Final Proj 03

Banking Sector In India
1 Lala Lajpatrai Institute Of Management

India's Growing Banking Sector
India's banking sector is booming at a great pace in spite of its relatively small size in
comparison of its counterparts in other leading economies. Indian banking sector has been found
lucrative by eminent players from the international world. For e.g., In India, Citibank and
Standard Chartered ank has more than half of all credit card receivables and personal loans,
which has generated more than !s. "## crore of profit for both banks. In "##$, %riental ank of
Commerce was listed by Forbes magazine in its '&lobal "## est Companies' list. In '((#s, after
a long gap of more than "# years, the ape) bank, !eserve ank of India *!I+ has issued licenses
to ( new private banks. In this, ,imes ank got merged with the -.FC ank. ,he !I also
allowed /otak 0ahindra Finance Company to become a bank. ,hese banks have shown their
edge over each others with the introduction of new products and technologies. 0ost of the banks
paid their focus on the retail sector and provide internet banking, phone banking and mobile
banking services to their customers and have cornered one of the largest segments of the India's
banking sector by targeting the India's growing middle income class. ,he Indian banking sector
has seen a proliferation of new services which has shown an improvement in customer service.
What is Bank?
In India, the definition of the business of banking has been given in the anking
!egulation 1ct, *! 1ct+, '(2(. 1ccording to Section 3*c+ of the ! 1ct, 'a banking company is
a company which transacts the business of banking in India.' Further, Section 3*b+ of the ! 1ct
defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdraw able, by che4ue, draft, order or
otherwise.' ,his definition points to the three primary activities of a commercial bank which
distinguish it from the other financial institutions. ,hese are5 *i+ maintaining deposit accounts
including current accounts, *ii+ issue and pay che4ues, and *iii+ collect che4ues for the bank's
customers. In e)planatory form a banker or bank is a financial institution whose primary activity
is to act as a payment agent for customers and to borrow and lend money. In other words, an
institution where one can place and borrow money and take care of financial affairs.
1 bank is a financial intermediary and appears in several related basic forms5
a central bank issues money on behalf of a government, and regulates the money supply
a commercial bank accepts deposits and channels those deposits into lending activities,
either directly or through capital markets. 1 bank connects customers with capital deficits
to customers with capital surpluses on the world's open financial markets.
a savings bank, also known as a building society in ritain is only allowed to borrow and
save from members of a financial cooperative
anking is generally a highly regulated industry, and government restrictions on financial
activities by banks have varied over time and location. ,he current set of global bank capital
standards are called asel II
Evolution of Banking Sector in India
anking in India originated in the last decades of the '6th century. ,he first bank in India,
though conservative, was established in '768. From '768 till today, the 9ourney of Indian
anking System can be segregated into three distinct phases. ,hey are as mentioned below5
:arly phase from '768 to '(8( of Indian anks
;ationalisation of Indian anks and up to '((' prior to Indian banking sector !eforms.
;ew phase of Indian anking System with the advent of Indian Financial < anking
Sector !eforms after '(('.
,o make this write=up more e)planatory, I prefi) the scenario as >hase I, >hase II and >hase III.
Phase I
,he &eneral ank of India was set up in the year '768. ;e)t came ank of -industan and
engal ank. ,he :ast India Company established ank of engal *'6#(+, ank of ombay
*'62#+ and ank of 0adras *'62$+ as independent units and called it >residency anks. ,hese
three banks were amalgamated in '("# and Imperial ank of India was established which started
as private shareholders banks, mostly :uropeans shareholders.
In '683 1llahabad ank was established and first time e)clusively by Indians, >un9ab ;ational
ank ?td. was set up in '6(2 with head4uarters at ?ahore. etween '(#8 and '('$, ank of
India, Central ank of India, ank of aroda, Canara ank, Indian ank, and ank of 0ysore
were set up. !eserve ank of India came in '($3.
.uring the first phase the growth was very slow and banks also e)perienced periodic failures
between '('$ and '(26. ,here were appro)imately ''## banks, mostly small. ,o streamline the
functioning and activities of commercial banks, the &overnment of India came up with ,he
anking Companies 1ct, '(2( which was later changed to anking !egulation 1ct '(2( as per
amending 1ct of '(83 *1ct ;o. "$ of '(83+. !eserve ank of India was vested with e)tensive
powers for the supervision of banking in India as the Central anking 1uthority.
.uring those days public has lesser confidence in the banks. 1s an aftermath deposit
mobilisation was slow. 1breast of it the savings bank facility provided by the >ostal department
was comparatively safer. 0oreover, funds were largely given to traders.
PhaseII
&overnment took ma9or steps in this Indian anking Sector !eform after independence. In
'(33, it nationalized Imperial ank of India with e)tensive banking facilities on a large scale
especially in rural and semi=urban areas. It formed State ank of India to act as the principal
agent of !I and to handle banking transactions of the @nion and State &overnments all over the
country. Seven banks forming subsidiary of State ank of India was nationalized in '(8# on '(th
Auly, '(8(, ma9or process of nationalization was carried out. It was the effort of the then >rime
0inister of India, 0rs. India &andhi. '2 ma9or commercial banks in the country was
nationalised.Second phase of nationalization Indian anking Sector !eform was carried out in
'(6# with seven more banks. ,his step brought 6#B of the banking segment in India under
&overnment ownership.
,he following are the steps taken by the &overnment of India to !egulate anking Institutions in
the Country5
'(2(5 :nactment of anking !egulation 1ct.
'(335 ;ationalization of State ank of India.
'(3(5 ;ationalization of SI subsidiaries.
'(8'5 Insurance cover e)tended to deposits.
'(8(5 ;ationalization of '2 ma9or banks.
'(7'5 Creation of credit guarantee corporation.
'(735 Creation of regional rural banks.
'(6#5 ;ationalization of seven banks with deposits over "## crore.
1fter the nationalization of banks, the branches of the public sector bank India rose to
appro)imately 6##B in deposits and advances took a huge 9ump by '',###B.
anking in the sunshine of &overnment ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
PhaseIII
,his phase has introduced many more products and facilities in the banking sector in its
reforms measure. In '((', under the chairmanship of 0 ;arasimham, a committee was set up by
his name which worked for the liberalization of banking practices.
,he country is flooded with foreign banks and their 1,0 stations. :fforts are being put to give a
satisfactory service to customers. >hone banking and net banking is introduced. ,he entire
system became more convenient and swift. ,ime is given more importance than money.
,he financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any e)ternal macroeconomics shock as other :ast 1sian Countries suffered. ,his is
all due to a fle)ible e)change rate regime, the foreign reserves are high, the capital account is not
yet fully convertible, and banks and their customers have limited foreign e)change e)posure.
Foreign banks too started to arrive, particularly in Calcutta, in the '68#s. ,he Comptoire
d':scompte de >aris opened a branch in Calcutta in '68#, and another in ombay in '68"C
branches in 0adras and >uducherry, then a French colony, followed. -SC established itself in
engal in '68(. Calcutta was the most active trading port in India, mainly due to the trade of the
ritish :mpire, and so became a banking center. ,he first entirely Indian 9oint stock bank was
the %udh Commercial ank, established in '66' in Faridabad. It failed in '(36. ,he ne)t was the
>un9ab ;ational ank, established in ?ahore in '6(3, which has survived to the present and is
now one of the largest banks in India. 1round the turn of the "#th Century, the Indian economy
was passing through a relative period of stability. 1round five decades had elapsed since the
Indian 0utiny, and the social, industrial and other infrastructure had improved. Indians had
established small banks, most of which served particular ethnic and religious communities. ,he
presidency banks dominated banking in India but there were also some e)change banks and a
number of Indian 9oint stock banks. 1ll these banks operated in different segments of the
economy. ,he e)change banks, mostly owned by :uropeans, concentrated on financing foreign
trade. Indian 9oint stock banks were generally undercapitalized and lacked the e)perience and
maturity to compete with the presidency and e)change banks. ,his segmentation let ?ord Curzon
to observe, DIn respect of banking it seems we are behind the times. Ee are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments.D ,he period between '(#8 and '('', saw the establishment of banks inspired by
the Swadeshi movement. ,he Swadeshi movement inspired local businessmen and political
figures to found banks of and for the Indian community. 1 number of banks established then
have survived to the present such as ank of India, Corporation ank, Indian ank, ank of
aroda, Canara ank and Central ank of India. ,he fervour of Swadeshi movement lead to
establishing of many private banks in .akshina /annada and @dupi district which were unified
earlier and known by the name South Canara * South /anara + district. Four nationalized banks
started in this district and also a leading private sector bank. -ence undivided .akshina /annada
district is known as DCradle of Indian ankingD. .uring the First Eorld Ear *'('2='('6+
through the end of the Second Eorld Ear *'($(='(23+, and two years thereafter until the
independence of India were challenging for Indian banking. ,he years of the First Eorld Ear
were turbulent, and it took its toll with banks simply collapsing despite the Indian economy
gaining indirect boost due to war=related economic activities. 1t least (2 banks in India failed
between '('$ and '('6 as indicated in the following table5
ears
!um"er of "anks
that failed
#uthori$ed capital
%&s' Lakhs(
)aid*up Capital
%&s' Lakhs(
'('$ '" "72 $3
'('2 2" 7'# '#(
'('3 '' 38 3
'('8 '$ "$' 2
'('7 ( 78 "3
'('6 7 "#( '
Post-Independence
,he partition of India in '(27 adversely impacted the economies of >un9ab and Eest engal,
paralyzing banking activities for months. India's independence marked the end of a regime of the
?aissez=faire for the Indian banking. ,he &overnment of India initiated measures to play an
active role in the economic life of the nation, and the Industrial >olicy !esolution adopted by the
government in '(26 envisaged a mi)ed economy. ,his resulted into greater involvement of the
state in different segments of the economy including banking and finance. ,he ma9or steps to
regulate banking included5
,he !eserve ank of India, India's central banking authority, was nationalized on
Aanuary ', '(2( under the terms of the !eserve ank of India *,ransfer to >ublic
%wnership+ 1ct, '(26 *!I, "##3b+.F!eference www.rbi.org.inG
In '(2(, the anking !egulation 1ct was enacted which empowered the !eserve ank of
India *!I+ Dto regulate, control, and inspect the banks in India.D
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,he anking !egulation 1ct also provided that no new bank or branch of an e)isting
bank could be opened without a license from the !I, and no two banks could have
common directors.
Nationaliation
anks ;ationalization in India5 ;ewspaper Clipping, ,imes of India, Auly, "#,
'(8(..espite the provisions, control and regulations of !eserve ank of India, banks in India
e)cept the State ank of India or SI, continued to be owned and operated by private persons.
y the '(8#s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. 1t the same time, it had emerged as a large employer, and a
debate had ensued about the nationalization of the banking industry. Indira &andhi, then >rime
0inister of India, e)pressed the intention of the &overnment of India in the annual conference of
the 1ll India Congress 0eeting in a paper entitled "Stray thoughts on Bank Nationalization."
,he meeting received the paper with enthusiasm.
,hereafter, her move was swift and sudden. ,he &overnment of India issued an
ordinance and nationalized the '2 largest commercial banks with effect from the midnight of
Auly '(, '(8(. Aayaprakash ;arayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Eithin two weeks of the issue of the ordinance, the
>arliament passed the anking Companies *1c4uisition and ,ransfer of @ndertaking+ ill, and it
received the presidential approval on ( 1ugust '(8(.
1 second dose of nationalization of 8 more commercial banks followed in '(6#. ,he
stated reason for the nationalization was to give the government more control of credit delivery.
Eith the second dose of nationalization, the &overnment of India controlled around ('B of the
banking business of India. ?ater on, in the year '(($, the government merged ;ew ank of India
with >un9ab ;ational ank. It was the only merger between nationalized banks and resulted in
the reduction of the number of nationalized banks from "# to '(. 1fter this, until the '((#s, the
nationalized banks grew at a pace of around 2B, closer to the average growth rate of the Indian
economy.
!i"eraliation
In the early '((#s, the then ;arsimha !ao government embarked on a policy of
liberalization, licensing a small number of private banks. ,hese came to be known as New
Generation tech-savvy banks, and included &lobal ,rust ank *the first of such new generation
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banks to be set up+, which later amalgamated with %riental ank of Commerce, 1)is
ank*earlier as @,I ank+, ICICI ank and -.FC ank. ,his move, along with the rapid
growth in the economy of India, revitalized the banking sector in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks. ,he ne)t stage for the Indian banking has been set up with the
proposed rela)ation in the norms for Foreign .irect Investment, where all Foreign Investors in
banks may be given voting rights which could e)ceed the present cap of '#B, at present it has
gone up to 72B with some restrictions. ,he new policy shook the anking sector in India
completely. ankers, till this time, were used to the 2=8=2 method *orrow at 2BC ?end at 8BC
&o home at 2+ of functioning. ,he new wave ushered in a modern outlook and tech=savvy
methods of working for traditional banks. 1ll this led to the retail boom in India. >eople not 9ust
demanded more from their banks but also received more. Currently *"##7+, banking in India is
generally fairly mature in terms of supply, product range and reach=even though reach in rural
India still remains a challenge for the private sector and foreign banks. In terms of 4uality of
assets and capital ade4uacy, Indian banks are considered to have clean, strong and transparent
balance sheets relative to other banks in comparable economies in its region. ,he !eserve ank
of India is an autonomous body, with minimal pressure from the government. ,he stated policy
of the ank on the Indian !upee is to manage volatility but without any fi)ed e)change rate=and
this has mostly been true. Eith the growth in the Indian economy e)pected to be strong for 4uite
some time=especially in its services sector=the demand for banking services, especially retail
banking, mortgages and investment services are e)pected to be strong. %ne may also e)pect
0<as, takeovers, and asset sales. In 0arch "##8, the !eserve ank of India allowed Earburg
>inks to increase its stake in /odak 0ahindra ank *a private sector bank+ to '#B. ,his is the
first time an investor has been allowed to hold more than 3B in a private sector bank since the
!I announced norms in "##3 that any stake e)ceeding 3B in the private sector banks would
need to be vetted by them.
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Basic principles of Banking
,he ritish had framed the banking and regulatory laws much before '(27, when India
became a democratic republic. ,hough the Indian model has been largely derived from the
ritish one, there are certain inherent differences between the two. ,he Indian commercial
banking system with branch banking and its regulation by !eserve ank of India *!I 1ct,
'($2+ as the ape) banking authority in the country was patterned on the ritish banking system
having ank of :ngland as the banking regulator. ,he @S1 banking system is altogether
different from the ritish and the Indian ones. Het, certain basic tenets of banking are common to
these three, as also the other systems of banking across the world. For these tenets are so
fundamental that the same would be characterizing almost all banking systems globally. ,hese
basic principles of banking are briefly described in this section.
Principles of Inter#ediation5
IIntermediaryJ means Ksomeone who carries message between people who are unwilling
to meet personallyL. anks are called Ifinancial intermediariesJ because they invest or lend funds
of depositors who themselves are unable to lend their funds, due to risk and other factors
involved in direct lending. anks assume the credit risk involved in direct lending to those who
needs funds. ,hey have e)pertise and abilities to manage such risks. ,hus, banks mediate
between depositors and borrowers and earn interest spread as a reward for risk taking, meeting
the administrative e)penses and making provisions for some portions of loans that may turn bad
or difficult to recover *i.e. ;>1Ls+
Principles of !i$uidit%5
,he simultaneous operations of acceptance of deposits* repayable on demand or on
certain maturity periods+ and lending these funds to borrowers in a manner such that the bank
would be able to arrange for the funds demanded by its depositors at any point of time, is called
Kli4uidity managementL or Kasset liability managementL. In line with the li4uidity principle, a
bank must keep a certain portion of its deposits liabilities in li4uid form so as to be able to repay
the same on demand or maturity dates to the depositors. ,his principle is reinforced by the
regulatory re4uirement of the reserve ank of India that every bank has to maintain deposits with
!I as Cash reserve !atio which stands at 2.73B of the bankLs demand and time liabilities and
statutory li4uidity ratio, wherein every bank has to invest in giftsM governments and other
approved securities *currently"3B of its .,?+. If a bank is cash=strapped it can easily trade the
S?! securities to generate cash, as the same the most li4uid of all. It is only after meeting the
minimum C!! and S?! re4uirements that a bank can invest Mlend its remaining .,?, by way of
loansMadvances or other kinds of lending business, to earn and ma)imize its profits.
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Principles of Profita"ilit%5
anking business, like any other, has to be profitable in order to sustain the re4uired
growth. Interest income, which represents the interest differential *spread+ between its loans and
deposits rates, is the main source of profit for a bank. ,he interest earned by a bank on its
lending operations should be higher than the interest paid by it on its deposit operations. ,he
interest spread, along with the volume of its deposits and loans determines the total net interest
income of a bank. Interest income along with non interest or fee= based income *e.g. commission
on letters of credits, fund remittance, e)change on bank drafts, foreign e)change business+
contribute to the bulk of a bankLs profits. ,he absolute size of a bankLs &rossM%peratingM;et
>rofits considered with ratios like !eturn on 1ssets *!%1+ and !eturn on Capital *!%C+ are the
true financial indicators of a bankLs profits.
Principle of Solvenc%5
Solvency connotes long term financial soundness of a bank, achieved by adherence to
prudent policies in lending, retention of some parts of profits for business growth,
implementation of professional management system and following the mandatory rules and
procedures in day=to=day operations. 1 bankLs financial soundness is 9udged by analyzing its
financial graph of a couple of years and comparing the relevant ratios *e.g. capital ade4uacy
ratio, standard asset ratio and provisions to non performing assets ratio+ with other banks. ,he
principle of solvency also embraces li4uidity and profitability attributes.
Principle of &rust5
,he trust that customers=e)isting and potential Nrepose in a bank is its hallmark as its
connotes dependability in the opinion of its customers. ,rustworthiness is a function of a bankLs
good track record over a fairly long period of time in terms of li4uidity, profitability, financial
soundness, and its record of meeting its commitments to all concerned parties. It also reflects the
governance 4uality of the bank. ,he magnitude of trust reposed in according to the parameters of
evaluation applied by each. -owever, for customers and public, trust indicates dependability and
safety as they perceive while lodging their deposits with a bank and it is reflected in the rate of
growth of its deposits and profits on a sustained basis.
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'unction of "anks
Functions of anks can be classified into5
,raditional Function
0odern Function
&raditional 'unction
(ccepting )eposits* ,he most significant and traditional function of commercial bank is
accepting deposit from the public. In case of current deposits, no interest is paid by the
bank but the depositor can withdraw his money anytime he likes without notice. Savings
deposits are paid a small rate of interest and the bank imposes certain restrictions on the
withdrawal of money. Fi)ed deposits are made by the persons who have idle money with
them. ,hey can withdraw their money only after the e)piry of the fi)ed period of time.
,hese deposits carry the highest rate of interest that depends on the period for which the
money is deposited.
Providing !oans : anks provide loans against approved securities to the public and
companies. ?oans can be granted in the form of cash credit, short term loan, overdraft,
discounting of bills and demand loans. @nder cash credit system, borrower is sanctioned
a credit limit up to which he can borrow from the bank. ,he interest is calculated on the
amount actually withdrawn. Short term loans are given as personal loans against some
security. ,he interest is payable on the entire sum of loan granted..In case of %verdraft, a
person is allowed to overdraw his current account to a certain limit as specified by the
bank. ,he interest is paid on the amount outstanding against his balance and not on the
amount of loan sanctioned. 1 bill of e)change is drawn by a creditor on the debtor
specifying the amount of debt and the date on which it is payable. efore the maturity of
the bill, a debtor can get it discounted from the bank paying a very small interest.
+redit +reation 5 1 bank can be called the factory or the manufacturer of the credit. In the
process of accepting and depositing money, banks multiply credit in the economy. It
depends on cash reserve ratio.
&ransfer of funds 5 Commercial banks can transfer funds of a customer to other
customer's accounts in the same or the different bank through che4ues, drafts, mail
transfers, telegraphic transfers etc.
(genc% 'unctions
i+Collection of bills, drafts etc.
ii+Collection of interest, dividends etc. on the behalf of the customers.
Iii+ >ayment of interests, installment of loans, insurance premium etc.
iv+ >urchase and sale of securities.
v+ anks also e)ecutes the will of their customers after their deaths.
Electronic funds transfer* :lectronic funds transfer or :F, is the electronic e)change or
transfer of money from one account to another, either within a single financial institution
or across multiple institutions, through computer=based systems.
,he term is used for a number of different concepts5
Cardholder=initiated transactions, where a cardholder makes use of a payment card
.irect deposit payroll payments for a business to its employees, possibly via a payroll
service bureau
.irect debit payments, sometimes called electronic checks, for which a business debits
the consumer's bank accounts for payment for goods or services
:lectronic bill payment in online banking, which may be delivered by :F, or paper
check
,ransactions involving stored value of electronic money, possibly in a private currency
Eire transfer via an international banking network *generally carries a higher fee+
)e#and )raft* eman! raft is a 1ritten order for making payments. It is also called
in short form as 22 *.emand .raft+. ,he person making payments is called dra1ee and
the recipient is called pa3ee. ,he bank provi!ing the service is called dra1er. .emand
draft can be of two types, Sight .raft or "ime .rafts. Sight drafts allows money transfer
only when proper documents are produced on sight. Ehile time drafts allows money
transfer after the specified time * a future date +.
