profits from investments, fees and other
receipts from services rendered by the
government.
Capital receipts: Receipts by way of loans
raised from the market, borrowings from the
RBI, external assistance from foreign
governments, recoveries of loans and
advances.
Revenue Expenditure: Expenditure incurred
for the normal running of government
departments, interest charges on debt, and
subsidies expenditure which does not result
in the creation of assets.
Capital Expenditure : Expenditure on
acquisition of assets and investments, loans
and advances to states, government
companies.
Plan Expenditure: Outlays on schemes and
programmes formulated by various
ministries under the five year plan.
Non-plan expenditure: Expenditure outside
of that incurred in keeping with the
programmes formulated under the five year
plans.
Revenue Deficits: Excess of government
revenue expenditure over revenue receipts.
Budgetary deficits: Excess of total
expenditure (capital and revenue) over total
receipts, bridged through borrowings from
the market and the RBI.
Fisical Deficits: Excess of total expenditure
over revenue receipts and capital receipts
after excluding borrowings.
Primary Deficits: The fiscal deficits reduced
by expenditure on interest payments.
Budget estimates: The estimates of

government spending on various sectors
during the year, together with an estimate of
the income in the form of tax revenues, form
the Budget estimates.
Consolidated Fund: All revenues received by
Government, the loans raised by it, and
receipts from recoveries of loans granted by
it, form the Consolidated Fund.
Contingency Fund: Fund into which the
Government dips its hands in emergencies,
to meet urgent, unforeseen expenditures
and cant wait for authorization by
Parliament.
Monetised Deficit: It is amount by which fiscal
deficit is going to be financed by printing of
currency.
National Debt : The total outstanding
borrowings of the central government
Exchequer. It is the debt owed by the
government as a result of earlier borrowing
to finance budget deficits.
Central plan: It refers to the governments
budgetary support to the Plan and, the
internal and extra budgetary resources raised
by the Public Sector Undertakings.
Demand for grants: It is a statement of
estimate of expenditure from the
Consolidated Fund. This requires the
approval of the Lok Sabha.
Reserve money: Refers to money supplied
by RBI and Central government. This
indicates monetary liability of RBI and the
government of India to public including
banks. The reserve money, or currency
notes and coins, is held by public and banks
in their currency chests and as deposits with
RBI. It also includes other deposits with
RBI.
Appropriation Bill: A Bill presented to

Parliament for approval providing for the
withdrawal or appropriation by the
government from and out of the Consolidated
Fund of India.
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210
year, is the deficit. This is sought to be made

up through additional taxation and/or borrowings.
Receipts and expenditure are compiled and
presented under four heads. The Budget for
2005-2006 would present the actuals incurred
for 2003-04(as proposed in the previous Budget),
the revised Estimates for 2004-05 (estimated
updated on the basis of actuals) and the Budget
Estimates for 2005-06. The first three heads
help gauge the extent to which the previous
years receipts or expenditure overshot or fell
short of what was forecast in the previous
Budget.
The expenditure side of the Budget is compiled
from the demands for grants presented by
various government departments and ministries.
Each demand provides a detailed account of
specific projects or purposes for which funds
are being sought, broken up into revenue/capital
and plan/non-plan expenditure.
The receipts side of the Budget, prepared by
the finance Ministry estimates likely revenue
receipts from direct and indirect taxes and capital
receipts from recoveries of loans and
government borrowings. Proposals to raise
additional revenues through taxation are
formulated after considering representations
from various industry associations.
Vote-on-account
The Budget Season of Parliament starts with
the finance Ministers Budget Speech in the Lok
Sabha, detailing the key proposals in the Budget.
A discussion on the proposals, demands for
grants and other facets follows. The process
of presentation of the Budget, the discussions
that follow it and the passage of the Finance Bill
can take considerable time. The process may
also be interrupted in the event of a noconfidence motion, requiring the government to
resign mid-term.
To meet the day-to-day expenses of the
government in the interim., the Lok Sabha is
empowered by the Constitution to authorise an
advance towards estimated expenditure for the
coming financial year, pending the completion
of the procedure for voting on the Finance Bill
and the demands for grants.
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How to read the budget

The budget comprises a set of several
documents. Unfortunately it is so convoluted that
only an expert can read and understand them.
You may not need to look at all of them. The key
documents that should interest you are:
The budget speech, which is in two parts. Part
A of the speech contains a review of the
prevailing economic situation and summarizes
the key objectives of the Budget. This is followed
by a summing up of the state of the economy.
Key macro-economic issues, such as the state
of agricultural and industrial production, housing
and infrastructure and the capital market, are
touched on in this section. Part B of the Budget
speech usually contains specific proposals on
tax pertaining to the financial year. Charges in
direct and indirect taxes and income tax form
part of this section. Based on the taxation
proposals for the Budget year, the estimate of
the fiscal and revenue deficits for the budget year
are arrived at. The speech also sets out the
target for deficit reduction.
Budget at a glance gives you a snapshot view
of the budget. The first page tells you how much
money the government is getting and how much
it is spending. Perhaps, the simplest explanation
is the chart on where the rupee comes from and
where it goes.
As for the rest, its not recommended reading
except for masochists. But if youre very keen
on knowing more about government accounting,
try the more detailed documents - not that youll
be any wiser.
The receipts budget tells you how much the
government has collected through various taxes
- apart from other collections like loans, capital
receipts, etc.
The expenditure budget comes in two parts.
Volume 1 tells you the total revenue and capital
disbursements for various ministries. Volume 2
gives details about allocations for ministries and
the programmes they are implementing. But
this wont ensure that you will be able to track
the way your money is being spent.
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CREDIT POLICY - An introduction
Credit Policy of RBI aims to influence the amount of money and credit in the Indian
economy.
It tries to even out the fluctuations between demand and supply of money and sets the
long-term agenda on money
Open Market operations (OMOs), Reserve requirements, Bank Rate and Repo rate
are the four major weapons used by RBI to regulate money supply
Very simply, a credit policy announcement is the

Reserve Bank of Indias (RBI) way to influence
the amount of money and credit in the Indian
economy, which has an impact on the rates of
interest and inflation and hence on economic
growth and prices. RBIs credit policy also the
institutions way of giving market signals on
which market players will base their production
decisions. For example, if the RBI says that
inflation may be a concern, then the lenders, like
home loan companies, may want to hike their
long term interest rates. Or if the RBI says that
we are still in a soft interest regime, then
borrowers can hope to borrow cheaply in the
future at a lower rate or at least, be sure that
rates will not harden. RBI also uses the Credit
Policy to do some housekeeping functions of
giving directions to the banks.
The RBIs role as the Central Banker makes it
responsible to smoothen out the seasonal
wrinkles between demand and supply of money
in the economy as well as set the long term
agenda for all money matters in the country. This
means that RBI, by making money cheaper
(lower interest rates) or more expensive (higher
interest rates) influences money and credit
conditions in the economy, targets good growth,
employment and stable prices.
Left to its own an economy can get into two
opposing cycles - an inflationary one or a
recessionary one. Big words but they have
simple meanings. An inflationary cycle begins
after an event (like a crop harvest in India) that
puts a lot of money in peoples pockets, which
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is spent. This drives up prices as the supply of

current goods is less than the demand. As prices
increase, production is stepped up, employment
increases, more money comes into circulation,
driving prices up further. This cycle (given very
simplistically here) may spin out of control and
cause hyper inflation in extreme cases.
On the opposite side is the situation when
people have less money to spend (like at tax
saving time or crop sowing time), this drives
prices down, leading to cuts in production, lay
offs and further loss in spending money. Again if
unchecked, a downward spiral can spin the
economy into recession.
Apart from these two signals there are
innumerable variables that have the power to
shift the economy from the desired growthinflation equilibrium. RBI has four chief weapons
to do its job of maintaining the desired
equilibrium, these are:
1. Open Market Operations (OMO): When
the RBI buys government securities, it adds to
the stock of money in the economy. This is
added to the reserve of the selling bank, who
can now lend a multiple of this amount. The extra
liquidity has the power to push down interest
rates and give a boost to business activity, that
now be financed more cheaply. The opposite
happens when the RBI sells government
securities, then it soaks up the extra money with
the banks and that has a multiplier effect in
reducing money supply and pushing up interest
rates. So, the RBI buys securities when the
212
economy is sluggish and demand is not picking

up and sells securities when the economy is
overheated and needs to cool down. OMO are
also used seasonally to heat up or cool off the
economy. For example, after the harvest the
economy is flush with funds and the RBI will sell
securities to soak up some of that liquidity.
2. Reserve Requirements.
The RBI does not allow banks to lend all of the
money they get as deposits. A fraction has to be
kept as a reserve. If the reserve requirement is
10 per cent, then a bank that gets Rs 100 as a
deposit may lend forward only Rs 90, Rs 10 it
will keep either with itself or will use to buy
government securities from the RBI. Now,
whoever borrows this Rs 90 will deposit it
somewhere. That bank will be able to lend out
only 90 per cent of Rs 90, or Rs 81. This Rs 81
will be deposited by the borrower somewhere,
and 90 per cent of that, or Rs 72.9, will get lent
by the third bank. This is called the multiplier
effect of the banking system. The higher is the
reserve ratio, the lower the multiplier effect and
the lesser the money supply in the economy,
higher the rates of interest. In India, the CRR
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currently is 5 per cent, down from 15 per cent in

1981.
3. Bank Rate or Discount rate.
This is the rate at which the RBI makes very
short term loans to banks. Banks borrow from
the RBI to meet any shortfall in their reserves.
An increase in the discount rate means the RBI
wants to slow the pace of growth to reduce
inflation. A cut means that the RBI wants the
economy to grow and can handle the
accompanying inflation. This credit policy has
kept the bank rate unchanged at 6 per cent
signalling an economy on course.
4. Repo rate
The rate at which the RBI borrows short term
money from the market. This is also an indicative
rate that gives price signals on money. Repo
rates are unchanged again giving the on-course
signal to the economy.
The RBI uses these tools to steer the ship of
the Indian economy at a pace that allows for
speed without too many lurches.
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ECONOMY & FINANCE

INSTITUTIONS
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CREDIT INFORMATION BUREAU (INDIA) LIMITED

(CIBIL)
CIBIL collects, collates and disseminates credit information pertaining to both
commercial and consumer borrowers.
Banks, Financial Institutions, Non Banking Financial Companies, Housing Finance
Companies and Credit Card Companies use CIBILs services.
Genesis : Rapid industrialization, expanding economy, growing aspirations,
increased incomes, improved lifestyles, availability of high quality products and
services leading to rapid credit off take.
CIBIL is a composite Credit Bureau, which caters to both commercial and consumer
segments
Credit Bureaus facilitate increased lending
opportunities for credit grantors while allowing
easier access to credit for borrowers. The
existence of credit bureaus in developed
countries has facilitated increased market
penetration of credit (to more than 66% as a
percentage of GDP as compared to 3% for India)
while keeping non-performing loans in check
(approximately 1% of outstanding credit).
CIBIL was incorporated in 2000 and was
promoted by the SBI, HDFC , Dun & Bradstreet
Information Services India Private Limited (D&B)
and TransUnion International Inc. with SBI &
HDFC holding a share of 40% each. Presently
the shareholding pattern has been diversified to
include various entities representing varied
categories of credit grantors and the
shareholding of SBI and HDFC stands reduced
to 10% each.
The aim of CIBIL is to improve the functionality
and stability of the Indian financial system by
containing NPAs while improving credit grantors
portfolio quality. CIBIL provides a vital service,
which allows its Members to make informed,
objective and faster credit decisions.
CIBILs aim is to fulfill the need of credit granting
institutions for comprehensive credit information
by collecting, collating and disseminating credit
information pertaining to both commercial and
consumer borrowers. Banks, Financial
Institutions, NBFCs, HFCs and Credit Card
Companies use CIBILs services. Data sharing
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263
is based on the Principle of Reciprocity, which

means that only Members who have submitted
all their credit data, may access Credit
Information Reports from CIBIL. The relationship
between CIBIL and its Members is that of close
interdependence. Co-operative banks, which
are currently not under CIBILs purview, would
also be brought into the information-sharing fold.
CIBIL is a composite Credit Bureau, which
caters to both commercial and consumer
segments and provides Credit Information
Report. The Consumer Credit Bureau covers
credit availed by individuals while the
Commercial Credit Bureau covers credit availed
by non-individuals such as partnership firms,
proprietary concerns, private and public limited
companies, etc. A Credit Information Report
(CIR) is a factual record of a borrowers credit
payment history compiled from information
received from different credit grantors. Its
purpose is to help credit grantors make informed
lending decisions - quickly and objectively. The
CIR only provides available factual credit
information and does not provide any opinion,
indication or comment pertaining to whether
credit should or should not be granted. The credit
grantors who have received an application for
credit will make the credit decision. CIBIL does
not grant or deny credit. CIBIL will provide credit
information reports only to its members in India.
Commercial Credit Bureau: The aim of CIBILs
Commercial Credit Bureau is to minimise
instances of concurrent and serial defaults by
providing credit information pertaining to non214
individual borrowers such as public limited

companies, private limited companies,
partnership firms proprietorships, etc. It will
house the credit history of large and mid-sized
corporates as well as the SME sector. CIBIL
will maintain a central database of information
as received from its Members. CIBIL will then
collate and disseminate this information on
demand to members in the form of CIR to assist
them in their loan appraisal process.
Consumer Credit Bureau: The objective of this
Bureau is to minimise defaults and maximise
credit penetration and portfolio quality by
providing comprehensive credit information
pertaining to individual borrowers. The Bureau
collects credit information from its Members. It
then collates and disseminates, on demand, this
information in the form of CIR to aid in the loan
appraisal process. CIBIL intends to provide
world-class service while providing both, positive
and negative information to Member credit
grantors. The basic Consumer CIR will broadly
contain the borrower information, Account
details like Account type, Ownership indicator,
Sanctioned amount , Current balance, Amount
overdue, Suit-filed status, Days past due / Asset
classification etc. The database size of
Banking Briefs
264
Consumer Bureau has grown to over 42 million

records in a period of over one year.
Access to CIBIL Information
CIBIL is maintaining a database on suit-filed
accounts of Rs. 1 Crore and above and suitfiled accounts (wilful defaulters) of Rs. 25 Lacs
and above and the information is in the public
domain and is available at no charge. This
information is based on an application developed
to enable the users to access data through a
parameterised search process across banks
and companies at various geographical
locations. Suit-filed accounts of lower value are
being covered in a phased manner.
CIBIL claims to possess credit details of more
than 60 per cent of the countrys borrowers and
after the passage of Credit Information
Companies (Regulation) Act 2004, details of the
remaining 40 per cent, as well as new
borrowers, would be added to the CIBIL
database. The new act allows all the details of
the borrowers with any bank/financial institutions
to be automatically submitted to CIBIL, unlike
the old practice of seeking borrowers consent
before sharing the details with CIBIL or any other
third party.
215
SME RATING AGENCY OF INDIA LIMITED (SMERA)

Joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited
(D&B), CIBIL and several leading banks in the country
Takes into account the financial condition and several qualitative factors that have
bearing on credit worthiness of the SME.
Better rating from SMERA could lead to favourable credit terms such as lower
collateral requirements and interest rates and simplified lending
SMERA has signed a memorandum of understanding with State Bank of India for
rating the SME clients of the bank
SME Rating Agency of India Limited
(SMERA) is a joint initiative by Small Industries
Development Bank of India (SIDBI), Dun &
Bradstreet Information Services India Private
Limited (D&B), Credit Information Bureau (India)
Limited (CIBIL) and several leading banks in the
country. SMERA is the countrys first rating
agency that focuses primarily on the Indian SME
segment. SMERAs primary objective is to
provide ratings that are comprehensive,
transparent and reliable.
SMERA Rating is an independent thirdparty comprehensive assessment of the
overall condition of the SME
It takes into account the financial
condition and several qualitative factors
that have bearing on credit worthiness
of the SME.
SMERA Rating consists of a Composite
Appraisal/Condition indicator and a size
indicator, for fair valuation of each SME
amongst its peers.
An SME unit having SMERA Rating
would enhance its market standing
amongst trading partners and
prospective customers.
SMERA would adopt a comprehensive,
transparent and reliable rating process and it
would have a wider acceptance within the
banking system of the country. In addition to
this, SMERA would be supported by SIDBI and
a large number of public and private sector
banks in the country. It will also simplify the
process of credit requests and make the
process more cost-effective. A better rating from
SMERA could lead to more favorable credit
terms for the SME like lower collateral
requirements, lower interest rates, and simplified
lending norms
Banking Briefs
265
SMERA Ratings facilitate banks/ lending

institutions in reducing the turnaround time in
processing credit applications, thereby providing
SMEs access to timely and adequate credit.
SMERA Ratings categorise SMEs based on
size, so that each SME is evaluated amongst
its peers. This enables rational comparison of
companies of the same size, thus ensuring that
the smaller companies are not at a disadvantage
while applying for credit. SMERA Ratings take
into account industry dynamics by factoring in
a system through which an SME could compare
its strengths and weaknesses with those of other
companies in the same line of business.
Composite Appraisal/Condition indicator is on a
scale of 1 to 8 representing highest to lowest.
For example 1 indicates highest condition of
health while 8 the lowest. The Networth size
indicator is from A to D with A for Rs. 20 crores
and above, B for Rs 5 - 20 crores, C for Rs. 1 5 crores, and D for less than Rs 1 crore. The
rating is displayed as a combination of both-such
as B1 or C5. For example A 1 stands for a
company with Networth of Rs. 20 crore and
above with highest condition of health.
SMERA had approached the Government of
India for release of subsidy to meet the rating
expenses. SMERA has signed a Memorandum
of Understanding (MOU) with State Bank of India
for rating the SME clients of the bank. SMERA
expects other commercial banks to follow the
example of SIDBI in considering softer interest
rates for SMEs credit-rated by SMERA. Under
the MoU SBI would encourage its SME clients
to be rated by SMERA. It has also broached the
subject with other banks and institutions,
including SIDBI. SIDBI is considering a proposal
to offer concession in interest rate to SMEs that
have been rated by SMERA, and quite a few
schemes of the bank that have retail focus would
insist on the applicants being rated by SMERA.
216
BANKING CODES AND STANDARDS BOARD OF INDIA

(BCSBI)
RBI-promoted BCSBI registered as an independent society
Banks to be members and pay an annual subscription fee towards self-sustaining
corpus
Relationship managers will act as an interface between compliance report filed by
the bank and their field report
The Reserve Bank of India based on the
recommendations of the Committee on
Procedures and Performance Audit on Public
Services (Tarapore Committee) has proposed
setting up of an independent Banking Codes and
Standards Board of India to oversee
implementation of Fair Practice Code evolved
by the Indian Banks Association. The task of
setting up BCSBI on the model of the
mechanism in the UK, has been assigned to
the Indian Banks Association.
In the UK, there exists an institutional
arrangement whereby a separate board has
been set up to oversee the code drawn up by
the banks association. The Banking Code of the
British Bankers Association (BBA) is a voluntary
code, which sets standards of good banking
practices for financial institutions to follow when
they are dealing with personal customers in the
UK. It provides valuable protection for customers
on a day-to-day basis as also in times of financial
Banking Briefs
266
difficulty. The code applies to savings deposits

and current accounts, card products and
services, loans and overdrafts and payment
services including foreign exchange.
BCSBI would be an independent society, and
will draw membership from banks and conduct
field visits of banks. As the IBA is not a selfregulatory organisation it cannot monitor the
observance of banking codes by banks. The
ombudsman deals with individual complaints
and not with systemic problems. The RBI too
is not in a position to carry out this function as it
is preoccupied with its regulatory and
supervisory functions.
Bank consumers can now look forward to
receiving a minimum level of service with the
RBI promoting the new institution with enough
clout to ensure that banks follow codes and
standards set by the industry.
217
THE INSTITUTE FOR DEVELOPMENT AND RESEARCH

IN BANKING TECHNOLOGY (IDRBT)

IDRBT was set up in 1996 at Hyderabad

It aims to promote technology solutions in banks and FIs
It has set up INFINET which provides connectivity to banks
INFINET helps in facilitating inter-bank transactions and settlements
IDRBT is now an authorised certifying authority for digital signatures
The Institute for Development and Research in

Banking Technology (IDRBT), was set up by the
Reserve Bank of India (RBI) in 1996 at Hyderabad
following the recommendations of W.S. Saraff
Committee on Technology Upgradation in
Payments System, with the objective of making
the institute a think-tank for the promotion of
technology solutions to improve the functioning
of the banking and financial sector.
The Institute, through its various initiatives, has
been spearheading the absorption of technology,
in the Indian Banking and Financial Sector. It has
made significant contributions in every aspect of
bringing in the best oftechnology for the benefit
of the Sector. IDRBT has taken up research
programmes in electronic payment systems,
security, standards, certification, data
warehousing, multi-media products, etc. with a
view to provide guidance to banks in networking
and security issues in applications, The institute
is also actively associated with a number of
activities coordinated by the RBI and Indian
Banks Association on the areas of technology
upgradation in banking sector, payment systems,
messaging standards and inter-bank applications.
INFINET : The Indian Financial Networking
(INFINET) a wide area satellite based networking
using VSAT technology, has been jointly set up
by RBI and IDRBT. INFINET is the communication
backbone for the Indian Banking and Financial
Sector. All Banks, Public Sector, Private Sector,
Cooperative, etc., and the premier Financial
Institutions in the country are eligible to become
members of the INFINET. The INFINET is a Closed
User Group [CUG] Network for the exclusive use
of Member Banks and Financial Institutions. It
uses a blend of communication technologies such
as VSATs and Terrestrial Leased Lines. Presently,
the network consists of over 2300 VSATs located
in 300 cities of the country and utilises one full
Banking Briefs
267
transponder of 36 MHz on INSAT 3B. Various

inter-bank and intra-bank applications ranging
from simple messaging, MIS, EFT, ECS,
Electronic Debit, Online Processing, Trading in
Government Securities, Centralised Funds
querying for Banks and FIs, anywhere/anytime
banking and Inter-bank reconciliation are
implemented through INFINET.
NFS : The NFS comprises a National Switch to
facilitate inter-connectivity between the Banks
Switches, and Inter-Bank Payment Gateway for
authentication & routing the payment details of
various e-commerce transactions, e-government
activities, etc. The NFS Network now connects
5641 ATMs, which is the largest number of ATMs
under a single network in the country. The volume
of daily transactions on the network presently is
around 8000.
There is a default inter-change switching fee
between the banks, if the banks do not have their
own mutual agreements. The National Financial
Switch allows connecting directly to the individual
banks switch or through their shared ATM
Network Switches. It is a win-win situation for all
the banks and more importantly, for the customers.
The Clearing Corporation of India Limited (CCIL)
is the clearing and settlement agency for the
switch, which also facilitates the NFS Disaster
Recovery Site from its premises at Mumbai.
SFMS: The need for a secure and common
messaging solution that would serve as the basic
platform for intra-bank and inter-bank
applications, and would fulfill the requirements of
domestic financial messaging, gave birth to the
Structured Financial Messaging Solution (SFMS).
The SFMS was launched on December 14, 2001,
at the IDRBT. The SFMS is built on the lines of
SWIFT but has many more utilities to offer. The
major advantage of SFMS is that it can be used
practically for all purposes of secure
218
communication within the bank and between

banks. The intra-bank part of SFMS, which is most
important, can be used by the banks to take full
advantage of the secure messaging facility it
provides. The inter-bank messaging part is useful
for applications like Electronic Funds Transfer
(EFT), Real Time Gross Settlement System
(RTGS), Delivery Versus Payments (DVP),
Centralised Funds Management System (CFMS)
etc. The SFMS provides easy to use Application
Program Interfaces (APIs), which can be used to
integrate all existing and future applications with
the SFMS. The Banks can develop
comprehensive and efficient tools and
applications and integrate them easily with SFMS
for use on the Corporate Intranet. Banks can link
all their important, high volume branches,
irrespective of their category to the SFMS through
appropriate connectivity like PSTN/ISDN or
Leased Lines. Moreover, use of SFMS is not
restricted only to computerised or partially
computerised branches. The development of
Forex Module as an add-on to the SFMS has been
completed and steps have been initiated to test
the end-to-end flow of message from SFMS to
SWIFT at DEIO of RBI. _ In a step towards making
available the SFMS on Internet, Client Interface
through SFMS and a few fund settlement
messages have been made available on Internet.
MMS
Electronic Mail is transforming the way people
communicate within and outside the organisation.
Messaging hasnt just become a lot quicker, but
messaging costs have dipped drastically. Mission
critical information now passes in and out of the
users desktop at a click. The Indian Banking and
Financial Sector, waking up to the wide range of
possibilities and immense benefits, was on the
lookout for a reliable Corporate e-mail System.
IDRBT is uniquely positioned to offer a robust
backbone for such a system since it owns and
operates a closed user group wide-area network
INFINET, for all banks and Financial Institutions,
and IDRBT Mail Messaging System serves as the
Mail Gateway for the Indian Banking System. With
over 20 Public Sector Banks, including the
Reserve Bank of India making use of this
backbone, its perhaps one of the largest
Messaging Systems in the country.
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268
CERTIFYING AUTHORITY
IDRBT has become a digital certification
authority (CA), licensed by the Controller
of Certification Authority (CCA), Government
of India and will fulfill the need for trusted third
party services in Electronic Commerce by issuing
Digital Certificates that attests to some fact about
the subject of the certificate, which provides
independent confirmation of an attribute claimed
by a person offering a Digital Signature.
Following this move, digital certificates issued by
the IDRBT CA are now legally valid in the Indian
courts as per the Information Technology Act
2000.
For securing the transactions through INFINET,
IDRBT provides high end Public Key Infrastructure
(PKI) based services and solutions to individuals,
organizations as well as governments, that enable
trust and security. IDRBT has set up a high-end,
global standards- based processing Center
capable of issuing thousands of Digital
Certificates, an important component of PKI.
IDRBT CA will issue, administer and revoke the
digital certificates which are trust worthy and
legally valid.
The IDRBT Certifying Authority has issued over
25,000 Digital Certificates, which accounts for
70% of the digital certificates issued by all CAs
put together in India. The Banks and Financial
Institutions are using the Certificates issued by
IDRBT CA for Corporate E-mail, RTGS, SFMS,
Web Servers used for Internet Banking,CFMS,
EFT/ECS and CCIL Settlement Applications.
Indian Financial Computer Emergency
Response Team (INFICERT)
The Institute is in the process of developing a
portal on INFICERT for the benefit of INFINET
CUG members. This portal would disseminate
information that would facilitate Incident Handling/
Remedial Response to the Banking and Financial
community. The Institute is also in the process of
analysing different tools available for Incident
Handling/Remedial Response.
Service Bureau (SB) for all SWIFT Users :
IDRBT has initiated steps for the establishment
of a Service Bureau (SB) for all SWIFT Users in
India. A White paper has been circulated to the
banks highlighting the concept, model and the
possible cost saving on joining the SB. Meanwhile,
the SWIFT have agreed in principle to the idea
of SB being established bythe IDRBT
219
NATIONAL PAYMENT CORPORATION OF INDIA

NPCI would be an umbrella organisation for undertaking retail payment and
settlement systems
In line with the international practice where retail clearing in entrusted to a separate
legal entity.
The company has been approved and registered as a Section 25 company, which
means that equity holders will not share company profits earned by the company
The Reserve Bank of India has set up a new
national clearing house to take over the countrys
retail clearing operations from the central bank.
The umbrella organisation for undertaking retail
payment and settlement systems would be
operational by 1st April 2006.
The setting up of the NPCI is part of RBI efforts
to build the appropriate technological
infrastructure for the smooth functioning of the
financial system. At the core of this drive is the
development of a sound and efficient payment
and settlement system.
This is in line with international practice where
retail clearing in entrusted to a separate legal
entity at the national level and the monetary
authority provides settlement services for all the
clearing systems, besides being the regulator
and supervisor of the payment and settlement
system. At present, electronic clearing both for
credit and debit operations functions from 46
places.
per cent to Rs 2,20,04,393 crore. The retail

payments systems include the cheque clearing
system and the electronic systems, including
electronic clearing service, electronic funds
transfer and card-based systems.
The company has been approved and registered
as a Section 25 company, which means that
equity holders will not share company profits
earned by the company. The authorised capital
of the company is Rs 300 crore and initial paidup capital would be Rs 100 crore. The NPCI will
initially be jointly owned by around 20 private,
public and foreign banks, with no institution
holding more than 10% stake. These banks
include most of the main players in the Indian
market such as State Bank of India, Canara
Bank, ICICI Bank, Bank of Baroda.
The functions of the existing clearing houses
owned by the Reserve Bank of India and State
Bank of India and other banks will be transferred
to the new company.
The overall turnover of various payment and

settlement systems in 2004-05 was up by 27.4
Banking Briefs
269
220
CLEARING CORPORATION OF INDIA LTD. (CCIL)

CCIL was incorporated in 2001.
Countrys first clearing house for the Government Securities, Forex and other related
market segments.
Operates Collateralized Borrowing and Lending Obligation (CBLO) a repo variant
with several unique features for NDS Members.
Recognising the need for upgrading the countrys
financial infrastructure in respect of Clearing and
Settlement of debt instruments and forex
transactions, Reserve Bank of India set up the
Clearing Corporation of India Ltd (CCIL). CCIL
was incorporated on the 30th of April, 2001, as
the countrys first clearing house for the
Government Securities, Forex and other related
market segments. State Bank of India took the
lead in piloting the discussions finalising a
blueprint for CCILs formation.
Set up a wholly owned Subsidiary Company

Clearcorp Dealing Systems (India) Pvt. Ltd.
to manage dealing platforms in Money and
Currency Markets.
The primary objective of setting up CCIL has

been to establish a safe institutional structure
for the clearing and settlement of trades in the
Government Securities, Forex (FX), Money and
Debt Markets so as to bring in efficiency in the
transaction settlement process, and insulate the
financial system from shocks emanating from
the operations related issues.
Electronic movement of Member Margins /

Collaterals facilitated through Value Free
Transfer Module of NDS.
The six core promoters for CCIL are SBI, IDBI,

ICICI Ltd., LIC, Bank of Baroda, and HDFC Bank.
The authorized share capital is Rs. 50 crore.
The following gives an overview of the activities
of CCIL:
clearing house for settlement of market
trades in Government Securities
Launched Electronic Currency Dealing

Platform FX Clear to facilitate inter-bank
foreign exchange dealing.
Extended scope of coverage of foreign

exchange settlements to include INR/USD
Cash and TOM trades.
Commenced net settlements in Government
Securities as per DVP III Guidelines of
Reserve Bank of India.
Started clearing and settlement of ATM
transactions of National Financial Switch
operated by Institute for Development and
Research in Banking Technology (IDRBT).
inter-bank foreign exchange transactions
Operationalised Straight Through

Processing arrangement for settlement of
foreign exchange trades done on FXCLEAR.
facility of guaranteed settlement for trades

in Government Securities.
Govt. Securities Lending and Borrowing

Scheme was operationalised.
guaranteed settlement of inter-bank foreign

exchange Spot trades in INR/USD and
Forward Trades on Spot Window.
Released its Sovereign Bond Indices,CCIL

BROAD GILTS INDEX, consisting of top 20
securities and CCIL LIQUID GILTS INDEX,
consisting of the 5 most liquid bonds, to track
the movement of the government securities
market.
Launched new Money Market Instrument

Collateralised Borrowing and Lending
Obligation (CBLO) a repo variant with
several unique features for NDS Members.
Banking Briefs
270
Operationalised Anonymous Auction System

to facilitate Buy Back of Government
Securities by Government of India.
221
Commenced settlement of cross currency

transactions through CLS.
released its T-Bill Index consisting of two Tbill indices CCIL EQUAL WEIGHT T-Bills
INDEX and CCIL LIQUIDITY WEIGHT T-Bills
INDEX. The CCIL T-Bills indices are
instruments that would capture the market
movement in the short term maturity
segment.
RBI launched the anonymous screen based
order matching trading module for govt.
securities on its Negotiated Dealing System
Order Matching Segment (NDS-OM) with
CCIL as the central counterparty to all deals.
CBLOi(Internet Trading System for Non-NDS
Members) commenced operations.
Future Plans
CCIL has put in place settlement arrangements
in the Securities and Forex segments, gone live
with CBLO segment, and Forex dealing platform
Fx-Clear. The settlement operations have
stabilized and the turnover in CBLO and Fx-Clear
are gradually going up. In the Securities Segment,
the settlement operation has since been
Banking Briefs
271
switched over to DvP III mode with netting of both

Funds and Securities which has facilitated the
Rollover of Repos. This has also enabled
participants to buy and sell securities on the
same day subject to the stipulations of RBI. CCIL
has plans to expand the scope of Securities
Settlement with the introduction of Security
Borrowing and Lending Programme.
CCIL has planned to consider acceptance of
Forward Trades on trade date itself for
guaranteed settlement. CCIL also plans to
commence settlement of other cross currency
trades after necessary tie-ups with a Settlement
Bank for final clearing and settlement of such
trades through the CLS system, as third party
member with CCIL members being fourth
parties. CCIL will shortly be releasing an internet
based trading platform for its CBLO product
which would provide access to corporates and
other non-banking entities to the institutional
lending and borrowing segment of money
markets. CBLO trades of Non-NDS members
are currently handled as Constituent Deals
through an NDS member. The extension of the
product through Internet is expected to increase
the depth and liquidity in the CBLO market.
222
ARCIL
Established in August 2003 under SARFAESI Act.
ARCs act as debt aggregators and engage in acquisition and resolution of NPAs.
It can restructure debts, strip & sell assets, settle with promoters, act as managers
and agents for recovery.
Foreign investors can now participate in equity capital of ARCs through FDI Route
Internationally, Asset Reconstruction Companies
(ARCs) have been created to bring about a
system-wide clean up of NPAs resulting from
financial and economic crises. In Asia, ARCs are
used to resolve bad-loan problems, and have
had a varying degree of success. ARCs act as
debt aggregators and engage in acquisition and
resolution of NPAs; and ARCs thus provide a
focused approach to the NPA resolution issue
by isolating NPAs from the banking system,
freeing the banking system to focus on their core
activities, facilitating their return to equity markets
and normal banking business.
accounts and NPAs comprise 14% of the GDP

at current factor cost. During last three fiscal
years new NPAs amounted to Rs. 66,000 Cr.
whereas NPAs over Rs. 77,000 Cr. were written
off. Out of the written off accounts, around 50%
will be in AUCA (Assets Under Collection
Accounts) having potential for value realization.
If we add 50% of the AUCA figures to the NPA
level of Rs. 2,03,000 Cr. the same will increase
to Rs. 2,36,000 Cr. and the same will account
for 16.3% of GDP.
NPAs in the Indian financial system being large

in dimension require on-going steps to unlock
their values. Restructured assets (Rs. 92000 Cr.)
and NPAs of all Scheduled Commercial Banks,
Financial Institutions, Non-Banking Finance
Companies and Co-operative banks (Rs.
1,11,000 Cr.) put together are Rs.2,03,000 Cr.
nearly 14% of the GDP at current factor cost.
Implementation of BASEL II from 2007 and 100%
provisioning on doubtful assets over three years
from March 2007 are likely to further increase
volume of NPAs. The present buoyancy of the
economy provides an opportune time for
recovering realizable value from the sizable
NPAs.
Asset Reconstruction Company India Limited

ARCIL is the first ARC in the country to be
licensed by RBI under the SARFAESI Act, 2002
to initiate business in India in the year 2003, with
a vision to be a major contributor to the Indian
economy by capturing value from the impaired
assets. The companys main objective is to
establish fair and transparent business parctices
and facilitate development of a market for
distressed debt. Adopting a bank-based model
of ARC, ARCIL has been funded by important
players in the Indian financial sector, namely the
State Bank of India, ICICI Bank, Industrial
Development Bank of India, Housing
Development Finance Corporation Ltd. and
HDFC Bank Ltd. SBI holds 19.95% share in
ARCIL. ICICI Bank is a bigger shareholder with
29.58%. ARCIL has been established as a
private sector body with 51% of its equity capital
being held by private sector banks. It acquired a
few financial assets from institutions and banks,
creating a record of being the first ARC to get
hold of financial assets in India. It is also an
associate member of the Indian Banks
Association and a member of the Corporate
Debt Restructuring system.
Banks have restructured Rs. 27,000 Cr. standard

assets which do not figure as NPAs. Beside, Rs.
65,000 Cr. debts have been restructured through
CDR.
Experience suggests that some of these
restructured loans (Rs. 92000 Cr.) are likely to
turn into NPAs. Restructured assets and NPAs
as stated above add up to Rs. 2,03,000 Cr. The
GDP at current factor cost as on September,
2005 is Rs. 14, 49,000 Cr. Thus restructured
Banking Briefs
272
Overview of ARCIL
223
ARCILs objectives

Convert NPA into performing assets

Act as a nodal agency for NPA resolution
Unlock value by utilizing productive assets
Create a vibrant market for NPA /
Restructured debt paper
Revitalizing the national economy
Re-energize the financial sector
No single promoter has a majority stake ensuring
independence of operations
ARCIL key strengths
ARCIL will bring about faster debt aggregation
and resolution of inter creditor issues. Debt
aggregation by ARCIL will enable single point
responsibility and ensure speedy implementation
of resolution strategy. ARCIL will pioneer the
development of an active secondary market for
Restructured Debt paper. ARCIL offers a
comprehensive range of resolution strategies
such as debt restructuring, mergers and
acquisitions, settlement with promoters and strip
sale of assets, based on an in depth analysis of
enterprise characteristics. Resolution strategy
adopted by ARCIL will be targeted towards
maximizing realization of value for the selling
banks.
The SARFAESI Act, 2002 provides that no fresh
reference to BIFR can be made once assets are
acquired by an ARC. ARCs are empowered to
change / takeover management and sale / lease
of assets under the Act. This empowerment will
be available as soon as RBI guidelines in this
regard are issued. These provisions facilitate
timely and effective implementation of the
resolution strategy.
The sale of the financial assets to ARCIL enables
the NPA to be taken off the loan books of the
Bank / FI and unlocks capital. Sale of NPAs on a
portfolio basis enables loss on sale of any one
asset to be set off against capital gains on
another, subject to RBI guidelines on provisioning
/ valuation norms. Takeover of debt by ARCs
reduces expenditure on NPA maintenance (legal
expenditure, follow-up requirements etc.) and
releases resources for core operations. Value
realizable to lenders is determined by the fair
price of the NPA (usually determined by an
Banking Briefs
273
independent valuer). Sellers have an opportunity

to invest, as Qualified Institutional Buyers (QIBs),
in Security Receipts (SRs) issued by ARCIL for
acquisition of NPAs. Subsequent to the sale of
NPAs no known liability devolves on the Banks /
FIs. The sale provides for sharing of upside upon
eventual realization by ARCIL.
Cash purchase Vs. purchase through SRs
By investing in SRs of the ARCIL trusts, banks
convert their NPAs into investment in their books
as standard investment and do not require
further provisioning. SRs represent undivided
rights, title and interest of the investors in the
financial assets held in the Fund floated by the
trusts. Thus the banks retain direct interest in
the underlying assets (NPAs). ARCIL passes on
bulk of the upside from the resolution to the
investors and thus banks as seller investors
stand to gain by remaining invested. This is in
contrast to a clean exit at the initial stages where
the benefit of the upside, if any, will not be
available to the banks. Cash purchase/sale of
NPAs would in all likelihood have lower pricing
compared to price offers of ARCs.
In general, banks with weaker capital bases and
low provisioning exposure choose to keep the
bad loans in their own books rather than sell it to
ARCs because when a bank sells a loan to
ARCIL, it needs to provide for the difference
between the assets book value and the value at
which ARCIL acquires it. By way of Basel II and
the more inflexible RBIs provisioning norms,
banks would be obligated to sell their bad loans
to ARCs by 2006-07.
PERFORMANCE OF ARCIL:
The Company has acquired 375 NPAs (114 large
cases and 261 small cases) with outstanding
dues of Rs. 17,783 Cr at an SR value of Rs.
4,358 Cr. During the third quarter of 2005-06 the
Company acquired total outstanding dues of Rs.
578 Cr. The Company has been able to achieve
targeted debt aggregation in respect of 86% of
SR value issued up to March, 2005. Till
December 31, 2005, Rs. 490 Cr. has been
recovered and distributed to the SR holders.
Resolution has been completed in 61 cases and
SR Value has been Rs. 2516 crores (88%). The
Company has fully redeemed and extinguished
224
trusts in respect of 7 large cases with a yield of

29% to the SR holders.
The policy on FII investment in SRs would

be reviewed after 1 year.
FDI/FII in ARCs
Their entry would bring much needed funds in

the sector. RBI has already issued guidelines
on inter bank/NBFC purchase and sale of NPAs.
These twocombined would likely result in better
valuations for selling system as moreplayers on
the buy side would facilitate price discovery and
benchmarking. Also, these guidelines would
increase the options to the banks. The sellers
can choose to receive cash and obtain clean
exit or receive SRs to participate in the potential
upside. Their entry would also help develop a
healthy NPA resolution culture with the new
money now also being available in the resolution
process (by way of equity/ priority debt etc.),
which in turn would speed up the resolution
process and an improved value realization.
Foreign investors can now participate in equity

capital of ARCs through FDI
Route
Maximum foreign equity shall not exceed
49% of the paid up equity capital of ARC.
An individual entity can invest upto 49% of
the paid up equity capital of an ARC.
The policy on FDI in ARCs would be subject
to review after 2 years.
FIIs can now invest upto 49 per cent of each
tranche of scheme of Security Receipts
subject to condition that investment of a
single FII in each tranche of scheme of SRs
shall not exceed 10% of the issue.
Banking Briefs
274
225
INDIA MORTGAGE GUARANTEE COMPANY (IMGC)

The India Mortgage Guarantee Company will improve the efficiency of housing
finance and protect mortgage lenders such as banks and housing finance
companies in cases of borrower default.
The company would help protect primary mortgage lenders HFCs and banks
in case of borrower default
The mortgage company would also provide guarantee support to the investors of
the securitised instruments
The first mortgage Guarantee Company was
pioneered in November 2002, with an initial
capital of $40 million in a bid to protect lenders
and mortgage investors from financial losses.
The National Housing Bank (NHB) holds 26 per
cent stake and the other promoters the
Canada Mortgage and Housing Corporation
(CMHC) and the Canada-based United
Guarantee Company (UGC) holds 24 per cent
each, while the Asian Development Bank (ADB)
and the International Finance Corporation (IFC)
hold 13 per cent each. CMHC and UGC would
lend their expertise for day-to-day operations of
the company, while ADB and IFC will be the
strategic partners.
The India Mortgage Guarantee Company will
improve the efficiency of housing finance and
protect mortgage lenders such as banks and
housing finance companies in cases of borrower
default.
The creation of IMGC will:
Generate a greater volume of mortgage

lending in the Indian market
Lower down payment requirements to as low
as 5%
Broaden the eligibility for mortgages, and
Extend mortgage repayment periods by up
to 25 years
These changes will, in turn, support capital

market development by promoting securitization
and increasing home ownership
With the enactment of The Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (The
Securitisation Act), banks have been
empowered to attach assets of the defaulters
without intervention of lengthy and time
consuming court procedures. This would help
Banking Briefs
275
the banks for speedier foreclosure of home loan

accounts in default. NHB is also operationalizing
the foreclosure laws, which will enable the HFCs
to foreclose the defaulting account and apply to
the recovery officer for sale of mortgaged
property. Easier foreclosure laws coupled with
the proposed mortgage credit guarantee
scheme of the NHB are expected to release nonperforming funds of HFCs for lending.
All housing loans above a cut-off point of loan to
value ratio will be compulsorily covered under
the scheme, for an upfront one time premium.
The company would help protect primary
mortgage lenders HFCs and banks in case
of borrower default. With the setting up of the
company, the risk of default has effectively
shifted to another entity, and lenders will be able
to improve their loan provisioning requirements,
thereby permitting a greater volume of mortgage
lending in the market. This would also help them
extend the tenure of loans to up to 25 years or
more instead of the current average of 15 years,
and improve the return on capital to the mortgage
lender.
HFCs and banks would be in a position to invoke
mortgage insurance if a borrower fails to repay
the loan. This scheme would also benefit
homebuyers.
The mortgage company would also provide
guarantee support to the investors of the
securitised instruments, to be created in the
form of non-recourse pass through vehicles.
This would mean that while the loan redemption
payments would pass through the originating
institution, the buyers of the securitised papers
would have to assume the credit risks. The credit
risks would be considerably mitigated by the
mortgage companys guarantee support.
IMGCLs income flows would mainly be from the
asset trading operations and the guarantee fees.
226
NATIONAL INTERNET EXCHANGE OF INDIA (NIXI)

The operationalisataion of NIXI, has enabled the routing the domestic traffic through
the national bandwidth.
The exchange help deliver better quality of services to users by reducing latency and
delays.
Already about 50 ISPs have signed up across the India.
Before the formation of NIXI, domestic traffic was
being bounced off via international bandwidth
rather than routed through local ISP (Internet
Service Provider) networks. For instance, if
packets have to be routed from Mumbai to
Chennai, it was likely that they were first going
from Mumbai to Singapore, then to US and then
come to Chennai. This was because the ISPs
whose traffic is originating from Mumbai did not
have a peering agreement with an ISP who has
a network in Chennai so the traffic can be routed
via that.
World over, this routing of domestic traffic is
done through peering. Peering is the
arrangement of traffic exchange between ISPs
where the participating ISPs allow traffic to ride
on each others network.
The operationalisataion of National Internet
Exchange of India or NIXI, has addressed the
issue and large chunks of their domestic traffic
are routed through the national bandwidth,
resulting in savings in operational costs for
service providers and surfing costs for users.
NIXI has now become the meeting point or in
more technical terms, the peering point of the
ISPs. Its purpose will be to facilitate domestic
Banking Briefs
276
Internet traffic by routing it through peering ISP

members, which in turn will save the usage of
international bandwidth and foreign exchange.
Apart from obtaining operational efficiencies, the
exchanges help deliver better quality of services
to users by reducing latency and delays. Savings
of foreign exchange as well as better quality are
the major advantages that Internet exchanges
bring.
With NIXI the quality of service for the customers
of ISPs participating in the project is expected
to significantly improve as multiple international
hops will be avoided and there will be lower
delays.
Currently delays are estimated to be in the range
of 0.7 seconds to 2.0 seconds. This is likely to
go down to 0.2 seconds to 0.4 seconds, which
will lead to markedly improved browsing.
Internet exchanges has been set up across the
following locations and the NIXI Nodes are
located at DELHI (STPI, Noida) , MUMBAI (STPI
, Vashi) ,Chennai(STPI) and Kolkata(STPI Saltlake). Already about 50 ISPs have signed up
across the above locations.
227
MULTI COMMODITY EXCHANGE OF INDIA

(MCX, NCDEX & NMCEIL)
MCX an independent and de-mutulised multi commodity exchange for facilitating online
trading, clearing and settlement operations for commodity futures markets across the
country
NCDEX is a professionally managed online multi commodity exchange.
National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, Electronic Multi-Commodity Exchange in India
Forward Markets Commission (FMC)
headquartered at Mumbai is the regulatory
authority for the commodity exchanges, which
is overseen by the Ministry of Consumer Affairs
and Public Distribution, Govt. of India. It is a
statutory body set up in 1953 under the Forward
Contracts (Regulation) Act, 1952. The
exchanges that have been set up under overall
control of Forward Market Commission (FMC)
of Government of India are Multi Commodity
Exchange of India Limited (MCX) , National
Commodity & Derivatives Exchange Limited
(NCDEX) and National Multi-Commodity
Exchange of India Limited (NMCEIL)
MCX an independent and de-mutulised multi
commodity exchange has permanent
recognition from Government of India for
facilitating online trading, clearing and settlement
operations for commodity futures markets
across the country. Key shareholders of MCX
include Financial Technologies (I) Ltd., State
Bank of India (Indias largest commercial bank)
& associates, Fidelity International, National
Stock Exchange of India Ltd. (NSE), National
Bank for Agriculture and Rural Development
(NABARD), HDFC Bank, SBI Life Insurance Co.
Ltd., Union Bank of India, Canara Bank, Bank of
India, Bank of Baroda and Corporation Bank.
Headquartered in Mumbai, MCX is led by an
expert management team with deep domain
knowledge of the commodity futures markets.
Through the integration of dedicated resources,
robust technology and scalable infrastructure,
since inception MCX has recorded many first to
its credit.
Banking Briefs
277
Inaugurated in November 2003 , MCX offers

futures trading in the following commodity
categories: Agri Commodities, Bullion, MetalsFerrous & Non-ferrous, Pulses, Oils & Oilseeds,
Energy, Plantations, Spices and other soft
commodities.
MCX has built strategic alliances with some of
the largest players in commodities eco-system
like New York Mercantaile Exchange, Inc (NYMEX), London Metal Exchange, Chicago
Exchange etc. MCX is offering spectacular
growth opportunities and advantages to a large
cross section of the participants including
Producers / Processors, Traders, Corporate,
Regional Trading Centers, Importers, Exporters,
Cooperatives, Industry Associations, amongst
others MCX being nation-wide commodity
exchange, offering multiple commodities for
trading with wide reach and penetration and
robust infrastructure, is well placed to tap this
vast potential.
With the view to extend the benefits of demat
system, it has been introduced in the commodity
sphere for the better and efficient settlement
system. Delivery of commodities can now be
effected through warehouse receipt in demat
form.
The exchange has consistently been on a growth
path since its inception and witnessed record
volumes in December 2005, with a cumulative
turnover of Rs.1,15,989.94 crores. In November
2005, it entered into a joint venture with Dubai
Metals and Commodities centre to set up Dubai
Gold and Commodities Exchange. It has
launched the MCX-COMDEX, Indias first
composite commodity futures Index, which is
calculated and displayed on a real-time basis.
228
National Commodity & Derivatives Exchange

Limited (NCDEX)
National Commodity & Derivatives Exchange
Limited (NCDEX) located in Mumbai is a public
limited company incorporated on April 23, 2003
under the Companies Act, 1956 and had
commenced its operations on December 15,
2003. It is promoted by ICICI Bank Limited, Life
Insurance Corporation of India (LIC), National
Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India
Limited (NSE). It is a professionally managed
online multi commodity exchange.
National Multi-Commodity Exchange of India
Limited (NMCEIL)
National Multi Commodity Exchange of India
Limited (NMCEIL) is the first de-mutualized,
Electronic Multi-Commodity Exchange in India.
On 25th July, 2001, it was granted approval by
the Government to organise trading in the edible
oil complex. It has operationalised from
November 26, 2002. It is being supported by
Central Warehousing Corporation Ltd., Gujarat
Banking Briefs
278
State Agricultural Marketing Board and Neptune

Overseas Limited. It got its recognition in October
2002.
Commodity exchange in india plays an important
role where the prices of any commodity are not
fixed, in an organised way. Earlier only the buyer
of produce and its seller in the market judged
upon the prices. Others never had a say. Today,
commodity exchanges are purely speculative in
nature. Before discovering the price, they reach
to the producers, end-users, and even the retail
investors, at a grassroots level. It brings a price
transparency and risk management in the vital
market.
A big difference between a typical auction, where
a single auctioneer announces the bids, and the
Exchange is that people are not only competing
to buy but also to sell. By Exchange rules and
by law, no one can bid under a higher bid, and
no one can offer to sell higher than somone
elses lower offer. That keeps the market as
efficient as possible, and keeps the traders on
their toes to make sure no one gets the purchase
or sale before they do.
229
REGIONAL RURAL BANKS

There are 196 RRBs with 14475 branches
More than 160 RRBs make profits
Narasimham Committee proposed several reforms for RRBs including creation of
separate subsidiary by combining branches of commercial banks and RRBs.
Some key reforms in RRBs: Deregulation of interest rate, permission to finance big
borrowers, handling non-fund based business such as guarantees and lockers.
Few sponsor banks have so far amalgamated 27 RRBs into 9 RRBs in few states
during the financial year 2005-2006
Government of India, with its developmental
initiatives during the first twenty five years after
independence, has observed in the early
seventies, that despite its wide banking network,
a critical gap still exists in rural areas, particularly
in meeting the credit needs of rural poor. To find
a solution for this, Govt. of India appointed a
working group on rural credit (popularly known
as Narsimham Committee) in July, 1975. The
Narsimham Committee observed that the cost
structure of commercial banks, attitudinal
features of their employees and lack of
professional banking approach in cooperative
credit structure were the true difficulties in rural
credit. It also observed that the deposit collection
by the Banks in rural areas was not totally
deployed in rural areas. Keeping in view of the
above, Narsimham Committee recommended
for creation of a new set of regionally oriented
rural banks which would combine the
cooperatives local feel and familiarity with
problems and commercial banks business
acumen. Regional Rural Banks (RRBs) were
established by promulgation of ordinance on 26th
September,1975. The first RRB was established
on 2 nd October,1975 coinciding the birth
anniversary of our father of the nation Mahatma
Gandhi. The RRBs are owned by Govt. of
India(50%), State Government(15%) and a
Sponsor Commercial Bank(35%). The sponsor
bank manages the RRB on behalf of owners.
RRB has emerged a major Central Government
Institution in 516 rural districts of the country.
The mandate of these rural financial institutions
was:
Banking Briefs
279
To take banking to the doorsteps of rural

masses, particularly in areas without
banking facilities
To make available cheaper institutional credit

to the weaker sections of the society, who
were to be the only clients of these banks
To mobilise rural savings and channelise

them for supporting productive activities in
rural areas
To generate employment opportunities in

rural areas and
To bring down the cost of providing credit in

rural areas.
2) PERFORMANCE OF RRBs
In initial stages, RRBs financed only the weaker
sections of the rural community-small and
marginal farmers, agricultural labourers, small
traders, and so on. Along with commercial
banks, they participated vigorously in poverty
alleviation schemes(IRDP) and disadvantaged
area programmes(Drought-prone, Desert
Development. With 95% of their branches in
rural areas, they have made substantial
contribution in financing agriculture.. RRBs
quickly became an important and integral part
of the rural credit system. However, their
financial viability was initially overstretched by
policy rigidities coupled with lower capital base
in an environment of inadequate infrastructure
and deeper social and economic disparities. In
the post reform era, more particularly after midnineties RRBs have adopted a multi pronged
230
Rs.in Crores
As at the
end of
No.of
RRBs
Dec.75
Jun82
June 88
Mar91
Mar95
Mar04
Mar05
Districts
No.of
covered branches
6
121
196
196
196
196
196
12
207
365
381
425
516
522
Deposits Advances
17
5393
13586
14527
14509
14433
14484
approach for overall development of the districts

as a whole. The following figures highlight
significant contribution of RRBs in rural sector.
0.20
382
2,455
4,989
11,150
56,350
62,283
3) REFORM MEASURES
CD Ratio
0.10
462
2,428
3,609
6,290
26,074
32,939
50
121
99
72
56
46
53
with sponsor bank for sustained viability in a

planned manner;
Provision of greater role space and larger
operational responsibilities to sponsor banks
in the management of RRBs;
Encouragement to function as self-help
promoting institutions and financing of selfhelp groups
Introduction of Kisan Credit Cards to simplify
provision of production credit to their clients.
After the financial sector reforms, several

measures to improve the viability of RRBs were
initiated. More importantly, re-capitalisation to
cleanse their balance sheets was taken up in
1993-94. Altogether, 187 RRBs have been
selected for recapitalisation with an aggregate
financial support of Rs.2182 crores. Other
important reform measures include:
RRBs have taken a lead role in financing of Self

