Banking Updates

Staff College, Ahmedabad Recent Updates in Banking Industry
Page 3 6 9 14 18 21 23 25 Contents Module A : Recent Important Changes Amendments in Banking Regulation Act and its impacts Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India BASEL III & Capital Management of Indian Banking Sector Introduction of Financial Holding company structure in India Liberalization of Branch Expansion Policy Deregulation of Interest on Savings Bank Union Budget of India 2013-14 Scope of Merger of Banks in India
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Page 27 30 31
33 34 36 39 40 44 46 63 67 71 81
Module B : Updates on Key Banking Segments Profitability: NIM under stress: How Banks will respond the situation Productivity and Efficiency Consumer Protection: Financial Consumer Protection and its Linkage to Management Function Know your Bank: Awards and accolades for the Bank in FY 2012 New Initiatives taken by Bank Project NAVNIRMAAN Baroda Next Project Sparsh SME & Wealth Management Services: SME Banking An overview & Important Guidelines Wealth Management Services e-Business Banks e-Channel products Priority Sector Lending & Financial Inclusion Revised Priority Sector Guidelines Financial Inclusion Recent Updates Credit Monitoring & NPA Management RBI Guidelines for Restructuring Non Performing Assets
Risk
Page 82 84 91
Module C : Future trends / Challenges HR Challenges of Decade 2020 IT Vision for 2011 to 2020 Banking by the year 2015
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MODULE A: RECENT IMPORTANT CHANGES Contemporary Banking Issues
The Indian banking system has seen a complete transformation during the last two decades, in sync with the progress made by the real economy. Almost every aspect of banking operation has seen significant change during this period as banks sought to reinvent themselves in an attempt to retain their pre-eminent position in the financial system. The period saw banks moving beyond brick and mortar branches to adopt innovative delivery channels including internet banking, ATMs, call / contact centres, kiosks, Business Correspondents (BCs), etc. Retail banking gained prominence. Banks have sought to grow, not just in terms of balance sheet size, but also in terms of greater penetration of banking services to the hitherto unbanked segments of the population. It is reasonable to say that banks have succeeded in rising up to the challenges posed by the unique needs of a transforming economy and have, in no small measure, contributed to the nations economic progress during this period.
However, Indian Banking is also facing several challenges and they must address these challenges to sustain their excellent performance. Following are some Contemporary issues faced by Banking in India.
Amendments in Banking Regulation Act and its impacts The Banking Regulation Act, 1949 being the law relating to banking has been in force for more than six decades, which empowers the RBI to regulate and supervise the banking sector. The banking companies are now operating in a liberalized environment. In this scenario, it has become necessary that the banking companies in India are enabled to raise capital in accordance with the international Baroda Academy 3 Inventing Methods for Igniting Minds
best practices. Therefore the Banking Laws (Amendment) Bill 2011 was introduced in order to amend the BANKING REGULATION ACT, 1949.
Some of the salient features of amendments with the impacts are as under:New Power to RBI:Under the existing provision contained in section 36AA of the BR Act, 1949, The RBI has , inter alia , power to remove any director or other officers of a banking company , but such power is not adequate if the entire Board of directors of a banking company is functioning in a manner detrimental to the interest of the depositors or the banking company itself. It is therefore proposed to confer power upon the RBI to supersede the Board of directors of a banking company for a total period not exceeding twelve months and appoint an administrator to manage the banking company during the said period. Enactment of this bill will provide new power to RBI. It proposes to confer upon the RBI the power to call for information and return from the associate enterprises of banking companies and also to inspect the same, if necessary. Impact: - Such power of RBI will help it in regulating new as well as existing entities in a better manner. To increase the cap on restrictions on Voting Rights:Another key feature of amendment is increasing the voting rights of all the shareholders of nationalized bank to 10 per cent from 1 percent. Impact:It is expected that higher voting rights will give investors more leeway. The increase in voting cap will help drive increased investors interest and hence facilitate raising additional capital.
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To enable banking companies to issue preference share subject to regulatory guidelines by the RBI Thus nationalized banks may access the capital market to raise capital required for expansion of banking business. To create a Depositors Education and Awareness Fund:Insertion of new section 26 A, the RBI shall establish a Fund to be called the Depositor Education and Awareness Fund by utilizing the inoperative deposit accounts. There shall be credited to the Fund the amount to the credit of any account in India with a banking company which has not been operated upon for a period of ten years, within a period of three months from the expiry of the said period of ten years. Impact: - This fund will be used for promotion of depositors interest and for such other purpose as may be specified by the RBI from time to time. To provide for special audit of cooperative banks at instance of RBI by extending applicability of Section 30 to them Impact:- To more vigilant by RBI to protect the depositors interest. Overall impacts of changes in Banking Law (Amendment Bill) 2012 pertaining to BR Act:This amendment for the banking sector is a long term positive. This will gradually pave the way for more competition in the sector and as it seen that new licenses will given by RBI to start new banking business in India which will carve out a more efficient and more valuable banking system.
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Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India The prevailing incurred loss model for provision on impaired loans came under severe criticism after the recent global financial crisis for delaying loss recognition. There is a view that earlier recognition of loan losses based on expected losses could have potentially reduced the cyclical impacts of the recent crisis. In the immediate aftermath of the Global Crisis, the G-20 leaders called upon the accounting standard setters to work urgently with banking supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high quality global accounting standards. Concepts and principles of Dynamic Provisioning Dynamic provisioning is a technique that allows banks to build up loan loss provisions when their profits are growing to draw on these provisions during an economic downturn. The underlying principle behind dynamic provisioning is that provisions should be set in line with estimates of long-run, or through-the-cycle expected losses. This will help in breaking pro-cyclicality and creating countercyclical provision buffers. This concept advocates the Provisioning norms based on Expected Loss basis in place of prevailing incurred loss method. Dynamic provisioning can be generally expressed as: Dynamic provision = Expected loss provision Specific provision
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Thus, a Dynamic Provisioning Framework for Loan Loss Provisions for banks in India, consisting of two components, may be considered as under: a) Ex-post Specific Provisions SP made during a year as required as per RBI guidelines. These provisions will be debited to P&L account. b) Dynamic Provisions DP equal to the difference between the long run average expected loss of the portfolio for one year and the incremental specific provisions made during the year. Dynamic provisioning framework in India is more or less based on the FSA model (UK model of dynamic provisioning). Improvements in credit risk models have supported the concept of expected losses and unexpected losses. From a conceptual point of view, loan loss provisions should cover expected losses while capital provides an adequate buffer for unexpected losses. The internal rating based (IRB) model approach under Basel II credit risk capital computation gave a fillip to the expected loss based provisioning and unexpected loss based capitalization. The provisioning framework suggested by RBI has two components are: (i) (ii) Specific provisions and Dynamic provisions.
While specific provisions would be as per the RBI guidelines on NPA provisioning, dynamic provisions would be the difference between the long run average expected loss of the portfolio for one year and specific provisions made during the year. Thus, this will ensure that every year the charge to profit and loss account on account of specific provisions and dynamic provisions is maintained at a level of expected losses. Dynamic provisions are created only when the specific provisions are lesser than the expected losses. The framework thus ensures that at any point of time, provisioning equivalent to expected losses should be made. Thus, the objective of Baroda Academy 3 Inventing Methods for Igniting Minds
the dynamic provisioning framework is to smoothen the impact of incurred losses on the profit and loss account through the cycle, and not to provide general provisioning cushion for expected losses. That is the essence of Indian dynamic provision framework.
Impact of Dynamic Provisioning on Indian banks It will help in earlier recognition of loan losses based on expected losses could have potentially reduced the cyclical impacts of the recent crisis. Dynamic provisions are created only when the specific provisions are lesser than the expected losses. The framework thus ensures that at any point of time, provisioning equivalent to expected losses should be made. The objective of the dynamic provisioning framework is to smoothen the impact of incurred losses on the profit and loss account through the cycle, and not to provide general provisioning cushion for expected losses. Loss given default (LGD) used in the calculation of expected loss is based on downturn LGD (instead of normal LGD) as used in the internal ratings-based approach for credit risk (IRB) of Basel II which will give more accurate provisions. Dynamic or expected loan loss provisioning can contribute to financial stability by recognizing the losses early in the cycle at the time of loan origination by building up buffers in good times that can be used in bad times, thereby limiting the consequences during a downturn.
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BASEL III & Capital Management of Indian Banking Sector Why Basel III? 1. Estimation of capital under Basel II is procyclical. During good time banks are doing well and market is willing to invest capital in banks but there was no provision in Basel II for additional capital for stress time which is inevitable in a business cycle. 2. Basel II was more risk sensitive compare to Basel I, however the composition of regulatory capital didnt reflect the changing market dynamics. This model was not capable to handle complex derivatives products. 3. Basel II model demanded less capital on banks trading book exposure with arguments that it is liquid in nature as bank can unwind the position rapidly. Most of banks shifted their banking book exposure to trading book exposure to optimize the capital. 4. Basel II didnt have any explicit regulation governing leverage. Excessive leverage was one of major causes for economic crisis. It assumed that risk based capital requirement would automatically control excessive leverage. 5. Liquidity risk was not covered under Pillar I of Basel II framework. During financial crisis it cascaded into solvency risk and became nightmare for most of the banks. 6. The framework has neglected the systemic risk or the risk emanated from interconnectedness of various institutes in a financial system. 7. Finally Basel III has strongly advocated in favour of more risk absorbing common capital in capital structure of a bank. How Basel III is superior to Basel II?
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1. Basel III is not a negation but an enhancement of Basel II. Lessons from financial crisis have open the lids in four major areas viz, augmentation of quality capitals, introduction of Liquidity standards, modifications in provisioning norms & better & more comprehensive disclosure.
2. Higher quality capitals Structure Particulars of Capitals
A= B+C+D B C D E F
Minimum Total capital Minimum Tier I capital Of which Common Equity Maximum Admitted Tier II capital Capital conversion Buffer (Common Equity) Minimum Common equity (Tier I +CCB) Minimum Total capital + CCB
Capital requirement as % on RWA Basel II Basel III 9.0 9.0 6.0 7.0 2.0 4.5 4.0 2.0 2.5 2.0 9.0 7.0 11.5
3. Provision for countercyclical Capital Conversion Buffer of 2.5 % of RWA in terms of common equity has prescribed to absorb of extra shock without breaching the minimum capital level as well as it has considered the hardship of banks to raise capital under stress situation. 4. More common equity to absorb loss internally rather waiting for budgetary bailout package. 5. To mitigate the risk of higher built up leverage ratio, Basel III contemplating a minimum Tier I leverage ratio of 3% (33.3 times of own fund) which will eventually a Tier I requirement as on January 1, 2018. 6. Unlike Basel II, Basel III enhances the loss absorbing capacity of banks against market risk. Basel III strengthens the counterparty credit risk framework in market risk instruments. It has included use of stressed input parameters to determine capital requirements for counterparty credit default risk. Besides Credit valuation Adjustment (CVA) risk capital charge Baroda Academy 3 Inventing Methods for Igniting Minds
for OTC derivatives to protect banks against the risk of decline in the credit quality of the counter party. 7. To mitigate liquidity risk of bank, Basel III addressed both potential short term liquidity stress and long term structural liquidity mismatch in banks balance sheet. For short term liquidity stress , bank will require to maintain sufficient high quality unencumbered liquid assets to withstand any stress funding scenario over a 30-days horizon as measured by the liquid coverage ratio (LCR) For long term liquidity mismatches , banks are required to maintain net stable fund ratio (NSFR). NSFR will be decided based on liquidity profile of assets and liquidity needs arising from off balance sheet commitments over a one year horizon. 8. The Basel committee is supporting the proposal for adopting Expected Loss (EL) based measure of provisioning which capture actual losses more transparently and is also less procyclical than the current incurred loss approach. What are Challenges for implementing Basel III in India? 1. The additional requirement under Basel III is based on some assumptions. The RBI has made some estimate of additional Capital requirement as on March 31 2018 of Rs. 5 trillion based on two assumptions: a) The RWA of each bank will increase at a rate of 20% per annum till March 31,2018 . b) Internal accrual will be of the order of 1% of RWA. 2. Further, the estimation of additional capital can be bifurcated between non equity capital of Rs.3.25 trillion while common equity capital in tune of Rs. 1.75 trillion. (Rs. In Billion) Public Sectors Private Bank Sector Bank Capital 1400-1500 200-250 3 Total 1600-1750
A Baroda Academy
Additional
Equity
B C
Requirement under Basel III Additional Equity Capital requirement Under Basel II Net additional requirement under Basel III Of additional equity capital requirement under Basel III for Public sector bank (A) Government share (if present share holding pattern in maintained) Government holding if share holding is brought down to 51% Market Share (if present share holding pattern of Govt. maintained)
650-700 750-800
20-25 180-225
670-725 930-1025
880-910
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660-690
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520-590
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3. The challenges in front of Indian Bank are to raising fund in a magnitude from Capital market. If we consider the past trends of few years it may give a clear picture. (Rs. In billions) 2007-08 793 2008-09 142 2009-10 549 2010-11 576
Resources Mobilized from Primary market Resource 310 Mobilized by Bank/FIs
Nil
32
172
(Hand books of statistics by SEBI) 4. Since 2000-2001 till 2010-11 the entire banking and financial sector raised capital from primary market is about Rs. 1145 billion (Hand books of Baroda Academy 3 Inventing Methods for Igniting Minds
5.
6. 7.
8.
statistics by SEBI). Considering the present estimate it is not an insurmountable task for Indian banking system to raise an amount of Rs. 700 billion for a span of five years. Moving to the second challenge of capitalization by Government to PSBs, If government want to maintain the same level of holding, it is required to be infuse a fresh fund of Rs. 900 billion. Considering the gross combine fiscal deficit of central & state government (about Rs. 6200 billions) , it is really a significant challenge for PSBs. But if Government is contemplating the concept of reducing its holding near to 51% or even less than that, then the burden will be reduce to half. Increase capital requirement will increase the cost of capital of bank at the same time it will affect the return on equity for investors. Introduction of two liquidity ratio will restrict bank to raise short term funds for long term deployment as a result it will impacted the pricing and margin of credit facilities Widening Fiscal deposit may degrade sovereign rating of Country in turn increase the cost of foreign funds.
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Introduction of Financial Holding company structure in India