,eal ti#e gross settle#ent s%ste#s * !eal time gross settlement systems *!,&S+ are
funds transfer systems where transfer of money or securities
F'G
takes place from one bank
to another on a Dreal timeD and on DgrossD basis. Settlement in Dreal timeD means payment
transaction is not sub9ected to any waiting period. ,he transactions are settled as soon as
they are processed. D&ross settlementD means the transaction is settled on one to one basis
without bunching or netting with any other transaction. %nce processed, payments are
final and irrevocable. ,he !,&S system is suited for low=volume, high=value
transactions. It lowers settlement risk, besides giving an accurate picture of an
institution's account at any point of time. !,&S does not re4uire core banking to be
implemented across participating banks, since transactions are direct, with no central
processing or clearing operations. 1ny !,&S employs two sets of 4ueues5 one for testing
outgoing funds availability on a chronological FIF% basis with the option of prioritizing
specific in4uiries, while the other 4ueue is for processing debitMcredit re4uests received
from the central bank's Integrated 1ccounting System.
-ther 'unctions
i+ >ayment of credit letters and travellers che4ues, gift che4ues, bank draft etc.
ii+ anks also provide locker services for the valuable securities of their customers and
charge a very nominal fee.
iii+ anks also deals in foreign e)change. Such banks are usually called foreign e)change
banks.
,here are various other functions that the bank performs but they cannot be cited here as
some of the functions differ from bank to bank. For e)ample, some banks provide the
facility of credit cards and online banking whereas many other do not. ,hese are some of
the modern functions of the bank. Commercial banks are the backbone of any economy,
be it India or 1merica. Industries and agriculture flourish due to these banks. ,hese banks
mobilize the savings of people that results in capital formation.
.odern 'unction
+ross "order "anking* It refers to banking between two individuals or business entities
residing in two different countries on account of fund remittance or deposit or business
dealings. It necessarily involves conversion of at least two foreign currencies belonging
to the countries where the two transacting parties are resident. ,herefore it involves
foreign e)change. In India, foreign e)change is done by banks designated as 1uthorized
.ealers *1.Ls+ by the !I and these banks designate some of their branches to do
foreign e)change of specified kind.
Cross border banking is classified as5
Cross "order fund raising ser4ices
:)ternal commercial banking
&lobal depository receiptsM 1merican depository receiptsMInternational .epository
!eceipts
;onresident e)ternalM Foreign currency ;onresident 1ccounts
Syndication of foreign currency loans
Cross Border Banking Ser4ices
Import financingMleasing
:)port financingMforfeitingMleasing
.erchant "anking* 0erchant anking is an activity that includes corporate finance
activities, such as advice on comple) financings, merger and ac4uisition advice
*international or domestic+, and at times direct e4uity investments in corporations by the
banks. 1 merchant bank deals with the commercial banking needs of international
finance, long term company loans, and stock underwriting. 1 merchant bank does not
have retail offices where one can go and open a savings or checking account. 1 merchant
bank is sometimes said to be a wholesale bank, or in the business of wholesale banking.
,his is because merchant banks tend to deal primarily with other merchant banks and
other large financial institutions. 0erchant banks are private financial institution. ,heir
primary sources of income are >I>: financings and international trade. ,heir secondary
income sources are consulting, 0ergers < 1c4uisitions help and financial market
speculation. ecause they do not invest against collateral, they take far greater risks than
traditional banks. ecause they are private, do not take money from the public and are
international in scope, they are not regulated
+redit +ards* 1 credit card is a small plastic card issued to users as a system of payment.
It allows its holder to buy goods and services based on the holder's promise to pay for
these goods and services.
F'G
,he issuer of the card creates a revolving account and grants a
line of credit to the consumer *or the user+ from which the user can borrow money for
payment to a merchant or as a cash advance to the user. Credit cards are issued by a
credit card issuer, such as a bank or credit union, after an account has been approved by
the credit provider, after which cardholders can use it to make purchases at merchants
accepting that card. 0erchants often advertise which cards they accept by displaying
acceptance marks N generally derived from logos N or may communicate this orally, as in
DCredit cards are fineD *implicitly meaning Dma9or brandsD+, DEe take *brands O, H, and
P+D, or DEe don't take credit cardsD. Ehen a purchase is made, the credit card user agrees
to pay the card issuer. ,he cardholder indicates consent to pay by signing a receipt with a
record of the card details and indicating the amount to be paid or by entering a personal
identification number *>I;+. 1lso, many merchants now accept verbal authorizations via
telephone and electronic authorization using the Internet, known as a card not present
transaction *C;>+. :lectronic verification systems allow merchants to verify in a few
seconds that the card is valid and the credit card customer has sufficient credit to cover
the purchase, allowing the verification to happen at time of purchase. ,he verification is
performed using a credit card payment terminal or point=of=sale *>%S+ system with a
communications link to the merchant's ac4uiring bank. .ata from the card is obtained
from a magnetic stripe or chip on the cardC the latter system is called Chip and >I; in the
@nited /ingdom and Ireland, and is implemented as an :0Q card.
'actoring* Factoring is a financial transaction whereby a business 9ob sells its accounts
receivable *i.e., invoices+ to a third party *called a factor+ at a discount in e)change for
immediate money with which to finance continued business. Factoring differs from a
bank loan in three main ways. First, the emphasis is on the value of the receivables
*essentially a financial asset+,

not the firmLs credit worthiness. Secondly, factoring is not a
loan N it is the purchase of a financial asset *the receivable+. Finally, a bank loan involves
two parties whereas factoring involves three.
'inancial Services undertaken "% "anks
,he primary operations of banks include5
/eeping money safe while also allowing withdrawals when needed
Issuance of checkbooks so that bills can be paid and other kinds of payments can be
delivered by post
>rovide personal loans, commercial loans, and mortgage loans *typically loans to
purchase a home, property or business+
Issuance of credit cards and processing of credit card transactions and billing
Issuance of debit cards for use as a substitute for checks
1llow financial transactions at branches or by using 1utomatic ,eller 0achines *1,0s+
>rovide wire transfers of funds and :lectronic fund transfers between banks
Facilitation of standing orders and direct debits, so payments for bills can be made
automatically
>rovide overdraft agreements for the temporary advancement of the ank's own money
to meet monthly spending commitments of a customer in their current account.
>rovide Charge card advances of the ank's own money for customers wishing to settle
credit advances monthly.
>rovide a check guaranteed by the ank itself and prepaid by the customer, such as a
cashier's check or certified check.
;otary service for financial and other documents
Other t3pes of "ank ser4ices
Private "anking = >rivate anks provide banking services e)clusively to high net
worth individuals. 0any financial services firms re4uire a person or family to have a
certain minimum net worth to 4ualify for private banking services. >rivate banks
often provide more personal services, such as wealth management and ta) planning,
than normal retail banks.
F2G
+apital #arket "ank = bank that underwrite debt and e4uity, assist company deals
*advisory services, underwriting and advisory fees+, and restructure debt into structured
finance products.
+onsortiu# Bank
1 subsidiary bank created by numerous banks. 1 consortium bank is created to fund a
specific pro9ect *such as providing affordable homeownership for low= and moderate=income
home buyers+ or to e)ecute a specific deal *such as selling loans in the loan syndication market+.
,he consortium leverages individual banksL assets to achieve its ob9ectives. 1ll member banks
have e4ual ownership shares N no one member has a controlling interest. 1fter the bank's
ob9ective is met the consortium typically dissolves. Consortium banks originated in the early
'(8#s and are predominantly found in :urope. ,hey were originally created to enable smaller
banks to participate in international banking activities. Consortium banks are not as active as in
the pastC however, e)amples can still be found both in the @.S. and overseas. 0ember banks can
be head4uartered in different countries.
.ultiple Banking
0ultiple anking is a banking arrangement where a borrowal avails of finance
independently from more than one bank. ,hus, there is no contractual relationship between
various bankers of such borrower. 1lso in such arrangement each banker is free to do his own
credit assessment and old security independent of other bankers
1+ Lala Lajpatrai Institute Of Management
+o#petitive !andscape of Banks in India
anks face competition from a wide range of financial intermediaries in the public and
private sectors in the areas of financial intermediation and financial services *although the
payments system is e)clusively for banks+. Such intermediaries form a diverse group in terms of
size and nature of their activities, and play an important role in the financial system by not only
competing with banks, but also complementing them in providing a wide range of financial
services. Some of these intermediaries include5
,erm=lending institutions
;on=banking financial companies
Insurance companies
0utual funds
&er#-!ending Institutions
,erm lending institutions e)ist at both state and all=India levels. ,hey provide term loans
*i.e., loans with medium to long=term maturities+ to various industry, service and infrastructure
sectors for setting up new pro9ects and for the e)pansion of e)isting facilities and thereby
compete with banks. 1t the all=India level, these institutions are typically specialized, catering
to the needs of specific sectors, which make them competitors to banks in those areas.$ ,hese
include the :)port Import ank of India *:OI0 ank+, Small Industries .evelopment ank of
India *SI.I+, ,ourism Finance Corporation of India ?imited *,FCI+, and >ower Finance
Corporation ?imited *>FC?+. 1t the state level, various State Financial Corporations *SFCs+
have been set up to finance andpromote small and medium=sized enterprises. ,here are also State
Industrial .evelopment Corporations *SI.Cs+, which provide finance primarily to medium=sized
and large=sized enterprises. In addition to SFCs and SI.Cs, the ;orth :astern .evelopment
Financial Institution?td. *;:.FI+ has been set up to cater specifically to the needs of the north=
eastern states.
1, Lala Lajpatrai Institute Of Management
Non-Banking 'inance +o#panies /NB'+s+
India has many thousands of non=banking financial companies, predominantly from the
private sector. ;FCs are re4uired to register with !I in terms of the !eserve ank of India
*1mendment+ 1ct, '((7. ,he principal activities of ;FCs include e4uipment=leasing,
hirepurchase, loan and investment and asset finance. ;FCs have been competing with and
complementing the services of commercial banks for a long time. 1ll ;FCs together currently
account for around nine percent of assets of the total financial system.
-ousing=finance companies form a distinct sub=group of the ;FCs. 1s a result of some recent
government incentives for investing in the housing sector, these companies' business has
grown substantially. -ousing .evelopment Finance Corporation ?imited *-.FC+, this is in
the private sector and the &overnment=controlled -ousing and @rban .evelopment Corporation
?imited *-@.C%+ are the two premier housing=finance companies. ,hese companies are ma9or
>layers in the mortgage business, and provide stiff competition to commercial banks in the
disbursal of housing loans.

Insurance +o#panies
InsuranceMreinsurance companies such as ?ife Insurance Corporation of India *?IC+,
&eneral Insurance Corporation of India *&ICI+, and others provide substantial long=term
financial assistance to the industrial and housing sectors and to that e)tent, are competitors of
banks.?IC is the biggest player in this area. In law and economics, insurance is a form of risk
management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is
defined as the e4uitable transfer of the risk of a loss, from one entity to another, in e)change for
payment. 1n insurer is a company selling the insuranceC an insured, or policyholder, is the
person or entity buying the insurance policy. ,he insurance rate is a factor used to determine the
amount to be charged for a certain amount of insurance coverage, called the premium. !isk
management, the practice of appraising and controlling risk, has evolved as a discrete field of
study and practice. ,he transaction involves the insured assuming a guaranteed and known
relatively small loss in the form of payment to the insurer in e)change for the insurer's promise
to compensate *indemnify+ the insured in the case of a financial *personal+ loss. ,he insured
receives a contract, called the insurance policy, which details the conditions and circumstances
under which the insured will be financially compensated.
.utual 'unds
0utual fund is a professionally=managed type of collective investment scheme that pools
money from many investors to buy securities *stocks, bonds, short=term money market
instruments, andMor other securities+. 1 mutual fund has a fund manager that trades *buys and
sells+ the fund's investments in accordance with the fund's investment ob9ective. 0utual funds
may invest in many kinds of securities *sub9ect to its investment ob9ective as set forth in the
fund's prospectus, which is the legal document under S:C laws which offers the funds for sale
and contains a wealth of information about the fund+. ,he most common securities purchased are
DcashD or money market instruments, stocks, bonds, other mutual fund shares and more e)otic
instruments such as derivatives like forwards, futures, options and swaps. Some funds'
investment ob9ectives *and or its name+ define the type of investments in which the fund invests.
0utual funds offer competition to banks in the area of fund mobilization, in that they offer
alternate routes of investment to households. 0ost mutual funds are standalone asset
1- Lala Lajpatrai Institute Of Management
management companies. In addition, a number of banks, both in the private and public sectors
have sponsored asset management companies to undertake mutual fund business. anks have
thus entered the asset management business, sometimes on their own and other times in 9oint
venture with others.
Porter's 0 'orces (nal%sis
&hreat of New Entrants1 ,he average person can't come along and start up a bank, but
there are services, such as internet bill payment, on which entrepreneurs can capitalize.
anks are fearful of being s4ueezed out of the payments business, because it is a good
source of fee=based revenue. 1nother trend that poses a threat is companies offering other
financial services. Ehat would it take for an insurance company to start offering
mortgage and loan servicesR ;ot much. 1lso, when analyzing a regional bank, remember
that the possibility of a mega bank entering into the market poses a real threat.
Power of Suppliers* ,he suppliers of capital might not pose a big threat, but the threat of
suppliers luring away human capital does. If a talented individual is working in a smaller
regional bank, there is the chance that person will be enticed away by bigger banks,
investment firms, etc.
Power of Bu%ers* ,he individual doesn't pose much of a threat to the banking industry,
but one ma9or factor affecting the power of buyers is relatively high switching costs. If a
person has a mortgage, car loan, credit card, checking account and mutual funds with one
particular bank, it can be e)tremely tough for that person to switch to another bank. In an
attempt to lure in customers, banks try to lower the price of switching, but many people
would still rather stick with their current bank. %n the other hand, large corporate clients
have banks wrapped around their little fingers. Financial institutions = by offering better
e)change rates, more services, and e)posure to foreign capital markets = work e)tremely
hard to get high=margin corporate clients.
(vaila"ilit% of Su"stitutes1 1s you can probably imagine, there are plenty of substitutes
in the banking industry. anks offer a suite of services over and above taking deposits
and lending money, but whether it is insurance, mutual funds or fi)ed income securities,
chances are there is a non=banking financial services company that can offer similar
services. %n the lending side of the business, banks are seeing competition rise from
unconventional companies. Sony *;HS:5 S;:+, &eneral 0otors *;HS:5&0+ and
1. Lala Lajpatrai Institute Of Management
0icrosoft *;asda450SF,+ all offer preferred financing to customers who buy big ticket
items. If car companies are offering #B financing, why would anyone want to get a car
loan from the bank and pay 3='#B interestR
+o#petitive ,ivalr% ' ,he banking industry is highly competitive. ,he financial services
industry has been around for hundreds of years and 9ust about everyone who needs
banking services already has them. ecause of this, banks must attempt to lure clients
away from competitor banks. ,hey do this by offering lower financing, preferred rates
and investment services. ,he banking sector is in a race to see who can offer both the best
and fastest services, but this also causes banks to e)perience a lower !%1. ,hey then
have an incentive to take on high=risk pro9ects. In the long run, we're likely to see more
consolidation in the banking industry. ?arger banks would prefer to take over or merge
with another bank rather than spend the money to market and advertise to people.
B(N2ING S&,3+&3,E IN IN)I(
Banking ,egulator
,he !eserve ank of India *!I+ is the central banking and monetary authority of India,
and also acts as the regulator and supervisor of all banks.
&%pes of "anks functioning
Scheduled Banks in India
Scheduled banks comprise scheduled commercial banks and scheduled co=operative
banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently
accounting for more than three=fourths of all financial institutions' assets. SCs are present
throughout India, and their branches, having grown more than four=fold in the last 2# years
now number more than 6#,3## across the country. 1 pictorial representation of the structure of
SCs in India is given below
Scheduled anking Structure in India
1/ Lala Lajpatrai Institute Of Management
4
Pu"lic Sector Banks
>ublic sector banks are those in which the ma9ority stake is held by the &overnment of
India *&oI+. >ublic sector banks together make up the largest category in the Indian banking
system. ,here are currently "7 public sector banks in India. ,hey include the SI and its 8
associate banks *such as State ank of Indore, State ank of ikaner and Aaipur etc+, '(
nationalisedbanks *such as 1llahabad ank, Canara ank etc+ and I.I ank ?td.
>ublic sector banks have taken the lead role in branch e)pansion, particularly in the rural
areas. From the table we can interpret that
>ublic sector banks account for bulk of the branches in India *66 percent in "##(+. In the
rural areas, the presence of the public sector banks is overwhelmingC in "##(,
(8 percent of the rural bank branches belonged to the public sector. ,he private sector
banks and foreign banks have limited presence in the rural areas.
,egional ,ural Banks
!egional !ural anks *!!s+ were established during '(78='(67 with a view to develop
the rural economy. :ach !! is owned 9ointly by the Central &overnment, concerned State
'$ &overnment and a sponsoring public sector commercial bank. !!s provide credit to small
farmers, artisans, small entrepreneurs and agricultural labourers. %ver the years, the
&overnment has introduced a number of measures of improve viability and profitability of
!!s, one of them being the amalgamation of the !!s of the same sponsored bank within a
State. ,his process of consolidation has resulted in a steep decline in the total number of !!s
to 68 as on 0arch $', "##(, as compared to '(8 at the end of 0arch "##3.
Private Sector Banks
In this type of banks, the ma9ority of share capital is held by private individuals and
corporates.;ot all private sector banks were nationalized in '(8(, and '(6#. ,he private banks
which were not nationalized are collectively known as the old private sector banks and include
banks such as ,he Aammu and /ashmir ank ?td., ?ord /rishna ank ?td etc.3 :ntry of private
sector banks was however prohibited during the post=nationalization period. In Auly '(($, as part
of the banking reform process and as a measure to induce competition in the banking sector, !I
permitted the private sector to enter into the banking system. ,his resulted in the creation of
a new set of private sector banks, which are collectively known as the new private sector
banks. 1s at end 0arch, "##( there were 7 new private sector banks and '3 old private sector
banks operating in India
'oreign Banks
Foreign banks have their registered and head offices in a foreign country but operate their
branches in India. ,he !I permits these banks to operate either through branchesC or through
wholly=owned subsidiaries. ,he primary activity of most foreign banks in India has been in
the corporate segment. -owever, some of the larger foreign banks have also made consumer
financing a significant part of their portfolios. ,hese banks offer products such as automobile
finance, home loans, credit cards, household consumer finance etc. Foreign banks in India are
re4uired to adhere to all banking regulations, including priority=sector lending norms as
applicable to domestic banks.6 In addition to the entry of the new private banks in the mid=
(#s, the increased presence of foreign banks in India has also contributed to boosting
competition in the banking sector. ;umber of Foreign anks. 1t the end of Aune "##(, there
were $" foreign banks with "($ branches operating in India. esides, 2$ foreign banks were
operating in India through representative offices. @nder the Eorld ,rade %rganization *E,%+
1greement, !I allows a minimum '" branches of all
foreign banks to be opened in a year.
Source5 !eport on ,rend and >rogress of anking in India "##6=#(, !I
+o-operative Banks
Co=operative banks cater to the financing needs of agriculture, retail trade, small industry
and self=employed businessmen in urban, semi=urban and rural areas of India. 1 distinctive
feature of the co=operative credit structure in India is its heterogeneity. ,he structure differs
across urban and rural areas, across states and loan maturities. @rban areas are served by urban
cooperative banks *@Cs+, whose operations are either limited to one state or stretch across
states. ,he rural co=operative banks comprise State co=operative banks, district central
cooperative banks, SC1!.s and >C1!.s.,he co=operative banking sector is the oldest
segment of the Indian banking system. ,he network of @Cs in India consisted of '7"' banks as
at end=0arch "##(, while the number of rural co=operative banks was '''( as at end=0arch
"##6.'# %wing to their widespread geographical penetrationC cooperative banks have the
potential to become an important instrument for large=scale financial inclusion, provided they are
financially strengthened. ,he !I and the ;ational 1griculture and !ural .evelopment ank
*;11!.+ have taken number of measures in recent years to improve financial soundness of
co=operative banks.
,eserve Bank of India
Esta"lish#ent
,he !eserve ank of India was established on 1pril ', '($3 in accordance with the
provisions of the !eserve ank of India 1ct, '($2.,he Central %ffice of the !eserve ank was
initially established in Calcutta but was permanently moved to 0umbai in '($7. ,he Central
%ffice is where the &overnor sits and where policies are formulated. ,hough originally privately
owned, since nationalization in '(2(, the !eserve ank is fully owned by the &overnment of
India.
Prea#"le*
,he >reamble of the !eserve ank of India describes the basic functions of the !eserve
ank as5 D...to regulate the issue of ank ;otes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the country
to its advantage.D ,he central bank of the country is the !eserve ank of India *!I+. It was
established in 1pril '($3 with a share capital of !s. 3 crores on the basis of the
recommendations of the -ilton Houng Commission. ,he share capital was divided into shares of
!s. '## each fully paid which was entirely owned by private shareholders in the beginning. ,he
&overnment held shares of nominal value of !s. ", "#,###.!eserve ank of India was
nationalized in the year '(2(. ,he general superintendence and direction of the ank is entrusted
to Central oard of .irectors of "# members, the &overnor and four .eputy &overnors, one
&overnment official from the 0inistry of Finance, ten nominated .irectors by the &overnment
to give representation to important elements in the economic life of the country, and four
nominated .irectors by the Central &overnment to represent the four local oards with the
head4uarters at 0umbai, /olkata, Chennai and ;ew .elhi. ?ocal oards consist of five
members each Central &overnment appointed for a term of four years to represent territorial and
economic interests and the interests of co=operative and indigenous banks.
,he !eserve ank of India 1ct, '($2 was commenced on 1pril ', '($3. ,he 1ct, '($2 *II of
'($2+ provides the statutory basis of the functioning of the bank.
,he ank was constituted for the need of following5
,o regulate the issue of banknotes
,o maintain reserves with a view to securing monetary stability and
,o operate the credit and currency system of the country to its advantage.