Help Groups(SHGs) mostly comprising of
women leading to their economic and social
empowerment. The share of RRBs in SHGBank linkage programme is equally
commendable asunder:
Deregulation of interest rates on advances

as well as deposits;
Permission to lend to others outside target
groups;
Provision for rationalization of branch
network- relocation and merger of lossmaking branches;
Introduction of prudential norms on incomerecognition, asset classification and
provisioning;
Preparation of development action plans and
signing of memorandum of understanding
4) CONTRIBUTION TO MICRO CREDIT

MOVEMENT
5) THE AMALGAMATION OF RRBs

RRBs were created to exclusively serve the rural
sector wherein many infrastructural deficiencies
still prevail. Post-reforms, a uniform level-
AGENCY-WISE DISTRIBUTION OF NUMBER OF SHGs FINANCED UPTO 31-3-2003

Agency
SHGs
Bank Loan
No.
Amount
(Rs. In Crores)
Commercial Bank
3,61,061
50
114.95
56
RRBs
2,77,340
39
72.72
36
Cooperatives
78,959
11
17.20
(Source: NABARD REPORT 2002-03)

Banking Briefs
280
231
playing field has been created between rural

financial institutions and commercial banks with
regard to regulatory regime/practices/norms
though both are operating in divergent and
unequal economic backyards. The role and
structure of RRBs have now assumed a great
deal of importance in view of the growing rural
credit requirements and the emphasis on
financial inclusion. In a move to revitalising/
revamping the structure of RRBs to enable them
to play a critical role in rural and agricultural
credit, the Credit Policy announced by RBI in
Banking Briefs
281
October 2004 indicated that sponsor banks in

consultation with state government would initiate
steps for amalgamation of RRBs sponsored by
them in each state. In accordance with this
policy enunciation, few sponsor banks have so
far amalgamated 27 RRBs into 9 RRBs in few
states during the financial year 2005-2006 with
the approval of state and central governments.
Amalgamation of the remaining banks in other
states is expected to gain momentum during the
next financial year(2006-2007).
232
NON BANKING FINANCE COMPANIES (NBFCs)

NBFCs are popular due to simple procedures, speed of service, higher rate of interest
and timeliness in meeting credit needs of clients
NBFCs are now subjected to Capital Adequacy, IRAC norms, reserve requirements
The number of reporting NBFCs (registered and unregistered) declined from 875 at
end-March 2003 to 573 at end-March 2005
Some types: Leasing Company, hire purchase company, housing finance company,
Loan company, Residual non-banking finance company etc.
Non-banking financial companies represent a
heterogenous group of institutions separated by
their type of activity, organisational structure and
portfolio mix. Four types of institutions,
categorized in terms of their primary business
activity and under the regulatory purview of the
Reserve Bank, are equipment leasing
companies, hire purchase companies, loan
companies and investment companies. The
residuary non-banking companies (RNBCs)
have been classified as a separate category as
their business does not conform to any of the
other defined classes of NBFC businesses.
Besides, there are other NBFCs, viz.,
miscellaneous nonbanking companies (Chit
Fund), mutual benefit finance companies (Nidhis
and Potential Nidhis) and housing finance
companies, which are either partially regulated
by the Reserve Bank or are outside the purview
of the Reserve Bank.
A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act,
1956 and is engaged in the business of loans
and advances, acquisition of shares/stock/
bonds/debentures/securities etc. or receiving
deposits under any scheme. All NBFCs are not
entitled to accept public deposits. Only those
NBFCs having minimum stipulated Net Owned
Fund and holding a valid Certificate of
Registration with authorisation to accept Public
Deposits can accept/hold public deposits.
NBFCs, which commence operations after April,
21 1999 are required to have a minimum Net
Owned Funds (NOF) of Rs.2 Crore. Net Owned
Fund is the aggregate of paid up capital and free
reserves after adjusting a) the amount of
Banking Briefs
282
accumulated loss b) deferred revenue

expenditure and other intangible assets c)
investment in shares and loans and advances
to subsidiaries, companies in the same group
and other NBFCs in excess of 10% of owned
fund. Information of NOFs can complement the
information on CRAR.
TYPES OF NBFCS
Some of the major types of Non Banking
Financial Companies are as under:
Equipment Leasing Company: Principal

business is leasing or equipment or
financing of such activity
Hire Purchase finance Company: Principal

business is hire purchase transactions or
the financing of such transactions
Housing Finance Company: Principal

business is financing the acquisition or
construction of houses including acquisition
and development of plots.
Investment Company: Principal business is

acquisition of securities
Loan Company: Principal business is

providing finance by way of loans and
advances.
Mutual benefit finance company: A company

notified by Central Government under Sec
620 A of the Companies Act. They are also
called Nidhi Companies
Residual non-banking company: These are

companies not falling under any of the above
233
Ceiling on acceptance of Public Deposits

Category of NBFC
Ceiling on public deposits
EL/HP Companies maintaining CRAR of 15%

without credit rating EL/HP Companies with
CRAR of 12% and having minimum investment
grade credit rating
1.5 times of NOF or Rs 10 crore whichever

is less
LC/IC with CRAR of 12% and having minimum

investment grade credit rating
4 times of NOF
LC/IC with CRAR of 12% and having minimum

investment grade credit rating
and governed by the provisions of Residuary
Non-Banking Companies (RBI) Directions,
1987.
The NBFCs are allowed to accept/renew public
deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot
accept deposits repayable on demand. The
maximum rate of interest a NBFC can offer is
11%. The NBFCs are allowed to accept/renew
public deposits for a minimum period of 12
months and maximum period of 60 months.
They cannot accept deposits repayable on
demand. A NBFC cannot accept deposit without
rating except an EL/HP company complying with
prudential norms and having CRAR of 15%,
though not rated, may accept public deposit up
to 1.5 times of NOF or Rs. 10 crore whichever
is less. Advances constitute the main assets of
NBFCs
Prudential Norms for NBFCS:
Guidelines are prescribed on income
recognition, asset classification and provisioning
requirements applicable to NBFCs, exposure
norms, constitution of audit committee,
disclosures in the balance sheet, requirement
of capital adequacy, restrictions on investments
in land and building and unquoted shares.
All the NBFCs having assets size of Rs. 500
crore and above but not accepting public
deposits are required to submit Quarterly Return
Banking Briefs
283
1.5 times of NOF
on important financial parameters of the

company. All companies not accepting public
deposits have to pass a board resolution to the
effect that they have neither accepted public
deposit nor would accept any public deposit
during the year.
The focus of regulatory initiatives in respect of
NBFCs during 2004-05 was on deposit
acceptance norms and improved disclosures.
NBFCs were allowed to enter into credit card
business on their own or in association with
another NBFC or a scheduled commercial
bank. NBFCs are not allowed to issue any
debit card as it tantamounts to opening and
operating a demanddeposit account, which is
the exclusive privilege of banks. NBFCs which
were granted Certificate of Registration (CoR)
in the non-public deposit taking category should
meet the minimum capital requirement of Rs.2
crore for being eligible to apply to the Reserve
Bank for accepting deposits. NBFCs not
accepting/holding public deposits and having an
asset size of Rs.500 crore and above have to
submit a quarterly return in the prescribed format.
NBFCs/RNBCs also will have to follow certain
customer identification procedure for opening of
accounts and monitoring transactions of a
suspicious nature for the purpose of reporting it
to the appropriate authority under the know your
customer (KYC) guidelines and were required
to ensure full compliance with the provisions of
the guidelines before December 31, 2005.
234
Supervisory oversight by the Reserve Bank over

NBFCs encompasses a four-pronged strategy;
(a) on-site inspection based on the CAMELS
methodology; (b) off-site monitoring supported
by state-of-the-art technology; (c) market
intelligence; and (d) exception reports of
statutory auditors.
An Informal Working Group (Chairperson: Smt.
Usha Thorat) was constituted to examine the
issues involved in financing of NBFCs. The
recommendations of the Group include
extending bank finance to NBFCs for
permissible activities; using NBFCs as business
correspondents or agents; permitting banks to
rediscount the bills discounted by NBFCs
pertaining to the transport sector; using NBFCs
as a conduit for providing long-term funds to the
SME sector; and extending training facilities to
NBFCs engaged in financing the SSI and
agriculture sectors.
Banking Briefs
284
The 2006-07 Budget seeks to rectify anomaly

by abatement of interest and instalments of
principal in calculating value of service and has
proposed to rectify the anomaly by abatement
of interest and instalments of the principal in
calculating the value of the service
NBFCs performance at a glance.
The number of reporting NBFCs (registered and
unregistered) declined from 875 at end-March
2003 to 777 at end-March 2004 and further to
573 at end-March 2005, with deposits to the
extent of Rs.3,646.00 crores. The decline was
mainly due to the exit of many NBFCs from
deposit taking activity. Deposits of reporting
NBFCs constituted 1.1 per cent of aggregate
deposits of scheduled commercial banks at endMarch 2005 as against 1.2 per cent at end-March
2004 .
235
ECONOMY & FINANCE

CAPITAL AND
SECURITIES MARKET
Banking Briefs
285
DEBT MARKET IN INDIA
A well-developed debt market would help in financing the investment needs of

infrastructure and other essential sectors.
It helps in reducing the intermediation cost
It would provide scope for effective deployment of funds
Facilitate product innovation and better management of interest rate risk
Administered interest rate, cash credit facility and preference for shares affected its
growth.
Present facilitating factors: Deregulation of interest rate; introduction of short term

treasury bills; phased reduction in SLR; introduction of PDs; credit rating
Importance
A well-developed and strong debt market would
offer many benefits to the economy. It would
facilitate financing massive investment needs
of sectors such as power, telecom, ports and
housing, while reducing intermediation costs
relative to comparable instruments like bank
deposits and equity. The debt market would
enable banks and financial institutions to shore
up their Tier II capital by issuing bonds without
diluting the equity base. It would provide
conducive environment for the central bank to
move away to open market operations an
effective indirect instrument of monetary policy.
Institutional investors such as pension and
provident funds will find profitable avenues for
deploying funds at their disposal through the debt
market. The costs of borrowing for the Central
and State Governments could come down with
broadening of market for gilt edged securities
an important subsegment of the debt market
which is a captive market at present. And finally
such a market would encourage development
of new products for risk management such as
interest rate futures and options thus enabling
market participants to better manage interest
rate risk.
Structure
The Indian debt market includes the money
market and the bond market. While the money
market is fairly well developed with a wide range
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286
of instruments and a fairly large turnover, the

secondary market for bonds has been primitive
and stunted. The instruments traded in the debt
market include Government of India Securities,
Treasury Bills, State Government Securities,
Government guaranteed bonds, PSU bonds,
corporate debentures, commercial papers and
certificates of deposit. The principal regulatory
authorities of the debt market are Ministry of
Finance and the Department of Company
Affairs, Government of India, the Reserve Bank
of India and the Securities and Exchange Board
of India (SEBI). In addition, there are a few
associations of intermediaries such as brokers,
merchant bankers and fund managers in the
securities industry, some of whom are planning
to evolve into self-regulatory organisations. The
National Stock Exchange (NSE) is emerging as
another regulator of the secondary market
activity.
Reasons for Slow Growth
There are historical reasons for the stunted
growth of the debt market in India. The system
of administered interest rates which was
prevalent till the greater part of 1980s, neither
reflected the scarcity of capital nor credit risk,
though there was a differentiation between nonGovernment borrowers and issuers and
Government bonds. The prevalence of cash
credit system of lending for working capital and
long-term loans for project finance prevented the
236
development of marketable debt instruments.

The preference of retail investors for equity and
equity-linked instruments explains the relative
slow growth of market for non-convertible
debentures. The market for gilt edged securities
remained captive with yields under the
administered interest rate regime remaining
unattractive for general investors.
Gradual Emergence of Active Market for
Debt Instruments
Since the latter half of 1980s, a number of policy
measures were initiated for providing market
orientation to the debt market. The measures
which have provided a shot-in-the arm to the
fledgling debt market in India are listed below:
Gradual deregulation of interest rates on

money market instruments which are now
largely market determined.
Introduction of 364-Day Treasury Bills on

auction basis with no pre-determined
amount and without any support from the
RBI.
Introduction of 91-Day Treasury Bills on

auction basis with a pre-determined amount
and with RBI support at the cut-off yield.
Offering market-related
Government securities.
Phased reduction in the SLR requirements

for commercial banks.
on
Establishment of the National Stock

Exchange with a separate debt trading
segment.
Setting up of the Securities Trading

Corporation of India (STCI) aimed at
improving the liquidity of the Government
securities and thereby enhancing their
attractiveness to the investors. STCI has
been giving two way quotes for Government
securities and Treasury Bills.
Introduction of the system of Delivery

Versus Payment (DVP) in transactions of
Government securities at the Public Debt
Office of Reserve Bank of India in Mumbai,
to speed up process of transfer of securities
Banking Briefs
287
yields
by introducing transparency and eliminating

counter-party risks.
Introduction of a system of Primary Dealers

(PDs) to strengthen the infrastructure in the
Government securities market. PDs will
perform the role of underwriters and will
provide two way quotes in the secondary
market.
Construction of bond market indices by ISec and other agencies.
Presence of credit rating agencies to rate

debt instruments.
FURTHER STEPS NEEDED

There is a need to broadbase the market and
attract the retail investors. Already RBI bonds
are made available to retail investors and steps
should be taken to enhance retail participation
to increase depth and maturity of debt market.
The legal system is cumbersome and time
consuming and it is estimated that it takes
anywhere between 10 to 12 years for a case to
be concluded at the lower courts. Unless and
until contract enforcement is possible in a
reasonable time, the premium for this risk will
be a barrier for retail investors. In addition to this,
the debt market could become retail in case we
adopt innovative mechanisms to sell rated
papers for the retail segments.
There is a need to expand the area of
discretionary investment for the existing
institutional investors, besides encouraging new
institutional investors. There are other obstacles
in the way of sound development of debt market
such as high incidence of stamp duty,
multiplicity of regulatory authorities, obsolete
settlement mechanism, poor liquidity at the long
end of the market due to lack of sufficient paper
and players and the absence of a fully mark-tomarket valuation system among the investors.
The debt market can act as a catalyst for Indias
economic development. It has a potential to meet
massive needs of the infrastructure, housing and
also large funds requirement of the Central and
State Government.
237
CALL MONEY MARKET
Call Money is money borrowed for shorter repayment period (1-14 days) to meet
temporary mismatch
Call market is generally a one day or an overnight market
Major Participants: Banks/FIs/PDs and Mutual Funds
Banks borrow/lend in call money to meet CRR
RBI intervenes in Call Money Market through STCI & DFHI to stabilize rate
Weighted Average Call rate presently rules around 5%
Non-banking entities to lend less in call money market.
What is the inter bank call market?

The interbank call market is a part of the domestic
money market from where banks borrow and
lend on a daily basis.
Who can participate in this market?
All scheduled commercial banks (private sector,
public sector and cooperative banks), financial
institutions (term-lending institu-tions, insurance
companies) and mutual funds can participate
in this market. Non banking finance companies,
however, are not allowed to participate in this
market as yet.
Participants are split into two categories. The
first consists of those who can both borrow and
lend in this market, and the second of those who
can lend but not borrow. Only the banks can do
both.
Why does a bank borrow in the call market ?
Banks borrow in the call market to meet any
temporary shortfall in funds on any given day.
There are mainly two reasons why a bank may
face such a shortfall. Banks normally lend out
of the deposits that they mobilise. But there are
temporary gaps, or mismatches. The call money
market is used to manage these gaps.
The second reason is to meet the cash reserve
ratio (CRR) which is the cash reserves it must
maintain with the Reserve Bank of India, to meet,
daily cash needs of the banks clientele.
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288
For how long can a bank borrow these

funds?
Technically, the call money market is an
overnight money market. But a bank can borrow
these funds for between one day up to 14 days.
Normally, funds are borrowed for one day, and
up to three days on weekends.
Can the RBI lend in the call market? What
does intervention by the central bank
mean?
The RBI is the market regulator and cannot lend
or borrow funds in the call market. However, as
a regulator it can intervene in the market when
rates go through the roof. It inter-venes in the
market through two market intermediaries the
Securities Trading Corporation of India and
Discount and Finance House of India. The STCI
lends funds against the government securities
that a bank holds with an offer to sell back the
security (called repurchases or repos), while the
DFHI lends funds it receives from the central
bank against repos of certain securities specified
as eligible for them.
Why do rates fluctuate? What does this
indicate?
The rates fluctuate in the market depending on
the demand and supply of money in the market.
High rates indicate a tightness of liquidity in the
financial system. While low rates indicate an
238
easy liquidity position. This is due to the fact that

it has a limited number of players whose needs
are similar.
Some Developments
In tune with the suggestion of Narasimham
Committee II, that of ultimately moving towards
a pure inter-bank call/notice money markets
including primary dealers, the following
measures were taken.
To enable non-bank participants to deploy

their short-term resources repo market was
widened for these players.
Non-bank entities could lend, on an average

in a reporting fortnight up to 30% of their
average daily lending in call/notice money
market during 2000-01.
During 2004-05 the weighted average call rate

was more than 5%. During Apr-July 05 the call
rate touched a high of 6.50%.
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239
PRIMARY DEALERS IN GOVERNMENT SECURITIES
Guidelines for PD announced in Mar 95
Purpose: To strengthen the infrastruture in Government securities market; and to make

it liquid and broad based
Benefits: Help place primary issues in government securities with committed participant
in auctions; active secondary market for Government Securities; conduit for open market
operations of RBI; provides signals to RBI for market intervention
SBI DFHI Ltd. posted a net loss of Rs. 94.80 Cr during 04-05 due to hardening of interest
rate and consequential depreciation.
With a view to strengthening the infrastructure

in the Government securities market and making
it liquid and broad based, the Reserve Bank
announced on March 29, 1995 guidelines and
procedures for enlistment of primary dealers in
the Government securities market. The broad
features of the guidelines are :
(ii) provide active secondary market in

securities by giving two way quotes;
(a) The eligibility is based on the considerations

that primary dealers should have a strong
capital base and they should not be final
investors but dealers in securities.
Primary dealers enjoy certain privileges like

maintenance of clearing balance with the central
bank and participation in clearing, facility of
borrowing bonds/funds from the central bank,
operating switches with the central bank, right
to participate in securities auctions and access,
on an exclusive basis, to open market
operations. Primary dealers are subject to
prudential and capital adequacy regulations
either by the central bank or by the agency incharge of investor protection.
(b) the primary dealers shall maintain the

minimum capital standards on risk weighted
basis.
(c) The Reserve Bank would extend to primary
dealers facilities like Current Account/
Subsidiary General Ledger (SGL) Account,
liquidity support linked to bidding
commitments, freedom to deal in money
market instruments and a favoured access
to open market operations.
(d) Primary dealers would be subject to the
Reserve Bank regulation.
Primary Dealers serve a number of purposes
such as the following :
(i)
help placement of Primary issues in Govt.

securities by committed participation in
auctions;
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290
(iii) act as conduit for open market operations

by the central bank; and
(iv) provide signals to central banks for market
intervention.
In 1996 RBI announced the guidelines for

Satellite Dealers (SDs) in Govt. securities
market. They are intended to act as second tier
in trading and distribution of govt. securities. 11
entities have been granted approval for
registration as SDs as on November 18, 1997.
The Monetary Credit Policy of RBI (April 2000)
continues to permit the PDs to underwrite 100%
of the notified amounts in Treasury Bills as well
as dated securities auctions.
Perhaps the 100% underwriting is a step
towards the RBI eventually off loading the entire
240
notified amount on the PDs who will inturn, place

it with investors, a system followed in certain
developed countries. The RBI as manager of
public debt, can expect to get finer rates with
the increase in the number of PDs from 6 to 15,
the PDs would now vie with each other to get a
larger chunk of the securities auctioned. The
PDs will have access to RBI finance at Bank
Rate (BR) upto a base limit and at BR + 2% for
higher amounts.
PERFORMANCE OF PDs as at the end of
Mar 05 and Recent Trends.
There were 17 PDs in India as at the end of Mar
05. Security Trading Corp of India, DFHI, SBI
Gilts Ltd, Gilt Securities Trading Corporation Ltd,
IDBI Capital Market Services are some of them.
The total market turnover of all PDs was Rs.
16,66,020 Cr in Treasury bills and Rs. 68, 23,
054 Cr in Govt. dated securities for the year
ended 31st Mar 05. The net loss of the 17 PDs
was Rs. 250 Crores for the year ended Mar 05.
PD system has contributed to the development
of a deep and vibrant market for the Government
securities. Several issues such as granting the
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291
PDs limited exclusivity in the Treasury Bills

auctions and permitting them to invest in
Overseas Sovereign bonds and setting of JVs/
Wholly owned subsidiaries abroad to enable
them to diversify their balance sheets are under
examination.
SBI DFHI Limited
SBI Gilts Limited was incorporated as a
subsidiary of SBI in March 1996, to act as a
Primary Dealer in the government securities
market. Asian Development Bank has
contributed 15% to its equity, whereas, SBI and
its Associates and Subsidiaries contributed the
rest 85%. The company commenced its
operations in July 1996.During 03-04, SBI Gilts
has merged with Discount and Finance House
of India Ltd and the combined entity is renamed
as SBI DFHI Ltd. The combined entity posted a
net loss of Rs. 94.80 Crores for the year 2004
2005 (as against net profit of Rs. 174.09 Cr for
the year 2003-04) due to hardening of interest
rate and consequential depreciation. The
hardening of interest rates adversely affected
all market players.
241
CLEARING AND SETTLEMENT MECHANISM FOR

TRADES IN INDIAN CORPORATE DEBT MARKET
Capital Market helps in channelising scarce capital for economic development
Presence of well functioning clearing and settlement process is essential for any
developed capital market
Indian Corporate Debt market has been witnessing rapid growth. While there exists
a well developed Government Securities market, there is a need for a similar structure
for Corporate Debt Market
FM in the recent Budget 2006 has proposed setting up of a national exchange for
Corporate Debt Market
I. Introduction
The role of capital markets in channelling scarce
capital for necessary economic development is
well-known. In addition to acting as an interface
for channelling funds from savers to investors,
they also provide the necessary link for
implementing monetary and debt management
policies of the government. Institutional
arrangements, such as legal, financial and
economic rules underpinning exchange
mechanism have very real consequences for
emerging economies. As a part of their overall
agenda for economic development, continuous
efforts are being undertaken by emerging
economies to develop and strengthen the
institutional mechanism underlying their financial
markets and India is no exception. The need for
nur turing and developing necessar y
infrastructure for Indian corporate bond market
needs to be appreciated against this perspective.
In this paper, the term "corporate debt" and
"corporate bond" are used interchangeably,
encompassing debt instruments / bonds issued
by banks, financial institutions, public sector
undertakings and private corporates.
The presence of a well functioning clearing and

settlement process is one of the essential
ingredients of any developed capital market.
Such a mechanism addresses the risks involved
in the transfer of ownership of securities to the
buyer and the transfer of funds to the seller.
In India a well functioning institutional mechanism
for clearing and settlement is already in place to
support the equity, gilt and forex markets. BOI
Shareholding Ltd. (BOISL) and The National
Securities Clearing Corporation Ltd. (NSCCL),
act as clearing houses for trades conducted in
the equities and derivatives segments of
Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE) respectively. The
Clearing Corporation of India Limited (CCIL)
provides the institutional structure and
mechanism for clearing and settlement of trades
in Government Securities and Forex (FX).
However, there exists a conspicuous absence
of any institutional mechanism for clearing and
settlement of transactions in the Indian corporate
bond market. An efficient clearance and
settlement mechanism would allow market
participants to determine accurately their
payment and securities delivery obligations and
to discharge such obligations in a predictable
and safe manner at a low cost. Confidence in
the mechanisms for clearing, settling and holding
securities, therefore, is essential for any well
functioning market. The importance of the
establishment of an institutional mechanism for
clearing and settling trades in the corporate bond
There have been studies examining several

aspects of Indian corporate bond market such
as depth and composition, relationship between
YTM and volatility of returns, nature of spreads
between YTM of different categories of bonds,
market pricing of risk, etc. However, the need
for a proper clearing and settlement mechanism
in Indian corporate bond market trades has not
received adequate attention.
242
Banking Briefs
292
segment has been approached against this

background.
Importance of Corporate Debt Market
A mature corporate bond market is an important
element of capital market structure for any
economy. It helps in enhancing risk pooling and
risk sharing opportunities for investors and
borrowers. Beyond diffusing stresses on the
banking sector by diversifying credit risk across
the economy, it is an important source of low
cost long-term funds compared to traditional
banking loans. Corporate bond market also
provides the flexibility to tailor risk reward profile
specific to investors' and borrowers'
preferences.
Traditionally in India, the private corporate
sector's debt requirements were met largely by
banks and Development Financial Institutions
(DFIs). With the onset of economic reforms and
the gradual withdrawal of budgetary support,
DFIs, Public Sector Undertakings (PSUs) and
Public Sector Banks (PSBs) have increasingly
tapped the corporate bond market to borrow at
market related rates. The growth in the size of
the leading Indian corporates has also increased
the importance of bond market for raising
resources at cost effective rates.
Indian Debt Market
Indian debt market can be segregated into two
main segments the government securities
market and the corporate debt market. The
government securities market consists of
instruments (dated securities, treasury bills and
bonds) issued by central / state governments.
The corporate bond segment includes
commercial papers, certificates of deposit,
corporate bonds/ debentures and institutional
bonds issued by banks, financial institutions,
public sector under takings and private
corporates. This apart, there are also emerging
markets for securitization and interest rate
derivatives.
The debt markets are pre-dominantly wholesale
markets with institutional investors being major
participants. Banks, financial institutions,
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293
insurance companies, Primary Dealers (PDs),

mutual funds, provident funds and corporates
are the major players in these markets. Many
of these participants are also issuers of debt
instruments as well. Debt issues are mostly
privately placed or auctioned to the participants
and secondary market dealing are mostly done
on telephone. Predominance of institutional
players has resulted in the debt markets being
fairly concentrated in the form of a wholesale
market. Debt funds of the mutual funds industry,
comprising of liquid funds, bond funds and gilt
funds, provide an indirect mode for retail
participation in these markets.
Dominant Role of Government Securities
Market with Well-Developed Infrastructure
The dominance of government securities in
Indian debt market gets reflected both in terms
of outstanding stock as well as trading volumes.
Total outstanding debt formed around 37 per cent
of Indian GDP in 2002. Central Government
dated securities formed around 23 per cent of
GDP whereas the share of State Government
was 4.5 percent of GDP. PSU bonds / private
corporate bonds amounted to around 9 per cent
of GDP. In the secondary market transactions,
government securities account for more than 90
per cent of the trades. Outstanding Government
of India securities as on March 31, 2003 stood
at a voluminous Rs. 6,73,689.30 crore. The
maturity period goes upto 29 years with a
weighted average residual maturity of 13.75
years.
Indian Corporate Bond Market Structure,
Size, etc.
The emergence of debt securities in India as a
major source of finance for trade and industry
has been witnessed since the onset of reforms
in 1990s. Recent data on corporate funding
shows an increasing importance of debt in Total
Resource Mobilization (TRM). The share of debt
has consistently exceeded 95 per cent of the
TRM in the past couple of years.
All India financial institutions, public sector banks,
PSUs and state level undertakings / financial
243
institutions account for a major chunk of the

resources raised from the debt market. With
efforts of fiscal consolidation and decline in
budgetary support, there has been an increased
need for the PSUs and financial institutions to
opt for market borrowing. Banks in both public
and private sector have also started tapping this
market to raise tier II capital to fulfil their capital
adequacy requirements.
Data available on bond issues by PSUs shows
an annual compounded growth rate of 48.32 per
cent over 1997-98 to 2001-02.
Indian corporates both in the private and public
sectors are increasingly expanding their
operations beyond domestic frontiers and
envisaging global scale operations. Besides, we
are also witnessing mergers and acquisitions
arising out of the consolidation in the Indian
industry. The debt market is being increasingly
accessed to meet the resource requirement
arising out of the above activities. Two other
important developments having a positive
bearing on the Indian debt market are
securitization and the possible entries of
supranationals (Asian Developmental Bank
(ADB) and World Bank). Mortgage Backed
Securities (MBS) and Asset Backed Securities
(ABS) as a new instrument through the process
of securitization have entered the Indian debt
market and are gaining rapid grounds. They help
banks and financial institutions to unlock capital,
manage exposure limits and facilitate balance
sheet management. The potential volume for
securitization in banks alone is estimated at a
massive Rs. 600 billion as on March 31, 2002.
Within the corporate debt market there has been
an observed dominance of privately placed debt
compared to public issues. On an average, it
has maintained a share of over 85 per cent from
1995-96 to 2001-02. this dominance is perhaps
on account of inherent advantages in terms of
savings in time and cost, convenience of
structuring issues to match the needs of issuers
with that of investors and less stringent
compliance for private placement compared to
public issue. However, there has been some
recent endeavours by the regulator Securities
Banking Briefs
294
and Exchange Board of India (SEBI) to enhance

the nature and quality of disclosures for private
placement of debt as well. It is envisaged that
private placement is a cost-effective means of
raising resources of small amounts (say upto
Rs.50 crore) and public issues would be
resorted to for raising resources of higher
amounts.
Against this background, the Indian corporate
bond market can be viewed to have come of
age and has a significant role to play in the years
to come.
Requisites for the Development of an
Efficient Corporate Bond Market
Some of the factors identified as essential
prerequisites for the development of an efficient
corporate bond market are :
(a) Macroeconomic environment
(b) Supportive legal environment, securities
laws, committed regulators, etc
(c) Developed government securities market
providing a benchmark
(d) Developed equity market culture
(e) Market participants
(f) Clearing and settlement system
Clearing and Settlement Institution for the
Indian Corporate Bond Market : A Road Map
RBI had initially undertaken the responsibility for
the gilt and interbank money market and later
empowered CCIL to act as the clearing and
settlement agency for the gilt and forex market.
Similarly the two leading stock exchanges,
namely, BSE and NSE have also put in place
clearing and settlement mechanism for clearing
and settling trades on the equity and derivative
segment of the respective exchanges. In the
absence of similar arrangements in the corporate
bond market, researchers have suggested the
following :
(a) Introduction of institutional mechanism for
clearing and settling
(b) Start with DvP settlement
244
(c) Disseminating price data of settled trade

(d) Migrate to guaranteed settlement as we gain
experience
(e) Other prospective avenues of Central
Clearing House (CCH) activity
Conclusion
With the issues of fiscal consolidation, decline
in budgetary support, declining government
ownership in many existing public sector
organizations and the simultaneous emergence
of a strong and vibrant private sector, the
corporate bond market in India is likely to play a
more proactive role in financing the economy's
future investment needs. Further integration
across various segments of Indian financial
sector is inevitable with the decline in control and
regulations and the move towards capital
account convertibility. Risk-return perspective
and the institutional infrastructure will be the
Banking Briefs
295
deciding factor in attracting funds into each

segment of the market.
In order to nurture and tap the potential of this
sector of the Indian capital market, necessary
infrastructure for its smooth functioning should
be put in place. An efficient clearing and settling
mechanism that has been in operation catering
to the needs of the forex, equity and government
securities market, needs to be established for
the corporate bond market as well. Its presence
will not only help in reducing some of the existing
inefficiencies and associated risks of nontransparency of negotiations, illiquidity, lack of
information dissemination and efficient price
discovery but also strength another avenue for
channelling funds into productive investments
to facilitate further economic growth. In the
Budget 2006, FM has announced the policy for
setting up a national exchange for corporate debt
market.
255
GLOBAL DEPOSITORY RECEIPTS (GDRs)
GDRs are dollar denominated instruments traded in US or Europe or both.
GDRs represent a fixed ratio of Indian Shares
It helps in raising funds from international market.
It is freely tradable and can be cancelled any time. Cancelled GDRs can be re-issued
(i.e two-way fungibility is permitted)
GDR holders assume exchange risks and price fluctuation risk.
Holders entitled to receive dividends but have no voting rights.
A GDR is a dollar denominated instrument

traded on the stock exchanges in Europe or the
US or both. Usually they represent a certain
number of equity shares. So, though the GDR
is denominated in dollars, the underlying shares
are denominated in rupees. The GDRs represent
a fixed ratio of Indian shares. The GDRs are
issued by a depository (usually an American
bank) denominated in US dollars, while the
actual Indian shares are held by a custodian in
India (typically an Indian institution like ICICI). It
is a negotiable certificate. These depository
receipts may be traded freely in the overseas
markets like any other dollar-denominated
security either on a foreign stock exchange or
in the OTC market.
The modus operandi of issuing a GDR is as
under: First a board resolution has to be passed
to adopt the issue. After this, an application is
made to the Ministry of Finance (MoF). The
approval from the MoF only specifies the price
range at which the issue is to be made. This is
because pricing is finalised only in the last stage.
A prospectus is then prepared, called the red
herring prospectus, which leaves a blank space
on the section reserved for entering the issue
price of the share. The underwriter then markets
the issue by organising road shows. The shares
are issued by the company to an intermediary,
the depository in whose names the shares are
registered. The physical possession of the
shares is with the custodian who is an agent of
the depository. Once a GDR is issued it can be
traded freely among investors. However, an
investor who wants to cancel a GDR can do so
only after the cooling off period of 45 days.
Dividend payments are made by the company
in rupees - which the depository converts into
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296
dollars and pays to the investor. In recent times,

when the demand for Indian paper increased
and then boomed with the coming of FIIs, some
issues began to be priced at a premium over
the price prevailing on the Indian bourses.
The buyers of GDRs tend largely to be
institutional investors. The advantage for such
a foreign investor in dealing with the GDRs
(rather than the underlying shares) of the Indian
Company is that it can effectively enjoy the
benefits of being a shareholder without having
to register itself as a SEBI approved foreign
institutional investor in India, i.e. without having
to subject itself to the settlement practices and
delivery procedures of the Indian Stock
Exchanges and without having to receive its
income in rupees.
The GDR is as liquid as the shares of the same
company in its home country. It can be traded
on the stock exchange. If for whatever reason,
a GDR holder wishes not to hold the GDR or to
trade it overseas he always has the option to
approach the depository bank for cancellation
of the GDR and the release of the underlying
shares back in India into the Indian stock market
for sale. GDRs can also be reconverted.
Apart from the exchange risk that he assumes,
the primary concern of a foreign investor who
buys the GDR of an Indian Company is the
behaviour of the underlying share itself in the
domestic Indian stock market.
GDR holders may enjoy all economic benefits
of the underlying shares but none of the
corporate rights. They do not have any voting
rights themselves. The record of ownership of
the underlying shares will stand in the name of
the overseas depository. Nonetheless, the
underlying shares represent large chunks of
voting capital.
246
AMERICAN DEPOSITORY RECEIPTS (ADRs)
ADRSs are dollar denominated instruments traded in US.
ADRs help companies in accessing funds from US; improve accounting and disclosure
practices; and get better valuation
ADRs can be cancelled and re-issued (i.e two-way fungibility is allowed)
ADR holders have no voting rights
ICICI, Satyam Infoway, Infosys are some companies which floated ADRs.
ADRs were first introduced in 1927 in response

to a law passed in Britain which prohibited British
companies from registering shares overseas
without a British-based transfer agent. UK
shares were not allowed to leave the UK
physically, and so, to accommodate US investor
demand, a US instrument had to be created;
this was called an American Depository Receipt.
American Depository Receipt (ADR) is a
negotiable instrument denominated in US dollars
and issued by a depository bank representing
ownership in non-US securities representing the
underlying ordinary shares. The most important
distinction for issuers of ADRs is that some
structures allow the company to raise capital in
the US while others simply provide a mechanism
facilitating the US investors to buy and trade
existing shares.
Advantages of ADRs
i)
simplify the trading and settlement of foreign
equities;
ii) offer lower trading and custody costs as
compared to shares bought directly in the
foreign market;
iii) ADRs are termed as domestic securities
and that makes it possible for many US bank
and pension fund portfolios to invest which
are otherwise prohibited to invest in nondomestic issues;
iv) enhance the liquidity of the underlying
shares of the issuer;
v) ADRs can be used as an equity financing
tool in merger and amalgamation
transactions.
ADR/GDR Guidelines
company is governed by the provisions of Issue

of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 (Guidelines) which
were announced by the Government of India on
November 12, 1993. These guidelines require
that any Indian company desirous of offering
ADRs to overseas investors is required to obtain
approval of the Ministry of Finance. The issuer
company should also have a consistent track
record of good performance (financial or
otherwise) for a period of at least three years.
This requirement has been done away with in
case of infrastructure companies.
The guidelines state that ordinary shares issued
against the ADRs shall be treated as direct
foreign investment in the issuing company and
such investment will be governed by the Foreign
Direct Investment Guidelines issued by the FIPB.
ADR holders are generally not entitled to any
voting rights as the ADRs are not shares. The
underlying shares are held by the Depository
which is entitled to vote at the general meetings.
ADRs are freely tradable in the overseas market
like any other dollar-denominated security. GDR/
ADR holders can sell their underlying shares on
a recognised stock exchange, through a
registered stock broker and remit the proceeds
out of India without RBIs prior approval. Also,
blanket permission from the apex bank is
available to the issuer company to repatriate
dividend or to issue additional ADRs to the
existing holders in case of rights or bonus
issues. ADRs which are cancelled can be reissued.
Any issue of ADRs or GDRs by an Indian

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247
INDIAN DEPOSITORY RECEIPT (IDR)
Indian version of ADR/GDR
helps foreign companies to access Indian funds
The issuing company should have pre-issue paid up capital and free reserves of min
US $ 100 million and turnover US $ 500 million
The issue in any financial year shall not exceed 15% of the capital.
Indian Depository Receipt (IDR) is an indian

version of ADR/GDR to attract Foreign
Investments in India. Readers are suggested to
refer the articles on ADR/GDR to understand
the mechanism. In this chapter we confine to
providing the guidelines for issue of IDRs.
In terms of the Companies (issue of Indian
Depository Receipts IDRs) Rules, 2004
notified by the Government, a company
incorporated outside India can issue IDRs
subject to the following:
a.
the pre-issue paid-up capital and free

reserves of the issuing company should be
alteast US $ 100 million with an average
turnover of US $ 500 million during the
preceding threee financial years;
b.
the company has been making profits for

atleast five years preceding the issue and
has been declaring dividend of not less than
10% each year in this peripd; and
c.
the pre-issue debit-equity ration is not more

than 2:1.
The issuing company may or may not have

established any place of business in India. The
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298
issuing company would also have to fulfill the

eligivilty criteria stipulated by the SEBI and obtain
necessary approvals from local authorities.
According to the IDR rules, the issuing company
shall appoint an overseas custodian bank, a
domestic depository and a merchant banker for
the purpose of issue of IDRs. The underlying
shares will be delivered to an overseas
custodian bank which will authorize the domestic
depository to issue IDRs. IDRs will not be
redeemable into the underlying equity shares for
a period of one year from the date of issue. IDRs
issued by any company in any financial year shall
not exceed 15% of its paid-up capital and free
reserves. The IDRs will have to be denominated
in Indian rupees, irrespective of the
denomination of the underlying securities.
IDRs will be listed on one or more recognized
stock exchanges having nation wide trading
terminals in India and may be purchased,
possessed and freely transferred by person
resident in India as defined under FEMA, 1999.
IDRs can be transferred and redeemed, subject
to the provisions of the FEMA.
248
EXCHANGE TRADED FUNDS
ETFs are funds that are listed on stock exchanges and traded like individual stocks
ETFs are linked to some index
In this the underlying shares are not traded
The prices of ETFs are determined by market dynamics
Benefits: It provides the benefit of diversified index funds and brings trading flexibility of
stocks. The operating expenses are lower
The first ETF in India was launched in 2001
What are Exchange Traded Funds?

Exchange Traded Funds, more popularly known
as ETFs, are a hybrid of open-ended mutual
funds and listed individual stocks. In simple
terms, ETFs are funds that are listed on stock
exchanges and traded like individual stocks.
Therefore, ETFs bring the trading and real time
pricing advantage of individual stocks to mutual
funds.
How do ETFs compare with mutual funds
structurally?
ETFs are not much different from mutual funds
in that they too enable an investor to own part of
a portfolio managed by a professional. Also, like
mutual funds, ETFs entitle investors to a
proportionate amount in their underlying portfolio.
However, unlike the mutual funds, which are
actively managed by the fund manager, ETFs
are linked to some index and are not managed.
In that sense, an investor does not have to worry
about the performance of the fund manager.
But there are some significant differences
between mutual funds and ETFs. Unlike mutual
funds, ETFs do not sell their shares directly to
investors for cash. A securities firm creates
ETFs by depositing a basket of stocks. This large
block of stocks is called a creation unit. In return
for these stocks deposited, the ETF receives
shares, which are then offered to investors over
the stock exchange. Thus, the stocks deposited
form the holding of the ETF.
In the case of mutual funds, the portfolio
undergoes changes whenever an investor buys
or redeems units, but in the case of ETFs,
trading at the stock exchanges does not affect
their portfolio.
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299
What are the advantages and disadvantages of investing in ETFs?

While providing the benefits of diversified index
funds, ETFs bring in the trading flexibility of
stocks. Just like the shares, ETFs can be bought
on margin, short sold, etc. Thus, investors have
ready liquidity even when they own not shares
but only a part of a diversified portfolio. Moreover,
the operating expenses of these funds are lower
than even that of similar index funds. This
difference is reflected in the somewhat higher
NAV against an index fund of same portfolio.
However, because ETFs are bought and sold
over stock exchanges, there is a transaction
cost involved in dealing with brokers. Also, at
times, an ETF can trade at a discount to the
NAV of the underlying net asset value.
What determines the price of Exchange
Traded Funds?
Since ETFs are listed on stock exchanges, it is
possible to buy and sell these throughout the
day, which one cannot do with mutual funds. And
because ETFs are traded on the stock
exchanges, their price is determined by the
demand-supply dynamics in the market.
However, since they are essentially open-ended
mutual funds, the price is also dependent on the
value of assets held by them. In practice, they
trade in a small range around the value of the
assets (NAV) held by them.
Does India have an exchange traded fund?
The first exchange traded fund in the world Standard & Poors Depository Receipt (SPDR)
- was launched in 1993. Indias first ETF - Nifty
Benchmark Exchange Traded Scheme (Nifty
BeES) - was launched towards the end of 2001
by Benchmark Mutual Funds.
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MUTUAL FUNDS (MFs)
UTI, the first mutual fund, in 1964. Public sector MFs in 1987. Private and Foreign
Mutual Funds in 1993
As at the end of Mar 05, there were 31 MFs and 462 schemes with total assets of
Rs.1,49,601 Crores
Regulated by SEBI
MFs sell units in small sums to investors and deploy the funds so collected in the
market as per the investment objective of the individual schemes.
SBI MF manages asset over Rs. 6000 Cr.
Mutual Fund
Worldwide, the Mutual Fund, or Unit Trust as it
is called in some parts of the world, has a long
and successfull history. The popularity of the
Mutual Fund has increased manifold. In
developed financial markets, like the United
States, Mutual Funds have almost overtaken
bank deposits and total assets of insurance
funds. As at the end of December 1999, in the
US alone there were 7,791 Mutual Funds with
total assets of over US$ 6.8 trillion (Rs.296 lac
crores).
In India, the Mutual Fund industry started with
the setting up of Unit Trust of India in 1964. Public
Sector banks and financial institutions began to
establish Mutual Funds in 1987. The private
sector and foreign institutions were allowed to
set up Mutual Funds since 1993. As at the end
of Mar 05 , there were 31 Mutual Funds and 462
schemes with total assets of Rs.1,49,601
crores. During 2003-04 MFs have mobilized Rs.
47,684 Crores through 467 schemes.
Traditionally debt oriented schemes topped the
funds mobilization of MFs and the trend
continued in 2003-04 as well.
In February 2003, following the repeal of the Unit
Trust of India Act 1963 UTI was bifurcated into
two separate entities. One is the Specified
Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores
representing broadly, the assets of US 64
Banking Briefs
300
scheme, assured return and certain other

schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator
and under the rules framed by Government of
India does not come under the purview of the
Mutual Fund Regulations. The second is the UTI
Mutual Fund Ltd, sponsored by SBI, PNB, BOB
and LIC. It is registered with SEBI and functions
under the Mutual Fund Regulations.
The Securities and Exchange Board of India
(SEBI) regulates this fast growing industry.
What is a Mutual Fund?
A Mutual Fund is a trust that pools the savings
of a number of investors who share a common
financial goal. Anybody with an investible surplus
of as little as a few thousand rupees can invest
in Mutual Funds. These investors buy units of a
particular Mutual Fund scheme that has a
defined investment objective and strategy.
The money thus collected is then invested by
the fund manager in different types of securities.
These could range from shares to debentures
to money market instruments, depending upon
the schemes stated objectives. The income
earned through these investments and the
capital appreciation realised by the scheme are
shared by its unit holders in proportion to the
number of units owned by them. Thus a Mutual
Fund is the most suitable investment for the
common man as it offers an opportunity to invest
in a diversified, professionally managed basket
of securities at a relatively low cost.
250
Types of Mutual Fund Schemes
(B) By Investment Objective
There are a wide variety of Mutual Fund

schemes that cater to our needs, whatever our
age, financial position, risk tolerance and return
expectations. Different schemes are :
Growth Schemes
(A) By Structure
Open-Ended Schemes
These do not have a fixed maturity. You deal
directly with the Mutual Fund for your investments
and redemptions. The key feature is liquidity. You
can conveniently buy and sell your units at Net
Asset Value (NAV) related prices.
Aim to provide capital appreciation over the

medium to long term. These schemes normally
invest a majority of their funds in equities and
are willing to bear short-term decline in value
for possible future appreciation.
These schemes are not for investors seeking
regular income or needing their money back in
the short-term.
Ideal for :
Investors in their prime earning years.
Investors who need some income to

supplement their earnings.
Close-Ended Schemes
Schemes that have a stipulated maturity period
(ranging from 2 to 15 years) are called closeended schemes. You can invest directly in the
scheme at the time of the initial issue and
thereafter you can buy or sell the unit of the
scheme on the stock exchanges where they are
listed. The market price at the stock exchange
could vary from the schemes NAV on account
of demand and supply situation, unitholders
expectations and other market factors. One of
the characterisitcs of the close-ended schemes
is that they are generally traded at a discount to
NAV; but closer to maturity; the discount narrows.
Balanced Schemes
Aim to provide both growth and income by
periodically distributing a part of the income and
capital goals they earn. They invest in both
shares and fixed income securities in the
proportion indicated in their offer documents. In
a rising stock market, the NAV of these schemes
may not normally keep pace, or fall equally when
the market falls.
Ideal for :
Some close-ended schemes give you an

additional option of selling your units directly to
the Mutual Fund through periodic repurchase at
NAV related prices.
SEBI Regulations ensure that at least one of the
two exit routes are provided to the investor.
Interval Schemes
These combine the features of open-ended and
close-ended schemes. They may be traded on
the stock exchange or may be open for sale or
redemption during predetermined intervals at
NAV related prices.
Money Market/Liquid Schemes

Aim to provide easy liquidity, preservation of
capital and moderate income. These schemes
generally invest in safer, short-term instruments
such as treasury bills, certificates of deposit,
commercial paper and interbank call money.
Return on these schemes may fluctuate,
depending upon the interest rates prevailing in
the market.
Ideal for :
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301
Investors looking for a combination of

income and moderate growth.
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Corporates and individual investors as a

means to park their surplus funds for short
periods or awaiting a more favourable

investment alternative.
Other Schemes
Tax Saving Schemes
These schemes offer tax rebates to the investors
under tax laws as prescribed from time to time.
This is made possible because the Government
offers tax incentives for investment in specified
avenues. For example, Equity Linked Savings
(ELSS) and Pension Schemes.
The details of such tax saving schemes are
provided in the relevant offer documents.
Ideal for :
Investors seeking tax rebates.
Special Schemes
This category includes index schemes that
attempt to replicate the performance of a
particular index such as the BSE Sensex or the
NSE 50, or industry specific scheme (which
invest in specific industries) or sectoral schemes
(which invest exclusively in segments such as
A Group shares or initial public offerings).
Index fund schemes are ideal for investors who
are satisfied with a return approximately equal
to that of an index.
Sectoral fund schemes are ideal for investors
who have already decided to invest in a particular
sector or segment.
About AMFI
AMFI stands for Association of Mutual Fund in
India. It has got a website which can be
accessed at www. Amfiindia.com. SEBI has
mandated all Mutual Fund companies to update
the Net Asset Values (NAVs) of various schemes
on this website by 8 P.M everyday to enable the
investors to know the NAV position on a daily
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302
basis.
AMFI also conducts various
examinations for different functionaries such as
Mutual Fund Advisors etc. As per SEBI
guidelines, it has become mandatory for all
agents, distributors and persons engaged in
sales and marketing of Mutual Funds to obtain
certification from AMFI. Our Bank has introduced
a special incentive scheme for our staff
members for obtaining the certification from
AMFI.
ABOUT SBI MUTUAL FUND
SBI Mutual Fund was set up in June 1987. Today,
the fund has a market share of 3.1% with more
than 8 lac investors spread over 18 schemes.
The total Asset Under Management (AUM) of SBI
Mutual Fund as on 31st March, 2005 is Rs. 6635
Crores. SBI MF reported a net profit of Rs. 15.05
Crores for the year ended Mar 05. The readers
can get more information on SBI Mutual Fund
on the website www. Sbimf.com.
In July 04, our Bank signed a MOU with Societe
Generale Asset Management (SGAM) to divest
37% of our holding in the Mutual Fund arm for
an amount exceeding US$ 35 million. SGAM is
the asset management arm of Societe Generale
group which manages more than Euro 252 billion
and operates in 20 countries including the U.S,
U.K, Japan, Thailand, Korea, China, Singapore
besides the Eurozone countries. SGAM would
bring its expertise in the area of Product
Development, innovation, economic Research
and strategy, investment process, risk control
and compliance.
As at the end of Dec 05, there were more than
200 equity funds in India. SBI MF's Magnum Tax
gain topped the return chart with 98% during
2005. 5 out of top 15 equity funds in terms of
returns were from SBIMF.
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MONEY MARKET MUTUAL FUNDS (MMMFs)
Introduced in 1992
Objective: To provide depth, stability and maturity to money market; and to increase
returns on investment to individual investors
Enables individuals to invest in: Treasury bills, dated government securities, CPs, CDs,
call or notice money through MMMFs scheme.
Both public and private sector MFs offer MMMF scheme
MFs are allowed to offer cheque writing facility to investors for MMMF schemes.
The genesis of the MMMFs in India is not very

old. In late 80s the Working Group on Money
Market (Chairman: N.Vagul) made a serious of
recommendations for developing various
segments of the money market. The Discount
and Finance House of India (DFHI) was
established in 1988 to promote secondary
market activity in money market instruments. In
September 1991, the RBI, while initiating the
reforms process in the country, felt the necessity
of strengthening the money market and
appointed a task force to examine indirect
participation of individual investors in the money
market through MMMFs. The RBI had twin
objectives behind inviting the household sector,
firstly, to provide depth, stability and maturity to
the money market and secondly to increase
returns on investments of individual investors.
On the basis of the recommendation made by
the task force, MMMFs Scheme was introduced
in April 1992. Initially only mutual funds floated
by insurance companies, public financial
institutions and nationalised banks were allowed
to start MMMFs and RBI issued guidelines
stipulating certain limits for investments by
MMMFs. RBI has also permitted private sector
funds to set up MMMFs.
In order to make the MMMFs more attractive to
non resident Indians (NRIs), the RBI has
permitted repatriation of dividend and income on
these subscriptions. The principal amount of the
subscription continues to remain non
repatriable. There is minimum lock-in period of
15 days which means that an investor cannot
exit out of the MMMF within 15 days of making
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303
his investment.
Public sector, mutual funds required prior
authorisation of only the RBI and the private
sector mutual fund needs to approach the RBI
as well as SEBI to setup MMMFs.
MMMFs, which invest exclusively in various
money market instruments like treasury bills,
dated government securities with an unexpired
maturity of up to one year, call and notice money,
commercial paper (CPs) and certificate of
deposit can now determine the extent of their
investment in individual instruments except in
the case of CPs, where RBI has kept a limit on
a MMMFs exposure to CPs issued by a company
to three percent of the total corpus. Allowing
corporates to invest also added to the optimism.
Kothari Pioneer Mutual Fund was the first to
launch a money market scheme and now many
MFs offer Money Market Schemes.
In its Credit Policy of April, 1999 RBI has allowed
banks to offer cheque writing facility for the
investors of money market mutual funds
(MMMF).
It should be in the nature of a drawing account
and no deposits can be made in the account. It
should clearly specify the drawal limit and the
number of cheques that can be drawn as
prescribed by the MMMF.
RBI has said that as MMMFs are non-banks and
cannot provide cheque writing facility directly,
this facility has to be in the nature of a tie-up
arrangement with a bank.
253
GOLD DEMAT
Commodity futures including gold are traded in commodity exchanges and online
exchanges such as MCX, NCDEX, NMCE and NBoT in India.
Gold and silver are highly traded on the MCX; Agri commodities are traded more
on the NMCE and the NCDEX.
The gold traded is required to meet certain pre-set quality specifications
MCX, in association with the World Gold Council, has launched a new product - a
gold contract that is settled in a week (T+7)
The lifting of the 30-year ban on commodity

futures trading in India has opened yet another
avenue for investors. Commodity futures are
traded in commodity exchanges and popular
online exchanges such as the Multi Commodity
Exchange (MCX), the National Commodity and
Derivatives Exchange (NCDEX), the National
Multi-Commodity Exchange (NMCE) and the
National Board of Trade (NBoT) in India. These
are platforms on which market participants
come together to effect their trades. The NCDEX
and the MCX are located in Mumbai, the NMCE
in Ahmedabad and the NBoT in Indore. These
exchanges are promoted by leading banks. The
NCDEX is co-promoted by the NSE; the MCX
by the SBI group; and the NMCE by the Central
Warehousing Corporation.
Investors are required to open a trading account
with a broker or sub-broker ; by providing
documents establishing address, identity proof
and Bank account details. Those who want to
give or take physical delivery for a contract on
the MCX and the NCDEX are additionally
required to open a demat account with NSDL or
CDSL, apart from providing local sales tax
registration details of the delivery centre.
The Forward Markets Commission (FMC)
approves commodities that can be traded.
Commodities available for trading include bullion
gold and silver; metals steel, copper,
aluminium, lead and nickel; crude; and several
agri commodities. Crude, gold and silver are
highly traded on the MCX, agri commodities are
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304
traded more on the NMCE and the NCDEX.