Recommendations of the Working Group under the Chairpersonship of Smt Shyamala Gopinath, Dy Governor (RBI):
Over the last two decades, India has seen the emergence of Financial Conglomerates (FCs), each operating in a different segment of the financial services sector a bank, housing finance company, non-banking financial company, and insurance company; or, in some cases, an industrial company. In many countries, deregulation and financial consolidation led to the development of Financial Holding Companies (FHCs) thereby allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella. The absence of the holding company structure in financial conglomerates exposes investors, depositors and the parent company to risks, strains the parent companys ability to fund its own core business and could restrict the growth of the subsidiary business. Considering the complexity of the issues involved and implications of the FHC model for the financial system in general and banking system in particular, the Reserve Bank constituted a Working Group in June 2010 under the Chairpersonship of Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India. The Working Group approached the issue from two fundamental perspectives: first, the risk to bank balance sheets from affiliate non-bank entities and Baroda Academy Inventing Methods for Igniting Minds
second, the perspective.
regulatory
oversight
of
financial
groups
from
systemic
Recommendations for moving to a full-fledged FHC Framework - The Working Group concluded that a holding company model may be more suited in the Indian context. It was conscious of the fact that banks cannot be totally insulated from the risks of non-banking activities undertaken by their affiliates. The Working Group also recognized that there are divergent ownership and governance norms for various sectors; entities within the sectors; legacy issues concerning the existing conglomerates etc. Any framework to harmonise them at the level of the FHC would be a challenge and therefore the FHC as a preferred model will need to be phased in gradually. Recommendation 1: The Financial Holding Company (FHC) model should be pursued as a preferred model for the financial sector in India. Recommendation 2: The FHC model can be extended to all large financial groups irrespective of whether they contain a bank or not. Therefore, there can be Banking FHCs controlling a bank and Non-banking FHCs which do not contain a bank in the group Recommendation 3: There should be a separate regulatory framework for financial holding companies. Recommendation 4: A separate new Act for regulation of financial holding companies should be enacted. Recommendation 5: Amendments should also be simultaneously made to other statutes/Acts governing public sector banks Recommendation 6: The Reserve Bank should be designated as the regulator for financial holding companies.
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Recommendation 7: The function of FHC regulation should be undertaken by a separate unit within RBI with staff drawn from both RBI as well as other regulators. Recommendation 8: The new FHC regulatory framework should also formalize a consolidated supervision mechanism through Memorandum of Understanding between regulators. Recommendation 9: Intermediate holding companies within the FHC should not be permitted due to their contribution to the opacity and complexity in the organizational structure. Recommendation 10: The FHC should primarily be a non-operating entity and should be permitted only limited leverage as stipulated by RBI. Recommendation 11: The FHCs should be permitted to carry out all financial activities through subsidiaries. Recommendation 12: The FHC should be well diversified and subject to strict ownership and governance norms. Recommendation 13: Appropriate limits should be fixed on cross-holding between different FHCs. There should also be limits on cross holding between FHCs on one hand and banks, NBFCs, and other financial institutions outside the group. Recommendation 14: Presently, under the Bank-Subsidiary Model (BSM), the banks total investment in their subsidiaries is capped at 20% of banks net worth. Under the FHC structure, the allocation of equity capital by Banking FHCs to nonbanking subsidiaries should also be capped at a limit as deemed appropriate by RBI to ensure that the banking continue to be a dominant activity of the group. Recommendation 15: If the holding company is to function as an anchor for capital support for all its subsidiaries, requisite space needs to be provided to the holding company for capital raising for its subsidiaries. Baroda Academy Inventing Methods for Igniting Minds
Recommendation 16: Suitable amendments to various taxation provisions may be made to make the transition from Bank-Subsidiary Model to FHC model. Recommendation 17: Dividends paid by subsidiaries to the FHC may be exempt from the Dividend Distribution Tax (DDT) to the extent these dividends are used by the FHC for investment in other subsidiaries. Operational Arrangements till the Enactment of the FHC Act - The Working Group recommends the following operational scheme till the enactment of new Act: (i) Pending enactment of a separate Act, the FHC model will be registered as an NBFC with the RBI and the RBI will frame a suitable regulatory framework. (ii) All identified financial conglomerates having a bank within the group will need to convert to the FHC model in a time bound manner and in cases the above conglomerates do not want to convert to FHCs, they should be required to confine only to those activities which the banks are presently permitted by RBI. (iii) All new banks and insurance companies, as and when licensed, will mandatorily need to operate under the FHC framework. (iv) Amendments to various taxation provisions to make the transition from BankSubsidiary model to FHC model tax neutral would be a binding condition for operationalising this framework.
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Liberalization of Branch Expansion Policy Section 23 of Banking Regulation Act 1949 which states that without prior permission of RBI, no banking company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India. Bank plays a vital role in economic development of a country. Bank provides credit to various segments in the society to start economic activities, thereby helps the people to raise their income and standard of living. In our country 70% populations was staying in rural area. Prior to 1969 Bank branches were mainly concentrated in Urban and Metro areas. To provide banking facilities to agriculture and small industries and to mobilize the untapped resources in rural and semi urban areas, nationalisation of 14 banks was done in 1969. To encourage banks to open more and more branches in rural areas, RBI introduced a policy to open 4 branches in rural unbanked centres to get a license to open a branch in metro banked centre. This policy was successful and by 1991 around 60%of bank branches were in rural and semi urban areas. Penetration of Branch net work had helped the Government to implement subsidised schemes for self employment and for rural development for eradication of poverty, successfully. The following table will show the impact of policy. Rural Branches 1833 3 Semi Urban Brs 3342 Total (R+SU) 5172
June 1969 Baroda Academy
March 1991
35206
11344
46550
In 1991 Financial sector reforms were introduced as per the recommendations of Narasimham Committee recommendations. The liberal policy was framed for foreign banks and for entry of private sector banks. The Narahamsim committee also felt that the Bank Management takes its own judgement for assessing need of additional bank branches. the Branch Licensing Policy in 1995. RBI while granting permission for new branch offices was considering the financial condition and history of applicant bank, general character of its management, adequacy of capital, earning prospects and whether new office will serve public interest. Keeping these aspects in mind, RBI issued following guidelines while liberalising the branch expansion policy in 1995. Bank fulfilling the following conditions can open new branch without prior permission of RBI. 1. Net profit for three years in a row 2. Capital Adequacy Ratio Minimum 8% 3. NPA Less than 15% 4. Minimum Owned Funds Rs 100 crore After liberalising the branch expansion policy as above, banks focus again shifted to Metro and Urban centres. Banks also closed the loss making branches. The following the statistic will prove the impact of liberalisation. Rural Branches Baroda Academy 3 Semi Urban Brs Total (R+SU) Hence RBI liberalised
June 1969 1833 March 1991 35206 March 2005 32082 March 2007 30551 During 1991 to 2007 total Rural and
3342 5172 11344 46550 15403 47485 16361 46912 Semi Urban bank branches increased from
46550 to 46912. The alarming thing is that number of rural branches reduced to 30551 from 35206 and semi urban branches increased to 16361 from 11344. In view of above trend RBI revised the policy in 2005. Policy encouraged the banks to open branches in unbanked and under-banked centres. Private Banks were also asked to open 25% of their branches in semi urban and rural centres. Recent Guidelines on Branch Expansion Policy 1 Bank to submit Annual Branch Expansion Plan duly approved by Board.
2 To open branches in Tier I centre ( area with population of 1 lac and above ) needs specific permission. 3 To open branches in Tier 2 to Tier 6 centers general Permission will be given. 4 25% of the branches should be opened in Tier 5 and Tier 6 centers which do not have a brick and mortar structure of any schedule commercial bank. 5 Bank can open administrative office ,Processing Centre/Branches in Tier 2 to Tier 6 centres without permission of RBI, subject to reporting. 6 Total number branches opened in Tier I will not generally exceed the total number of branches to be opened in Tier 2 to Tier 6 centres. 7 Authorisation will be valid for one year. Total deregulation of Branch authorization: Advantages: Baroda Academy 3 Inventing Methods for Igniting Minds
1. Time taken to approach RBI to obtain permission will be saved. 2. Operational work load of RBI will be reduced.
Deregulation of Interest on Savings Bank Facts / Guidelines: Effective from October 25, 2011, Banks are free to determine their savings bank deposit interest rate, subject to the following two conditions: A. First, each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. B. Second, for savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices. Pros: 1. It will enhance the return on SB deposit to the customers, which in turn will contribute to an increase in financial savings.
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2. It may lead to volume of SB portfolio of the bank as a little more interest earning decision (interest on daily product basis) increased the SB deposit of the Bank within 2 yrs (Rs11367 billion in March 2010 to Rs.15392 billion March 2012). 3. It will trigger the product innovations related to SB segment in the Bank and a better opportunity for banks to cross-sell 4. It will provide the multiple opportunities to the customers to place their funds. 5. This move may improve the effect of transmission of monetary system of the country, as at present, on any change in regulatory rate like Bank rate, REPO rate etc., SB interest is not responding in tandem with those changes due to its fixed rate nature. 1. It will increase the cost of funds for the banks. 2. It may lead to unhealthy competition amongst the banks. 3. It may discriminate the return on investments of smaller & bigger customers due to permitted differential rate of interest on SB segment. 4. It may adversely affect the small savers and lead to the challenge of financial exclusion. 5. Banks may face higher risk of asset-liability mismatch/management. Baroda Academy Inventing Methods for Igniting Minds
Cons:
6. There could be occasions, especially in a surplus liquidity situation, when the savings deposit interest rate may decline even below the present level.
Union Budget of India 2013-14 Major Highlights of this Budget 2013-14 are: Fiscal deficit seen at 5.2 point of GDP in 2012/13 Fiscal deficit seen at 4.8 point of GDP in 2013/14 No Change in Income Tax Slabs Tax credit of Rs. 2,000 for income upto Rs. 5 lakh 10 % surcharge on persons with taxable income of over Rs 1 crore Direct Taxes Code (DTC) bill to be introduced in current Parliament session Income limit for the tax-saving Rajiv Gandhi Equity Savings Scheme (RGESS) is raised to Rs. 12 lakh from Rs. 10 lakh Baroda Academy 3 Inventing Methods for Igniting Minds
First home loan of up to Rs 25 lakh to get extra interest deduction of up to Rs 1 lakh Duty-free limits for Gold raised to Rs 50000 for men and Rs 1 lakh for women Tax Deducted at Source to be fixed at 1% on land deals over Rs 50 lakh Proposal to launch Inflation Indexed Bonds or Inflation Indexed National Security Certificates to protect savings from inflation. All public-sector banks have assured the Finance Minister that they will all have ATMs in their branch areas by 2014 Propose to reduce securities transaction tax on equity futures to 0.01 point from 0.017 point Time to introduce commodities transaction tax (CTT). CTT on nonagriculture futures contracts at 0.01 point Propose to impose withholding tax of 20 point on profit distribution to shareholders No change in peak custom, excise rates. Excise duty on SUVs to be increased to 30 per cent from 27 per cent, SUVs registered as taxis exempted 18% rise in excise duty on Cigarattes, cigars and cheerots Service tax on all A/C restaurants To increase surcharge to 10 point on domestic companies with annual income of more than 100 million rupees
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For foreign companies, who pay the higher rate of corporate tax, the surcharge will increase from 2 pct to 5 per cent. To continue 15 point tax concession on dividend received by India companies from foreign units for one more year
SCOPE OF MERGER OF BANKS IN INDIA India is the second largest emerging market destination, after china. Keeping in view the huge potential for raising world class infrastructure the Govt. is targeting infrastructure investment of the scale of USD 1 trillion in Baroda Academy 3 Inventing Methods for Igniting Minds
the 12th five year plan. Banks will be the primary debt provider for almost half of this planned expenditure amount. Globalization has been a major driver of both Indian and Multinational corporation (MNC) investments, merger and acquisition. Indian Banking System must be in position to support & grab the business opportunities in funding these M & A. Banks will be required to raise their equity base as per the provisions of BASEL III norms. Banks with large capital base and huge size of Balance Sheet, equipped with all risk mitigating system as well as tools, offering good return to investor can only attract new investors for further raising the core capital base. Being a member of WTO, India will have to allow foreign Banks to operate in India as per the prescribed norms of WTO. Consequently Indian Banks will have to compete with the big International Banks with huge capital and capacity. Market Dynamics may create problem for small banks to survive in those highly competitive environment. These facts have once again opened the discussion for Merger of Banks for creating Big Banks to compete at global levels. Though this issue of consolidation of PSBs was first recommended by the Narasimham Committee on Financial Systems (1991) and working group was constituted by the government on bank mergers, which had submitted it recommendation in October 2004. Post liberalization a lot of changes took place in the banking sector and the biggest development is the adoption of CBS operating platform in all Banks in India. This uniform operating platform has made the consolidation task easy, because the integration of operating tools and procedures was the major challenge in the way of consolidation. Objectives that may be achieved through merger will be: Need for strengthening core capital base and diversifying of risk in line with compliance of BASEL III guidelines in coming 5 years. To eliminate systemic risk due to failure of Bank. To meet the requirement of lending for infrastructure creation Baroda Academy 3 Inventing Methods for Igniting Minds
Stepping up size (market power) and maximizing value (revenue) by exploiting
economies of scale.
Module B: Updates on Key Banking Segments PROFITABILITY Baroda Academy 3 Inventing Methods for Igniting Minds
NIM under stress: How Banks will respond the situation Profitability is sine qua non for any commercial organization and banking is not its exception. The most known indices of measuring the efficiency on capacity utilization in banks are spread, net interest margin, and intermediation ratio. Spread and net interest margin are loosely interpreted one and same thing but both terms are defined differently for productivity and profitability measurement of banks. Spread indicates efficiency of generating net interest income from the assets owned by the banks, while net interest margin (NIM) is defined as the
difference between the total interests earned on advances & investment and total interest paid on deposits & borrowings divided by earning assets of bank .
This ratio indicates as to how effectively the banks deploy all their deployable
funds i.e. both deposit and borrowings to generate income from credit and
investment operations. However, there is a classical argument which reinforce that banks should strive to lower their NIMs to benefit their borrowers and depositors i.e. lend at lower rate for economic growth and pay high on deposits to reward the savers. The present NIM of Indian banks is expected to hit about 2 percent by 2020 owing to highly deregulated and competitive environment. But an emerging economy like India with inclusiveness as a national priority, it is not clear whether low banking margin (NIM) would be a worthy goal for survival of industry.
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NIM for all banks fell down from 3.04% (2007) to 2.74% (2010). During the year 2011, NIM grew to 3.10% in year 2011 but further declined to 3.07% for the year end March 2012 with highest of 4.91% for foreign banks. As observed from the Table- that NIM had increased during the year 2011 as compared to previous year level in 2010 for all categories of banks except foreign banks, with a recovery in
economy and higher credit growth but further declined due to tighten interest
rate policy of regulators. The increase in NIM from core banking business indicates that the cost of
financial intermediation increased in the economy . Based on this rationale, there