'unctions of ,eserve Bank of India
,he !eserve ank of India 1ct of '($2 entrust all the important functions of a central bank
Bank of Issue
@nder Section "" of the !eserve ank of India 1ct, the ank has the sole right to issue
bank notes of all denominations. ,he distribution of one rupee notes and coins and small coins
all over the country is undertaken by the !eserve ank as agent of the &overnment. ,he !eserve
ank has a separate Issue .epartment which is entrusted with the issue of currency notes. ,he
assets and liabilities of the Issue .epartment are kept separate from those of the anking
.epartment. %riginally, the assets of the Issue .epartment were to consist of not less than two=
fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less
than !s. 2# crores in value. ,he remaining three=fifths of the assets might be held in rupee coins,
&overnment of India rupee securities, eligible bills of e)change and promissory notes payable in
India. .ue to the e)igencies of the Second Eorld Ear and the post=was period, these provisions
were considerably modified. Since '(37, the !eserve ank of India is re4uired to maintain gold
and foreign e)change reserves of !a. "## crores, of which at least !s. ''3 crores should be in
gold. ,he system as it e)ists today is known as the minimum reserve system.
Banker to Govern#ent
,he second important function of the !eserve ank of India is to act as &overnment
banker, agent and adviser. ,he !eserve ank is agent of Central &overnment and of all State
&overnments in India e)cepting that of Aammu and /ashmir. ,he !eserve ank has the
obligation to transact &overnment business, via. to keep the cash balances as deposits free of
interest, to receive and to make payments on behalf of the &overnment and to carry out their
e)change remittances and other banking operations. ,he !eserve ank of India helps the
&overnment = both the @nion and the States to float new loans and to manage public debt. ,he
ank makes ways and means advances to the &overnments for (# days. It makes loans and
advances to the States and local authorities. It acts as adviser to the &overnment on all monetary
and banking matters.
Banker4s "ank and lender of the last resort
,he !eserve ank of India acts as the bankers' bank. 1ccording to the provisions of the
anking Companies 1ct of '(2(, every scheduled bank was re4uired to maintain with the
!eserve ank a cash balance e4uivalent to 3B of its demand liabilities and " per cent of its time
liabilities in India. y an amendment of '(8", the distinction between demand and time
liabilities was abolished and banks have been asked to keep cash reserves e4ual to $ per cent of
their aggregate deposit liabilities. ,he minimum cash re4uirements can be changed by the
!eserve ank of India. ,he scheduled banks can borrow from the !eserve ank of India on the
basis of eligible securities or get financial accommodation in times of need or stringency by
rediscounting bills of e)change. Since commercial banks can always e)pect the !eserve ank of
India to come to their help in times of banking crisis the !eserve ank becomes not only the
banker's bank but also the lender of the last resort
+ontroller of +redit
,he !eserve ank of India is the controller of credit i.e. it has the power to influence the
volume of credit created by banks in India. It can do so through changing the ank rate or
through open market operations. 1ccording to the anking !egulation 1ct of '(2(, the !eserve
ank of India can ask any particular bank or the whole banking system not to lend to particular
groups or persons on the basis of certain types of securities. Since '(38, selective controls of
credit are increasingly being used by the !eserve ank.
,he !eserve ank of India is armed with many more powers to control the Indian money
market. :very bank has to get a license from the !eserve ank of India to do banking business
within India, the license can be cancelled by the !eserve ank of certain stipulated conditions
are not fulfilled. :very bank will have to get the permission of the !eserve ank before it can
open a new branch. :ach scheduled bank must send a weekly return to the !eserve ank
showing, in detail, its assets and liabilities. ,his power of the ank to call for information is also
intended to give it effective control of the credit system. ,he !eserve ank has also the power to
inspect the accounts of any commercial b
1s supreme banking authority in the country, the !eserve ank of India, therefore, has the
following powers5
*a+It holds the cash reserves of all the scheduled banks.
*b+ It controls the credit operations of banks through 4uantitative and 4ualitative controls.
*c+ It controls the banking system through the system of licensing, inspection and calling for
information.
*d+ It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
+ustodian of 'oreign ,eserves
,he !eserve ank of India has the responsibility to maintain the official rate of
e)change. 1ccording to the !eserve ank of India 1ct of '($2, the ank was re4uired to buy
and sell at fi)ed rates any amount of sterling in lots of not less than !s. '#,###. ,he rate of
e)change fi)ed was !e. ' S sh. 8d. Since '($3 the ank was able to maintain the e)change rate
fi)ed at lsh.8d. though there were periods of e)treme pressure in favour of or against
the rupee. 1fter India became a member of the International 0onetary Fund in '(28, the !eserve
ank has the responsibility of maintaining fi)ed e)change rates with all other member countries
of the I.0.F. esides maintaining the rate of e)change of the rupee, the !eserve ank has to act
as the custodian of India's reserve of international currencies. ,he vast sterling balances were
ac4uired and managed by the ank. Further, the !I has the responsibility of administering the
e)change control of the country.
Supervisor% 'unction
In addition to its traditional central banking functions, the !eserve bank has certain non=
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. ,he !eserve ank 1ct, '($2, and the anking !egulation 1ct, '(2( have given the !I
wide powers of supervision and control over commercial and co=operative banks, relating to
licensing and establishments, branch e)pansion, li4uidity of their assets, management and
methods of working, amalgamation, reconstruction, and li4uidation. ,he !I is authorized to
carry out periodical inspections of the banks and to call for returns and necessary information
from them. ,he nationalization of '2 ma9or Indian scheduled banks in Auly '(8( has imposed
new responsibilities on the !I for directing the growth of banking and credit policies towards
more rapid development of the economy and realization of certain desired social ob9ectives. ,he
supervisory functions of the !I have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation
Pro#otional 'unction
Eith economic growth assuming a new urgency since Independence, the range of the
!eserve ank's functions has steadily widened. ,he ank now performs a variety of
developmental and promotional functions, which, at one time, were regarded as outside the
normal scope of central banking. ,he !eserve ank was asked to promote banking habit, e)tend
banking facilities to rural and semi=urban areas, and establish and promote new specialized
financing agencies. 1ccordingly, the !eserve ank has helped in the setting up of the IFCI and
the SFCC it set up the .eposit Insurance Corporation in '(8", the @nit ,rust of India in '(82, the
Industrial .evelopment ank of India also in '(82, the 1gricultural !efinance Corporation of
India in '(8$ and the Industrial !econstruction Corporation of India in '(7". ,hese institutions
were set up directly or indirectly by the !eserve ank to promote saving habit and to mobilize
savings, and to provide industrial finance as well as agricultural finance. 1s far back as '($3, the
!eserve ank of India set up the 1gricultural Credit .epartment to provide agricultural credit.
ut only since '(3' the ank's role in this field has become e)tremely important. ,he ank has
developed the co=operative credit movement to encourage saving, to eliminate moneylenders
from the villages and to route its short term credit to agriculture. ,he !I has set up the
1gricultural !efinance and .evelopment Corporation to provide long=term finance to farmers.
+lassification of ,BI functions
,he monetary functions also known as the central banking functions of the !I are
related to control and regulation of money and credit, i.e., issue of currency, control of bank
credit, control of foreign e)change operations, banker to the &overnment and to the money
market. 0onetary functions of the !I are significant as they control and regulate the volume of
money and credit in the country. :4ually important, however, are the non=monetary functions of
the !I in the conte)t of India's economic backwardness. ,he supervisory function of the !I
may be regarded as a non=monetary function *though many consider this a monetary function+.
,he promotion of sound banking in India is an important goal of the !I, the !I has been
given wide and drastic powers, under the anking !egulation 1ct of '(2( = these powers relate
to licensing of banks, branch e)pansion, li4uidity of their assets, management and methods of
working, inspection, amalgamation, reconstruction and li4uidation. @nder the !I's supervision
and inspection, the working of banks has greatly improved. Commercial banks have developed
into financially and operationally sound and viable units. ,he !I's powers of supervision have now been
e)tended to non=banking financial intermediaries. Since independence, particularly after its
nationalization '(2(, the !I has followed the promotional functions vigorously and has been
responsible for strong financial support to industrial and agricultural development in the country.
&ools of .onetar% +ontrol
Bank rate
ank !ate is the rate at which central bank of the country *in India it is !I+ allows
finance to commercial banks. ank !ate is a tool, which central bank uses for short=term
purposes. 1ny upward revision in ank !ate by central bank is an indication that banks should
also increase deposit rates as well as >rime ?ending !ate. ,his any revision in the ank rate
indicates could mean more or less interest on your deposits and also an increase or decrease in
your :0I.
Bank ,ate /'or Non Bankers5
,his is the rate at which central bank *!I+ lends money to other banks or financial
institutions. If the bank rate goes up, long=term interest rates also tend to move up, and vice=
versa. ,hus, it can said that in case bank rate is hiked, in all likelihood banks will hikes their
own lending rates to ensure and they continue to make a profit.
+ash ,eserve ,atio
,he !eserve ank of India *1mendment+ ill, "##8 has been enacted and has come into
force with its gazette notification. Conse4uent upon amendment to sub=Section 2"*'+, the
!eserve ank, having regard to the needs have securing the monetary stability in the country,
can prescribe Cash !eserve !atio *C!!+ for scheduled banks without any floor rate or ceiling
rate. Fefore the enactment of this amendment, in terms of Section 2"*'+ of the !I 1ct, the
!eserve ank could prescribe C!! for scheduled banks between $ per cent and "# per cent of
total of their demand and time liabilitiesG.!I uses C!! either to drain e)cess li4uidity or to
release funds needed for the economy from time to time. Increase in C!! means that banks have
fewer funds available and money is sucked out of circulation. ,hus we can say that this serves
duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk=free, but also
enables !I to control li4uidity in the system, and thereby, inflation by tying the hands of the
banks in lending money.
Statutor% !i$uidit% ,e$uire#ent
5 :very bank is re4uired to maintain at the close of business every day, a minimum
proportion of their ;et .emand and ,ime ?iabilities as li4uid assets in the form of cash, gold
and un=encumbered approved securities. ,he ratio of li4uid assets to demand and time liabilities
is known as Statutory ?i4uidity !atio *S?!+. >resent S?! is "2B. *!educed i.e. 6M''M"#6, from
earlier "3B+ !I is empowered to increase this ratio up to 2#B. 1n increase in S?! also
restricts the bankLs leverage position to pump more money into the economy.
Statutor% !i$uidit% ,e$uire#ent /'or Non Bankers5
S?! stands for Statutory ?i4uidity !atio. ,his term is used by bankers and indicates the
minimum percentage of deposits that the bank has to maintain in form of gold, cash or other
approved securities. ,hus, we can say that it is ratio of cash and some other approved to
liabilities *deposits+ it regulates the credit growth in India.
,epo /,epurchase5 rate
It is the rate at which the !I lends shot=term money to the banks. Ehen the repo rate
increases borrowing from !I becomes more e)pensive. ,herefore, we can say that in case, !I
wants to make it more e)pensive for the banks to borrow money, it increases the repo rateC
similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate
,everse ,epo rate
It is the rate at which banks park their short=term e)cess li4uidity with the !I. ,he !I
uses this tool when it feels there is too much money floating in the banking system. 1n increase
in the reverse repo rate means that the !I will borrow money from the banks at a higher rate of
interest. 1s a result, banks would prefer to keep their money with the !I
,hus, we can conclude that !epo !ate signifies the rate at which li4uidity is in9ected in the
banking system by !I, whereas !everse repo rate signifies the rate at which the central bank
absorbs li4uidity from the banks.
-pen #arket operation
It is the means of implementing monetary policy by which a central bank controls the
short term interest rate and the supply of base money in an economy, and thus indirectly the total
money supply. ,his involves meeting the demand of base money at the target rate by buying and
selling government securities, or other financial instruments. 0onetary targets such as inflation,
interest rates or e)change rates are used to guide this implementation. Ehen there is an increased
demand for base money, action is taken in order to maintain the short term interest rate *that is,
to increase the supply of base money+. ,he central bank goes to the open market to buy a
financial asset such as government bonds, foreign currency or gold. ,o pay for this, bank
reserves in the form of new base money *for e)ample newly printed cash+ is transferred to the
sellerLs bank, and the sellers account is credited. ,hus, the total amount of base money in the
economy has increased. Conversely, if the central bank sells these assets in the open market, the
amount of base money that the buyer's bank holds decreases, effectively destroying base money.
Since most money is now in the form of electronic records rather than cash, open market
operations are conducted simply by electronically increasing or decreasing *'crediting' or
'debiting'+ the amount of base money that the bank has in its reserve account at the central bank.
,hus, the process does not literally re4uire new currency. *-owever, this will increase the central
bank's re4uirement to print currency when the member bank demands banknotes, in e)change for
a decrease in its electronic balance.+
Selective credit control
It is a tool in the hands of !eserve ank of India to restrict bank finance against sensitive
commodities. ,hese sensitive commodities generally include5

Food grains i.e., cereals and pulses.
Cotton te)tiles, which include cotton yarn, man=made fibres and yarn and
fabrics made out of man=made fibres and partly out of cotton yarn and
partly out of man=made fibres.
Selected ma9or oil seeds indigenously grown viz. groundnut,
rapeseedMmustard, cottonseed, linseed and castor seed, oils thereof,
vanaspati and all imported oils and vegetable oils.
Sugar, &ur and /handsari.
!aw cotton and kapas.

1ll these commodities, as would be observed, are of mass consumption and &overnment makes
all efforts to ensure ade4uate supply of these commodities in the free market. ,he policy,
therefore, is to discourage advances against these commodities as far as possible and the purpose
is achieved through KSelective Credit ControlL, which has two different aspects as under5

*i+ 0inimum margin for lending against security of specified commodities is fi)ed.
*ii+ Ceiling on the level of credit is fi)ed.

,hese steps restrict the overall lending by the banks against these commodities. !eserve ank of
India also used to stipulate minimum rate of lending against commodities covered under
Selective Credit Control. Eith liberalisation in rates of interest announced by !eserve ank, this
stipulation has since been withdrawn and banks are free to determine rate of interest i.e. '6
th
%ctober, '((2.
Bank )eposits (ccounts
Financial intermediation by banks has played a key role in Indian supporting the
economic growth process. 1n efficient financial intermediation process, as is well known, has
two components5 effective mobilization of savings and their allocation to the most productive
uses. In this chapter, we will discuss one part of the financial intermediation by banks5
mobilization of savings. Ehen banks mobilize savings, they do it in the form of deposits, which
are the money accepted by banks from customers to be held under stipulated terms and
conditions. .eposits are thus an instrument of savings. Since the first episode of bank
nationalization in '(8(, banks have been at the core of the financial intermediation process in
India. ,hey have mobilized a sizeable share of savings of the household sector, the ma9or surplus
sector of the economy. ,his in turn has raised the financial savings of the household sector and
hence the overall savings rate. ;otwithstanding the liberalization of the financial sector and
increased competition from various other saving instruments, bank deposits continue to be the
dominant instrument of savings in India. &ross domestic savings of the Indian economy have
been growing over the years and the household sector has been the most significant contributor
to
savings. -ousehold sector saves in two ma9or ways, viz. financial assets and physical assets
within the financial savings of the household sector, bank deposits are the most prominent
instrument, accounting for nearly half of total financial savings of the household sector.
Introduction to Bank )eposits
%ne of the most important functions of any commercial bank is to accept deposits from
the public, basically for the purpose of lending. .eposits from the public are the principal
sources
of funds for banks. >ublic sector banks continue to dominate the Indian banking industry.
-owever, the share of the new private sector banks has been raising at the e)pense of the public
sector banks, particularly in the last few years.
Safet% of deposits
1t the time of depositing money with the bank, a depositor would want to be certain that
hisMher money is safe with the bank and at the same time, wants to earn a reasonable return.
,he safety of depositors' funds, therefore, forms a key area of the regulatory framework for
banking. In India, this aspect is taken care of in the anking !egulation 1ct, '(2( *! 1ct+.
,he !I is empowered to issue directivesMadvices on several aspects regarding the conduct of
deposit accounts from time to time. Further, the establishment of the .eposit Insurance
Corporation in '(8" *against the backdrop of failure of banks+ offered protection to bank
depositors, particularly small=account holders.
)eregulation of interest rates
,he process of deregulation of interest rates started in 1pril '((". @ntil then, all interest
rates were regulatedC that is, they were fi)ed by the !I. In other words, banks had no freedom
to
fi) interest rates on their deposits. Eith liberalization in the financial system, nearly all the
interest rates have now been deregulated. ;ow, banks have the freedom to fi) their own
deposit rates with only a very few e)ceptions. ,he !I prescribes interest rates only in respect
of savings deposits and ;!I deposits, leaving others for individual banks to determine
)eposit polic%
,he oard of .irectors of a bank, along with its top management, formulates policies
relating to the types of deposit the bank should have, rates of interest payable on each type,
special deposit schemes to be introduced, types of customers to be targeted by the bank, etc. %f
course, depending on the changing economic environment, the policy of a bank towards deposit
mobilization, undergoes changes.
&%pes of )eposit (ccounts
,he bank deposits can also be classified into *i+ demand deposits and *b+ time deposits.
)e#and deposits*
,hey are defined as deposits payable on demand through che4ue or otherwise. .emand deposits
serve as a medium of e)change, for their ownership can be transferred from one person to
another through che4ues and clearing arrangements provided by banks. ,hey have no fi)ed term
to maturity.
&i#e deposits*
,hey are defined as those deposits which are not payable on demand and
on which che4ues cannot be drawn. ,hey have a fi)ed term to maturity. 1 certificate
of deposit *C.+, for e)ample, is a time deposit
+ertificate of )eposit
1 Certificate of .eposit *C.+ is a negotiable money market instrument and is issued in
.ematerialized form or as a Since >romissory ;ote, for funds deposited at a bank or other
eligible financial institution for a specified time period. &uidelines for issue of C.s are currently
governed by various directives issued by the !I, as amended from time to time.
C.s can be issued by *i+ scheduled commercial banks *SCs+ e)cluding !egional !ural
anks *!!s+ and ?ocal 1rea anks *?1s+C and *ii+ select all=India Financial Institutions
that has been permitted by the !I to raise short=term resources within the umbrella limit
fi)ed by !I. .eposit amounts for C.s are a minimum of !s.' lakh, and multiples thereof.
.emand and time deposits are two broad categories of deposits. ;ote that these are only
categories of depositsC there are no deposit accounts available in the banks by the names
'demand deposits' or 'time deposits'. .ifferent deposit accounts offered by a bank, depending
on their characteristics, fall into one of these two categories.
,here are several deposit accounts offered by banks in IndiaC but they can be classified into three
main categories5
Current account
Savings bank account
,erm deposit account
+urrent (ccount
Current account deposits fall entirely under the demand=deposit category and term
deposit account falls entirely under time deposit. Savings bank accounts have both demand=
deposit and time=deposit components. In other words, some parts of savings deposits are
considered demand deposits and the rest as time deposits. Ee provide below the broad terms and
conditions governing the conduct of current, savings and term=deposit accounts.
1 current account is a form of demand=deposit, as the banker is obliged to repay these
liabilities on demand from the customer. Eithdrawals from current accounts are allowed any
number of times depending upon the balance in the account or up to a particular agreed amount.
Current deposits are non=interest bearing. 1mong the three broad categories of deposits==current
account deposit, savings accounts deposit and term deposits==current account deposits account
for the smallest fraction. 1 current account is basically a running and actively operated account
with very little restriction on the number and amount of drawings. ,he primary ob9ective of a
current account is to provide convenient operation facility to the customer, via continuous
li4uidity. %n account of the high cost of maintaining such accounts, banks do not pay any
interest on such deposits. In addition, many banks insist on customers maintaining minimum
balances to
offset the transaction costs involved. If minimum balances are not maintained, these banks
charge the customers a certain amount. Current accounts can be opened by rich individualsM
partnership firmsM private and limited companiesM -indu @ndivided Families *-@Fs+M societiesM
trusts, etc.
Savings Bank )eposits
Savings deposits are a form of demand deposits, which is sub9ect to restrictions on the
number of withdrawals as well as on the amounts of withdrawals during any specified period.
Further, minimum balances may be prescribed in order to offset the cost of maintaining and
servicing such deposits. Savings deposits are deposits that accrue interest at a fi)ed rate set by
!I *$.3percent as of Aanuary "#'#+.Savings bank accounts are used by a large segment of small
depositors as they can put their regular incomes into these accounts, withdraw the money on
demand and also earn interest on the balance left in the account. ,he fle)ibility provided by such
a product means that savings bank accounts cannot be opened by big trading or business firms.
Similarly, institutions such as government departments and bodies, local authorities, etc. cannot
open savings bank accounts.
Savings account deposits together with current account deposits are called C1S1 deposits
+(S( )eposits
From a bank's viewpoint, C1S1 deposits *Current 1ccount and Savings 1ccount
deposits+ are low=cost deposits, as compared to other types of deposits. Current account is
noninterest bearing, while interest payable on savings accounts is very low *currently $.3
percent+. ,o be competitive, it is important for banks to garner as much low=cost deposits as
possible, because by doing so banks can control the cost of raising deposits and hence can lend at
more competitive rates. ,he methods used by banks to mobilize C1S1 deposits include
%ffering salary accounts to companies, and encouraging merchants to open current accounts,
and use their cash=management facilities. anks with low C1S1 ratios *C1S1 deposits as B of
total deposits+ are more dependent on term deposits for their funding, and are vulnerable to
interest rate shocks in the economy, besides the lower spread they earn. *1s discussed above,
banks earn profit on the spread between their deposit and loans rates.+
,he share of current account and savings account *C1S1+ deposits in total deposits is the
highest for foreign banks followed by the State ank &roup. It can also be observed that the
share of C1S1 deposits in total deposits of the scheduled commercial banks as a whole has been
declining. ,his means that the cost of deposit mobilization of the commercial banks is rising,
which may pose a challenge for the banking sector in the coming years.