Commodity future contracts are tradeable
standardised contracts, the terms and
conditions of which are set in advance by the
exchanges regulating the trade.
The gold traded is required to meet certain preset quality specifications .On the NCDEX and
MCX a minimum fineness of 0.995 and a serial
number of an approved refiner is required while
it is 0.999 fineness in the NMCE.The Lot size is
kg in MCX and 100 gm in NCDEX and
NMCE.The quotation is 10 gm of 0.999 fineness
in all the exchanges. The delivery centre for
NCDEX is Mumbai and for MCX Mumbai and
Ahmedabad while NMCE has 7 delivery centres.
The delivery size is 100 gm in NMCE and 1000
gm in the case of NCDEX and MCX.
If a person wants to enter into a delivery
settlement for gold, he will have to enter into a
minimum of 10 contracts or multiples thereof.
Market participants are required to negotiate only
the quantity and price of the contract, as all other
parameters are predetermined by the exchange.
A settlement takes place either through squaring
off your position or by cash settlement or physical
delivery. Squaring off is taking a contrary position
to the initial stance, which means in the case of
an original buy contract an investor would have
to take a sell contract. An investor who intends
to give or take delivery would have to inform his
broker of the same prior to the start of delivery
period.
254
Delivery is at the option of the seller; a buyer

can take delivery only in case of a willing seller.
All unmatched/rejected/excess positions are
cash settled; all open positions for which no
delivery information is submitted are also cash
settled. Under cash settlement, the difference
between the contract price and settlement price
is to be paid or received. Unlike the stock markets
that close by 3-30 p.m., the NMCE is open till
8.00 p.m. and the MCX and the NCDEX until
11.00 p.m. Unlike equity futures, which have a
life cycle of three months, contract duration in
case of commodity futures varies, and in some
instances extends up to six months.
Market participants can hedge their position over
a longer period. Commodity futures are also
easier to understand compared to equity futures,
as one has to just keep track of demand and
supply and not the several financial metrics that
the latter calls for. Sales tax is applicable only
when a contract results in delivery.
Investors are required to maintain margins and
top up their accounts on a daily basis markedto-market margin for fluctuations based on
the tick size. Margins have different
components; there is an additional delivery
margin that has to be maintained once the
contract enters the delivery period in case of
delivery settlements.
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305
A seller intending to give delivery would have to

approach the accredited warehouse for
availability of space and the assayer, who
certifies the quality of the goods; the goods are
required to meet the pre-set quality
specifications. The seller has to bear storage
charges until the date of demat credit, loading/
unloading and all other incidental charges,
including assaying charges. A buyer intending
to take physical delivery has to request his
broker. The buyer has to then approach the
warehouse with the document. It is possible to
take partial delivery from the warehouse. All
incidental charges pertaining to taking delivery
are to be borne by the buyer.
Investors can now buy, hold and trade gold in
dematerialised form without having to worry
about parking it in a vault for its safe-keeping.
MCX, in association with the World Gold Council,
has launched a new product - a gold contract
that is settled in a week (T+7). Investors can
get exposure to gold through a one-week
contract, which is closer to a spot market. A Gold
passbook would be issued to investors opting
for this product. MCX would be linked to NSDL
for offering this product.
255
VENTURE CAPITAL IN INDIA - GROWTH AND

CHALLENGES
Venture Capitalist finance innovations or ideas, which have the potential for high
growth with inherent uncertainties.
VCs help in development of entrepreneurship, innovation and economic growth.
VCs provide finance, purchase equities, assist in the development of new products
and have a long-term orientation
Poor growth of VCs in India may be attributed to negative mindset, delay in issue of
licence, problem in scalability, regulatory issues and difficulty to exit
Introduction
Venture capital is different from traditional
sources of financing. Venture capitalists finance
innovations or ideas which have the potential for
high growth but with inherent uncertainties. This
makes it a high-risk, high return investment. Apart
from finance, venture capitalists provide
networking, management and marketing support
as well. In the broadest sense, venture capital
connotes financial as well as human capital.
Venture capitalists actively work with the
companys management by contributing their
experience and business savvy gained from
helping other companies with similar growth
challenges.
Venture capitalists are professionals, often with
industry experience, and the investors are silent
limited partners. At present a fund generally
operates for a set number of years (usually
betweem 7 and 10) and then it is terminated.
Normally, each firm manages more than one
partnership simultaneously. Even though the
venture capital firm has the quintessential
organisational format, there are other vehicles,
the most persistent of which have been venture
capital subsidiaries of major corporations,
financial and non-financial.
The venture capitalist invests in recently
established firms believed to have the potential
to provide a return of ten times or more in less
than five years. This is highly risky, and many of
the investments fail entirely; however, the large
winners are expected to more than compensate
for the failures. In return for investing, the venture
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306
capitalists not only receive a major equity stake

in the firm, but also demand seats on the board
of directors. By active intervention and
assistance, venture capitalists act to increase
the chances of survival and rate of growth of the
new firms. Their involvement extends to several
functions, such as helping to recruit key
personnel, giving strategic advice and
introduction to potential customers, strategic
partners, later-stage financiers, investment
bankers and various other contacts. Venture
capitalist, therefore, provides more than money.
This is a crucial difference between venture
capital and other types of funding. The venture
capital process is complete when the company
is sold through either a listing on the stock
market or the acquisition of the firm by another
or when the company fails. For this reason, the
venture capitalist is a temporary investor. The
firm is a product to be sold not retained. The
venture capital process requires that
investments be liquidated so there is the
possibility of exiting the firm. Countries that erect
impediments to any of the exit paths (including
bankruptcy) are choosing to handicap the
development of the institution of venture capital.
Venture capital is collected through different
sources to invest alongside management in
rapidly growing industries. It is an important
source of equity of start-up companies. Venture
capital firms (VFC) are private partnerships or
closely held corporations funded by private and
public pension funds, endowment funds,
foundations, corporations, wealthy individuals,
256
foreign investors, and the venture capitalists.

Venture capitalists are persons with razor sharp
minds and deep pockets who are ready to take
the challenge to enter into untested areas.
Venture capitalists generally
Finance new and rapidly growing companies;

Purchase equity securities;
Assist in the development of new products
or services;
Add value to the company through active
participation;
Take higher risks with the expectation of
higher rewards;
Have a long-term orientation.
For decades, venture capitalists have

nurtured the growth of Americas high technology
and enterpreneurial communities resulting in
significant job creation, economic growth and
international competitiveness. Companies such
as Digital Equipment Corporation, Apple, Federal
Express, Compaq, Sun Microsystems, Intel and
Microsoft are famous examples of companies
that received venture capital early in their
development. An OECD Report (2000) has also
identified venture capital as a critical component
for the success of enterpreneurial hightechnology firms and recommended that all
countries consider strategies for encouraging the
availability of venture capital. In India, which is
booming with Information Technology, venture
capital in this particular sector can play an
important role, as it is faced with problems such
as rapid changes in the technologies used,
upgradation and high cost of employee retention.
Development of Venture capital in India
First stage in venture capital Industry
In the early 1980s, there was no conducive
environment for venture capital in India. The
countrys highly bureaucratised economy,
avowed pursuit of socialism, still quite
conservative social and business worlds and a
risk averse financial system provided little
institutional space for the development of venture
capital. But the environment began to change
after 1985. In 1988, the Government of India
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issued its first guidelines to legalise venture

capital operations (Ministry of Finance 1988).
Prior to this, there was no policy regarding
venture capital; in fact, there was no formal
venture capital. These regulations really aimed
at allowing stage-controlled banks to establish
venture capital subsidiaries, though there was a
possibility for other investors to create a venture
capital firm. However, there was only a minimal
interest in the private sector in establishing a
venture capital firm.
They were also allowed to exit investments at
prices not subject to the control of the Ministry
of Finances Controller of Cpaital Issues (which
otherwise did not pemit exit at a premium). The
fund promoters had to be banks, large financial
institutions or private investors. Private investors
could own no more than 20 per cent of the fund
management companies (although a public
listing could be used to raise the needed funds).
The funds were restricted to investing in a small
amount per firm (less than 100 million rupees):
the recipient forms had to be involved in
technology that was new, relatively untried, very
closely held or being taken from pilot to
commercial stage, or which incorporated some
significant improvement over the existing ones
in India. The government also specified that the
recipient firms founders should be relatively
new, professionally or technically qualified and
with inadequate resources or banking to finance
the project. There were also other bureaucratic
fetters including a list of approved investment
areas. Two government sponsored development
banks, ICICI and IDBI, were required to
scrutinise portfolio firms application to a venture
capital firm to ensure that it fulfilled the right
purposes. In addition, the Controller of Capital
Issues of the Ministry of Finance had to approve
every line of business in which a venture capital
firm wished to invest.
Four stage-owned financial institutions
established venture capital subsidiaries under
these restrictive guidelines and received a total
of $45 million from the World Bank, Of the four
new venture capital firms, two were established
by two well-managed state-level financial
257
organisations (Andhra Pradesh and Gujarat), one

by a large nationalised bank (Canara Bank) and
one by a development finance organisation
(ICICI).
Second Stage of Development in Venture
Capital
The success of Indian entrepreneurs in Silicon
Valley that began in 1980s became far more
visible in the 1990s. This attracted attention and
encouraged the notion in the United States that
India might have more possible entrepreneurs.
It encouraged the entry of foreign institutional
investors. This included investment arms of
foreign banks, but particularly important were
venture capital funds raised abroad. Very often
NRIs were important investors. The overseas
private sector investors became a dominant
force in the Indian venture capital industry.
In the late 1990s, the Indian government became
aware of the potential benefits of a healthy
venture capital sector. In 1996, the venture
capital regulator, the Securities and Exchange
Board of India (SEBI), announced the first
guidelines for registration and investment by
venture capital firms. Since March 1999,
Government of India has taken several initiatives
in formulating policies regarding sweat equity,
stock options; tax breaks for venture capital along
with overseas listings have all contributed to the
enthusiasm amongst investors and
entrepreneurs. In the year 2000, the Finance
Ministry announced a major liberalisation of the
tax treatment for venture capital funds to promote
knowledge based enterprises and job creation.
Besides this, SEBI was made the single point
nodal agency for registration and regulation for
both domestic and overseas venture capital
funds. This liberalisation and simplification of
procedures was done to encourage NRIs in
Silicion Valley and elsewhere to invest some of
their capital, knowledge and enterprise in
ventures in their motherland.
software, services and other IT related

segments. Many State governments have also
set up venture capital funds for the IT sector in
partnership with local state financial institutions
and SIDBI. Thus in 1990 a number of new
regulations were promulgated. Some of the most
significant of these were related to liberalising
the regulations regarding the ability of various
financial institutions to invest in venture capital.
Perhaps the most important of these, banks
were allowed to invest upto 5 per cent of their
new funds annually in venture capital. However,
banks have not made much venture capital
investment so far. This is because bank
managers are rewarded for risk averse
behaviour. Lending to a risky, fast growing firm
could be unwise because the loan principal is at
risk while the reward is only interest. Since banks
control the bulk of discretionary financial savings
in the country, there is little internally generated
capital available for venture investing.
Like in the United States, in India also there is a
clustering of venture capital firms in Mumbai, New
Delhi and Bangalore. In contrast to the United
States, where Silicon Valley asserted its
dominance as a technology centre at the end of
the 1970s, Bangalore had a smaller share of
offices in 1998 when compared with Mumbai and
New Delhi, which are the financial and political
capitals of India respectively.
Problems for the development of venture
capital in India
When compared to the success of venture
capital industry in U.S.A, in India there are several
hurdles for its development. These are negative
mindset, delay in issue of licence, problem in
scalability, regulatory issues and difficulty in
exiting.
Conclusion
India still remains in difficult environment as
regards venture capital. In India venture capital
remains a small industry precariously dependent
upon other institutions, particularly the
government, the external actors such as
international lending agencies, overseas
investors and successful Indian enterpreneurs
in Silicon Valley.
A National Venture Capital Fund for the software

and IT industry (NFSIT) was set up in association
with various financial institutions and the industry
is operating under the umbrella of the SIDBI to
encourage entrepreneurship in the areas of
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Banking Briefs
308
CREDIT RATING IN INDIA
The first credit rating Agency, CRISIL, was set up in India in 1987
Credit Rating provides a measure of credit risk associated with specific reference to
the rated instrument. In essence, the rating is done not for a company but for the
instrument.
CRISIL, CARE, ICRA and Duff and Phelps are the credit rating agencies in India.
Major Credit Rating Agencies in the world 1. Moodys Investor service 2. Fitch Investor
Service 3. Standard and Poors Corporation.
Rating is based on evaluation of CRAMEL- Capital Adequacy, Resources, Asset Quality,

Management Evaluation, Earnings and Liquidity.
Credit Rating (CR) as a financial service, has

come a long way, since John Moody first
introduced the concept in 1909, when he started
rating US railroad bonds. In the Indian
context, though it started only in 1988, credit
rating has recorded rapid strides.
A Credit rating may be defined as an opinion of
a CRA as to the issuers (i.e., borrower of
money) capacity to meet its financial obligations
to the depositor or bondholder (i.e., lender of
money) on a particular issue or type of
instrument (i.e. a domestic or foreign currency:
short term or medium term or long term etc.) in
a timely manner. The ratings are usually provided
through a simple symbol system like AAA, BBB,
Baa or BBB- etc. Broadly speaking ratings are
divided by CRAs into three levels, viz.,
investment grade, non-investment grade and
default grade.
Ratings attempt to provide a consistent and
reasonable rank-ordering of relative credit risks,
with specific reference to the instrument being
rated.
Credit ratings are in use in the financial markets
of most developed economies and several
emerging market economies as well. The major
rating agencies in the world are: 1. Moodys
Investors Service, 2. Fitch Investors Service, 3.
Standard and Poors Corporation, 4. Canadian
Bond Rating Service, 5. Thomson BankWatch,
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309
6. Japan Bond Rating Institute, 7. Duff and

Phelps Credit Rating, 8. Japanese Credit Rating
Agency, 9. IBCA Ltd.
Most of the rating agencies have long had their
own symbols some of them use alphabets,
others use numbers, many use a combination
of both for ranking the risk of default. The default
risk varies from extremely safe to highly
speculative.
Since the setting up of the first credit rating
agency Credit Rating and Information Services
of India Ltd. (CRISIL) in India in 1987, there has
been a rapid growth of credit rating agencies in
India. The major players in the Indian market,
apart from CRISIL, include Investment
Information and Credit Rating Agency of India
Ltd. (ICRA), promoted by IDBI in 1991 and Credit
Analysis and Research Ltd. (CARE), promoted
by IFCI in 1994. Duff and Phelps has tied up
with two Indian NBFCs to set up Duff and Phelps
Credit Rating India (P) Limited in 1996. CRISIL
rated the first bank in the country in 1992. The
ratings provided by the different rating agencies
(Indian and international) have been provided
below.
The ratings methodology for banks and financial
institutions is essentially based on the CRAMEL
approach (Capital Adequacy, Resources, Asset
Quality, Management Evaluation, Earnings and
Liquidity).
259
In spite of the advantages that the ratings

process offers, several drawbacks remain. The
ratings process attempts to provide a guidance
to investors/creditors in determining the risks
associated with the instrument/credit obligation.
It does not attempt to provide a
recommendation and does not take into account
factors like market prices, personal risk/reward
preferences that might influence investment
decisions. Secondly, the ratings process is
based on certain primitives. The agency, for
instance, does not perform an audit. Instead, it
has to rely solely on information provided by the
issuer. Consequently, to the extent that the
information provided is inaccurate and
incomplete, the ratings process is
compromised. Thirdly, to the extent that a certain
instrument of a specific company attracts a
lower rating, the company has an incentive to
shop around for the best possible rating,
compromising the authenticity of the rating
process itself.
SEBI is the regulatory authority for CRAs. The
SEBI board has chosen to go well beyond the
recommendations of the Vijay Ranjan
Committee on credit rating regulations which
had recommended dual rating in the case of
rating of securities of promoters. Some of the
important and far reaching regulations are as
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310
under:
No credit rating agency (CRA) shall rate a

security issued by its promoter.
No chairman, director or employee of the

promoters shall be a chairman, director or
employee of the CRA or its rating
committee.
The CRA cannot rate securities issued by

any borrower, subsidiary, an associate of
promoters of CRA, if (i) there are common
chairman, directors between CRA and
these entities; (ii) there are common
employees, (iii) there are common
chairman, directors, employees on the
rating committee.
No CRA shall rate a security issued by its

associate or subsidiary if the rating agency
or its rating committee has a chairman,
director or employee who is also a
chairman, director or employee of any such
entity.
Period of validity of registration shall be three

years.
260
BOOK BUILDING
Introduced in India in 1995
It is a process of determining price of shares based on market feedback
Under this, the offer price is not determined by the issuer but by the quotes given by
the prospective buyers. Hence, it is also called price discovery mechanism.
Benefits: Evaluation of the intrinsic worth of the shares; savings on issue expenses;
investors have a say in pricing; market determined pricing; reduction in lead time.
Concept
Book building is rather a new concept for us in
India, being introduced only in 1995. Under book
building process, the issuer (or issuing
company) is required to tie up the issue amount
by way of private placement. The issue price is
not priced in advance. It is determined by offer
of potential investors about the price which they
may be willing to pay for the issue. In course of
the roadshow exercises, the issue manager,
called Book-Runner, records the amounts
offered by various investors. The price of the
instrument (i.e., equity, debenture or bonds) is
arrived at as an weighted average at which the
majority of investors are willing to buy the
instrument.
Determining Issue Price
Book building is a process of price discovery.
Book building is a pricing mechanism whereby
new securities are valued on the basis of a
demand feedback following a period of
marketing. Book building is a transparent and
flexible system based on real time feed-back of
investors and is an alternative to the rigidity of
the existing system of fixed pricing. Book
building enables fair pricing of the issue. Fair
price is supposed to emerge out of offers given
by various institutional investors.
Statutory Requirements
Book building is a novel concept and is in infancy
in India. The concept has assumed significance
in India as the SEBI has approved the book
building process in pricing new issues with effect
from the 1st November, 1995. SEBI has further
clarified in December 1996 that the option of
book building is available to all body corporates
which are otherwise eligible to make an issue
of capital to the public.
SEBI has thrown open the doors for public issue
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311
for companies without a profit track record

provided they did so only through the book
building route and 60% of the issue is picked up
by qualified institutional buyers. SEBI further
stipulated that all issues of over five times the
networth via the book building route only and all
pre-IPO and preferential allotments to have a
lock-in period of one year.
Benefits of Book Building
1. Book-building helps in evaluating the
intrinsic worth of the instrument being
offered.
2. Price of instrument is determined in a more
realistic way on the commitments made by
the prospective investors to the issue.
3. The process of book building is
advantageous to the issuer company since
the final price is decided at a date very close
to the date of opening of the issue. Book
building also offers access to capital more
quickly than the public issue.
4. As the issue is pre-sold, there would be no
uncertainties relating to the fate of the issue
involved.
5. The issuer company saves on advertising
and brokerage and they can choose
investors by quality.
6. Investors have a voice in the pricing of
issues. They have a greater certainty of
being allotted what they demand.
7. The issue price is market determined. It is
a distant possibility that the market price of
the shares would fall lower than the issue
price.
8. Optimal demand-based pricing is possible.
9. Efficient capital raising and improved issue
procedures lead to a reduction in (a) issue
costs, (b) paper work and (c) lead time.
261
BUY BACK
Buy Back is an arrangement by which shares issued to equity holders are bought back
by the company
Why done: To support market price; to acquire controlling interest; to deploy surplus
funds
Funds for buy back should come from authorised sources
Effects: Buy back may affect companys liquidity; profits; EPS, Book Value and gearing
ratio of the Company.
back as a weapon to soothe their nerves
by supporting the share price during periods
of temporary weakness.
What is buy back?

Buy back is paying back of paid up capital or
specified securities (including employees stock
option or other securities as may be notified by
the Central Government from time to time)
which are in excess of the requirements of the
company.
2.
Company is not Performing Well: Some

companies may not be performing well
leading to bear hammering of their scrips.
Buy back of shares can be used as a market
support operation for the scrip of such a
company.
Buy back can be in one of the following ways

1.
Shares/securities bought back may be

extinguished: As per Companies Act, the
company buying back its own securities
shall extinguish and physically destroy the
securities bought back within 7 days of the
last date of completion of buy back.
3.
Controlling Interest: If buy back takes

place in which promoters will not sell, the
percentage holdings of the promoters will
increase without bringing in a single paisa.
Thus buy back of shares by the company
can block unwelcome take-overs.
2.
Shares/securities bought back may not

be extinguished: The shares or securities
bought back by the company can be
retained and reissued after some time. This
type of buy back is not permitted in India.
4.
3.
Liability on any of its shares/securities

may be reduced: Under this scheme, the
liability of the company buying back can
reduce the liability of the company
proportionately on the security/share but not
to the full amount of the face value. This
type of buy back is also not permitted in
India.
Returning
surplus
cash
to
shareholders: If the company is generating
more cash than they need or when the
business in which they are operating does
not offer substantial opportunity for growth
and does not find long term avenues for
deployment, then the company may decide
to return the surplus cash to shareholders.
1. Ultimate Sources:
Buy back shall be out of the following sources
as per Section 77A1 of the Companies Act.
Why buy back at all?
out of its free reserves
Buy back of shares is done for one or more of

the following purposes:
out of the securities premium account
out of the proceeds of an earlier issue other

than fresh issue of shares made specifically
for buy back purposes
1.
In other words, the funds required for buy

back shall not exceed the balances under
1.
Shares are underpriced: Sometimes,

despite fundamentals of the company being
strong, the prices of shares fall below the
intrinsic value of the stock making the
investors nervous. Companies can use buy
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312
CONDITIONS:
262
the above mentioned three sources. Thus

the rule has also ensured that buy back of
shares is not directly financed by issue of
securities.
2.
3.
the profit before tax (PBT) if all other factors

remain constant. If the funds are raised by
way of interest bearing liabilities, the interest
payable on these liabilities will be a charge
on the profits and hence the PBT will
decrease if the others remain constant.
The buy back shall not exceed 25% of the

total paid up capital and free reserves of the
company purchasing its own shares or
other specified security.
The corporate tax liability will also decrease

due to the decrease in the taxable profit of
the company and the charges on income
allowed by the Income Tax Act.
The ratio of the debt owed by the company

is not more than twice the capital and its
free reserves after such buy back.
Since the PBT will decrease, the Profit after

Tax (PAT) will also decrease even after the
decreased tax liability of the company.
PROCEDURE:
1.
2.
Buy back from the existing security

holders on a proportionate basis
through the tender offer: Offer by a
company to buy back its shares through a
letter of offer from the holders of shares is
called tender offer. Since the offer is to all
the shareholders, this will be on
proportionate basis. The offer shall be open
within the range of 7 to 30 days.
From open market: Under this it can be
under 2 ways. One is through book building
process and the other through stock
exchange. The announcement shall come
at least 7 days in advance.
In case of book building, the offer shall be open

for 15 to 30 days. The price shall be determined
based on the acceptance received. The final buy
back price, which shall be the highest price
accepted, shall be paid to all the holders whose
shares have been accepted for buy back.
3.
Earnings Per Share : Though the profits

will decrease, the number of shares after
the buy back will also decrease. Thus the
number of shareholders eligible for dividend
will decrease. Hence the earnings per share
will go up.
4.
Book Value of the Share: Book value of

the share will also increase after the buy
back of shares.
5.
Gearing Ratio: If liquidity for buy back

comes from the proceeds of assets, or from
additional liabilities, the gearing ratios of the
company will be adversely affected.
Shareholders perspective : If the EPS of the

company is expected to increase after the buy
back of shares, why the present shareholders
shall sell the shares at all?
1.
Liquidity : The shareholders in need of

funds may need to dispose off some of the
shares. In such a case they would dispose
of the shares at the rate being bought back
because there will be ready demand for it.
2.
Profitability : Generally, the shares are

bought back at a price higher than market
value. Such price makes it attractive for
holder to dispose off the shares.
3.
Booking of Profits : The holder of shares

may decide to book profits or cut loss and
therefore surrender the shares to the
company under buy back.
EFFECTS ON THE COMPANY:

1.
2.
Liquidity of the company : Though the

company may be having adequate
undistributed profits etc., these funds might
have already been used for treasury
function/holding current assets/creation of
fixed assets. Hence the nature of immediate
source of funds for buying back the shares
will determine the liquidity position/current
ratio of the company.
Profits of the company : If the source of
funds are the sale proceeds of the earning
assets, the income that would have been
earned therefrom will cease, thus reducing
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313
The proceeds of the shares under buy back are

subject to capital gains tax in the hands of the
share disposers.
263
STOCK INDEX FUTURES
Futures are standardized contracts and are tradeable
Standardisation implies that size, date of expiry and other features are standardized.
Stock Index represents an average price of various scrips
Advantages: Serves as a hedging mechanism; guards against price fluctuation caused

by FIIs investment strategy; preserves portfolio value during market stress.
Futures contracts are standardised tradeable

contracts. They are standardised in size,
expiration date and all other features. They are
traded on specially designated exchanges in a
highly sophisticated environment. The futures
trading system has effective inbuilt safeguards
in the form of cash adjustments (mark to
market) to the account of trading member on
daily price change.
available in sufficient quantity. The

availability of stock index futures can take
care of this problem.
iii)
Open-ended funds: In the case of openended scheme, repurchases may

sometimes necessitate liquidation of a part
of the portfolio but there are problems in
executing such liquidations. Selling each
holding in proportion to its weight in the
portfolio is often impracticable. Some of the
holdings may be relatively illiquid. Rushing
to the cash market to liquidate would drive
down prices. Stock Index Futures can help
to overcome these problems to the
advantage of the unit holders.
iv)
Preserving the value of portfolio during times

of market stress: There are times when the
main worry is the possibility that the value
of the entire equity portfolio may fall
substantially if, say, event X occurs. Sales
of stocks Index Futures can be used to
insure against the risk.
v)
International investors: The buying and

selling operations of FIIs presently cause
disproportionate price-effect on the Indian
bourses. In other words, what the FIIs buy/
sell is a piece of the whole Indian equities
market. If stock index futures are available,
this can be carried out with greater speed
and less cost and without adding too much
to market. While trying to maximise the net
inflow of FII portfolio investment, its
disturbing effects can possibly be
minimised if the facility of stock index futures
is available.
b)
Stock index is difficult to be manipulated as

compared to individual stock prices, more
Stock Index Futures

Stock Index represents an average price of
various scrips. Also, Index futures do not
represent a physically deliverable asset.
Institutional and other large equity holders need
portfolio hedging facility and Stock Index Futures
help investors to hedge their funds.
Stock Index Futures offers the following
advantages:
i)
Reducing the equity exposure in a mutual

fund scheme:
Suppose that a balanced mutual fund scheme

decides to reduce its equity exposure from, say
40% to 30% of the corpus. Presently, this can
be achieved only by actual selling of equity
holding. Such selling entails three problems: first,
it is likely to depress equity prices, second, it
cannot be achieved speedily and third, it is a
costly procedure because of brokerage etc. The
same objective can be achieved through index
futures at once, at much less cost and with much
less impact on the cash market.
ii)
Investing the funds raised by new schemes:

When a new scheme is floated, the money
raised does not get fully invested for
considerable time. Suitable securities at
reasonable prices may not be immediately
Banking Briefs
314
264
so in India, and the possibility of cornering

is reduced. Of course, manipulation of stock
index can be attempted by influencing the
cash prices of its component securities.
While the possibility of such manipulation
cannot be ruled out, it is reduced by
designing the index appropriately.
at 5000. At least 50 contracts of Sensex futures

have to be bought and each contract is priced
at Rs.5.
c)
Stock index futures enjoy distinctly greater

popularity, and are, therefore, likely to be
more liquid than all other types of equity
derivatives as is learnt by international
experience.
d)
Stock index, being an average, is much less

volatile than individual stock prices. This
implies much lower capital adequacy and
margin requirements in the case of index
futures. The lower margins will induce more
players to join the market.
The entire money need not be paid upfront; for

futures contracts work on a margin basis. The
initial margin is fixed at 5 per cent or a
percentage based on Value at Risk (VaR) model,
whichever is higher. Suppose the margin is 5
per cent, we have to pay just Rs.62,500 on the
contract worth Rs.12.5 lakhs. But that is not
the end of the transaction.
e)
Since Index futures do not represent a

physically deliverable asset, they are cash
settled all over the world on the premise that
the index value is derived from the cash
market. This, of course, implies that the
cash market is functioning in a reasonably
sound manner and the index value based
on it can be safely accepted as the
settlement price.
Regulatory complexity is likely to be less in the

case of stock index futures than for other kinds
of equity derivatives, such as stock index
options, or individual stock options.
Stock Index Futures Trading
The BSE and NSE ushered in a new era by
launching index futures trading in the second
week of June, 2000. A trader can bet on Sensex
futures of six types - one month, two months
and three months and three spread futures
(June-July, July-August and June-August). The
mechanics of trading are as under:
Suppose Sensex futures for July is 5000; it
means that the market today expects the
Sensex to close at 5000 on expiry of the futures
contract in July.
If we believe that the Sensex will close at a higher
level by end-July, we can buy the index futures
Banking Briefs
315
Suppose we buy 50 July contracts of Sensex

futures at 5000, our contract value will be
Rs.12.5 lakhs (50 contracts x Rs.5 per contract
x 5000 index).
What if the Sensex futures rises to 5200 the

next day?
We have already gained 200 points on our
futures contract (5200-5000 points). We have,
thus, made a profit of Rs.50,000 (200 points x
50 contract x Rs.5 per contract) which we will
receive from the seller. But what if the Sensex
falls to 4,700 the day after we purchase the
futures contract? Since we have lost 300
points per contract, we will have to pay the seller
Rs.75,000. This mark-to-market transaction is
carried out on a daily basis till the futures
contract expires.
How is the final settlement made? Suppose
the contract expires on the last Thursday of July
and the Sensex futures closes the previous day
at 5200. If the Sensex in the cash market closes
on the last Thursday at 5400, we have gained
200 points (5400 in the cash market - 5200, the
previous days futures price). We will, thus,
receive Rs.50,000 (200 points x 50 contracts x
Rs.5 per contract) from the seller.
If, however, the Sensex loses 300 points on the
expiry of the contract, we will have to pay the
seller Rs.75,000 as the final settlement.
The most important point is that on final
settlement, the Sensex value in the cash market
is compared with the Sensex futures value of
the previous day.
265
EMPLOYEES STOCK OPTION PLANS (ESOPS)
Employee stock option plan gives the right to employees to purchase share of a
company at a set price
Under this, employees are offered shares in lieu of salary or other compensation
Advantages: Increased employee commitment; no drain on cash
Disadvantages: Stock options will not be attractive when share prices fall.
ESOP Accounting
A Stock option confers on an employee the right
to purchase the share of the company at a set
price, after a set period of time. As the
companys share price goes up, so will the value
of the option.
Nowhere the use of employees stock options is
as widely prevalent as in corporate America.
Today it is not only the chief executive who gets
paid in stocks but also the lower level employee.
Much of the success of the tech companies of
Silicon Valley as also the techies who inhabit it
is ascribed to the stock options. Tech companies
whose success depends on the skill of human
assets found stock options a handy device to
lure the human capital.
The underlying logic is that when managers own
part of the stock of the firm they tend to make
decisions that increase the value of the firm as
also that of their holdings in the process.
Also, stock options do not result in a drain on
cash resources up front, unlike other forms of
compensation. For employees the booty
represented a beautiful road to riches. The stock
options turned many of the young techies into
millionaries.
The accounting framework makes the stock
options a cheaper way to pay. In simpler terms
devoid of jargon what it means is that when the
salaries are paid in cash they become cost and
reduce the reported profits. When the salaries
are paid in the form of stock options they do not.
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316
That is because the US GAAP allows them to

do so. Never before in the history of corporates,
the concept of shareholder value was so dearly
adored as it is in the present day. Thanks to
stock options, more and more company bosses
today are more bothered about shareholder
value than they would otherwise be. Normally
this should be considered a healthy
development but this led to unusual chemistry
in corporate America. Shareholder value is
measured by the increase in the market prices
of equities. The market prices in turn are
influenced by the profitability of the firms. The
market became so sensitive to profits, that if a
company reports a drop of 10 percent in profits,
its market price gets battered by more than as
much. That is keeping the CEOs on toes to report
year on year increases in profits lest they shall
meet the wrath of the market. Strangely, it is this
focus on shareholder value that is driving the
company bosses to report highest profits, come
what may. Given such a situation, it is
understandable that company bosses dislike the
idea of taking a shot on their company profits by
treating the stock options as cost.
While granting stock options doesnt result in
cash cost, more and more companies are
borrowing money to buy back the equities to
enable their employees to exercise their options.
Thus companies are under double constraints,
firstly they come under debt trap not for
expansion but to pay their employees. Secondly,
with the market prices ruling at historic highs,
they tend to buy equities at high costs. There is
no gain saying the fact that human capital is the
266
driving force of the tech companies, but the

enormous price that is being paid, that too
outside the accounting framework, is a cause
for serious concern. A bold approach has been
taken with regard to taxation of the perquisite
value of the shares etc., allotted under the ESOP.
And as a result of the amendment to the Income
Tax Act, ESOPs is not taxed as a perquisite in
the hands of the employees but subjected only
to one time capital gains tax and that too only at
the time of its sale. As a result of this
amendment, ESOPs are virtually tax free.
Various options are available to the employers
for granting ESOPs to their employees. While
in some cases ESOPs can be granted by
allotting to the employees equity shares of the
employer company at face value itself, in the
alternative ESOPs may contain a proposal to
grant shares of the employer company at a price
lower than the prevailing market price.
Reversely, ESOPs may also be in form of free
issue of shares or debentures to the employees.
In recent times, due to global economic
slowdown, decline in IT boom and financial
scandals such as Enron, Worldcom etc. stock
option is losing its charm. With recent robust
growth in IT industry and recovery of global
economy, one may find revival of interest in
ESOP in the days ahead.
Banking Briefs
317
267
MARGIN TRADING
Margin trading is an arrangement whereby an investor purchases securities by borrowing

a portion of the purchase value
SEBI has allowed member brokers to provide margin

the cash segment since April 1, 2004
Only corporate brokers with net worth of at least Rs.3 crore would be eligible to
participate
Margin trading is an arrangement whereby an

investor purchases securities by borrowing a
portion of the purchase value from the authorized
brokers by using securities in his portfolio as
collateral.
The Securities Exchange Board of India (SEBI)
has allowed member brokers to provide margin
trading facility to their clients in the cash segment
since April 1, 2004. Securities with mean impact
cost of less than or equal to one and traded at
least 80 per cent (+/-5 per cent) of the days
during the previous 18 month s would be eligible
for margin trading facility. Only corporate brokers
with net worth of at least Rs.3 crore would be
eligible to participate. Brokers wishing to extend
the facility of margin trading to their clients are
required to obtain prior permission from the
exchange(s) where the facility is proposed to
be provided. The broker may use his own funds
or borrow from scheduled commercial banks
and/or NBFCs regulated by the Reserve Bank.
At any point of time, total indebtedness of a
broker for the purpose of margin trading is not
allowed to exceed 5 times of his net worth as
defined by the SEBI. The total exposure of a
broker towards the margin trading facility shall
be within the self-imposed prudential limit and
shall not, in any case, exceed the borrowed funds
and 50 per cent of net worth. The exposure to
any single client at any point of time is restricted
to 10 per cent of the total exposure of the
broker.
trading facility to their clients in
subject of the SEBI guidelines prescribed on

March 19, 2004. Initial and maintenance margin
for the client shall be a minimum of 50 per cent
and 40 per cent, respectively, which has to be
paid in cash. Initial margin is the minimum
amount, calculated as a percentage of the
transaction value, to be placed by the client with
the broker before the actual purchase. The
maintenance margin is the minimum amount,
calculated as a percentage of the market value
of securities with respect to the last trading days
closing price to be maintained by the client with
the broker. When the balance deposit in the
clients margin trading accounts falls below the
required maintenance margin, the broker shall
promptly make the margin call. According to the
current arrangement, the broker may liquidate
the securities if: (i) the client fails to meet the
margin call made by the broker; (ii) fails to
deposit the cheques after the marginal call has
been made; (iii) where the cheque deposited by
the client has been dishonored; and (iv) if the
clients deposit in the margin account (after
adjustment for mark to market losses) falls to
30 per cent or less of the latest market value of
the securities. The broker shall maintain
separate client-wise accounts of the securities
purchased on the basis of margin trading with
depositories. The SEBI and stock exchange(s)
have the right to inspect the books of accounts
maintained by brokers with respect to the margin
trading facility.
The margin arrangement has to be agreed upon

between the authorized broker and the client
Banking Briefs
318
268
INTERNET TRADING
Internet trading is buying and selling of securities through the Internet.
It helps in transparency, creates a fair and efficient market and reduces systemic risk.
SEBI has issued regulatory guidelines on internet trading.
ICICI, HSBC, ABN-Amro are some of the banks which provide internet trading facility.
Worldwide e-broking otherwise called as Internet

broking has radically transformed the way
people trade in stocks. Since Internet is the
fastest medium to get stock quotes no other
medium can beat the net in speedy
dissemination of information and, therefore, netbased trading has the enormous potential of the
Indian stock market, to exploit as it comprises
of 23 stock exchanges and over 9000 registered
brokers.
trading long back and thus, started working in

the same line much before. The speed at which
Net brokerages are mushrooming will certainly
make a huge difference in the coming days in
the capital market. Some of the Foreign and
Private Banks are in the fray to provide the best
facilities to the investors with the help of their
integrated network. ICICI, for instance, has its
own bank, broking house, and is also a
depository participant.
Objectives
Regulatory initiatives
Internet trading is expected to
SEBI adopted the roadmap laid down by the

International Organisation of Securities
Commission (IOSCO) in framing its policy on
the use of Internet in the securities market.
increase transparency in the markets
enhance market quality through improved

liquidity, by increasing quote continuity and
market depth,
reduce settlement risks due to open trades,

by elimination of mismatches,
provide management information system

(MIS),
introduce flexibility in systems, so as to

handle growing volumes easily and to
support nationwide expansion of market
activity.
Besides, through Internet trading three

fundamental objectives of securities regulation
can be easily achieved. These are:
investor protection
creation of a fair, and efficient market and
reduction of the systematic risk.
SEBI has laid down the conditions to be enforced

by the stock exchanges for permitting their
stockbrokers to trade on Internet. These
conditions pertain to operational integrity, system
capacity, signature authentication, client-broker
relationship, contract notes, trade confirmation,
risk management, network security protocols
and interface standards. Regarding the
operational and system requirements, SEBI has
directed the exchanges to ensure that the
system used by the stock broker has provisions
for security, reliability and confidentiality of data
through use of encryption technology.
Banks have discounted the benefits of Internet

Banking Briefs
319
269
DEPOSITORY PARTICIPANT SERVICES
It is a bank for deposit of securities
Helps in holding securities in dematerialized form
Benefits: Eliminates risks of forgery and bad delivery; no stamp duty on transfers;
reduction in transaction costs; speedy transfer; reduction in paper work; no risk of loss
of share certificate in transfer
Depository is an organization, which holds

securities in the form of electronic book entries.
This is done at the request of shareholders
through the medium of a Depository Participant
(DP). If an investor wants the services of a
Depository, he has to open an account with the
DP. Further, a depository transfers securities as
per the investors instructions without actually
handling securities, through the electronic mode.
The DP maintains the account balances of
securities bought and sold by the investor from
time to time. The DP also gives the investor a
statement of holdings, which is similar to a
passbook.
Facilities provided by Depository
Depository Account Opening
Account opening
An investor needs a satisfactory introduction

and identification to open a Demat account with
our DP.Every account holder in our Bank can
open a Demat account. An investor has to fill up
an Account Opening Form and execute an
agreement with the DP for opening a Demat
account.
An investor (investors are called Beneficial

owners in Depository system) intending to hold
securities in the electronic form in the Depository
system openes an account with a DP of NSDL/
CSDL. The investor has to fill up an account
opening form and sign an Agreement. The
investor can open multiple accounts with same
DP as also with different DPs. The DP provides
the investor a statement of holdings and
transactions. In case the shares are held in joint
names then the account is to be opened in the
same order of names. Separate account needs
to be opened for each combination of names.
DPs are located in various cities and towns

These are directly connected with National
Securities Depository Limited or Central
Securities Depositories Limited through VSAT.
Benefits of holding Shares in Electronic
form
Transactions take place much faster in

electronic trading compared to a 30-60 days
settlement cycle that is presently
experienced. Transfer of shares is effected
within a few days after payment is made.
Banking Briefs
320
Elimination of bad deliveries and all risks

associated with physical certificate such as
loss, theft, mutilation, forgery, etc.
Easy liquidity.
No stamp duty on transfer.
No postage/courier charges.
Faster disbursement of corporate benefits

like rights, bonus, etc.
Facility for creating charge on dematerialized

shares for granting loans and advances
against shares.
Dematerialisation/Rematerialisation
270
Dematerialisation is the process by which

an investor gets his physical certificates
converted into electronic form and reflected
in his account with the DP.
One has to just fill in Dematerialisation

Request Form available with his DP. Submit
his share certificates along with the above
form (legend like Surrendered for
Dematerialisation should be written on the
face of each certificate before its submission
for Dematerialisation). The beneficial
owners account will be credited with in 15
days and he will be informed by the DP.
If one wishes to convert his electronic shares
back to physical shares at a later stage, he
can still do so by applying for
rematerialisation
through
a
Rematerialisation Request Form available
with his DP. The new rematerialized
certificates with new range of certificate
number may use existing Folio number or a
new folio number for the certificates.
At the time of distribution of corporate benefits

NSDL transmits the data electronically to the
Issuer/R&TA. Monetary benefits like, dividend is
mailed directly to the investors by the Issuer. For
non-monetary benefits like Bonus, Rights,
Conversion, the alteration details are
downloaded to NSDL by the Issuer/R&TA. NSDL
then downloads this information to the DP and
the corresponding beneficiary (i.e., investor)
accounts are credited.
Pledging
The securities with the investor can be pledged
in favour of a lender for securing a loan. The
pledged securities are blocked in favour of the
lender, who releases the pledge and get the
shares transferred in its name.
Electronic Trading
Freezing/Locking of Investor Accounts
Trading in the Depository mode takes place in

the following manner:
An investor can freeze/lock his account for any

given period of time if he so desires. During this
period no debits can be made to the investors
account.
If the investor wants to sell his shares, he

has to place an order with his broker and
give a Delivery Instruction to his DP. The
DP will debit his account with the number of
shares sold by him.
If one wants to buy shares, he is to inform
his broker about his Depository Account
Number so that the shares bought by him
are credited into his account.
Payment for the electronic shares bought or

sold is to be made in the same way as in the
case of physical securities.
The shares one buys are transferred in his

name promptly after he makes the payment.
No formalities of filling transfer deeds,

affixing stamps and applying to the Company
for registering the shares in Beneficial
owners name are required to be observed,
neither there is any fear of bad delivery.
Banking Briefs
321
Corporate Benefits
Cost of Trading in the Electronic mode

Each DP charges its client a certain amount of
fees. These charges are by way of Account
Opening fees, Transaction fees, Custody fees,
etc. and the rate of fee is fixed by each DP
separately.
Security Aspect
At the time of opening account with DP, one
signs an Agreement in which DP indemnifies
the investor for any misuse of his holdings. The
Depository (i.e., NSDL) will also ensure that the
interests of the investor are protected. Every
transaction in the account will be authorized by
beneficial owner.
271
REPOS
Repos means a contract to buy securities such as Treasury bills, gilts and sell them
back at an agreed future date and price
RBI uses it for open market operations to influence liquidity and short-term interest rate
The average monthly turnover in repo market during 2004-2005 was Rs. 17,135 Crores.
Simply stated repo means a purchase and sale

agreement. It is a contract to buy securities and
then to sell them back at an agreed future date
and price. It is thus an avenue for short-term
investment of surplus funds. A reverse repo is
an instrument of borrowing funds for a short
period and involves selling a securi-ty and
simultaneously agreeing to repurchase it at a
stated future date for a slightly higher price. The
price differential represents interest element, the
rate of which is slightly lower than the Call money
rate and constitutes the cost of borrowing funds
against the security. The instrument has
provided liquidity and depth to the underlying
securities markets like bond markets. In
countries like the USA, Canada, Germany and
Australia, repos are effectively used by central
banks as part of open market operations (OMO)
to influence bank reserves/overnight or shortterm interest rates and thereby the liquidity and
monetary condi-tions in the economy.
Repo transactions are entered into by
commercial banks mainly for two reasons. In
the first place, banks having shortfall in their
CRR requirement, prefer to borrow through the
repo route against surplus SLR securities, as
the cost of borrowing through a repo deal is
usually lower than that of borrowing in the Call
market (there are exceptions to this. For
example, during Apr 04, call rate was lower due
to large volumes of liquidity). In the second place
banks, which are short on SLR securities due
to a temporary increase in their demand and time
liabilities, acquire SLR securities through repo
as under repo they are not required to lock up
Banking Briefs
322
their funds in SLR securities for longer periods.

Apart from RBI the repo market in India is also
regulated by the provisions of Securities
Contracts Regulation Act (SCRA).
The development of repo increases the range
of short-term money market instruments.
Investing money in a repo can generate a better
return than other short-term money market
instruments, such as the Treasury Bill.
Fixed Rate Repos were introduced with effect
from November 29, 1997. The repo rate and the
period of repo is announced by the Reserve
Bank in the evening of the previous day.
The RBI has made some radical attempts tostir up the repo market. The RBI has also
permitted inter-bank repo deals on the NSE
through brokers. Through the mechanism of
repos, FIs are allowed to borrow from the money
market across the entire spectrum of short-term
maturities. Repoable securities include not only
T-bills and gilts but also State Government
securities, PSU and corporate bonds and those
of FIs. 35 non-banking entities were permitted
to undertake ready forward transactions in
notified govt. securities.
A welcome fall-out of this should be the
increased liquidity of bonds and FIs will be able
to liquefy their balance sheets an essential
characteristic of a well-developed financial
market with the help of repos.
272
ECONOMY & FINANCE

INTERNATIONAL TRADE
Banking Briefs
323
NATIONAL FOREIGN TRADE POLICY 2004-09
Introduced in 2004 and replaces EXIM policy
Objectives: To double our share in global trade (presently around 0.70%) by 2009 and
to act as an effective instrument of economic growth with thrust on employment
generation particularly in semi-urban and rural areas
Sectors with export prospects and potential for employment in rural and semi-urban
areas are identified as thrust sectors
A new scheme- Vishesh Krishi Upaj Yojana introduced to boost exports of fruits,
vegetables, flowers, minor forest produce
Target Plus, served from India scheme, removal of age of goods and decrease in cut
off of minimum depreciated value to Rs. 25 Cr for imported goods are other special
features.
The New government terminated the five-year

Exim Policy, 2002-07 and introduced a Foreign
Trade Policy for a five-year term beginning this
fiscal year on the 31st August 2004.
1. Strategy:
(a) It is for the first time that a comprehensive
Foreign Trade Policy is being notified. The
Foreign Trade Policy takes an integrated
view of the overall development of Indias
foreign trade.
(b) The objective of the Foreign Trade Policy is
two-fold:
(i)
to double Indias percentage share of global

merchandise trade by 2009; &
(ii) to act as an effective instrument of

economic growth by giving a thrust to
employment generation, especially in semiurban and rural areas.
(c) The key strategies are:
(i)
Unshackling of controls;
(ii) Creating an atmosphere of trust and

transparency;
2. Special Focus Initiatives:
(a) Sectors with significant export prospects
coupled with potential for employment
generation in semi-urban and rural areas
have been identified as thrust sectors, and
Banking Briefs
324
specific sectoral strategies have been

prepared.
(b) Further sectoral initiatives in other sectors
will be announced from time to time. For
the present, Special Focus Initiatives have
been prepared for Agriculture, Handicrafts,
Handlooms, Gems & Jewellery and Leather
& Footwear sectors.
(c) The threshold limit of designated Towns of
Export Excellence is reduced from Rs.1000
crores to Rs.250 crores in these thrust
sectors.
3. Package for Agriculture
The Special Focus Initiative for Agriculture
includes:
(a) A new scheme called Vishesh Krishi Upaj
Yojana has been introduced to boost exports
of fruits, vegetables, flowers, minor forest
produce and their value added products.
(b) Duty free import of capital goods under
EPCG scheme.
(c) Capital goods imported under EPCG for
agriculture permitted to be installed
anywhere in the Agri Export Zone.
(d) ASIDE funds to be utilized for development
for Agri Export Zones also.
(e) Import of seeds, bulbs, tubers and planting
material
has
been
liberalized.
273
(f) Export of plant portions, derivatives and

extracts has been liberalized with a view to
promote export of medicinal plants and
herbal products.
4. Export Promotion Schemes:
(a) Target Plus:
A new scheme to accelerate growth of exports
called Target Plus has been introduced.
Exporters who have achieved a quantum growth
in exports would be entitled to duty free credit
based on incremental exports substantially
higher than the general actual export target fixed.
(Since the target fixed for 2004-05 is 16%, the
lower limit of performance for qualifying for
rewards is pegged at 20% for the current year).
Rewards will be granted based on a tiered
approach. For incremental growth of over 20%,
25% and 100%, the duty free credits would be
5%, 10% and 15% of FOB value of incremental
exports.
(b) Vishesh Krishi Upaj Yojana:
Another new scheme called Vishesh Krishi Upaj
Yojana (Special Agricultural Produce Scheme)
has been introduced to boost exports of fruits,
vegetables, flowers, minor forest produce and
their value added products. Export of these
products shall qualify for duty free credit
entitlement equivalent to 5% of FOB value of
exports. The entitlement is freely transferable
and can be used for import of a variety of inputs
and goods.
(c) Served from India Scheme:
To accelerate growth in export of services so
as to create a powerful and unique Served from
India brand instantly recognized and respected
the world over, the earlier DFEC scheme for
services has been revamped and re-cast into
the Served from India scheme.
Individual service providers who earn foreign
exchange of at least Rs.5 lakhs, and other
service providers who earn foreign exchange of
at least Rs.10 lakhs will be eligible for a duty
credit entitlement of 10% of total foreign
exchange earned by them.
Banking Briefs
325
In the case of stand-alone restaurants, the

entitlement shall be 20%, whereas in the case
of hotels, it shall be 5%. Hotels and Restaurants
can use their duty credit entitlement for import
of food items and alcoholic beverages.
(d) EPCG:
(i)
Additional flexibility for fulfillment of export

obligation under EPCG scheme in order to
reduce difficulties of exporters of goods and
services.
(ii) Technological upgradation under EPCG

scheme has been facilitated and
incentivised.
(iii) Transfer of capital goods to group
companies and managed hotels now
permitted under EPCG.
(iv) In case of movable capital goods in the
service sector, the requirement of
installation certificate from Central Excise
has been done away with.
(v) Export obligation for specified projects shall
be calculated based on concessional duty
permitted to them. This would improve the
viability of such projects.
(e) DFRC:
Import of fuel under DFRC entitlement shall be
allowed to be transferred to marketing agencies
authorized by the Ministry of Petroleum and
Natural Gas.
(f) DEPB:
The DEPB scheme would be continued until
replaced by a new scheme to be drawn up in
consultation with exporters.
(g) New Status Holder Categorization for
Export Houses
A new rationalized scheme of categorization of
status holders as Star Export Houses has been
introduced as under:
Category Total performance over three years
One Star Export House 15 crores
Two Star Export House 100 crores
Three Star Export House 500 crores
Four Star Export House 1500 crores
Five Star Export House 5000 crores
274
Star Export Houses shall be eligible for a number

of privileges including fast-track clearance
procedures, exemption from furnishing of Bank
Guarantee, eligibility for consideration under
Target Plus Scheme etc.
7.Import of Second hand Capital Goods

a.
Import of second-hand capital goods shall

be permitted without any age restrictions.
b.
Minimum depreciated value for plant and

machinery to be re-located into India has
been reduced from Rs.50 crores to Rs.25
crores.
5. Export oriented units (EOUs)

(a) EOUs shall be exempted from Service Tax
in proportion to their exported goods and
services.
(b) EOUs shall be permitted to retain 100% of
export earnings in EEFC accounts.
(c) Income Tax benefits on plant and machinery
shall be extended to DTA units which
convert to EOUs.
(d) Import of capital goods shall be on selfcertification basis for EOUs.
(e) For EOUs engaged in Textile & Garments
manufacture leftover materials and fabrics
upto 2% of CIF value or quantity of import
shall be allowed to be disposed of on
payment of duty on transaction value only.
(f)
Minimum investment criteria shall not apply

to Brass Hardware and Hand-made
Jewellery EOUs (this facility already exists
for Handicrafts, Agriculture, Floriculture,
Aquaculture, Animal Husbandry, IT and
Services).
6. Free Trade and Warehousing Zone:

(i)
A new scheme to establish Free Trade and

Warehousing Zone has been introduced to
create trade-related infrastructure to
facilitate the import and export of goods and
services with freedom to carry out trade
transactions in free currency. This is aimed
at making India into a global trading-hub.
(ii) FDI would be permitted up to 100% in the

development and establishment of the
zones and their infrastructural facilities.
(iii) Each zone would have minimum outlay of
Rs.100 crores and five lakh sq. mts. built
up area.
Units in the FTWZs would qualify for all other
benefits as applicable for SEZ units.
Banking Briefs
326
8. Services Export Promotion Council:

An exclusive Services Export Promotion Council
shall be set up in order to map opportunities for
key services in key markets, and develop
strategic market access programmes, including
brand building, in co-ordination with sectoral
players and recognized nodal bodies of the
services industry.
9. Common Facilities Centre
Government shall promote the establishment of
Common Facility Centres for use by homebased service providers, particularly in areas like
Engineering & Architectural design, Multi-media
operations, software developers etc., in State
and District-level towns, to draw in a vast
multitude of home-based professionals into the
services export arena.
10.
Procedural Simplification
Rationalisation Measures
&
All exporters with minimum turnover of Rs.5

crores and good track record shall be exempt
from furnishing Bank Guarantee in any of the
schemes, so as to reduce their transactional
costs.Validity of all licences/entitlements issued
under various schemes has been increased to
a uniform 24 months.Time bound introduction
of Electronic Data Interface (EDI) for export
transactions. 75% of all export transactions to
be on EDI within six months.
11. Bio Technology Parks
Biotechnology Parks to be set up which
would be granted all facilities of 100% EOUs.
The other measures are in areas like :
Gems & Jewellery
Handlooms & Handicrafts
Leather & Footwear
Co-acceptance/ Avalisation
Board of Trade
275
OVERVIEW OF INDIAS FOREIGN TRADE
Foreign Trade benefits an economy due to comparative advantage
Inflows and outflows of foreign exchange take place under two accounts- Capital and
Current
Current Account: Import and Export of goods and invisibles (Services and remittance)
Capital Account: External borrowings or repayment; external investment/disinvestments;

foreign aid; grants etc
Indias share in total world trade is 0.67% in 2002-03.
Indias exports and imports during 04-05 was Rs. 3.61 lac Crores and 4.90 lac Crores
The fundamental reason why foreign trade

benefits an economy is the principle of
comparative advantage. Different countries
have comparative advantage in different
commodities or services, arising out of
differences in resources, costs or technology.
Comparative advantage principle refers to
relative and not absolute efficiency in producing
goods & services. Different countries generally
concentrate on providing goods & services in
which they have comparative advantage and in
this sense international trade is economically
beneficial to all the countries.
Insurance Freight (CIF) basis while exports are

valued on Free On Board (FOB) basis to arrive
at Balance of Trade or Trade Balance of a
country.
The international trade leads to inflow & outflow

of foreign exchange. The inflows i.e. external
receipts and outflows i.e., external payments are
customarily classified under two broad
headings, namely
(iii) Foreign Aid, grants etc.
(i)
Current account
(ii) Capital account

The current account inturn can be spilt into two
heads.
(i)
Merchandise trade (i.e., export-import of

goods)
(ii) Invisibles (i.e., services and remittances)

The difference between export and import of
goods is referred to as Balance of Trade (BoT).
It is customary to value imports on Costs
Banking Briefs
327
Merchandise trade and invisibles together

comprise the current of account of a country
and the difference between inflows & out-flows
here gives the current account surplus or deficit.
The capital account includes
(i)
External borrowings or repayment
(ii) External investments or disinvestments
The balance on current account together with

the balance on the capital account will effect
changes in the countrys forex reserves.
Conceptually and arithmetically, the net
difference between current and capital account
must compensate the movement in reserve
position of a country.
Historically India had been an exporter of primary
goods like tea, cotton, jute etc., besides special
items like spices and precious metals. In 1948,
Indias share in the total world export was 2.53%.
Indias share in the total world export has
declined to a mere 0.6%. In other words, it
implies that exports of other countries have
grown much faster than ours.
The foreign exchange reserves of India touched
276
the all time low of US $ 1.2 billion as at the end

of December 1990, during the Gulf crisis (Kuwait
war) and India had to pledge gold in the London
market to prevent a possible default in meeting
external obligations. It was at this juncture, that