is a need to bring down NIM from an efficiency point of view, nevertheless, from a profitability point of view; there is a need to increase it. To achieve collective aspiration of double digit and inclusive growth, a nation needs to raise the level of national savings and channel those savings into investment. This means banks need to raise the interest rates on deposits and reduce the lending rates charged from borrowers - in other words,
reduce
their
intermediation costs, or in technical terminology, reduce the net interest margin.

A balanced approach would be to bring down NIM, which will improve efficiency of financial intermediation, along with an increase in income from other sources and reduction in operating expenses to maintain profitability . The efficient financial intermediation is important from the point of view of economic growth.
Table : NIM Analysis of Indian Banks
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Bank Group 31st March (%age)
SBI & Its Associates Nationalized Banks Public Sector Banks Old Private Banks New Private Banks Private Sector Banks Foreign Banks All SCBs
Net Interest Margin (Net Interest Income / Earning Assets) 2007 2008 2009 2010 2011 2012 3.00 2.64 2.50 2.55 3.10 3.48 2.93 2.39 2.40 2.33 2.84 2.66 2.96 2.47 2.43 2.40 2.92 2.90 3.24 2.81 2.96 2.70 3.08 2.97 2.49 2.83 3.25 3.36 3.31 3.22 2.66 2.82 3.19 3.20 3.26 3.16 5.22 5.31 5.92 5.41 4.96 4.91 3.04 2.75 2.82 2.74 3.10 3.07
Source: Computed from published data of banks in Profile of Banks by Reserve Bank of India (RBI)
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Productivity and Efficiency Banks play the critical role of financial intermediation by performing the task of maturity and risk transformation, besides providing payment and settlement services. In order to effectively perform these functions, banks need to ensure that they maintain high levels of productivity and efficiency in their operations. Two kinds of efficiency are essential for banks:
Allocational Efficiency: This requires banks to ensure that the precious societal resources are allotted to the most productive activities. Besides, while taking allocation decisions, the interests of the most vulnerable sections of the society should also be taken into account. Operational Efficiency: Operational Efficiency requires banks to perform the financial intermediation function in a safe, secure and speedy manner while ensuring that the cost of performing the intermediation function is minimized. While profit margins are important for sustaining banking operations, the cost of operational inefficiencies of banks should not be passed on to customers by way of higher service charges and fees.
Indian banks need to improve both, allocational and operational efficiency, so that the financial intermediation function is effectively performed. This would include reengineering of all critical products and processes by leveraging on innovative technology-based solutions, while retaining a strong customer-centric focus.
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CONSUMER PROTECTION Financial Consumer Protection and its Linkage to Risk Management Function Financial Consumer Protection has emerged as a key area of supervisory focus globally. The global financial crisis has highlighted the vulnerability of the consumer class, which has been worst hit in the crisis. The key feature of the exploitation has been the discriminatory, nontransparent and illogical pricing which has affected the poor and vulnerable consumers most emphatically. The product innovations have not focused on customer requirements and have, instead, aimed at serving the interests of the service provider. The basic fact, that the well being of the consumer is essential for the sustainability and growth of the service provider, has been lost sight of. As part of its regulatory reform agenda, G 20 Finance Ministers and Central Bank Governors have also endorsed a set of High-level Principles on Financial Consumer Protection, underlining its overall importance for financial stability.
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The principles enjoin upon the supervisors and oversight bodies to ensure an equitable and fair treatment of consumers, disclosure and transparency in product and service offerings along with promotion of financial education and awareness amongst the consumers. In this context, some important aspects of consumer protection and risk management that banks need to imbibe in their business processes are as under:
Pricing of asset and liability products should be transparent and nondiscriminatory. At a minimum, it must be ensured that poor do not subsidize the provision of banking services to the rich. The business operations of banks should be customer-centric in nature. This should be reflected in all aspects of banking operations including creation of customized products and services, pricing of services, delivery channels, etc. Banks should, inherently, be flexible in their operations so that they have the ability to meet the evolving stakeholder expectations. Banks should be able to appreciate the risk-return trade-off involved in various activities. The basic premise that greater return would invariably come from assumption of higher risk, needs to be appreciated and disseminated, both within the organization and to banks customers. Banks need to develop the ability to discern good risk from bad so that they selectively take on only those risks that are in alignment with the banks long term strategic vision. The culture of efficient risk management needs to be imbibed in the organizations ethos so that everyone from the top management to frontline managers in the field shares a common vision of risk management.
A key related issue is the integrity of MIS in banks. Each bank claims to be oriented towards its customers. Are the banks aware of the number of customers they have? Moreover, most of the banks do not have a system of working out activity wise costs and returns. Unless banks know the return on each and every product, they cannot arrive at a truly risk based pricing. Baroda Academy Inventing Methods for Igniting Minds
KNOW YOUR BANK AWARDS AND ACCOLADES FOR THE BANK IN FY12 Best Public Sector Bank (PSB) by CNBC-TV18 & MCX Golden Peacock Award for Excellence in Corporate Governance by Institute of Directors & World Forum for Corporate Governance received in London Baroda Academy Inventing Methods for Igniting Minds
Dainik Bhaskar India Pride Award for 2011 Most Efficient Bank in Kenya Best Initiatives in Inclusive Banking FIBC Banking Award Dun & Bradstreets Leading PSB in Global Business Development Category National Award for Performance under SME Business Award for Best Utilisation of Intellectual Resources Best Growing Large Bank by Business World-PWC Business Leadership Award by NDTV- Best PSB in 2011 Award for Excellence in Financial Reporting by ICAI in PSB category Fastest Growing Large Bank by Business World-PWC UTV-Bloomberg Financial Leadership Award FM Stars Industry Brand Leadership Award BOBs Brand Ranking has increased by 47 notches in a years time in Top 500 Banking Brands by The Banker, London Best Bank Award-2012 Awards for the Banks CEO (CMD) Outstanding Financial Professional-2010 by CNBC-TV18 & MCX Best Banker Award (T. A. Pai Memorial Award) by Karnataka State Open University Lifetime Achievement Award by Dainik Bhaskar India Pride Awards Banker of the Year by Business World-PW
NEW INITIATIVES TAKEN BY BANK Major technology Initiatives:
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As on 31st Dec 2011, the Banks entire domestic, overseas and RRBs [i.e., five sponsored RRBs] related operations were on the CBS platform. Bank has developed IT facilities for online/offline account opening through Business Correspondents under Financial Inclusion. Banks retail & corporate customers enjoy several facilities under its Internet Banking Delivery Channel. The SMS alerts of transactions are also implemented in the Internet Banking Portal. Bank has implemented Internet Banking in 13 of its overseas territories, notably Oman, Tanzania, Uganda, Kenya, Mauritius, Seychelles, Botswana, New Zealand, UAE, Fiji, UK, Ghana &Australia Bank has also implemented RapidFunds2India solution in all the major territories. Bank has built a State-of-the-Art Data Centre conforming to Uptime Institute Tier-3 standard & a Disaster Recovery Site in different seismic zones to ensure uninterrupted banking services delivery to customers. Banks Mobile Banking (Baroda M-Connect) provides various facilities to its customers. Anti Money Laundering (AML) has been implemented in India and 23 of Banks overseas territories. Bank has developed an Integrated Global Treasury Solution in its major territories like U.K., UAE, Bahamas, Bahrain, Hong Kong, Singapore, Belgium, USA and India to achieve reduced cost of operations & better fund management. Bank has a centralised SWIFT system for India & its 23 overseas territories. Internet Payment Gateway has been implemented to facilitate e-commerce transactions in multi currencies across the globe. Bank has introduced the facility of Multiple Accounts being linked to a single Debit Card (verified by Visa, CVV2) and also Mobile Number registration thru ATMs in CBS for SMS Alerts. E-tax payments thru ATMs are also facilitated and Mobile ATMs are introduced in several cities. To provide safe online banking services to its customers & protect them from phishing attacks, Bank has implemented a Fraud Management Solution. Baroda Academy 3 Inventing Methods for Igniting Minds
Bank has set up two Contact Centres in Lucknow & Baroda to fast addresse the customer queries & grievances. Back Office functions have been centralised in the Bank at City Back Offices & ten Regional Back Offices ( at Baroda, Jaipur, Lucknow, Bhopal, Coimbtore, Kolkata, Mumbai, Jamshedpur, New Delhi & Pune) to improve the delivery of services. Cash Management Solution is implemented to provide operational support to customers ALM. Baroda e-trading has been launched for Retail and Corporate customers. Roll out of HRMS and Payroll. Baroda e- Pay - Electronic Utility Bill Payment Online Loan Application Educational Loan, Home Loan, Car Loan Launching of Baroda Gift Card Introduced Visa Platinum Premium Debit Card Travel Card in foreign currency is introduced. CTS -Cheque Truncation System implemented in Delhi and Grid based CTS was implemented in Chennai, Coimbatore and Bangalore. CTS will be shortly implemented in Western Grid also.
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Project NAVNIRMAAN Baroda Next A comprehensive transformation programme called NAVNIRMAAN has launched by our Bank for its domestic operations on 22 June 2009. The Bank has partnered with Mckinsey & Company for this programme, which is centered around our customers and our employees, and has two core elements Business Process Re-engineering (BPR) & Organization Restructuring (OR). Why Navnirmaan? 1. Less time spent on relationship management and business development 2. Low utilization of technology 3. To reach at no.1 among PSU Banks 4. High aspirations 5. In previous 20 years, banking sector underwent sea changes, so, it needs immediate attention to realign process change. BPR (Business Process Re-engineering) Main Objectives Improvement in branch productivity on sales Best-in-class service levels for customer delight Redesign of front and back office processes and roles to reduce turnaround time Reduction in operating costs Organization restructuring Main Objectives Appropriate organization structure and systems to support BPR and be in line with future business plans, at corporate, zonal and regional offices & at branches Sustainability of change program through capability building. Navnirmaan having 5 key elements: Baroda Academy 3 Inventing Methods for Igniting Minds
1. Simplified systems and processes at branches and other offices 2. World-class back offices to support branch operations 3. Alternate Channel usage 4. Redefined organization structure and roles 5. Training to Barodians for new roles Development /Repositioning under Navnirmaan project: Project Navnirmaan has altogether 18 activities covering both BPR & Organisational Restructuring, aimed at transforming the Banks branches into a sales & service centres to make possible a sustained sales growth, superior customer experience and alternate channel migration. The most important initiatives covers : o Conversion of all metro & urban branches into Baroda Next branches within a timeline [ over 1328 branches rolled out so far ] o Creation of automated & leaner Back Offices like: City Back Office Regional Back Office (10 functioning) Establishment of two Call Centres Introduction of frontline automation [viz. Queue Management System and Cheque deposit Machines] at select branches for customer convenience Conducting Trainings and Boot camps. Organization Re-structuring [creation of Selling roles at branch, R.O. and Z.O.] The initial impact of Baroda Next migration has been found to be rewarding both in terms of increased customer satisfaction and CASA growth. The said impact has been sustained at 110 Baroda Next branches evaluated on (a) sales and (b) customer satisfaction during first stage of evaluation. Another evaluation carried out recently on (a) Customer satisfaction [at -177-] and (b) Employee satisfaction [at -171] Baroda Next branches, shows significant improvement. A certification procedure for Baroda Next branches have been introduced in terms of which process compliance/ adherence are being evaluated by Banks Baroda Academy Inventing Methods for Igniting Minds
Internal inspectors and CSAT / ESAT externally evaluated by engaging Market Research Agencies. To sustain Sales Growth, a new Sales Operating Model has been rolled out in -629- branches in -25- Regions over 20 cities. Out of -15- Mid-corporate branches planned, all are functional. Further centralization initiatives are being piloted to enable the branches to become a Sales-cum-Service Outlet. Banks Hi-tech City branch, Hyderabad has been transformed into an ebranch.
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Project SPARSH A dedicated HR transformation project SPARSH has been initiated by the Bank to revamp its existing HR processes, structures and policies. Various measures in the direction of talent management, succession planning, creating a scientific staffing model & manpower planning, development and capability building, performance management, etc. have been initiated. Baroda Manipal School of Banking Opening of the Baroda Manipal School of Banking as an innovative and new channel of resourcing of trained manpower in the Bank. Around 180 students are being inducted into this school every quarter for a focussed grooming and for a one-year full-time PG course in banking which is tailored to the Banks specific requirements. Baroda Academy 3 Inventing Methods for Igniting Minds
SME & WEALTH MANAGEMENT SERVICES
SME Banking An Overview & Important Guidelines
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SME is a growth engine of economy for any nation across the world. The importance of this sector in India as compared to corporate giants with respect to its contribution towards Indian economy can be best understood that they contribute 8% in Gross Domestic Product (GDP), 45% of manufactured output, 40% of exports, manufacture over 6000 products and provide employment to around 60 million person through 26 million enterprises as per latest 4 th all India census of MSMEs. Recognizing the significant contribution of this sector in economic growth and also in employment generation in our country, Government of India has taken good number of initiatives to develop the sector such as erstwhile definition of Small Scale Industries was enlarged by increasing investment ceiling in plants & machineries from Rs. One crore and trading activities have taken in the ambit of MSMEs by enactment of Micro, Small & Medium Enterprises Development (MSMED) Act from 2nd October 2006. Also the Act recognizes the term Enterprises instead of Industry to include service in MSME segment. The units engaged in manufacturing or producing and providing or rendering of services has been defined as micro, small & medium under MSMED Act on basis of original investment in plant & machinery and equipment as under Enterprises Micro Enterprises Small Enterprises Medium Enterprises Manufacturing Up to Rs.25.00 lacs Service Up to Rs.10.00 lacs
Above Rs.25.00 lacs to Above Rs.10.00 lacs to Rs.500.00 lacs Rs.200.00 lacs Above Rs.500.00 lacs Above Rs.200.00 lacs to to Rs.1000.00 lacs Rs.500.00 lacs
Looking to the significance of SME sector, it is estimated that if India wishes to have growth rate of 8-10% for next couple of decades, it needs a strong SME sector, without which it would be difficult to realize. Today there are about 30 Baroda Academy 3 Inventing Methods for Igniting Minds
million MSMEs in the country and this sector has shown an average growth of 18% over the last five years. In this backdrop, MSME is considered to be fast growing sector of economy and the sector gaining more importance to realize theme of 12 th Five Year Plan (2012-2017) approach paper faster, sustainable & more inclusive growth. Institutional, Policy & Government incentives: Enhance viability of SME Finance 1) Banks have set up dedicated processing cell, SME Loan Factory & SME Loan Hub with a pool of specialized skills of SME credit. Also set up regional SME care center giving different nomenclature by the banks to facilitate SMEs for quick redressed of their grievances. 2) Banks to achieve mandatory lending to SME for inclusive growth such as 20% YoY growth in credit to Micro & Small enterprises, 60% of MSE advance to Micro enterprises by 2012-13 3) Statutory provisions requirement for standard advances under SME advances is merely 0.25% as against 1.00% in case of real estate and 0.40% for other advances which is a reward for banks to make lower provision towards buffer capital on SME advances 4) Collateral free loans up to Rs. One crore are secured by CGTMSE guarantee which is highly liquid at par with cash security as compared to any other collateral in loan accounts 5) Allocation of Zero risk weight to SME loans guaranteed by CGTMSE for capital adequacy requirement 6) Simplified computation of working capital limit to MSE units on basis of minimum 20% of their estimated annual turnover up to limit of Rs.500 lacs. 7) Union Government has schemes of felicitating Best Bank awards in recognition of contribution made by banks for promoting SME sector that builds Corporate Brand which is invaluable and add new feathers to the business of winner banks 8) Public Procurement Policy introduced with a provision that every Central Ministry / Department / PSU shall set an annual goal for procurement from MSE sector at the beginning of every financial year. Objective is to achieve an overall procurement goal of minimum 20% of total annual purchases of products or services produced or rendered by MSEs. Baroda Academy 3 Inventing Methods for Igniting Minds