&er# )eposits
1 D,erm depositD is a deposit received by the ank for a fi)ed period, after which it can
be withdrawn. ,erm deposits include deposits such as Fi)ed .eposits M !einvestment depositsM
!ecurring .eposits etc. ,he term deposits account for the largest share and have remained
within the range of 8'B to 87 B of total deposits in the recent years. Interest is paid on term=
deposits, either on maturity or at stipulated intervals depending upon the deposit scheme under
which the money is placed. 1lso, a customer can earn interest on a term=deposit for a minimum
period of 7 days. Interest rates on term=deposits are usually higher than on savings deposits.
,erm deposits include5
Fi)ed deposits on which a fi)ed rate of interest is paid at fi)ed, regular intervalsC
!e=investment deposits, under which the interest is compounded 4uarterly and paid on maturity,
along with the principal amount of the deposit. Some banks have introduced Dfle)iD deposits
under which, the amount in savings deposit accounts beyond a fi)ed limit is automatically
converted into term=depositsC and !ecurring deposits, under which a fi)ed amount is deposited
at regular intervals for a fi)ed term and the repayment of principal and accumulated interest is
made at the end of the term. ,hese deposits are usually targeted at persons who are salaried or
receive other regular income. 1 !ecurring .eposit can usually be opened for any period from 8
months to '"# months.
Strategies of #o"iliing deposits
,o ma)imize their profits, commercial banks always attempt to mobilize savings at the
lowest cost possible. Ehile mobilizing deposits, banks have to comply with various directives
issued by the !I, the Indian ank 1ssociation *I1+, &overnment of India and other statutory
authoritiesMagencies. 1t the same time, since banks operate in a very competitive environment,
they have to reach out to a wide spectrum of customers and also offer deposit products that
lead to higher customer satisfaction. anks devise various strategies to e)pand the customer base
and reducing the cost of raising deposits. ,his is done by identifying target markets, designing
the products as per the re4uirements for customers, taking measures for marketing and promoting
the deposit products. It is essential not only to e)pand the customer base but also to retain it. ,his
is done by providing counseling, after=sales information and also through prompt handling of
customer complaints. Ehile the strategies for mobilizing bank deposits vary from bank to bank,
one common feature is to ma)imize the share of C1S1 deposits. ,he other common features
generally observed are as follows5
Staff members posted at branches are ade4uately trained to offer efficient and
courteous
service to the customers and to educate them about their rights and obligations.
1 bank often offers personalized banking relationship for its high=value customers by
appointing Customer !elationship 0anagers *C!0s+.
Senior citizensMpensioners have become an important category of customers to be
targeted by a bank. >roducts are developed by banks to meet the specific
re4uirements of this group.
Ehile banks endeavour to provide services to the satisfaction of customers, they put
in place an e)peditious mechanism to redress the complaints of the customers.
+o##on Guidelines of -pening and -perating )eposit (ccounts
,o open and operate a bank account, the following guidelines need to be followed.
.ue .iligence >rocess5 1 bank before opening any deposit account has to carry out due
diligence as re4uired under D/now Hour CustomerD */HC+ guidelines issued by !I and or such
other norms or procedures adopted by the bank.'8 ,he 'due diligence' process, while opening
a deposit account, involves the bank having ade4uate knowledge of the person's identity,
occupation, sources of income, and location. %btaining an introduction of the prospective
depositor from a person acceptable to the bank, obtaining recent photographs of people openingM
operating the account are part of the due diligence process. For customers providing proof of
identification and address, there is no need for personal introduction to the bank for opening
of a new savings bank account. ,o promote financial inclusion in rural areas M tribal areas, /HC
norms have been rela)ed for below the poverty line *>?+ families.
.ini#u# Balance 5
For deposit products like a savings bank account or a current account, banks normally
stipulate certain minimum balances to be maintained as part of terms and conditions governing
operation of such accounts. ut for people below the poverty line, banks encourage the opening
of ';o=frills 1ccounts', typically a special savings bank account where no minimum balance
re4uirement is re4uired. For a savings bank account, the bank may also place restrictions on
number of transactions, cash withdrawals, etc., during a given period.
&ransparenc% 5
Failure to maintain minimum balance in the accounts, where applicable, will
attract levy of charges as specified by the bank from time to time. Similarly, the bank may
specify charges for issue of che4ues books, additional statement of accounts, duplicate passbook,
folio charges, etc. 1ll such details regarding terms and conditions for operation of the accounts
and schedule of charges for various services provided should be communicated to the
prospective depositor while opening the account for the sake of transparency.
Eligi"ilit% 5
1 savings bank account can be opened by eligible person*s+ and certain
organizationsMagencies, as advised by the !I from time to time. ut current accounts can be
opened by individuals, partnership firms, private and public limited companies, -indu @ndivided
Families *-@Fs+, specified associates, society trusts, etc. :ligibility criteria for a savings account
and a current account is largely similar, but there are important differences too. Ehile both
the accounts can be opened by individuals, the savings account cannot be opened by a firm.
,erm .eposit 1ccounts can be opened by all categories of account holders.
,e$uire#ent of P(N 5
In addition to the due diligence re4uirements, under /HC norms, banks are re4uired by
law to obtain a >ermanent 1ccount ;umber *>1;+ from the prospective account holder or
alternate declarations as specified under the Income ,a) 1ct.
-peration of 6oint (ccount 5
.eposit accounts can be opened by an individual in his own name or by more than one
individual in their own names *known as a '9oint account'+. 1 9oint account can be operated by a
single individual or by more than one individual 9ointly. ,he mandate for who can operate the
account can be modified with the consent of all account holders. Aoint accounts opened by
minors with their parents or guardians can be only operated by the latter. 1ccountholders of a
9oint account can give mandates on the operation of the account, and the disposal of balances in
the event of the demise of one or more of the holders. anks classify these mandates as 'either or
Survivor', and 'anyone or Survivor*s+', etc.
Power of (ttorne% 5
1t the re4uest of the depositor, the bank can register mandateMpower of attorney given by
him authorizing another person to operate the account on his behalf.
+losure7renewal of deposits 5
,erm=deposit account holders at the time of placing their deposits can give instructions
with regard to closure of deposit account or renewal of deposit for further period on the date of
maturity. In absence of such mandate, the bank will usually seek instructions from the
depositor*s+ as to the renewal of the deposit or otherwise by sending intimation before say, '3
days of the maturity date of the term deposit. If no mandate is given or received by the bank
before the date of maturity of term deposit, the bank will be at liberty to roll over the deposit on
due date.
No#ination 5
1 depositor is permitted to officially authorize someone, who would receive the
money of his account when the depositor passes away. ,his is called the nomination process.
;omination facility is available on all deposit accounts opened by individuals. ;omination is
also available to a sole proprietary concern account. ;omination can be made in favour of one
individual only. ;omination so made can be cancelled or changed by the account holderMs any
time. ;omination can be made in favour of a minor too.
-peration of Special +lasses of )eposit (ccount 8olders
.inors' (ccounts
Savings bank accounts can be opened by minors along with their guardians, and operated
solely by the guardians, until the minor attains ma9ority. Qerification of signatures and other
identification is repeated before the ma9or starts operating the account.
(ccount of illiterate7visuall% challenged persons
1ccounts of illiterateMvisually challenged individuals are usually opened by banks at their
own discretion, in the presence of a mutually known witness. ,erms and conditions of operating
the account in this case is then specifically e)plained by the bank to the account=holder.
)eposit sche#es for Senior +itiens
anks have developed fi)ed=deposit schemes specifically meant for senior citizens *i.e.
individuals over the age of 8# years+. Such schemes usually provide an incentive by way of
additional interest, over and above the normal rate of interest, on term=deposits across
various maturities. Such schemes are applicable for both fresh deposits as well as renewals
of maturing deposits.
)eposit ,elated Services
1s per the !I guidelines, banks are re4uired to provide some services to the depositors
and to recognize the rights of depositors. ,he ultimate ob9ective of the banking industry should
be to provide a customer different services they are rightfully entitled to receive without demand.
.
+usto#er Infor#ation
Customer information collected from the customers should not be used for cross=selling
of services or products by the bank, its subsidiaries and affiliates. If the bank proposes to use
such information, it should be strictly with the 'e)press consent' of the account=holder.
anks are not e)pected to disclose detailsMparticulars of the customer's account to a third
person or party without the e)pressed or implied consent from the customer. -owever, there
are some e)ceptions, such as disclosure of information under compulsion of law or where
there is a duty to public for the bank to disclose.
Interest Pa%#ents
Savings "ank accounts*
Interest is paid on savings bank deposit account at the rate specified by !I from time to
time. In case of savings bank accounts, till recently, banks paid interest on the minimum balance
between the ''th and the last day of the month. Eith effect from 1pril ', "#'#, banks have been
advised to calculate interest on savings bank deposit by considering daily product, which would
benefit the holders of savings bank accounts.
&er# deposits 5
,erm=deposit interest rates are decided by individual banks within these general
guidelines. In terms of !I directives, interest is calculated at 4uarterly intervals on term
deposits and paid at the rate decided by the bank depending upon the period of deposits. ,he
interest on term deposits is calculated by the bank in accordance with the formulae and
conventions advised by Indian ank 1ssociation. 1lso, a customer can earn interest on a term
deposit for a minimum period of 7 days, as stated earlier.
&a9 deducted at source /&)S5*
,he bank has statutory obligation to deduct ta) at source if the total interest paidMpayable
on all term deposits held by a person e)ceeds the amount specified under the Income ,a) 1ct
and rules there under. ,he ank will issue a ta) deduction certificate *,.S Certificate+ for the
amount of ta) deducted. ,he depositor, if entitled to e)emption from ,.S, can submit a
declaration to the bank in the prescribed format at the beginning of every financial year.
Pre#ature Withdrawal of &er# )eposit
,he bank on re4uest from the depositor, at its discretion, may allow withdrawal of term
deposit before completion of the period of the deposit agreed upon at the time of placing the
deposit. anks usually charge a penalty for premature withdrawal of deposits. ,he bank shall
declare their penal interest rates policy for premature withdrawal of term deposit, if any, at the
time of opening of the account.
Pre#ature ,enewal of &er# )eposit
In case the depositor desires to renew the deposit by seeking premature closure of an
e)isting term deposit account, the bank will permit the renewal at the applicable rate on the date
of renewal, provided the deposit is renewed for a period longer than the balance period of the
original deposit. Ehile prematurely closing a deposit for the purpose of renewal, interest on
the deposit for the period it has remained with the bank will be paid at the rate applicable to
the period for which the deposit remained with the bank and not at the contracted rate.
(dvances against )eposits
,he ank may consider re4uests of the depositor*s+ for loanMoverdraft facility against
term deposits duly discharged by the depositor*s+ on e)ecution of necessary security documents.
,he Indian anks' 1ssociation *I1+ is an association of banks from both the public and the
private sector and represents the management of banks. ,he bank may also consider giving an
advance against a deposit standing in the name of minor. -owever, a suitable declaration stating
that the loan is for the benefit of the minor is to be furnished by the depositor=applicant.
Settle#ent of )ues in )eceased )eposit (ccount
a+ If the depositor has registered nomination with the bankC the balance outstanding in the
account of the deceased depositor will be transferredM paid to the nominee after the bank is
satisfied about the identity of the nominee, etc.
b+ ,he above procedure will be followed even in respect of a 9oint account where nomination
is registered with the bank.
c+ In case of 9oint deposit accounts where 9oint account holders do not give any mandate for
disposal, when one of the 9oint account holders dies, the bank is re4uired to make payment
9ointly to the legal heirs of the deceased person and the surviving depositor*s+. In these cases,
delays may ensue in the production of legal papers by the heirs of the deceased. -owever, if the
9oint account holders had given mandate for disposal of the balance in the account in the forms
such as 'either or survivor', 'formerMlatter or survivor', 'anyone of survivors or survivor'C etc., the
payment will be made as per the mandate. In such cases, there is no delay in production of legal
papers by the heirs of the deceased.
d+ In the absence of nomination, the bank will pay the amount outstanding to all legal heirs
against 9oint application and on receipt of the necessary documents, including court order.
Stop Pa%#ent 'acilit%
,he ank will accept 'stop payment' instructions from the depositors in respect of
che4ues issued by them. Charges, as specified, will be recovered.
)or#ant (ccounts
1ccounts which are not operated for a considerable period of time *usually '"M"2 months
for savings bank accounts and 8M'" months for current accounts+, will be transferred to a separate
dormantMinoperative account status in the interest of the depositor as well as the bank.'6 ,he
depositor will be informed if there are charges that the bank would levy on dormantMinoperative
accounts. Such accounts can be used again on an activation re4uest to the bank. Such a practice
is in the interest of the depositor since it avoids the possibility of frauds on the account. It is also
in the interest of the bank as it reduces the servicing costs that the bank would have had to incur
if the account were to remain active.
Safe )eposit !ockers
,his facility is not offered through all bank branches and wherever the facility is offered,
allotment of safe deposit vault will be sub9ect to availability and compliance with other terms
and conditions attached to the service. Safe deposit lockers may be hired by an individual *not
a minor+ singly or 9ointly with another individual*s+, -@Fs, firms, limited companies, associates,
societies, trusts etc. ;omination facility is available to individual*s+ holding the lockers singly
or 9ointly. In the absence of nomination or mandate for disposal of contents of lockers, with a
view to avoid hardship to common persons, the bank will release the contents of locker to the
legal heirs against indemnity on the lines as applicable to deposit accounts.
,edress of +o#plaints and Grievances
.epositors having any complaintMgrievance with regard to services rendered by the bank
have a right to approach the authorities designated by the bank for handling customer
complaintsM grievances. In case the depositor does not get a response from the bank within one
month after the bank receives his representation Mcomplaint or he is not satisfied with the
response received from the bank, he has a right to approach the anking %mbudsman appointed
by !I.
2eposit Ser4ices Offered to !on*&esident Indians
anks actively seek banking business from ;on=!esident Indians *;!Is+ by offering
different types of deposit accounts *and related services+ in accordance with !I guidelines,
including5
;on=resident ordinary accountC
;on=resident *e)ternal+ !upee accountC and
Foreign currency nonresident account *anks+
)efinition of Non-,esident Indian /N,I5
1s per the Foreign :)change 0anagement 1ct *F:01+, '(((, an ;!I means5
;on=!esident Indian ;ational *i.e. ;on=resident Indian holding Indian passport+,
and
>ersons of Indian %rigin *i.e., ;on=residents holding foreign passports+
Non-resident Indian Nationals include
*i+ Indian citizens who proceed abroad for employment or for any business or vocation in
circumstances indicating an indefinite period of stay outside IndiaC ;!I is defined differently
under different acts. For the purpose of bank accounts, F:01 definition holds.
*ii+ Indian citizens working abroad on assignments with foreign governments, internationalM
multinational agencies such as the @nited ;ations, the International 0onetary Fund,
the Eorld ank etc.
*iii+ %fficials of Central and State &overnments and >ublic Sector @ndertakings *>S@s+
deputed abroad on assignments with foreign governments, multilateral agencies or
Indian diplomatic missions abroad.
PI- /Persons of Indian -rigin5 is defined as a citizen of any country other than angladesh or
>akistan, if
a. he has at any time held an Indian passportC or
b. he or either of his parents or any of his grand parents was a citizen of IndiaC or
c. the person is a spouse of an Indian citizen or a person referred to in sub=clause
*a+ or *b+.
In general, ;!I is thus a person of Indian nationality or origin, who is resident abroad for
business or employment or vocation, or with the intension of seeking employment or vocation
and the period of stay abroad is uncertain."'
Non ,esident -rdinar% (ccounts /N,-5
,hese are !upee accounts and can be opened by any person resident outside India.
,ypically, when a resident becomes non=resident, his domestic !upee account gets converted
into an ;!% account. In other words, it is basically a domestic account of an ;!I which help
him get
credits which accrue in India, such as rent from property or income from other investments.
;ew accounts can be opened by sending fresh remittances from abroad. ;!% accounts can be
opened only as savings account, current account, recurring deposits and term=deposit accounts.
!egulations on interest rates, tenors etc. are similar to those of domestic accounts. Ehile the
principal of ;!% deposits is non=repatriable, current income such as interest earnings on ;!%
deposits are repatriable. Further, ;!IM>I% may remit an amount, not e)ceeding @ST'million
per financial year, for permissible transactions from these accounts.
!on*&esident %67ternal( &upee #ccounts
,he ;on=!esident *:)ternal+ !upee 1ccount ;! *:+ !1 scheme, also known as the
;!: scheme, was introduced in '(7#. ,his is a rupee account. 1ny ;!I can open an ;!:
account with funds remitted to India through a bank abroad. 1n ;!: rupee account may be
opened as current, savings, and recurring or term deposit account. Since this account is
maintained in !upees, the depositor is e)posed to e)change risk. ,hus, a student going abroad
for studies or a tourist going abroad for brief visit is not an ;!I. ,his is a repatriable account *for
both interest and principal+ and transfer fromMto another ;!: account or FC;! *+ account *see
below+ is also permitted. ?ocal payments can also be freely made from ;!: accounts. ;!Is M
>I%s have the option to credit the current income to their ;!: accounts, provided income ta)
has been deducted M provided for. Interest rates on ;!: accounts are determined by the !I, for
both savings and term deposits.
'oreign +urrenc% Non ,esident (ccount /Banks5
,he Foreign Currency ;on=!esident 1ccount *anks+ or FC;! *+ accounts scheme
was
introduced with effect from 0ay '3, '(($ to replace the then prevailing FC;!*1+ scheme
introduced in '(73.
,hese are foreign currency accounts, which can be opened by ;!Is in only
designated currencies5 >ound Sterling, @S .ollar, Canadian .ollar, 1ustralian
.ollar, :@!% and Aapanese Hen.
!epatriation of principal amount and interest is permitted.
,hese deposits can be opened only in the form of term deposits.
.eposits are in foreign currency and are repaid in the currency of issue. -ence,
there is no e)change risk for the account holder.
,ransfer of funds from e)isting ;!: accounts to FC;! *+ accounts and vice=
versa, of the same account holder, is permissible without the prior approval of
!I.
1 bank should obtain the prior approval of its oard of .irectors for the interest rates that it
will offer on deposits of various maturities, within the ceiling prescribed by !I.
)eposit Insurance
.eposit insurance helps sustain public confidence in the banking system through the
protection of depositors, especially small depositors, against loss of deposit to a significant
e)tent. In India, bank deposits are covered under the insurance scheme offered by .eposit
Insurance and Credit &uarantee Corporation of India *.IC&C+, which was established with
funding from the !eserve ank of India. ,he scheme is sub9ect to certain limits and conditions.
.IC&C is a wholly=owned subsidiary of the !I.
Banks insured "% the )I+G+
1ll commercial banks including branches of foreign banks functioning in India, local
area banks and regional rural banks are insured by the .IC&C. Further, all State, Central and
>rimary cooperative banks functioning in StatesM@nion ,erritories which have amended the local
Cooperative Societies 1ct empowering !I suitably are insured by the .IC&C. >rimary
cooperative societies are not insured by the .IC&C.
'eatures of the sche#e
Ehen is .IC&C liable to payR
In the event of a bank failure, .IC&C protects bank deposits that are payable in India. .IC&C
is liable to pay if *a+ a bank goes into li4uidation or *b+ if a bank is amalgamatedM merged with
another bank.
.ethods of protecting depositors' interest
,here are two methods of protecting depositors' interest when an insured bank fails5
*i+ by transferring business of the failed bank to another sound bank"$ *in case of merger or
amalgamation+ and *ii+ where the .IC&C pays insurance proceeds to depositors *insurance
pay=out method+.
&%pes of deposit covered "% )I+G+
,he .IC&C insures all deposits such as savings, fi)ed, current, recurring, etc. e)cept the
following types of deposits5
.eposits of foreign &overnmentsC
.eposits of CentralMState &overnmentsC
>rimary agricultural credit societies *>1CS+ are village=level cooperatives that disburse short=
term credit. ,here are over (3### such societies in the country. In "##2, &lobal ,rust ank was
merged into %riental ank of Commerce, after significant losses from ;>1s, and a three=month
&ovt. imposed moratorium.
Inter=bank depositsC
.eposits of the State ?and .evelopment anks with the State co=operative bankC
1ny amount due on account of any deposit received outside IndiaC
1ny amount, which has been specifically e)empted by the corporation with the
previous approval of !I.
.a9i#u# deposit a#ount insured "% the )I+G+
:ach depositor in a bank is insured up to a ma)imum of !s'##, ### for both principal
and
interest amount held by him in the same capacity and same right. For e)ample, if an individual
had a deposit with principal amount of !s.(#, ### plus accrued interest of !s.7, ###, the total
amount insured by the .IC&C would be !s.(7, ###. If, however, the principal amount were !s.
((,### and accrued interest of !s 8,###, the total amount insured by the .IC&C would be !s
' lakh.,he deposits kept in different branches of a bank are aggregated for the purpose of
insurance cover and a ma)imum amount up to !s ' lakh is paid. 1lso, all funds held in the same
type of ownership at the same bank are added together before deposit insurance is determined. If
the funds are in different types of ownership *say as individual, partner of firm, director of
company, etc.+ or are deposited into separate banks they would then be separately insured.
1lso, note that where a depositor is the sole proprietor and holds deposits in the name of the
proprietary concern as well as in his individual capacity, the two deposits are to be aggregated
and the insurance cover is available up to rupees one lakh ma)imum.