India embarked on the path of liberalisation and
globalisation. Since then external sector
performed rather well.
Indias Foreign Trade: Performance in the last 3 years (2002-03 to 2004-05)

Item
Exports
Rs. in Crores
Growth (%)
US $ Bn
Growth (%)
Imports
Rs. in Crores
Growth (%)
US $ Bn
Growth (%)
2002-03
2003-04
2004-05
April 05-Dec 05
255137
293367
361879
293829
22.1
15.0
23.4
15.2
52.72
63.84
80.54
66.43
20.3
21.0
26.2
18.1
297206
359108
490532
425667
21.2
20.8
36.6
24.2
61.41
78.15
109.17
96.24
19.4
27.3
39.7
27.3
Salient features of our foreign trade in principal

commodities in April 2005 - Dec. 05
Export growth remained broad based

across major commodity groups during Apr
- Dec 2005, marked by decelaration in
export of primary products i.e. ores,
minerals & marine products.
Export of agricultural products posted

double digit growth due to export of raw
cotton, rice & coffiee. Engineering goods,
gems & Jewellery & petroleum products
were key drivers of growth of manufactured
exports. Destination wise Latin America was
the fastest growing region for India's exports.
Imports maintained a high tempo of growth

led by oil imports. Non-oil imports
withnessed a marginal decline.
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328
Projected Growth
Indias share in global foreign trade is still below
1%. EXIM Policy seeks to achieve a global share
of 1% while National Foreign Trade Policy aims
to double our share in global trade (which means
more than 1.35%) by 2009. It may be noted that
in the budget 2006, the finance minister has
projected the global share of exports at 1.5%
for 2006 - 2007.
277
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)
Enacted in 1999
It liberalises the dealings in foreign exchange and relaxes the punitive provisions in
FERA
It attracts only civil and not criminal consequences
It introduces a new concept of Authorised Persons to include ADs/MCs/RMCs and

OCBs
Some key measures: Clear definition of current and capital account; simple and
transparent rules;, fewer sections; reduction in number of forms; fewer occasions for
RBI interventions; increase in threshold limits for various transactions under the
discretionary powers of the Authorised Dealers; Alignment of NRI definition with IT act.
After opening up of the Indian economy and

initiation of the liberalisation process during the
year 1991-92, significant developments in forex
investment and foreign trade have taken place
in our country. A few of these developments are:
(1) participation of foreign institutional investors
in Indian stock markets has increased manifold,
(ii) external commercial borrowings have gone
up as Indian corporates are now accessing the
capital markets abroad, (iii) Indian investments
abroad, in joint ventures, have been liberalised
and Foreign Direct Investment policy has been
simplified, (iv) rates of tariffs have been
rationalised, (v) Exim Policy has been
considerably liberalised, and (vi) foreign trade
and foreign exchange reserves have increased
substantially.
In view of the abovesaid developments it had
become necessary that the modifications and
some new amendments are incorporated in the
existing FERA, 1973. Also, it was felt that some
measures in the existing FERA were too
restrictive, therefore, a new legislation titled a
FEMA should be enacted.
The Foreign Exchange Management Act, 1999
is a step towards foreign exchange
management as a part of the policy of
globalisation and liberalisation of trade, initiated
in 1991. It has made significant departures from
former FERA (Foreign Exchange Regulation
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329
Act) and a number of changes contained therein

have far reaching effects. It provides a
mechanism for forex dealings and financial
transactions in a more liberal way than that
existed under FERA. The FEMA has at least
annulled the most feared of flaws i.e. FERA,
particularly the punitive provisions which it
contained.
There are substantial changes, particularly in
regard to the outlook and approach in dealing
with foreign exchange issues. The new law has
now only civil and no criminal consequences.
Any contravention of its provisions results in a
fine in monetary terms and penalty, but no
imprisonment, except where the offender does
not pay even the fine.
The FEMA provides that no person will carry out
transactions with foreign exchange or
transactions with non-residents i.e. transactions
in or out of India by residents and their overseas
offices or agents and transactions in India by
non-residents or their offices or the agents in
India. But current account transactions are
exempted from such restrictions, unless there
are specific restrictions. Capital account
transactions will face restrictions that are
greater than current account transactions.
FEMA has made a significant departure from the
FERA in regard to the definition of a person
278
resident in India. Section 2(v) defines a person

resident in India to mean a person resident in
India for more than 182 days during the course
of the preceding financial year. As against this,
Section 2(p) and (q) of the FERA determines
the status of a person based on the purpose or
intention of stay rather than the duration of its
stay. Thus, an Indian resident going abroad to
take up employment, business or profession will
have to undergo a gestation period of 182 days
to attain NRI status. Consequently, there will be
delay in forex inflows from such persons
awaiting the status of a NRI. Similarly, NRIs
returning to India for employment, business or
profession will also wait for 182 days to acquire
residential status in India. Under the FERA
regulations Indians returning to India became
residents immediately on their arrival. The FEMA
not only changes the definition of a person
resident in India, but has also delinked it from
citizenship.
Further section 2(v)(iv) treats offices, branches
and agencies outside India owned or controlled
by Indian residents as persons resident in
India. Consequently, these would be subject to
FEMA restrictions and rules and regulations
made thereunder. Under FERA, overseas
offices and branches of all corporates including
banks in India, are treated as non-residents with
freedom to carry on their business operations
Banking Briefs
330
abroad. If these offices and branches are treated

as persons resident in India, according to the
FEMA as above, the provisions for normal
residents would apply to them. The rupee
accounts in India of such offices/branches of
Indian banks would be treated as resident
accounts and cease to be eligible for settlement
of international transactions.
The FEMA no longer allows the RBI to grant
general permission to individuals, corporates
or to a class of persons as provided under
FERA to deal in Forex. This is a restriction on
the powers of RBI.
The FEMA does away with the criminal
prosecution for any violation of its provisions,
as stated earlier. It only provides for a penalty
upto thrice the sum involved. It empowers the
Central Government to compound offences. It
also contains provisions that a Chartered
Accountant can present the case before the
relevant authority hearing an appeal on behalf
of the appellant. It is a significant departure from
the criminal law and essentially turns the
contravention of the FEMA to a civil
contravention.
The FEMA is surely a step towards facilitating
external trade and payments and for promoting
the orderly development and maintenance of
foreign exchange market in India.
279
WTO AND LIBERALISATION OF

FINANCIAL SERVICES
Word Trade Organisation came into being on Jan 1, 1995
Has 148 member countries
Provides forum for establishing an open and liberal global environment free from trade
restrictions
Objectives: Expand production and trade, optimize use of global resources, raise standard
of living and income and ensure full employment
Steps taken by India under WTO: Reduction in number of items under QR; amendment
to Patents Act, Copyrights Act, Trade Marks law; and relaxation in investment norms
The World Trade Organisation (WTO) is the only

international body dealing with the rules of trade
between nations. It came into being on January
1, 1995. It has 148 members, 34 observercountries and seven observers to the General
Council. The observers are international
organisations the UN, UNCTAD, IMF, World
Bank, FAO, WIPO and OECD. They act as
advisory bodies to the WTO to fulfil its primary
objective to ensure smooth trade flow.
Objectives of the WTO
Raising standards of living and incomes
Ensuring full employment
Expanding production and trade
Optimal use of worlds resources
The WTO provides a forum for interpreting

established international trade laws, for fresh
negotiations among member countries, and for
settlement of trade-related disputes. It lays down
a comprehensive set of regulations and
guidelines covering all aspects of international
trade. It is committed to establishing an open
and liberal global environment, free from trade
restrictions, and to encourage participation of
developed and developing countries in the newlyestablished Multilateral Trading System.
Banking Briefs
331
The Principles
The Principles of the WTO aim to create a liberal
and open trading environment through which
business enterprises can trade under conditions
of fair and undistorted competition. Four
principles guide the trading rules:
Protection through tariffs: The WTO has
advocated liberal trade but recognises that
members need to protect domestic production
against foreign competition. The underlying
principles is to keep such protection at low
levels.
Bound Tariffs: Members are advised to reduce
and eliminate protection to domestic production
by reducing tariffs and eliminating non-tariff
barriers. The principle followed is to bind the
reduced tariffs as committed in the respective
national schedules against further increase.
Most favoured nation treatment : The
principle is favour one-favour all. Tariffs and
regulations must be applied to imports or exports
without discrimination among members.
It prevents discrimination among goods
originating from different countries, i.e. between
imported products and equivalent domestically
produced goods, especially in levying internal
taxes and domestic regulations.
280
The Framework
The WTO framework is based on legally
enforceable trading rules, dispute settlement,
trade policy review mechanism, and a platform
for future negotiations. The agreements,
covering goods, services and intellectual
property, are the basis of the framework. They
spell out rules of trading based on liberalisation
and permitted exceptions. Commitment to lower
customs tariff and other trade barriers remain a
primary consideration while drawing up trading
rules. Besides goods, trade in services was
brought under the aegis of the WTO as it
accounted for more than 20 per cent of world
trade. The dispute settlement system set
procedures for settling trade-related
controversies within a stipulated timeframe. The
trade policy review mechanism ensures that
members respect their commitments. Besides
agriculture and services, other issues are
investments, environment, competition policy,
labour standards, etc.
WTO Agreements
WTO Agreements, which formed part of the
Uruguay Round results concluded in 1994, cover
goods, services and intellectual projects. (Its
predecessor GATT dealt only with trade in
goods). These agreements generally spell out
the principles of liberalisation and the permitted
exceptions.
The agreements are under 3 broad groupings
viz., the General Agreement on Tariffs and
Trade-GATT 1994 (for goods), the General
Agreement on Trade in Services (GATS) and the
Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS).
commitments to open their financial markets to

international players. The FSA has come into
effect from March 1, 1999. The Uruguay Round
decided to bring financial services within the
purview of WTO and put in place a legal
framework for cross-border trade, market
access for financial services and a mechanism
for dispute settlement. Financial services is one
of the three major sectors, along with
telecommunications services and information
technology products, where multilateral
liberalisation agreements were reached in the
WTO.
The focus of FSA is market opening and foreign
investment. Foreign investment in the financial
sector is considered an enabling factor, because
foreign institutions bring new skills and products,
and promote competition and efficiency. The
focus is on efficient financial systems, rather
than totally free capital investments, for
promoting growth and development.
However, risks of possible financial crises and
perhaps loss of national control of a strategic
sector can offset the benefits of financial
liberalisation. Therefore, the prime concern is
strengthening the financial systems ability to
evaluate and manage risk.
Financial firms in developed countries have
technologies that have reduced transactions
cost, but the maturing markets at home have
lesser opportunities for growth. Therefore, the
developed countries are interested in market
access through the FSA so that their large
financial firms can take advantage of business
opportunities and higher rates of return in the
dynamic emerging economies. On their part,
developing countries are more interested in
foreign capital flows to accelerate growth in their
domestic economies and are less interested in
the financial markets of the OECD countries.
In July 1995, trade in services was included in

the ambit of the World Trade Organisation
(WTO) under the General Agreement on Trade
in Services (GATS), thus providing for increased
market openings in banking, insurance and other Seattle Ministerial Conference
financial services. In December 1997, the
The Ministerial Conference is the highest
Financial Services Agreement (FSA) was
decision making authority of the WTO and it
reached and 102 WTO members made
281
Banking Briefs
332
meets every two years or so to discuss and take

decisions on various issues and proposals
made by member countries, including issues
relating to future work of the WTO.
Implementation issues: India has been
emphasising that implementation of existing
agreements need to be addressed so that
imbalances and inequities in their
implementation can be rectified. For example,
imbalances in the TRIPS Agreements, which
gives high protection to industrial products but
does not recognise the rights of countries of
origin, while granting patents on products of
developed countries.
Trade Related Intellectual Properly rights

(TRIPS)
TRIPS agreement requires minimum

standard of protection to be adopted on
Copyrights, Trade marks, Geographical
Indications, Industrial Designs, Patents,
Layout Designs of Integrated Circuits and
Protection of Undisclosed Information (trade
secrets) and enforcement of these.
All developing countries provided a transition

period of five years in order to implement
TRIPS agreement. Countries that do not
implement product patents in certain areas
can delay provisions of product patents for
another five years. However they have to
provide exclusive marketing rights for
products, which obtain patents after
01.01.95. As per Indias obligation, Patents
(Amendments) Act, 1999 was passed in
March 1999 to provide for exclusive
marketing rights.
India, along with other developing countries,

wants greater flexibility and autonomy in
determining its agricultural policy to take care of
our primary concerns of food security and rural
employment.
In the area of mandated reviews such as TRIPs,
India has pressed for transfer of technology at
reasonable rates to developing countries and
protection of farmers rights, while review of the
Dispute Settlement Mechanism of the WTO
should recognise constraints of the developing
countries.
The entire world dynamics is in a fast changing
mode towards greater and greater
competitiveness. With Chinas entry in WTO,
and the surfacing of many implicit issues
together with the changing composition of
emerging giants of the world economy and
developing countries increasingly becoming
conscious of their rights, it is definite that WTO
rules and directives are likely to get modified.
Patents
Basic obligation is that inventions in all fields

of technology, whether products or
processes, shall be patentable if novel,
involve inventive step and capable of
industrial application
Present term provided for in TRIPS

agreement is twenty years. A bill was earlier
introduced in Parliament to make these
changes and has been referred to Joint
Select committee of Houses.
Layout Designs of Integrated Circuits
Washington Treaty, to which India is a

signatory, covers protection of intellectual
property in respect of layout designs that
are original in nature
Obligations include national treatment to

foreign right holders and term of protection
of 10 years.
INDIAS COMMITMENTS TO THE WORLD

TRADE ORGANISATION (WTO)
Quantitative restrictions (QRs):
In 1997, India decided to phase out QRs on

imports for 2714 items, on negative list, with
its trading partners, over a period of six
years.
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Copyrights
282
Agreement requires compliance with

provisions of Berne convention in area of
copyrights and related rights i.e., rights of
performers, producers of phonograms and
broadcasting organisations. Terms of
protection for copyrights, rights of
performers and producers of phonograms
should not be less than 50 years.
Trade Related Investment Measures

(TRIMS)
Under this agreement, developing countries

have a transition period of 5 years up to
31.12.99 during which they were allowed to
retain measures inconsistent with
Agreement, provided they were duly notified.
Computer programmes to be protected as

literary works.
Copyright Act, 1957 as amended in 1994

meets requirement of TRIPS agreement
except in case of protection of performers
right. To increase the term to 50 years, a
bill was passed by Parliament in Dec, 1999.
India notified two measures, on relating to

local content requirements in production of
certain pharmaceutical products and other
for dividend balancing requirement in case
of investments in 22 categories of
consumer items.
In Seattle Ministerial Conference, no final

decision was taken on the request of
developing countries to extend transition
period for elimination of notified TRIMS.
Trade Marks
Trade Marks law, Trade and Merchandise

Act (TMMA), 1958, in its essential features,
is in accordance with international law.
Bill to amend TMMA in order to provide for
protection to service marks was passed by
Parliament in Dec, 1999.
Doha Conference (November 2001)

Significant developments in Doha Conference :
Transition period to introduce the new drug

patent regime remains at year 2005 for India.
Action plan for 40 implementation issues

should be chalked out by member countries
by the end of 2002.
Fresh negotiations to begin on investment,

competition, government procurement and
link between trade and the environment.
India wanted that protection of geographical

indications should be made available to
Basmati and other bio-resources.
Geographical Indications
At present, India does not have any specific

law on grographical indications.
Decided to enact a new law on the subject

to take advantage of provisions of TRIPS
agreement.
Bill in this regard passed in Dec, 1999.
Industrial Designs
Agreement requires that independently

created designs that are new and original
shall be protected.
Designs Act, 1911 needs updation and

amendment
Bill prepared by Department of Industrial

Development in this regard was passed by
Rajya Sabha in Dec, 1999 and will now have
to be passed by Lok Sabha.
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FIFTH MINISTERIAL MEETING OF THE

WTO AT CANCUN, MEXICO (SEP 2003)
AND POST-CANCUN - SIGNIFICANT
DEVELOPMENTS
The meeting couldnt reach any agreement

due to sharp differences in the views and
positions.
Post-Cancun consultations focused on four

negotiating areas (Agriculture, market
283
access for non-agri products, Singapore

issues and Cotton).
Among the three pillars of Agri negotiation

(Export subsidies, domestic support and
market access) market access was viewed
as the most important issue.
In the meeting held in Mar 04, delegates

agreed on the need to allow developing
countries to accord special treatment for
agriculture.
EU (European Union) agreed to phase out

farm export subsidy
In the Framework Agreement adopted in

Aug 04, the following major decisions were
taken:
Eliminate all forms of subsidies in

agriculture by an end date
Reduce all trade distorting domestic

support as per a tiered formula.
Continuation of the flexibility for developing

countries in providing certain subsidies for
export of agricultural products for a
reasonable period.
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284
FOREIGN INSTITUTIONAL INVESTORS (FII)
FIIs entry into India began in 1993 in the wake of economic reforms
They provide much needed funds for development of the country
Unlike FDIs, FIIs bring in portfolio investment i.e investment in shares, debentures,
bonds etc.
Morgan Stanley, Templeton, Jardine Fleming are some examples of FIIs
Advantages: Provide funds; bring in international practices; promotes transparency;
and bring in venture capital.
During 2004-05 FIIs brought in around US$ 12 billion, the highest in 3 years
The era of FIIs in India originated in 1993. In the

wake of reform process, foreign investment was
welcomed with open arms. For a country that
embraced free market model after having
remained closed to the outside world for long,
foreign capital, whether it was portfolio money
like that of FIIs or investment flows like that of
FDI, was imperative to rebuild India. FIIs of
different countries, predominantly American,
begun opening their shops in India. India currently
has about 7-8 percent weightage among the
funds dedicated to Asia.
The FIIs currently operating in India are of different
types. They comprise of pension funds, mutual
funds, trusts, asset management companies,
portfolio managers etc. The number of
registered FIIs in India has grown over the years
to beyond 800. The big names include: Morgan
Stanley, Templeton, Capital International, Jardine
Fleming etc. Over the year FIIs have been
allowed the freedom to invest in any security
including derivatives in both secondary and
primary markets.
FII money comprises of various segments such
as Pension funds, Indian funds, allocations
pertaining to India out of Asia funds and hedge
funds. Hedge funds would certainly be more
volatile. But as far as the other segments of the
FII funds are concerned they are not so volatile.
In the case of investing in emerging markets
there are country risks, regulatory risks, taxation
risks, forex risks , etc. which need to be hedged.
When an FII invests in an emergent market like
India, it takes all these risks into consideration
and decides a minimum level of return to put it
on equal footing with what would have been
earned by investing in a developed market.
in terms of taking reasonably medium to longterm view of the company as also ensuring
proper assessment before investing. Better
disclosures and corporate governance and
ensuring that the decisions of the company are
in consonance with the investor perceptions are
the things that have changed over the last 7
years. FIIs along with other institutions have had
a very significant role in causing these changes.
FIIs are transparent and this has made Indian
Companies to follow suit.
Increasingly companies are using the annual
reports as a medium to communicate their
strategies and vision to the world.
Carrots and sticks
The nature of FII investment flows into Indian
markets requires them to focus on medium to
long-term investment horizon. While the arrival
of FIIs led to greater institutionalization of the
Indian market, their activity also provided depth
to the market. Institutionalization also helped in
lending better price discovery mechanism in the
capital market. Since the kind of FIIs operating
in India are long-term players, they tend to put
pressure on policy markers to ensure continuity
of sound economic and business policies.
FIIs have also played a catalytic role in nurturing
the nascent venture capital culture in India.
Future Role
The clout of foreign institutional investors is
immense. Even a tiny fraction of this would mean
lot of money to the emerging markets. They have
become a force to reckon within the global
financial markets. During 2004-05, FIIs have
brought in a net inflow of US $ 12 billion to Indiaone of the highest in the last three years.
Harbingers of transparency
FIIs have brought in a set of practices and
standards in terms of researching a company,
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336
285
EXTERNAL COMMERCIAL BORROWINGS (ECB)
ECB refers to commercial loans availed from non-resident lenders.
ECB can be accessed under two routes, viz., Automatic Route and Approval Route
ECB proceeds should be parked overseas until actual requirement in India
Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI
ECB are a key component of Indias overall

external debt which includes, inter alia, external
assistance, buyers credit, suppliers credit, NRI
deposits, short-term credit and Rupee debt.
ECB refer to commercial loans, [in the form of
bank loans, buyers credit, suppliers credit,
securitised instruments (e.g. floating rate notes
and fixed rate bonds)] availed from non-resident
lenders with minimum average maturity of 3
years. Any legal entity such as a corporate /
financial intermediary is an eligible borrower. In
view of its implication for potential systemic
risks, ECB availed by financial intermediaries
need to be distinguished from those availed by
corporates. Banks have the facility (i) to borrow
from its head office or branch or correspondents
outside India up to 25 per cent of its unimpaired
Tier-I Capital or US$ 10 million, whichever is
higher, (ii) to borrow from its head office or
branch or correspondents outside India without
limit for the purpose of replenishing Rupee
resources (not for investment in call money or
other markets) and (iii) to avail lines of credit
from a bank / financial institution outside India
without any limit for the purpose of granting preshipment / post-shipment credit to its
constituents.
i) Eligible borrowers
ECB can be accessed under two routes, viz.,

(i) Automatic Route and (ii) Approval Route.
iv) End-use
Corporates registered under the Companies Act

except financial intermediaries (such as banks,
financial institutions (Fls), housing finance
companies and NBFCs) are eligible.
ii) Recognised Lenders
Borrowers can raise ECB from internationally
recognised sources such as (i) international
banks, international capital markets, multilateral
financial institutions (such as IFC, ADB, CDC
etc.,), (ii) export credit agencies and (iii)
suppliers of equipment, foreign collaborators and
foreign equity holders.
iii)
a)
ECB up to USD 20 million or equivalent with

minimum average maturity of three years
b)
ECB above USD 20 million and up to USD

500 million or equivalent with minimum
average maturity of five years
c)
ECB up to USD 20 million can have call/put

option provided the minimum average
maturity of 3 years is complied before
exercising call/put option.
a)
(A) AUTOMATIC ROUTE

ECB for investment in real sector -industrial
sector, especially infrastructure sector-in India,
will be under Automatic Route, i.e. will not require
RBI/Government approval.
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337
Amount and Maturity
286
ECB can be raised only for investment

(such as import of capital goods, new
projects. Modernization / expansion of
existing production units) in real sector industrial sector including small and
medium enterprises (SME) and
infrastructure sector - in India. Infrastructure
sector is defined as (i) power, (ii)

telecommunication. (iii) railways, (iv) road
including bridges, (v) ports, (vi) industrial
parks and (vii) urban infrastructure (water
supply, sanitation an sewage projects);
(B) APPROVAL ROUTE
b)
Utilisation of ECB proceeds is permitted in

the first stage acquisition of shares in the
disinvestment process and also in the
mandatory second stage offer to the public
under the Governments disinvestment
programme of PSU shares.
a)
c)
Utilisation of ECB proceeds is not permitted

for on-lending or investment in capita!
market by corporates.
d)

in real estate. The term real estate
excludes development of integrated
township as defined by Ministry of
Commerce and Industry, Department of
Industrial Po(icy and Promotion, S!A (FC
Division), Press Note 3 (2002 Series, dated
04.01.2002).
Financial institutions dealing exclusively

with infrastructure or export finance such
as IDFC, ILFS, Power Finance Corporation,
Power Trading Corporation, IRCON and
EXIM Bank will be considered on a case by
case basis. In addition special purpose
vehicles (SPV) or any other such entity set
up to finance infrastructure companies /
projects exclusively & notified by RBI will
also be considered as financial institutions
for these purposes.
b)
Banks and financial institutions which had

participated in the textile or steel sector
restructuring
package as approved by
the Government will also be permitted to the
extent of their investment in the package and
assessment by RBI based on prudential
norms. Any ECB availed for this purpose
so far will be deducted from their
entitlement.
c)
Cases falling outside the purview of the

automatic route limits and maturity period
indicated at paragraph 2 (A)(iii) (a) and 2
(A) (jii) (b).
The following types of proposals for ECB will be

covered under the Approval Route.
i) Eligible borrowers
v) Guarantees
Guarantee/standby letter of credit or letter of
comfort by banks/financial institutions and
NBFCs relating to ECB is not permitted.
vi) Parking of ECB proceeds overseas
ECB proceeds should be parked overseas until
actual requirement in India.
vii) Prepayment
Prepayment of ECB up to USD 200 million is
permitted without prior approval of RBI, subject
to compliance with the stipulated minimum
average maturity period as applicable for the
loan.
viii) Refinance of existing ECB
Refinancing of existing ECB by raising fresh
loans at lower cost is permitted subject to the
condition that the outstanding maturity of the
original loan is maintained.
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338
ii) Recognised Lenders

Borrowers can raise ECB from internationally
recognised sources such as (i) international
banks, international capital markets, multilateral
financial institutions (such as IFC, ADB, GDC
etc. ). (ii) export credit agencies and (iii)
suppliers of equipment, foreign collaborators and
foreign equity holders.
iii) End-use
a)
287
ECB can be raised only for investment

(such as import of capital goods, new
projects, modernization/expansion of
existing production units) in real sectorindustrial sector including small and

medium enterprises (SME) and
infrastructure sector-in India. Infrastructure
sector is defined as (i) power, (ii)
telecommunication. (iii) railways, (iv) road
including bridges, (v) ports, (vi) industrial
parks and (vii) urban infrastructure (water
supply, sanitation and sewage projects);
b)
Utilisation of ECB proceeds is permitted in

the first stage acquisition of shares in the
disinvestment process and also in the
mandatory second stage offer to the public
under the Governments disinvestment
programme of PSU shares.
c)

for on-lending or investment in capital
market by corporates except for banks
financial institutions eligible under
paragraph 2(B)(i)(a) and 2(B) (i) (b);
d)

in real estate. The term real estate
excludes development of integrated

township as defined by Ministry of
Commerce and Industry, Department of
Industrial Policy and Promotion, SIA (FC
Division), Press Note 3 (2002 Series, dated
04.01.2002).
v) Guarantees
Guarantee/standby letter of credit or letter of
comfort by banks, financial institutions and
NBFCs relating to ECB is not normally
permitted. Applications for providing guarantee/
standby letter of credit or letter of comfort by
banks, financial institutions relating to ECB in
the case of SME will be considered on merit
subject to prudential norms.
ECB proceeds should be parked overseas
until actual requirement in India.
vi) Prepayment
Prepayment of ECB up to USD 200 million is
permitted without prior approval of RBI subject
to compliance with the stipulated minimum
average maturity period as applicable for the
loan.
vii) Refinance of existing ECB
Refinancing of outstanding ECB by raising fresh
loans at lower cost is permitted subject to the
condition that the outstanding maturity of the
original loan is maintained.
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288
CAPITAL ACCOUNT LIBERALISATION
Capital account transactions further liberalized
Resident individuals allowed to remit upto US$25000 freely per calendar year
Indian students studying abroad given facilities available to NRIs
AD s permitted to allow higher remittances
Facilities to Corporates, Exporters and Importers liberalized
Listed Indian companies permitted to disinvest their investment in JVs abroad
NRIs given additional investment avenues.
Residents allowed to book forward contracts and hedge risk in forex market
Non-residents permitted to enter into forward sale contracts with ADs in India to hedge
currency risk
Capital account transactions have been gradually

liberalised with relaxations allowed for overseas
investments and remittances abroad by banks,
corporates, resident and non-resident
individuals. Policy initiatives to improve the
inflows of foreign direct investment, foreign
portfolio investment and external commercial
borrowings were also carried forward over the
last few years.
Indian students studying abroad were made

eligible for all facilities available to nonresident Indians (NRIs) under the Foreign
Exchange Management Act (FEMA). They
would, however, continue to avail of
educational and other loans as residents in
India. The limit for foreign exchange
remittance by resident individuals for current
account purposes other than import without
documentation formalities was raised to US
$ 10,000 from US $ 500.
ADs were permitted to allow remittances

for (i) securing insurance for personal health
from a company abroad; (ii) covering
expenses by artists while touring abroad;
(iii) commission to agents abroad towards
sale of residential flats/commercial plots in
India up to US $ 25,000 or five per cent of
the inward remittance per transaction,
whichever is higher; (iv) short term credit
to overseas offices of the Indian companies;
(v) advertisements on foreign television
channels; (vi) royalty up to five per cent of
local sale and eight per cent of exports and
lump sum payment not exceeding US $ 2
million; and (vii) use and/or purchase of
trademark/franchise in India.
The limit for release of foreign exchange for

employment
abroad,
emigration,
Facilities for Resident Individuals
Resident individuals were allowed to remit

up to US $ 25,000 freely per calendar year
for any permitted purposes under the
current and the capital account Under this
scheme, resident individuals were permitted
to acquire and hold immovable property or
shares/portfolio investment or any other
asset outside India without prior approval
of the Reserve Bank. They were also
allowed to open, maintain and hold foreign
currency accounts with a bank outside India
for making remittances without prior
approval of the Reserve Bank. Resident
beneficiaries were permitted to open and
credit the proceeds of insurance claims/
maturity/surrender value settled in foreign
currency to their resident foreign currency
(RFC) domestic accounts.
Banking Briefs
340
289
maintenance of close relatives abroad and

education abroad was increased to US $
1,00,000 on the basis of self declaration.
The limit for release of foreign exchange for
medical treatment abroad without estimate
from a hospital/doctor was increased to US
$ 1,00,000 from US $ 50,000. The limit for
remittance towards consultancy services
from outside India was raised to US $ one
million per project from US $ 1,00,000.
Resident individuals were permitted to take
interest free loans from close relatives
residing
outside
India
up
to
US $ 250,000 with a minimum maturity
period of one year.
Resident individuals maintaining foreign

currency accounts with ADs in India or
banks abroad were allowed to obtain
International Credit Cards (ICCs) issued by
overseas banks and other reputed
agencies. While no monetary ceiling was
fixed by the Reserve Bank for remittance
under ICCs, the applicable limit is the credit
limit fixed by the card issuing banks.
Diplomatic missions, diplomatic personnel
and non-diplomatic staff of foreign
embassies were allowed to maintain foreign
currency deposit accounts in India.
Remittance of the net salary of a citizen of

India on deputation to the office or branch
of an overseas company in India was
allowed for the maintenance of close
relatives residing abroad.
Balances in the exchange earners foreign

currency (EEFC) and resident foreign
currency (domestic) [RFC(D)] accounts
were allowed to be credited to non-resident
(external) (NRE) rupee/ foreign currency
non-resident (banks) [FCNR(B)] accounts
at the option of the account holders
consequent upon change of residential
status (to nonresident).
Facilities for Corporates

Banking Briefs
341
Steps were taken to encourage outflows that

would enhance the strategic presence of
Indian corporates overseas. They were
allowed to invest in overseas joint ventures
(JVs)/wholly owned subsidiaries (WOSs)
up to 100 per cent of their net worth. This
facility was also extended to partnership
firms. Resident corporates and registered
partnership firms were allowed to undertake
agricultural activities overseas, including
purchase of land incidental to this activity,
either directly or through their overseas
offices, i.e., other than through JVs/ WOSs,
within the overall limit available for
investment overseas under the automatic
route. This would enable Indian companies
to take advantage of global opportunities
and also to acquire technological and other
skills for adaptation in India. The automatic
route for overseas investment was widened
to cover investment overseas through
special purpose vehicles (SPVs) and by
way of share swaps with requisite approval
processes.
Foreign banks operating in India were

permitted to remit net profits/surplus (net
of tax) arising out of their Indian operations
to their head offices on a quarterly basis
without prior approval of the Reserve Bank.
Corporates were permitted to issue equity
shares against lump sum fees, royalty and
outstanding
external
commercial
borrowings (ECBs) in convertible foreign
currency. General permission was granted
to foreign entities for setting up project
offices in India. These project offices were
permitted to open foreign currency
accounts with the Reserve Banks approval.
Permission was also granted to foreign
companies to establish branch offices/units
in special economic zones (SEZs) to
undertake manufacturing and service
activities subject to certain conditions.
Keeping in view the comfortable foreign
290
exchange reserves and the prevailing

strength of Indias external sector, a
comprehensive review of the guidelines for
ECBs led to significant liberalisation. The
revised ECB guidelines allowed (i)
corporates to access ECBs for undertaking
investment activity in India and for overseas
direct investment in JVs/WOSs, and (ii)
borrowings under the approval route by
financial institutions dealing exclusively with
infrastructure or export finance and also by
banks and financial institutions which had
participated in the textile or steel sector
restructuring package. The maximum
amount of ECB that can be raised by Indian
corporates under the automatic route was
enhanced to US $ 500 million in a financial
year with minimum average maturity of
three years for loans up to US $ 20 million
and minimum average maturity of five years
for loans above US $ 20 million. Initiatives
were taken for bringing about transparency
in policy implementation and data
dissemination with respect to ECBs.
The limit on export of goods by way of gifts

was increased from Rs. 1 lakh to Rs. 5 lakh
per annum. With effect from April 1, 2004
submission of declaration in form GR/SDF/
PP/SOFTEX in respect of export of goods
and software of value not exceeding US $
25,000 or its equivalent was waived.
The limit for submission of documentary

evidence of all imports made into India was
enhanced from US $ 25,000 to US $
1,00,000. For select importers, the limit for
accepting exchange control (EC) copy of
bill of entry for import remittances was
enhanced from US $ 1,00,000 to US $ one
million, subject to certain conditions.
Credits for imports up to US $ 20 million

per transaction with a maturity period
beyond one year and up to three years were
permitted only for import of capital goods.
Limits for direct receipt of import bills/
documents by non-corporate importers
were raised to US $ 100,000 or its
equivalent.
Exporters with good track record, including

those in small and medium sectors, have
been made eligible for issue of Gold Card
to ensure easy availability of export credit.
The salient features of the Gold Card
scheme include better terms of credit than
those extended to other exporters by banks,
faster and simpler processing of
applications for credit, sanction of in
principle limits for a period of three years
with the provision of timely renewal and
preference for grant of packing credit in
foreign currency. The Gold Card holders are
eligible for issuance of foreign currency
credit cards for meeting urgent payment
The remittance of premium made by

exporters for overseas insurance of exports
of sea-food and other perishable food/food
products against rejection by importers was
permitted. ADs were allowed to grant
permission to exporters for opening/hiring
of warehouses abroad initially for one year
and renewal thereof. Units in domestic tariff
areas (DTAs) were allowed to make
payment in foreign currency towards goods
supplied to them by units in SEZs. Project/
service exporters were allowed to pay their
Indian suppliers/ service providers in foreign
currency from their foreign currency
Banking Briefs
342
Indian companies were permitted to grant

rupee loans to their employees who are
NRIs or persons of Indian origin (PIO) for
personal purposes, including purchase of
housing property in India.
Facilities for Exporters and Importers
accounts maintained in India for execution

of such projects. Realisation of export
proceeds up to 360 days from the date of
shipment was allowed for export of books
on a consignment basis.
291
obligations on the basis of their track record

of timely realisation of export bills.
Facilities for Overseas Investments
Listed Indian companies were permitted to

disinvest their investment in JVs/WOSs
abroad even in cases where such
disinvestment may result in a write-off of
the capital invested to the extent of 10 per
cent of the previous year s export
realisation. Firms India registered under the
Indian Partnership Act, 1932 and with a good
track record were permitted to make direct
investments outside India in an entity
engaged in any bona fide business activity
under the automatic route up to 100 per cent
of their net worth.
Foreign Exchange Clearing
Multilateral institutions such as International

Finance Corporation (IFC) and Asian
Development Bank (ADB), which can float
rupee bonds in India, were permitted to
purchase Government dated securities.
Facilities for Non-resident Indians (NRls)

and Persons of Indian Origin (PIO)
Non-resident shareholders were allowed to

apply for issue of additional equity shares
or preference shares or convertible
debentures over and above their rights
entitlements. Allotment is subject to the
condition that the overall issue of shares to
non-residents in the total paid-up capital of
the company does not exceed the sectoral
cap.
NRIs were permitted to invest in exchange

traded derivative contracts approved by the
SEBI out of rupee funds held in India on a
non-repatriable basis, subject to the limits
prescribed by the SEBI. Foreign Embassies
/Diplomats/Consulate Generals were
allowed to purchase/sell immovable
property in India other than agriculture land/
plantation property/farm houses.
Banking Briefs
343
ADs were permitted to grant rupee loans to

NRIs. Earlier, housing loans availed by NRIs/
PIO could be repaid by borrowers either by
way of inward remittances through normal
banking channels or by debit to NRE/
FCNR(B)/NRO/NRNR/ NRSR accounts or
out of rental incomes derived from the
property. In May 2004, borrowers close
relatives in India were allowed to repay the
instalment of such loans, interest and other
charges directly to the concerned ADs/
housing finance institutions through their
bank accounts.
An important element in the infrastructure

for the efficient functioning of the foreign
exchange market has been the clearing and
settlement of inter-bank US dollar-rupee
transactions. The CCIL offers a multilateral
netting mechanism through a process of
novation for inter-bank spot and forward US
dollar-rupee transactions. The live
operations of foreign exchange clearing,
which commenced from November 12,
2002 have been satisfactory. Effective
February 2004, the CCIL began to settle
cash and T+1 settlement trades in addition
to spot and forward trades. The CCIL also
launched its foreign exchange trading
platform, i.e., FXCLEAR on August 7, 2003.
During the period between April 2003 and
June 2004, 8,97,352 trades amounting to
over US $ 727 billion were settled by the
CCIL.
Forward Contracts - Residents
292
Residents were allowed to book forward

contracts and participate in hedging
instruments for managing risk in the foreign
exchange market. Authorised Dealers
(ADs) were allowed to offer foreign
currency-rupee options on a back-to-back
basis or run an option book as per specified
terms and conditions.
Residents were permitted to book forward

contracts for hedging transactions
denominated in foreign currency but settled
in rupees.
Resident entities were also allowed to
hedge their overseas direct investment
exposure against exchange risk.
The eligible limit for booking of forward
contracts by exporters/importers was
increased to 50 per cent (from 25 per cent
earlier) of the average of the previous three
financial years actual import/export turnover
or the previous years turnover, whichever
is higher, (from only average of past three
years turnover earlier) without any limit (US
$ 100 million, earlier). Importers/exporters
desirous of availing limits higher than the
overall ceiling of 50 per cent were allowed
to approach the Reserve Bank for
permission.
Forward Contracts -Non-residents
Non-residents were permitted to enter into

forward sale contracts with ADs in India to
hedge the currency risk arising out of their
proposed FDI in India.
HoIders of FCNR(B) accounts were

permitted to book cross-currency forward
contracts to convert the balances in one
currency into another currency in which
FCNR(B) deposits are permitted.
Flls were permitted to trade in exchange

SEBI subject to the limits prescribed by it.
NRIs were allowed to invest in exchange

SEBI out of rupee funds held in India on a
non-repatriable basis.
ADs were permitted to enter into forward/

option contracts with residents who wish
to hedge their overseas direct investment
Banking Briefs
344
in equity and debt. These contracts could

be completed by delivery or rollover up to
the extent of market value on the due date.
293
ECONOMY & FINANCE

MANAGEMENT
Banking Briefs
345
CORPORATE GOVERNANCE
Corporate Governance means monitoring the functions of a company to ensure

enhancement of shareholders value through ethical conduct of business
CG aims to provide positive effect on all stakeholders such as customers, employees,

suppliers, regulatory bodies and community at large
Essential elements of CG: Adequate disclosure, distribution of power; supervision and

audit of executive functions and performance; expertise of the Board
Birla Committee recommendations provide institutional framework for CG.
Good governance is an essential element for

any organisation that wishes to maximise its
effectiveness. This is true in all the private/public
sector commercial and noncommercial
organisations, not-for-profit organisations, and
the economies representing different states. The
areas of discontent in corporate management
cluster around the following:
Low ethical and professional standards

leading to poor performance and a loss of
value in the various organisations.
Double standards allowing practice to differ

from stated ideals.
Failure of commercial organisations as a

result of inadequate controls or
unsatisfactory checks and balances.
Corporate Governance : Some Definitions
Corporate Governance means doing

everything better; to improve relations
between
companies
and
their
shareholders; to improve the quality of
outside directors; to encourage people to
think longer term; to ensure that information
needs of all stakeholders are met; to ensure
that executive management is monitored
properly in the interests of shareholders,
such as through audit and other
committees, and so on.
Corporate Governance is nothing but the

traditional responsibility the corporate
Banking Briefs
346
managers and their Board of Directors have

in enhancing the shareholder value thus
contributing for the greater image of the
company by following the moral code of
conduct.
Why Corporate Governance :
Liberalisation, privatisation and globalisation of
economies followed by the establishment of
World Trade Organisation (the WTO
Agreement) to which India is a signatory, ushered
in a new era of global economic cooperation,
reflecting the widespread desire to operate in a
fairer and more open multilateral trading system.
The implication of this WTO Agreement for
developing countries is removal of tariff and nontariff barriers to improve market access for
partner countries signifying that protectionism
has become a thing of the past. Though different
concessions, relating to time frame and tariff/
non-tariff barriers, have been given to developing
countries like India, it is a fact that India will be
able to gain from the global free-trade, marked
by reduced barriers, only when the Indian
corporates learn to govern and manage their
financial and non-financial affairs more efficiently.
With these liberalisation/globalisation measures,
facilitating increased flow of foreign direct
investment in different sectors of the economy,
Indian corporates would not be able to avoid the
rigours of international regulation and many of
the best business practices prevalent in
developed countries.
294
Good corporate governance enhances the

image/reputation of the corporation and helps
it, as a user of the capital, to build long term
relationship with the suppliers of capital. With
the transnationalisation of financial markets, it
is used as a marketing tool to tap international
capital markets to raise required capital at lowest
possible cost.
Cadbury Committee recommendations
There should be a clearly accepted division

of responsibilities at the head of a company
which will ensure balance of power and
authority, such that no one individual has
unfettered powers of decision.
A Directors term of office should run for no
more than three years without shareholders'
approval for reappointment.
The Board should monitor the Executive

Management.
Where the Chairman is also the CEO, there

should be a strong independent element on
the board with an independent leader.
Non-Executive Directors of the Board should

significantly influ-ence Board decisions.
Directors should have access to

independent professional advice at the
Companys expense.
There should be an Audit Committee in

every organisation. The terms of reference
of the audit committee should inter-alia
include the following:
discuss the matters arising from the

audit with the external auditors
In India, SEBI has prescribed that the mandatory

recommendations of Kumar Mangalam Birla
Committee be complied with by listed
companies.
For
Birla
Committee
recommendations please refer relevant chapter
under Committees.
PROCESS OF CORPORATE GOVERNANCE
Improving the relationship between

companies and their sharehold-er and other
stakeholders (including banks etc.)
Improving the quality of outside (Non

Executive) directors.
To encourage the people to think long term.
To enable markets to value the shares

properly by improving the quantity, quality
and frequency of financial and managerial
disclosure.
To improve the monitoring mechanism

(inside the company) by improving the
quality of information that managements
share with their boards.
maintaining excellent relationship with

customers and suppliers.
Improving compliance with applicable legal

and regulatory re-quirements.
Consideration and care for the interest of

the employees and local community.
Corporate Governance in Banking Sector
review the draft annual accounts prior

to their approval by the board
review the compliance with statutory

and stock exchange requirements for
financial reporting
discuss the scope of the audit with the

external audit
Banking Briefs
347
Basel Committee Publication ( Sep 1999)

In the opinion of the Committee there are four
important forms of oversight that should be
included in the organisational structure of any
bank in order to ensure appropriate checks and
balances: (1) Oversight by the board of directors
or supervisory board; (2) Oversight by individuals
not involved in the day-to-day running of the
295
various business areas; (3) Direct line

supervision of different business areas; and (4)
Independent risk management and audit
functions.
As regards the role of the Board, the Committee
sets out the following:
Establishing strategic objectives and a set

of corporate values that are communicated
throughout the banking organisation.
Setting and enforcing clear lines of

responsibility and accountability throughout
the organisation.
Ensuring that board members are qualified

for their positions, have a clear
understanding of their role in corporate
governance and are not subject to undue
influence from management or outside
concerns.
Ensuring that there is appropriate oversight

by senior management.
Effectively utilizing the work conducted by
internal and external auditors, in recognition
of the important control functions they
provide.
Ensuring that compensation approaches

are consistent with the banks ethical values,
objectives, strategy and control
environment.
Conducting corporate governance in a

transparent manner.
Ensuring an environment supportive of

sound corporate governance.
Developments in the last 3 years

Task Force set up by Department of
Company Affairs and CRISIL rating
The task force of the Study Group set up by the
Department of Company Affairs in May 2000
suggested setting up of a centre for corporate
excellence in order to promote good corporate
governance.. CRISIL has volunteered to rate the
corporate governance of companies, even
though the rated companies can choose to
disclose it or not.
Banking Briefs
348
Narayana Murthy Committee report on

Corporate Governance (appointed by SEBI)
The Committee submitted its report in Mar 04.
Some of the recommendations made by the
Narayana Murthy Committee are:
Whistle Blower Policy: Personnel who

come to know about unethical or improper
practices should be able to approach the
companys audit committee without
necessarily informing their supervisors.
Whistle blowers should be protected from
unfair termination and other unfair
prejudicial practices.
Corporates should take steps to see that

the right of access to audit committees is
communicated to all employees through
internal circulars.
The audit committee members should be

non-executive directors.
The management should give their views

and auditors comment on management
views regarding contingent liabilities should
be given in the annual report
Regarding reports of security analysts, the

SEBI should make rules for disclosure
whether the company that is being written
about is a client of the analysts employer
or an associate of the analysts employer,
and the nature of services rendered to such
company, if any and also whether the
analyst employer hold or intend to hold any
debt/equity of the issuer company.
Ganguly Committee Recommendations

Report of the consultative group of Directors of
Banks/Financial Institutions set up by RBI under
the Chairmanship of Dr.A.S.Ganguly submitted
in Apr 02 made 31 recommendations. Some of
the key recommendations relate to carrying out
due diligence of directors, creating a pool of
talented and professional persons for induction
as non-executive directors, qualification and
expertise of Board, separation of the office of
Chairman and M.D, periodical and rigorous
296
review of performance by the Board, setting up

of Supervisory Committee of the Board and
expansion of eligibility of Chairman of Audit
Committee to include specialization in Banking
and Finance.
There are four committees of directors

namely Executive Committee, Audit
Committee, Asset-Liability Management
Committee( now called Risk Management
Committee), Shareholders/Investors
Committee and a Special Committee of
Directors for monitoring of Large Value
Frauds (of Rs. 1 Cr and above)
The Audit Committee is headed by a Non

executive Director. Its functions include
oversight of audit of the bank, review of
internal inspection/audit functions,
Obtention and review of half-yearly reports
from compliance department and follow up
of issues raised in the Long Form Audit
Report (LFAR)
Shareholder/investors
Grievance
Committee of the Board looks into the
redressal of shareholders and investors
complaints regarding transfer of shares,
non receipt of Balance sheet, dividend/
interest etc.
Board of Directors meet regularly; and the

date and attendance of the meeting are
published in the Annual Report.
The Bank has a well documented and

transparent management process.
Board has free access to all needed and

relevant information
The Bank communicates its financial

performance to the public through
publication of quarterly, and half yearly
results.
Naresh Chandra Committee

Recommendations
The Enron and Anderson debacle resulted in the
enactment of Sarbanes-Oxley Act, 2002 in U.S.
The Act besides providing for setting up of a
Public Company Accounting Oversight Board
contains rigorous provisions for regulating the
relationship between a Company and the Audit
firms. The Act provides for penalty of
imprisonment up to 5 years for CEO and CFO
for violation of Security Exchange Act.
Consequent to this, Department of Company
Affairs set up a committee in Aug 2002 under
the Chairmanship of Shri Naresh Chandra. The
Committee
made
a
number
of
recommendations relating to company-audit
firm relationship, certification of accounts by
CEO and CFO etc. Some of the key
recommendations of the Committee are
disqualification for audit assignments, list of
prohibited non-audit services, compulsory
rotation of audit partners, disclosure of
contingent liabilities, consultation of audit
committee for appointment of auditors,
certification of statements by CEO and CFO,
proposal for setting up of Corporate Serious
Fraud Office in Department of Company Affairs
(Cabinet has since approved the same), setting
up of independent quality review Board,
minimum board size, disclosure of timing and
duration of Board meeting, provision of tele
conferencing and video conferencing of the
Board, indemnity for non-executive directors and
provision of training for Board members
Corporate Governance in State Bank of
India
The Bank has articulated its corporate

governance objectives, which are disclosed
in the Annual report.
Banking Briefs
349
Conclusion
In sum, Corporate Governance aims to maintain
a high level of business ethics and to optimize
the value for all stakeholders. Corporate
Governance facilitates effective management
and control of business. Corporate Governance
has become a corporate business imperative.
Since banks deal with public money, proper
implementation of corporate governance
practices in banks would safeguard depositors
interest while ensuring better returns for
stakeholders.
297
BALANCED SCORE CARD
Developed by Dr Robert Kaplan and David Norton of Harvard Business School
It is a performance measurement and monitoring tool
Through measurement monitors, it attempts to link the vision, mission and values of
the organisation for application by employees
Four perspectives namely business process, customer, financial and learning.
It helps to promote goal-oriented behaviour
Background
Balanced Scorecard (BSC) is a management
decision tool for performance measurement and
management. Traditional perfomance
measurement tools such as financial reports ,
sales reports , production reports, customer
survey reports etc measure performance on
multiple dimensions and hence are not balanced
in providing better view of performance. A new
approach to strategic management was
developed in the early 1990s by Drs. Robert
Kaplan (Harvard Business School) and David
Norton. They named this system the balanced
scorecard. Recognizing some of the
weaknesses and vagueness of previous
management approaches, the balanced
scorecard approach provides a clear
prescription as to what companies should
measure in order to balance the financial
perspective.
The balanced scorecard is a management
system (not only a measurement system) that
enables organizations to clarify their vision and
strategy and translate them into action. It
provides feedback around both the internal
business processes and external outcomes in
order to continuously improve strategic
performance and results. When fully deployed,
the balanced scorecard transforms strategic
planning from an academic exercise into the
nerve center of an enterprise.
The balanced scorecard suggests that we view
the organization from four perspectives, and to
develop metrics, collect data and analyze it
Banking Briefs
350
relative to each of these perspectives:

The Learning and Growth Perspective
The Business Process Perspective
The Customer Perspective
The Financial Perspective
What is Balanced Scorecard?

Performance Management is the use of
performance measurement information to effect
positive change in organisational culture,
systems and processes, by helping to set
agreed upon performance goals, allocating and
prioritizing resources and informing managers
to either confirm or change current policy or
program directions to meet those goals, and
sharing the results of performance in pursuing
those goals.
The Balanced Score Card is a set of financial
and non-financial measures relating to an
organizations critical success factors. It helps
management make right and fast decisions on
what to improve and celebrate.
Strategic Perspective
Scorecard.
of
Balanced
To put it differently, the BSC is a conceptual

framework for translating an organisations vision
into a set of performance indicators among the
four perspectives namely the Financial,
Customer, Internal Business Processes and
Learning and Growth as mentioned above.
After a company has articulated its Vision,
Mission and Strategy, it has to raise the following
questions on the four perspectives:
298
Customer: To achieve our vision how

should we be seen by our customers?
desired outcome.
Financial: To succeed financially what kinds

of financial performance should we provide
to our investors.
Internal Business Processes: To satisfy

customers where and how should we excel
in our processes?
Learning and Growth: To achieve our vision,

how will we sustain our ability to change and
grow?
In the absence of measurable targets, vision

statements remain as show pieces without
directing appropriate behaviour among
employees. The authors of BSC suggest that
normally one can have 4 to 5 measures under
each perspective so that the number of
measures does not exceed 20. Many Fortune
100 companies have reportedly used Balanced
Scorecard with success.
On each perspective, the organisation has to

set objectives, measures, targets and initiatives
so as to achieve its stated vision and mission.
Measures are important to align employee
behaviour with mission, strategy and values.
Measures would promote right behaviour and
serve to numerically define the meaning of
Success.
To understand it better, let us look at one of our
mission statements: Committed to excellence
in customer satisfaction. Let us also look at one
of our values: Excellence in customer service.
According to BSC, we have to further define what
excellence in customer service means through
select objectives and measures which would
indicate our definition of excellence; and give
targets (benchmarks) to various functionaries
to achieve them. For example, the following
measures may be set for excellence in
customer service:
Customer satisfaction rate of Excellent in

at least 90% of the cases. This can be
obtained through customer feedback.
Processing of credit products within the set

Turnaround Time (TAT). For example,
delivering housing loans in 7 days. The
measures should be set, communicated,
monitored and improved. The processes
should be tuned to meet this standard.
Customer grievance redressal in 4 days.
These measures must be communicated to the

stakeholders. We then have to track progress
by seeing the action of each stakeholder and
initiate suitable corrective action to reach the
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Implementing a Balanced Scorecard

The following steps are essential for effective
implementation of Balanced Scorecard:
Make a commitment at all levels- especially

at the top level
Develop organisational goals
Offer training in improvement techniques
Establish a reward and recognition system

to foster performance improvements
Break down organisational barriers
Coordinate Headquarers and Branch

Responsibilities
Demonstrate a clear need for improvement
Make realistic initial attempts at

implementation
Integrate the Scorecard into the organization
Change the corporate culture
Institutionalise the process.