9) Limit of turnover for compulsory tax audit of account has been raised to Rs.100 lacs (from Rs.60 lacs) in budget of 2012-13 10)Capital gain tax is exempted on sale of residential property if sales consideration is used for subscription in equity of a manufacturing SME company for purchase of plant & machinery. 11) National Manufacturing Policy has aim to increase share of manufacturing in GDP to 25% and create 100 Mn new jobs by 2022; to achieve this target, SME growth is considered to be an answer.
Important Committees Nayak Committee - To Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) The Committee was constituted by Reserve Bank of India in December 1991 under the Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the issues confronting SSIs (now MSE) in the matter of obtaining finance. All the major recommendations of the Committee have been accepted and the banks have been interalia advised to: give preference to village industries, tiny industries and other small scale units in that order, while meeting the credit requirements of the small scale sector; grant working capital credit limits to SSI (now MSE) units computed on the basis of minimum 20% of their estimated annual turnover whose credit limit in individual cases is upto Rs.2 crore [ since raised to Rs.5 crore ]; prepare annual credit budget on the `bottom up basis to ensure that the legitimate requirements of SSI (now MSE) sector are met in full; extend Single Window Scheme of SIDBI to all districts to meet the financial requirements (both working capital and term loan) of SSIs(now MSE); Ensure that there should not be any delay in sanctioning and disbursal of credit. In case of rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities should be made; Baroda Academy 3 Inventing Methods for Igniting Minds
not to insist on compulsory deposit as a `quid pro quo for sanctioning the credit; open specialised SSI (now MSE) bank branches or convert those branches which have a fairly large number of SSI (now MSE) borrowal accounts, into specialised SSI (now MSE) branches; identify sick SSI (now MSE) units and take urgent action to put them on nursing programmes; standardise loan application forms for SSI (now MSE) borrowers; Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs. The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks.
Wealth Management Services Baroda Academy Inventing Methods for Igniting Minds
Our Bank as part of customer centric measure initiated Wealth Management Services to provide to our HNI and affluent customer a complete financial solution at one stop. The service has enabled our customers to buy various investment products through our branches and is positioning our Bank as One Stop Financial Super Market. Under Wealth Management Services currently we are offering 3 rd party products in Bancassurance, Mutual Fund, e-Trading etc. under tie up arrangement with various partners. Segment Name of Tie-up Partner Products Life IndiaFirst Life Insurance Co. Unit Linked Insurance Plan Insurance Ltd. (Joint Venture Co. of the Term Insurance Plan Bank) Endowment Plan Group Insurance Plan & Health Insurance General National Insurance Co. Ltd. Baroda Health co-branded Insurance medi-insurance products for hospitalization expenses Insurance covered for assets such as vehicle, business & industries, live stock etc. from various risks. Mutual Baroda Pioneer Mutual Fund Growth/Equity Scheme Fund (Joint venture Co. of the Bank) Income / Debt Scheme Balance Fund UTI Mutual Fund Money Market or Liquid Birla Sunlife Mutual Fund Fund Reliance Mutual Fund Gilt Fund Sundaram BNP Paribas Index Fund Franklin Templeton Tax Saving Scheme Investments Fixed Maturity Plan Kotak Mahindra Mutual Fund E-Broking Baroda Academy IDFC Mutual Fund India Infoline Ltd 3 Trading in equity,
commodities derivatives
and
its
Other Major tie up / MOU of Bank with other Service providers EXIM Bank, IDFC and SIDBI for co-financing of projects. IFCL for infrastructure development finance Bank of Baroda enters into an agreement with Bombay Stock Exchange for clearing and settlement M/s Avenue (India) Pvt. Ltd will enable customers of the Bank to shop opline, and make payments through Net Banking account. M/s Techprocess Ltd. For providing online payment solution and direct debit credit to its customers. This tie-up will enable Banks customers to shop online through Banks e-banking portal and also make utility bill payments like telephone bills, electricity bills etc. Car Finance with Tata Motors Ltd., Hyundai Motors India Ltd., Mahindra & Mahindra Ltd., Maruti Suzuki India Ltd. Tie up with Kotak Mahindra Old Mutual Life Insurance Ltd. For providing Life Insurance Cover to Education Loan borrowers and Home Loan borrowers sanctioned under a special package. MOU with CGTMSE for extending collateral free loans up to Rs. 100 lacs under Risk Sharing Facility scheme launched by CGTMSE.
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e-BUSINESS BANKS e-CHANNEL PRODUCTS Bank is providing various Alternate Delivery channels apart from Brick and mortar Banking. The purpose of these alternate delivery channels is to provide anywhere any time banking by using technology. Anywhere banking means no geographical restriction of banking transactions whether within banking hours or out side banking hours, whether from the bank premises or out side of the banks premises. Details of such alternate channels and Banks e business products are 1 2 3 4 5 6 7 8 9 Automate Teller Machine (ATM) Prepaid & Debit Cards Real Time Gross Settlement System (RTGS) National Electronics Fund Transfer (NEFT) Baroda Connect ( Internet Banking) Baroda M Connect (Mobile Banking) Contact Centre Baroda e-Gateway Baroda Cash Management Services (BCMS)
1 AUTOMATED TELLER MACHINES (ATMs) Banking sector is undergoing major transformation towards convenience banking through technology products and customer centric initiatives. Value added services, especially in the area of any time anywhere banking, are essential to retain existing clientele and expand business. Keeping this in view our bank has introduced ATM (Automated Teller Machine) facility in 1995. All our ATMs prior to introduction of Debit Card were stand alone ATMs. Baroda Academy 3 Inventing Methods for Igniting Minds
ISSUER: In the card industry, the issuer is an entity, which issues the card. In the debit card segment, this normally is a Banker, who maintains the account of the customer. ACQUIRER: The acquirer is an entity, which makes the payment e.g. owners of ATMs (mostly banks) to the Card holders to the member establishments SWITCH: Switch is a Computer with specially developed software, the main function of which is to route the transactions. HOST: Host is another computer, which is installed at branches/central location which maintains the Data and also issues the authorisations 2 Prepiad Cards & Debit Cards
Existing SN VISA Classic Debit Cash limit at Rs..25,000 1 ATM in Rs. per day Limit at POS Rs..50,000 2 in Rs. per day 3 CVV2 feature Yes Authenticatio 4 Signature n at POS Segmentation of customers 5 All customers in Rs. 6 Annual fees In Rs.
Features
Classic Maestro Debit card Rs..25,000 per day Rs..50,000 per day Yes PIN
VISA Gold Combi Platinum Debit card Debit card Rs..50,000 per Rs..1,00,000 day per day Rs..1,00,000 Rs..2,00,000 per day per day Yes Yes PIN/ Signature Signature
Annual income All Annual Income > Rs..5,00,000 customers > Rs..3,00,000. / HNI / NRI customers First year First year First year free Rs. 250/- per free & then free & then & then Rs..100 year* 3 Inventing Methods for Igniting Minds
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Rs..100 p.a. 7 PIN change utility at ATM PIN change/ Mini Statement at other Bank ATM PIN regeneration charges in Rs. Card renewal charges Card replacement charges (India) in Rs. Card number (digits) Cash at POS in Rs. International usage charges (ATM) Charges for retrieval of charge slip in Rs. Number of transactions per day at ATMs Accident Yes
Rs..100 p.a. Yes
p.a. Yes Yes
Rs..10**
Rs..10**
Rs..10**
Rs..10**
9 10
Rs..150** Free
Rs..150** Free
Rs..150** Free
Rs..150** Free
11
Rs..200**
Rs..200**
Rs..200**
Rs..200**
12 13 14
16 Rs..1,000
16 Rs..1,000
16 -N.A-
16 -N.A-
Mark up fee Mark up fee Mark up fee of Mark up fee of 3% of 3% 3% of 3.5%
15
Rs..400**
Rs..400**
Rs..400**
Rs..400**
16 17
4 No
5 No 3
10 No
10 Accident /
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Insurance
18
Card validity
10 years
10 years
10 years
theft or misuse insurance of Rs..5,00,000/10 years
* Waived after reaching a threshold spending of Rs. 50,000/- in POS/ e-commerce in a calendar year. ** Excluding Service charges Additional benefits/concessions (Visa Platinum): In addition to support provided by our Debit Card operations team, VISA also offers the following which are useful to the Card holders when traveling outside India. Visa concierge for providing personalized customer service 24/7 Global customer assistance service provided by VISA a. Lost/stolen card reporting (through VISA on International travel) b. Emergency card replacement (through VISA on International travel) c. Emergency cash disbursement (through VISA on International travel) d. Travel assistance (through VISA on International travel) Various reward/promotional offers made available by Visa (in and outside the country) Target customers (Visa Platinum): Super Saving Account holders (existing & new). Premium Current Account Holder (existing & new). Non resident A/c holders, whose accounts are active, with a minimum turnover of Rs.4,00,000 an year, or who holds Fixed deposit with our Bank to the tune of > Rs.Rs. 4,00,000.
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Saving Bank Account holders with average monthly balance of Rs. 25,000/(previous twelve months) Current Account holders with average monthly balance of Rs. 1,00,000/(previous twelve months) Staff members: Chief Managers and above. Target customers (Gold Combi MasterCard): Salary Accounts (Branches should ensure that salary is getting credited to this account and the total salary per year is > Rs. 3,00,000/-) All Staff members. NRI Account holders (existing & new)
Pre Paid Cards Introduction: Over the years we have witnessed growth of credit cards and Debit Cards as alternate payment options to conventional cash, cheque and demand draft. Pre paid cards are next development in card business which is gaining momentum in Indian market .Prepaid cards are pre-funded cards mainly used for gift purpose, making adhoc payment, for online purchase etc and can be used till balance is available in the card. In pre-paid cards, he Account is not exposed and hence it protected. Ownership can be transferred and prepaid cards are safe and easy to handle. Open Ended and Close Ended cards: Prepaid cards are available in non reloadable (use and throw) as well as reloadable (multi use) category based on the type of card and associated regulation. Prepaid variants which can be used at large number of merchant locations are called open ended cards and the ones which have accessibility at select centers/outlets/CUG are classified under close/semi close cards Baroda Gift Cards: Bank of Baroda has launched gift variant of prepaid cards called Baroda Gift Card on 20th July 2011. This Verified by VISA enabled prefunded card can be Baroda Academy 3 Inventing Methods for Igniting Minds
used to make purchases at merchant outlets and online stores which accepts VISA till available amount on the card. Pre-paid cards can be issued to anybody with a valid Bank of Baroda A/c or to a non customer for purchase of card up to Rs.5000/- having a valid Government issued Photo Id card , For non customer , for amount higher than Rs.5000/-, regular KYC is required. Baroda Gift cards can be good revenue stream for branches by way of increase in non interest income, breakage income, and float funds. It also helps in increasing the foot falls at the branches and thereby helps the branches for up selling & cross selling of other products Salient features of Baroda Gift Card Issued in Indian Rupee for a minimum amount of Rs500/- and up to a maximum amount of Rs.50000/- in multiples of Rs.1 Card is valid for a period of one year Usable at VISA card accepting merchant outlet across India. Baroda Gift cards can be used for making online purchase which would be fully secured with Verified by VISA authentication Cash withdrawal at ATM is not allowed as per RBI guidelines Cards can be activated on the same day of purchase No balance transfer from one card to another card is permitted KYC/AML/CFT provisions of RBI will apply Card holders can reach the support team through the dedicated 24x7 toll free number or through e-mail to customer care team Baroda Travel Easy Cards: Bank has launched foreign currency pre-paid card Baroda Travel Easy Card and the first release is US Dollar card. Baroda TravelEasy card is presently issued in US$ for minimum US$200 and maximum as per FEMA guidelines issued from time to time. Travel easy card is valid for three years from the date of issue. Baroda Travel Easy card is issued to Resident Indians and are usable abroad for ATM cash withdrawal and making merchant payments at physical/online stores Baroda Academy Inventing Methods for Igniting Minds
from the loaded currency. Baroda TravelEasy Card will be available at B Category branches for issuance. Salient features of Baroda TravelEasy Card: Issued in US Dollar; minimum load value of USD 200 Activation within 24 hours of purchase Travelers are relieved of the risk of carrying cash & travelers cheque during foreign visits Fees/charges are lower than applicable charges on domestic debit/credit cards used abroad Cards are valid for -3- years. In this period, the card can be reloaded Cardholder will have access to 24x7 Customer Care team as well as secured online portal for viewing their card balance and transaction details Accounting, reconciliation and customer support shall be provided by the Operations team, based at e-Business Department, in collaboration with the service provider KYC, AML/CFT requirement are as per RBI guidelines Cards cannot be used in India, Nepal & Bhutan 3 Real Time Gross Settlement System (RTGS) RTGS was introduced in India by RBI on 26 th March, 2004 and our bank became a RTGS member from 8th May, 2004. Real Time Gross Settlement System (RTGS) is an efficient, secure, economical and reliable system of transfer of funds from bank to bank as well as from a remitters account in a particular bank to the beneficiarys account in another bank across the country. The minimum amount of txn under RTGS for the customer is Rs. 2 lakh. Another difference between NEFT and RTGS is that transfer of funds up to a limit of Rs. 50000 is allowed by cash under NEFT while it is strictly an account to account transfer in RTGS. Baroda Academy Inventing Methods for Igniting Minds
The funds are made available for immediate use. It is a cheaper remittance facility as compared to conventional remittance like DD or Collection of cheques. RTGS system can require relatively large amounts of intra-day liquidity because participants need sufficient funds in the settlement account to cover their outgoing payments. Liquidity can come from various sources, including opening balances, or reserve balances at the central bank, incoming payments and intraday credit (which is usually provided by the central bank). Adequate liquidity, relative to the value and distribution of payments, makes a smooth flow of payments possible through such systems, helping to avoid delays in individual payments and minimizing liquidity risks. The cost of intraday liquidity depends on variables such as amount required, the opportunity cost of maintaining liquid balances and the cost of intra-day credit. Following are the pre-requisite for putting through a funds transfer transaction using RTGS Originating and destination bank branches should be part of the RTGS network Amount to be remitted Remitting customers account number which is to be debited Name of the beneficiary bank Name of the beneficiary customer Account number of the beneficiary customer Sender to receiver informations, if any The IFSC number of the receiving branch Foe net banking customers, some banks provide the facility to automatically pop-up the IFSC once name of the destination bank and branch is highlighted / chosen / indicated / keyed in. IFSC The IFSC is Indian Financial System Code is an alpha numeric code that uniquely identifies a bank-branch participating in the RTGS system.
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IFSC is used by the RTGS system to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches. This is an -11- digit code with the first four alpha characters indicate the Bank. (For our Bank it is BARB). The fifth character is numeral Zero (0) reserved by RBI for future use. The last six characters identify the respective banks branch. (Our Bank has adopted ALPHA code of the respective branch for these last six characters). In case the ALPHA code is less than six alphabets, then suffix by Xs so as to make it six characters. For example in the case of Agra main branch, the alpha code is AGRA and the IFS Code, thus, shall be:- BARB0AGRAXX. 4 National Electronics Fund Transfer (NEFT) The National Electronic Funds Transfer (NEFT) is a nation wide Inter-bank remittance system of Reserve Bank of India facilitating one-to-one funds transfer and has been in operation since 21 November 2005. The facility is currently being offered across the country by more than 74,000 branches of various 121 member banks. NEFT is basically for transferring funds between Banks only and not for inter-branch transfer within our Bank. Transaction per day in Rs. 38081 billion and number of per day transaction is 3805814. This is a secure and trusted electronic funds transfer system and the credit has to be passed on to the beneficiary on the same day or at the most on next working day on receipt of the message. In case beneficiary details are found to be incorrect then the funds have to be returned to the sending bank/ branch. The NEFT is electronic fund transfer which operates on a deferred net settlement (DNS) basis which settles transactions in batches. There is no minimum or maximum amount ceiling in case of NEFT transactions. Each banks branch, participating in NEFT, is allotted a unique -11- digit Indian Financial System Code (abbreviated as IFSC). The fifth digit is Zero. Baroda Academy Inventing Methods for Igniting Minds
For e.g. our Ashram Road br Ahmedabad will have the IFS Code as BARB0ASHRAM NEFT is an account to account funds transfer system. However, it has been decided by RBI to provide remittance facility up to Rs. 50,000/- in cash to walk-in customers i.e. customers not having an account with remitting banks. Full details of such remitters such as addresses, telephone numbers etc. are to be collected, if cash deposited is for an amount less than Rs. 20,000/ In case of of amount of Rs. 20,000/- to Rs. 50,000/- in addition to the above collect photo ID from the customer such as PAN card, Driving licence, Election card, Adhar card etc.