+ost of deposit insurance
.eposit insurance premium is borne entirely by the insured bank. anks are re4uired to
pay the insurance premium for the eligible amount to the .IC&C on a semi=annual basis. ,he
cost of the insurance premium cannot be passed on to the customer.
Pre#iu# charged and clai#s paid "% )I+G+
,he premium rates charged by .IC&C were raised to !e #.'# per deposit of !s.'## with
effect from 1pril ', "##3. Ehile the premiums received by .IC&C during the years "##8=
#7, "##7=#6 and "##6=#( were !s."$"' crores, !s."622 crores and !s.$23$ crores
respectively, the net claims paid by .IC&C during these three years were !s.$"$ crores,
!s.'6# crores and !s.(#( crores respectively.
Withdrawal of insurance cover
,he deposit insurance scheme is compulsory and no bank can withdraw from it. ,he
.IC&C, on the other hand, can withdraw the deposit insurance cover for a bank if it fails to pay
the premium for three consecutive half year periods. In the event of the .IC&C withdrawing its
cover from any bank for default in the payment of premium, the public will be notified through
the newspapers.
Basics of Bank !ending
anks e)tend credit to different categories of borrowers for a wide variety of purposes.
For many borrowers, bank credit is the easiest to access at reasonable interest rates. ank credit
is provided to households, retail traders, small and medium enterprises *S0:s+, corporate,
the &overnment undertakings etc. in the economy. !etail banking loans are accessed by
consumers of goods and services for financing the purchase of consumer durables, housing or
even for day=to=day consumption. In contrast, the need for capital investment, and day=to=day
operations of private corporate and the &overnment undertakings are met through wholesale
lending. ?oans for capital e)penditure are usually e)tended with medium and long=term
maturities, while day=to=day finance re4uirements are provided through short=term credit
*working capital loans+. 0eeting the financing needs of the agriculture sector is also an
important role that Indian banks play.
Principles of !ending and !oan polic%
Principles of lending
,o lend, banks depend largely on deposits from the public. anks act as custodian of
public deposits. Since the depositors re4uire safety and security of their deposits, want to
withdraw based on principles that reflect these concerns of the depositors. ,hese principles
include5 safety, li4uidity, profitability, and risk diversion.
Safet%
anks need to ensure that advances are safe and money lent out by them will come back.
Since the repayment of loans depends on the borrowers' capacity to pay, the banker must be
satisfied before lending that the business for which money is sought is a sound one. In addition,
bankers many times insist on security against the loan, which they fall back on if things go
wrong for the business. ,he security must be ade4uate, readily marketable and free of
encumbrances.
!i$uidit%
,o maintain li4uidity, banks have to ensure that money lent out by them is not locked up
for long time by designing the loan maturity period appropriately. Further, money must come
back as per the repayment schedule. If loans become e)cessively illi4uid, it may not be
possible for bankers to meet their obligations vis=U=vis depositors.
Profita"ilit%
,o remain viable, a bank must earn ade4uate profit on its investment. ,his calls for
ade4uate margin between deposit rates and lending rates. In this respect, appropriate fi)ing of
interest rates on both advances and deposits is critical. @nless interest rates are competitively
fi)ed and margins are ade4uate, banks may lose customers to their competitors and become
unprofitable.
,isk diversification
,o mitigate risk, banks should lend to a diversified customer base. .iversification should
be in terms of geographic location, nature of business etc. If, for e)ample, all the borrowers of a
bank are concentrated in one region and that region gets affected by a natural disaster, the
bank's profitability can be seriously affected.
!oan Polic%
ased on the general principles of lending stated above, the Credit >olicy Committee
*C>C+ of individual banks prepares the basic credit policy of the ank, which has to be approved
by the ank's oard of .irectors. ,he loan policy outlines lending guidelines and establishes
operating procedures in all aspects of credit management including standards for presentation of
credit proposals, financial covenants, rating standards and benchmarks, delegation of credit
approving powers, prudential limits on large credit e)posures, asset concentrations, portfolio
management, loan review mechanism, risk monitoring and evaluation, pricing of loans,
provisioning for bad debts, regulatoryM legal compliance etc. ,he lending guidelines reflect the
specific bank's lending strategy *both at the macro level and individual borrower level+ and have
to be in conformity with !I guidelines. ,he loan policy typically lays down lending guidelines
in the following areas5
?evel of credit=deposit ratio
,argeted portfolio mi)
-urdle ratings
?oan pricing
Collateral security
+redit )eposit /+)5 ,atio
1 bank can lend out only a certain proportion of its deposits, since some part of deposits
haveto be statutorily maintained as Cash !eserve !atio *C!!+ deposits, and an additional part
has to be used for making investment in prescribed securities *Statutory ?i4uidity !atio or S?!
re4uirement+. It may be noted that these are minimum re4uirements. anks have the option
of having more cash reserves than C!! re4uirement and invest more in S?! securities than
they are re4uired to. Further, banks also have the option to invest in non=S?! securities.
,herefore, the C>C has to lay down the 4uantum of credit that can be granted by the bank as
a percentage of deposits available. Currently, the average C. ratio of the entire banking
industry is around 7# percent, though it differs across banks. It is rarely observed that banks
lend out of their borrowings.
&argeted Portfolio .i9
,he C>C aims at a targeted portfolio mi) keeping in view both risk and return. ,oward
this end, it lays down guidelines on choosing the preferred areas of lending *such as sunrise
sectors and profitable sectors+ as well as the sectors to avoid. anks typically monitor all ma9or
sectors of the economy. ,hey target a portfolio mi) in the light of forecasts for growth and
profitability for each sector. If a bank perceives economic weakness in a sector, it would restrict
new e)posures to that segment and similarly, growing and profitable sectors of the economy
prompt banks to increase new e)posures to those sectors. ,his entails active portfolio
management. Further, the bank also has to decide which sectors to avoid. For e)ample, the C>C
of a bank may be of the view that the bank is already overe)tended in a particular industry and
no more loans should be provided in that sector. It may also like to avoid certain kinds of loans
keeping in mind general credit discipline, say loans for speculative purposes, unsecured loans,
etc.
8urdle ratings
,here are a number of diverse risk factors associated with borrowers. anks should have
a comprehensive risk rating system that serves as a single point indicator of diverse risk factors
of a borrower. ,his helps taking credit decisions in a consistent manner. ,o facilitate this, a
substantial degree of standardization is re4uired in ratings across borrowers. ,he risk rating
system should be so designed as to reveal the overall risk of lending. For new borrowers, a
bank usually lays down guidelines regarding minimum rating to be achieved by the borrower
to become eligible for the loan. ,his is also known as the 'hurdle rating' criterion to be achieved
by a new borrower. :ach bank has to statutorily set aside a certain minimum fraction of its net
demand and time liabilities in prescribed assets to fulfill these re4uirements. For e)ample, in the
last decade, a number of banks identified retail finance as an area with potential for strong
growth and have therefore sought to increase their financing in retail space. %ne advantage of
financing a large number of small loans is that risk concentration is reduced. -owever, during an
economic downturn, the retail portfolio may also e)perience significantly high credit defaults.
Pricing of loans
!isk=return trade=off is a fundamental aspect of risk management. orrowers with weak
financial price *that is, at higher interest+. ,he higher the credit risk of a borrower the higher
would be his cost of borrowing. ,o price credit risks, banks devise appropriate systems, which
usually allow fle)ibility for revising the price *risk premium+ due to changes in rating. In other
words, if the risk rating of a borrower deteriorates, his cost of borrowing should rise and vice
versa. 1t the macro level, loan pricing for a bank is dependent upon a number of its cost factors
such as cost of raising resources, cost of administration and overheads, cost of reserve assets like
C!! and S?!, cost of maintaining capital, percentage of bad debt, etc. ?oan pricing is also
dependent upon competition.
+ollateral securit%
1s part of a prudent lending policy, banks usually advance loans against some security.
,he loan policy provides guidelines for this. In the case of term loans and working capital assets,
banks take as 'primary security' the property or goods against which loans are granted. In
addition to this, banks often ask for additional security or 'collateral security' in the form of
both physical and financial assets to further bind the borrower. ,his reduces the risk for the
bank. Sometimes, loans are e)tended as 'clean loans' for which only personal guarantee of the
borrower is taken.
+o#pliance with ,BI guidelines
,he credit policy of a bank should be conformant with !I guidelinesC some of the
important guidelines of the !I relating to bank credit are discussed below.
)irected credit stipulations
,he !I lays down guidelines regarding minimum advances to be made for priority
sector advances, e)port credit finance, etc."7 ,hese guidelines need to be kept in mind while
formulating credit policies for the ank.
+apital ade$uac%
If a bank creates assets=loans or investment=they are re4uired to be backed up by bank
capitalC the amount of capital they have to be backed up by depends on the risk of individual
assets that the bank ac4uires. ,he riskier the asset, the larger would be the capital
For e)ample, in case of a home loan, the house for which the loan is taken serves as the 'primary
security'. ank capital provides a cushion against une)pected losses of banks and riskier assets
would re4uire larger amounts of capital to act as cushion.
,he asel Committee for ank Supervision *CS+ has prescribed a set of norms for the
capital re4uirement for the banks for all countries to follow. ,hese norms ensure that capital
should be ade4uate to absorb une)pected losses. In addition, all countries, including India,
establish their own guidelines for risk based capital framework known as Capital 1de4uacy
;orms. ,hese norms have to be at least as stringent as the norms set by the asel committee.
1 key norm of the asel committee is the Capital 1de4uacy !atio *C1!+, also known as Capital
!isk Eeighted 1ssets !atio, is a simple measure of the soundness of a bank. ,he ratio is the
capital with the bank as a percentage of its risk=weighted assets. &iven the level of capital
available with an individual bank, this ratio determines the ma)imum e)tent to which the bank
can lend. ,he asel committee specifies a C1! of at least 6B for banks. ,his means that the
capital funds of a bank must be at least 6 percent of the bank's risk weighted assets. In India, the
!I has specified a minimum of (B, which is more stringent than the international norm.
In fact, the actual ratio of all scheduled commercial banks *SCs+ in India stood at '$."B in
0arch "##(.,he !I also provides guidelines about how much risk weights banks should assign
to different classes of assets *such as loans+. ,he riskier the asset class, the higher would be the
risk weight. ,hus, the real estate assets, for e)ample, are given very high risk weights.
,his regulatory re4uirement that each individual bank has to maintain a minimum level of
capital, which is commensurate with the risk profile of the bank's assets, plays a critical role in
the safety and soundness of individual banks and the banking system.
+redit E9posure !i#its
1s a prudential measure aimed at better risk management and avoidance of concentration
of credit risks, the !eserve ank has fi)ed limits on bank e)posure to the capital market as well
as to individual and group borrowers with reference to a bank's capital. ?imits on inter=bank
e)posures have also been placed. anks are further encouraged to place internal caps on their
sectoral e)posures, their e)posure to commercial real estate and to unsecured e)posures.
,hese e)posures are closely monitored by the !eserve ank. >rudential norms on banks'
1 ank typically faces two types of losses in respect of any borrower or borrower class =
e)pected and une)pected losses. :)pected losses should be budgeted for, and provisions should
be made to offset their adverse effects on the ank's balance sheet. -owever, to cushion against
une)pected losses, which are unpredictable, banks have toehold ade4uate amount of capital.
e)posures to ;FCs and to related entities are also in place.
Some of the categories of the above table are discussed below5
Individual Borrowers 5 1 bank's credit e)posure to individual borrowers must not
e)ceed '3 B of the ank's capital funds. Credit e)posure to individual borrowers may
e)ceed the e)posure norm of '3 B of capital funds by an additional 3 B *i.e. up to
"# B+ provided the additional credit e)posure is on account of infrastructure financing
Group Borrowers 5 1 bank's e)posure to a group of companies under the same
management control must not e)ceed 2#B of the ank's capital funds unless the
e)posure is in respect of an infrastructure pro9ect. In that case, the e)posure to a
group of companies under the same management control may be up to 3#B of the
ank's capital funds.
(ggregate e9posure to capital #arket* 1 bank's aggregate e)posure to the capital
market, including both fund based and non=fund based e)posure to capital market, in
all forms should not e)ceed 2# percent of its net worth as on 0arch $' of the previous
year. In addition to ensuring compliance with the above guidelines laid down by !I, a ank
may fi) its own credit e)posure limits for mitigating credit risk. ,he bank may, for e)ample, set
upper
caps on e)posures to sensitive sectors like commodity sector, real estate sector and capital
markets. anks also may lay down guidelines regarding e)posure limits to unsecured loans.
!ending ,ates
anks are free to determine their own lending rates on all kinds of advances e)cept a few
such as e)port financeC interest rates on these e)ceptional categories of advances are regulated by
the rigit may be noted that the Section "'1 of the ! 1ct provides that the rate of interest
charged by a bank shall not be reopened by any court on the ground that the rate of interest
charged is e)cessive. ,he concept of benchmark prime lending rate *>?!+ was however
introduced in ;ovember "##$ for pricing of loans by commercial banks with the ob9ective of
enhancing transparency in the pricing of their loan products. :ach bank must declare its
benchmark prime lending rate *>?!+ as approved by its oard of .irectors. 1 bank's >?! is
the interest rate to be charged to its best clientsC that is, clients with the lowest credit risk. :ach
bank is also re4uired to indicate the ma)imum spread over the >?! for various credit
e)posures. -owever, >?! lost its relevance over time as a meaningful reference rate, as the
bulk of loans were advanced below >?!. Further, this also impedes the smooth transmission of
monetary signals by the !I. ,he !I therefore set up a Eorking &roup on enchmark >rime
?ending !ate *>?!+ in Aune "##( to go into the issues relating to the concept of >?! and
suggest measures to make credit pricing more transparent. anks may, in e)ceptional
circumstances, with the approval of their boards, enhance the e)posure by additional
3B for both individual, and group borrowers Following the recommendations of the &roup, the
!eserve ank has issued guidelines in February"#'#. 1ccording to these guidelines, the 'ase
!ate system' will replace the >?! system with effect from Auly #', "#'#.1ll categories of loans
should henceforth be priced only with reference to the ase !ate. :ach bank will decide its own
ase !ate. ,he actual lending rates charged to borrowers would be the ase !ate plus borrower=
specific charges, which will include product specific operating costs, credit risk premium and
tenor premium. Since transparency in the pricing of loans is a key ob9ective, banks are re4uired
to e)hibit the information on their ase !ate at all branches and also on their websites. Changes
in the ase !ate should also be conveyed to the general public from time to time through
appropriate channels. 1part from transparency, banks should ensure that interest rates charged to
customers in the above arrangement are non=discriminatory in nature.
Guidelines on 'air Practices +ode for !enders
!I has been encouraging banks to introduce a fair practices code for bank loans. ?oan
application forms in respect of all categories of loans irrespective of the amount of loan sought
by the borrower should be comprehensive. It should include information about the feesM charges,
if any, payable for processing the loan, the amount of such fees refundable in the case of no
acceptance of application, prepayment options and any other matter which affects the interest
of the borrower, so that a meaningful comparison with the fees charged by other banks can be
+0 Lala Lajpatrai Institute Of Management
made and informed decision can be taken by the borrower. Further, the banks must inform
'all=in=cost' to the customer to enable him to compare the rates charged with other sources
of finance.
,egulations relating to providing loans
,he provisions of the anking !egulation 1ct, '(2( *! 1ct+ govern the making of
loans by banks in India. !I issues directions covering the loan activities of banks. Some of the
ma9or guidelines of !I, which are now in effect, are as follows5
1dvances against bank's own shares5 a bank cannot grant any loans and advances against
the security of its own shares.
1dvances to bank's .irectors5 ,he ! 1ct lays down the restrictions on loans and
advances to the directors and the firms in which they hold substantial interest.
!estrictions on -olding Shares in Companies5 In terms of Section '(*"+ of the ! 1ct,
banks should not hold shares in any company e)cept as provided in sub=section *'+
whether as pledge, mortgagee or absolute owner, of an amount e)ceeding $#B of the
paid=up share capital of that company or $#B of its own paid=up share capital and
reserves, whichever is less.
Basics of !oan (ppraisal: +redit decision-#aking and ,eview
+redit approval authorities
,he ank's oard of .irectors also has to approve the delegation structure of the various
credit approval authorities. anks establish multi=tier credit approval authorities for corporate
banking activities, small enterprises, retail credit, agricultural credit, etc. Concurrently, each
bank should set up a Credit !isk 0anagement .epartment *C0!.+, being independent of the
C>C. ,he C!0. should enforce and monitor compliance of the risk parameters and prudential
limits set up by the C>C.
,he usual structure for approving credit proposals is as follows5
Credit approving authority5 multi=tier credit approving system with a proper scheme
of delegation of powers.
In some banks, high valued credit proposals are cleared through a Credit Committee
approach consisting of, say $M 2 officers. ,he Credit Committee should invariably have
a representative from the C!0., who has no volume or profit targets.
+redit appraisal and credit decision-#aking
Ehen a loan proposal comes to the bank, the banker has to decide how much funds does
the proposal really re4uire for it to be a viable pro9ect and what are the credentials of those who
are seeking the pro9ect. In checking the credentials of the potential borrowers, Credit Information
ureaus play an important role.
+redit Infor#ation Bureaus
,he >arliament of India has enacted the Credit Information Companies *!egulation+ 1ct,
"##3, pursuant to which every credit institution, including a bank, has to become a member
of a credit information bureau and furnish to it such credit information as may be re4uired of
the credit institution about persons who en9oy a credit relationship with it. Credit information
bureaus are thus repositories of information, which contains the credit history of commercial
and individual borrowers. ,hey provide this information to their 0embers in the form of
credit information reports. ,o get a complete picture of the payment history of a credit applicant,
credit grantors must be able to gain access to the applicant's complete credit record that may be
spread over different institutions. Credit information bureaus collect commercial and consumer
credit related data and collate such data to create credit reports, which they distribute to their
0embers. 1 Credit Information !eport *CI!+ is a factual record of a borrower's credit payment
history compiled from information received from different credit grantors. Its purpose is to
help credit grantors make informed lending decisions = 4uickly and ob9ectively. 1s of today,
bureaus provide history of credit card holders and S0:s.
.onitoring and ,eview of !oan Portfolio
It is not only important for banks to follow due processes at the time of sanctioning and
disbursing loans, it is e4ually important to monitor the loan portfolio on a continuous basis.
anks need to constantly keep a check on the overall 4uality of the portfolio. ,hey have to
ensure that the borrower utilizes the funds for the purpose for which it is sanctioned and
complies with the terms and conditions of sanction. Further, they monitor individual borrowal
accounts and check to see whether borrowers in different industrial sectors are facing difficulty
in making loan repayment. Information technology has become an important tool for efficient
handling of the above functions including decision support systems and data bases. Such a
surveillance and monitoring approach helps to mitigate credit risk of the portfolio.
anks have set up ?oan !eview .epartments or Credit 1udit .epartments in order to ensure
compliance with e)tant sanction and post=sanction processes and procedures laid down by the
ank from time to time. ,his is especially applicable for the larger advances. ,he ?oan !eview
.epartment helps a bank to improve the 4uality of the credit portfolio by detecting early
warning signals, suggesting remedial measures and providing the top management with
information on credit administration, including the credit sanction process, risk evaluation and
post=sanction follow up.
&%pes of (dvances
1dvances can be broadly classified into5 fund=based lending and non=fund based lending.
'und "ased lending5
,his is a direct form of lending in which a loan with an actual cash outflow is given to the
borrower by the ank. In most cases, such a loan is backed by primary andMor collateral security.
,he loan can be to provide for financing capital goods andMor working capital re4uirements.
Non-fund "ased lending5
In this type of facility, the ank makes no funds outlay. -owever, such arrangements
may be converted to fund=based advances if the client fails to fulfill the terms of his contract
with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities
such as 'letters of credit' and 'guarantees' fall under the category of non fund based credit.
?et us e)plain with an e)ample how guarantees work. 1 company takes a term loan from ank
1 and obtains a guarantee from ank for its loan from ank 1, for which he pays a fee. y
issuing a bank guarantee, the guarantor bank *ank + undertakes to repay ank 1, if the
company fails to meet its primary responsibility of repaying ank 1.
,BI Guidelines on 'und Based 'acilities
Working +apital 'inance
Eorking capital finance is utilized for operating purposes, resulting in creation of current
assets *such as inventories and receivables+. ,his is in contrast to term loans which are utilized
for establishing or e)panding a manufacturing unit by the ac4uisition of fi)ed assets.
anks carry out a detailed analysis of borrowers' working capital re4uirements. Credit limits
are established in accordance with the process approved by the board of directors. ,he limits
on Eorking capital facilities are primarily secured by inventories and receivables *chargeable
current assets+. Eorking capital finance consists mainly of cash credit facilities, short term loan
and bill discounting. @nder the cash credit facility, a line of credit is provided up to a pre=
established amount based on the borrower's pro9ected level of sales inventories, receivables and
cash deficits. @p to this pre=established amount, disbursements are made based on the actual
level of inventories and receivables. -ere the borrower is e)pected to buy inventory on payments
and, thereafter, seek reimbursement from the ank. In reality, this may not happen. ,he
facility is generally given for a period of up to '" months and is e)tended after a review of the
credit limit. For clients facing difficulties, the review may be made after a shorter period.
%ne problem faced by banks while e)tending cash credit facilities, is that customers can draw
up to a ma)imum level or the approved credit limit, but may decide not to. ecause of this,
li4uidity management becomes difficult for a bank in the case of cash credit facility. !I has
been trying to mitigate this problem by encouraging the Indian corporate sector to avail of
working capital finance in two ways5 a short=term loan component and a cash credit component.