Conclusion
The Balanced Scorecard attempts to align
employee behaviour with the organisations
vision, mission and values. It places
organisations strategic vision at the centre of
the performance assessment structure. It is an
instrument through which organisations can
nurture goal-oriented behaviour and
institutionalize performance culture through
measurement matrix.. We find in most
organisations Vision, Mission and Values are
neither known to most employees nor
understood. The BSC is a wonderful tool not only
to effectively communicate the strategy of the
organisation to all its people but also to achieve
excellent results by focusing their energies
towards the ultimate goal of the organisation.
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Leadership is the ability to make followers do he wants them to do, willingly or on their
own, towards accomplishing an organizational goal.
Transactional leadership is based on the leader and the followers having transacted to
do it characterized by close direction, control and follow up. The focus is on behavioural
compliance and outcome. The inner state of thinking and feeling are not matters of concern.
Transformational leadership aims at transforming people by working with and through
them on their values, beliefs, attitudes and behaviour. It aims at emotionally connecting
the followers to the vision of the leader so that they are galvanized to achieve the vision.
Managers are people who do things right,

while leaders are people who do right
things.Warren Bennis. On becoming a
leader.
Leadership has been defined as a process of
influencing the activities of an individual or a
group in efforts towards accomplishing
organizational goals. Influencing has been
defined as the ability of the leader to make
followers do, willingly or on their own, what he
wants them to do; and the measure of success
of a leader is the extent of willingness he can
generate in the followers.
In todays world characterized by radical change,
mergers, acquisitions, downsizing, business
process re-engineering, customer focus etc.,
the business leader must balance the
tremendous demands of managing the change
complexity with performance and productivity.
High performance team is the key word today.
Management in the 21st century will focus on
the value based theory of transformational
leadership, rather than behaviour based concept
of transactional leadership. Successful
leadership depends far more on the followers
perception of the leader than on the leaders
abilities. In other words, leadership is in the eye
of the followers.
Transformational leadership, on the other hand,
is defined in terms of the ability of a leader to
influence the values, attitudes, beliefs and
behaviours of others by working with and through
them in order to accomplish the organisations
mission and goal. (Rouche, Baker, and Rose,
1989)
Transformational leaders foster model values of
honesty, loyalty, and fairness and end values of
justice, equality and human rights.
Transformational leadership aims at
transforming people.
CHARACTERISTICS OF
TRANSFORMATIONAL LEADERS
The following six characteristics are likely to be
present in the transformational leaders:
TRANSACTIONAL LEADERSHIP
1. VISIONARY:
The concept of transactional leadership is based

on the followers carrying out what they have
transacted to do with the leader. These leaders
Transformational leaders have a great vision

about their organization and the road map to
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motivate followers either by promises, praise and

rewards or by threat and disciplinary action. The
leadership style is characterized by directions,
close control. The focus is on outcome and
behavioural compliance only. Negative
feedbacks are used as a tool for correcting the
followers. The inner state of feeling and thinking
of a follower is not a matter of concern. They
treat the followers as mere means to achieve
their self-satisfying needs.
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attain it. They have the great communication

ability to communicate and emotionally connect
the followers to the vision; the followers are
galvanized to achieve it.
2. INSPIRATIONAL:
Transformational leaders are charismatic, who
are able to obtain the devotion of the followers
by sheer personality. These leaders are ethical,
listen carefully to followers, provide support, are
flexible, do not make fun of opinions of others
and are open to criticism. They will be role
models and have great influence on professional
and personal development of the followers.
3. THOUGHTFUL:
Transformational leaders encourage their
followers to provide innovative solutions and new
ideas for achieving their vision. They encourage
positive thinking and creative problem solving.
When things go wrong, they focus on what and
why of the problem rather than on who to put
the blame on.
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4. CONSIDERATE:
Transformational leaders treat every individual
as a distinct and significant human being. They
have positive regard for every follower, and listen
to their problems with empathy. They take
interest in the development of each individual.
5. TRUSTWORTHY:
Transformational leaders enjoy the trust of their
followers by being value based and maintaining
high standards of personal credibility. They are
ethical in their dealings, keep their
commitments. They also trust their followers.
They have no difficulty in delegating decisionmaking.
6. CONFIDENT:
Transformational leaders always maintain a
positive self-concept and exhibit self-confidence
and optimism. They also repose confidence in
their followers. They treat their followers with
dignity and respect. They accept issue based
differences of opinion.
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LEARNING ORGANIZATION
A learning organisation is one which is skilled in creating, acquiring and transferring
knowledge and changing its behaviour to reflect new knowledge and insights
Learning provides competitive advantage and helps in organisational transformation
Some of the characteristics include openness, encouragement for creative ideas,
sharing and constant change.
Introduction
In a competitive environment, the market place
is characterized by moves and counter-moves
thereby moving beyond the traditional business
ethics. The organization needs to unlearn many
of the business practices and stategies which
have out-lived their utility and redefine its
business, rediscover the markets, realign its
attitudes that foster customer delight. In order
to meet such a growing international
competition, it is imperative for all organizations
- irrespective of their activity - to reposition their
competitive edge by reorienting their business
goals, strategies and their management
practices.
This emerging economic and business order
calls for a new approach on the part of the
organizations to transform themselves into a
treasure of newer skills, knowledge and abilities
which can translate the emerging competition
into business advantage by discovering new
products and services meeting the everchanging customer demands and preferences.
Besides, the sudden breakthrough in the
Information Technology and Business
Communication renders the traditional skills and
knowledge redundant, thereby making even
some of the high-profile academic literates
virtually computer illiterates. As human beings
strive to exist in the organization, for their very
survival even in the midst of turbulence, there is
every need for them to acquire new skills,
knowledge and attitudes lest the system itself
will make them redundant. This is possible only
when there exists a collective and continuous
system for effective learning in the organizations
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with the avowed objective of transforming the

traditional organizations into 'Learning
Organizations'.
Concept of 'Learning' : An Overview
It is the ability to assimilate new ideas from
others and past experiences and to translate
those ideas into action faster than a competitor
can. 'Learning' can be viewed as changes to
the stricture of the living system that allow its to
continue to respond to environmental
perturbations.
Every human being is capable of learning but
the methodology used for learning and also the
skills, knowledge and attitudes of both the parties
to the process, i.e., the learner and the trainer,
do play a vital role in achieving the objectives of
learning. Learning is a continuous interaction
between the individual and the particular social
environment in which he or she functions.
Learning is more effective when one sheds one's
half-knowledge, prejudices, bias, likes and
dislikes and when one abandons the 'I know'
attitude and adopts the 'I want to know' approach.
'Learning Organizations' : Concept,
Definition and Features
'Organizational Learning' is a process of
continuously redefining people's beliefs and
perceptions about how things work. In a dynamic
environment, it is important for organizations to
continuously learn and adapt, organizations
which discover how to tap people's commitment
and capability to learn at all levels, will only
become truly successful and excel in future. In
other words, the traditional organizations need
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to transform themselves into a new breed of

organizations which are called as 'Learning
Organizations'.
A 'Learning Organization' is an organization
which is not only skilled in creating, acquiring
and transferring knowledge but also at modifying
behaviour to reflect new knowledge and insights.
It is a holy place where all people working with it
- irrespective of their positions and cadre - will
collectively and continuously learn the
knowledge and skills for mutual benefit of
themselves and the organization. Learning
Organization practises how to learn in an on
going way - the periodic surfacing and
examination of why and how work is
accomplished. This enables the organization,
not only to acquire skilled people and skilled
processes but also to acquire learned
experience which enhances the adaptability and
probability of success, particularly in turbulent
and uncertain conditions.
It is a place where the human beings are

encouraged to unveil their creative ideas and
knowledge for its competitive advantage.
It disseminates learning and shared knowledge
and vision throughout the organization.
It keeps the company in a state of constant
change.
The ultimate objective of the Learning
Organization is to develop core competencies
for forging ahead with the change of times.
The chief characteristics of 'Learning

Organizations' can be listed out as under :
Organizational excellence can be achieved

through the holistic well-being of employees, as
the 'people in the organization are the key factors
for transforming the organization as a 'Learning
Organization'. The organizations are incrasingly
realizing that their stategic and competitive
advantage lies mostly in leveraging knowledge
and working with empowered multifunctional
teams. In order to achieve this holistic purpose,
the organizations have been adopting modern
methods
like
Constant
Learning,
Empowerment, Benchmarking, Customer
Relationship Management (CRM), Employee
Care and Welfare, Economic Value Added
(EVA), i.e., Return on Investment (ROI)
Concepts, Retention of Creative Talents and
Total Quality Management (TQM).
It is a place where high quality human learning

goes on on a continuous basis.
Essential Prerequisites for 'Organizational

Learning'
The objective to transform is to learn and grow

and change, as opposed to the traditional
bureaucratic models of organizational structure.
Effective organizational learning aims to improve

group performance, expand communication
focus on creating learning values and motivation
and creating and nurturing a culture of
continuous improvement. Extensive usage of
Information Technology and adopting systems
approach to problem - solving are the essential
tools for improving these processes in the
organization.
The core competence of any organization is

nothing but the quantum of individual and
collective learning and the value addition it
creates in the organization. The Learning
Organizations are the complex economic
institutions in which thinking, learning and
knowledge creation takes place and creative
ideas are constantly generated so as to permit
organizational transformation.
It is a place where the capacity to be creative

and innovative is continuously expanding.
It endeavours to unlearn old and obsolete
knowledge and to acquire new knowledge and
enhance the existing knowledge.
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It creates open and frank communication

channels - vertical, horizontal and crosssectional - interdepartmentally and
interpersonally.
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There are certain essential prerequisites for

making organizational learning more effectiv.
They are :
The organizational learning should be a part of
the corporate vision and mission and there
should be a genuine commitment to this concept
from the top management.
Organization should develop an effective

system for constant scanning of external as well
as internal environment so as to bring required
resilience into the learning methods and
strategies.
The organization should develop a culture and

policies that continually support learning
behaviours.
There should be a proper system for

maintenance of constructive relationships
among all stakeholders in the organization.
The modus-operandi being evolved for

organizational learning should be compatible with
the culture, philosophy and ethos of the
concerned organization.
The organization should adopt an attiude of

openness and bias towards change; never being
satisfied with the status-quo and always
searching for ways to do better.
Appropriate time should be spent by the

organization in reorienting behaviour towards an
effective learning culture and as such the whole
concept of time expenditure requires radical
change.
The learning costs should be viewed as potential

investments in the endeavour to achieve top
class tangible performance at all levels.
The quality and efforts of organizational

members should be par excellent and the
mistakes and failures should be viewed as
learning opportunities and stepping stones for
success.
The organizational structure, work processes,
decision-making tree, reporting relationships,
communication channels, control systems and
leadership styles, etc., should be supportive and
effective enough for nurturing a learning
experience among the people in the
organization.
There should be effective control, monitoring and
prompt feedback systems to assess the
effectiveness of the organizational learning and
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also to take immediate and prompt corrective

action, wherever needed.
In view of the imperative need for collective

learning, organizations have been adopting
learning as one of their fundamental values. The
existing learning systems are constantly
reviewed and the training endeavour is being
revitalized into initiatives for change
management. The individual training needs are
integrated into the organizational needs and the
training is being increasingly used to bridge the
gap with the external world. The organizational
performance and ultimate success heavily draw
from the level of organizational learning, and
learning is the only significant mechanism for
substantive positive change. In a knowledgebased economy, the rate at which organizations
learn and adapt may become the only
sustainable source of competitive advantage.
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INTELLECTUAL CAPITAL
Intellectual Capital is the product of commitment and competence. Both should exist
in an employee for organizational effectiveness
Competence should align with business strategy
Competence can be built, bought and borrowed by organizations
Commitment can be fostered by articulating vision and sharing power and resources
with the employees.
Leaders should raise standards, set high expectations and demand more performance
and provide corresponding resources to meet high demands
In the ongoing debate about where managers

should focus their attention something has been
missing: a focus on intellectual capital.
Intellectual capital-the commitment and
competence of workers- is embedded in how
each employee thinks about and does work and
in how an organization creates policies and
systems to get work done.
First, intellectual capital is a firms only
appreciable asset. Most other assets (building,
plant, equipment as machinery, and so on) begin
to depreciate the day they are acquired.
Intellectual capital must grow if a firm is to
prosper. A managers job is to make knowledge
productive, to turn intellectual capital into
customer value.
Second, knowledge of work is increasing, not
decreasing. As the service economy grows, the
importance of intellectual capital increases.
Service generally comes from relationships
founded on the competence and commitment
of individuals.
Third, employees with the most intellectual
capital have essentially become volunteers,
because the best employees are likely to find
work opportunities in a number of firms. This
does not mean that employees work for free.
Volunteers are committed because of their
emotional bond to a firm; they are less interested
in economic return than in the meaning of their
work.
Fourth, many managers ignore or depreciate
intellectual capital. In the aftermath of
downsizing, increased global competition,
customers higher requirements, fewer
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management layers, increased obligations, and

pressures exerted from almost every other
modern management practice, employees
work lives have not always changed for the
better.
Fifth, employees with the most intellectual
capital are often the least appreciated.
Sixth, current investments in intellectual capital
are misfocused. Under the name corporate
citizenship, many senior executives talk about
work-family issues.
What is Intellectual Capital?
While many agree that intellectual capital
matters, few can explicitly quantify it. A simple,
yet measurable and useful definition would be:
intellectual capital = competence x commitment.
This equation suggests that with a unit,
employees overall competence should rise but
that competence alone does not secure
intellectual capital. Intellectual capital requires
both competence and commitment. Because
the equation multiplies rather than adds, a low
score on either competence or commitment
significantly reduces.
Tools for Increasing Competence
There are two primary challenges in increasing
competence: First, competencies must align
with business strategy. Second, competencies
need to be generated through more than one
mechanism. There are five tools for increasing
competence within a unit (firm, site, business,
or plant): buy, build, borrow, bounce, and bind.
Appropriately using all five ensure a stable flow
of competence.
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Buy: Managers can go outside the unit to replace

current talent with higher quality talent. Buying
involves staffing and selection from the entry
level to the officer level.
Build: By building, managers invest in the
current workforce to make it stronger and better.
A build strategy for intellectual capital works
when senior managers ensure that
development is more than an academic
exercise, when training is tied to business results
not theory, when action learning occurs, and
when systemic learning from job experience
occurs.
Borrow: In borrowing, managers invest in
outside vendors who bring in ideas, frameworks,
and tools to make the organization stronger.
Effectively used consultants or outsourcing
partners may share knowledge, create new
knowledge, and design work in a way that people
too close to the work would not have done.
However, appropriately used, borrowing
competence is a viable way to secure intellectual
capital.
Bounce: Managers must remove those
individuals who fail to perform to standard. A firm
should systematically and courageously remove
the bottom percentiles in performance.
Managers must make difficult personnel
decisions decisively.
Bind: Retaining employees is critical at all levels.
Keeping senior managers who have vision,
direction, and competence is important, and
retaining technical, operational, and hourly
workers also matters because investment made
in individual talent often take years to pay back.
How to Foster Commitment
A company can foster commitment in three
ways. First, it can reduce demands. Second, it
can increase resources. Third, it can turn
demands into resources.
Reduce Demands: Employees have many
demands of varying importance. Helping them
separate legitimate from groundless demands
and then removing the unnecessary ones may
balance their lives. Even with priority setting,
focusing, and reengineering, demands on
employees will continue to increase. Regardless
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of how many demands are removed or reduced,

competition continues.
Increase Resources: Not all demands can be
reduced. Business demands accompany a
firms desire to compete in tough markets.
Walking away from competition would, in many
cases, equate to failure. Demands will inevitably
be high in globally competitive firms. Resources
represent the values, practices, and actions the
company takes to respond to demands. Certain
resources may counterbalance demands.
In sharing power and giving up control,
managers implicitly trust that their employees
have the skills and motivation to do a good job.
Having control demonstrates trust and builds
employees commitment. Managers may use
control as a resource by creatively and flexibly
answering: where is work done? How is work
done? What work is done? When is work done?
Who does what work? As long as employees
understand and are committed to the goals, they
can share the way goals are accomplished.
Employees commitment often comes from a
leader who shares a clear vision that
passionately communicates agenda and intent.
Many executives articulate visions or directions
that give employees resources and add to their
resolve to cope with increase demand.
Companies are learning that sharing the
economic gains of reaching targets helps
employees stay motivated to reach increasingly
difficult goals. When employees see that a
particularly demanding project results in
economic payback, they are likely to be more
committed. When the line of sight between work
and reward is clear, employees may cope better
with increased demands.
Intellectual capital comes from employees
competence and commitment. Both must exist
together for intellectual capital to grow. Leaders
interested in investing, leveraging, and expanding
intellectual capital should raise standards, set
high expectations, and demand more of
employees. They must also provide resources
to help employees meet high demands.
Employees will become engaged and flourish,
and the organizations intellectual capital will
become its defining asset.
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KNOWLEDGE MANAGEMENT
HRM needs to develop Knowledge Management System due to changing customer
trends, competitive products and services and changing society
The Collective knowledge of the employees gives distinct competitive advantage
The integrated system of KMS should value collection of knowledge, react quickly to
market changes and facilitate faster decisions
Banks should specifically focus on finding, creating, sharing and applying knowledge
that it is relevant to its business
The importance of knowledge for achieving
competitive success has been recognized in the
early 1990s, but it is only recently that the formal
system for managing the acquisitions and the
use of knowledge has begun to emerge, often
created on the back of new information
technology applications and systems. Banking
today is more competitive and technology driven
where human capital can play a pivotal role in
determining the worth of the institution. The
organizational structure of the banks is gradually
changing and in keeping with the global trend,
most banks are focusing on the implementation
of core banking solution where the branch
network should be downsized but the delivery
system will be more dependent on technology.
The rapid pace with which the changes are taking
place in the banking industry is phenomenal. In
order to keep pace with the changes, it is
essential that the Human Resource
Development (HRD) in the banks develop the
Knowledge Management System (KMS) within
the organization so that maximum benefit
accrues to the organization. From a business
strategic perspective, changing customer
trends, competitive products and services and
changing societal and governmental pressures
make the existing business models, business
practices and business value propositions
obsolete. Banks that can figure out the next right
thing and prepare well in advance to ride the next
wave will be more effective in the longer run. All
the information, technology and database cannot
assure banks competitive advantage in the longterm unless the same are translated into
actionable value propositions. Banks have to
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keep in mind that the only long-term competitive

advantage they can have is how effectively to
manage the corporate knowledge.
Role of KMS in Banking
It may be noted that most of the new generation
private sector banks and foreign banks have
created sophisticated database of clients and
have been able to utilize the knowledge base of
their staff member with the aid of IT, to improve
the productivity to a higher level. Interestingly,
talent drawn from the public sector banks is
managing most of the new generation private
sector banks. It is interesting to note that there
is a phenomenal gap between employee
productivity of the PSU banks and that of the new
generation private sector banks. The strength
of any bank is reflected by the collective
knowledge of its employees. It is a source of
sustainable competitive advantage, as the same
cannot be copied by other banks. In a service
organization like banks, KMS is very important
as the end products are to be delivered to the
client in multiple bases.
KMS - Experience of Leading Corporates
Leading corporates across the world are
investing in millions to stay ahead of their
competitors in terms of competitiveness and
technology. They institutionalize the people in
teams through formal/informal structures for
them to effectively share the knowledge. The
companies have created a group of
communicators that comprise a team of people
who are practitioners of a well-defined knowledge
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domain. As and when the need arises, the

corporates can take advantage of the database
of knowledge for enhancing the value of the
shareholders.
organizations implicit knowledge base.

Implicit knowledge is the kind of knowledge
that is presumed to be possessed by highly
skilled individuals who are capable of
performances that mystify others.
New Delivery Channels and KMS

With the advent of Internet, a new potential
delivery channel is being opened to clients where
banks should take maximum advantage of
knowledge management structure that will
enable them to interact with the clients in a more
productive way. More and more time and energy
can now be spared by the employees for the
growth of the organization rather than to attend
to routine customer transactions. No doubt, the
customers need to be educated in the use of
the innovative products that may demand some
extra attention at the initial stages but in the long
run the benefits to the banks outweigh the
disadvantages.
Integrated System of KMS
Banks can formulate an integrated process of
Knowledge Management of their organization by
addressing some critical issues as given below.
Thye have to capture knowledge and information
for effective sharing amongst their employees.
Banks should recognize the value of

collective knowledge base.
Banks should ensure that the system reacts

to the market changes fast.
Banks should see that they should not suffer

from any information overload.
Banks core team should be in a position to

take timely and accurate decision.
Banks should try to find synergy between the

application of IT and Knowledge
Management System.
Banks can be protected against the

knowledge degradation that results in losses,
employee defections, and the inaccessibility
of experts at the right place.
The speed of doing business can be

accelerated through the availability of the
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Banks should significantly increase the

tangible assets of organizations.
Banks can create new opportunities typically

resulting from the ability to create implicit
knowledge base.
Every banks knowledge base depends on

the quality of the people in terms of education
and skills, the software and hardware it uses in
the business process and the process of storage
of data for future use. The function of HRD is to
ensure that this base is fine-tuned in the light of
changing banking environment at regular
intervals. There should be a system where likeminded colleagues communicate with each
other regularly and try to innovate ways for better
productivity of banks. A sort of
compartmentalization can be made wherein
every group can follow a specific target like say
retail products marketing. IT development,
streamlining of systems and procedures in
banks and recovery of NPA etc. There should
be project driven groups in every bank that will
focus their attention on specific area where some
deficiency is noted in terms of competition with
other banks or in terms of lacunae in the system.
This group can be formed from the same branch
of the bank or it can be a cluster group of staff
members from the branches in the same city
situated at an approachable distance. Banks
need people who continuously strive to increase
knowledge. Incentives should be given to the
group achieving superordinate performance.
KMS Effectiveness and Role of HR
Banks should focus on building capabilities,
making sure they are shared across the
organization, and using those capabalities to
create growth opportunities. The knowledge
strategy shows how the creation, dissemination
and use of knowledge can create customer and
shareholder value. In particular, it focuses on the
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Human Resources (HR) management in

enhancing an organizations ability to respond
to market forces and meeting business
objectives. Recognizing the key link between the
capabilities of bank employees and its overall
success, the HR function has been transformed
into a strategic capabilities unit for use of the
individual, the team and organizational learning
with the objective of serving the customer in a
better way. Here the role of HR is to create a
successful database for the bank and take care
to synchronize the function of education and
knowledge that is documented in the corporate
database. The knowledge exchange connects
employees and allows them to share information.
In particular, a climate should be created by HR
department to ensure that employees skill and
knowledge are kept up-to-date in topics like
finance and banking and in more general areas
of management, technology and leadership. It
should also facilitate the training and education
needs of the organization by aligning HR
development and learning strategies with overall
strategies of the bank. If need be, framework for
the knowledge management structure may be
outsourced which will take care of the growing
need of the bank in future years to come.
Employee Communications in KMS
Like any other corporate structure, banking
companies typically require a host of linked
knowledge management practices. Banks
should develop the valuable expertise in this area
through a series of strategies. For example, the
management should now be specificially
conscious about finding, creating, sharing and
applying knowledge that is relevant to its many
lines of business. KM forum should contribute
to knowledge sharing by stimulating
communication between employees across the
organization. Most organizations recognize the
value of helping employees to communicate with
each other. The mission of Knowledge
Management group is to facilitate
communication across the bank by developing
its IT infrastructure and building communities of
practice, extended across the formal
organizational structure, to enable the bank to
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work more efficiently than if it were formed along

traditional functional lines. Ultimately,
communities of practice are seen as essential
to accommodate the rapid growth of the bank.
Banks should encourage intranet to encourage
their front-line staff to initiate contact with
customers as well as with fellow colleagues.
4 Conclusion
The Knowledge Management is first seen as a
integral part of overall corporate strategy, and
aims to grow, extract and exploit the banks
knowledge to increase shareholders value.
Secondly, it focuses on improving upon the
knowledge necessary to carry specific business
processes and thereby improve efficiency. The
future of KM depends on the extent to which it
can make value addition to shareholders value
and managing the knowledge systematically
which is important for the welfare of the
organization. It will continue to matter as long as
organizations rely on the ability of their employees
to make good decisions. It also gives opportunity
to the employees to make good decision and to
continue to innovate for the benefit of
shareholders value. To get the optimum benefit
of KMS, banks should make a methodical
approach through the whole process of KM and
the same should be understood by people
involved at all levels. Traditional management
looks at technologies,systems and people
separately. Banks need to develop KMS, which
should treat three of them as an integrated
system with a people focus.
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E-GOVERNANCE
E-governance is using Information Technology to improve the methods of governance
Select areas to make e-governance project successful: Local language support, Easy
access to users, extensibility and scalability, reuse of existing public infrastructure,
standard interchange formats, technology upgrades, documentation, continued
training, endurance and flexibility.
E-governance is using IT to improve the
methods of governance. More importantly, it is
about using IT to take governance to more and
more of the population, rather than make them
come to the government. So, it is about enabling
people to have easier government interactions
and making available government services and
information, preferably over public networks.
What does it take to build successful egovernance systems? There are twelve areas
that make e-governance project successful.
Depending on the scope of the project, one may
be give more importance to some over the
others.
1. Local language support
Governance in this country is carried out at the
grassroots level in the local language and not in
English. Hence systems have to work in the
language of governance. Depending on the
location, e-governance systems would have to
use a changing mix of languages, and should
have facilities for translation or transliteration
across them, for them to be successfully
adopted.
2. Easy access for users
Designers of e-governance systems should take
extra care to ensure that ease of access to the
system is enhanced. This could range all the
way from establishing public access kiosks
where they are needed the most, to using
standard access technologies, such as a
browser. Similarly, locations such as village
libraries and Panchayat offices need to be
evaluated for locating systems requiring public
access.
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3. A rich and evolving knowledge base

Most government business is governed by fairly
well established procedures. The problem
comes in the interpretation and practice of the
same. So, a good e-governance system should
have rules and procedures and an easily
searchable knowledgebase of resolutions and
practices as they happen.
4. Extensibility and scalability
As time goes by, a good system would need to
be extended in ways and into areas that the
original project owners could not even have
imagined. Therefore, it helps if the system were
to be originally architected with scope for
extensibility and scalability.
5. Reuse of existing public infrastructure
Wherever possible, e-governance systems
should use existing public infrastructure instead
of attempting to create new and proprietary ones.
For example, instead of creating fresh networks,
e-governance systems should use the Internet.
Instead of creating fresh payment mechanisms,
they should leverage existing payment collection
mechanisms available with banks (or with
treasury departments).
This will not only help to keep the costs of the
systems down, but will also help to make them
more accessible, acceptable and useable by the
intended audiences.
6. Standard interchange formats
E-government systems like enterprise systems
in the past are often built as isolated silos of
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information. Information fed into one can often

not be exported to another, nor can it import data
from others. So, if the government of J&K issues
smartcard based driving licenses, and if the RTO
at Delhi or Kanyakumari wants to verify the same
or retrieve information from it, that would not be
possible without the systems at both ends being
the same, or at least being able to understand
the data structures used.
As more and more government processes get
e-enabled, there is an urgent need to drive the
standardization required to ensure that these
systems can exchange information.
7. Technology upgrades
Technology platforms and solutions are
constantly evolving, often at a pace that
traditional government processes and budgets
are not used to. Suffice to say that for the longterm success of e-governance initiatives,
provision must be made to provide for
technology updates and renewal.
8. Self sustenance?
Ideally, any project should be able to fund itself
in the long run. Expecting all IT enabled
governance projects to pay for themselves
would be akin to expecting the paper systems
also to pay for themselves. If the paper-based
systems were not paying for themselves in the
first place, it would be futile to expect their IT
replacements to do so.
9. Documentation
The need for explicit and elaborate
documentation only gets more acute in the case
of governance systems that are to evolve and
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serve out over many, many years. Any egovernance system will undergo substantial
modification over time and it would be futile to
expect this to be possible without good
documentation.
Good documentation is not a one-time process,
but a continuing one.
10. Continued training
Till such time as IT becomes commonplace,
provision needs to be made in government
budgets for continued user and administrator
training. And traditional training courses should
also include modules on IT and e-governance
systems.
11. Endurance
Government systems, whatever may be the
media of delivery, are to be built to endure.
Information stored in those systems has to be
available for generations, if not for centuries. For
example, land ownership and mutation records
are already available for more than a century in
most states and will have to be recorded for
possibly many more.
12. Flexibility
The endurance required of e-governance
implementation also means that they have to
be flexible. The rules and requirements of
governance are not written in stone and evolve
with time. As society evolves, new demands
would be placed on existing systems of
governance. E-governance systems require
more flexibility and should be more
accommodating of change than traditional
enterprise systems.
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ASSESSMENT CENTRE
Assesses the adequacy of various critical attributes, functional expertise, aptitudes

and skills required in the job
Used for higher level executives
Some of the competencies assessed are leadership, teamwork, decision making

capability, communication skills and market orientation
As Managers rise higher and higher in an

organization, they are expected to develop new
competencies, which enable them to perform
more effectively. Technical skills, which most
managers acquire through work experience/
training, are not enough to handle the
complexities of higher roles in an organization.
These must be supported by human skills, i.e.
how we manage/lead people in work settings.
As managers become executives in an
organization, the technical component of their
role gets reduced and human skills and
conceptual skills assume an integral part of their
job component. Again, the competencies
required for different roles, may vary significantly.
The Assessment Centres, identify the various
critical attributes, functional expertise, aptitudes
and skills that are required in our jobs, and make
an assessment of the adequacy or otherwise
of the same through the use of various
structured experiences and administration of
instruments and in-basket exercises. Typically,
this is a tool that devises an intensive laboratory
to run tests on candidates for promotion/or
evaluating their training needs etc., probing their
leadership qualities, prodding their ability to
innovate, palpating the managerial possibilities
that lurk within them.
A typical assessment center test may have
group exercises as well as individual exercises.
Competencies that are measured could be a
few or all of the following:
1.
Assessing the negotiating skills, ability to

persuade and ability to compromise.
2.
Assessing the ability to handle uncertainty,

changing office environment and stress.
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3.
Assessing the ability to lead/work in teams

and solve problems collectively
4.
Assessing ability to plan, organize, decide,

manage, and delegate
5.
Assessing the decision making capability

on scientific basis
6.
Assessing communication skills, patience

and interpersonal skills
7.
Assessing the market orientation
As against the above, certain criteria and

descriptors are selected, and process
observation is made by experts to find evidence
of particular behaviour / traits amongst the
assessees. Just to give an example, the
following criteria and descriptors may be looked
for
(+ means positive behaviour, - means
negative behaviour in an assessee):
Criteria for Team Work Exercise:
+ Presents idea sensitively to maintain harmony
with the group.
+ Builds bridges with others.
- Waits to be invited to draw out his/her ideas
+ Allows others to give their views
- Prefers working on his/her own
+ Cooperates effectively
- Presents ideas aggressively; dominates.
Criteria for Leadership
+ Acts as a focal point for the groups ideas
- Shows little influence on the group working
+ Directs the group to achieve objectives
- Plays a passive role.
Apparently, today's executive is required to have
multiple skills beyond functional abilities to
succeed in Assessment centre.
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COMPETENCY MAPPING
aims to match the competency of the employee with those of the job requirement.
Competency is a combination of knowledge, skill, behaviour and personal characteristics
There are different tools including psychometric tests used to map competency.
A formal implementation of the system will help organisations to save on costs and
improve performance.
Competency and Performance

One of the major objectives of every company
is to improve its performance every year and
set new standards and norms. For every
operation and machine there is a human being
and it is the quality of the man behind the machine
or the process which determines the
performance of the company. In view of this, the
performance of the company depends not on
the human assets but the human asset having
right match of competencies and their levels for
performance requirements. If the right match of
competencies is available with the employees,
then it is their motivation, work environment and
incentives which help them to give their best
performance. Company can use goal setting,
performance appraisal, incentives, career
planning, and succession planning as measures
to further improve the performance of the
employees.
To select the employees with right match for
performing the job efficiently, companies
normally recruit people based on qualifications
and conduct interview for final selection. But the
effectiveness of this technique in selecting the
right people is not even 10%. Therefore, in order
to improve performance, the companies must
look for better and more reliable techniques to
identify the right competencies among the
employees.
In view of this, some companies conduct
psychometric tests so that they can identify the
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competencies of the candidates for recruitment

and selection. The main purpose of such tests
is to decide whether candidates possess
knowledge, skills, attitude and ethics which
match with those that the company needs in the
job for which they are recruiting.
What is Competency?
Competency is underlying skills, personal
characteristics, or motive demonstrated by
various observable behaviors that contribute to
outstanding performance in a job. Competencies
exist at different levels of personality. The various
levels are:
Knowledge: Information that an individual

has in a particular area.
Skills: An individuals ability to do something

well.
Behavior: Action of a person in a given

situation.
Personal Characteristics
Traits: A typical way of behaving such as

taking initiative.
Motive: A fundamental and often

unconscious driver of thoughts and behavior
for example, concern for excellence.
Personal characteristics, unlike knowledge and

skills, are hard to develop and it is more costeffective to select people having the desired
personality traits.
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What is Competency Mapping?

Competency
mapping
involves
the
determination of the extent to which the various
competencies related do a job are possessed
by the person. For example, the extent to which
a person is adjustable, resourceful, capable of
working efficiently under stress, capable of
anticipating threats, finding solutions and
contributing in innovations. This is compared
with the extent to which the various
competencies are required for a job. The
comparison enables one to know the suitability
of a person for a job. It is also useful for setting
standards and checking the employees standing
on the various competencies platform and to
identify the training needs.
Competency Mapping and Developmental
Needs
The competencies required for a job may be
identified by head of that functional department
or a team which has core knowledge and
experience of that area. This team or head of
the functional department tries to identify the
skills, attitude, and behaviors required for that
job. Competencies may be classified into four
different areas: Behavioral, Technical, Emotional
and Conceptual competencies.
Behavioral competencies tell us the kind of

behavior one should have to perform a
particular job.
Technical competencies relate to the

techniques required for performing a
particular job.
Emotional competencies relate to the

emotions like anxiety, jealousy, anger, fear
etc.
Conceptual competencies relate to the

information and concepts for performance
of the job.
competencies and to what extent are being

displayed by the employee during his job. Then
a comparison is made between the
competencies that head of the functional
department was looking for and the
competencies being displayed by the employee
in that job. This provides us the missing links or
gaps which can be bridged by training.
The degree to which these competencies are
required also matter a lot. Some competencies
which are extremely essential for a job can be
stated as Core Competencies which relate to
the Key Responsibility Areas (KRA) and are
required to a very high degree in an individual.
Just as every coin has two sides, every
methodology has certain merits and demerits.
The drawback of this model is that the
competencies required in a person performing
a particular job are defined by the Head of
Department (HOD) who might have more
inclination
towards
some
specific
competencies.
HR department designs a performance

appraisal method to check what all
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ORGANISATION CULTURE
Organisation culture refers to the way we do things here
It is the easiest thing to comprehend but most difficult to define
It is unique and distinct for every organisation
The Johnson and Scholes cultural web model contains six inter related elements
rituals and routines, stories, organisation structure, symbols, power structures and
control systems
INTRODUCTION
Every Organisation has its own distinct culture
and structure.
Culture has its origin in the organisational
interaction.
Culture pervades all the
relationships in the organisation and influences
all its decisions.
Organisational Culture is the easiest thing to
comprehend and at the same time the most
difficult thing to define. This is because of the
aura of mystique that surrounds Organisational
Culture.
DEFINITION:
Organisation Culture refers to a system of
shared meaning held by members that
distinguishes the organisation from other
organisations. Organisation culture is the key
to much that happens (or does not happen).
Organisation Culture is the fabric of meaning in
terms of which human beings interpret their
experience and guide their action.
An organisations culture is also described as
the way we do things here. It is a combination
of deeply felt values, beliefs and attitudes about
how the work of the organisation should be
done. Cultures are acquired during periods of
success, and employees see the culture as the
reason for that success. However, the real
reasons for success are more likely to relate to
the organisations markets and the relevance of
its competencies
Organisation culture is akin to the DNA of a
human organism, which is unique and specific.
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There are certain characteristics that have made

the organisation what it is. Each organisations
culture has its own strengths and weaknesses.
JOHNSON AND SCHOLES CULTURAL WEB
MODEL
This model enables one to look into the elements
that make an Organisations culture.
The cultural web contains 6 inter-related
elements:
1. Rituals and routines - are concerned with
the day-to-day behaviour of people in the
organisation e.g. the way customers are
dealt with or the existence of privileges for
certain staff. They are things that are taken
for granted by existing staff but have to be
learned by new people. They often present
significant barriers to change, if people are
protective of their customs. Rituals such
as training programmes or personnel
procedures can reinforce the perception of
how things are done, and demonstrate to
staff what behaviour is desirable and valued
by senior management
2. Stories - within the Organisation focus upon
past events in the organisation and are told
to people both outside and inside the
organisation. They communicate something
of the organisations culture. Company
heroes, such as charismatic leaders of the
past, and mavericks can be perceptions of
normal behaviour.
3. Symbols - Logos, language, status symbols
e.g. company cars, office carpets etc can
all provide a visible reflection of company
culture.
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4. Power structures Top management and

senior managers with the most power, are
likely to have the most influence.
5. Organisational structure. - Both the formal
structure (as found on the organisation chart)
and the informal structure are likely to reflect
power structures and play an important part
in influencing the core values of an
organisation.
6. Control systems - the measurement and
reward systems used in the organisation
When an employee joins an Organisation, he
or she needs to look at these aspects to
understand the culture of the organisation.
Interacting with various people in the
organisation, observing the processses taking
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place in the organisation will definitely give an

employee an idea of the culture of the
Organisation. The quicker an employee
understands the culture of the Organisation and
tunes his or her behaviour accordingly, the
greater the chances of adaptability with the
Organisation.
CONCLUSION:
An organisations culture evolves over time, and
is influenced by a variety of factors. As an
organisation grows and develops, the
organisation culture that originally proved so
helpful may begin to get in the way. Hence the
culture of an Organisation must be able to tune
itself to the changing environment.
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MENTORING
It is a process of making an employee more effective in his job through developing

personal working relationship.
Coaching, counselling, providing guidance, social and emotional support are some of
the ways.
Advantages: Higher performance of employees, building a better organisational climate,

generate positive feelings of pride and satisfaction
Institution of formal mentoring process would benefit organisations.
Background
Every organization has its own culture as defined
by formal and informal organization. The
Should and Should nots in any organization
are sometimes at variance with what any
individual has experienced before joining the
organization. Besides this, the political climate
and culture of any organization are unknown to
new recruits or new role holders. The new
recruits many times are unable to reconcile the
dilemma
between
competition
and
collaboration. These and many other processes
are clarified through a process of mentoring,
where the new recruit can approach the mentor
without the fear of putting his/her career at stake.
What is Mentoring ?
Mentoring has been a recognized form of
personal development for thousand years. Since
most ancient experiences in mentoring are
informal, considering the benefits of mentoring,
many organizations have introduced formal
mentoring processes in their companies.
Mentoring is a process of making a person
(generally new recruits or new role holders) more
effective in the profession by developing
personal working relationship. A mentor is
someone with the skills, experience and
perspectives that are needed by the
organization; who has a reasonable amount of
organizational influence; and who is willing to
develop a personal working relationship with
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someone of less experience and status in order

to help the person to become more effective.
The Protg is the person who is being helped
( otherwise termed as mentee).
Activities in mentoring
Following activities form part of the mentoring
process:
Coaching: Coaching enables the mentee to
correct performance problems and find new
ways of approaching the task. It involves
imparting knowledge and skills to the protg
for improving the quality of output. The main
focus is task-centred.
Counseling: Counseling addresses the
emotional problems of mentees, at home or at
work, which people may encounter affecting
their job performance. It aims to restore the
normal cognitive abilities in people, temporarily
shut by emotional disturbances. Effective
counseling needs the counselors to have
empathy, listening skills and skills in
paraphrasing so that the affected person is able
to view the problem and initiate redressal
providing political guidance: every organization
has its own norms and values, its own political
structures, which manifest itself into a culture,
which a new entrant is ignorant of these are
mostly unstated, unpublished, and yet vital, for
the social order. one of the important functions
of the mentor is to create the awareness in the
mentee about these norms and values, which
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govern group behaviour, the dos and donts and

how the power is distributed in a particular
organization.
Providing Social and Emotional Support: The
Mentor besides the above must provide
continuous encouragement to the mentee, as
the latter takes on new challenges. The mentor
should create a climate where the mentee feels
safe to air grievances, anger and sadness before
the mentor.
For discharging the afore-mentioned activities
effectively, mentor should himself be seen as
an ideal role model, highly positive and loyal to
the organization. He should be held in esteem.
He should also have other traits such as
awareness of the self, strengths and
weaknesses, comfortable relationship with
peers and seniors, patience, ability to deal with
the feelings of people, skill to generate alternative
solutions besides deriving satisfaction as a
mentor.
Advantages of Mentoring
The organization gains through higher
performance of the protgs. It helps to tap the
latent potentials for mentoring in many of the
senior functionaries of the organization. It would
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nurture present protgs to become able

mentors in future. This in effect would result in
building a new climate in the organization
founded on closer inter-personal relationship,
through a network of protgs and mentors.
Thus mentoring promises organizations a higher
accretion of human capital.
The advantages to mentors are many. Learning
new skills, the development of the ability to see
things in new light, recognition from peers and
superiors, loyalty and support from protgs,
ability to generate positive feelings of pride,
satisfaction, happiness and commitment and
finally the capacity for higher contribution to the
organization and the world at large.
Sensing this potential, many organizations have
set up a formal mentoring process in their
institutions. With the complexity of businesses
growing at rapid pace with each passing day,
organizations need to find effective ways to build
their human capital. Mentoring is one of the
potent tools for strengthening human capital and
building a company with emphasis on human
care. Therefore, it pays to the organization to
develop and strengthen the mentoring
competencies of their senior functionaries and
create a formal structure for mentoring.
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360DEGREE TECHNIQUE
seeks to measure the performance of employees on the job from multiple stakeholders.
focuses more on intrinsic qualities and strengths than on achievements
promotes team work and voluntary self change.
creates an atmosphere of openness and improves inter-personal relations.
Limitations of Traditional Appraisal
Methodology
Performance appraisal has long been regarded

as one of the most critical area of human
resource management. Most of the appraisal
systems are designed to evaluate past
performance and stress less on future
requirements such as employees career
aspirations, potential latent skills identification,
career planning training & development
requirements to take up higher assignments.
The methodology used involves collecting

responses through standard assessment forms
about a manager from his bosses, peers and
subordinates. They cover several parameters
of performance as well as behavior. Indeed
nothing excluded from the ambit even values,
ethos, fairness and balance courtesy.
The traditional 90-degree performance appraisal

(done by the immediate boss) judges the
outcome of an appraisees efforts but ignores
the road taken. He focuses on achievements
rather than the intrinsic qualities and strengths.
360-degree Feedback
The 360-degree feedback is understood as
systematic collection of performance data on
an individual or group, derived from a number of
stakeholders-the stakeholders being the
immediate supervisors, team members,
customers, peers and self. In fact, anyone who
has useful information on how an employee
does the job may be one of the appraisers. The
personality of each manager-his talents,
behavioral traits, values, ethical standards,
tempers, loyalties-is to be scanned, sorted out
and stethoscoped. Corporations like General
Electric India (GE), Reliance Industries Ltd.
(RIL), Crompton Greaves, Godrej Sops, Wipro,
Infosys, Thermax and Thomas Cook are
reportedly using this to know everything about
their managers.
The forms are designed to measure subjects

rating on three parameters strengths,
weakness and improvement required. Each
manager is assessed by a minimum of nine
persons-at least two of them being his bosses,
two or three of them peers, and two or three of
them subordinates. Data collected is analyzed
and graphed by computer. The responses are
presented collectively to the appraiser.
Depending on the interpretations of the data and
findings, counseling sessions are held to solve
the specific problem and the weaknesses as
identified by 360-degree appraisal. This is a
powerful tool for self-development especially at
the senior level, which is where one tends to
get isolated.
Benefits
If 360-degree appraisal is done in a systematic
manner, it will contribute to motivation of
employees, clarify role of employees, provide
scope to express individual view and opinions,
recognize talents, placement requirements,
training needs and career planning. The merits
of the technique are:
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The organization gains from heightened

self-awareness of the top managers. It
assess.
reveals the strengths and weakness of their

managing style.
Teamwork develops once peer group

assessment is included in the methodology.
Empowerment is facilitated.
Facts about organizational culture and

ambience are brought to light.
Inflexible managers are forced to mitigate

self-change.
360-degree feedback technique holds brilliant

promises provided it is used with utmost care
keeping in view the following guidelines:
The 360-degree assessment program will

be effective only when the top management
backs it with the assurance to managers
that the exercise will be used exclusively
for individual development and benefit only.
System should be introduced only after a

thorough study of the organizational climate
and the requirements of the system in a
given set up.
People should be prepared mentally to

adapt to the system. Their doubts must be
clarified. There should be full transparency
about its mechanism.
Employees need to believe that the data is

unbiased and objective.
360-degree feedback system should not

replace the existing appraisal system of the
organization but it should be done as an
addition to that system.
Assessors should encourage open

discussions on the feedback.
360-degree assessment form should

contain those items only that assessors are
capable of observing and are competent to
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Assessors should be trained in what and

how to observe.
Organizations considering 360-degree

feedback should start small and move
slowly.
360-degree feedback works best in

organizations where the environment is
open and participatory, where giving, and
receiving feedback is seen as valuable
source of information and development.
The gap between self-assessment and the

views of ones colleagues is reduced.
Conclusion
The 360-degree feed back provides a broader
perspective about employees strengths and
weakness: It facilitates greater self development
to employees. It enables an employee to
compare his or her perceptions about self with
the perceptions of the assessors. Besides, 360degree feedback creates an atmosphere of
more openness, improved inter personal
relations and teamwork. It makes employees
feel more accountable to the internal and
external customers. However, there are
drawbacks associated with 360-degree
feedback. Receiving feedback on performance
from multiple sources can be intimidating.
Further, selecting the assessors, designing
questionnaires and analyzing data may be
cumbersome and time consuming tasks. In
addition, there might be difficulties in getting
objective feedback due to personal differences
and biases. Notwithstanding, more and more
number of companies are using 360-degree
feedback. It is essential that the organization
should follow the above-mentioned guidelines
and create a conducive environment by
emphasizing the positive impact of the technique
on employees performance and development.
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EMOTIONAL INTELLIGENCE
Emotional Intelligence is the capacity to recognise ones own feelings and those of
others.
It helps to motivate oneself, manage emotions of self and others; contribute to effective
performance in the job and developing satisfying relationship in life
Most leaders succeed because of EI
Four essential capabilities: Emotional self awareness; self-management; social

awareness and Social skill
Emotional Intelligence is the key ingredient which

distinguishes star performers from performers.
It is one of the differentiating factors for success
and a study of 15 global companies attributes
85 to 90% of leadership success to emotional
intelligence. Emotional competence is twice as
important as cognitive abilities for all jobs, for all
roles. Intelligent Quotient is only a threshold
competence, but it is emotional intelligence that
distinguishes star performers from others.
Emotional intelligence is the capacity for
recognising our own feeling and those of others,
for motivating ourselves, and for managing
emotions well in ourselves and others. It
contributes to effective performance at work,
outstanding leadership, and deeply satisfying
relationships in life.
Building ones emotional intelligence cannot and
will not happen without sincere desire and
concerted efforts.
Daniel Goleman, author of the book Emotional
Intelligence describes four fundamental
capabilities of people who are high in emotional
intelligence.
Accurate self-assessment: a realistic

evaluation of your strengths and limitations.
Self-confidence: a strong and positive sense

of self worth.
Self-management:
Self-control: the ability to keep disruptive

emotions and impulses under control.
Trustworthiness: a consistent display of

honesty and integrity.
Conscientiousness: the ability to manage

yourself and your responsibilities.
Adaptability : skill at adjusting to changing

situations and overcoming obstacles.
Achievement orientation: the drive to meet

an internal standard of excellence.
Initiative: a readiness to seize opportunities.
Social Awareness:
Empathy: skill at sensing other peoples

emotions, understanding their perspective,
and taking an active interest in their
concerns.
Organisational awareness: the ability to

read the currents of organisational life, build
decision networks, and navigate politics.
Service orientation: the ability to recognise

and meet customers needs.
Self-Awareness :
Emotional self-awareness:
The ability to read and understand ones

emotions as well as their impact on work
performance, relationships, and the like.
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Social Skills:
Visionary leadership: the ability to take

charge and inspire with a grand vision.
Influence: the ability to wield a range of

persuasive tactics.
Developing others: the propensity to bolster

the abilities of others through feedback and
guidance.
Communication : skill at listening and at

sending clear, convincing and well tuned
messages.
Change catalyst: proficiency in initiating new

ideas and leading people in a new direction.
Conflict management: the ability to deescalate disagreements and encourage

resolutions.
Building bonds: proficiency at cultivating and

maintaining a web of relationships.
Team work and collaboration: competence

at promoting cooperation and building
teams.
All these four capabilities and

competencies
are
interlinked
interdependent.
their
and
As one becomes more aware emotionally, one

is able to see what causes these emotions and
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learns empathy the awareness of others'

emotions. The highest level of emotional
awareness is Interactivity, where one is sensitive
to the ebb and flow of emotions around one.
Emotional awareness is only the first step
towards emotional literacy, which is a
cornerstone of Emotional intelligence. Self
management or the ability to manage ones
emotions coupled with conscientiousness,
adaptability and initiative is also essential for
Emotional Intelligence.
Emotional regulation aims at examining the
values, beliefs and assumptions that are
responsible for each emotion, and trying to find
a way to manage the emotion, so that one can
be more responsible for one's emotions.
The mindset for a better Emotional Quotient
(EQ) would be to remember that all feelings are
telling us something, there is no failure, only
feedback; the map (of emotional journey and
experiences) is not the same for all of us; people
have within them all the resources they need,
and mind and body are part of the same system.
Thus emotional intelligence, which refers to the
capacity for recognising our own feelings and
those of others, for motivating ourselves, and
for managing emotions well in ourselves and in
our relationships can be learnt, but with
commitment, diligence and practice.
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STRESS MANAGEMENT

Stress is an integral part of life.