Timings: Presently, NEFT operates in hourly batches there are twelve settlements from 8 am to 7 pm on week days (Monday through Friday) viz. 8 A.M; 9 A.M.; 10 A.M.; 11 A.M.; 12 Noon; 1 P.M.; 2 P.M.; 3 P.M.; 4 P.M.; 5 P.M.; 6 P.M. and 7 P.M. and six settlements from 8 am to 1 pm on Saturdays viz. 8 A.M; 9 A.M.; 10 A.M.; 11 A.M.; 12 Noon and 1 P.M. Accordingly, the NEFT Cell at Mumbai downloads the outward messages from CBS at suitable intervals and sends to RBI for settlement. In case of on-line NEFT through Baroda connect or through M-connect after the above cut-off time, the account will be debited on the same day but the funds will be transferred in the first batch of the next working day. 5 Baroda Connect (Internet Banking) Internet Banking (Baroda Connect): Baroda Connect was launched in our bank on 14/09/2006. It provides 24*7*365 service to our Retail & Corporate customers. Baroda connect can be accessed from any where using Internet. Features available: Mobile and Utility Payments Baroda Academy 3 Inventing Methods for Igniting Minds
Online booking of Railway tickets Online Direct/Indirect taxes & state VAT payment. Online RTGS/NEFT Interbank Fund transfer. Institution Fee Payment. Self linked account & Third Party Fund transfer within BOB. Baroda e Shoppe. Online Temple Donation. Application supported by blocked account (ASBA)/ IPO Baroda easy pay, Bill Payment for various vendors. Account summary, Mini Statement (last 10 transactions), Statement of accounts in excel, PDF format, max 400 transaction statement, TDS inquiry, Nominee details, Cheque status inquiry, Joint holder details, TOD, Lien inquiry etc. Request available for FDR Renewal, issue cheques through RLMs. SMS alerts can receive on registered mobile for all subscribed alerts transactions. Financial & Nonfinancial activities inquiry through activity option. Modelling of Loan & FDR is also available. Form 26AS for TDS Certificate from NSDL Fraud Management Solutions Online FDR Opening Online Loan Payment
Security: Baroda Connect is secured by 128 bit Secured Socket Layer (SSL) provided by VeriSign. 6 Baroda M Connect (Mobile Banking) Bank of Baroda offers you BARODA M-CONNECT, the most convenient and secure way to bank on the move 24X7. BARODA M-CONNECT is a banking application that can be downloaded on your mobile phone and can be used to conduct banking transactions in your Bank of Baroda account using your registered mobile phone. With BARODA M-CONNECT you can access account information, transfer funds, pay utility bills, recharge mobile, do airline/movie ticketing and many more. Baroda Academy 3 Inventing Methods for Igniting Minds
Details of Services Offered BALANCE ENQUIRY MINI STATEMENT FUND TRANSFER (WITHIN BANK) 1. MOBILE TO MOBILE 2. MOBILE TO ACCOUNT FUND TRANSFER (OUTSIDE BANK) 1. NEFT (National Electronic Fund Transfer) 2. IMPS (Interbank Mobile Payment Service) BILL PAYMENT AIRLINE TICKETING MOVIE TICKETING SHOPPING (NEXT PHASE) MOBILE RECHARGE STOP CHEQUE CHEQUE STATUS BLOCK CARD LOCATOR USSD BASED MOBILE BANKING SERVICE Unstructured Supplementary Services Data (USSD) is a GSM service which allows high speed interactive communication between the subscriber and application. Unlike SMS, USSD is a session oriented service. USSD gateway enables operator to introduce messaging services and allow up-to 182 characters on a network between mobile stations and applications. USSD gateway uses the same application programming interface that the Short Message Service (SMS) center does. Currently the facility is available with daily transaction limit of Rs. 5,000/- per customer. NUUP (National Unified USSD Platform) is real-time and session oriented platform for Mobile Banking transactions. It works on mobiles without downloading application software. It is initiated by *99# short code and is available across Baroda Academy 3 Inventing Methods for Igniting Minds
mobile operators and banks through a common integration of NPCI. It has better adoption rate due to non dependency on application and is expected to broad-base Mobile Banking and promote Financial Inclusion Difference between applications based service and USSD based service Application based service USSD based service Mobile Banking application has to be No application is required downloaded and installed onto the mobile handset Mobile handset must be java enabled Available on any GSM mobile handset Mobile connection can be CDMA or GSM Mobile connection to be GSM 7 Contact Centre The Call Center, christened as Contact Centre that bank has recently introduced is delivery of banking services through TOLL FREE PHONE. Through these Toll Free Numbers, Banks customers and members of general public can call the Banks Contact Centre and seek information on their accounts, request for banking services, enquire on banks products, interest rates, etc. All customers can avail contact centre services by dialing any one of the following Toll Free Numbers. 1800 22 33 44 1800 102 44 55
It works for 365 days in a year (Except national holidays), from 8.00 am to 8.00 pm. Though these two centers are housed in two geographies, they are complimentary to each other and function as a single unit. These contact centers are provided with necessary access to software applications like CBS, CRM, Net banking portal, etc, for enabling them to service banks customers. Baroda Academy 3 Inventing Methods for Igniting Minds
The resources deployed, called agents have been trained to service the Banks customers. Benefits to the Bank: Contact centre helps branches by providing customer service over PHONE without intervention of the branches. Provides information on routine queries such as Account Balance, transactions, cheque status, product enquiry, interest rate enquiry, gold rate enquiry, etc. instantly. Provides guidance to customers on Baroda Connect services. It can also (a) activate passwords and (b) take request for regeneration of passwords. Stops the payment of cheque and can take the request for issuance of cheque book in respect of RBO covered branches. Hotlists the Debit Card and takes request for reissuance of PIN or Debit Card. As the Contact Centers will be able to address most of the common queries and service requests, Branches will be relieved from such workload and would be in a position to focus their attention more for business promotion / development. Further, Bank proposes to extend functions like (a) Registration of Debit Card related complaints (cash not dispensed), (b) outbound recovery calls, and (c) outbound sales calls. The contact centre will work as extended arm of the branch facilitating marketing and sales of the banks various products. Benefits to the Customers: Most convenient delivery channel Services are available from 8 am to 8 pm 365 days a year, (excluding Independence Day and Republic Day) Baroda Academy 3 Inventing Methods for Igniting Minds
Free of Cost. Toll Free Number and hence No Cost TWO Toll Free Numbers are available to ensure uninterrupted service Customers are not required to visit branch for any services. Emergency Services Debit Card Hot-listing is easy, simple, authentic All service requests are supported by Docket Number, for further enquiry. Services for all linked accounts are available Professionally managed and Technology driven services
8 Baroda e-gateway (Internet Payment Gateway) Internet payment gateway is an internet based payment system under e-commerce business, christened as Baroda e-Gateway by Bank of Baroda. It allows merchants to offer their goods and services through websites. The consumer is provided an opportunity to know, compare and shop products on virtual stores round the clock from the convenience of their home. Since the concept of visiting a physical store is becoming time consuming and inconvenient especially at major centers. The IPG infrastructure is usually complex and expensive. It provides an easy and secure mechanism to merchants for processing online payments by shielding them from underlying complexity of payment transactions and integration with electronic fund transfer switches. IPG service provider is responsible for settlement, accounting, reconciliation between various agencies involved and merchant is free to concentrate on his business. Target Customer:
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Merchants, who have their website and are in the business of selling products / services through internet. Merchants, who are interested in expanding their existing business using internet technology. Benefits of Baroda e-Gateway: Owned infrastructure of hardware, software and dedicated support system for Baroda e-Gateway. Hosted from Banks tier-3 data centre providing 24x7x365 Global support. Exclusive business vertical for e-Business, headed by General Manager, emphasizing Banks focus towards e-channels. Best available technology and time bound support in integration and operations at competitive rates. Dedicated operations team to provide assistance in configuration, day-to-day processing, settlement and associated reconciliation. Merchants get credit as early as next working day for INR, though Bank receives settlement subsequently after 1-2 days. Merchant is shielded from installing and maintaining complex technology and interacting with various agencies. Payment is received in stipulated timeframe even though Bank receives the amount subsequently. Merchant can themselves view/print transactions carried out from their website. Simple interface with Banks system. Dedicated support is provided to configure and test the setup. Cardholder is assured of the safety of their card details/usage. In addition, they get convenience of purchasing goods/services from the comfort of their home/office. Round the clock hassle free service. At present it is only accepting Master / Visa, Credit / Debit Cards issued by any bank in India. It has got Security feature such as CVV2 & 3D security for transactions. Baroda Academy Inventing Methods for Igniting Minds
Security Features: Utilizes strong industry standard 128 bit SSL encryption 3-D Secure : Additional password compliant with Visa and MasterCard protocol specifications and Reserve Bank of India guidelines (reduces chances of fraud to almost negligible) McAfee Secure : To prevent from Internet worms and credit card thefts, we are using McAfee Secure certified system. It continuously scan messages coming to the server and send alerts to administrator. The data transmission is encrypted and storage is under strict data centre environment. 9 Baroda Cash Management Services (BCMS) While Core Banking Solution (CBS) provides a means to swifter collections but there are a number of gaps vis--vis the corporate customers requirements. Baroda Cash Management Solution empowers the Bank to offer its corporate customers optimized Cash Management services by drastically improving their Funds Collection Inflow forecasting Speed & quality of information assisting the process Customized Reports with additional information Payment dispatch Funds utilization to minimize interest outflow Baroda Cash Management Services is divided into two broad categories (1) On-site Bank Operations and (2) Web driven Operations. Cash Management Services consist of three functional modules: Collections Module Payment Module Liquidity Management Baroda Academy Inventing Methods for Igniting Minds
PRIORITY SECTOR LENDING & FINANCIAL INCLUSION Revised Priority Sector Guidelines: Target for the Priority sector Lending Priority Sector credit should be minimum 40 % for Domestic commercial banks / Foreign banks with 20 and above branches & 32 % for Foreign banks with less than 20 branches , of their Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance sheet exposure whichever is higher of previous financial years (as on 31st March). Adjusted Net Bank Credit (ANBC): For the purpose of priority sector lending, ANBC denotes the outstanding Bank Credit in India minus bills rediscounted with RBI and other approved Financial Institutions plus permitted non SLR investments in Held to Maturity (HTM)
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category plus investments in other categories, which are eligible to be treated as part of priority sector lending (eg. investments in securitised assets). Different Components of P/S Lending The following categories of advances as mentioned below would be included in the Priority Sector Lending. Agriculture (Direct/Indirect) Micro & Small Enterprises (Direct/Indirect Finance) Educational Loans Housing Loans Export Credit Others Within the overall main lending target of 40 per cent of Adjusted Net Bank Credit (ANBC) or equivalent amount of Off-Balance sheet exposure, it should be ensured that:
Total agriculture: 18 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Of this, indirect lending in excess of 4.5% of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, will not be reckoned for computing achievement under 18 percent targ et. However, all agricultural loans under the categories 'direct' and 'indirect' will be reckoned in computing achievement under the overall priority sector target of 40 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Micro & Small Enterprises (MSE): (i) Advances to micro and small enterprises sector will be reckoned in computing achievement under the overall priority sector target of 40 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Baroda Academy Inventing Methods for Igniting Minds
(ii) 40 percent of total advances to micro and small enterprises sector should go to Micro (manufacturing) enterprises having investment in plant and machinery up to 5 lakh and micro (service) enterprises having investment in equipment up to Rs 2 lakh; (ii) 20 percent of total advances to micro and small enterprises sector should go to Micro (manufacturing) enterprises with investment in plant and machinery above Rs 5 lakh and up to Rs 25 lakh, and micro (service) enterprises with investment in equipment above Rs 2 lakh and up to Rs.10 lakh Particulars In case of Mfg. sector, original investment in P & M Upto Rs.25 lacs Above Rs.25 lacs and upto Rs.500 lacs In case of Service sector (Loan upto Rs.2.00 cr), original investment in Equipments Upto Rs.10 lacs Above Rs.10 lacs and upto Rs.200 lacs
Micro Enterprises Small Enterprises
Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006. Education Loan: Study in India up to Rs.10 lacs and Study abroad up to Rs.20 lacs Housing Loans: Upto Rs.25 lac in Metro and Rs.15 lac in other centres, for constructions of houses. For EWS, Rs.5 lac per dwelling unit (irrespective of area ) will qualify for P.S. classification. Loans for repair and renovations up to Rs. 2 lac in Rural and Semi Urban Area and upto Rs. 5 lacs in Urban Areas. Export Credit: Export Credit extended by foreign banks with less than 20 branches will be reckoned for priority sector target achievement. Baroda Academy Inventing Methods for Igniting Minds
As regards the domestic banks and foreign banks with 20 and above branches, export credit is not a separate category under priority sector. Others: Loans, not exceeding Rs 50,000 per borrower provided directly by banks to individuals and their SHG/JLG, Overdrafts, up to Rs 50,000 (per account), granted against 'no-frills' / basic banking / savings accounts provided the borrowers household annual income in rural areas does not exceed Rs 60,000/- and for non-rural areas it should not exceed Rs 1,20,000/-. Loans to distressed persons not exceeding Rs 50,000 per borrower to prepay their debt to non-institutional lenders. Loans outstanding under loans for general purposes under General Credit Cards (GCC). If the loans under GCC are sanctioned to Micro and Small Enterprises, such loans should be classified under respective categories of MSE. Loans sanctioned to State Sponsored Organisations for SC/ST for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations. Loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-grid renewable energy solutions for households.
Weaker section: In order to ensure proper attention in the matter of allocation of credit to following preferred sector, (known as WEAKER SECTION as per the recommendations of Shri Krishnaswami Committee) RBI has stipulated that 25 % of Priority Sector advances i.e. 10 % of net bank credit should go to these weaker sections beneficiaries. Following types of finance are included under Weaker Section finance: Baroda Academy Inventing Methods for Igniting Minds
Small and Marginal Farmers: Farmers with landholding of up to 1 hectare is considered as Marginal Farmers. Farmers with a landholding of more than 1 hectare but less than 2 hectares are considered as Small Farmers. For the purpose of priority sector loans small and marginal farmers include landless agricultural labourers, tenant farmers, oral lessees and share-croppers, whose share of landholding is within above limits prescribed for Small and Marginal Farmer.
Financial Inclusion Recent Updates A large section of the rural poor still does not have access to the formal banking channel. Further, the backward regions of the country, too, lack basic financial infrastructure. 3 Inventing Methods for Igniting Minds
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Financial Inclusion is aimed at providing banking services at an affordable cost to the disadvantaged and low-income groups. Capital formation through credit and financial services essential prerequisite for inclusive and sustainable growth can be achieved through access to a wellfunctioning financial system resulting into better integration of economically and socially excluded people into the economy. Globally, the triad of Financial Inclusion, Financial Literacy and Consumer Protection has been recognized as intertwining threads in pursuit of Financial Stability.
Extent of Financial Inclusion (Source: RBI) Parameter Number of habitations Habitations having access to commercial Bank Branch Population having bank account Population having debit card Population having credit card
600000 5% 57% 13% 2%
The penetration of financial services is very low in North Eastern states. Low level of financial penetration compared to OECD countries. Access of bank branches better compared to china but worse off compared to Malaysia and Thailand. ATM penetration poor compared to Asian peer group countries. In view of poor financial inclusion status RBI accorded top priority to it and accordingly commercial banks were advised to: Formulate specific Board approved Financial Inclusion Plans (FIP) and to act on them on a mission mode. To provide banking services in every village having a population of over 2000 by 31 March 2012, through bank branches as well as through various ICT-based models including through Business Correspondents (BCs). Inventing Methods for Igniting Minds