,he loan component would be fully drawn, while the cash credit component would vary
depending upon the borrower's re4uirements. 1ccording to !I guidelines, in the case of
borrowers en9oying working capital credit limits of !s. '# crores and above from the banking
system, the loan component should normally be 6#B and cash credit component "# B. anks,
however, have the freedom to change the composition of working capital finance by increasing
the cash credit component beyond "#B or reducing it below "# B, as the case may be, if they so
desire. ill discounting facility involves the financing of short=term trade receivables through
negotiable instruments. ,hese negotiable instruments can then be discounted with other banks, if
re4uired, providing financing banks with li4uidity.
Pro;ect 'inance
>ro9ect finance business consists mainly of e)tending medium=term and long=term rupee
and foreign currency loans to the manufacturing and infrastructure sectors. anks also provide
financing by way of investment in marketable instruments such as fi)ed rate and floating rate
debentures. ?ending banks usually insist on having a first charge on the fi)ed assets of the
borrower. .uring the recent years, the larger banks are increasingly becoming involved in
financing large pro9ects, including infrastructure pro9ects. &iven the large amounts of financing
involved, banks need to have a strong framework for pro9ect appraisal. ,he adopted framework
will need to emphasize proper identification of pro9ects, optimal allocation and mitigation of
risks. ,he pro9ect finance approval process entails a detailed evaluation of technical, commercial,
financial and management factors and the pro9ect sponsor's financial strength and e)perience.
1s part of the appraisal process, a risk matri) is generated, which identifies each of the pro9ect
risks, mitigating factors and risk allocation. >ro9ect finance e)tended by banks is generally fully
secured and has full recourse to the borrower company. In most pro9ect finance cases, banks
have a first lien on all the fi)ed assets and a second lien on all the current assets of the borrower
company. In addition, guarantees may be taken from sponsorsM promoters of the company.
Should the borrower company fail to repay on time, the lending bank can have full recourse to
the sponsorsM promoters of the company. *Full recourse means that the lender can claim the entire
unpaid amount from the sponsors M promoters of the company.+ -owever, while financing very
large pro9ects, only partial recourse to the sponsorsM promoters may be available to the lending
banks.
!oans to S#all and .ediu# Enterprises
1 substantial 4uantum of loans is granted by banks to small and medium enterprises
*S0:s+.Ehile granting credit facilities to smaller units, banks often use a cluster=based
approach, which encourages financing of small enterprises that have a homogeneous profile such
as leather manufacturing units, chemical units, or even e)port oriented units. For assessing the
credit risk of individual units, banks use the credit scoring models. 1s per !I guidelines, banks
should use simplified credit appraisal methods for assessment of bank finance for the smaller
units. Further, banks have also been advised that they should not insist on collateral security for
loans up to !s.'# laky for the micro enterprises.
Specialied Branches for S.E +redit
&iven the importance of S0: sector, the !I has initiated several measures to increase
the flow of credit to this segment. 1s part of this effort, the public sector banks *>Ss+ have
been operationalizing specialized S0: bank branches for ensuring uninterrupted credit flow
to this sector. 1s at end=0arch "##(, >Ss have operationalised as many as 68( specialized
S0: bank branches. Small Industries .evelopment ank of India *SI.I+ also facilitates the
flow of credit at reasonable interest rates to the S0: sector. ,his is done by incentivizing banks
and State Finance Corporations to lend to S0:s by refinancing a specified percentage of
incremental lending to S0:s, besides providing direct finance along with bank.
,ural and (gricultural !oans
,he rural and agricultural loan portfolio of banks comprises loans to farmers, small and
medium enterprises in rural areas, dealers and vendors linked to these entities and even
corporates.For farmers, banks e)tend term loans for e4uipments used in farming, including
tractors, pump sets, etc. anks also e)tend crop loan facility to farmers. In agricultural financing,
banks prefer an 'area based' approachC for e)ample, by financing farmers in an adopted village.
,he regional rural banks *!!s+ have a special place in ensuring ade4uate credit flow to
agriculture and the rural sector. ,he concept of '?ead ank Scheme *?S+' was first mooted by
the &adgil Study &roup, which submitted its report in %ctober '(8(. >ursuant to the
recommendations of the &adgil Study &roup and those of the ;ariman Committee, which
suggested the adoption of 'area approach' in evolving credit plans and programmes for
development of banking and the credit structure, the ?S was introduced by the !I in
++ Lala Lajpatrai Institute Of Management
.ecember, '(8(. ,he scheme envisages allotment of districts to individual banks to enable them
to assume leadership in bringing about banking developments in their respective districts. 0ore
recently, a -igh ?evel Committee was constituted by the !I in ;ovember "##7, to review the
?S and improve its effectiveness, with a focus on financial inclusion and recent developments
in the banking sector. ,he Committee has recommended several steps to further improve the
working of ?S. ,he importance of the role of State &overnments for supporting banks in
increasing banking business in rural areas has been emphasized by the Committee.
)irected !ending
,he !I re4uires banks to deploy a certain minimum amount of their credit in certain
identified sectors of the economy. ,his is called directed lending. Such directed lending
comprises priority sector lending and e)port credit.
Priorit% sector lending
,he ob9ective of priority sector lending program is to ensure that ade4uate credit flows into some
of the vulnerable sectors of the economy, which may not be attractive for the banks from the
point of view of profitability. ,hese sectors include agriculture, small scale enterprises,
retail trade, etc. Small housing loans, loans to individuals for pursuing education, loans to
weaker sections of the society etc also 4ualify as priority sector loans. ,o ensure banks
channelize a part of their credit to these sectors, the !I has set guidelines defining targets for
lending to priority sector as whole and in certain cases, sub=targets for lending to individual
priority sectors . ,he !I guidelines re4uire banks to lend at least 2#B of 1d9usted ;et ank
Credit *1;C+ or credit e4uivalent amount of %ff=alance Sheet :)posure *C:%S:+,
whichever is higher. In case of foreign banks, the target for priority sector advances is $"B of
1;C or C:%S:, whichever is higher. In addition to these limits for overall priority sector
lending, the !I sets sub=limits for certain sub=sectors within the priority sector such as
agriculture. anks are re4uired to comply with the priority sector lending re4uirements at the end
of each financial year. 1 bank having shortfall in lending to priority sector lending target or sub=
target shall be re4uired to make contribution to the !ural Infrastructure .evelopment Fund
*!I.F+ established with ;11!. or funds with other financial institutions as specified by the
!I.
)ifferential ,ate of Interest /),I5 Sche#e
&overnment of India had formulated in 0arch, '(7" a scheme for e)tending financial
assistance at concessional rate of interest V 2B to selected low income groups for productive
endeavors. ,he scheme known as .ifferential !ate of Interest Scheme *.!I+ is now being
implemented by all Scheduled Commercial anks. ,he ma)imum family incomes that 4ualify
a borrower for the .!I scheme is revised periodically. Currently, the !I has advised the
banks that borrowers with annual family income of !s.'6,### in rural areas and !s."2,###
in urban and semi=urban areas would be eligible to avail of the facility as against the earlier
annual income criteria of !s.8,2## in rural areas and !s.7,"## in urban areas. ,he target for
lending under the .!I scheme in a year is maintained at one per cent of the total advances
outstanding as at the end of the previous year.
E9port +redit
+, Lala Lajpatrai Institute Of Management
1s part of directed lending, !I re4uires banks to make loans to e)porters at concessional rates
of interest. :)port credit is provided for pre=shipment and post=shipment re4uirements of
e)porter borrowers in rupees and foreign currencies. 1t the end of any fiscal year, '".#B of a
bank's credit is re4uired to be in the form of e)port credit. ,his re4uirement is in addition to the
priority sector lending re4uirement but credits e)tended to e)porters that are small scale
industries or small businesses may also meet part of the priority sector lending re4uirement.
,etail !oan
anks, today, offer a range of retail asset products, including home loans, automobile
loans, personal loans *for marriage, medical e)penses etc+, credit cards, consumer loans *such as
,Q sets, personal computers etc+ and, loans against time deposits and loans against shares.
anks also may fund dealers who sell automobiles, two wheelers, consumer durables and
commercial vehicles. ,he share of retail credit in total loans and advances was "'.$B at end=
0arch "##(. Customers for retail loans are typically middle and high=income, salaried or self=
employed individuals, and, in some cases, proprietorship and partnership firms. :)cept for
personal loans and credit through credit cards, banks stipulate that *a+ a certain percentage of the
cost of the asset *such as a home or a ,Q set+ sought to be financed by the loan, to be borne by
the borrower and *b+ that the loans are secured by the asset financed. 0any banks have
implemented a credit=scoring program, which is an automated credit approval system that
assigns a credit score to each applicant based on certain attributes like income, educational
background and age. ,he credit score then forms the basis of loan evaluation. :)ternal agencies
such as field investigation agencies and credit processing agencies may be used to facilitate a
comprehensive due diligence process including visits to offices and homes in the case of loans to
individual borrowers. efore disbursements are made, the credit officer checks a centralized
delin4uent database and reviews the borrower's profile. In making credit decisions, banks draw
upon reports from agencies such as the Credit Information ureau *India+ ?imited *CII?+.
Some private sector banks use direct marketing associates as well as their own branch network
and employees for marketing retail credit products. -owever, credit approval authority lies only
with the bank's credit officers.
,wo important categories of retail loans==home finance and personal loans==are discussed
below.
8o#e 'inance 5 anks e)tend home finance loans, either directly or through home
finance subsidiaries. Such long term housing loans are provided to individuals and
corporations and also given as construction finance to builders. ,he loans are secured by
a mortgage of the property financed. ,hese loans are e)tended for maturities generally
ranging from five to fifteen years and a large proportion of these loans are at floating
rates of interest. ,his reduces the interest rate risk that banks assume, since a bank's
sources of finance are generally of shorter maturity. -owever, fi)ed rate loans may also
be providedC usually with banks keeping a higher margin over benchmark rates in order
to compensate for higher interest rate risk. :4uated monthly installments are fi)ed for
repayment of loans depending upon the income and age of the borrower*s+.
Personal !oans* ,hese are often unsecured loans provided to customers who use these
funds for various purposes such as higher education, medical e)penses, social events and
+- Lala Lajpatrai Institute Of Management
holidays. Sometimes collateral security in the form of physical and financial assets may
be available for securing the personal loan. >ortfolio of personal loans also includes
micro=banking loans, which are relatively small value loans e)tended to lower income
customers in urban and rural areas.
International !oans E9tended "% Banks
Indian corporate raise foreign currency loans from banks based in India as well as abroad
as per guidelines issued by !IM &overnment of India. anks raise funds abroad for on=lending
to Indian corporate. Further, banks based in India have an access to deposits placed by ;on
!esident Indians *;!Is+ in the form of FC;! *+ deposits, which can be used by banks in India
for on=lending to Indian customers.
,BI G3I)E3NES -N N-N-'3N) B(SE) '(+I3&IES
!eserve ank of India has also issued detailed guidelines to commercial banks in respect
of non=fund based credit facilities. Some of the important points to be kept in view in this regard
are discussed below5
!etters of +redit
ank should normally open letters of credit for their own customers who en9oy credit
facilities with them Customers maintaining current account only and not en9oying any
credit limits should not be granted ?MC facilities e)cept in cases where no other credit
facility is needed by the customer.
,he re4uest of such customer for sanctioning and opening of letter of credit should be
properly scrutinised to establish the genuine need of the customer. ,he customer may be,
re4uired to submit a complete loan proposal Including financial statements to satisfy the
bank about his, needs and also his financial resources, to mire the bills drawn under
Ehere a customer en9oys credit facilities with some other bank, the reasons for his
approaching the bank for sanctioning ?MC limits have to be clearly stated. ,he bank
opening ?MC on behalf of such customer should invariably make a reference to the,
e)isting banker of the customer.
In all cases of opening of letters of credit, the bank has to ensure that the customer is able
to retire the bills drawn under ?MC as per the financial arrangement already finalised.

Guarantees
,he conditions relating to obligant being a customer of the bank en9oying credit facilities
as discussed in case of letters of credit are e4ually applicable for guarantees also. In fact,
guarantee facilities also cannot be sanctioned in isolation.
+. Lala Lajpatrai Institute Of Management
Financial guarantees will be issued by the banks only if they are satisfied that the
customer will be in a position to reimburse the bank in case the guarantee is invoked and
the bank is re4uired to make the payment in terms of guarantee.
>erformance guarantee will be issued by the banks only on behalf of those customers
with whom the bank has sufficient e)perience and is satisfied that the customer has the
necessary e)perience and means to perform the obligations under the contract and is not
likely to commit any default.
1s a rule, banks will guarantee shorter maturities and leave longer maturities to be
guaranteed by other institutions. 1ccordingly, no bank guarantee will normally have a
maturity of more than '# years.
anks should not normally issue guarantees on behalf of those customers who en9oy
credit facilities with other banks.
+o acceptance of Bills
?imits for co acceptance of bills will be sanctioned by the banks after detailed appraisal
of customer's re4uirement is completed and the bank is fully satisfied about the
genuineness of the need of the customer. Further customers who en9oy other limits with
the bank should be e)tended such limits.
%nly genuine trade bills shall be co accepted and the banks should ensure that the goods
covered by bills co accepted are actually received in the stock accounts of the borrowers.
,he valuation of goods as mentioned in the accompanying invoice should be verified to
see that there is no overvaluation of stocks.
,he banks shall not e)tend their co acceptance to house billsM accommodation bills drawn
by group concerns on one another.
efore discountingMpurchasing bills co accepted by other banks for !s." lakh and above
from a single party, the bank should obtain written confirmation of the concerned
controlling office of the accepting bank.
Ehen the value of total bills discountedMpurchased *which have been co=accpeted by
other banks+ e)ceed !s."# lakh for a single borrowerM group of borrowers prior approval
of the -ead %ffice of the co accepting bank shall be obtained by the discounting bank in
writing.
anks are precluded from co accepting bills drawn under uyer's ?ine of Credit schemes
of financial institutions like I.I, SI.I, >FC etc. Similarly banks should not co accept
bills drawn by ;FCs. Further, banks should not e)tend co acceptance on behalf of their
buyersMconstituents under the SI.I scheme.
+/ Lala Lajpatrai Institute Of Management
-owever, banks may co accept bills drawn, under Seller's ?ine of Credit schemes for ill
.iscounting operated by the financial institutions like I.I, SI.I, >FC etc. without any
limit sub9ect to buyer's capacity to pay and the compliance with e)posure norms
applicable to the borrower.
Ehere banks open ?MC and also to accept bills drawn under such ?MC, the discounting
banks, before discounting such co accepted bills, must ascertain the reason for co
acceptance of bills and satisfy themselves about the genuineness of the transaction.
Co acceptance facilities will normally not be sanctioned to customers en9oying credit
limit with other banks.
P,-B!E.S EN+-3N&E,E) WI&8 +,E)I& '(+I!I&IES
1lthough there are various options available to the entrepreneur as stated above to finance the
working capital re4uirements, it does not often help the entrepreneurs ,% 0::, ,-:
E%!/I;& C1>I,1? !e4uirement in time because of the following reasons.
,0 Lala Lajpatrai Institute Of Management
%ne of the most common reasons is that many entrepreneurs are not even aware of the
ongoing schemes and methods to finance the working capital re4uirements.
Secondly, it ultimately increases the cost of their products and thereby making
them less competitive.
Sometimes the businessman is unable to furnish one or more details re4uired by
the banks in the form of documentation for the approval of the credit facility.
0ost of the banks, want to have with them less number of productive customers who are
sufficient to give them more business volume rather than having a large number of small
customers. ,his approach of the banks also acts as a hindrance for the entrepreneurs to obtain
credit. -ence, the large enterprises are in win=win situation as even the banks favor them.
.anage#ent of Non Perfor#ing (ssets
1n asset of a bank *such as a loan given by the bank+ turns into a non=performing asset
*;>1+ when it ceases to generate regular income such as interest etc for the bank. In other
words, when a bank which lends a loan does not get back its principal and interest on time, the
loan is said to have turned into an ;>1. Ehile ;>1s are a natural fall=out of undertaking
banking business and hence cannot be completely avoided, high levels of ;>1s can severely
erode the bank's profits, its capital and ultimately its ability to lend further funds to potential
borrowers. Similarly, at the macro level, a high level of nonperforming assets means choking off
credit to potential borrowers, thus lowering capital formation and economic activity. So the
challenge is to keep the growth of ;>1s under control. Clearly, it is important to have a robust
appraisal of loans, which can reduce the chances of loan turning into an ;>1. 1lso, once a loan
starts facing difficulties, it is important for the bank to take remedial action.
!evel of Non Perfor#ing (ssets
,he gross non=performing assets of the banking segment were !s. 86, (7$ crores at the
end of 0arch "##(, and the level of net ;>1s *after provisioning+ was !s.$', 2"2 crores.
1lthough they appear to be very large amounts in absolute terms, they are actually 4uite small in
comparison to total loans by banks. ,he ratio of gross non=performing loans to gross total
loans has fallen sharply over the last decade and is at ".$ per cent as at end=0arch "##(.
,his ratio, which is an indicator of soundness of banks, is comparable with most of the
developed countries such as France, &ermany and Aapan. ,he low level of gross ;>1s as a
percent of gross loans in India is a positive indicator of the Indian banking system.
Source5 !eport on ,rend and >rogress of anking in India "##6=#(, !I and !eport on
Currency and Finance "##8=#6.
+lassification of non-perfor#ing (ssets
anks have to classify their assets as performing and non=performing in accordance with
!I's guidelines. @nder these guidelines, an asset is classified as non=performing if any amount
of interest or principal installments remains overdue for more than (# days, in respect of term
loans. In respect of overdraft or cash credit, an asset is classified as non=performing if the
account remains out of order for a period of (# days and in respect of bills purchased and
discounted account, if the bill remains overdue for a period of more than (# days.
1ll assets do not perform uniformly. In some cases, assets perform very well and the recovery
of principal and interest happen on time, while in other cases, there may be delays in recovery
or no recovery at all because of one reason or the other. Similarly, an asset may e)hibit good
4uality performance at one point of time and poor performance at some other point of time.
1ccording to the !I guidelines, banks must classify their assets on an on=going basis into the
following four categories5
Standard assets* Standard assets service their interest and principal installments on timeC
although they occasionally default up to a period of (# days. Standard assets are also called
performing assets. ,hey yield regular interest to the banks and return the due principal on
time and thereby help the banks earn profit and recycle the repaid part of the loans for further
lending. ,he other three categories *sub=standard assets, doubtful assets and loss assets+ are
;>1s and are discussed below.
Su"-standard assets 5 Sub=standard assets are those assets which have remained ;>1s
*that is, if any amount of interest or principal installments remains overdue for more than
(# days+ for a period up to '" months.
)ou"tful assets* 1n asset becomes doubtful if it remains a sub=standard asset for a period
of '" months and recovery of bank dues is of doubtful.
!oss assets* ?oss assets comprise assets where a loss has been identified by the bank or
the !I. ,hese are generally considered uncollectible. ,heir realizable value is so low
that their continuance as bankable assets is not warranted.
)e"t ,estructuring
%nce a borrower faces difficulty in repaying loans or paying interest, the bank should
initially address the problem by trying to verify whether the financed company is viable in the
long run. If the companyM pro9ect is viable, then rehabilitation is possible by restructuring the
credit facilities. In a restructuring e)ercise, the bank can change the repayment or interest
payment schedule to improve the chances of recovery or even make some sacrifices in terms of
waiving interest etc. !I has separate guidelines for restructured loans. 1 fully secured standardM
sub=standardM doubtful loan can be restructured by rescheduling of principal repayments andMor
the interest element. ,he amount of sacrifice, if any, in the element of interest, is either written
off or provision is made to the e)tent of the sacrifice involved. ,he sub=standard
accountsMdoubtful accounts which have been sub9ected to restructuring, whether in respect of
principal installment or interest amount are eligible to be upgraded to the standard category only
after a specified period. ,o create an institutional mechanism for the restructuring of corporate
debt, !I has devised a Corporate .ebt !estructuring *C.!+ system. ,he ob9ective of this
framework is to ensure a timely and transparent mechanism for the restructuring of corporate
debts of viable entities facing problems.
-ther recover% options
If rehabilitation of debt through restructuring is not possible, banks themselves make
efforts to recover. For e)ample, banks set up special asset recovery branches which concentrate
on recovery of bad debts. >rivate and foreign banks often have a collections unit structured along
various product lines and geographical locations, to manage bad loans. Qery often, banks
engage e)ternal recovery agents to collect past due debt, who make phone calls to the customers
or make visits to them. For making debt recovery, banks lay down their policy and procedure
in conformity with !I directives on recovery of debt.
,he past due debt collection policy of banks generally emphasizes on the following at the time
of recovery5
!espect to customers
1ppropriate letter authorizing agents to collect
.ue notice to customers
Confidentiality of customers' dues
@se of simple language in communication and maintenance of records of
communication
In difficult cases, banks have the option of taking recourse to filing cases in courts, ?ok 1dalats,
.ebt !ecovery ,ribunals *.!,s+, %ne ,ime Settlement *%,S+ schemes, etc. .!,s have been
established under the !ecovery of .ebts due to anks and Financial Institutions 1ct, '(($ for
e)peditious ad9udication and recovery of debts that are owed to banks and financial institutions.
1ccounts with loan amount of !s. '# lakhs and above are eligible for being referred to .!,s.
%,S schemes and ?ok 1dalats are especially useful to ;>1s in smaller loans in different
segments, such as small and marginal farmers, small loan borrowers and S0: entrepreneurs.
If a bank is unable to recover the amounts due within a reasonable period, the bank may write
off the loan. -owever, even in these cases, efforts should continue to make recoveries.