We need to manage our abnormal response to stress that cause disease and disability.
We have to identify the stressors and symptoms of stress.
There are three levels on which stress management techniques are focused: BODY,
MIND and BEHAVIOUR.
Exercise, diet and relaxation constitute our response at body level.
Positive thinking and attitude and prayer are coping techniques at mind level.
Self monitoring, change of life style, laughter and balanced life activities are our strategies
at behaviour level.
Stress is the single most important growth
related stimulus for all living organisms. If there
is no stress, there is no growth and,
consequently, there would be death soon. Stress
is an integral part of life, and we cannot get rid
of stress.
It is our abnormal response to stress that
causes disease and disability. This is better
called distress. Whereas stress is good and
welcome, distress is the killer that needs to be
managed well. Up to a certain point, increased
stress improves performance. After a critical
level, our ability to perform effectively declines
rapidly with increasing stress.
Psychologists have defined stress as demands
of life. Technically these demands of life are
called stressors and the actual wear and tear of
our body for fulfillment of the same is stress.
Stress can also be defined as an adaptive
response to an external situation that disturbs a
persons healthy mental and physical well being.
Dr. Hans Selye has classified reactions to stress

as the general adaptation syndrome (GAS). GAS
has three stages:
Alarm Reaction: The stressor activates the

body to prepare for fight or flight.
Resistance Stage: The sign of alarm

reaction are diminished or non-existant.
COPING WITH STRESS

Three important stepping stones in learning to
cope with stress are:
Admit the existence of negative attitudes and

destructive behaviour patterns.
Believe that you can change your potentially

destructive attitudes and behaviours.
Work out positive steps, put them into

practice, accept some failings, but persevere
and give yourself a pat in the back for every
success you have.
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Exhaustion Stage: The exposure to a

stressor has nearly depleted the organisms
adaptive energy.
WHERE DOES STRESS COME FROM
It is important to identify the different categories
of stressors to strengthen our coping
mechanism:
Emotional stressors like fear and anxiety
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Family stressors on account of our

interaction with family members
Social stressors involve our interaction with
people
Change stressors result when we alter
anything important in life.
Chemical stressors like abuse of drugs,
caffeine, nicotine, pesticides and
sweeteners in food.
Work stressors the tensions and
pressure we experience in work place.
Decision stressors arise on account of
availability of more alternatives and less
decision time.
Commuting stressors caused by long
distance to work and facing rush hour traffic.
Phobic stressors caused by exaggerated
fears
Physical stressors arise when we
overextend ourselveslack of sleep,
malnutrious diet, injury.
Disease and pain stressors as a result of
long or short term disorders and also old
aches and pains of new and old injuries.
Environmental stressors such as cramped
offices, burning heat of summer or chilling
cold of winter.
SYMPTOMS OF STRESS
Physical
Psychological
Behavioural
Tension headaches
Migraine
Sleep disorder
Nervousness
Anxiety
Irritability/ anger
Fatigue
Overeating
Loss of appetite
Constipation/ diarrhea
Reduced performance
Lower productivity
Mistrust or hostility
towards associates
Missing deadlines
Shirking responsibilities
Minor accidents
Increased errors
Depression
Losing sense of humour
Feeling withdrawn
Feeling that you do not want
to do things that you have to do
Feeling emotionally drained
Indecisive use of drugs
Difficulty in remembering
Excessive use of drugs
Excessive use of alcohol
Excessive use of tobacco
Low back pain

Allergy problems
Skin rashes
Aching neck/ shoulders
Ulcers
There are three levels on which stress managed

techniques are focussed:
I. BODY
a) Exercise:
Seek medical advice beforehand
Maintain regularity
b) Diet:
Have a balanced diet and eat in
moderation
Intake of salt, sugar, caffeine, alcohol
etc. should be in moderation
Avoid tobacco products
Drink at least 8-10 glasses of water
every dayit helps in elimination of
toxins from our body
Take dinner at least two hours before
sleeping
Drink the food and eat the liquid
masticate properly what you eat and
sip the liquids slowly.
c) Relaxation:
Breathing exercisebreathe slowly
using diaphragm. This makes the
whole lung expand and body cells
have better oxygenation.
Shavasana or deep muscle
relaxation: This Yoga posture
provides complete relaxation in 1520 minutes.
Meditation: Meditation is silence that
is golden, and listening to our sane
inner voice.
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II. MIND:
a) Positive thinking and attitude: We
can use the power of mind for self
hypnosis and imagery training. We can
replace our negative thoughts with
positive thoughts and this in turn will
influence our thinking.
b) Prayer: Prayer simply means passing on
our worries and anxieties to Almighty or
Mother Nature. Scientific studies have
shown that believers have significantly
lower rates of stress related ailments.
III. BEHAVIOUR
Self Monitoring: Take a few minutes for
yourself in the evening/ night to analyse
stressful situations of the day and plan
corrective action for the future.
Change life style: Getting up early,
regularity of exercise, food habits, time
management, reasonable working hours
etc. and take corrective action.
Laughter: Develop a habit of laughing at
yourself by saying Do not take this
person seriously. A good laugh relaxes
muscles, lowers blood pressures,
suppresses stress related hormones
and enhances the immune system.
Balanced life activities: Avoid building
your life around one person or one thing.
Live a balanced life, have many sources
of happiness.
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EMPOWERMENT
Empowerment is the authority to make decisions within ones area of responsibility without
first having to get approval from someone else
Empowerment is a Motivational tool in the hands of the Organisation
It enables employees to use their talents and capabilities
Empowerment has become a buzzword in the
late 1990s. Organisations see it as a competitive
edge and have started using this as a Motivation
tool.
VARIOUS DEFINITIONS OF EMPOWERMENT
(a) Empowerment has been defined as

recognising and releasing into the
Organisation the power that people have in
their wealth of useful knowledge and internal
motivation.
(b) It is also the authority to make decisions
within ones area of responsibility without first
having to get approval from someone else.
(c) It is the process of sharing power and
providing an enabling environment in order
to encourage employees to take initiative
and make decisions to achieve organisational
and individual goals.
NEED FOR EMPOWERMENT
As people in an Organisation mature, the need
arises for them to use their talents and
capabilities. The competencies or skills required
also undergo change as Organisations prepare
themselves for facing the competition.
Empowering people may seem scary but with
trust in oneself and in ones people it can be
overcome. Every employee needs to feel that
he or she is very important to the Organisation.
.Empowerment is one such way.
According to David McClelland every employee
has three basic motivating needs - Need for
Power, Need for Achievement and Need for
Affiliation. The Need for Achievement is due to
the desire to do something better or more
efficiently.
The focus is on personal
improvement. People with high Need for
Achievement will look upon Empowerment as
a great Motivational tool.
Empowerment works when Organisations
Understand that the more power you give
the more you have
Have faith in their employees i.e. they
perceive their employees as capable in
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decision making, problem solving, goal

setting etc
Recognize that their employees are
resourceful and have vast untapped capacity
and potential
Treat their employees as valued members
of the Organisation
Some of the misconceptions about

empowerment are:
It results in loss of control
People do not want power; they want to be
led
Power is a fixed quantity; if you give it away,
you lose it
It always leads to beneficial results
Empowerment leads to:
Respect for team members
Open Communication
Opportunities for learning new competencies
/ skills
Opportunities for self development
Autonomy
Consequences of empowerment:
Organisational commitment
Work environment satisfaction
Role satisfaction
Job involvement
CONCLUSION:
Empowerment does not mean that employees
can break all the rules with impunity nor that
leaders abdicate their responsibilities.
Empowerment is a movement that is probably
irreversible in organisational life. For higher
productivity, Organisations need to find more
and more areas in which they can empower their
employees. In the end, empowerment must be
seen by the employees as something which
helps them to satisfy their Need for
achievement. It also must be seen as a tool
which improves their quality of work life.
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SERVICE QUALITY MANAGEMENT

Two well known approaches to improvement of quality are Bottom-up approach and
Top-down approach
The quality service delivery results in customer satisfaction and their retention
Quality is a winning attitude and it always needs improvement
Quality is difficult to define because it is highly
dependent upon customer perception. The task
is made more complicated in the case of
services industries because of the intangible
nature of services and the variation in services
offered to different customers.
The American Society for Quality Control has
defined quality as the totality of features and
characteristics of a product or a service that bear
on its ability to satisfy stated or implied needs
e.g. Banking services is not only for selling of
products and services to the customers but also
the total environment attached to it like how much
value is added to the products and services
including the physical ambience and the quality
of the products and services.
The well known approaches to improvement of
quality are:(a) Bottom-up approach
(b) Top-down approach
In case of bottom up approach, the
implementation of any policy begins from the
lowest level of employees. It slowly transmits
itself upwards. For example, card punching or
swiping of cards at entry or exit from workplace
may begin with the lowest cadre employee and
later adopted by higher levels of management
to give a semblance of fairness.
The quality initiatives have no chance of success

without the top managements blessings.
Changes in quality occur only after changes in
attitudes and behaviour take place. The new
approach to quality improvement comprises not
of rejecting defective output and presenting only
good quality of products and services to the
customers, but also not producing defective
goods or services at all. Once a customer
rejects a product it is always a bad product
whatever superior quality it may have.
The quality service delivery results in customer
satisfaction and their retention as it reinforces
the perception that the value of the service
received is greater than the price paid for it..
Better quality leads to productivity and increases
the profitability. The mechanism acts as under:First step improvement:
(a) Image/ perception of Bank goes up
(b) Volumes are built up because of the service/
product preference
(c) Inspection cost is less due to improved built
in quality
(d) Repetition of tasks is reduced by providing
better quality service the very first time itself.
In top down approach, the top management

makes an initial and definitive commitment to
policy implementation and the approach is
percolated down to all levels of employees.
(e) Complaints are considerably reduced about

maintenance of quality.
For example, top management commits to the

consumer that the Bank while considering
housing loan proposal not only takes care of
construction and value of land but also
considers the cost of consumer or beautification
(a) Better price can be charged or price yield is

better
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items also. This should be percolated down to

fulfill the commitment.
Second step improvement:
(b) Economy of scales accrue due to higher

volumes
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(c) Costs of cross selling are reduced

(d) Costs of networking are reduced as word of
mouth publicity increases.
(b) Lack of empowerment of the employees
(e) Adherence to quality norms and procedures

ensures the high quality of the system and
reduction in non-conformance. About 35%
of the companys costs are due to faults and
their corrections.
(c) Lack of training to the franchisees staff
Final results: Profitability improvement
Gap 4: Mismatch between promises and

performance: In this era of competition there
is a great temptation to promise the world in
order to win over customers. However, it may
be either physically impossible or financially
unviable to provide all that was promised. This
results in customer disappointment. The typical
reasons for this kind of failure are:
Quality improvement is not a win/lose strategy

where we lose a lot of costs in order to win more
profitability but a win/win strategy where
permanent changes are made to ensure that
the high quality is built in to the system.
Gap Model of Service Quality Delivery:
Gap 1: Not knowing what customers expect.
Gap between perceived and expected levels of
service quality delivery.
(d) Insufficient customer education especially

when banks are handing over their platform
for customers use.
(a) Unrealistic communication to customers

(b) Overpromising through advertisement or
personal selling
Reasons are:
(c) Lack of internal communications.
(a) No direct interaction with customers
Delivery of High Quality Service: High-quality

service delivery is not just the function of the
front-end employees but of all the members of
the organization. The factors that could play a
crucial role in the quality of service delivery are
many. A few important factors amongst them
are:-
(b) Unwillingness to ask customers about

expectations
(c) Unpreparedness
expectations
to
address
the
(d) Lack of market segmentation to understand

the needs of each segment
Gap 2: Inability to set the right type of
standards: The customers have service
standard expectations that may be either higher
or lower that the standards set by the Banks.
Reasons are:
(a) Absence of customer-driven standards of
service delivery
(b) Absence of formal quality control goals
(c) Vague or undefined service standards
Gap 3: Not delivering to service standards:
This is the most common type of failures brought
about by day to day difficulties in service delivery.
The common causes for this failure are:
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379
(a) Lack of right type of employees or their

training in service delivery
(a) Human factor: To ensure that I shall not

deliver substandard service nor shall I let
anybody else deliver substandard service
(b) Systems support: The computerized system
in Bank has to ensure accurate and timely
delivery of the customers request
(c) Organisational Factor: Organisation with
mighty structure has very poor interaction
between the front-end employees and the
higher top officials within the organization.
The interaction between the supervisors and
the front-end service delivery employees is
very important.
Feed back: Organisation need to encourage
feedback from customers and every employee
including the front-end employees as a part of
the quality
monitoring
system.
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Employees have to be told that their opinion is

valuable for the organizational success.
(f) Tangibles: Opinion on physical facilities,

equipment, environment etc.
(e) Prevention of Customer defection.
(g) Reliability: Whether delivery of promised

service can be assured.
While obtaining feedback from the customers,

the banks can take care of the following
dimensions to specifically evaluate service
quality:
(a)Credibility: To ensure trustworthiness,
credibility and honesty of the service provider.
(b) Security: To ensure safety and freedom from
risk
(c) Access: To ascertain approachability and
ease of contact
(d) Communication: Listening to customers and
keeping them informed
(h) Responsiveness: Whether providers are

willing to help and provide prompt service
(i) Competence: Whether service providers
are in possession of skills and knowledge to
do the job.
(j) Courtesy: To examine politeness, respect,
consideration and friendliness of the contact
person.
Quality is a winning attitude and it always needs
improvement. The improvement is never ending
and calls for review according to market
scenario.
(e) Understanding the customer: Making the

effort to know the customers and their needs
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328
NICHE MARKET
A niche market is a group of potential customers who share common characteristics
that make them receptive to a particular produce or service
Launching a product into a niche market is far cheaper than launching a mass-market
product
The Internet has features that make it ideal for niche marketing
A niche market is a group of potential custom- enough, and that is not owned by one estabers who share common characteristics that lished vendor already.
make them receptive to a particular produce or Three Steps of Niche Market
service.
First off, its too expensive and usually a very
A niche market is a focused, targeted portion of difficult task to try and develop ones own niche.
a market. By definition, a business that focuses Its better to identify and plan on addressing an
on a niche market is addressing a need for a existing niche that has good potential for using
product or service that is not being addressed unique product or services.
by mainstream providers. One can think of a
niche market as a narrowly defined group of For example, it is assumed that one has invented
a fantastic sports drink and want to develop the
potential customers.
market for his product.
Launching a product into a niche market is far
cheaper than launching a mass-market product. Here are the first three steps to find niche:
The potential customers are easier to identify 1. Assess self and determine what areas of
life are most interested (in the product) and
and to target. Niche markets often develop from
how it will interface with product.
mass markets and mass-market manufacturers
sometimes choose to launch niche product as 2. Assess potential market to determine if
well. Conversely, what are expected to be niche
there is an area that could use services.
markets sometimes develop into mass markets.
An easy way to make this determination is
When Apple came up with the PC in the early
just to talk to the people in targeted
1980s, for instance, it did not expect it to becommunity. Another is to join groups of
come a mass-market product. Yet, it did, and out
people who have similar interests such as
of that mass market there ultimately emerged
health clubs, little league boosters, and
some niches, such as the educational PC marsoccer clubs or at car racing activities.
ket.
3. Once a promising niche is found, then it
The trouble with niche markets that do not deneeds to be determined whether the same
velop into mass markets is that they soon reach
can be comfortable with the anticipated
their maximum size. A niche, which can be so
income from it.
helpful in getting a product off the ground, can
soon become a straitjacket. Manufacturers have A brief history:
to find another niche product, or another market Some have seen niche marketing as a phase in
a 20th - century journey from mass marketing to
in which to sell their existing product.
The Internet has features that make it ideal for one-to-one marketing. The 50s and 60s were the
niche marketing. Through its mailing lists and heyday of mass marketing. There was one kind
newsgroups it gathers electronically in one spot of Coca-Cola soft drink for the thirsty, one kind
of cyberspace precisely those groups of cus- of Holiday Inn hotel for the traveler. The 70s betomers with similar interests that are a niche came a decade segmentation and line extension.
marketers dream. Mailing lists and newsgroups It was followed in the early 80s by intensified
focus on specific topics. In each discussion niche marketing that sliced market into smaller
group there can be as many as regular readers and smaller groups of consumers. The whole
world has started moving from mass marketing
with a special interest in that topic.
to segmented marketing to niche marketing to
The trick to capitalizing on a niche market is to tomorrows world of one to one marketing through
find or develop a market niche that has custom- Internet in the 21st Century.
ers who are accessible, that is growing fast
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RELATIONSHIP BANKING
Relationship Banking means maintaining a long and enduring relationship with clients
It aims to have 100% of a clients business, both present and future, in one bank/one
service provider.
CRM integrates people, process and technology
CRM aims to optimize profitability through enhanced customer satisfaction
Relationship Banking helps in cost reduction, better use of data and increased opportunity
for cross-selling
To survive in todays competitive financial

services marketplace, banks must realise the
full potential of every customer relationship they
have. But banks rarely have all of their
customers business. Capturing a 100% share
of wallet-high value relationship banking-is in fact
a realistic objective for banks.
High-value relationships are customers who
have consolidated total bank product usage in
one bank. When the idea of a lifetime customer
is included, we say that a high value relationship
is one in which the bank has all of a customers
business now and in the future. The relationship
enables the bank to provide a proactive service
process to selected customers, converting
them into highly profitable clients.
Unlike the product driven marketing strategy, the
relationship banking strategy aims at capturing
the customer relationship so that the customer
consolidates all products and services with a
single provider. It is essentially a strategy
focusing on cross selling and upselling more
products to a customer.
Economic benefits of Relationship Banking
a)
Firstly it is a fact that retaining profitable

customers is five times cheaper than
attracting new ones.
b)
Reduced marketing costs
c)
Better use of database
d)
Increased opportunity for cross selling
e)
Enhanced reliability of new customers

introduced by existing clients.
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Customer Relationship Management (CRM)

in Banking
CRM covers a wide range of products and
interfaces (Front office customer touch points
to Back office integration and everything in
between)-Marketing automation, sales force
automation, call center for customer service,
data warehousing and data mining which focus
on decision making, etc. CRM follows both
business and technology trend. CRM is a
strategy by which companies optimise
profitability through enhanced customer
satisfaction. It involves process, technology and
people issues. All the three together really
captures what CRM is. CRM enables people
within the organisation to interact with the
customers, rather than enabling customers to
interact with the organisation. In e-CRM handling
transaction becomes a seamless part of the
relationship lifecycle say from e-marketing to esales to e-commerce to e-service. It is an
enterprise wide effort - a fusion of CRM and ecommerce.
Motivating employees-Internal relationship
in banking
Relationship banking needs to balance strategic
aspirations with internal resources-Banks will
need to involve employees at all stages in
developing a relationship banking strategy. The
banks must create conditions for relationship
strategy awareness among its employees,
provide right kind of leadership initiatives, ensure
job satisfaction and empowerment to its
employees and above all have proper coordination at the organisation level.
330
CROSS SELLING
it is selling additional products / services to an existing customer and it fosters brand

loyalty.
it costs a bank five times less to cross sell an existing client than to acquire a new one
Cross selling helps banks to plan, implement and maintain better customer relationship
management programmes
The success of cross selling depends on offering at the right time, the relevant product
to the customer
INDIAN banking industry is chanting the retail

moola(h) mantra for its tech initiatives, customer
base expansion, retail asset explosion, profits,
net interest margins, and so on. Almost all banks,
including those with the public sector, are following standard strategies with a slew of housing, auto, education and consumer loans and
other niche products to add volume to their retail asset book.
The technology advantage boasted by the foreign and new gen private banks has also evened
out. Now, all banks are fighting the retail battle,
targeting the prospective customer universe with
almost similar strategies and insignificant product/value differentiation, trying to expand the
customer base and achieve their retail asset
targets and profits.
The success depends on how far they are able
to translate the strategies into business. The result is evident from the growth in numbers in retail asset expansion of scheduled commercial
banks by almost 50 per cent and the amount
went up by more than 130 per cent from Rs.
28,000 crore to more than Rs. 1,00,000 crore
between March 1997 and March 2005.
In a situation where banks are stepping on the
accelerator to expand their customer base and
develop and implement strategies to bring additional customers involving additional cost, (customer mining) will give definite clues for cross
selling.
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What is Cross selling

What is cross selling? In simple terms, it is selling an additional product/service to an existing
customer. Relating it to the retail asset expansion scenario, it is generating new/additional retail asset(s) from a liability. In other words, if the
bank is able to sell an asset product (housing/
car/educational loan) to a saving/current/deposit
account holder successfully, then it is cross
selling.
In the present day retail banking scenario, systematic cross selling of assets is happening in
some banks, but in most others, an integrated
approach to retail asset expansion through cross
selling is still at a nascent stage.
Why should banks cross sell?
The prime point for cross selling is the cost

factor. It zeroes in on the cost of new customer acqisition for asset expansion and the
cost of cross selling to an existing customer.
According to Money magazine, it costs a bank

five times less to cross sell an existing client
than to acquire a new one. Another finding says
that it costs four times as much to get a new
customer as it does to keep an existing one. The
underlying is the cost advantage of selling to an
existing client.
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The second important reason is the profit,

Cross selling an asset/additional asset
product to an existing customer improves
the profits, in general, and profits per
customer, in particular.
Cross selling fosters brand loyalty. A
customer who has availed himself of more
than one product from the bank is drawn
closer to the bank than a customer who has
taken only one product. If a customer having
a savings account has taken a consumer/
personal loan, the chances of switching to
another bank is less than when he has only
savings account. If, in addition, he takes a
housing loan or any mortgage product, the
chances of bank hopping reduces further.
Research studies have established that the percentage of loyalty increases with the number of
products the customer takes. The reasons may
be for convenience, service, price and value
offerings by the bank for the total product solutions to the customer.
Cross selling helps banks to plan,

implement and maintain better customer
relationship management programmes as
it gives clarity to developing plans based on
the customers relationship profile.
Potential for crossing selling

Let us work out an hypothetical example to explore the potentials of cross selling. We in SBI,
have 90 million customer accounts. Assuming
that we have a marketing plan to sell one more
product (say a credit product), with an average
size of Rs. 50,000/- to our 10% of the clients.
The additional credit business would work out
to Rs. 45,000 crore (90,00,000 x 50,000). This
is almost 4 times the projected growth of advances in P segment for the year 2004-05. Apparently there exists a huge potential in cross
selling.
strategy is built.
Based on the customer relationship history

and the cross selling model, a broad
mapping of the customer profile and retail
products to be cross sold has to be done.
The mapped data has to be sliced and diced

to develop specific asset related cross
selling information.
The cross selling information has to be put

in place for staff (internal customers) to view
and communicate to the target customer
group.
The internal customers should be trained

to effectively cross sell and convert the
initiatives into business
Cross selling is a team effort and success

depends on the attitude and involvement of
al! the staff concerned.
The success of cross selling depends on

offering at the right time, the relevant product
to the customer. It will be a futile exercise to
cross sell a product which is not needed or
relevant for the customer.
The strategy has to percolate from the

corporate to the branch level based on
customer database across geographies.
Dynamic feedback from the line level should

be taken cognisance of for fine-tuning /retuning the strategies.
Selecting the target customer group is

essential for cross selling success. Selling
the right product to the right customer
improves the relationship.
Cross selling is more relationship- than

transaction-based. At any point of time, the
cross selling initiative by the line staff should
not be an irritant for the customer.
The above are only some illustrative

strategies and success depends on the
bank managements belief and commitment
in retail asset expansion through cross
selling as a viable tool and also customer
acceptance of the initiatives by the bank.
Strategies for effective cross selling
A robust customer database is foremost

for effective cross selling. The database the
core on which the entire cross selling
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SIX SIGMA - FOR QUALITY
It is a quality tool.
It denotes tolerance of only 3.4 defects in 10 lakh operations.
Companies like Motorola and G.E have implemented this with success
Helps in customer satisfaction and retention, elimination of waste and reduction in cost
In our Bank, CAG has successfully implemented it for issue of LC.
What is Six Sigma

Sigma is a mathematical term that represents
a measure of variation around the mean. It helps
to determine how good or bad the performance
of a process is. It helps to measure how many
mistakes a company makes in doing whatever
it does, from manufacturing steel to delivering
Pizza at the customers doorstep.
If a company works at one sigma level, it will
have 7,00,000 defects out of 10,00,000, which
means that it is doing things right 30 % of the
time. Similarly, the defect levels for other sigma
would be as under:
In 1995 GEs operating margin was about 13.5

per cent. By 1998, after adopting Six Sigma, it
was up to 16.7 per cent, a number Welch
previously thought was impossible. This
increase represented a $600 million bonus
(Rs.3000 Crores) to the bottom line. Today, it is
reported that many of the Fortune 500
companies have adopted Six Sigma.
SIGMA
WHY ADOPT SIX SIGMA?
Defects
Per Million
Defects
Percentage
One
7,00,000
70%
Two
3,00,000
30%
Three
67,000
6.7%
Four
6,000
0.6%
Five
230
0.0002%
Six
3.4
0.000034%
At Six Sigma level, there will be 3.4

defects(called DPMO- Defects Per Million
Operations) out of 1 million parts produced.
Six Sigma therefore implies being right
almost 100% of the time.
Six Sigma as a Quality tool was first introduced

by Motorola in 1988 with tremendous success.
Later the concept was taken up by Jack Welch,
the CEO of General Electric, who got the idea
from Lawrence Bossidy, the former CEO of
Allied Signal, a company with 70,000 employees
making fibres, plastics and aerospace and
automotive parts. Bossidy applied Six Sigma to
every one of the business processes from
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inventing and commercializing a new product

to billing and collecting after they deliver the
product. Six Sigma improved Allied Signals
products, their price, customer satisfaction and
cash flow significantly.
To eliminate errors for achieving Customer

Satisfaction and retention: Six Sigma helps
in measuring the level of error in order to
perfect the processes. So it pays to adopt
Six Sigma to retain customers and deliver
customer satisfaction.
To improve the bottom line: By focusing on

wastes and redundancies, Six Sigma helps
to enhance profits of the firm.
To eliminate waste: Six Sigma helps to trace

wasteful activities in order to eliminate them.
In Six Sigma, quality improvement is a means

to an end and not an end itself. The goal of Six
Sigma is not simply to improve quality for quality
sake, but to make customers happier and add
money to the bottom line. If we improve quality
by losing money without satisfying or adding
value to customers, we are missing the point.
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Thus the main thrust of Six Sigma is to

reduce errors and waste in every kind of
business endeavour to please customers
and fatten the bottom line. Six Sigma aims

to give customers excellent products and
excellent services at an acceptable price.
defects. In this step, benchmarking may

also be useful. Benchmarking is essentially
finding out how our competitors perform in
this area in order to set our standards
against those benchmarks. During this
phase, we need to identify processes which
are critical to quality (CTQ)- that is those
that have the most impact on the outcome
in order to work on them.
Where it can be applied

Six Sigma can be used in the service industry,
manufacturing, operations- everything from
accounts receivables to automobile spare parts,
from software to hardware.
How to go about it
Idea Generation
Find out what the customer wants
Take one problem at a time
Analyse: This is done to find out how well

or poorly the processes are working
compared with what is possible and with
what the competitors are doing. This would
help us to know the maximum results
possible if everything is perfect and also
how far our company is falling short. If the
gap is not great, we may not stand to gain
much and hence can move to some other
problem. In this phase, we need to raise
questions such as why are the errors
committed and how to fix them. If we can
answer when, where and how and how
often the defects occur it would facilitate us
in remedying the problem.
Improve: Having identified the processes

critical to quality and the defects in it, we
have to implement the changes which will
improve performance.
Control: Like all management processes,

it is important to measure the actual
performance against the expected in order
to implement corrective action when there
is a deviation.
Golden Rule: Pick the problem that gives the

most trouble, the one that is costing the
company most, the one that is making
customers unhappy- the one that will reward us
the most if we can fix it.
Getting Started- the Five Steps (DMAIC
Cycle)
Find out the number: It is important to know
where we stand and where we want to go. For
this, we need to define our problems in numbers,
as other methods are subjective and hence
impossible to measure performances and
achievements. Numbers bring clarity. To cite an
example, if we wish to improve our despatch
processes, we need to define on how many
occasions our letters are delivered wrongly.
Define the problem : Problem definition

is the biggest challenge in any problem
solving effort. Wrong and incomplete
definition of the problem results in wastage
of money and effort. The more accurately
we define the problem, the more precise
will be our target, the better are the chances
of hitting the bulls eye.
Measure: The next step is measurement.
Unless the problem is measurable it would
be difficult to quantify and much more
difficult to effectively implement change
initiatives. While doing this, we need to
measure as to how many opportunities for
defects the current process presents. This
would help us to adopt a new process,
which would not lend scope for congenital
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Experience in Service Industry

In the Services sector, some insurance
companies such as MetLife and non-banking
finance companies in the USA have very
successfully achieved Six Sigma status. In our
Bank, CAG, Mumbai has successfully
implemented Six Sigma for issue of Letter of
Credit. Since customer expectation and
competition is intensifying every passing day
many service companies are exploring new
ways to enhance their service quality. Six Sigma
is one of the potent tools in the hands of
organisations in this mission.
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TOTAL QUALITY MANAGEMENT (TQM)
TQM means ensuring error free functions all around in the organization
It aims to continually improve quality through employee and management participation.
It attempts to increase productivity through building teams.
The focus of TQM is to satisfy the needs and expectations of customers
Zero defects, Kaizen (continuous improvement), benchmarking are its key approaches
The Management gurus in the 1970s and 1980s

were engaged with the theme of profit
maximisation which was seen as the main
agenda of an enterprise. However during 1990s,
the focus has shifted to customers and frontline
employees are expanding their reach into service
management and service quality resulting in the
growth of knowledge about TOTAL QUALITY
MANAGEMENT (TQM). The concept of TQM is
increasingly recommended as the means of
satisfying the needs and expectations of their
customers. This management philosophy of
tireless striving towards perfection is gaining
wide acceptance as evidenced by the explosion
of published material on the topic. In developed
countries, the interest in quality extends to every
competitive business and industry. To stay
ahead of the competi-tion, the organisations sell
quality as a value added service introducing
revolutionary ideas into a very traditional
business.
be turned on. It is an evolutionary process of

trust and feedback which develops over time.
Continuous process improvement means
accepting small, incremental gains as a step in
the right direction towards quali-ty. It recognises
that substantial gains can be achieved by the
accumulation of many seemingly minor
improvements whose synergies yield
tremendous gains over the long run. Finally TQM
involves teams. The employees are aligned with
the organisations goals for improvement. This
personal commitment is achieved in exchange
for individual and team rewards, recognition and
job security.
The sum total of an error-free function all round
knowledge of the work, motivation,
productivity, rationalism in work place, goaloriented work, quality assessment, functional
assessment is Total Quality Management.
a.
Participative management
TQM is a science and not a witchcraft. Nothing

can happen out of the blue. A set of methods
systematically applied for a period of time which
are properly planned, done, checked and acted
upon will eventually result in total quality control
circle. Improvements from the present
standards, a positive and perfect frame of mind
and do it right at the first time approach would
culminate in full quality culture and in turn full
customer satisfaction.
b.
Continuous process improvement and
ESSENTIALS OF TQM
c.
Use of teams
TQM DEFINED
TQM is a co-operative form of doing business
that relies on talents and capabilities of both
labour and management to continually improve
quality and productivity using teams. Embodied
in this definition are three main ingredients
necessary for TQM to flourish in an organisation:
Participative management comes about by

practicing TQM. Unlike a switch, it cannot simply
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The importance of management:

Commitment of managers at all levels is
essential for sustained improvement.
The involvement, commitment and

responsibility of everybody: When we talk
of everybody being involved, we mean the
customers, employees, investors, all of
whom can affect quality.
Quality in all processes: Processes cut

across departments and the right quality
depends on the right relations between
departments and organisation.
recognising the customers perception

and apologising,
Quality as strategy: This means that the

organisation must recognise the
importance of quality and evolve a strategy
for improving quality. The quality strategy
should be part of the business strategy in
the market.
Focus on prevention rather than
inspection: Instead, it is a matter of
preventing poor quality at the earliest point.
Recovery: Recovery means acting quickly

when the customer is not satisfied by, for
example,
giving the customer a reasonable

explanation for what had occurred,
compensating the customer for the
inconvenience,
ensuring that the problem does not occur
again.
Benchmarking
Quality by design: Old services need to

be redesigned with the customers needs
overriding back office needs. Service
design is a way of avoiding inbuilt faults in
the system from the start.
Benchmarking is comparing oneself with the

standards of the best in a particular field though
the comparison need not be with a competitor
or even with an organisation in the same line of
business.
Continuous improvement - Kaizen

approach: The Japanese practice the
concept of KAIZEN widely which means
ON-GOING IMPROVEMENT involving
every one including management and
workers. Kaizen stresses the value of
progress on a continuous basis.
CONCLUSION
Zero Defects: It means doing the job right

at the first time. Zero defects are in relation
to the specifications laid down and
grounded in the customers needs. The
concept originated in manufacturing, but is
now a key part of TQM for services also.
Meeting the needs of target customers:
This means adjusting the services to the
requirements, needs and expectations of
identified special groups of customers
thereby avoiding dissatisfied consumers. In
other words, marketing should be oriented
to avoid creating wrong and often excessive
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expectations in customers. It is the

responsibility of the service provider to
educate the public so that the customer
does not have unrealistic demands and
expectations of the service.
The TQM approach addresses tough issues and

describes costs and rewards of implementing
the change process. TQM philosophy creates
an opportunity which does not require in-depth
cost justification to convince the rank and file. It
is a challenging blueprint for corporate-wide
change.
In order to be effective and successful, the
concept of Total Quality Management has to be
applied throughout top to bottom, vertically,
horizontally, functional and cross functional
just with one aim that is total customer
satisfaction. The focus should be on customer
through management commitment, total
participation and systematic analysis. Total
Quality Management is not a programme, it is a
continuous process never ending. The
systematic methods form the architecture that
links quality to customer satisfaction.
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BENCHMARKING
It means observing Best Practices in competitors or companies in other industries in

some activity, function or processes and comparing ones own performance to theirs.
In effect, it implies setting benchmarks for excellence and working towards it.
Normally the measurement is done along three components- Products/Services,

Processs/Procedure and People.
Being externally focused, Benchmarking leads to setting higher standards.
Today most organisations operate in a business

climate in which uncertainty, risk and complexity
in the external environment are becoming
fundamental facts of life. Pressures of
international competition and market
globalisation are such that organisations
intending to become corporate leaders should
aim to be the best in class in the key areas that
sustain competitive advantage. The market
place is rapidly changing and consumers
expectations continue to rise. Customers are
becoming more informed and more demanding
of their suppliers.
To continue to succeed, companies must focus
increasingly on product and service
development and on consumer and market
research. This requires the ability to focus
externally, in order to compare the firms
strengths and weaknesses in meeting
customers expectations relative to the best
performers. It also requires targeting in weak
areas within the organisation for specific
improvement activities. Benchmarking enables
the organisation to enhance its competitive
advantage by learning from practice of others
internally and externally, at strategic, operational
or business management level.
Benchmarking is a continuous management
process that helps firms to identify the
benchmark and to use that knowledge in
designing a practical plan to achieve superiority
in the market place. The measurement of
relative performance takes place along the three
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products and services, business processes and

procedures and people.
This brings about changes that lead to quantum
and continuous improvements in products,
processes and services that result in total
customer satisfaction and competitive
advantage. The strategy consultants McKinsey
& Co viewed benchmarking as a skill, an attitude
and a practice that ensures an organisation
always has its sights set on excellence, not
merely on improvement.
Benchmarking involves observing competitors
or companies in other industries that exemplify
best practice in some activity, func-tion or
process and then comparing ones own
performance to theirs. This externally oriented
approach makes people aware of possible
improvements needed; beyond what they would
have thought possible. In contrast, internal
yardsticks that measure current performance
in relation to prior period results, current budget,
or the results of the other units within the
company rarely have such an eye-opening
effect. Moreover, these internally focussed
comparisons have the disadvantage of breeding
complacency through a false sense of security
and of stirring up more energy for intramural
rivalry than for competition in the market place.
There are four types of benchmarking activity
when seen from the perspective of
organisations/divisions in relation to whom the
benchmarking is done. They are, internal,
function-al, competitive and generic.
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An effective benchmarking process has the

following six steps.
Understanding customer needs and own

internal business processes.
Determine the key performance areas to be

benchmarked. They may include product
and services, customers, business
processes in all departments and the
organisation, business culture and the
calibre and training of employees.
Focusing on the processes first and the

metrics second.
Identification of the right performance

variables to benchmark.
Identify the most relevant competitors and

best-in-class companies.
Taking small steps at a time by focusing on

a few key processes initially.
Set the key standards and variables to

measure
Making the measurements objective and

truly comparable.
Being honest in assessment, in sharing

information and in providing feedback.
Measure regularly and objectively
Develop an action plan to gain or maintain

superiority.
Specify programmes and actions to close

the gap, implement and monitor ongoing
performance.
In the service industry environment critical

business processes are similar and capable of
being benchmarked in the same way as in
manufacturing environments. Key operational
issues which have been identified in service are:
productivity improvement, standardisation
versus customization, batch versus unit
processing, job design, managing queues and
capacity management.
Focus on the bottom line
A successful approach to benchmarking
involves a clear focus on the business and
bottom line and continuing emphasis on being
externally, rather than internally, focused.
Experts cite the following keys to successful
implementation of benchmarking initiatives.
Commitment to the aims and the process

throughout the organisation.
Involving the people who will make the

changes.
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ISO 9001
ISO 9001 is an international quality standard and adopted first in 1987
Latest version is in 2000 and is called ISO 9001:2000
The standard aims to promote quality and continual improvement in organizations
The certification is issued by Registrars
What is ISO
ISO stands for International Standards
Organisation. It is a worldwide federation of
National standards bodies. National standard
bodies of different countries are members of ISO.
ISO was first established in 1985 when around
85 countries became signatories to this universal
standard. The Headquarters of ISO is in Geneva,
Switzerland. Earlier different countries followed
different standards and hence there was no
uniformity. ISO seeks to establish universal
standards of quality and thus help in bringing
about quality improvement worldwide.
Establishment Standards
The work of preparing International Standards is
normally carried out through ISO technical
committees. Each member body interested in a
subject for whom a technical committee has been
established has the right to be represented on
that committee. International organisations,
governmental and non-governmental, in liaison
with ISO, also take part in the work. Publication
as an International Standard requires approval
by at least 75% of the member bodies casting a
vote on draft International Standards.
Registrar and Consultant

It is pertinent to note that while ISO adopts
standards it does not give certification. Each
nation has a National Body, which is an accredited
member of ISO. These National bodies in turn
empower Registrars for issuing certificates to user
Institutions on its behalf. Registrars are
designated by the National bodies based on the
their competency, track record and experience.
The Registrars issue ISO certification on behalf
of the National body to various institutions. The
certificate is valid for three years. However,
periodical inspections are conducted to review
Quality Management in a span of 6 to 9 months.
In case Quality standards as accepted by the
users are not maintained,
Registrars have the right to cancel certification.
Registrars charge a fee for certification and for
conducting periodic audit. The fee charged by
different Registrars are different. A consultant is
one who guides the certification-seeking
institution, for a fee, in obtaining certification.
What is Quality
Auditing
Interestingly, the ISO standard does not prescribe

any rigid measure of quality. According to ISO,
quality is defined as The degree to which a set
of inherent characteristics fulfill requirements.
The definition takes into account the difficulty in
prescribing the uniform measure of quality due
to inherent differences in resources,
infrastructure and the expectations of customers
across countries. However ISO demands that
there should be continual improvement in quality.
By implication this means that while each
institution can define its own measure of quality,
it should continuously strive for progressive
improvements in it.
Auditing is necessary for maintenance and

improvement of any systems and procedures. As
already mentioned, periodical auditing is done
under ISO certification by Registrars. Besides this,
the users themselves should conduct periodical
internal audit through their own staff designated
for the purpose. This exercise helps not only in
regular rectification of irregularities but also in
familiarizing the people in office with the quality
management practices of the user institution.
Revision
The ISO standard was first adopted in 1987. It
was later revised in 1994. The present version
ISO 9001:2000 is adopted in 2000. The standard
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is revised at periodical intervals in order to reflect

the changes in the environment and to update
the provisions based on experience.
ISO Certification will institutionalize a culture of

Quality in the organisation.
The certifying bodies are proposing to issue
certificates for those companies which are
adhering to both quality and environment
standards under Integrated Management
Standard (IMS) to save on multiplicity of structure,
documents and procedures.
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ISO 14000
ISO 14000 is a quality standard for environmental management
The standard is voluntary
It can be obtained for the whole company or a department
It helps in reduction of energy consumption, liability and risk and improves compliance
to legal and regulatory requirements
What is ISO 14000?

The ISO 14000 standards are voluntary
environmental management system standards
being created under the auspices of the
International Organization for Standardization.
ISO has 111 member countries represented
mainly by industry and government standards
groups.
The standards can be classified according to
their focus:
Organization and process evaluation standardsEnvironmental management system (ISO
14000,14004), environmental auditing (ISO
14010, 14011/1, 14012) and environmental
performance evaluation (ISO 14031).
Product-oriented standards - Life-cycle
assessment (ISO 14040, 14041, 14042, 14043),
environmental labelling (ISO 14021, 14024,
14025) and environmental aspect in product
standards (ISO 14060).
Definition standard - A terms-and-definitions
standard (ISO 14050) harmonizes the language
among the others.
ISO 14001, the environmental management
system specification, is intended as the only
standard establishing requirements against
which companies will be audited for certification.
It is the backbone of the series.
Implementation
Worldwide interest in these standards among
both countries and governments is growing.
Many countries and companies have already
started implementing ISO 14001 with an eye
toward certification.
The list of reasons companies are now adopting
an environmental management system, and
ISO 14001 in particular, includes identifying
areas for reduction in energy and other resource
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consumption, reducing liability and risk and

improving compliance with legislative and
regulatory requirements.
Its voluntary
ISO 14001 is not a mandatory requirement: it is
voluntary. But it may end up being a requirement
for conducting international trade. It is not a
performance-based standard that prescribes
levels of emissions and releases. But you must
commit to following the laws of the land and
preventing pollution. ISO 14001 is not a product
standard. Rather, it is a systems-based standard
that gives the company a blueprint for managing
environmental impacts. ISO 14001 can be
implemented piece meal, in any fashion, from
the corporate level to the single-unit level.
What are the major requirements ?
The standards first requirement is that a
company should have a publicly available
environmental policy articulated by top
management. It should be appropriate to the
nature of the organization and include
commitments toward pollution prevention.
Establishment and maintenance of procedures
to identify significant environmental aspects and
their associated impacts are also envisaged.
Procedure to ensure compliance should be
consistent with the environmental policy and
include legal and other requirements. Objectives
and targets are to be documented and must be
consistent with the goals of the environmental
policy, including continual improvement and
pollution prevention.
The certifying bodies are proposing to issue
certificates for those companies which are
adhering to both quality and environment
standards under Integrated Management
Standard (IMS) to save on multiplicity of
structure, documents and procedures.
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QUALITY CIRCLES
QC is a small group of employees in the same work area, who meet regularly to identify,
analyse and solve work related problems.
The members identify problems, prioritise the most important problem to be addressed,
develop solutions and implement them
Brain Storming, Pareto Analysis and Fish Bone Diagram are the key techniques used.
Quality circle is a small group of employees in

the same work area, who meet regularly to
identify, analyse and solve work-related
problems in their work area. If necessary, help
from specialists can be taken.
at solutions/recommendations to resolve each

cause individually.
BRAIN STORMING :
1.
Each member will be, in rotation, asked for

ideas. This has to continue until all ideas
are exhausted. To enable flow of ideas each
can ask himself- What, why when, where,
who and how ?
2.
No idea shall be dismissed as irrelevant/

stupid - Free flow of ideas shall be allowed.
3.
No evaluation of ideas shall be done during

the process of brain storming.
4.
Leader shall help in summarising the idea

and enable clarity of expression by
members.
5.
After ideas are exhausted and brain

storming completed, each idea shall be
taken up for detailed discussion and
consensus arrived at on those which are
valid and vital.
6.
Prior - distribution of agenda to members

will enable them to think in advance and
participate in Q.C. deliberations.
7.
If non-members drop in during brain

storming, they may be allowed to join in.
8.
Keep a record of the brain storming for

future reference.
OPERATION OF QUALITY CIRCLE
Identity Problems
Prioritise the problems
Choose one problem for the project
Analyse the causes of the problem
Develop solution
Present it to Management for approval
Implement solution
Review implementation and results
More over to next project
PARETO ANALYSIS. Pareto is an Italian

economist. Pareto analysis helps in identifying
the vital few from the trivial many at a glance,
when projected using column graph named after
Pareto. It facilitates fixing the priorities for
selection of the problem to be taken up serially,
listed after brain storming and data collection.
ISHIKAWA OR FISHBONE DIAGRAM. This
technique was devised by Dr. Ishikawa who
conceived Quality Circles. In this diagram, a
systematic arrangement of all possible causes
which give rise to the effect are made. Before
taking up a problem for detailed study it is
necessary to list down all the possible causes
through brain storming so that no important
cause is missed.
The causes are generally divided into the four
major sources (groups) viz Man, Machine,
Method and Material. Each source is ultimately
divided into sub-sources. After the Ishikawa
diagram, brainstorming is undertaken to arrive
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MANAGEMENT PRESENTATION: It is the

culmination of the Quality circles project study
and helps in making the recommendations
based on the solutions to the problems chosen,
more effectively and purposefully.
IMPLEMENTATION:
Following
the
recommendations of the QC, implementation
has to be given priority after securing the
necessary approvals.
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BUSINESS PROCESS OUTSOURCING

ISSUES INVOLVED
India is a leading destination for outsourcing of Information Technology Enabled Services

(ITES) and other related Business Process Outsourcing (BPO) activities
BPO activities encompass wide range of areas comprising services relating to

manufacturing , banking, insurance, HR etc.
BPO activities have benefited India by generating substantial job opportunities
India is a leading destination for outsourcing of

Information Technology Enabled Services
(ITES) and other related Business Process
Outsourcing (BPO) activities. Currently, India
renders more than two-thirds of all offshored
ITES worldwide. The BPO activities encompass
not only ITES but also a wide range of areas
comprising services relating to manufacturing
, banking, insurance, sales, marketing, utilities
and human resources. Indias comparative
advantage in the outsourcing business is on
account of availability of well developed
telecommunication network and advanced
technological infrastructure, skilled yet low cost
labour force, widespread use of English
language, and Indias location in a different time
zone from the United States (US) enabling a 24hour service. The BPO activities have benefited
India by generating substantial job opportunities
in the country and augmenting export earnings.
India is expected to maintain its lead as the best
offshore outstanding destination, particularly for
the US and European companies.
Several studies have indicated that offshoring
of US business to India provides greater benefits
to the US economy than to the Indian economy.
The outsourcing has reduced the prices of IT
hardware by 10-30 per cent due to the diffusion
of IT throughout the US economy. It has also
raised productivity and growth significantly. The
US outsourcing from India reduces costs by 4060 per cent, improves quality by 3-8 per cent
and increases productivity by 20-150 per cent.
A number of US companies are in favour of
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outsourcing to India purely on economic

grounds. More and more traditional industries
like manufacturing, energy, transportation and
retail sectors located in developed countries
would be outsourced to developing countries in
the near future.
Certain developed economies have, however,
begun to view the outsourcing of ITES-BPO as
a loss of domestic employment. Several States
of the US have introduced legislations seeking
a ban on outsourcing of various economic
activities from India. There are, on the other
hand, influential views in the US that feel that
the fear of job losses due to outsourcing is
exaggerated. Outsourcing abroad has proved
profitable primarily for jobs that can be routinised.
The European Union observes that BPO is good
for India and good for the world economy. The
UNCTAD has called upon developing countries
to bring a legislation relating to BPO under the
General Agreement on Trade in Service (GATS)
in the wake of the legislative measures in the
US. The UK is in favour of free, transparent and
open market and would not put up barriers on
the BPO. Globalisation and outsourcing work
both ways. A study by Global Insight reveals that
the majority of job losses to offshore outsourcing
occurred due to factors such as the slowdown
in the US and the bursting of the telecom and
dotcom bubbles. Raising of barriers by the US
to worldwide outsourcing would not only slow
down its economy but also reduce the number
of new jobs available to American workers.
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Indian entities should strive to diversify their

markets to other countries rather than depending
only on the US market. India would also have to
continuously innovate and maintain its low-cost
niche in order to compete with competitors like
China, the Philippines, Malaysia, Australia, South
Africa, and Singapore. India needs to set up
more foreign affiliates in the IT segment to
provide services offshore, besides attracting
more FDI to undertake BPO activities in the
country, which would pacify the protectionist
reactions by developed countries. The Indian
BPO market should also strive to attain maturity
through consolidation to withstand the
competitive threat, particularly from the
emerging East Asian countries. This could be
achieved through increased mergers and
acquisitions, not only in India but also in
developed countries, which would help to
achieve cost efficiency and competitive price
advantages. The BPO segment in India
attracted US $1 billion worth of FDI during 19962002, which works out to 5 per cent of the total
FDI inflows of US $20 billion during the period.
While BPO has created a big job opportunity for
youths in India, it has also given rise to new
challenges. Security of database has become
a challenge in the light of employee frauds using
customer information. Providing security to
women workforce during night shift is another
concern.
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FINANCIAL ENGINEERING
Financial Engineering is a sophisticated management technique aimed to manage the

risk and return of financial transactions
It uses derivative instruments to hedge (counter balance) risks.
Advancement in IT and telecommunication has strengthened financial engineering

Increasing volatility of prices and interest rates underline the importance of financial
engineering
Definition
Financial engineering is a multi-disciplinary
approach to the management of risk and return
which involves the use of derivative instruments
to decompose standard financial transactions
into their elements and then synthesise these
elements into innovative cross market structures
customised to the particular re-quirements of
counter parties.
The term financial engineering was coined in
the mid 1980s, among London investment banks
and is the product of several parallel
developments.
The emergence of both derivative instruments
and financial engi-neering has only been possible
because of the development of new information
technology, in particular, the PC and
spreadsheet software. These innovations have
provided a fast and flexible means of managing
the large volumes of information which are
necessary to construct complex transactions.
Other innovations, mainly in the field of
telecommunications, have reduced the cost of
generating and delivering the information. Lower
costs have in turn increased the availability of
information, which has extended the range of
opportunities for financial engineering to exploit.
An important force behind the emergence of
financial engineering has been the trend towards
liberalisation of financial markets which began
at the end of the 1970s. The removal of official
barriers has permitted the cross-market activity
that characterises financial engineering. The
competition it has unleashed has encouraged
the process. However, care needs to be taken
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in attributing cause and effect in this area.

Financial engineering has played a part in
encouraging liberalisation, by undermining the
effectiveness of regulation.
The increasing volatility of prices during the
1970s and 1980s increased both the need to
hedge risk and the opportunities for taking risk.
Financial engineering is the product of the
growing sophistication of risk management
techniques. It reflects the more rigorous
application of the scientific method to finance,
in particular, analysis into elements and
empirical testing (in the form of financial
modelling and sensitivity analyses). It has also
been seen in a trend towards the recruitment of
staff with scientific rather than financial training.
Multi-disciplinary approach
Financial engineering straddles several
traditional financial markets. It is also frequently
used to exploit anomalies in the tax, accounting
and regulatory frame-works within which
markets operate. Financial engineering is
therefore conducted by teams, which bring
together traders, financial analysts, syndication
staff, corporate finance officers, lawyers, tax
specialists, accountants, mathematicians,
statisticians, compliance officers, programmers
and other spe-cialists.
Financial Engineering involves the application of
derivative instruments such as swaps and
options. Through the process of decomposition
of financial instruments into forward and option
contracts and synthesising them into new
combinations, the objective of Financial
Engineering is achieved.
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ECONOMIC VALUE ADDED (EVA)
EVA helps to measure the extent of value created for shareholders
EVA= Net Operating Profit After Tax (NOPAT) (Cost of capital * Operating Capital)
Eg: If NOPAT is Rs. 100000/-; Capital employed is Rs.500000 and Cost of Capital is
12% then EVA= {100000- (500000 * 12%)= 100000-60000= Rs.40000
Capital includes both equity and debt; and determining cost of equity is difficult
The speciality of EVA is that it takes into account Capital employed and the risk as
measured by cost of capital
Various indicators are used to identify

companies which are investment worthy. Sales,
net profit, book value, dividend yield, Return on
networth, return on capital employed, EPS, EPS
growth and so on, have enjoyed popularity at
different times. One such measure is economic
value-added (EVA).
Simply put, EVA is the difference between the
rates at which the company is earning from its
operations and its cost of capital. Mathematically,
it is the difference between the net operating
profit after tax (NOPAT) and the operating capital
employed times the cost of capital. It has
emerged as a useful tool in corporate finance to
the extent that it is able to capture the cost of
capital employed.
The EVA looks at how well the company has
deployed its capital to get optimal returns. It looks
at the rate at which the assets are put to use
and compares the cost of such capital. If the
company is able to earn a return which is more
than its cost of capital, it is said to be creating
wealth for its shareholders.
EVA as a measure has an edge over traditional
measures like earnings per share (EPS) and
return on equity (ROE) which are pure return
functions and do not factor in risk. To that extent,
EVA provides a more refined barometer of value
addition after defraying the costs of owed and
owned funds. There are however, some popular
myths which one need to be aware of to
understand EVA more effectively.
One of the myths about EVA is that the only
complication in calculation of EVA is the
estimation of the cost of equity to arrive at the
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397
cost of capital. In reality, calculating EVA for any

company involves hundred of adjustments to
arrive at a credible figure of operating profit. This
is because any changes in depreciation policy,
inventory valuation policy or in accounting for
deferred taxation as also lease adjustments can
have a major impact on profits and all these
factors need to be adjusted.
Another dangerous myth about EVA is that it is
an ideal measure for comparing value creation
across companies and industries. EVA by
definition is biased against companies which are
capital intensive. This is because EVA only
considers the capital outlay necessary for
creation of physical assets and ignores the
implicit capital outlay involved in the creation of
intangible assets.
The last and perhaps greatest myth about EVA
is that companies with high EVA are cash rich.
What EVA actually depicts is the notional value
created by a business. It has no relation to the
liquidity requirements of the business. More so
for companies that are cash sensitive and where
shortage of cash can lead to bankruptcy of the
company. That explains why many software
companies which show high EVA in their books
of accounts could still be on the verge of
bankruptcy if their cash sensitivity is factored
in.
EVA is the ideal measure for matured companies
or matured industries. But for cash sensitive
companies or companies in the growth stage
of the business cycle, where liquidity is a major
factor, the CVA (Cash Value Added) could better
depict value creation.
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MARKET VALUE ADDED (MVA)
MVA is defined as the excess of the market value of the Company over the value of
investors capital
Thus MVA= (Market value of debt and equity Book Value of debt and equity)
Book Value of equity is the equity plus retained earnings
MVA is similar to Price Earning Ratio except that MVA indicates an absolute figure
while PER is a ratio
Market Value Added (MVA) is used by many

companies to show how they have rewarded
their shareholders. The MVA is defined as the
excess of the market value of the company over
the value of the investors capital.
It quantifies the premium the market is willing to
pay for the value created by the company.
Mathematically, it is defined as the sum of the
current market value of debt and equity, less the
economic book value.
The MVA of a company is determined by two
factors: The market value of the capital
employed and its economic value. In the case
of equity, it is possible to find out the market value
if the shares are regularly traded in the stock
exchange. In the case of unlisted companies or
infrequently traded companies, it is difficult to
determine the market value of equity. Hence,
MVA, as a concept, is not applicable to such
companies.
In the case of debt, it is difficult to determine the
market value, as term loans from banks and
financial institutions constitute 75-80 per cent
of the total borrowings by companies. For such
term loans, there is no secondary market and,
hence, it is not possible to determine the market
price. Where the borrowers have issued
debentures, which are listed, it is possible to
determine market value, but even then the rates
may not reflect the price, as the secondary
market is not well developed.
theoretical market price assuming the current

interest rate and the rate at which the company
has borrowed. In other words, what would be
the price, if the total borrowings were listed in
the market, assuming the current interest rates,
its credit rating and the risk perception of the
company. But this may indicate only the
theoretical market value and not the true value.
This is also not the cost to the company as it
may be able to borrow at a rate that is
significantly different from the market rate in the
past. Benchmarking these borrowings against
the current interest rate may not reflect the true
cost to the company too. Hence, the best
alternative would be to use the book value as
market value. This is what many companies
which give MVA finally boils down to the
difference between the market value of equity
and its economic book value. A company creates
value in the market if its MVA is positive. This
would mean that the company has created more
wealth than it has raised from its shareholders
as well its retained earnings which have been
reinvested.
The MVA is same as the price-to-book-value
figure. The former is the difference between the
market value and the economic value whereas
the latter is the ratio between the two parameters.
A price-to-book-value of more than one indicates
that the company has created value in terms of
market valuation, which is the same as a positive
MVA.
Conversely, it is possible to find out the

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346
DEBACLES, CRISES AND LESSONS
Long Term Capital Management (LTCM) Fund in US failed due to excessive risk taking
and huge borrowings
Barrings Bank despite 225 years tradition failed due to reckless trading by Nick Leeson
and lack of internal control
Brazilian crisis was triggered by excessive reliance on foreign investments without proper
fiscal discipline
Mexican crisis was caused by low reserves accompanied by heavy imports
Asian Currency crisis was triggered off in Thailand. Reason: Huge current account
deficit, decline in export growth and large volatile flow
Long Term Capital Management (LTCM)

Debacle
Long Term Capital Management (LTCM) is a
hedge fund and an investment partnership that
started in 1994 in the US. It borrowed huge
money disproportionate to its capital and used
them for purchase of securities in different
markets using arbitrage operations by applying
complex mathematical techniques. Encouraged
by its performance, it rewarded the investors
handsomely and returned a substantial portion
of captial to them. Towards the end of August
1998, the firm had undertaken heavy risk
exposure and as the market became illiquid it
could not reduce the size of its positions and
strategies. This resulted in the erosion of more
than half its capital base. Some of the mistakes
committed by the fund were excessive risk
taking, over leverage and failure to take
corrective action at the appropriate time.
Barings Bank Debacle
Barings Bank is the oldest investment bank in
Britain started 225 years back. It was running
very well until the wrong investment strategy
followed by its dealer Nick Leesson resulted in
the collapse of the bank in February 1995. Nick
Leeson bought between 15000 to 20000
derivative instruments worth $190000 each
totaling nearly $650 million beginning end
Banking Briefs
399
January 1995 hoping massive profits-but

gamble failed. Barrings is a victim of losses
caused by massive, unauthorized dealings by
its Singapore trader. Barrings collapse also
shows how derivatives, if wrongly used, can
muliply losses. Barrings failure exposed the
woeful inadequacy of internal controls. The
debacle also exposed how a bank with such a
long tradition of more than 200 years can be
brought down by a few negligent decisions.
Brazilian currency Crisis
Brazil is the biggest economy in the Latin
American region and is the eighth largest
economy in the world. In the face of hyperinflation
Brazil abolished its currency Cruziero and
replaced it with a new currency real in 1994.
On January 15, 1999 the real was devalued and
allowed to float freely. The problem in Brazil
began when one of the State Governors
declared a 9-day moratorium on payment of the
States US$14 billion debt with the Centre. The
other State Governments followed suit. The
macro economic situation was already fragile
with fiscal deficit at more than 8% of GDP and
current account deficit at 4.4% of GDP. In this
background, the investor confidence became
weak resulting in flight of capital and collapse of
stock market. Brazillian governments effort by
increasing the interest rate to as high as 41% to
defend the currency did not yield enough result.
347
Reliance on external funds to defend exchange

rate without proper fiscal discipline was the
central cause of Brazillan Currency Crisis.
56.65%, the Philippine peso by 28.44% the

Malaysian ringgit by 31.16% and the Indonesian
rupiah by 42.12%.
Mexican Debt Crisis
Lessons for India
The Mexican economy witnessed a deep

economic crisis - for the second time since
1992. The crisis was triggered of by an armed
rebellion though the problem began much earlier.
With imports flooding the country, Mexicos
foreign currency reserves fell from $25 billion to
$6.5 billion barely sufficient to cover import bill
of two months. In order to regain
competitiveness, the Government devalued the
peso by 15% on December 20, 1994. This
resulted in steep fall in profits of foreign investors
in dollar terms. Foreign investors lost confidence
and hence did not invest in short-term dollar
denominated securities issued by Government.
As though it is not enough, the foreign invetors
fled with their capital. Some of the reasons for
Mexican Debt crisis are hasty implementation
of full convertibility when the current account
deficit was high, heavy reliance on imports and
less domestic savings.
A great emphasis is needed on internal control

and risk management. Creation of independent
back office with strict separation of trading and
back office operations, periodic marking of the
portfolio to market, building an early warning
system and stipulation of capital adequacy
norms for firms dealing in derivatives are prerequisite for entering into the world of derivatives.
The traders in derivatives should be well trained
and appraised of the complexities of derivatives.
We should not defend pegged exchange rates
with external support system. Outside credit
alone cannot shore investor confidence. Unless
fiscal discipline and political will are in place high
interest rates alone cannot stabilize the currency
and instead would only undermine economic
growth and fuel fiscal deficit. A sound financial
system is essential for efficient intermediation
of capital flows and to ensure that these are
directed into the most productive areas.
Asian Currency Crisis

The currency crisis in Asia was triggered off
following the run on the Thai bath in early July
1997. The immediate cause was misalignment
in exchange rate. The persistently high current
account deficit resulted in a speculative attack
on the currency. Though Thailand had a low
fiscal deficit, low inflation, high economic growth
rate and a high savings rate of over 30% of GDP,
the real reason for crisis was the inability of the
system to manage large volatile flows, decline
in export growth and large current account
deficit. Fall in currency value led to the crash of
stock market and outflow of short-tem foreign
portfolio funds. the Thailand currency crisis
immediately spread to neighbouring countries
such as Malaysia, Indonesia, Philippines and
resulted in Asian Currency crisis. Between July
1 and November 15, 1997, the Thai bath fell by
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348
FALL OF GLOBAL TRUST BANK
Established in 1994 and imposed moratorium in July 2004
High deposit rates, high cost of lending, lending to sensitive sectors, were some of the
reasons for the fall
Amalgamated with Oriental Bank of Commerce. Shareholders have lost their investment
Lessons: Need for strong systems and procedures, proper credit appraisal and credit
management, integrity of officials, well established norms and practices for high-risk
exposure.
Global Trust Bank (GTB), a new generation