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Despite increased outreach of the branches in rural and semi urban areas and the implementation of directed credit, farmers and rural artisans still did not receive adequate credit from banks and accessibility of avenues for savings in formal banking channels were limited. In order to address this issue RBI liberalised the branch authorisation policy in December 2009 and domestic scheduled commercial banks were given freedom to open branches in tier 3 to tier 6 centres (having population up to 49,999 as per 2001 census) without obtaining permission from RBI, subject to reporting. Committee on Financial Sector Reforms (Government of India, 2009), proposed that instead of focussing primarily at expanding credit, financial inclusion should be viewed as expanding access to financial services, such as payments services, savings products, insurance products, and inflation-protected pensions. The focus also shifted from social banking without profitability concerns to profitable business propositions for the banks. The delivery models instead of being cost centric should aim at generating revenue aimed at providing quality banking service to customers at their doorstep with a profitable proposition for the banks. (RBI 2011).
Concept of ultra small branch (USB): Ultra small branches be set up in all villages covered through BCA ( Business correspondent agent) Branch to consist of small area 100-200 sq. feet where officer designated by the bank will be available with a laptop on predetermined day and time in a week. This would ensure close supervision and mentoring of BCA and availability of range of banking services in villages. Cash services would be offered by the BCA from the USB premises. The bank officer would offer other services, undertake field verification and follow up the banking transactions. After periodic review the periodicity and duration of visit can be progressively enhanced depending upon business potential. Presence of bank officer at USB will create confidence in the rural masses prompting them to shift to banking channels and thereby reducing their Baroda Academy Inventing Methods for Igniting Minds
dependency on non institutional moneylenders. Progress of financial inclusion plan
financial
channels
specially
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Banking connectivity has been extended to more than 1, 99,702 villages up to September 2012 from 67,694 villages in March 2010. 4848 rural branches have been opened. Numbers of Business Correspondents have increased from 34,532 to 128,054. 83.70 million Basic Savings Bank Accounts (NFAs) have been added. 7.35 million KCCs and about 0.98 million GCCs have been added. About 37 million people/families have been credit-linked. Share of ICT based accounts have increased substantially - % of ICT accounts to NFAs has increased from 25% to 45%. Urban Financial Inclusion Urban Financial Inclusion is an initiative by the Government of India to inculcate saving habits and to extend financial services to migrant labourers and street vendor/hawkers in urban areas. The account opening drive is of paramount importance in achieving the broader objective of Financial Inclusion, which is very high on the agenda of the Government. The Government desires to open bank accounts for all migrant labors and street vendors/hawkers who are working within 500 meters of the branches, in urban and metro areas. To achieve the Urban Financial Inclusion, marketing staff of branches should personally contact all street vendors/hawkers who are working within 500 meters of branches, to open their accounts.
Progress of our Bank in Urban Financial Inclusion Campaign launched in our SLBCs UP and Rajasthan. Baroda Academy 3 Inventing Methods for Igniting Minds
For convenience of customers, a call centre is established by putting up a Toll-free line at SLBCs cell at Jaipur and Lucknow. Mobile phones at Lead District Managers Office are being provided for SMS facility Separate email-id created for UP and Rajasthan SLBC. Wards allocated to the member banks of SLBC in UP and Rajasthan. Publicity is being given to campaign by issuing advertisement in the newspapers. Why financial inclusion should be seen as an opportunity by the Banks? It will help the banks to increase the customer base and reduction of dependency of rural masses on non institutional financial channels. This will be helpful in increasing the CASA base of the banks. As per CRISIL survey the consumption in rural area is growing faster than in urban area, during 2009-10 to 2011-12, additional spending by rural India was Rs. 3750 billion, significantly higher than Rs. 2,994 billion by urban population. This untapped potential in rural area can be utilised by the banks in increasing their business. The lack of easy access to financial products and services creates demand for non financial products like gold and real estate. Through combined effect of financial inclusion and financial literacy demand for financial products and services can be created leading to a more sustainable growth of the financial sector. Financial inclusion will facilitate economic growth and financial deepening of the Indian economy thereby leading to banking growth.
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CREDIT MONITORING & NPA MANAGEMENT Reserve Bank of India guidelines for Restructuring General Principles and Prudential Norms for Restructured Advances The principles and prudential norms laid down here are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification. Eligibility criteria for restructuring of advances 1 Banks may restructure the accounts classified under 'standard', 'sub-
standard' and 'doubtful' categories. 2 Banks can not reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because restructuring proposal is under consideration. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern. 3 Normally, restructuring can not take place unless alteration / changes in the original loan agreement are made with the formal consent / application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.
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4 No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns / action. 5 While the borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring, banks may review the reasons for classification of the borrowers as willful defaulters specially in old cases where the manner of classification of a borrower as a willful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the wilful default. The restructuring of such cases may be done with Board's approval, while for such accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group only. 6 BIFR cases are not eligible for restructuring without their express approval. CDR Core Group in the case of advances restructured under CDR Mechanism / the lead bank in the case of SME Debt Restructuring Mechanism and the individual banks in other cases, may consider the proposals for restructuring in such cases, after ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package. Baroda Academy 3 Inventing Methods for Igniting Minds
Asset classification norms Restructuring of advances could take place in the following stages : (a) before commencement of commercial production / operation (b) after commencement of commercial production / operation but before the asset has been classified as 'sub-standard' (c) after commencement of commercial production / operation and the asset has been classified as 'sub-standard' or 'doubtful'. 1 The accounts classified as 'standard assets' should be immediately reclassified as 'sub-standard assets' upon restructuring. 2 The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule. 3 All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for up-gradation to the 'standard' category after observation of 'satisfactory performance' during the 'specified period'. 4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the prerestructuring payment schedule. 5 Any additional finance may be treated as 'standard asset', up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. However, in the case of accounts Baroda Academy 3 Inventing Methods for Igniting Minds
where the prerestructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. 6 In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance. Income recognition norms Interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the accounts classified as 'non-performing assets' will be recognized on cash basis. Provisioning norms 1 Normal provisions Banks will hold provision against the restructured advances as per the existing provisioning norms. 2 Provision for diminution in the fair value of restructured advances
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(i) Reduction in the rate of interest and / or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the bank's market value of equity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms and in an account distinct from that for normal provisions. For this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. The above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to follow consistently by banks in future. Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to Baroda Academy 3 Inventing Methods for Igniting Minds
deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other. (ii) In the case of working capital facilities, the diminution in the fair value of the cash credit / overdraft component may be computed as indicated above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components. (iii) In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated. (iv) The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account. (v) If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small / rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair Baroda Academy Inventing Methods for Igniting Minds
value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore till the financial year ending March 2013. The position would be reviewed thereafter. 3 The total provisions required against an account ( normal provisions 100% of the outstanding debt amount. Special Regulatory Treatment for Asset Classification 1 The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated, will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated below. Such treatment is not extended to the following categories of advances: i. Consumer and personal advances; ii. Advances classified as Capital market exposures; iii. Advances classified as commercial real estate exposures The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated below, will be governed by the prudential norms in this regard described above. Elements of special regulatory framework The special regulatory treatment has the following two components : (i) Incentive for quick implementation of the restructuring package. Baroda Academy 3 Inventing Methods for Igniting Minds plus
provisions in lieu of diminution in the fair value of the advance) are capped at
(ii) Retention of the asset classification of the restructured account in the prerestructuring asset classification category Incentive for quick implementation of the restructuring package During the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in non-CDR cases: (i) Within 120 days from the date of approval under the CDR Mechanism. (ii) Within 90 days from the date of receipt of application by the bank in cases other than those restructured under the CDR Mechanism. Asset classification benefits Subject to the compliance with the under noted conditions in addition to the adherence to the prudential framework laid down: (i) an existing 'standard asset' will not be downgraded to the sub-standard category upon restructuring. (ii) during the specified period, the asset classification of the sub-standard / doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period. Baroda Academy Inventing Methods for Igniting Minds
However, these benefits will be available subject to compliance with the following conditions: i) The dues to the bank are 'fully secured'. The condition of being fully secured by tangible security will not be applicable in the following cases: (a) SSI borrowers, where the outstanding is up to Rs.25 lakh. (b) Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows. (c) Micro Finance Institution accounts, which are standard at the time of
restructuring, even if they are not fully secured. However, this relaxation is granted purely as a temporary measure and would be applicable to standard MFI accounts restructured by banks upto 31st March 2011. ii) The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units. iii) The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. The aforesaid ceiling of 10 years would not be applicable for restructured home loans; in these cases the Board of Director of the banks should prescribe the maximum period for restructured advance keeping in view the safety and soundness of the advances. Lending to individuals meant for acquiring residential property which are fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented are risk weighted as under the new capital adequacy framework, provided the LTV is not more than 75% , based on board approved valuation policy. However, Baroda Academy 3 Inventing Methods for Igniting Minds
the restructured housing loans should be risk weighted with an additional risk weight of 25 percentage points to the risk weight prescribed already. iv) Promoters' sacrifice and additional funds brought by them should be a minimum of 15% of banks' sacrifice. The term 'bank's sacrifice' means the amount of "erosion in the fair value of the advance above. Further, the additional funds required to be brought in by the promoter should generally be brought in up front . However, if the banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfill their commitments, the promoters could be allowed to bring in 50% of their sacrifice , i.e. 50% of 15%, upfront and the balance within a period of one year. Further, in case the promoters fail to bring in their balance share of sacrifice within the extended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the they will have to revert to classifying such accounts as per the asset classification norms. v) Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry. vi) The restructuring under consideration is not a 'repeated restructuring'.
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Non Performing Assets Another issue which is generating considerable concern and is likely to impact banks ability to serve its stakeholders is the rising portfolio of nonperforming assets (NPAs) and restructured loans. While the downturn in business environment globally and in India has contributed to this rise, we need to reflect on why our risk management practices during boom time were unable to anticipate future downturns and build up suitable safeguards while giving loans. The rising impaired assets is a governance issue as banks have forgotten the art of saying no, except, may be, to small borrowers. Banks need to significantly improve their risk assessment capability and their ability to price risks, so that they take on only those risks that they understand and can effectively manage. This need is all the more pronounced in the case of public sector banks, which, at times, end up with assets that have been exited by private sector/ foreign banks on account of inherent weaknesses. The ability to manage NPAs is important in order to preserve the strength of bank balance sheets and to retain the appetite to take on good risks. An attitude of complete risk aversion would not be appropriate as banks are in the business of taking risks, but with adequate safeguards. . Another issue is the element of discrimination practiced by the banks in restructuring of loans. Analysis of available data indicates that the larger Baroda Academy 3 Inventing Methods for Igniting Minds
borrowers have invariably received the benefit of restructuring of loans, while the restructuring in case of SME/ agriculture loans has remained abysmally low. Timely intervention and support from the banks, this sector would have definitely shown much lower levels of impaired assets than it presently does.
MODULE C : FUTURE TRENDS / CHALLENGES
HR Challenges of Decade 2020 Development of knowledge and talent marketplace Though the face of banking industry has undergone a sea change in the years that have gone by, one characteristic of the industry that has remained unchanged is people. The banks succeed or fail depending on the quality of their workforce talent at every levelthe front lines, middle management and executive leadership. Banks should look at workforce talent as the primary engine for sustained, competitive advantage and for creating a workforce in which people at every level are capable of contributing with high levels of performance leveraging on technology. It's about creating a IT culture of excellence. It is the HR teams that will give banks the competitive advantage in the years to come. Skilling of workforce Baroda Academy 3 Inventing Methods for Igniting Minds
There is shortage of trained manpower for the industry, both at the bottom of the pyramid and higher up the ladder. India is often considered to be a source for skilled labour supply to the rest of the world, given its sheer size of manpower. It is often not recognized that over four-fifths of our rural population and over half of our urban population remains unskilled. Women participation rate in the labour market remains poor. The biggest problem is the lack of focus on technical education that could absorb a large chunk of unskilled labour, if backed by greater push to primary education. Less than 11 per cent of the job-seeking population in the age group of 15-29 receives any form of vocational training in India and only one of every three who do get vocational training receive it from specialized training institutes. Furthermore, even in the value added segment, where we have the largest pool of skilled manpower i.e. in the area of information technology, real wages are rising at a pace that may impact our competitiveness. Improve productivity and efficiency
Productivity is an important driver of growth. Productivity depends on the efficiency with which scarce resources are allocated be it your time, work effort, natural resources, capital or any other inputs. A great deal of the growth for most countries can be explained by productivity growth, especially total factor productivity growth (TFPG). Factor accumulation (such as increase in labour or capital) explains a smaller part of the growth. Given this experience, India would need to focus on technological developments to improve its rate of TFPG. Capital deepening may also help, but the key lies in overall productivity enhancements. In India, output per worker has increased at an impressive rate in the services sector after the reforms initiated in early 90s. In this period, TFPG growth has also been impressive for this sector. TFPG growth has also improved for the manufacturing sector since the 1980s. So, progress is being made. However, the rate of this technical change, still, has been lower than that for the East Asian economies during the period in which they earned the tag of being East Asian tigers.
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Creating Synergy Between Seniors and Gennext