S(,'(ESI (ct: <==<
anks utilize the Securitization and !econstruction of Financial 1ssets and :nforcement
of Security Interest 1ct, "##" *S1!F1:SI+ as an effective tool for ;>1 recovery. It is possible
where non=performing assets are backed by securities charged to the ank by way of
hypothecation or mortgage or assignment. @pon loan default, banks can seize the securities
*e)cept agricultural land+ without intervention of the court. S1!F1:SI is effective only for
secured loans where bank can enforce the underlying security e.g. hypothecation ,
pledge and mortgages. In such cases, court intervention is not necessary, unless the security is
invalid or fraudulent. -owever, if the asset in 4uestion is an unsecured asset, the bank would
have to move the court to file civil case against the defaulters.
,he 1ct provides three alternative methods for recovery of ;>1s, namely5
Securitiation 5 It means issue of security by raising of receipts or funds by SCsM1!Cs. 1
securitization company or reconstruction company may raise funds from the WIs by
forming schemes for ac4uiring financial assets. ,he SCM1!C shall keep and maintain
separate and distinct accounts in respect of each such scheme for every financial asset
ac4uired, out of investments made by a WI and ensure that realizations of such financial
asset is held and applied towards redemption of investments and payment of returns
assured on such investments under the relevant scheme.
(sset ,econstruction 5 ,he SCsM1!Cs for the purpose of asset reconstruction should
provide for any one or more of the following measures5
X the proper management of the business of the borrower, by change in, or takeover of,
the management of the business of the borrower
X the sale or lease of a part or whole of the business of the borrower
X rescheduling of payment of debts payable by the borrower
X enforcement of security interest in accordance with the provisions of this 1ct
X settlement of dues payable by the borrower
X taking possession of secured assets in accordance with the provisions of this 1ct.
E9e#ption fro# registration of securit% receipt 5 ,he 1ct also provides, notwithstanding
anything contained in the !egistration 1ct, '(#6, for enforcement of security without
Court intervention5 *a+ any security receipt issued by the SC or 1!C, as the case may be,
under section 7 of the 1ct, and not creating, declaring, assigning, limiting or
e)tinguishing any right, title or interest to or in immovable property e)cept in so far as it
entitles the holder of the security receipt to an undivided interest afforded by a registered
instrumentC or *b+ any transfer of security receipts, shall not re4uire compulsory
registration.
Bank Invest#ents
,+ Lala Lajpatrai Institute Of Management
In addition to loans and advances, banks deploy a part of their resources in the form of
investment in securitiesM financial instruments. ,he bulk of a bank's assets are held either in the
form of
*a+ loans and advances and
*b+ investments.
Investments form a significant portion of a bank's assets, ne)t only to loans and advances,
and are an important source of overall income. Commercial banks' investments are of three
broad types5
*a+ &overnment securities,
*b+ other approved securities and
*c+ other securities.
,hese three are also categorized into S?! *Statutory ?i4uidity !atio+ investment and non=S?!
investments. S?! investments comprise &overnment and other approved securities, while
non=S?! investments consist of 'other securities' which comprise commercial papers, shares,
bonds and debentures issued by the corporate sector. @nder the S?! re4uirement, banks are
re4uired to invest a prescribed minimum of their net demand and time liabilities *;.,?+ in
&overnment= and other approved securities under the anking !egulation act, '(2(. *;ote that
S?! is prescribed in terms of banks' liabilities and not assets+. ,his provision amounts to
'directed investment', as the law directs banks to invest a certain minimum part of their ;.,? in
specific securities. Ehile the S?! provision reduces a bank's fle)ibility to determine its asset
mi), it helps the &overnment finance its fiscal deficit. ,he &overnment finances its fiscal deficit
*broadly, government e)penditure minus government revenue+ by borrowing, in other words,
through the issue of &overnment securities. ecause of the legal provision mandating It is the
!I that lays down guidelines regarding investments in S?! and non=S?! securities ank
investments are handled by banks through their respective ,reasury .epartment.
Invest#ent Polic%
,, Lala Lajpatrai Institute Of Management
:ach bank is responsible for framing its own Internal Investment >olicy &uidelines *or,
simply, Investment policy+. ,he 1sset ?iability Committee *1?C%+ of a bank, comprising senior
bank officials and headed in most cases by the C:%, plays a key role in drafting the investment
policy of the bank. ,he investment policy and the changes made therein from time to time
have to obtain the bank oard's approval for it. ,he aim of an Investment >olicy of a bank is to
create a broad framework within which investment decisions of the ank could be taken. ,he
actual decisions regarding investment are to be taken by the Investment Committee set up by
the oard. ,he Investment >olicy outlines general instructions and safeguards necessary to
ensure that operations in securities are conducted in accordance with sound and acceptable
business practices. ,he parameters on which the policy is based are return *target return as
determined in individual cases+, duration *target duration of the portfolio+, li4uidity consideration
and risk. ,hus, while the >olicy remains within the framework of the !I guidelines with respect
to bank investment, it also takes into consideration certain bank=specific factors, viz., the bank's
li4uidity condition and its ability to take credit risk, interest rate risk and market risk. ,he policy
is determined for S?! and non=S?! securities, separately. ,he Investment >olicy provides
guidelines with respect to investment instruments, maturity mi) of investment portfolio,
e)posure ceilings, minimum rating of bondsM debentures, trading policy, accounting standards,
valuation of securities and income recognition norms, audit review and reporting and provisions
for ;on=>erforming Investments *;>I+. It also outlines functions of front officeM back officeM mid
office, delegation of financial powers as a part of e)peditious decision=making process in
treasury operations, handling of asset liability management *1?0+
issues, etc. Several banks follow the practice of a strategy paper. ased on the market
environment envisaged by 1sset ?iability Committee *1?C%+ in the 1sset ?iability
0anagement *1?0+ >olicy, a Strategy >aper on investments and e)pected yield is usually
prepared which is placed before the C:% of the ank. 1 review of the Strategy >aper may be
done at, say half yearly basis and put up to the C:%. banks to invest a minimum fraction of their
;.,? in government securities, banks are captive financiers of the &overnment's fiscal deficit.
%f course, banks are not the only subscribers of government securities.
Statutor% ,eserve ,e$uire#ents
,- Lala Lajpatrai Institute Of Management
.aintenance of Statutor% !i$uidit% ,atio /S!,5
anks' investments in Central and State &overnment dated securities including treasury
bills are governed by the !I guidelines regarding maintenance of minimum level of S?!
securities as well as their own approved policy. 1s stated earlier, under the anking !egulation
1ct, '(2(, the !I prescribes the minimum S?! level for Scheduled Commercial anks *SCs+
in India in specified assets as a percentage of the bank's ;.,?. ,he actual percentage *that is,
the value of such assets of an SC as a percentage of its ;.,?+ must not be less than such
stipulated percentage. ,he !I may change the stipulated percentage from time to time.
%ver the years, this ratio *S?! ratio+ has changed a lot, but has broadly moved on a downward
tra9ectory, from the of $6.3B of ;.,? in the early (#'s *September '((#+ to "3B by %ctober
'((7, with the financial sector reforms giving banks greater fle)ibility to determine their
respective asset mi). ,he S?! was further reduced to "2 percent of ;.,? in ;ovember "##6,
but has been raised back to "3 percent level since %ctober "##(. Currently, it is at "3 percent
level. anks can and do invest more than the legally prescribed minimum in S?!, ,he !I has
prescribed that all SCs should maintain their S?! in the following instruments which will be
referred to as Dstatutory li4uidity ratio *S?!+ securitiesD5
.ated securities as notified by !IC
,reasury ills of the &overnment of IndiaC
.ated securities of the &overnment of India issued from time to time under the market
borrowing programme and the 0arket Stabilization SchemeC
State .evelopment ?oans *S.?s+ of the State &overnments issued from time to time
under their market borrowing programmeC and
1ny other instrument as may be notified by !I.
,hese investments must be unencumbered. ,he composition of investment by commercial banks
is given in the following ,able. It can be seen that S?! investments, particularly government
securities, form the bulk of total securities. ;on=S?! investments form a relatively small part of
banks' total investment.
.
Penalties
If a banking company fails to maintain the re4uired amount of S?! securities on any
given day, it shall be liable to pay to the !I penal interest for that day at the rate of $ per cent
per annum above the ank !ate on the shortfall and, if the default continues on the ne)t
succeeding working day, the penal interest may be increased to a rate of 3 per cent per annum
above the ank !ate for the concerned days of default on the shortfall. ,he ank !ate is
determined by the !I from time to time. It is the rate at which the !I lends to the banks, and
should not be confused with the repo rate, which is the lending rate the !I uses in the daily repo
*repurchase+ markets.
,. Lala Lajpatrai Institute Of Management
Non-S!, Invest#ents
If there is any proposal to invest or disinvest in non=S?! securities, the concerned
officials must refer these proposals to the Investment Committee of the bank. @pon vetting and
clearance by the Investment Committee, financial sanction should be obtained from the
appropriate authority in terms of the Scheme of .elegation of Financial >owers.
;on=S?! Investments can include5
Investments in 1ssociatesM Subsidiaries and !egional !ural anks
Strategic Investments
Qenture Capital Investments
>S@ onds
Corporate Investments
0utual Funds
ondsMdebentures issued by Securitization Companies *SCs+ and !econstruction
Companies *!Cs+
-owever, as per !I guidelines, the investments *S?! as well as ;on=S?!+ will be disclosed in
the balance sheet of the ank as per the si)=category classification listed below5
&overnment securities,
%ther approved securities,
Shares,
.ebentures < onds,
Investment in subsidiariesM 9oint ventures in the form of shares, debentures, bonds
etc, and
%thers *Commercial >aper, 0utual Fund @nits, etc.+.
Bank Guidelines for invest#ents in other than Govern#ent Securities
1ccording to the !I, banks desirous of investing in e4uity sharesM debentures should
observe the following guidelines5
i. uild up ade4uate e)pertise in e4uity research by establishing a dedicated e4uity
research department, as warranted by their scale of operationsC
ii. Formulate a transparent policy and procedure for investment in shares, etc., with the
approval of the oardC and
iii. ,he decision in regard to direct investment in shares, convertible bonds and debentures
should be taken by the Investment Committee set up by the bank's oard. ,he
Investment Committee should also be held accountable for the investments made by
the bank. Further, with the approval of respective oards, banks should clearly lay down the
broad investment ob9ectives to be followed while undertaking transactions in securities on their
own investment account and on behalf of clients, clearly define the authority to put through
deals, procedure to be followed for obtaining the sanction of the appropriate authority, procedure
to be followed while putting through deals, various prudential e)posure limits and the reporting
system. 1ccordingly, the oards of banks lay down policy and prudential limits on investments
in various categories, as stated earlier. Investment proposals should be sub9ected to the same
degree of credit risk analysis as any loan proposal. anks should have their own internal credit
analysis and ratings even in respect of issues rated by e)ternal agencies and should not entirely
rely on the ratings of e)ternal agencies. ,he appraisal should be more stringent in respect of
investments in instruments issued by non=borrower customers. 1s a matter of prudence, banks
,/ Lala Lajpatrai Institute Of Management
should stipulate entry=level minimum ratingsM 4uality standards and industry=wise, maturity=
wise, duration=wise and issuer=wise limits to mitigate the adverse impacts of concentration of
investment and the risk of illi4uidity.
Statutor% Prescriptions
Statutory prescriptions relating to the investment portfolio are to be complied with. ,he
investments have to be within the specific and general prudential limits fi)ed by !I and in
conformity with the provisions of the ! 1ct and other applicable laws and guidelines that are
issued by the regulators like !I, Securities :)change oard of India *S:I+, etc.
For e)ample, banks should not invest in non=S?! securities of original maturity of less than
one=year, other than Commercial >aper and Certificates of .eposits, which are covered under
!I guidelines. Further, according to !I guidelines, a bank's investment in unlisted non=S?!
securities should not e)ceed '# per cent of its total investment in non=S?! securities as on
0arch $', of the previous year, and such investment should comply with the disclosure
re4uirements as prescribed by Securities :)change oard of India *S:I+ for listed companies.
ank's investment in unlisted non=S?! securities may e)ceed the limit of '# per cent, by an
additional '# per cent, provided the investment is on account of investment in securitized papers
issued for infrastructure pro9ects, and bondsM debentures issued by Securitization Companies
*SCs+ and !econstruction Companies *!Cs+ set up under the S1!F1:SI 1ct and registered with
!I. 1 bank may also decide to put in place additional 4uantitative ceilings on aggregate non=
S?! investments as a percentage of the bank's net worth *e4uity plus reserves+. ,here are also
restrictions regarding e)posure to a particular industry.
,ating re$uire#ents
anks must not invest in unrated non=S?! securities. -owever, the banks may invest in
unrated bonds of companies engaged in infrastructure activities, within the ceiling of '# per cent
for unlisted non=S?! securities as mentioned earlier. Furthermore, the debt securities shall carry
a credit rating of not less than investment grade from a credit rating agency registered with
the S:I.
!i#its on Banks' E9posure to +apital .arkets
,he aggregate e)posure of a bank to the capital markets in all forms *both fund based and
non=fund based+ should not e)ceed 2#B of its net worth as on 0arch $' of the previous year.
Eithin this overall ceiling, the bank's direct investment in shares, convertible bondsM debentures,
units of e4uity=oriented mutual funds and all e)posures to venture capital funds *both registered
and unregistered+ should not e)ceed "# per cent of its net worth. ,he above=mentioned ceilings
are the ma)imum permissible and a bank's oard of .irectors is free to adopt a lower ceiling for
the ank, keeping in view its overall risk profile and corporate strategy. anks are re4uired to
adhere to the ceilings on an ongoing basis. !estrictions on Investments in a Single Company
;o bank can hold shares, as a pledge, mortgagee or absolute owner in any company other
than a subsidiary, e)ceeding $# per cent of the paid up share capital of that company or $#
percent of its own paid=up share capital and reserves, whichever is less.
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Banks' Invest#ent +lassification and >aluation Nor#s
,he key features of !I guidelines on categorization and valuation of banks' investment
portfolio are given below. ,he investment portfolio of a bank normally consists of both
Dapproved securitiesD *predominantly &overnment securities+ and DothersD *shares, debentures
and bonds+. ,he ank should classify their entire investment portfolio under three categories viz.
'-eld to 0aturity' *-,0+, '-eld for ,rading' *-F,+, and '1vailable for Sale' *1FS+.
-,0 includes securities ac4uired with the intention of being held up to maturityC -F, includes
securities ac4uired with the intention of being traded to take advantage of the short=term
-,0 must not be more than "3B of the portfolio priceM interest rate movementsC and 1FS refers
to those securities not included in -,0 and -F,. anks should decide the category of
investment at the time of ac4uisition. >rofit or loss on the sale of investments in both -F, and
1FS categories is taken in the income statement. Shifting of investments from M to -,0 may be
done with the approval of the oard of .irectors once a year, normally at the beginning of the
accounting year. Similarly, shifting of investments from 1FS to -F, may be done with the
approval of the oard of .irectors, the 1?C% or the Investment Committee. Shifting from -F,
to 1FS is generally not permitted. -owever, it will be permitted only under e)ceptional
circumstances like not being able to sell the security within (# days due to tight li4uidity
conditions, or e)treme volatility, or market becoming unidirectional. Such transfer is permitted
only with the approval of the oard of .irectorsM 1?C%M Investment Committee. -,0 securities
are not marked to market and are carried at ac4uisition cost or at an amortized cost if ac4uired at
a premium over the face value. *In the case of -,0 securities, if the ac4uisition cost is more
than the face value, premium should be amortized or written off over the period remaining to
maturity.+ 1FS and -F, securities are valued at market or fair value as at the balance sheet date.
Qaluation of investments is to be done as per guidelines issued by !I from time to time.
-owever, banks may adopt a more conservative approach as a measure of prudence.
,he 'market value' for the purpose of periodic valuation of investments included in the 1FS and
-F, would be the market price of the scrip as available from the tradesM 4uotes on the stock
e)changes, price list of !I and prices declared by >rimary .ealers 1ssociation of India *>.1I+
9ointly with the Fi)ed Income 0oney 0arket and .erivatives 1ssociation of India *FI00.1+
periodically. In respect of un4uoted securities, !I has laid down the detailed procedure to be
adopted. For e)ample, banks should value the un4uoted Central &overnment securities on the
basis of the pricesM yield to maturity *H,0+ rates put out by the >.1IM FI00.1 at periodic
intervals.
&reasur% .anage#ent
Investment transactions are undertaken as per the approved investment policy of the bank
and in accordance with the trading policy and 0anual of Instructions. Eith a view to synergizing
strengths, a bank usually operates an integrated treasury department under which both domestic
and fore) treasuries are brought under a unified command structure. ,he following distinction
is important to note. ,he task of domestic treasury operations is predominantly to make
investments on their own account, while the task of fore) treasury is to predominantly conduct
operations on behalf of clients. ,he discussions so far on S?! and non=S?! operations fall
under domestic treasury management.
'ore9 &reasur% .anage#ent
,he Fore) department of a bank does the following5
administers and monitors merchant or client transactions emanating from branches,
undertakes cover operation for merchant transactions, trades in inter=bank fore) market
manages foreign currency funds like Foreign Currency ;on !esident *FC;!+ 1ccounts,
:)change :arners Foreign Currency *::FC+ 1ccounts, etc. and maintains ;ostro
1ccounts $2. Ehile bulk of the fore) treasury operations are on behalf of the clients, the banks
also handle proprietary trading, i.e., fore) trading on the banks' own account.
%ne important safeguard that banks are re4uired to take is to make a clear separation between
their transactions on their own account and those on behalf of their clients.
-ther (ctivities of Banks
1s a continuation of their main deposit taking and lending activities, banks pursue certain
activities to offer a number of services to customers. ,hey can be put into two broad categories5
*a+ %ther basic banking activities and
*b+ >ara=banking activities.
,he former includes provision of remittance facilities including issuance of drafts, mail transfers
and telegraphic transfers, issuance of travelersL che4ues < gift che4ues, locker facility etc. anks
also undertake various >ara=banking activities including investment banking services, selling
mutual funds, selling insurance products, offering depository services, wealth management
services, brokerage, etc. Ehile the services offered assist the banks to attract more depositors
and borrowers, they also manage to increase their income in the process. anks earn fees by
offering these services to the customers, as opposed to interest income earned from the lending
activities.
-ther Basic Banking (ctivities
'oreign E9change Services
anks undertake foreign e)change transactions for their customers. ,he foreign e)change
contracts arise out of spot *current+ and forward foreign e)change transactions entered into
with corporate and non=corporate customers and counter=party banks for the purpose of hedging
and trading. anks derive income from the spread or difference between buying and selling
rates of foreign e)change. ?eading banks provide customer specific products and services which
cater to risk hedging needs of corporate at domestic and international locations, arising out of
currency and interest rate fluctuations. ,hese include products such as options and swaps, which
are derived from the foreign e)change market or the interest rate market. ,hese are tailor made
products designed to meet specific risk hedging re4uirements of the customer. In addition to the
direct foreign e)change related income on buying and selling of foreign e)change, income is
generated in related services while undertaking the main foreign e)change business. ,hese
services include the establishment of letters of credit, issuance of guarantees, document
collection services, etc. Some banks, including leading public sector banks, private sector banks
and local branches of foreign banks earn significant income from foreign e)change related
transactions.
Banks' services to Govern#ent
anks offer various types of services to government departments including direct and
indirect ta) collections, remittance facilities, payments of salaries and pensions, etc. anks also
undertake other related businesses like distribution of &overnment and !I bonds and handling
public provident fund accounts. &overnment departments pay fees to banks for undertaking
this business. anks such as State of ank of India, with a wide network of branches, are able
to earn significant income by offering these services to government departments.
Pa%#ent and Settle#ent S%ste#s
In any economy, banks are at the core of the payment and settlement systems, which
constitute a very important part of the commercial banks' functions. ,he payment and settlement
systems, as a mechanism, facilitate transfer of value between a payer and a beneficiary by which
the payer discharges the payment obligations to the beneficiary. ,he payment and settlement
systems enable two=way flow of payments in e)change of goods and services in the economy.
,his mechanism is used by individuals, banks, companies, governments, etc. to make payments
to one another. ,he !I has the power to regulate the payment system under the provisions of
the >ayment and Settlement Systems *>SS+ 1ct "##7, and the >ayment and Settlement Systems
!egulations "##6.,he oard for !egulation and Supervision of >ayment and Settlement Systems
*>SS+ is a sub=committee of the Central oard of !I and is the highest policy making body on
the payment system. ,he oard is assisted by a technical committee called ;ational >ayments
Council *;>C+ with eminent e)perts in the field as members. ,here are two types of payments5
paper based and electronic. >ayments can be made in India in paper based forms *in the forms of
cash, che4ue, demand drafts+, and electronic forms *giving electronic instructions to the banker
who will make such a payment on behalf of his customersC credit cardC debit card+.
Paper "ased clearing s%ste#s
,he primary paper based payment instrument is the che4ue. ,he process of che4ue
payment starts when a payer gives his personal che4ue to the beneficiary. ,o get the actual
payment of funds, the receiver of the che4ue has to deposit the che4ue in his bank account. If the
beneficiary has an account in the same bank in the same city then the funds are credited into his
account through internal arrangement of the bank. If the beneficiary has an account with any
other bank in the same or in any other city, then his banker would ensure that funds are collected
from the payer's banker through the means of a 'clearing house'.1side from the regulatory role,
the !I, as the central bank of the country, has been playing a developmental role
in this important area and has taken several initiatives for a secure and efficient payment system.