Private Sector Bank was established in the Year
1994 in Hyderabad under the chairmanship of
Ramesh Gelli. GTB along with other New
Generation Private Banks came to the market
in the liberalized banking environment with the
promise of redefining banking experience for the
Indian consumers using state-of-the-art global
practices. The Bank entered with tremendous
public confidence as revealed by the over
subscription of its Initial Public Offer by more
than 60 times. It had good foundation initially in
the form of equity partnership by IFC
(International Finance Corporation). The Bank,
in fact, brought in excellent technology, wellqualified and trained professional and plush retail
ambience for the consumers. The Bank
launched on an aggressive marketing campaign
using excellent publicity, advertisement and
promotional campaign. For the Year 2001,
Financial Express rated GTB as the Best Bank
in India.
Road to Crisis
The Bank s priorities from the beginning were
lopsided. It offered higher rate of interest for
deposits in order to attract huge funds and lent
them to capital market, real estate , Gems and
Jewellery business by taking high risk. The Bank
in a short time gained the notoriety for resorting
to short cuts to earn quick profits through highrisk exposure. Its auditors, PriceWaterhouse
Coopers, who certified the accounts, were
accused of unprofessional conduct. Its
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401
negatives include the high risk attitude of the

top management, adverse selection of
borrowers due to higher lending rates, high cost
of funds, poor credit appraisal and credit
management. The Chairman was also accused
of colluding with Ketan Parekh, stockbroker in
rigging the share prices of GTB in 2001.
Attempts to salvage the bank
GTB had been accumulating non-performing
assets due to overexposure to sensitive sectors
like equity market and real estate. Its bad loan
aggregated to Rs. 1500 Cr nearly 45% of its
loan portfolio.
The inspection of the Bank by RBI revealed
inadequate provisioning, negative capital and
faulty asset classification. RBI advised the Bank
to infuse fresh capital either through domestic
route or from foreign partnership. RBI kept a strict
watch by imposing restrictions with regard to
exposure to capital markets, declaration of
dividend, premature withdrawal of deposits. RBI
advised the Bank to change its auditors and take
steps for cleaning up the Balance sheet. The
Bank tried to bring in New Bridge Capital , an
internationally reputed private equity fund, which
promised to invest about Rs. 920 Cr. RBI
declined it due to regulatory concerns.
Way back in Mar 2001, there were attempts to
merge UTI Bank with GTB, to form UTI Global
Bank. The merged entity would have had a
deposit of Rs. 16,000 Cr and asset of Rs. 19,000
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Cr. This was dropped following the report of price

rigging of GTB shares. Ketan Parekh and his
associates have been accused of manipulating
the share prices of GTB, which had also
generously lent to the group, much beyond the
prudential levels. The Bank reportedly funded
Ketan Parkeh to buy GTB shares and to keep
the scrip afloat.
LESSONS
The fall of GTB provides the following lessons
for the bankers:
Bad Corporate Governance is harmful
One has to be very cautious when taking

high risk especially while lending to
sensitive sectors.
Integrity of the top management and

officials is critical for banks safety
Attracting funds at high cost increases

lending rates and therefore forces
compromising on the quality of lending
Focus on short-cuts and quick gains may

affect the long-term stability and viability
of the bank.
A large bank requires strong internal

systems and procedures with enough
checks and balances
Moratorium
RBI, in exercise of its powers under Banking
Regulation Act, 1949, imposed moratorium on
GTB on 24th July 04. RBI acted swiftly and
concluded the amalgamation of GTB with
Oriental Bank of Commerce. For OBC, it has
taken an immediate hit of Rs. 800 Cr profit in its
books ( though there are provisions of tax rebate
etc) and got more than Rs. 7,000 Cr deposits,
one million customers, entry into south, a branch
network of 130, 250 ATMs, common technology
platform and high networth clients. The
shareholders of GTB have, however, lost their
money, though they are entitled to the residual
surplus, if any, after 12 years following the
liquidation of impaired loans.
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350
COMMITTEES
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403
RECOMMENDATIONS OF THE INTERNAL GROUP ON

RURAL CREDIT AND MICRO-FINANCE
Chairman Sri H.R. Khan
(Report Submitted in July 2005)
Chaired by Shri. H.R.Khan and the report submitted in July 05
To enhance financial services in rural areas banks can use two models namely
Business Facilitator Model and Business Correspondent Model
Regulated Micro Finance Institutions (MFIs) may be refinanced by NABARD
Accounting Standards may be developed for SHGs and NGOs
Rural Kiosks and Village Knowledge Centres may be set up
MFIs may be rated.
The Group felt that extended outreach to the
under-serviced areas and the rural poor would
facilitate acquisition of a large number of
customers, albeit small ones with subsistantial
potential for large increase in business volumes
and profit as banking with the poor is rather
profitable banking. The major recommendatiions
of the Group are set out below:
IT enabled rural outlets of corporates, postal

agents, insurance agents, well-functioning
panchayats, rural multi-purpose kiosks/village
knowledge centres, agriclinics/business centres
financed by banks, Krishi Vigyan Kendras, Khadi
and Village Industry Commission (KVIC)/ Khadi
and Village Industry Commission Board (KVIB)
units may function as the Business Facilitators.
For providing comprehensive financial services

encompassing savings, credit and remittance,
insurance and pension products in rural areas,
the Group recommended two models, viz., the
Business Facilitator Model and the Business
Correspondent Model as proactive response.
Under the Business Correspondent Model,

institutional agents/other external entities may
support the banks for extending financial
services. The Business Correspondents would
function as "pass through agencies to provide
credit related services such as disbursal of small
value credit, recovery of principal/ collection of
interest and sale of micro insurance/mutual fund
products/pension products besides the other
functions of Business Facilitator Model.
Under the Business Facilitator Model it was

envisaged that banks could use a wide array of
civil society organisations (CSOs) and others
for supporting them by undertaking non-financial
services. The Facilitators would provide support
services for effective delivery of financial
services such as: (i) borrower identification; (ii)
collection, processing and submission of
applications, (iii) preliminary appraisal; (iv)
marketing of the financial products including
savings; (v) post-sanction monitoring; (vi)
promotion and nurturing of SHGs/Joint Liability
Groups (JLGs): and (vii) follow-up for recovery.
NGOs, farmer clubs, functional co-operatives,
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404
Registered NBFCs with significant rural

presence, NGO-micro-finance Institutions
(MFIs) set up under the Societies/ Trust Act,
Mutually Aided Co-operative /Societies (MACS)
with a charter to undertake financial functions,
IT enabled rural outlets of corporates with
appropriate contractual agreements with the
principal, well running primary agricultural credit
societies (PACSs) and post offices may function
as the Business Correspondents.
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The micro credit portfolio of the regulated MFIs

may be made eligible for direct finance from
NABARD: a line of credit may be extended by
NABARD to provide liquidity assistance in view
of the co-variant nature of credit risk of the MFIs.
Institutions such as NABARD and SIDBI may
provide bulk lending support to start-up MFIs and
funds of State/Central Development/Finance
Corporations, if feasible, may be channelised
through NABARD to identified MFIs.
Accounting standards for SHGs and NGOs may
be developed, codified, and standardised by
NABARD as a promotional initiative in
consultation with the Institute of Chartered
Accountants of India (ICAI).
NABARD, in consultation with Ministry of
Information and Technology, may draw up a time
bound action plan to set up Rural Kiosks/Village
Knowledge Centres, partly funded from RIDF.
The remaining cost may be borne by the Central/
State Governments on a shared basis.
institutions to decide about engaging them as

their agents and funding them. The rating
agencies need to be accredited by an appropriate
authority.
NABARD, SIDBI and major banks may consider
promoting independent rating agencies by way
of equity contributions. Financial support may be
provided to the accredited rating agencies to
cover their operational deficits for a period of three
to five years and the expenses in this regard may
be met from the Micro Finance Development and
Equity Fund (MFDEF).
Non-deposit taking MFIs may attempt selfregulation by forming State level associations.
A separate and exclusive regulatory and
supervisory framework for MFIs may not be
required for the present.
Considering the transaction costs and the
emphasis on timely availability of credit, it may
not be approprate to fix any ceilling on interest
rates and service fees charged by MFIs.
The MFIs may be rated to help banks/financial
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REPORT OF THE WORKING GROUP ON WAREHOUSE

RECEIPTS AND COMMODITY FUTURES
Report Submitted in April 2005
CHAIRMAN : SHRI. PRASHANT SARAN
Chaired by Shri. Prashant Saran and report submitted in April 05
Task entrusted: To evolve guidelines, criteria, limits, risk management system and
legal framework for facilitating banks to participate in commodity (derivative) market
and use of warehouse receipts in financing agriculture
Major recommendations: Central Govt to notify permitting banks to deal in agricultural
commodities; to evolve a system for free transfer of warehouse receipts; creation of
Closed User Group; banks may take proprietary position in commodity derivatives;
to introduce option trading in Agricultural commodities
The working Group was entrusted with the task
of evolving broad guidelines, criteria, limits, risk
management system as also a legal framework
for facilitating participation of banks in commodity
(derivative) market and use of warehouse
receipts in financing of agriculture. The major
recommendations of the Group are set out
below:
As banks at present are not allowed to deal in
goods, the Central Government may issue a
Notification under clause (o) of sub-section (1)
of Section 6 of the Banking Regulation Act, 1949
permitting banks to deal in the business of
agricultural commodities, including derivatives.
Considering the experience that banks already
have in dealing with agricultural commodities, it
would be prudent at the current stage to permit
banks to deal with derivatives in agricultural
commodities only.
A system needs to be evolved by which
warehouse receipts become freely transferable
between holders as it would reduce transaction
costs and increase usage.
An umbrella structure, which may act as a
Closed User Group (CUG) for everyone engaged
in the agricultural commodities business, be
created. The umbrella structure is envisaged as
an electronic platform that would offer straight
through processing for everyone connected with
commodities. There can be more than one CUG
which would be subject to regulation and
supervision by a regulatory authority such as
Forward Markets Commission (FMC).
Proprietary positions in agricultural commodity
derivatives could be used by banks to mitigate
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406
their risk in lending to farmers. To achieve this,

they will have to buy options or futures.
The Forward Contracts (Regulation) Act, 1952
be amended and the FMC should evolve a
framework for introducing options trading in
agricultural commodities in India.
Banks may be permitted to have independent
proprietary position and commodity futures
linked in a macro way to their credit protfollo.
However, suitable risk control measures may
have to be adopted by banks.
At present, purely cash-settled contracts are not
available in India. The banks trading or dealing
in commodity contracts should, therefore, be
prepared to make or accept delivery of physical
goods. While no restriction may be placed in this
regard, banks may be persuaded to preferably
close their positions and settle the contracts in
cash.
Banks may be granted general permission to
become professional clearing members of
commodity exchanges subject to the condition
that they do not assume any exposure risk on
account of offering clearing services to their
trading clients. At least for the present, banks
may not be permitted to act as trading members
in the commodity exchanges.
While banks may continue to hold their equity
stake in the commodity exchanges in order to
provide them financial strength and stability, they
may reduce/divest their equity holding to a
maximum permitted level of 5 per cent over a
period of time so as to avoid any conflict of
interest.
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REPORT OF THE WORKING GROUP TO REVIEW

EXPORT CREDIT
Chairman : Shri. Anand Sinha
Report Submitted in May 2005
Chaired by Shri Anand Sinha and the report submitted in May 05
Major recommendations: Change in the attitude of officials towards export credit,
posting of nodal officers, timely disposal of application for export credit, simplified
procedure for issue of Gold cards, priority for the foreign currency requirements of
exporters.
The major recommendatioins of the Group are
set out below:
Although existing procedures for export credit in
place were adequate to take care of the interest
of the exporters, there is a need for attitudinal
change in approach by banks officials. While
posting officials, banks may keep in view the
attitude of officials to exporters credit
requirements, especially the small and medium
exporters.
Banks should post nodal officers at Regional/
Zonal Offices and major branches having
substantial export credit, especially from SMEs,
for attending to the credit related problems of
SME exporters.
Banks should put in place a control and reporting
mechanism to ensure that the applications for
export credit are disposed off within the
prescribed timeframe.
Banks should raise all queries in one shot and
should avoid piecemeal queries in order to avoid
delays in sanctioning credit.
There was a need to look into the grievances of
the small and medium exporters and a fresh
satisfaction survey may be undertaken by an
external agency regarding the satisfaction of the
exporters with the services rendered by banks.
regarding issue of the Cards.

The Cards should be extended to all the eligible
exporters, especially the SME exporters and the
process may be completed within three months.
The present interest rate prescription by the
Reserve Bank may continue for the time being
in the interests of the small and medium
exporters.
Interest rates on export credit in foreign currency
may be raised by 25 basis points (i.e., LIBOR +
1.00 per cent for the first slab and additional 2
per cent for the second slab). subject to the
express condition that the banks will not levy any
other charges in any manner under any name
viz., service charge, management charge. etc.
except for recovery towards out of pocket
expenses incurred.
Banks should give priority for the foreign
currency export credit requirements of exporters
over foreign currency loans to non-exporter
borrowers.
In view of the substantial increase in export credit
in foreign currency through borrowings from
abroad, there is a need to look into whether a
regulatory limit could be prescribed, up to which
banks may be allowed to borrow from abroad
for the purpose.
Since the number of Gold Cards issued by banks

is small, banks may be advised to speed up the
process and adopt a simplified procedure
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DR.RAKESH MOHAN COMMITTEE

on the Administered Interest Rates and Rationalisation of Saving Instruments
Suggested appropriate benchmarking and spread rules for administered interest rate
rationalises existing saving schemes particularly in respect of tax treatment
designs a structure of the proposed Dada-Dadi (Senior Citizens) Scheme
recommended discontinuance of a few saving instruments viz., National Savings

Certificates (VIII Issue), Deposit Scheme for Retiring Employees and 6.5 per cent Gol
(Tax Free) Savings Bond (2003), Kisan Vikas Patra
The Advisory Committee to Advise on the

Administered Interest Rates and Rationalisation
of Saving Instruments (Chairman: Dr. Rakesh
Mohan), which submitted its report in May 2004,
addressed three broad issues within its overall
terms of reference, viz., (i) suggesting
appropriate benchmarking and spread rules for
administered interest rate, (ii) rationalising
existing saving schemes particularly in respect
of tax treatment in the light of the
recommendations made by the Expert
Committee to Review the System of
Administered Interest Rates and Other Related
Issues (Chairman: Dr. Y. V. Reddy) in 2001 , and
(iii) designing a structure of the proposed DadaDadi (Senior Citizens) Scheme as announced
by the Finance Minister on January 9, 2004.
After considering alternative benchmarks like the
inflation rate, bank deposit rate, Bank Rate, and
yields on Government securities, the Committee
decided to continue with Government securities
(G-sec) yields as the most suitable benchmark
in line with the suggestion made by the Reddy
Committee as they are mostly market
determined, signal a measure of expected
(rather than past) inflation and would facilitate
rationalisation of interest rates on various
schemes. However, in order to impart stability
to the benchmark, the Committee
recommended that the benchmark could be
calculated on a weighted average basis, with
weights of 0.67 to G-sec yields for the previous
Banking Briefs
408
year and 0.33 to yields for the year before that.

Furthermore, a fixed illiquidity premium of 50
basis points over the average benchmark yields
was also retained on similar lines as suggested
by the Reddy Committee. The Committee
expressed concern over the sharply falling
yields over the past few years due to excess
liquidity in the financial market and suggested
an inter-year movement of interest rate
fluctuations within a band of 100 basis points to
address the immediate concern of savers.
The Committee was in favour of continuing most
of the small saving schemes as these are
popular in rural and semi-urban areas due to
convenience, habitual preference and ease of
transactions as well as more intensive
penetration of post offices as compared with the
branch network of commercial banks. However,
in the interest of rationalising existing saving
schemes, the Committee recommended
discontinuance of a few saving instruments
offered by the Government where investments
are primarily motivated by tax benefits available
under Section 88 and Section 10 of the Income
Tax Act. Accordingly, it recommended
discontinuance of National Savings Certificates
(VIII Issue), Deposit Scheme for Retiring
Employees and 6.5 per cent Gol (Tax Free)
Savings Bond (2003). The Committee also
recommended the discontinuance of the Kisan
Vikas Patra in which tax is not deducted at
source and therefore, could lead to potential
355
difficulties from the viewpoint of tax

management. In this respect, the Committee
also emphasised the need to explore ways and
means of making tax deductible at source (TDS)
provisions effectively applicable to taxable
bonds. The Committee, however, observed that
the Public Provident Fund (PPF), which also
enjoys similar tax benefits, could be retained in
its present form for sometime as it provides
income security, especially in the unorganised
sector. Similarly, other post office schemes
catering to the needs of small savers, particularly
in rural and semi-urban areas, were
recommended to continue in their present form.
The Committee recommended a structure for
the Dada-Dadi Scheme designed to improve the
welfare of senior citizens. The interest rate on
the Scheme could be 100 basis points higher
than the average benchmark for other small
saving instruments. The tenor could be shorter
at three years to ensure liquidity. The Scheme
would be taxable in terms of Section 80L of the
Income Tax Act so that senior citizen at the lower
end of the tax bracket, ipso facto, obtain higher
returns. An individual ceiling of Rs. 20 lakh was
proposed on investment.
Banking Briefs
409
356
SADASIVAN WORKING GROUP

on Development Financial Institutions
Banks encouraged to extend high risk project finance
DFIs must convert to either a bank or a NBFC
DFIs which have been constituted as companies and are performing developmental
roles should be classified as a new category of NBFCs called Development Financial
Companies (DFCs)
The major recommendations of the Group

are set out below:
Banks may be encouraged to extend high

risk project finance with suitable
Government support.
As a market-driven business model of any

DFI is inherently unsustainable, a detailed
social cost benefit analysis should identify
activities which require development
financing. The rest of the DFIs must convert
to either a bank or a NBFC, as
recommended by the Narasimham
Committee.
Concessions in the form of according

approved investment status to paper
issued and a lower risk weight of 20 per cent
allowed for exposure by banks, DFIs,
NBFCs and RNBCs should be withdrawn
for public financial institutions, as many of
them have become financially weak and act
without any assurance of Government
support.
DFIs which convert into banks could be

accorded certain exemptions/relaxations for
a period of 3-5 years after conversion.
Regulation of DFIs should ensure that

overall systemic stability is not endangered.
The Reserve Bank should continue to

regulate the Exim Bank, NABARD, SIDBI
and NHB which would continue to function
as DFIs. As there is a scope for conflict of
Banking Briefs
410
interest, the Reserve Bank may divest its

ownership in NABARD and NNB.
The Reserve Bank may ensure that the

standards of regulation and/or supervision
exercised by NHB (in case of Housing
Finance Companies), SIDBI (SFCs and
SIDCs) and NABARD (state co-operative
banks, district central co-operative banks
and RRBs) are broadly at par with those
maintained by the Reserve Bank.
DFIs which have been constituted as

companies
and
are
performing
developmental roles should be classified as
a new category of NBFCs called
Development Financial Companies
(DFCs) and subjected to uniform regulation.
Considering the nature of business of
development financing, DFCs may be
permitted to maintain 9 per cent CRAR as
against 15 per cent prescribed for NBFCs
in general.
Public deposit mobilisation by RNBCs

should be capped at 16 times the net owned
fund (NOF) as an initial measure and finally
to the level for other NBFCs in five years.
This should be accompanied by
deregulation in the quantitative restrictions
(alongside more stringent quality criteria) on
the asset side.
357
TARAPORE COMMITTEE
on Procedures and Performance Audit on Public Services
Transparency in currency management
Currency Chest Agreement to be revised to incorporate a provision for monetary penalty

for non compliance with the Reserve Banks instructions
The Reserve Bank Note Refund Rules to be written in easily understandable language
The major recommendations of the Committee

which have been accepted by the Reserve
Bank, are:
Transparency in currency management;
Early introduction of Rs.10 coin
Phasing out of Rs.5 note totally;
Currency Chest Agreement to be revised

to incorporate a provision for monetary
penalty for non compliance with the
Reserve Banks instructions;
A Systems Study of Banking Hall

arrangements in the Mumbai Office of the
Reserve Bank to be commissioned with the
help of a specialised agency to resolve the
bottlenecks in the smooth flow of
transactions;
Citizens Charter for Currency Exchange

Facilities be made available to customers
visiting the Banking Halls of the Reserve
Bank officers and bank branches;
Authorised bank branches to exhibit

prominently a notice that soiled/mutilated
currency notes are freely exchanged at the
bank branch;
The Reserve Bank Note Refund Rules to

be written in easily understandable
language;
The practice of pasting of mutilated notes

at the time of tendering for exchange should
be reviewed by the Reserve Bank; and
Stringent action to be taken against violation

of instructions by banks on exchanging
soiled mutilated notes.
Suitable measures to separate location/time

for services to money changers and other
individuals;
Banking Briefs
411
358
VYAS COMMITTEE
on Flow of Credit to Agriculture and Related Activities from the Banking System
(Report submitted in June 2004)
A road map for public sector and private sector banks to reach a level of direct lending
at 13.5 per cent of net bank credit - within the overall limit of 18.0 per cent of total
agricultural lending - within a period of four years
The share of small and marginal farmers in agricultural credit to be raised to 40 per
cent of disbursements
Reduction in cost of agricultural credit through enhancing the cost effectiveness of

agricultural loans
Non-performing asset (NPA) norms in agricultural credit to be attuned to the cash flow
of the farmer, coinciding with the harvesting/marketing of the crop.
The Reserve Banks Advisory Committee on

Flow of Credit to Agriculture and Related
Activities from the Banking System (Chairman:
Prof. V.S. Vyas) submitted its report in June
2004. The major recommendations of the
Committee are:
A comprehensive review of mandatory

lending to agriculture by commercial banks
to enlarge direct lending programmes for
greater integration of investment credit and
production credit.
A road map for public sector and private

sector banks to reach a level of direct
lending at 13.5 per cent of net bank credit within the overall limit of 18.0 per cent of
total agricultural lending - within a period of
four years with an interim target of 1 2 per
cent in two years.
Special Agricultural Credit Plan (SACP) to

be restricted to direct lending and extended
to private sector banks.
Expanding the outreach of banks in rural

areas by enlarging retail lending to
agriculture, externalising retailing through
corporate dealer networks, organizational
innovations, offering hedging mechanisms
to the farmers, providing legal backing to
tenancy to facilitate access to credit,
capacity building of borrowers, greater use
of information technology, procedural
simplifications and modifications m the
service area approach.
Reduction in cost of agricultural credit

through enhancing the cost effectiveness
of agricultural loans, especially in terms of
cost of raising funds, transaction cost and
risk cost.
Non-performing asset (NPA) norms in

agricultural credit to be attuned to the cash
flow of the farmer, coinciding with the
harvesting/marketing of the crop.
Impediments to the flow of credit to

disadvantaged borrowers to be mitigated
through reduction in cost of borrowing,
revolving credit packages, procedural
simplifications, involvement of Panchayafi
Raj institutions and extension of micro
finance.
The share of small and marginal farmers in

agricultural credit to be raised to 40 per cent
of disbursements under the Special
Agricultural Credit Plan (SACP) by the end
of the Tenth Plan period.
Banking Briefs
412
359
GANGULY WORKING GROUP

On Small and Medium Enterprises
Report Submitted in 2004
SME classification to be based on

Turnover : Tiny - up to Rs. 2 cr, Small - Rs. 2 - 10 cr, Medium - Rs.10 - 50 cr
Major recommendations : measures to promote corporate linked clusters, proactive

role by CIBIL, setting up of dedicated SME development fund, technology bank for
SMEs.
Definition of the small and medium enterprises

(SMEs) sector to be based on turnover. Tiny,
small and medium enterprises could be
redefined in turnover as under:
Tiny : Turnover up to Rs. 2 crore;
Small : Turnover of above Rs. 2 crore and up to
Rs. 10 crore; and
Medium : Turnover of above Rs.10 crore and up
to Rs. 50 crore.
Lending to SMEs in identified clusters.
Rating mechanism for designated industrial

clusters, designed jointly by CRISIL, IBA,
SIDBI and SSI Associations.
Measures to promote corporate-linked SME

cluster models by banks and Fls.
Proactive role by CIBIL to serve as an

effective mechanism for exchange of
information between banks and financial
institutions for curbing growth of nonperforming assets in the SME sector.
Setting up of a dedicated national level SME

Development Fund by the SIDBI for
exclusively undertaking venture and other
development financing activities for SMEs.
Banks could also contribute to the corpus
created by the SIDBI (on risk-sharing basis)
or alternatively, set up their own venture
financing instruments.
Setting up of an independent technology

Bank for the SMEs by the SIDBI to facilitate
technology transfer and provide services
such as project evaluation, risk
assessment and mitigation to SMEs
adopting new technologies. Besides the
SIDBI, banks may also contribute to the
Banking Briefs
413
corpus of the proposed Technology Bank

to ensure its commercial viability and play
an active role in enhancing the capabilities
and credit worthiness of the SME sector.
Promoting and financing special purpose

vehicles (SPVs) by banks in the form of
micro credit agencies dedicated to servicing
SME clusters. Such micro credit
intermediaries in the form of NBFCs (funded
by individual or a group of banks but not
permitted to accept public deposits) could
credit rate and assess risk and serve as
instruments for extending quick credit to
SME clusters accredited to them.
Special dispensation for the North-East

region and other backward areas such as
adoption of model of mutual credit
guarantee to address the problem of
collateral, where village council guarantee
is available. Coverage of all SSI units without
any ceiling (of Rs.25 lakh) under the Credit
Guarantee Fund Trust for Small Industries
(CGTSI) scheme.
Revival of State Financial Corporations.

In pursuance of these recommendations, the
Reserve Bank instructed the CIBIL to work out
a mechanism, in consultation with the Reserve
Bank, the SIDBI, and the IBA, to develop a
system of proper credit records to facilitate
appropriate pricing of loans to SMEs. A special
group is formulating a mechanism for debt
restructuring for medium enterprises on the lines
of the Corporate Debt Restructuring (CDR)
scheme.
360
CHALAPATHY RAO WORKING GROUP

on Regional Rural Banks
Capital adequacy norms, with due adaptation, needs to be introduced in RRBs
Prescribed minimum level of shareholding should be at 51 per cent for sponsor

institutions.
The area of operation of RRBs need to be extended to cover all districts.
The scope of financial services to be

provided by RRBs. as per the amendments
proposed in the preamble to Regional Rural
Banks act, 1976, needs to be widened.
Capital adequacy norms, with due

adaptation, needs to be introduced in RRBs
in a phased manner along with RRBspecific amount of equity based on their riskweighted asset ratio.
Based on financial health of RRBs,

differentiated ownership structures should
be allowed.
Prescribed minimum level of shareholding

should be at 51 per cent for sponsor
institutions.
The area of operation of RRBs need to be

extended to cover all districts.
Keeping in view the regional character and

distinct socio-economic identity of issues.
RRBs falling in one socio-economic zone
may be amalgamated so as to create one
or a few RRBs in each State.
RRBs may have a minimum of five and a

maximum of eleven Board members,
including the Chairman. The number of
Directors may not be fixed uniformly for all
RRBs as at present.
As part of consolidation process, some

sponsor banks may be eased out and some
Fis and other strategic managing partners
may take over as sponsor institutions.
Half-yearly financial audit may be introduced

in the RRBs.
In order to strengthen the RRBs to cater to

the needs of the rural economy for all kinds
of financial services, diversification of their
business needs to be encouraged without
losing focus on fulfilling the financial needs
of the rural poor.
RRBs may avail of all the services of their

sponsor banks / institution or other
established and authorized public sector
portfolio management service providers
based on their own judgement of costs and
benefits for professionalisation of the
investment function for achieving optional
returns on the banks resources.
Various IT-based innovations may be

adopted by RRBs at different stages of their
development for providing competitive
customer services in a cost-effective
manner.
The induction of technology in RRBs may

be monitored by a national-level Standing
Committee that may guide RRBs on various
issues arising out of the implementation of
computerization plans by various RRBS
The regulatory framework for RRBs must

be on the lines of those for commercial
banks with provision for such bank-specific
Banking Briefs
414
relaxations as may be necessary for

specific time period. RRBs may also be
subjected to the statutory norms of
licensing and each RRB should be required
to obtain a license from the Reserve Bank
under the provisions of the Banking
Regulation Act, 1949 within a specific time
period.
361
KUMAR MANGALAM BIRLA COMMITTEE

(On corporate governance)
Report submitted in March, 2000
Report submitted in Mar 2000.
Dealt with Corporate Governance aimed to protect investor interests.
Made 25 recommendations of which 19 are mandatory.
Some recommendations: Board to have atleast 50% non-executive directors; setting

up of audit committee; regular meeting of board and redressal of shareholders
complaints.
The chairman of the Audit Committee
should be an independent director. The
chairman of the Audit Committee should be
present at the Annual General Meeting to
answer shareholderqueries. The Audit
Committee should invite such of the
executives, as it considers appropriate to
be present in the meetings of the
committee, but on occasions it may meet
without the presence of any executives of
the company. The finance director and head
of internal audit and when required, a
representative of the external auditor should
be present as invitees for the meeting of
the Audit Committee. The company
secretary should act as the secretary to the
Committee.
On May 7, 1999 SEBI constituted an 18-member

committee, chaired by Mr. Kumar Mangalam
Birla (a chartered accountant himself), on
Corporate Governance, mainly with a view to
protecting investors interests. The Committee
made 25 recommendations, 19 of them
mandatory in the sense that these were
enforceable and the rest non-mandatory. The
listed companies are obliged to comply with
these on account of the contractual obligation
arising out of the listing agreement with stock
exchanges.
Mandatory Recommendations:
1.
The recommendations of the Committee

are applicable to all the listed companies.
2.
The board of a company should have an

optimum combination of executive and nonexecutive directors with not less than 50%
of the board comprising of non-executive
directors.
3.
The board of a company should set up a

qualified and an independent Audit
Committee.
4.
The Audit Committee should have minimum

three members, all being non-executive
directors, with the majority being
independent, and with at least one director
having financial and accounting knowledge.
Banking Briefs
415
5.
The Audit Committee should meet at least

thrice a year.
6.
The quorum should be either two members

or one-third of the members of the Audit
Committee, whichever is higher, and there
should be a minimum of two independent
directors.
7.
The Audit Committee should have powers

to investigate any activity within its terms of
reference, to seek information from any
employee, to obtain outside legal or
professional advice, and to secure
attendance of outsiders if necessary.
362
8.
9.
The Audit Committee should discharge

various roles such as, reviewing any
change in accounting policies and practices;
compliance with Accounting Standards;
compliance with Stock Exchange and legal
requirements concerning financial
statements; the adequacy of internal control
systems; the companys financial and risk
management policies etc.
The Board of Directors should decide the
remuneration of the non-executive directors.
10. Full disclosure should be made to the

shareholders regarding the remuneration
package of all the Directors.
11. The Board meetings should be held at least
four times a year.
12. A director should not be a member in more
than ten committees or act as the chairman
of more than five committees across all
companies in which he is a director. This is
done to ensure that the members of the
Board give due importance and
commitment of the meetings of the Board
and its committees.
13. As part of the directors report, a Managing
Discussion and Analysis report should form
part of the annual report to the shareholders.
This report should include discussion on
matters such as industry structure and
developments, opportunities and threats,
segment-wise
or
productwise
performance, outlook, risks and concerns,
internal control systems and their adequacy
and material developments in human
resources/industrial relations front.
14. The management must make disclosures
to the Board relating to all material, financial
and commercial transactions, where they
have personal interest.
resume of the director, his expertise and the

names of companies in which the person
also holds directorship and the membership
of committees of the Board.
16. A Board committee should be formed to
look into the redressal of shareholders
complaints like transfer of shares, nonreceipt of balance sheet, dividend etc.
17. To expedite the process of share transfers
the board of the company should delegate
the power of share transfer to an officer, or
a committee or to the registrar and share
transfer agents, who should attend to share
transfer formalities at least once in a
fortnight.
18. There should be a separate section on
Corporate Governance in the annual reports
of the companies with a detailed
compliance report.
19. The company should arrange to obtain a
certificate from the auditors of the company
regarding compliance of mandatory
recommendations and annexe the
certificate with the directors report, which
is sent annually to all the shareholders of
the company. The same certificate should
be sent to the stock exchange along with
the annual returns filed by the company.
Non-Mandatory Recommendations
1.
Non-executive Chairman should be entitled

to maintain a Chairmans office at the
companys expense and also allowed
reimbursement of the expenses incurred in
performance of his duties.
2.
The Board should set up a Remuneration

Committee to determine the companys
policy on specific remuneration packages
for Executive Directors.
3.
In order to avoid conflicts, the Remuneration

Committee should have atleast 3 directors,
all of whom should be non-executive
directors.
15. In case of the appointment of a new director

or reappointment of a director, the
shareholders must be provided with a brief
Banking Briefs
416
363
4.
All the members of the Remuneration

Committee should be present at the
meeting of the Remuneration Committee.
5.
The Chairman of the Remuneration

Committee should be present at the Annual
General Meeting, to answer shareholder
queries.
6.
Half-yearly declaration of financial

performance including summary of the
significant events in the last six months
should be sent to each shareholder.
The Committee felt that some of the

recommendations are absolutely essential for
the framework of Corporate Governance and
virtually form its code, while others could be
considered as desirable and hence settled for
two classes of recommendations.
SEBI has given effect to the Kumar Mangalam
Committees recommendations by a direction
to all the Stock Exchanges to amend their listing
agreement with various companies in
accordance with the mandatory part of the
recommendations.
Banking Briefs
417
364
NARASIMHAM COMMITTEE - I
(On Financial Sector Reforms-1991)
Purpose: To suggest measures for banking sector reforms
Some key recommendations: Reduction in SLR/CRR; deregulation of interest rate;

introduction of IRAC norms; creation of ARF; entry of private/new banks; abolition of
branch licensing; liberal opening of foreign offices; shift to syndicated lending; removal
of dual control of RBI and Govt.
Some of the important recommendations of

the Committee are as follows:
1. Reduction in SLR/CRR. SLR to be brought
down in a phased manner in about 5 years. SLR
should not be a major instrument for financing
the Public Sector. RBI should have the flexibility
to operate the CRR to serve its monetary policy
objectives.
Interest rate on SLR investments and on CRR
in respect of impounded deposits above the
basic minimum should be increased. Rates on
SLR investments should be progressively
market-related while that on the CRR above the
basic minimum should be broadly related to
banks average cost of deposits.
2. Directed Credit. For redistributive objective,
the fiscal system should be used rather than
the credit system. Directed credit programmes
should be phased out. Priority sector should be
redefined to include the weaker sections. The
credit target for the redefined priority sector
should be 10% of the aggregate credit.
3. Deregulation of Interest Rates.
Deregulation to reflect emerging market
conditions. Interest rate on Govt. borrowings
gradually brought in line with market-determined
rates. Interest rate structure should bear a
relationship to the Bank Rate. Desirable to
provide for a prime rate, which would be the floor
of the lending rates of banks and DFIs.
4. Capital Adequacy. The BIS standard of 8%
should be achieved by Banks & FIs by March 1996.
Banking Briefs
418
5. Income Recognition & Classification of

Assets. No income to be recognised in NPAs.
An asset would be considered non-performing
if interest on such assets remains past due for
a period exceeding 180 days as at the balance
sheet date.
6. Transparency of Balance Sheet. Balance
Sheets of banks and FIs should be made
transparent with full disclosures.
7. Alignment with Income Tax Rules. Criteria
recommended for NPAs and provisioning
requirements be given due recognition by the
tax authorities.
8. Creation of Assets Reconstruction Fund
(ARF). An Assets Reconstruction Fund should
be established to take over from the banks and
FIs a portion of the bad and doubtful debts at a
discount, the level of discount being determined
by independent auditors on the basis of clearly
stipulated guidelines. The ARF should be
provided with special recovery powers. Capital
of ARF to be subscribed by the public sector
banks and FIs.
All bad and doubtful debts should be transferred
to the ARF in a phased manner. Banks and FIs
should pursue recovery through the special
tribunals.
Banks/DFIs would have to write off the
losses incurred on account of transfer of doubtful
assets to ARF, which may be difficult due to their
weak capital position. GOI should, where
365
necessary, provide a subordinated loan counting

for capital to meet this contingency.
9. Proposed Structure of the Banking
System. Suggested Structure:
a)
3 or 4 large banks (including SBI),

international in charac-ter.
b)
8 to 10 National Banks with a network of

branches throughout the country engaged
in universal banking.
c)
Local banks whose operations would be

generally confined to a specific region. and
d)
Rural banks (including RRBs) whose

operations would be confined to the rural
areas and predominantly engaged in the
financing of agriculture/allied activities.
The revised system should be marketdriven and

based on profita-bility considerations and brought
about through a process of mergers and
acquisitions.
10. Setting up of Rural Banking Subsidiaries.
Each Public Sector Bank to set up one or more
rural banking subsidiary, to take over all its rural
branches, and where appropriate, swap its rural
branches with those of other banks, depending
on the size/administrative convenience of the
sponsor bank. Such rural banking subsidiaries
should be treated at par with RRBs in regard to
SLR/CRR requirements and refinance facili-ties
from NABARD. Interest rate structure of RRBs
should be in line with those of the commercial
banks. RRBs may have the option to merge
with the sponsor banks (becoming a separate
100%- owned subsidiary) or to maintain a
separate identity.
11. Entry of Private/New Banks. No further
nationalisation of banks. Private Sector Banks
should be on par with Public Sector Banks.
There should be no bar for entry of new banks
in the private sector, subject to meeting statutory
and other requirements.
Banking Briefs
419
12. Branch Licensing/Expansion. Branch

licensing should be abolished. Opening/closing
of branches (other than rural branches for the
present) should be left to the commercial
judgment of the individual banks.
13. Entry of Foreign Banks. RBI should allow
foreign banks to open branches/subsidiaries
more liberally, subject to fulfilling usual
requirements. Foreign banks should be placed
on par with domestic banks.
14. Rationalisation of Foreign Operations of
Indian Banks. In addition to SBI, there is scope
for one or more of the large banks to have
operations abroad in major international financial
centres and in regions with strong ethnic
presence.
15. Freedom from RBI/GOI Directives in
Internal Administration. Various RBI/GOI
guidelines/directives in relating to internal
administration such as creation/categorisation
of posts, promo-tion procedures etc. affecting
the banks should be rescinded.
16. Supervision over Banks. Supervision to
be based on evolving prudential norms and
regulations, and not excessive controls. Greater
emphasis on internal audit and inspection
systems.
17. Removal of Dual Controls. RBI should be
the primary agency for regulating the banking
system and dual control of RBI and Ministry of
Finance-Banking Division should end. A
separate authority to operate as a quasiautonomous body under the aegis of RBI should
be set up, Govt. should not engage in directing
regulatory functions.
18. Depoliticising Appointments of CMDs.
Appointments to CMDs posts may be made by
the Govt. as hitherto. They should be based on
a convention of accepting recommendations of
a group of eminent persons.
366
19. Consortium Lending. Existing Consortium

lending system should be changed to
syndication or participation in lending, at the
instance of not only the lenders but also the
borrowers.
Commercial banks should be encouraged to
provide term finance to industry. DFIs should
increasingly engage in providing core working
capital, thus enhancing, healthy competition
between banks and DFIs.
20. State-level Financial Institutions. To be
distanced from the State Governments and to
function on business principles based on
prudential norms, and to have a management
set-up suited for this purpose.
Conclusion
The Committee sought to consolidate the gains
made in the Indian financial sector while
improving the quality of portfolio, providing
greater operational flexibility, and autonomy in
the internal operations of banks and FIs, so as
to usher in a healthy competitive and vibrant
financial sector.
Banking Briefs
420
367
NARASIMHAM COMMITTEE - II
(On Banking Sector Reforms - 1998)
To review the progress in Banking sector reforms
Major areas covered: Strengthening capital adequacy, Asset quality, Prudential norms
& disclosure requirements; Systems and methods in Banks and structural issues
Some recommendations: Marking government security to market; increase in CAR;

transferring NPA to ARC as a one time measure; reduction in transit time from substandard to doubtful; provision for standard asset; bringing down government holding in
nationalized banks.
Financial sector reform process in India, as a

part of the broader programme of structural
economic reforms, was initiated in 1992. There
have been major changes in the
macroeconomic environment, policy and
institutional development. Thus the need was
felt to examine the problem issues and review
some of the recommendations made earlier to
see their relevance in the changed environment.
Accordingly, a Committee was set up under the
chairmanship of Shri M. Narasimham mainly to
review the progress in banking sector reforms
over the past six years, especially with reference
to the recommendations made by CFS. The
report of the Committee was submitted on April
24, 1998.
Risk weight on a government guaranteed

advance should be the same as for other
advances. This should be made
prospective from the time the new
prescription is put in place.
Foreign exchange open credit limit risks

should be integrated into the calculation of
risk weighted assets and should carry a 100
per cent risk weight.
CRAR be increased from the existing 8 per

cent to 10 per cent; an intermediate
minimum target of 9 per cent be achieved
by 2000 and the ratio of 10 per cent by 2002.
PSBs which are in a position to access the

capital market to be encouraged.
The
following
are
the
important
recommendations of the Committee:
Asset Quality
Strengthening Capital Adequacy
An asset be classified as doubtful if it is in

the substandard category for 18 months in
the first instance and eventually for 12
months, and loss if it has been identified
but not written off.
For evaluating the quality of assets portfolio,

advances covered by Government
guarantees, which have turned sticky, be
treated as NPAs.
For banks with a high NPA portfolio, two

alternative approaches could be adopted.
One approach can be that, all loan assets
Capital adequacy requirements should take

into account market risks in addition to the
credit risk. It implies taking into account the
larger exposure of banks to off-balance
sheet risks.
In the next three years the entire portfolio of
government secu-rities should be marked
to market and the schedule for the same
announced at the earliest; government and
other approved securities which are now
subject to a zero risk weight, should have a
5 per cent weight for market risk.
Banking Briefs
421
368
in the doubtful and loss categories, should

be identified and their realisable value
determined. These assets could be
transferred to an Assets Reconstruction
Company (ARC) which would issue NPA
Swap Bonds.
An alternative approach could be to enable
the banks in difficul-ty to issue bonds which
could form part of Tier II capital, backed by
government guarantee to make these
instruments eligible for SLR investment by
banks, LIC, GIC and Provident Funds.
The interest subsidy element in credit for

the priority sector should be totally
eliminated and interest rate on loans under
Rs. 2 lakhs should be deregulated for
scheduled commercial banks as has been
done in the case of Regional Rural Banks
and cooperative credit institutions.
Prudential Norms
Requirements
and
In India, income stops accruing when

interest or instalment of principal is not paid
within 180 days, which should be reduced
to 90 days in a phased manner by 2002.
Introduction of a general provision of 1 per
cent on standard assets in a phased
manner be considered by RBI.
As an incentive to make specific provisions,

they may be made tax deductible.
Systems and Methods in Banks

There should be an independent loan review
mechanism especially for large borrowal
accounts and systems to identify potential
NPAs. Banks may evolve a filtering
mechanism by stipulating in-house
prudential limits beyond which exposures
on single/group borrowers are taken
keeping in view their risk profile as revealed
through credit rating and other relevant
factors.
Banking Briefs
422
Banks and FIs should have a system of

recruiting skilled manpower from the open
market.
Public sector banks should be given

flexibility to determine managerial
remuneration levels taking into account
market trends.
There may be a need to redefine the scope

of external vigilance and investigation
agencies with regard to banking business.
There is need to develop information and

control system in sever-al areas like better
tracking of spreads, costs and NPAs for
higher profitability, accurate and timely
information for strate-gic decision to identify
and promote profitable products and
customers.
Public sector banks should speed up

computerisation and focus on relationship
banking.
Disclosure
Structural Issues
With the conversion of activities between

banks and DFIs, the DFIs should, over a
period of time convert themselves to banks.
Mergers to Public Sector Banks should

emanate from the management of the
banks. Merger should not be seen as a
means of bailing out weak banks. Mergers
between strong banks/FIs would make for
greater economic and commercial sense.
Weak Banks may be nurtured into healthy

units by slowing down on expansion,
eschewing high cost funds/borrowings etc.
Small local banks should be confined to

states or cluster of districts in order to serve
local trade, small industry and agriculture.
The minimum share of holding by

Government/Reserve Bank in the equity of
the nationalised banks and the SBI should
be brought down to 33%.
369
There is a need for a reform of the deposit

insurance scheme based on CAMELs
ratings awarded by RBI to banks.
Inter-bank call and notice money market and

inter-bank term money market should be
strictly restricted to banks; only exception
to be made is primary dealers.
Non-bank parties be provided free access

to bill rediscounts, CPs, CDs, Treasury
Bills, MMMF.
RBI should totally withdraw from the primary

market in 91 days Treasury Bills.
Functions of banks boards and

management need to be reviewed so that
the boards remain responsible for
enhancing shareholder value through
formulation of corporate strategy, and not
get involved in credit-decision making and
other aspects of day-to-day management.
The Committee made a strong pitch for
professionalising and depoliticising of bank
boards, especially for appointment of nonofficial directors.
Banking Briefs
423
370
GOIPORIA COMMITTEE
(On Customer Service)
Purpose; To suggest measures to improve customer service
Some recommendations: Employees working hours to be 15 minutes earlier; extension

of business hours; nomination facility; passbook system for TDRs; introduction of bank
order; instant credit for outstation cheques; value dating of TTs; single window approach
for consortium finance; wearing Identity badges; optimum branch size; pay telephones
in large branches.
The following are some of the major

recommendations of the Committee:
Introduction of notes/coins counting

machines where volume of work warrants.
Commencement of employees working

hours 15 minutes before commencement
of business hours at branches in
metropolitan and urban centres.
Nomination should be made a rule, to cover

all other existing and new accounts, unless
customer decides otherwise; also for safe
custody articles and safe deposit lockers.
Attending to all the customers who enter the

banking hall before the close of business
hours.
Encouragement of Savings Bank accounts

by offering better rate of interest.
Extension of business hours for

transactions except cash, up till one hour
before close of the working hours.
Manning of all counters during the business

hours.
Advance instructions from depositors for

disposal of the deposit on maturity may be
obtained in the application form itself:
wherever such instructions are not obtained,
intimation regarding deposit becoming due
should be sent, as a rule.
Provision for enquiry counters near the entry

point at all branches, except very small
branches.
Banks may accept term deposits in units

of Rs. 5000/- or in its multiples, and issue
pass books (doing away with deposit
receipt system).
Provision for one or more Teller counters at

area 1 centres, including state capitals, at
one or more branches for cash
trans-actions upto Rs. 5000 and for noncash transactions upto Rs. 10000/-.
Change in interest rates on deposits should

be made applica-ble to the existing deposits
also.
Change in interest rates on deposits should

be made known to customer as well as bank
branches by press notifications, based on
which branches should be enabled to
accept deposits at new rates provisionally,
to be confirmed later on by receipt of official
communication.
Bank orders, like postal orders, may be

introduced in denominations of Rs.5,
Acceptance of small denomination notes

from customers as well as from noncustomers for issuance of drafts.
Monitoring by RBI of cash handling by bank

branches and functioning of currency
chests.
Providing more user friendly service relating

to exchange of mutilated and soiled notes.
Banking Briefs
424
371
Rs.20, Rs.100, Rs.500, Rs.1000 etc.

pro-viding for payees name to be filled in
by the purchaser.
Single-window approach with regard to

documentation of consor-tium finance may
be promoted actively.
Facility of instant credit of outstation

cheques may be raised to Rs. 5000 (from
Rs. 2500). A separate type of pay-in-slip
may be evolved for availing of this facility.
Where delay in crediting bill proceeds can

be attributed to the bank, it should pay
interest to the lodger for the delayed period
at the rate of 2% above savings bank
interest rate.
More centres may be notified for creation

of equitable mortgages, covering district
headquarters to start with. In the long run,
notified centres concept may be done away
with, by suitable statutory amendment.
Each employee may wear on his person

an identity badge with photograph and
name.
Periodic change of desk and entrustment

of elementary super-visory jobs may be
considered for clerical employees.
Training programmes should be with a

customer service orientation.
Induction training should be a must for all

newly recruited clerical and officer
employees.
Quality circles may be encouraged.
Reward and recognition system should be

used effectively.
Employees unions and officers

associations should be invited to radiate
spirit of customer service towards one and
all of the banks employees.
At metro and urban centres work may be

automated and modern techniques of
working may be adopted, where necessary,
in consul-tation with the Unions.
Customer transactions, especially transfer

of funds, may be attended to by putting to
effective use BANKNET. S.W.I.F.T. Remote
Area Business Message Network (RABMN).
etc.
Complaint book with perforated copies in

each set may be introduced, designed so
Dishonoured instruments may be returned/

despatched to the customer within 24 hours.
If remittance of proceeds is delayed beyond

two days by paying bank, it should reimburse
the collecting bank interest for such delay.
Telegraphic Transfer (TTs) issued and

payable at Area 1 centres including state
capitals may be value-dated on third day;
other remittances may be credited on
receipt of telegram or confirmation thereof
whichever is received earlier.
Clearing houses may be set up at centres

having ten or more banks; lead bank of the
district may manage such clearing house.
More centres may be covered by National
Clearing.
Working capital applications may be

processed by banks simultaneously with
financial institutions dealing with term loan
applications.
After agreeing at consortium meetings,

processing and sanc-tioning its own share
of credit facility by any member bank should
be within 45 days. Disbursement of such
agreed share should not be delayed for
constraint of funds, which the bank should
arrange on its own initiative.
Banking Briefs
425
372
as to instantly provide an acknowledgement

to the customer and intimation to the
controlling office.
Branch level Customer Service

Committees should be rejuve-nated.
Inspectors and auditors should give due
importance in their reports to customer
service aspects, such as efficacy of
com-plaints handling and grievance
redressal machinery.
Public relations oriented officers may be
posted to complaint prone branches with a
view to converting these into good customer
service units.
Senior officials from controlling offices may
give priority to customer service aspects
during their branch visits, cross--checking
actual atmosphere with a copy of the
customer service report.
Restricted holidays on Government pattern,
may be intro-duced in banks also, to provide
more working days. The number of holidays
in a year including restricted holidays should
not be more than 15 days in any state.
Specialised branches may be opened for
catering to exclusive customer segments.
Personalised service may be promoted by
levy of higher service charges, if necessary.
Banking Briefs
426
Optimum branch size may be determined.

For the present, branches should have staff
strength not exceeding 100 and business
level not beyond Rs 200 crores.
Unwieldy large branches may be trimmed,

by carving out certain functional areas to
be spun off to new specialised branches.
Instead of joint publicity by public sector

banks, individu-al bank may do its own
publicity campaigns: wherever public in
general is the target group, the Indian Banks
Association may undertake publicity on
behalf of the banks.
In predominantly residential areas, banks

may observe Sunday working, adjusting
weekly offs suitably.
Banks should arrange for pay telephones

in large branches.
Credit cards and other innovative products

like ATMs may be floated on a joint venture
basis.
Best branches from customer service point

of view should be rewarded by annual
awards/running shield.
Time norms for specialised business

transactions should be displayed
predominantly in the banking hall.
373
STATISTICAL
PROFILE
Banking Briefs
427
It is a perforated copy. You can use this as your Desktop
SBI- PERFORMANCE AS ON 31.03.2005

(Rs in Crore)
BUSINESS
31.03.2005
31.03.2004
31.03.2003
Global deposits
367047
318619
296123
Of which domestic
352798
309798
288866
Global Advances
Of which domestic
202374
178474
157934
142026
137758
123850
Global investments
Of which domestic
197097
192456
185676
181684
172347
167885
4304
3681
3105
Total Income
39548
38073
36827
Total Exp excl

28557
28519
33722
526
526
526
Reserves & Surplus
23545
19705
16677
Capital Adequacy(%)
12.45
13.53
13.50
32428
30460
31087
Non interest income
7120
7613
5740
Operating Expenses
10074
9245
7942
6685
5872
4670
18.10
18.19
18.05
125
110
85
Cost of deposits(%)
4.70
5.48
6.43
Yield on advances (%) domestic
7.68
8.17
8.97
Net Interest Margin
3,39
3.04
2.95
81.79
69.94
59
36.61
38.69
38
2.65
3.48
4.50
459882
407815
375876
Return on average assets (%)
0.99
0.94
0.86
Profit per employee (Rs in lacs)
2.07
1.77
1.48
243
210
191
RBI shareholding (%)
59.73
59.73
59.73
Market share of deposits (excl RIB/IMD/Interbank) (%)
16.78
17.33
17.60
Market share- Advances (%)
16.45
16.87
17.54
Net Profit
CAPITAL STRUCTURE
Capital
PROFITABILITY
Interest income

ROE(%)
Dividend(%)
EPS (for Rs.10 share) in Rs.