Banking Industry is witnessing the enormous diversity in the composition of the
workforce. More young officers including women are entering the workforce who are more technology-savvy, people in hurry and difficult to satisfy. Bank is having biggest challenge for creating synergy between young workforce and experienced seniors. Retention of Talent During last one & two years Banking Industry is experiencing that the rate of attrition is increasing due to various reasons and almost all PSBs are facing some degree of uncertainties in their humane base planning due to this attrition behavior prevalent in the market. Attrition not only cost us in the form of time and money but also affects the momentum of our business growth.
IT Vision for 2011 to 2020 Focus for Banks Although banks have deployed technology for transaction processing, analytical processing by banks is still in a nascent stage. It is now essential for banks to look at improving the efficiency and effectiveness of the IT Infrastructure created. Technology has its own set of challenges to be addressed. These are the need to have high availability of IT systems, efficient and effective business continuity plans, system of periodical assessment of the risks for IT and IS systems, conduct of regular audit, taking care of IT obsolescence and the likes. Newer areas of technology initiatives apart from risk management of the enterprise include, CRM using business intelligence, improving internal effectiveness and managing risks arising out of IT implementation. Indian payment systems Baroda Academy 3 Inventing Methods for Igniting Minds
Indian payment systems thus pose significant opportunities and challenges/ threats in the coming years. An indication of the scope of the challenges and opportunities can be gathered from the following few pointers: (i) There is a huge potential of migrating government transactions (payments and receipts) to electronic mode. It is estimated that Government subsidies alone constitute more than Rs. 2.93 trillion and if these payments are effected electronically, it may translate to 4.13 billion electronic transactions in a year. In addition, there is a large scope for further electronification of collection of Government receipts. (ii) A fraction of the 10 million plus retailers in India have card payment acceptance infrastructure presently this number stands at just 0.6 million - and this infrastructure needs to be grown exponentially. A "point of purchase" terminal has also been envisioned to ensure seamless e-payments to sellers of goods/farm products at wholesale markets and government procurement programs. (iii) The e-commerce and m-commerce platforms are poised for a big stride in coming years. Similarly, electronic bill presentment and payments involving insurance, utility bills, taxes, school fees, etc. present a huge opportunity. (iv) Currently, the number of non-cash transactions per person stands at just 6 per year. If the efforts of financial inclusion bear fruit and if each citizen of the country undertakes a minimum of one transaction in month, the total transactions in the country would reach an astronomical 12 billion transactions per annum. (v) To accomplish the vision of a less-cash society, if not cashless society, the key elements which would impact all our efforts towards creation of a modern and widespread payment system. Efficiency enhancement in the payment systems: Cheque Clearing: Opportunity: Over the years efficiency in Cheque clearing has been brought by way of introduction of MICR processing, computerised clearing using the Express Cheque Clearing System (ECCS) which also facilitates speed clearing and introduction of cheque truncation system (CTS). The CTS projects have Baroda Academy 3 Inventing Methods for Igniting Minds
been entrusted to NPCI the umbrella organisation for retail payments in the country. Challenges: The focus of cheque clearing operations in the coming years would be consolidation, rationalisation and centralisation, through the implementation of grid-based CTS solution (which is Information Technology Act compliant) across the country by NPCI. The grid-based CTS will usher in a standardised cheque clearing scenario across the country. The issuance of CTS 2010 standard cheques will further facilitate this process. Dialogue with the Government will continue to be pursued for issuance and adoption of CTS 2010 standard cheques at the earliest and discontinue the existing practice of "paper to follow" in CTS by seeking amendment of the treasury rules. National Electronic Funds Transfer System (NEFT): Given the reach of the system and increasing volumes being handled every day, the system has become an important payment system. Introduction of user / customer friendly features and increasing the number of settlement cycles in NEFT would be further examined. . Opportunity: The positive confirmation feature in NEFT has been well appreciated by the customers. Challenges: there is a need for improving the visibility of the payment transaction. This would require that the transaction reference number is unique and same throughout the life cycle of the transactions - from the point of origin to the destination. Further, return transactions should carry the original transaction reference number to aid the reconciliation process. National Electronic Clearing Services (NECS): Currently there are many avatars of ECS operating in the country with ECS on a standalone mode available in 81 centres. The way forward would be to consolidate local ECS into RECS and ultimately to NECS. Opportunity: Redesigning ECS suite of products to function as an Automated Clearing House (ACH) for bulk transactions including both credit and debit, is an option that needs further examination. However, this needs to be weighed against Baroda Academy Inventing Methods for Igniting Minds
the roll out of ACH by NPCI as also the need to provide a backstop in the event of failure of any system. Challenges: One of the major challenges faced in the ECS schemes relates to mandate management and the ease with which the customers can manage their mandates. Efforts would be made to rationalise and strengthen the mandate management systems. This could be achieved through business process reengineering resulting in an electronic (centralised/ decentralised) mandate management system. In addition, an electronic GIRO5 instrument for effecting credit transfer by a payer from any branch of a bank or from any other authorised non-bank would also be explored. Further, considering the fact that cheque continues to be a dominant payment instrument in India, the scope of implementing a cheque based GIRO system would be examined. Harmonisation of routing codes: Opportunity: Currently different payment systems use different routing codes. The MICR code is used for cheque clearing and ECS operations, the IFSC code is used for NEFT and RTGS operations and the BSR code is used for identification of a bank branch for submission of returns to the RBI and is now being used for reporting government business details to Government. Additionally, Aadhaar number is sought to be populated along with bank account numbers to enable electronic transfer of Government benefits. With the inprinciple approval for using SWIFT for domestic financial transactions, the participants in the payment system should not be burdened with yet another routing code. Challenges: There is, therefore, a need to harmonise all these routing codes in co-operation and collaboration with the stakeholders viz., banks, Government, IBA, IDRBT, NPCI, SWIFT, etc. and the departments concerned within RBI. Further, any such exercise would involve business process re-engineering at the application level for various payment systems as well as the core banking solution of banks. While this has major cost implications the fructification of efforts towards a uniform routing code for both domestic as well as cross border transactions would deliver major cost savings in terms of enhancing STP and minimising operational risks. Baroda Academy Inventing Methods for Igniting Minds
Standardisation of account numbers: Opportunity: Currently the account numbers maintained across various banks are different based on their requirements and range from 10 digits to 17 digits. Lack of uniformity in account numbers hinders STP and banks have to either mask excess digits or add extra digits to facilitate this process. There is therefore a business case for examining the need for developing a common account number across payment systems. Challenges: the adoption of International Bank Account Number (IBAN)/ Basic Bank Account Number (BBAN) could be explored. IBAN/BBAN provides a format for account identification and also contains validation information in the form of check digits which can be validated at source based on a prescribed single standard procedure. The IBAN/BBAN in itself contains all the routing information needed to get a payment from one bank to another.
Standardisation of bill payments: Opportunity: It is estimated that a large portion of the bill payments are done at billers location (generally walk-in customers). Thus there is a huge opportunity for developing a bill payment system for payments towards insurance premia, utility payments, taxes, school fees. Challenges: Towards this end, there is a need for developing an electronic GIRO system. One of the prerequisites for developing an electronic GIRO system is the standardisation of biller information. Payment Hub: Opportunity: The concept of a payment hub is being perceived to allow consolidation of multiple payment systems into one centrally managed mid-office payment system. This would necessitate putting in a streamlined IT architecture which would eliminate point to point interfaces for various payment products. Such a payment hub with the latest technology would result in facilitating faster and smoother electronic payment transfers as opposed to the current system of Baroda Academy 3 Inventing Methods for Igniting Minds
individual interfaces being responsible for inputting electronic payment instructions into various systems. Once a payment hub becomes functional an individual bank would simply need to input an electronic payment instruction to the hub which would then automatically route the instructions to various payment systems. Challenges: The concept of payment hub is very much dependent on standardised message formats and uniform routing codes. This would also enable rationalisation of costs for the banks. Manage Mobile The mobile revolution has created a sort of new world order. It has the potential to change the way banks do business. It is up to the banks to take cue. While banks are embracing the mobile channel -- and continuing to support the old standby of online banking -- they are not integrating the technologies used to build e-banking solutions. Also as more people conduct their banking on mobile devices, these devices also will become the growing focus of hackers and fraudsters, who are always on the hunt for ripe targets. Banks can work on two areas within the mobile channel, fraud prevention and marketing to customers. In fact, world over mobile banking already is playing a role in reducing fraud in a variety of ways -- ranging from simple transaction and security alerts to mobile authentication for bank transfers. White Label ATMS: The Automated Teller Machine (ATM) has been hailed as one of the most innovative and revolutionary technological developments in the history of banking. The channel, which was initially a medium for disbursal of cash to customers at bank branches, has now developed into a touch-point for delivery of a wide variety of banking services at branches and convenient off-site locations. Though banks initially owned and deployed their own ATMs, over time this has undergone a broad change, with banks now preferring outsourcing all or many of the activities associated with ATM operations - starting from deployment, maintenance, cash Baroda Academy 3 Inventing Methods for Igniting Minds
loading and technology upgrading. This has helped them reduce their operational costs and stay more focused on their core business. Internationally, in addition to bank-owned and deployed ATMs, Independent ATM Deployers (IADs) and Independent Service Organisations (ISOs) are engaged in the ATM business. Such ATMs are called White-label ATMs (WLAs). IADs and ISOs are almost similar in their operations, barring the following differences: (i) ISOs are usually larger operators that own and deploy ATMs and the entire related infrastructure. They have a sponsorship arrangement with the banks for cash loading and services. The relationships with sponsor banks are guided by local regulatory requirements. The ISO scheme works either through a single sponsor bank or the multisponsor bank model. (ii) In the IAD model, the entities concentrate on investment in the assets (ATMs). They own the ATM and connect to any existing network provider for the payment infrastructure. The IADs can include entities ranging from individual business owners to large retail outlets/ supermarkets. Such entities do not have a direct arrangement with any bank for any aspect related to the operation of such ATMs, including cash loading. ATMs and WLA Scheme in India The number of ATMs in the country stands at more than 1 lac, of which 38 per cent are owned by private sector banks, 33 per cent by public sector banks, 27 per cent by the SBI and Associates, and 2 per cent by foreign banks. There has been a 30 per cent year-on-year growth in the number of ATMs deployed in the country since 2008, but the penetration of ATMs in Tier III to Tier VI centres remains below the desired level. In order to ensure deeper penetration of ATMs
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in unbanked/ under-banked areas, the Reserve Bank has permitted White-Label ATMs in the country to supplement the existing ATM schemes operated by banks. Under the policy guidelines, non-bank entities incorporated in India under the Companies Act, 1956 would be authorised to set up, own and operate ATMs in India, which will provide banking services to the customers of banks in India, based on the cards (debit/ credit/ pre-paid) issued by banks. Such non-bank entities should have a minimum net worth of Rs 1 billion as per the latest financial years audited balance sheet, which is to be maintained at all times. The model envisages that cash management and customer redressal would continue to be the responsibility of the sponsor banks. The scheme offers scope for large volumes, especially in unbanked/ under-banked areas. It is expected that WLA operators in India will use the features of the IAD and ISO models, as permitted under the guidelines, and collaborate closely with the sponsor banks.
Banking by the year 2015: The survey was conducted by IBM research unit on future banking scenario, which revealed five key trends that will determine market success in 2015: Customers take control- Customers will be smart, informed and savvy users of financial services. They will only be interested in service providers that can meet their very specific individual needs. Specialized niche competitors- Market consolidation will continue, making the mega banks even bigger. But they will face many competitors including community banks, industry specialists and non-bank banks that specialize in providing specific services. Partner-competitor relationships will arise. A new workforce- The need for productivity and efficiency will create new labour and work practices. But there will also be intense competition to attract and retain talent. Inventing Methods for Igniting Minds
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Regulated transparency- The need to comply with globally enforced standards of transparency and accountability will force the adoption by banks of integrated, enterprise-wide systems and processes. Sharply focused technology- The enabler of all this change will be technology that supports rapid, accurate decision making and greater operational flexibility and efficiency. The successful specialists will be those who can track and analyze specific customer needs and speedily meet them with profitable, reliable products.
Even, banks will source products and services from many specialized and best-inclass service providers, including independents and other banks providing whitelabel products and services. Innovation in products, processes, relationships and business models will be the primary path to sustainable growth.
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Staff College, Ahmedabad Recent Updates in Banking Industry

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MODULE A: RECENT IMPORTANT CHANGES Contemporary Banking Issues

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2. Higher quality capitals Structure Particulars of Capitals

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Resources Mobilized from Primary market Resource 310 Mobilized by Bank/FIs

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Introduction of Financial Holding company structure in India

second, the perspective.

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June 1969 Baroda Academy

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Stepping up size (market power) and maximizing value (revenue) by exploiting

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financial intermediation increased in the economy . Based on this rationale, there

intermediation costs, or in technical terminology, reduce the net interest margin.

Table : NIM Analysis of Indian Banks

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Bank Group 31st March (%age)

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NEW INITIATIVES TAKEN BY BANK Major technology Initiatives:

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SME & WEALTH MANAGEMENT SERVICES

SME Banking An Overview & Important Guidelines

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Rs..100 p.a. Yes

p.a. Yes Yes

Mark up fee Mark up fee Mark up fee of Mark up fee of 3% of 3% 3% of 3.5%

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theft or misuse insurance of Rs..5,00,000/10 years

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Micro Enterprises Small Enterprises

600000 5% 57% 13% 2%

dependency on non institutional moneylenders. Progress of financial inclusion plan

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MODULE C : FUTURE TRENDS / CHALLENGES

Creating Synergy Between Seniors and Gennext

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