OTHER INFORMATION
Priority Sec Advances as % of total advances
Net NPAs as % of total advances(%)
Balance sheet- total assets
Business per employee(Rs in lacs)
Banking Briefs
428
Branches (including foreign offices)
9156
9093
9033
No of ATMs installed
5217
3814
1305
No of Branches having Internet Banking
2225
1110
531
205
207
209
31.03.2005
31.03.2004
31.03.2003
6907
6447
5688
Officers
29.32
28.71
27.5
Clerical
45.65
46.17
47.1
Sub Staff
25.03
25.12
25.4
Core Banking Branches
1093
40
260
94
4819
4215
210
156.85
128.70
- Deposits
24.51
26.05
27.40
- Advances
24.05
24.22
24.40
No of employees (in 000s)

New Additional Information
Staff Cost (in Crore)
Break up of Staff (%)
Trade Finance Software (Branches)

SBI Connect (Branches)
- Group
Net Profit of Foreign Offices (in crores)
SBI Groups Market Share (%)
Banking Briefs
429
FINANCIAL PERFORMANCE OF STATE BANK GROUP

as at 31.03.2005
(Amount in Rs. Crore)
Item
2003-04
2004-05
Variation
Absolute
Percentage
51,875.27
53,512.54
1,637.27
3.16
(100.00)
(100.00)
Interest Income
40,956.39
44,045.35
3,088.96
7.54
(78.95)
(82.31)
of which : Interest on Advances
16,250.05
18,919.56
2,669.51
16.43
20,864.16
21,326.48
462.32
2.22
10,918.88
9,467.19
-1,451.69
-13.30
(21.05)
(17.69)
4,217.36
4,792.99
575.63
13.65
46,256.55
47,836.68
1,580.13
3.42
(100.00)
(100.00)
25,395.15
24,842.08
-553.07
-2.18
(54.90)
(51.93)
of which : Interest on Deposits
24,027.79
23,275.67
-752.12
-3.13
ii) Provisions and Contingencies
8,744.80
9,584.29
839.49
9.60
(18.90)
(20.04)
A. Income (i+ii)
i)
Income on Investments
ii) Other Income
of which : Commission and Brokerage
B. Expenditure (i+ii+iii)
i)
Interest Expended
of which : Provision for NPAs

iii) Operating Expenses
of which : Wage Bill
51,999.92
1,406.83
-3,793.09
-72.95
12,116.60
13,410.31
1,293.71
10.68
(26.19)
(28.03)
8,318.98
9,009.43
690.45
8.30
14,363.52
15,260.15
896.63
6.24
5,618.72
5,675.86
57.14
1.02
15,561.24
19,203.27
3,642.03
23.40
5,49,123.72
6,27,074.70
77,950.98
14.20
C. Profit
i)
Operating Profit
ii) Net Profit

D. Net Interest Income / Margin
E. Total Assets
Note Figures in brackets are percentage share to the respective total.
Source : Report on Trend and progress of banking in India, 2004-05.
Banking Briefs
430
376
FINANCIAL PERFORMANCE OF SCHEDULED COMMERCIAL BANKS

Item
2003-04
1
A. Income (i+ii)
i)
Interest Income
Absolute
Percentage
1,83,872.12
1,93,268.88
9,396.76
5.11
100.00
100.00
1,44,346.81
1,58,438.26
14,091.45
9.76
19.31
(78.50)
(81.98)
83,573.94
13,524.09
66,104.78
66,171.79
67.01
0.10
Other Income
39,525.31
34,830.62
-4,694.69
-11.88
(21.50)
(18.02)
of which : Commission and Brokerage
11,837.60
14,913.49
3,075.89
25.98
1,61,601.18
1,71,948.72
10,347.54
6.40
3,974.25
4.54
Income on Investments
B. Expenditure (i+ii+iii)
i)
Variation
70,049.85
of which : Interest on Advances

ii)
2004-05
Interest Expended
(100.00)
(100.00)
87,562.75
91,537.00
(54.18)
(53.24)
of which : Interest on Deposits
77,667.58
77,611.84
-55.74
-0.07
Provisions and Contingencies
30,329.28
30,363.86
34.58
0.11
(18.77)
(17.66)
of which : Provision for NPAs
17,441.31
7,105.92
-10,335.39
-59.26
Operating Expenses
43,709.15
50,047.86
6,338.71
14.50
(27.05)
(29.11)
of which : Wage Bill
26,359.53
29,032.26
2,672.73
10.14
i)
Operating Profit
52,600.22
51,684.02
-916.20
-1.74
ii)
Net Profit
22,270.94
21,320.16
-950.78
-4.27
56,784.06
66,901.26
10,117.20
17.82
19,74,017.00
23,55,982.67
3,81,965.67
19.35
ii)
iii)
C. Profit
D. Net Interest Income / Margin

E. Total Assets
Note : Figures in brackets are percentage share to the respective total.
Banking Briefs
431
Banking Briefs
432
378
12,29,462.52
1,41,318.27
3,21,016.66
7,67,127.59
Reserves and Surplus
Deposits
3.1. Demand Deposits
3.2. Savings Bank Deposits
3.3. Term Deposits
3.
61,994.34
87,616.41
14,71,077.38
58,308.21
60,483.70
100.00 16,92,578.55
3.96
12,552.02
3,98,059.06
3,48,556.25
62,642.41
8,09,257.72
92,514.37
15,463.25
3,249.48
5,49,447.26
0.87
100.00
3.57
0.74
23.52
20.59
3.70
47.81
5.47
0.91
0.19
32.46
32.65
39.03
3.66
5.18
100.00
7.98
2.53
52.25
22.27
9.42
83.94
4.68
# : Including the impact of conversion of a non-banking entity into a banking entity.
Total Assets
Other Assets
6.
11,531.49
0.78
19.35
4.3. Term Loans
2,84,697.02
4.2. Cash Credit, overdrafts, etc.3,00,412.46
Fixed Assets
3.26
20.42
4.1. Bills purchased and discounted47,926.01
43.03
6.72
6,33,035.49
98,906.45
3.3. In non-approved Securities
Loans and Advances
1.16
3.2. In other approved Securities 17,137.45
34.50
0.19
5,07,451.67
2,780.10
b) Outside India
a) In India
5,52,696.74
3.93
5.73
3.1. In Government Securities (a+b)5,10,231.77 34.68
5.
4.
1,35,009.46
42,874.14
8,84,446.87
3,76,883.99
1,59,419.6
100.00 16,92,578.55
9.98
2.06
52.15
21.82
9.61
6,60,674.36
6,26,175.69
57,784.74
84,241.76
14,71,077.38
79,139.46
1,4805.57
83.58 14,20,749.92
4.39
1.00
42.57
Investments
money at call and short notice
Balances with banks and
2.
3.
Cash and balances with RBI
1.
Assets
Total Liabilities
Other Liabilities and Provisions 1,32,115.86
5.
30,256.50
Borrowings
4.
64,566.94
Capital
2.
14,675.56
2005
Amount Per cent
to total
2004
Public Sector Banks
Amount Per cent

to total
1.
Liabilities
Item
17,73,938.80
64,833.11
13,441.44
4,39,832.66
3,49,839.94
64,998.69
8,54,671.29
1,02,670.81
15,463.25
3,249.48
5,64,345.51
5,67,594.99
6,85,729.05
65,271.60
89,992.31
17,73,938.80
1,45,335.26
92,879.68
8,93,770.96
3,78,775.88
1,63,305.72
14,35,852.56
84,343.96
15,527.34
100.00
3.65
0.76
24.79
19.72
3.66
48.18
5.79
0.87
0.18
31.81
32.00
38.66
3.68
5.07
100.00
8.19
5.24
50.38
21.35
9.21
80.94
4.75
0.88
Amount Per cent

to total
2005#
2004
9,21,953.66
34,332.05
8,181.99
1,85,057.47
2,00,523.35
26,938.87
4,12,519.69
71,066.75
11,784.71
2,577.16
2,93,445.42
2,96,022.58
3,78,874.04
29,966.23
58,079.66
9,21,953.66
62,593.11
13,441.07
5,02,387.39
2,14,311.11
77,727.56
7,94,426.26
37,853.46
13,639.76
100.00
3.72
0.89
20.07
21.75
2.92
44.74
7.71
1.28
0.28
31.83
32.11
41.09
3.25
6.30
100.00
6.79
1.46
54.49
23.25
8.43
86.17
4.11
1.48
2005
10,65,503.85
35,593.35
9,008.12
2,49,916.57
2,39,425.43
35,188.86
5,24,530.86
67,634.37
10,817.33
2731.66
3,18,786.75
3,21,518.41
3,99,970.11
33,925.20
62,396.21
10,65,503.85
69,823.68
19,398.71
5,76,275.63
2,50,666.64
88,158.24
9,15,100.51
47,411.18
13,769.77
10
100.00
3.34
0.85
23.46
22,47
3.30
49.23
6.35
1.02
0.26
29.92
30.18
37.54
3.18
5.86
100.00
6.55
1.82
54.08
25.53
8.27
85.88
4.45
1.29
11
Amount Per cent

to total
Nationalised Banks
Amount Per cent

to total
(As at end - March)

2004
5,49,123.72
23,976.16
3,349.50
99,639.55
99,889.11
20,987.14
2,20,515.80
27,739.72
5,352.74
202.94
2,14,006.25
2,14,209.19
2,47,301.65
27,818.51
26,162.10
5,49,123.72
69,522.75
16,815.43
2,64,740.20
1,06,705.35
63,590.71
4,35,036.26
26,713.48
1,035.80
12
28,069.14
25,220.20
6,27,074.70
65,185.78
23,475.43
3,08,171.24
1,26,217.35
71,260.82
5,05,649.41
31,728.28
1,035.80
14
100.00
4.37
0.61
18.15
18.19
3.82
40.16
5.05
0.97
0.04
38.97
39.01
6,27,074.70
24,890.35
3,463.90
1,48,142.49
1,09,130.82
27,453.55
2,84,726.86
24,880.00
4,645.92
517.82
2,30,660.51
2,31,178.33
100.00
3.97
0.55
23.62
17.40
4.38
45.41
3.97
0.74
0.08
36.78
36.87
41.57
4.48
4.02
100.00
10.40
3.74
49.14
20.13
11.36
80.64
5.06
0.17
15
Amount Per cent

to total
45.04 2,60,704.215
5.07
4.76
100.00
12.66
3.06
48.21
19.43
11.58
79.22
4.86
0.19
13
Amount Per cent

to total
2005

State Bank Group
CONSOLIDATD BALANCE SHEET OF PUBLIC SECTOR BANKS
Banking Briefs
433
379
0.82
100.00
4.26
2.16
30.71
12.27
3.50
46.48
10.73
0.22
0.03
26.18
26.20
37.15
4.04
5.91
100.00
9.70
10.99
51.34
10.92
10.93
73.18
5.31
3,67,299.50
6. Other Assets
Total Assets
7,924.10
15,656.63
5. Fixed Assets
1,12,794.36
45,064.82
4.2. Cash Credit, overdrafts, etc.
4.3. Term Loans
12,868.58
4.1. Bills purchased and discounted
1,70,727.76
39,406.40
4. Loans and Advances
790.67
96.83
96,142.61
96,239.44
1,36,436.51
14,828.93
21,725.57
3.2. In other approved Securities
b) Outside India
a) In India
3.1. In Government Securities (a+b)
3. Investments
2. Balances with banks and
1. Cash and balances with RBI
Assets
3,67,299.50
35,636.62
5. Other Liabilities and Provisions
Total Liabilities
40,365.62
4. Borrowings
1,88,554.54
40,093.07
3.3. Term Deposits
40,134.73
2,68,782.34
3. Deposits
3,028.14
19,486.78
`2
2. Reserves and Surplus
Per cent
to total
2004
2005
4,27,915.51
18,156.50
7,726.76
1,47,669.95
56,448.69
17,029.98
2,21,148.62
42,083.92
613.00
113.58
97,077.49
97,191.07
1,39,887.99
19,671.45
21,324.19
4,27,915.51
38,259.95
44,443.41
2,18,745.55
50,662.98
45,221.19
3,14,629.72
27,217.93
3,364.50
Amount
Public Sector Banks
Amount
1. Capital
Liabilities
Item
100.00
4.24
1.81
34.51
13.19
3.98
51.68
9.83
0.14
0.03
22.69
22.71
32.69
4.60
4.98
100.00
8.94
10.39
51.12
11.84
10.57
73.53
6.36
0.79
Per cent
to total
1,20,723.75
3,580.46
1,512.23
24,823.56
25,564.62
5,192.51
55,580.69
11,631.40
690.93
83.54
35,202.78
35,286.32
47,608.65
6,172.94
6,268.68
1,20,723.75
5,741.88
2,129.85
78,787.41
16,983.84
9,793.11
1,05,564.36
6,654.95
632.71
Amount
2004
100.00
2.97
1.25
20.56
21.18
4.30
46.04
9.63
0.57
0.07
29.16
29.23
39.44
5.11
5.19
100.00
4.76
1.76
65.26
14.07
8.11
87.44
5.51
0.52
Per cent
to total
1,33,494.06
3,828.41
1,581.53
32,475.82
30,063.05
5,645.17
68,184.04
9,338.12
522.01
75.79
34,743.40
34,819.19
44,679.32
8,135.39
7,085.37
1,33,494.06
6,481.54
2,149.69
85,259.20
20,004.24
11,672.64
1,16,936.08
7,118.35
808.40
Amount
2005
Old Private Sector Banks
(As at end - March)
100.00
2.87
1.18
24.33
22.52
4.23
51.08
7.00
0.39
0.06
26.03
26.08
33.47
6.09
5.31
100.00
4.86
1.61
63.87
14.99
8.74
87.60
5.33
0.61
Per cent
to total
2004
2,46,575.75
12,076.17
6,411.77
87,970.80
19,500.20
7,676.07
1,15,147.07
27,775.00
99.74
13.39
60,939.83
60,953.12
88,827.86
8,655.99
15,456.89
2,46,575.75
29,894.74
38,235.77
1,09,767.13
23,109.23
30,341.62
1,63,217.98
12,831.83
2,395.43
10
Amount
100.00
4.90
2.60
35.68
7.91
3.11
46.70
11.26
0.04
0.01
24.71
24.72
36.02
3.51
6.27
100.00
12.12
15.51
44.52
9.37
12.31
66.19
5.20
0.97
11
Per cent
to total
2005
2,94,421.45
14,328.09
6,145.23
1,15,194.13
26,385.94
11,384.81
1,52,964.58
32,745.80
90.99
37.79
62,334.09
62,371.88
95,208.67
11,536.06
14,238.82
2,94,421.45
31,778.41
42,293.72
1,33,486.35
30,658.74
33,548.55
1,97,693.64
20,099.58
2,556.10
12
Amount
100.00
4.87
2.09
39.13
8.96
3.87
51.95
11.12
0.03
0.01
21.17
21.18
32.34
3.92
4.84
100.00
10.79
14.37
45.34
10.41
11.39
67.15
6.83
0.87
13
Per cent
to total

New Private Sector Banks
CONSOLIDATD BALANCE SHEET OF PRIVATE SECTOR BANKS
CONSOLIDATD BALANCE SHEET OF FOREIGN BANKS IN INDIA

(As at end - March)
Item
2004
2005
Amount
Per cent
to total
Amount
Per cent
to total
4.55
1
Liabilities
1. Capital
4,644.53
3.42
7,012.90
2. Reserves and Surplus
10,200.61
7.52
11,968.42
7.77
3. Deposits
80,205.49
59.13
86,504.76
56.13
21,784.27
16.06
26,068.49
16.91
12,567.56
9.27
15,505.33
10.06
3.3. Term Deposits
45,853.66
33.81
44,930.94
29.15
4. Borrowings
24,939.75
18.39
30,993.21
20.11
5. Other Liabilities and Provisions
15,649.74
11.54
17,649.07
11.45
1,35,640.12
100.00
1,54,128.36
100.00
7,278.23
5.37
6770.41
4.39
Total Liabilities
Assets
1. Cash and balances with RBI
2. Balances with banks and
3. Investments
3.1. In Government Securities (a+b)
a) In India
9,419.38
6.94
11,260.75
7.31
41,586.86
30.66
42,518.36
27.59
32,671.94
24.09
34,116.70
22.14
32,671.94
24.09
34,116.70
22.14
b) Outside India
3.2. In other approved Securities
172.22
0.13
215.22
0.14
8,742.70
6.45
8,186.44
5.31
60,507.40
44.61
75,318.25
48.87
6,172.92
4.55
7,515.55
4.88
4.2. Cash Credit, overdrafts, etc.
26,729.84
19.71
30,771.73
19.97
4.3. Term Loans
27,604.64
20.35
37,030.97
24.03
5. Fixed Assets
1,953.46
1.44
1,882.71
1.22
6. Other Assets
14,894.79
10.98
16,377.88
10.63
1,35,640.12
100.00
1,54,128.36
100.00

4. Loans and Advances
4.1. Bills purchased and discounted
Total Assets
: Nil / Negligible.
Banking Briefs
434
380
Banking Briefs
435
381
11,231.11
(2.27)
14,363.52
(2.62)
15,260.15
(2.43)
18,486.13
(2.34)
24,926.58
(2.70)
23,431.01
(2.20)
29,717.24
(2.31)
39,290.10
(2.67)
39,413.18
(2.22)
38,691.13
(2.29)
40,681.94
(2.39)
52,600.22
(2.66)
51,684.02
(2.20)
50,962.00
(2.24)
Operating
Profit
(3+11)
4,511.52
(0.91)
5,618.72
(1.02)
5,675.86
(0.91)
7,783.94
(0.98)
10,927.66
(1.19)
9,494.04
(0.89)
12,295.46
(0.96)
16,546.38
(1.12)
15,784.40
(0.89)
15,169.90
(0.90)
17,077.22
(1.01)
22,270.94
(1.13)
21,320.16
(0.91)
20,705.66
(0.91)
Net
Profit
(4-7)
2004-05
2003-04
State Bank Group

2002-03
2004-05
2003-04
Nationalised Banks
2002-03
2004-05#
2004-05
2003-04
Public Sector Banks

2002-03
2004-05#
2004-05
2003-04
Scheduled Commercial Banks

2002-03
Year
48,866.65
(9.88)
51,875.27
(9.45)
53,512.54
(8.53)
79,597.73
(10.06)
85,712.04
(9.30)
87,548.03
(8.22)
1,28,464.38
(9.99)
1,37,587.31
(9.35)
1,47,626.25
(8.32)
1,41,060.57
(8.33)
1,72,345.02
(10.14)
1,83,872.12
(9.31)
1,93,268.88
(8.21)
1,86,703.20
(8.22)
Income
(5 + 6)
40,864.01
(8.26)
40,956.39
(7.46)
44,045.35
(7.02)
66,368.04
(8.39)
68,590.96
(7.44)
73,645.20
(6.91)
107,232.05
(8.34)
109,547.35
(7.45)
123,001.99
(6.93)
117,690.55
(6.95)
140,742.48
(8.28)
144,346.81
(7.31)
158,438.26
(6.73)
153,126.82
(6.74)
Interest
Income
8,002.64
(1.62)
10,918.88
(1.99)
9,467.19
(1.51)
13,229.69
(1.67)
17,121.08
(1.86)
13,902.83
(1.30)
21,232.33
(1.65)
28,039.96
(1.91)
24,624.26
(1.39)
23,370.02
(1.38)
31,602.54
(1.86)
39,525.31
(2.00)
34,830.62
(1.48)
33,576.38
(1.48)
44,355.13
(8.97)
46,256.55
(8.42)
47,836.68
(7.63)
71,813.79
(9.38)
74,784.38
(8.11)
78,053.99
(7.33)
1,16,168.92
(9.04)
1,21,040.93
(8.23)
1,31,841.85
(7.43)
1,25,890.67
(7.44)
1,55,267.80
(9.14)
1,61,601.18
(8.19)
1,71,948.72
(7.30)
1,65,997.54
(7.30)
Other Expenditure
Income
(8+9+11)
27,206.64
(5.50)
25,395.15
(4.62)
24,842.08
(3.96)
42,645.95
(5.39)
40,369.38
(4.38)
41,446.03
(3.89)
69,852.59
(5.43)
65,764.53
(4.47)
71,223.85
(4.02)
66,288.11
(3.92)
93,596.27
(5.51)
87,562.75
(4.44)
91,537.00
(3.89)
86,601.26
(3.81)
Interest
Expended
10,428.90
(2.11)
12,116.60
(2.21)
13,410.31
(2.14)
18,465.65
(2.33)
20,416.08
(2.21)
22,670.99
(2.13)
28,894.55
(2.25)
32,532.68
(2.21)
36,989.22
(2.09)
36,081.30
(2.13)
38,066.81
(2.24)
43,709.15
(2.21)
50,047.86
(2.13)
49,139.94
(2.16)
TotaL
7,382.78
(1.49)
8,318.98
(1.51)
9,009.43
(1.44)
13,062.10
(1.65)
14,262.25
(1.55)
15,434.50
(1.45)
20,444.88
(1.59)
22,581.23
(1.54)
24,742.61
(1.39)
24,443.93
(1.44)
23,610.14
(1.39)
26,359.53
(1.34)
29,032.26
(1.23)
28,733.58
(1.26)
10
Of which:
Wage Bill
Operating Expenses
IMPORTANT FINANCIAL INDICATORS - BANK GROUP-WISE
6,719.59
(1.36)
8,744.80
(1.59)
9,584.29
(1.53)
10,702.19
(1.35)
13,998.92
(1.52)
13,936.97
(1.31)
17,421.78
(1.36)
22,743.72
(1.55)
23,628.78
(1.33)
23,521.26
(1.39)
23,604.72
(1.39)
30,329.28
(1.54)
30,363.86
(1.29)
30,256.34
(1.33)
11
Provisions
and Contingencies
13,657.37
(2.76)
15,561.24
(2.83)
19,203.27
(3.06)
23,722.09
(3.00)
28,221.58
(3.06)
32,199.17
(3.02)
37,379.46
(2.91)
43,782.82
(2.98)
51,778.14
(2.92)
51,402.44
(3.04)
47,146.21
(2.77)
56,784.06
(2.88)
66,901.26
(2.84)
66,525.56
(2.93)
12
Spread
(NII)
Banking Briefs
436
382
3,728.14
(3.20)
4,985.53
(3.68)
4,597.26
(2.98)
4,432.13
(2.31)
5,132.93
(2.08)
5,434.64
(1.85)
2,804.43
(2.67)
3,191.66
(2.64)
2,238.94
(1.70)
722.02
(0.89)
Operating
Profit
(3+11)
1,824.04
(1.56)
2,243.07
(1.65)
2,002.39
(1.30)
1,725.98
(0.90)
2,035.01
(0.83)
3,097.56
(1.05)
1,231.74
(1.17)
1,446.48
(1.20)
435.81
(0.33)
614.50
(0.76)
Net
Profit
(4-7)
12,034.58
(10.32)
13,008.35
(9.59)
13,034.44
(8.46)
20,567.23
(10.70)
21,721.43
(8.81)
22,099.23
(7.51)
11,278.83
(10.75)
11,555.03
(9.57)
10,508.96
(8.00)
6,565.68
(8.07)
Income
(5 + 6)
8,957.63
(7.68)
9,137.04
(6.74)
9,170.85
(5.95)
15,633.01
(8.13)
16,541.52
(6.71)
16,990.13
(5.77)
8,919.79
(8.50)
9,120.90
(7.56)
9,275.29
(7.06)
5,311.44
(6.53)
Interest
Income
3,076.95
(2.64)
3,871.31
(2.85)
3,863.59
(2.51)
4,934.22
(2.57)
5,179.91
(2.10)
5,109.10
(1.74)
2,359.04
(2.25)
2,434.13
(2.02)
1,233.67
(0.94)
1,254.24
(1.54)
10,210.54
(8.75)
10,76528
(7.94)
11,032.05
(7.16)
18,841.25
(9.80)
19,686.42
(7.98)
19,001.67
(6.45)
10,047.09
(9.57)
10,108.55
(8.37)
10,073.15
(7.67)
5,951.18
(7.31)
Other Expenditure
Income
(8+9+11)
5,055.01
(4.33)
4,268.52
(3.15)
4,039.91
(2.62)
12,361.45
(6.43)
11,547.82
(4.68)
10,600.40
(3.60)
6,327.22
(6.03)
5,981.88
(4.96)
5,672.84
(4.32)
4,935.74
(6.07)
Interest
Expended
3,251.43
(2.79)
3,754.30
(2.77)
4,397.27
(2.85)
3,773.65
(1.96)
5,040.68
(2.04)
6,064.19
(2.06)
2,147.18
(2.05)
2,381.49
(1.97)
2,597.18
(1.98)
907.92
(1.12)
TotaL
1,038.65
(0.89)
1,199.67
(0.88)
1,345.30
(0.87)
828.76
(0.43)
1,178.41
(0.48)
1,483.39
(0.50)
1,297.85
(1.24)
1,400.22
(1.16)
1,460.96
(1.11)
298.68
(0.37)
10
Of which:
Wage Bill
Operating Expenses
1,904.10
(1.63)
2,742.46
(2.02)
2,564.87
(1.68)
2,706.15
(1.41)
3,097.92
(1.26)
2,337.08
(0.79)
1,572.69
(1.50)
1,745.18
(1.45)
1,803.13
(1.37)
107.52
(0.13)
11
Provisions
and Contingencies
3,902.62
(3.35)
4,868.52
(3.59)
5,130.94
(3.33)
3,271.56
(1.70)
4,993.70
(2.03)
6,389.73
(2.17)
2,592.57
(2.47)
3,139.02
(2.60)
3,602.45
(2.74)
375.70
(0.46)
12
Spread
(NII)
the impact of conversion of a non-banking entity into a banking entity

The number of scheduled commercial banks in 2002-03, 2003-04 and 2004-05 were 93,90 and 88 respectively.
The number of old private banks in 2002-03, 2003-04 and 2004-05 were 21, 20 and 20 respectively.
The number of new private banks in 2003-03, 2003-04 and 2004-05 were 9, 10 and 20 respectively.
The number of foreign banks in 2002-03, 2003-04 and 2004-05 were 36, 33 and 31 respectively.
Figures in brackets are percentages to total assets.
Nil - Net Interest Income.
Scheduled commercial banks data for 2003-04 are as reported in the balance sheets for 2004-05 and hence may not tally with those reported in the Report on Trend and Progress of Banking in India, 2003-04,
to the extent the figures for 2003-04 were revised by some banks.
Source : Balance sheets of respective banks.
# : Excluding
Note : 1.
2.
3.
4.
5.
6.
7.
2004-05
2003-04
Foreign Banks
2002-03
2004-05
2003-04

2002-03
2004-05
2003-04

2002-03
Other Public Sector Bank

2004-05
Year
IMPORTANT FINANCIAL INDICATORS - BANK GROUP-WISE
Banking Briefs
437
383
8.04
7.95
7.58
6.67
7.12
11.05
8.68
6.17
6.46
8.03
8.21
7.05
7.10
7.29
6.08
13.55
6.63
7.60
7.10
5.42
5.26
8.87
6.10
5.75
6.07
14.15
7.59
Tier I
28.
20.
21.
22.
23.
24.
25.
26.
27.
Nationalised Banks
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of india
Vijaya Bank
State Bank Group
State Bank of India
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Pattala
State Bank of Saurashtra
State Bank of Travancore
IDBI Ltd.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Name of the Bank
Sr.
No.
4.11
4.65
4.10
4.94
4.96
3.16
2.77
4.88
6.07
4.08
4.40
4.47
5.58
5.49
6.07
2.68
5.28
6.54
7.10
3.79
4.20
5.91
4.60
5.51
6.02
4.01
5.33
Tier II
CRAR
15.51
12.45
12.60
11.74
11.61
12.08
14.21
11.45
11.05
12.53
12.11
12.61
11.52
12.68
12.78
12.15
16.23
11.91
14.14
14.20
9.21
9.46
14.78
10.70
11.26
12.09
18.16
12.92
Total
1.74
2.65
1.61
0.61
1.00
0.92
1.23
1.40
1.81
1.28
0.28
1.45
2.77
2.15
1.88
2.98
1.12
5.23
1.35
1.27
1.29
8.11
0.20
1.59
2.93
2.64
2.43
0.59
Net NPAs/
Net
Advances
3.35
7.70
7.75
7.33
7.67
8.15
7.34
8.49
7.77
7.83
8.06
6.86
6.71
7.40
7.28
8.28
7.84
7.48
7.34
7.77
7.40
7.89
7.04
7.11
7.50
7.96
7.93
8.00
0.79
1.69
2.15
1.33
1.23
2.69
1.23
0.85
1.58
1.57
2.67
1.39
1.29
1.20
1.48
1.46
1.97
1.35
1.45
1.26
1.00
1.62
1.39
1.07
1.09
1.23
1.78
1.35
Interest Non-Interest
Income /
Income /
Working
Working
Funds
Funds
(As at end - March 2005)
0.46
2.61
3.25
2.25
2.43
3.15
2.94
2.76
3.10
2.64
3.52
2.45
1.62
1.71
2.48
2.56
3.68
1.94
2.45
2.63
2.50
1.63
2.25
1.88
1.73
2.52
2.56
3.01
Operating
Profit /
Working
Funds
0.78
0.99
0.88
0.72
0.79
1.25
0.91
0.27
0.86
1.20
1.59
0.75
0.38
0.54
1.01
0.53
1.40
0.26
1.08
1.28
1.40
-0.45
1.12
0.82
0.73
1.10
1.04
1.43
10
Return
on
Assets
1349.60
243.08
220.29
339.74
293.88
203.54
361.15
249.60
346.25
282.00
346.25
310.37
320.00
294.65
351.12
206.89
438.00
313.00
246.00
269.48
515.00
217.57
276.87
280.22
321.00
346.72
208.00
312.89
11
6.85
2.07
1.69
1.91
2.07
2.16
2.48
0.56
2.21
2.86
3.97
1.71
0.80
1.25
2.48
0.93
3.95
0.60
1.87
2.66
5.20
-0.74
2.42
1.53
1.43
2.81
1.72
3.48
12
Business
Profit
Per
per
Employe
employee
(Amount in Rs. Lakh)
SELECT FINANCIAL PARAMETERS OF SCHEDULED COMMERCIAL BANKS
Banking Briefs
438
384

3.83
17.80
5.85
9.60
7.59
7.24
10.12
8.87
18.64
7.84
9.28
7.49
10.05
6.12
6.42
-0.25
5.20
12.48
12.15
14.36
5.67
7.57
11.30
10.44
6.44
23.01
5.68
16.22
2.43
Tier I
21.
22.
23.
24.
25.
26.
27.
28.
29.

Bank of Rajasthan Ltd.
Bharat Overseas Bank Ltd.
Catholic Syrian Bank Ltd.
City Union Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
Ganesh Bank of Kurundwad Ltd.
ING Vysya Bank Ltd.
Jammu and Kashmir Bank Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Lakshmi Vilas Bank Ltd.
Lord Krishna Bank Ltd.
Nainital Bank Ltd.
Ratnakar Bank Ltd.
Sangli Bank Ltd.
SBI Commercial & International Bank Ltd.
South Indian Bank Ltd.
Tamilnad Mercantile Bank Ltd.
United Western Bank Ltd.
Bank of Punjab Ltd.
Centurion Bank Ltd.
Development Credit Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
Indus Ind Bank Ltd.
Kotak Mahindra Bank Ltd.
UTI Bank Ltd.
Yes Bank Ltd.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Name of the Bank
Sr.
No.
5.40
21.42
4.03
2.56
4.19
4.38
2.68
3.79
0.17
4.91
5.67
3.86
2.13
4.04
4.85
4.24
3.89
2.67
2.01
1.71
5.65
4.17
3.55
1.97
2.86
0.55
4.21
3.52
2.43
Tier II
CRAR
9.23
39.22
9.88
12.16
11.78
11.62
12.80
12.66
18.81
12.75
14.95
11.35
12.18
10.16
11.27
3.99
9.09
15.15
14.16
16.07
11.32
11.74
14.85
12.41
9.30
23.56
9.89
19.74
4.86
Total
4.64
2.51
6.83
0.24
1.65
2.71
0.37
1.39
-
2.50
1.56
3.80
3.37
3.92
2.21
8.32
2.13
1.41
2.29
1.66
4.98
4.22
5.54
4.30
7.65
3.81
2.95
5.97
Net NPAs/
Net
Advances
6.93
9.74
6.29
6.85
6.94
8.11
7.71
6.94
4.49
7.24
7.05
8.14
8.36
7.58
8.14
7.86
7.54
7.65
7.79
8.13
7.66
8.24
8.15
8.12
8.05
6.30
7.47
9.49
6.99
0.15
1.81
1.89
1.44
2.52
1.79
2.42
1.50
2.72
0.88
0.62
1.02
0.96
0.58
1.45
-0.30
0.92
0.41
2.05
1.56
0.98
0.05
1.04
0.62
0.52
2.26
1.08
1.26
0.94
Income /
Income /
Working
Working
Funds
Funds
0.41
0.65
-0.09
2.56
2.18
2.87
2.44
2.04
-0.83
1.14
1.75
1.74
2.35
0.73
2.74
-2.58
0.76
1.75
3.16
2.74
1.40
2.34
1.18
0.35
2.66
1.82
3.23
1.20
Operating
Profit /
Working
Funds
-1.29
0.64
-3.38
1.47
1.59
1.35
1.56
1.21
-0.29
0.38
0.62
0.24
1.33
-0.83
0.54
-2.58
-0.25
0.47
1.27
1.45
0.08
1.25
-1.17
-1.52
-2.10
0.09
1.47
-1.40
10
Return
on
Assets
355.93
383.49
392.29
806.00
880.00
925.78
387.27
895.00
687.93
231.18
422.00
215.97
325.80
292.70
366.00
124.28
394.92
435.00
380.90
387.00
296.00
306.35
162.32
220.75
105.35
527.06
352.00
316.97
309.00
11
-3.24
1.69
-10.84
8.80
11.00
10.12
5.37
7.03
-1.82
0.86
1.86
0.37
3.23
-1.65
1.39
-0.73
2.00
3.35
3.75
0.17
1.74
-1.73
-1.66
-9.73
0.24
3.60
-3.12
12
Business
Profit
Per
per
Employe
employee
Banking Briefs
439
385
Foreign Banks in India

ABN-AMRO Bank N.V.
Abu Dhabi Commercial Bank Ltd.
American Express Bank Ltd.
Antwerp Diamond Bank
Arab Bangladesh Bank Ltd.
Bank Internasional Indonesia
Bank of America NA
Bank of Bahrain and Kuwait B.S.C.
Bank of Ceylon
Bank of Nova Scotia
Bank of Tokyo-Mitsubishi Ltd.
Barclays Bank PLC
BNP Paribas
Chinatrust Commercial Bank
Chohung Bank
Citibank N.A.
Calyon Bank
Deutsche Bank AG
DBS Bank Ltd.
HSBC Ltd.
ING Bank N.V.
JP Morgan Chase Bank
Krung Thai Bank Public Co.Ltd.
Mashreqbank psc
Mizuho Corporate Bank Ltd.
Oman International Bank S.A.O.G.
Societe Generate
Sonali Bank
Satndard Chartered Bank
State Bank of Mauritius Ltd.
UFJ Bank Ltd.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
7.89
12.03
10.23
26.81
108.00
92.06
23.39
9.84
48.30
14.36
21.65
19.88
6.10
58.46
53.00
8.60
10.00
12.62
34.45
11.38
74.97
9.44
99.59
58.03
28.82
13.20
61.53
103.73
7.10
29.76
120.07
Tier I
2.66
2.35
0.64
13.18
1.39
0.20
6.68
1.82
1.10
0.91
10.45
0.97
3.31
1.48
2.31
2.18
4.40
3.60
0.61
2.65
0.75
1.42
2.11
1.52
0.32
3.28
2.08
3.36
1.30
1.53
Tier II
10.55
14.38
10.87
39.99
109.39
92.26
30.07
11.66
49.40
15.27
32.10
20.85
9.41
59.94
55.31
10.78
14.40
16.22
35.06
14.03
74.97
10.19
101.01
60.14
30.34
13.52
64.81
105.81
10.46
31.06
121.60
Total
0.35
12.73
0.99
0.18
10.49
5.53
13.76
3.08
0.01
0.58
6.02
1.00
0.30
0.50
55.05
1.90
1.12
4.08
-
Net NPAs/
Net
Advances
7.28
7.68
9.29
4.61
4.38
4.49
4.75
5.94
4.26
4.33
4.75
1.65
6.21
6.60
6.44
7.17
7.40
4.37
5.46
6.39
0.02
5.20
4.92
8.11
5.19
5.99
3.96
7.00
8.16
7.10
5.02
7
3.49
2.07
8.64
0.76
5.38
-0.44
2.19
0.43
2.92
1.41
4.77
6.66
2.38
1.04
2.51
3.07
1.40
4.57
0.56
2.60
1.23
12.05
0.35
1.04
1.87
0.57
1.09
24.00
1.72
0.41
1.58
Income /
Income /
Working
Working
Funds
Funds
3.55
0.26
2.66
2.31
6.23
-1.44
2.60
0.31
3.30
1.87
5.51
6.20
1.99
1.96
5.24
3.81
-0.70
2.40
1.76
3.79
3.15
11.63
1.32
1.19
2.86
-0.15
1.20
12.00
3.50
2.16
4.16
Operating
Profit /
Working
Funds
: Nil / Neglibible.
Note : Data reported in this table may not exactly tally witgh those reported in Appendix Table III.17 Appendix Table III.23 on account of conceptual differences.
Source : Balance sheets of respective banks.
Name of the Bank
Sr.
No.
CRAR
1.27
-2.57
0.55
1.00
3.43
-0.98
1.46
-3.77
1.19
-0.35
0.93
4.53
0.50
-7.68
2.49
2.84
-0.80
0.72
0.89
1.21
4.38
3.58
0.03
1.10
2.20
-2.86
1.61
4.00
1.61
1.20
2.13
10
Return
on
Assets
823.70
1,061.10
237.53
2,267.01
183.07
274.51
1,707.72
820.00
628.76
2,085.17
663.58
188.49
980.52
628.66
1,109.39
1,359.51
1,885.82
1,608.93
1,110.99
779.45
593.74
460.75
521.26
608.21
1,132.28
1,057.90
92.29
786.36
1,191.00
494.64
11
10.24
-77.24
1.05
33.40
10.29
-4.15
29.47
-28.00
7.95
-6.30
6.45
160.21
4.70
-52.51
40.94
21.75
-15.04
20.31
14.52
8.90
69.96
0.19
36.99
19.25
-40.79
25.40
3.35
11.50
18.00
21.99
12
Business
Profit
Per
per
Employe
employee
SECTORAL DEPLOYMENT OF GROSS BANK CREDIT

(As at end - March)
Sector
Outstanding as on
Variation
March 21,
2003
March 19
2004
March 18,
2005
2003-04
2004-05
669534
49479
620055
764383
35961
728422
972587
41121
931466
211609
263834
345627
a) Agriculture
73518
90541
122370
b) Small Scale Industries
60394
65855
76114
c) Other Priority Sectors
77697
107438
147143
B. Industry (Medium and Large)

C. Wholesale Trade (other than
food procurement)
D. Other Sectors
235168
22578
247210
24867
290186
33814
150700
192511
261839
94849
-13518
108367
(100.0)
52225
(48.2)
17023
(15.7)
5461
(5.0)
29741
(27.4)
12042
2289
(38.6)
41811
(38.6)
208204
5160
203044
(100.0)
81793
(40.3)
31829
(15.7)
10259
(5.1)
39705
(19.6)
42976
8947
(34.1)
69328
(34.1)
36587
7219
14127
2001
51981
8274
16802
2020
75173
8655
18610
2390
15394
1055
2675
19
23192
381
1808
370
5894
27905
22708
2428
49202
5577
35165
26346
3269
57687
10612
58812
29310
3455
65914
668576
763855
971809
-317
7260
3638
841
8485
(7.8)
95279
5035
23647
2964
186
8227
(4.1)
207954
1
I. Gross Bank Credit (1+2)
1. Public Food Procurement Credit
2. Non-food Gross Bank Credit (A+B+C+D)
A. Priority Sector ## (a+b+c)
of which :
a) Housing
b) Consumer Durables
c) Non-Banking Financial Companies
d) Loans to Individuals against Shares
and Debentures / Bonds
e) Real Estate Loans
f) Other Non-Priority Sector Personal Loans
g) Advances against Fixed Deposits
h) Tourism and Tourism related Hotels
II. Export Credit
[including under item I(2)]
III. Net Bank Credit
[including inter-bank participations]
## : DAta in this statement may not agree with those quoted elsewhere in the report as the data base are different.
Note : 1. Date are provisional and relate to select scheduled commercial banks which account for about 90 percent of bank credit of all scheduled
commercial banks. Gross bank Credit date include bills rediscounted with RBI, IDBI, EXIM Bank, other approved financial institutions and interbank participations. Net bank credit data are exlusive of bills rediscounted with RBI, IDBI, EXIM Bank and other approved financial institutions.
2. Figures in brackets are proportions to incremental non-food gross bank credit.
Banking Briefs
440
386
Progress of Co-operative Credit Movement in India

(Amount in Rs. Crore ratio in per cent)
Sr.No. Type of Institution
Item
Urban Co-Operative
Banks (UCBs)
Number
Owned Funds
Deposits
Borrowings
Working Capital
Loans Outstanding
C-D Ratio
2.
State Co-operative
Banks (StCBs)
3.
4.
5.
District Central
Co-operative Banks
(CCBs)
State Co-operative
Agriculture and Rural
Development Banks
(SCARDBs)
Primary Co-operative
Agriculture and Rural
Development Banks
(PCARDBs)
2001-02
2002-03
2003-04 P
2004-05 P
1,854
13,797
93,069
N.A.
1,15,596
62,060
67
1,941
9,830
1,01,546
1,590
1,11,746
64,880
64
1,926
12,348
1,10,256
1484
N.A.
67,930
62
1,872
N.A.
1,05,017
N.A.
N.A.
66,905
65
Number
Owned Funds
Deposits
Borrowings
Working capital
Loans Issued
Loans Outstanding
Recovery Performance
(as per cent to demand)
C-D Ratio
30
6,712
36,191
11,672
54,262
34,663
32,678
30
7,979
39,386
12,209
57,600
38,118
34,761
31
8,520
43,486
12,457
58,889
34,466
35,105
31
N.A.
44,338
14,626
N.A.
38,319
37,347
82
90
80
88
84
81
N.A.
84
Number
Owned Funds
Deposits
Borrowings
Working Capital
Loans Issued
Loans Outstanding
C-D Ratio
368
14,141
68,181
18,820
99,424
55,915
59,316
367
16,836
73,919
19,639
1,08,265
59,544
64,214
365
19,131
79,153
20,256
1,14,372
58,964
67,152
367
N.A.
81,013
20,899
N.A.
55,764
72,797
66
87
61
87
62
85
N.A.
90
Number @
Owned Funds
Deposits #
Borrowings
Working Capital
Loans Issued
Loans Outstanding
20
2,494
533
14,832
18,753
2,746
14,110
20
2,906
501
15,892
20,609
2,962
15,354
20
3,504
605
16,882
21,250
2942
16,212
20
N.A.
518
17,005
N.A.
3,235
17,435
55
49
44
N.A.
Number
Membership (in lakhs)
Owned Funds
Deposits #
Borrowings
Working Capital
Loans Issued
Loans Outstanding
(as per cent to demnad)
768
142
2,480
255
10,331
13,986
2,045
10,005
768
136
2,722
214
11,214
15,374
2,151
10,809
768
N.A.
2,971
252
11,880
15,851
2,200
11,209
730
N.A.
N.A.
168
12,572
N.A.
2,517
11,877
48
44
44
N.A.
P : Provisional.
N.A. : Not Available
@ : Maharashtra SCARDB came under Federal structure as on October 1, 2001 with Maharashtra SCARDB at the Apex level and 29 PCARDBs at ground
l
e
v
e
l
.
# : Deposits of SCARDBs and PCARDBs include advnace repayment by LDBs.
Source : NABARD.
Banking Briefs
441
387
Banking Briefs
442
388
: Nil / Negligible.
@ : Data are provisional
Note : Figures in brackets represent percentages to net bank credit.
2.6
IV. Total priority sector advances
V. Net Bank Credit
0.4
III. Other priority sector advances
0.1
ii) Indirect
0.5
1.6
i) Direct
II. Small Scale Industries
1.7
June
1969
I. Agriculture
Sector
258
81
19
153
158
March
2002
273
88
17
165
168
March
2003
301
94
17
188
190
March
2004
No. of Accounts (in lakh)
319
85
18
17
191
208
March
2005@
(As on the last reporting Friday)
3,016
441
(14.6)
22
(0.7)
257
(8.5)
122
(4.0)
40
(1.3)
162
(5.4)
June
1969
3,94,064
1,71,484
(43.5)
59,074
(15.07)
54,268
(13.8)
14,123
(3.6)
44,019
(11.2)
58,142
(14.8)
March
2002
4,85,271
1,99,786
(41.2)
76,638
(15.8)
52,646
(10.8)
19,017
(3.9)
51,484
(10.6)
70,501
(14.5)
March
2003
5,60,819
2,44,456
(43.6)
1,01,710
(18.1)
58,311
(10.4)
22,265
(4.0)
62,170
(11.1)
84,435
(15.1)
10
March
2004
Amount Outstanding (Rs. crore)
ADVANCES TO THE PRIORITY SECTOR BY PUBLIC SECTOR BANKS
7,17,304
3,10,093
(43.2)
1,29,984
(18.1)
67,634
(9.4)
29,862
(4.2)
82,613
(11.5)
1,12,475
(15.7)
11
March
2005@
FINANCIAL ASSETS OF FINANCIAL INSTITUTIONS

(Amount in Rs. Crore )
(As at end - March)

Institution
1991
2000
2001
2002
2003
2004
57,372
2,29,109
22,701
70,576
2. ICICI@
7,084
65,571
3. IFCI
5,835
22,800
818
4,004
5. EXIM Bank
1,984
6,995
6. SIDBI
5,317
16,388
12,664
33,082
8. NHB
969
6,251
9. TFCI
985
10. IDFC
2,457
10,049
24,518
6,412
12,218
3,637
12,300
C. Investment Institutions
(13 to 15)
13. UTI+
58,566
2,61,885
23,164
75,102
14. LIC
29,040
1,59,949
15. GIC and its subsidiaries
6,362
26,834
D. Other Insitutions
(16 and 17)
16. DICGC
1,988
6,954
1,744
5,607
244
1,347
E. Grand Total (A+B+C+D) 1,27,975
5,22,466
2,42,062
5.7
68,822
-2.5
73,676
12.4
21,808
-4.4
4,232
5.7
7,362
5.3
16,909
3.2
38,655
16.8
6,836
9.4
862
-12.5
2,901
18.1
31,993
30.5
12,692
3.9
19,301
56.9
3,07,732
17.5
85,426
13.7
1,92,482
20.3
29,824
11.1
7,954
14.4
6,311
12.6
1,643
22.0
5,89,741
1,71,215
-29.3
65,444
-4.9
N.A.
N.A.
20,723
-5.0
4,089
-3.4
8,051
9.4
17,458
3.2
44,454
15.0
6,872
0.5
872
1.2
3,252
12.1
38,904
21.6
12,712
0.2
26,192
35.7
3,50,538
13.9
64,223
-24.8
2,44,448
27.0
41,867
40.4
8,596
8.1
6,933
9.9
1,663
1.2
5,69,253
1,80,740
5.6
61,831
-5.5
N.A.
N.A.
21,127
2.0
3,183
-22.2
12,269
52.4
17,427
-0.2
50,642
13.9
9,802
42.6
791
-9.3
3,668
12.8
53,044
36.3
17,026
33.9
36,018
37.5
3,34,570
-4.6
N.A.
N.A.
2,89,630
18.5
44,940
7.3
9,523
10.8
7,786
12.3
1,737
4.4
5,77,877
1,95,247
8.0
66,322
7.3
N.A.
N.A.
18,165
-14.0
2,849
-10.5
15,456
26.0
19,140
9.8
55,642
9.9
11,344
15.7
710
-10.2
5,619
53.2
60,942
14.9
20,708
21.6
40,234
11.7
4,33,178
29.5
N.A.
N.A.
3,72,052
28.5
61,126
36.0
10,973
15.2
9,094
16.8
1,879
8.2
7,00,340
A. All India Financial

Institutions (1 to 10)
1. IDBI*
4. IIBI
7. NABARD
B. State Level Institutions

(11 and 12)
11. SFCs
12. SIDCs
17. ECGC
2005P
1,39,153
-28.7
N.A.
N.A.
N.A.
N.A.
15,976
-12.0
2,439
-14.4
18,369
18.8
18,161
-5.1
60,544
8.8
17,405
53.4
592
-16.6
5,668
0.9
60,942#
20,708#
40,234#
4,39,409
1.4
N.A.
N.A.
3,72,052#
67,357
10.2
12,336
12.4
10,146
11.6
2,190
16.6
6,51,840
N.A. : Not Applicable

P : Provisional
* : IDBI was converted into a bank in October 2004.
@: ICICI was converted into a bank in May 2002.
+ : The Unit Trust of India Act. 1963 was repeated through an ordinance on October 30, 2002 and UTI was restructed by splitting it into two parts,
viz.. UTI-I and UTI-II (later renamed as UTI Mutual Fund), in January 2003.
# : Figures repeated.
Note :1. Data pertain to the accounting year of the respective financial institutions. The accounting year of IFCI was changed to financial year from
1993-94.
2. Figures in parentheses indicate percentage change over the previous year.
Source : Balance sheets of respective Fis.
Banking Briefs
443
389
Banking Briefs
444
390
Regional Rural Banks
Non-Scheduled
Commercial Banks
(Local Area Banks)
7.
8.
288
196
31
29
19
32,091
(47.7)
4
(20.0)
11,922
(82.4)
1,106
(19.1)
13,582
(40.9)
1,409
(30.8)
4,068
(45.3)
Rural
15,151
(22.5)
9
(45.0)
2,134
(14.7)
(14.2)
1,768
(30.5)
7,190
(21.6)
1,588
(34.7)
2,462
(27.4)
11,070
(16.4)
7
(35.0)
396
(2.7)
31
(85.8)
1537
(26.5)
6,801
(20.5)
849
(18.5)
1,449
(16.1)
Urban
As on June 30, 2004 @

Semi
Urban
# : As on June 30, 2005.

@ : Population Group-wise classification of branches is based on 1991 Census.
- : Nil.
Note : 1. figures in brackets indicate percentages to total in each group.
2. Data on number of branches data exclude administrative offices
3. Data for Jund 2004 are revised.
4. 'Other Public Sector Bank' comprises IDBI Ltd. only.
Total
Foreign Banks in India
4.
6.
Nationalised Banks
3.
Indian Private Sector Banks
Associates of SBI
2.
5.
State Bank of India
1.
7
No. of
Bank *
Bank Group
9,001
(13.4)
20
(0.1)
188
(100.0
1,383
(23.9)
5,668
(17.1)
732
(16.0)
1,010
(11.2)
Metro
politan
67,313
(100.0)
20
(100.0)
14,472
(100.0)
219
5,794
(100.0)
(3.1)
33,241
(100.0)
4,578
100.0
8,989
(100.0)
Total
32,095
(47.0)
4
(17.4)
11,922
(82.2)
(0.4)
1,097
(17.9)
5
(16.4)
13,587
(40.4)
1,412
(30.5)
4,068
(45.0)
Rural
Number of Branches
15,396
(22.5)
9
(39.1)
2,158
(14.9)
1
(16.9)
1,831
(29.9)
26
(42.8)
7,291
(21.7)
1,605
(34.7)
2,475
(27.4)
Semi
urban
11,504
(16.8)
10
(43.5)
401
(2.8)
42
(82.7)
1,714
(28.0)
68
(37.7)
6,935
(20.6)
864
(18.7)
1,470
(16.3)
10
Urban
As on June 30, 2005 @
DISTRIBUTION OF COMMERCIAL BANK BRANCHES IN INDIA BANK GROUP AND POPULATION GROUP WISE
9,344
(13.7)
20
(0.1)
206
(100.0)
1,479
(24.2)
60
(100.0)
5,812
(17.3)
744
(16.1)
1,023
(11.3)
11
Metro
politan
68,339
(100.0)
23
(100.0)
14,501
(100.0)
249
6121
(100.0)
159
33,625
(100.0)
4,625
(100.0)
9,036
(100.0)
12
Total
Banking Briefs
445
396
Nationalised Banks
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indiand Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
United Bank of India
United Bank of India
Vijaya Bank
State Bank Group
State Bank of India
State Bank of Hyderabad
State Bank of Indore
State Bank of Masore
State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore
Name of the Bank
13,588
970
380
1,160
1,237
542
760
1,381
178
392
468
527
253
294
1,930
648
775
793
645
255
5,480
4,068
313
290
132
213
277
140
47
Rural
20.
21.
22.
23.
24.
25.
26.
27.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Sr.No.
7,291
323
316
558
489
233
683
760
143
215
351
374
302
110
802
421
336
469
203
203
4,080
2,475
229
285
132
149
211
136
463
Semi urban
6,935
389
274
476
423
242
551
556
214
192
321
337
323
218
752
402
333
439
248
245
2,334
1,470
133
202
64
116
170
69
110
Urban
Branches
5,813
248
153
486
402
263
525
433
234
243
229
282
260
136
521
346
286
349
210
207
1,767
1,023
138
138
110
149
87
73
49
Metropolitan
33,627
1,930
1,123
2,680
2,551
1,280
2,519
3,130
769
1,042
1,369
1,520
1,138
758
4,005
1,817
1,730
2,050
1,306
910
13,661
9,036
813
915
438
627
745
418
669
Total
3,205
80
77
171
145
33
647
32
229
137
126
198
306
6
399
202
75
274
47
21
1,548
415
154
261
99
184
208
77
150
On-site
1,567
11
253
1
115
12
63
1
572
18
14
38
183
151
41
4
80
9
1
3,672
3,197
97
69
76
19
43
56
115
Off-site
ATMs
BRANCHES AND ATMS OF SCHEDULED COMMERCIAL BANKS
4,772
91
330
172
260
45
710
33
801
155
140
236
489
6
550
243
79
354
56
22
5,220
3,612
251
330
175
203
251
133
265
10
Total
4.66
0.57
22.53
0.04
4.51
0.94
2.50
0.03
74.38
1.73
1.02
2.50
16.08
3.77
2.26
0.23
3.90
0.69
0.11
26.88
35.38
11.93
7.54
17.35
3.03
5.77
13.40
17.19
11
Percent of Offsite ATMs to total

branches
Banking Briefs
446
397

Bank of Rajasthan Ltd.
Bharat Overseas Bank Ltd.
Catholic Syrian Bank Ltd.
City Union Bank Ltd.
Development Credit Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
Ganesh Bank of Kurundwad Ltd.
Jammu and Kashmir Bank Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Lakshmi Vilas Bank Ltd.
Lord Krishna Bank Ltd.
Nainital Bank Ltd.
Ratnakar Bank Ltd.
Sangli Bank Ltd.
SBI Comm. and International Bank Ltd.
Sounth Indian Bank Ltd.
Tamilnad Mercantile Bank Ltd.
United Western Bank Ltd.
ING Vysya Bank
Bank of Punjab Ltd.
Centurion Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
IDBI Bank Ltd.
Indus Ind Bank Ltd.
Kotak Mahindra Ltd.
UTI Bank Ltd.
Yes Bank Ltd.
Name of the Bank
994
104
8
32
32
5
23
31
8
232
95
35
38
12
18
22
51
68
46
48
86
108
16
82
5
5
-
Rural
22.
23.
24.
25.
26.
27.
28.
29.
30.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Sr.No.
1499
80
9
171
36
11
82
269
13
38
87
69
81
47
15
24
47
214
57
61
88
348
36
15
90
100
22
25
6
54
-
Semi urban
1150
95
40
64
42
10
41
91
8
104
110
82
67
27
21
18
46
78
45
54
107
589
34
33
146
168
50
55
11
92
-
Urban
Branches
868
90
34
33
26
41
27
63
2
50
94
47
36
26
14
10
40
2
62
25
65
81
640
45
29
194
158
43
36
36
96
3
Metropolitan
4511
369
91
300
136
67
173
454
31
424
386
233
222
112
68
74
184
2
422
173
228
362
1685
115
77
446
508
120
116
53
247
3
Total
800
35
15
35
11
59
31
111
114
26
112
10
42
7
2
59
9
57
65
1883
146
87
544
569
117
115
35
269
1
On-site
441
19
15
62
1
145
56
2
44
2
1
64
13
3
14
3729
79
72
603
1341
212
80
11
1330
1
Off-site
ATMs
1241
54
15
50
11
121
32
256
170
28
156
10
44
8
2
123
22
60
79
5612
225
159
1147
1910
329
195
46
1599
2
10
Total
9.78
5.15
5.00
92.54
0.58
31.94
13.21
0.52
18.88
1.79
1.35
15.17
7.51
1.32
3.87
221.31
68.70
93.51
135.20
263.98
176.67
68.97
20.75
538.46
33.33
11

branches
Banking Briefs
447
398
Foreign Banks
ABN-AMRO Bank N.V.
Abu Dhabi Commercial Bank Ltd.
American Express Bank Ltd.
Antwerp Diamond Bank
Arab Bangladesh Bank Ltd.
Bank Internasional Indonesia
Bank of America NA
Bank of Bahrain and Kuwait B.S.C.
Bank of Ceylon
Bank of Nova Scotia
Bank of Tokyo-Mitsubishi Ltd.
Barclays Bank PLC
BNP Paribas
Chinatrust Commercial Bank
Chohung Bank
Citibank N.A.
Calyon Bank
Deutsche Bank AG
DBS Bank Ltd.
HSBC Ltd.
ING Bank N.V.
JP Morgan Chase Bank
Krung Thai Bank Public Co.Ltd.
Mashreqbank psc
Mizuho Corporate Bank Ltd.
Oman International Bank S.A.O.G.
Societe Generate
Sonali Bank
Satndard Chartered Bank
State Bank of Mauritius Ltd.
UFJ Bank Ltd.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
: Nil / Neglibible.
Rural
Name of the Bank
Sr.No.
Semi urban
38
2
1
10
9
1
15
-
Urban
Branches
204
17
2
8
1
1
1
4
2
1
4
3
1
9
4
1
1
25
1
5
30
2
1
1
2
1
1
2
1
68
3
1
Metropolitan
242
19
2
8
1
1
1
4
2
2
4
3
1
9
4
1
1
35
1
5
39
2
1
1
2
1
2
2
1
83
3
1
Total
218
24
1
9
2
44
59
1
78
-
On-site
579
54
2
1
4
332
99
87
-
Off-site
ATMs
797
78
3
10
6
376
158
1
165
-
10
Total
239.26
284.21
100.00
12.50
200.00
948.57
253.85
104.82
-
11

branches
(You can also email to gurumurthy.n@sbi.co.in

mr.satyanarayana@sbi.co.in
Banking Briefs
448
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