1 clearing house is an association of banks that facilitates payments through che4ues between
different bank branches within a cityM place. It acts as a central meeting place for bankers to
e)change the che4ues drawn on one another and to claim funds for the same. Such operations
are called 'clearing operations'. &enerally one bank is appointed as in=charge of the clearing
operations. In the four metros and a few other ma9or cities, however, !I is looking after the
operations of the clearing house. ,he paper based clearing systems comprise5
*a+ 0IC! Clearing,
*b+ ;on= 0IC! clearing and
*c+ -igh Qalue clearing. 0IC! stands for 0agnetic Ink Character !ecognition *0IC!+.
0IC! is a technology for processing che4ues. ,his is done through information contained in the
bottom strip of the che4ue where the che4ue number, city code, bank code and branch code are
given. &enerally, if a che4ue is to be paid within the same city *local che4ue+, it takes "=$ days
for the money to come to the beneficiary's account. In case of -igh Qalue Clearing, however,
which is available only in some large cities, che4ue clearing cycle is completed on the same day
and the customer depositing the che4ue is permitted to utilize the proceeds the ne)t day morning.
,he introduction of 'Speed Clearing' in Aune "##6 for collection of outstation che4ues has
significantly brought down the time taken for realization of outstation che4ues from '#='2
daysC now the funds are available to customers on ,Y' *transaction day Y ' day+ or ,Y"
*transaction day Y " days+ basis.
+he$ue &runcation
Che4ue ,runcation is a system of che4ue clearing and settlement between banks based on
electronic dataM images or both without physical e)change of instrument. Che4ue truncation
has several advantages. First, the bank customers would get their che4ues realized faster, as
,Y# *local clearing+ and ,Y' *inter=city clearing+ is possible in Che4ue ,runcation System
*C,S+. Second, faster realization is accompanied by a reduction in costs for the customers and
the banks. ,hird, it is also possible for banks to offer innovative products and services based
on C,S. Finally, the banks have the additional advantage of reduced reconciliation and clearing
frauds. ,o encourage customers to move from paper=based systems to electronic systems, which
are more secure, faster and less costly, the banks were advised in 1pril "##( to increase the
threshold amount of che4ue eligible to be presented in -igh Qalue Clearing from !s.' lakh to
!s.'# lakhs and gradually discontinue the scheme in an undisruptive manner over a period of the
ne)t one year. -owever, the facility of 0IC!M ;on=0IC! clearing will continue to be available
for paper=based instruments.
Electronic Pa%#ent S%ste#s
>ayments can be made between two or more parties by means of electronic instructions
-+ Lala Lajpatrai Institute Of Management
without the use of che4ues. &enerally, the electronic payment systems are faster and safer
than paper based systems. !eal ,ime &ross Settlement *!,&S+ system, introduced in India in
0arch "##2, is a system through which electronic instructions can be given by banks to transfer
funds from their account to the account of another bank. ,he !,&S system is maintained and
operated by !I and provides a means of efficient and faster funds transfer among banks
facilitating their financial operations. 1s the name suggests, funds transfer between banks takes
place on a 'real time' basis. ,herefore, money can reach the beneficiary instantaneously. ,he
system which was operationalised with respect to settlement of transactions relating to inter=bank
payments was e)tended to customer transactions later. ,hough the system is primarily designed
for large value payments, bank customers have the choice of availing of the !,&S facility for
their time critical low value payments as well. 0ore than 8#,### branches as at end=September
"##( are participants in the !,&S.
:lectronic Funds ,ransfer *:F,+ is a system whereby anyone who wants to make
payment to another personM company etc. can approach his bank and make cash payment or give
instructionsM authorization to transfer funds directly from his own account to the bank account
of the receiverM beneficiary. !I is the service provider for :F,. ,he electronic payment systems
comprise large value payment systems as well as retail payment mechanisms. In addition, there
are some electronic payment systems which are e)clusively for retail payments. ,he retail
payment system comprises :lectronic Clearing Services *:CS+, ;ational :lectronic Funds
,ransfer *;:F,+ and card based payment systems including 1,0 network. :lectronic Clearing
Service *:CS+ is a retail payment system that can be used to make bulk paymentsM receipts of a
similar nature especially where each individual payment is of a repetitive nature and of relatively
smaller amount. ,his facility is meant for companies and government departments to makeM
receive large volumes of payments rather than for funds transfers by individuals. ,he :CS
facility is available at a large number of centers. ,he :CS is further divided into two types = :CS
*Credit+ to make bulk payments to individualsM vendors and :CS *.ebit+ to receive bulk utility
payments from individuals. In addition to these systems, some banks in India have begun to offer
certain banking services through the Internet that facilitate transfer of funds electronically.
@nder :CS *Credit+, one entityM company would make payments from its bank account to a
number of recipients by direct credit to their bank accounts. For instance, companies make
use of :CS *Credit+ to make periodic dividendM interest payments to their investors. Similarly,
employers like banks, government departments, etc make monthly salary payments to their
employees through :CS *Credit+. >ayments of repetitive nature to be made to vendors can
also be made through this mode. ,he payments are affected through a sponsor bank of the
Company making the payment and such bank has to ensure that there are enough funds in its
accounts on the settlement day to offset the total amount for which the payment is being made
for that particular settlement. ,he sponsor bank is generally the bank with whom the company
maintains its account. :CS *.ebit+ is mostly used by utility companies like telephone companies,
electricity companies etc. to receive the bill payments directly from the bank accounts of their
customers. Instead of making electricity bill payment through cash or by means of che4ue, a
consumer *individuals as well as companies+ can opt to make bill payments directly into the
account of the electricity providerM companyM board from his own bank account. For this purpose,
the consumer has to give an application to the utility company *provided the company has opted
for the :CS *.ebit+ scheme+, providing details of the bank account from which the monthlyM bi=
monthly bill amount can be directly deducted. ,hereafter, the utility company would advise the
consumer's bank to debit the bill amount to his account on the due date of the bill and transfer the
-, Lala Lajpatrai Institute Of Management
amount to the company's own account. ,his is done by crediting the account of the sponsor bank,
which again is generally the bank with whom the company receiving the payments, maintains the
account. ,he actual bill would be sent to the consumer as usual at his address. ,he settlement
cycle under the :CS has been reduced to ,Y' day from earlier ,Y$ days across the country. ,o
widen the geographical coverage of :CS beyond the e)isting :CS centers and to have a
centralized processing capability, the ;ational :lectronic Clearing Service *;:CS+ was
operationalised with effect from September "(, "##6. ,he ;:CS is a nationwide system in
which as many as ''2 banks with $#,76# branches participated as at the end of September,
"##(.;ational :lectronic Funds ,ransfer *;:F,+ system, introduced in ;ovember "##3, is a
nationwide funds transfer system to facilitate transfer of funds from any bank branch to any other
bank branch. ,he beneficiary gets the credit on the same day or the ne)t day depending on the
time of settlement. ;inety one banks with over 8',### branches participated in ;:F, as at end
of September "##(. ,he banks generally charge some processing fees for electronic fund
transfers, 9ust as in the case of other services such as demand drafts, pay orders etc. ,he actual
charges depend upon the amount and the banker=customer relationship. In a bid to encourage
customers to move from paper=based systems to electronic systems, !I has rationalized and
made transparent the charges the banks could levy on customers for electronic transactions. !I
on its part has e)tended the waiver of its processing charges for electronic modes of payment up
to the end of 0arch "#''. In order not to be involved with day=to=day operations of the retail
payment system, !I has encouraged the setting up of ;ational >ayment Corporation of India
*;>CI+ to act as an umbrella organization for operating the various retail payment systems in
India. ;>CI has since become functional and is in the process of setting up its roadmap. ;>CI
will be an authorized entity under the >ayment < Settlement Systems 1ct and would, therefore,
be sub9ected to regulation and supervision of !I.
CreditM .ebit cards are widely used in the country as they provide a convenient form of
making payments for goods and services without the use of che4ues or cash. Issuance of credit
card is a service where the customer is provided with credit facility for purchase of goods and
services in shops, restaurants, hotels, railway bookings, petrol pumps, utility bill payments,
etc. ,he merchant establishment who accepts credit card payments claims the amount
subse4uently from the customer's bank through his own bank. ,he card user is re4uired to
pay only on receipt of the bill and this payment can be either in full or partially in installments.
anks issuing credit cards earn revenue from their customers in a variety of ways such as
9oining fee, additional card fee, annual fee, replacement card fee, cash advance fee, charge
slipM statement retrieval fee, charges on over limit accounts and late payment fee, interest on
delayed payment, interest on revolving credit, etc. ,he fees may vary based on the type of
card and from bank to bank. anks earn income not only as issuers of credit cards, but also as
ac4uirers where the transaction occurs on a point of sale terminal installed by the bank.$6 1s
the Indian economy develops, it is e)pected that the retail market will increasingly seek short=
term credit for personal uses, and to a large e)tent, this rising demand would be met by the
issuance of credit cards.
.ebit Card is a direct account access card. @nlike a credit card, in the case of a debit
card, the entire amount transacted gets debited from the customer's account as soon as the debit
card is used for purchase of goods and services. ,he amount permitted to be transacted in debit
card is to the e)tent of the amount standing to the credit of the card user's account.
1 >oint of Sale *>%S+ terminal is the instrument in which the credit card is swiped. ,he
bank that installs >%S terminal is called the ac4uirer bank.
-- Lala Lajpatrai Institute Of Management
1utomated ,eller 0achines *1,0s+ are mainly used for cash withdrawals by customers.
In addition to cash withdrawal, 1,0s can be used for payment of utility bills, funds transfer
between accounts, deposit of che4ues and cash into accounts, balance en4uiry and several
other banking transactions which the banks owning the 1,0s might want to offer.
N,I ,e#ittances
;!I, as an individual, can remit funds into India through normal banking channels using
the facilities provided by the overseas bank. 1lternately, an ;!I can also remit funds through
authorized 0oney ,ransfer 1gents *0,1+. Further, a number of banks have launched their
inward remittance products which facilitate funds transfer on the same dayM ne)t day.
+ash .anage#ent Services and ,e#ittances
0any banks have branches rendering cash management services *C0S+ to corporate
clients, for managing their receivables and payments across the country. @nder cash management
services, banks offer their corporate clients custom=made collection, payment and remittance
services allowing them to reduce the time period between collections and remittances, thereby
streamlining their cash flows. Cash management products include physical che4ue=based
clearing, electronic clearing services, central pooling of country=wide collections, dividend and
interest remittance services and Internet=based payment products. Such services provide
customers with enhanced li4uidity and better cash management.
-. Lala Lajpatrai Institute Of Management
Para-"anking (ctivities
,he !eserve ank of India *!I+ has allowed the Scheduled Commercial anks *SCs+
to undertake certain financial services or >ara=banking activities and has issued guidelines to
SCs for undertaking these businesses. ,he !I has advised banks that they should adopt
ade4uate safeguards so that >ara=banking activities undertaken by them are run on sound
and prudent lines. anks can undertake certain eligible financial services either departmentally
or by setting up subsidiaries, with prior approval of !I.
Pri#ar% )ealership Business
>rimary .ealers can be referred to as 0erchant ankers to &overnment of India. In '((3,
the !eserve ank of India *!I+ introduced the system of >rimary .ealers *>.s+ in the
&overnment Securities 0arket, which comprised independent entities undertaking >rimary
.ealer activity. In order to broad base the >rimary .ealership system, banks were permitted to
undertake >rimary .ealership business in "##8=#7. ,o do primary dealership business, it is
necessary to have a license from the !I.
,he two primary ob9ectives of the >. system are to5
strengthen the infrastructure in the government securities market to make it vibrant,
li4uid and broad based.
improve secondary market trading system, which would
*a+ contribute to price discovery,
*b+ enhance li4uidity and turnover and
*c+ encourage voluntary holding of government securities.
1 bank can do >. business either through a subsidiary or departmentally. 1 subsidiary of a
scheduled commercial bank dedicated predominantly to the securities business *particularly,
the government securities market+ can apply for primary dealership. ,o do >. business
departmentally, only banks which do not have a partly or wholly owned subsidiary undertaking
>. business and fulfill the following criteria can apply5
0inimum net owned funds *;%F+ of !s.',### crores
0inimum C!1! of ( per cent
;et ;>1s of less than $ per cent and a profit making record for the last three years
Invest#ent Banking7 .erchant Banking Services
Investment anking is not one specific function or service but rather an umbrella term for
a range of activities. ,hese activities include issuing securities *underwriting+ for companies,
managing portfolios of financial assets, trading securities *stocks and bonds+, helping investors
purchase securities and providing financial advice and support services. It can be seen that all
these services are capital market related services. ,hese services are offered to governments,
companies, non=profit institutions and individuals. 1 number of commercial banks have formed
subsidiaries to undertake investment banking services. -ere, it is important to draw the
distinction between 0erchant anking and Investment anking. 1s per the Securities and
:)change oard of India *S:I+ *0erchant ankers+ !ules, '((" and S:I *0erchant ankers+
!egulations, '((", merchant banking service is any service provided in relation to issue
management either by making arrangements regarding selling, buying or subscribing securities
as manager, consultant, advisor or rendering corporate advisory service in relation to such issue
management. ,his, inter alia, consists of preparation of prospectus and other information relating
-/ Lala Lajpatrai Institute Of Management
to the issue, determining financial structure, tie up of financiers and final allotment and refund of
the subscription for debtM e4uity issue management and acting as advisor, consultant, co=
manager, underwriter and portfolio manager. In addition,
merchant banking services also include advisory services on corporate restructuring, debt or
e4uity restructuring, loan restructuring, etc. Fees are charged by the merchant banker for
rendering these services. anks and Financial Institutions including ;on anking Finance
Companies *;FCs+ providing merchant banking services are governed by the S:I !ules and
!egulations stated above. %n the other hand, the term 'Investment anking' has a much wider
connotation and has gradually come to refer to all types of capital market activity. Investment
banking thus encompasses not merely merchant banking but other related capital market
activities such as stock trading, market making, broking and asset management as well as a host
of specialized corporate advisory services in the areas of mergers and ac4uisitions, pro9ect
advisory and business and financial advisory. Investment banking has a large number of players5
Indian and foreign. ,he large foreign investment banks such as &oldman Sachs and 0errill
?ynch *which are standalone investment banks+ have entered India attracted by India's booming
economy. -owever, the Indian investment banking firms *including investment banking arms of
Indian commercial banks+ have generally succeeded in holding their own as they are able to
service both small and large customers. -owever, one area foreign banks still dominate is global
mergers and ac4uisitions.
.utual 'und Business
1 number of banks, both in the private and public sectors have sponsored asset
management companies to undertake mutual fund business. anks have entered the mutual fund
business, sometimes on their own *by setting up a subsidiary+ and sometimes in 9oint venture
with others. %ther banks have entered into distribution agreements with mutual funds for the sale
of the latter's mutual fund products, for which they receive fees. ,he advantage that banks
en9oy in entering the mutual fund businesses is mainly on account of their wide distribution
network. ank Sponsored 0utual Funds Indian banks which have sponsored mutual fund
business so far include ICICI ank, -.FC ank and /otak 0ahindra ank in the private sector,
and State ank of India in the public sector. 1s per 10FI *1ssociation of 0utual Funds in
India+ data, total assets under management of all mutual funds in India amounted to !s. 2'7, $##
crores as on 0arch $', "##(, of which bank sponsored mutual funds accounted for '3.3 percent.
0oney 0arket 0utual Funds *000Fs+ come under the purview of S:I regulations. anks
and Financial Institutions desirous of setting up 000Fs would, however, have to seek
necessary clearance from !I for undertaking this additional activity before approaching S:I
for registration.
Pension 'unds .anage#ent /P'.5 "% "anks
Conse4uent upon the issue of &overnment of India ;otification dated 0ay "2, "##7,
banks have been advised that they may now undertake >ension Funds 0anagement *>F0+
through their subsidiaries set up for the purpose. ,his would be sub9ect to their satisfying the
eligibility criteria prescribed by >ensions Fund !egulatory and .evelopment 1uthority
*>F!.1+ for >ension Fund 0anagers. anks intending to undertake >F0 should obtain prior
approval of !I before engaging in such business. ,he !I has issued guidelines for banks
acting as >ension Fund 0anagers. 1ccording to the guidelines, banks will be allowed to
undertake >F0 through their subsidiaries only, and not departmentally. anks may lend their
.0 Lala Lajpatrai Institute Of Management
namesM abbreviations to their subsidiaries formed for >F0, for leveraging their brand names and
associated benefits thereto, only sub9ect to the banks maintaining 'arm's length' relationship with
the subsidiary. In order to provide ade4uate safeguards against associated risks and ensure that
only strong and credible banks enter into the business of >F0, the banks complying with the
following eligibility criteria *as also the solvency margin prescribed by >F!.1+ may approach
the !I for necessary permission5
;et worth of the bank should be not less than !s.3## crores.
C!1! should be not less than ''B during the last three years.
ank should have made net profit for the last three consecutive years.
!eturn on 1ssets *!%1+ should be at least #.8B or more.
?evel of net ;>1s should be less than $B.
>erformance of the bank's subsidiaries, if any, should be satisfactory.
>ension Fund usiness by anks
>ension Fund !egulatory and .evelopment 1uthority *>F!.1+ had invited :)pressions
of Interest from public sector entities for sponsoring >ension Funds for &overnment employees
on ''th 0ay "##7. In response, :)pressions of Interest were received from seven public
sector entities. 1 committee constituted by the >F!.1 has selected State ank of India
*SI+, @,I 1sset 0anagement Company *@,I10C+ and ?ife Insurance Corporation *?IC+ to
be the first sponsors of pension funds in the country under the new pension system *;>S+
for government employees.
)epositor% Services
In the depository system, securities are held in depository accounts in dematerialized
form. ,ransfer of securities is done through simple account transfers. ,he method does away
with the risks and hassles normally associated with paperwork. ,he enactment of the
.epositories 1ct, in 1ugust '((8, paved the way for the establishment of ;ational Securities
.epository ?imited *;S.?+ and later the Central .epository Services *India+ ?imited *C.S?+.
,hese two institutions have set up a national infrastructure of international standards that handles
most of the securities held and settled in dematerialized form in the Indian capital markets.
1s a depository participant of the ;ational Securities .epository ?imited *;S.?+ or Central
.epository Services *India+ ?imited *C.S?+, a bank may offer depository services to clients
and earn fees. Custodial depository services means safe keeping of securities of a client and
providing services incidental thereto, and includes5
maintaining accounts of securities of a clientC
collecting the benefit of rights accruing to the client in respect of the securitiesC
keeping the client informed of the action taken or to be taken by the issuer of securities,
having a bearing on the benefits or rights accruing to the clientC and
maintaining and reconciling records of the services referred to in sub=clause
*a+ to *c+.
Wealth .anage#ent7 Portfolio .anage#ent Services
1 number of banks and financial institutions are seeking a share in the fast=growing
wealth management services market. Currently, a high net worth individual can choose from
among a number of private sector and public sector banks for wealth management services. In
addition to high net worth resident Indians, non=resident Indians *;!Is+ form a ma9or chunk
of the customer base for personal wealth management industry in India. anks that do portfolio
management on behalf of their clients are sub9ect to several regulations. ;o bank should
introduce any new portfolio management scheme *>0S+ without obtaining specific prior
approval of !I. ,hey are also to comply with the guidelines contained in the S:I *>ortfolio
0anagers+ !ules and !egulations, '(($ and those issued from time to time. ,he following
conditions are to be strictly observed by the banks operating >0S or similar scheme5
>0S should be entirely at the customer's risk, without guaranteeing, either directly or
indirectly, a pre=determined return.
Funds should not be accepted for portfolio management for a period less than one
year. >ortfolio management deals with only financial assets whereas wealth management
overLs both financial assets and non financial assets such as real estates.-SC >rivate
ank in 1sia, for e)ample, provides the full spectrum of private banking solutions for
affluent individuals and their families. ,heir services include investment services, family
wealth advisory services, private wealth solutions such as wealth planning and protection,
and traditional banking services.
>ortfolio funds should not be deployed for lending in callM notice moneyC inter=bank term
deposits and bills rediscounting markets and lending toM placement with corporate bodies.
anks should maintain client wise accountM record of funds accepted for management and
investments made and the portfolio clients should be entitled to get a statement of
account.
anks' own investments and investments belonging to >0S clients should be kept
distinct from each other, and any transactions between the bank's investment account and
client's portfolio account should be strictly at market rates.
>0S clients' accounts should be sub9ected by banks to a separate audit by e)ternal
auditors.
Bancassurance
Eith the issuance of &overnment of India ;otification dated 1ugust $, "###, specifying
'Insurance' as a permissible form of business that could be undertaken by banks under Section
8*'+ *o+ of the ! 1ct, banks were advised to undertake insurance business with a prior
approval of the !I. -owever, insurance business will not be permitted to be undertaken
departmentally by the banks. 1 number of banks *both in public and private sectors+ have
entered into 9oint venture partnerships with foreign insurance companies for both life and non=
life insurance business. 1t present, Indian partners *either alone or 9ointly+ hold at least 72B of
Indian insurance 9oint ventures. ,his is because the ma)imum holding by foreign companies put
together cannot e)ceed "8B of the e4uity of Indian insurance ventures. ?aws and regulations
governing insurance companies currently provide that each promoter should eventually reduce
its stake to "8B following the completion of '# years from the commencement of business by
the concerned insurance company. ,he advantage that banks have in entering the insurance
business is mainly on account of their wide distribution network. anks are able to leverage their
corporate and retail customer base for cross selling insurance products. anks collect fees from
these subsidiaries for generating leads and providing referrals that are converted into policies.
Insurance 8oint 9entures )romoted "3 Banks
Some of the insurance 9oint ventures promoted by banks have become leaders in the
insurance business. ICICI ank and -.FC ank have promoted 9oint ventures in both life and
non=life business, while State ank of India *SI+ has promoted a successful 9oint venture in life
business. In addition, some banks distribute ,hird >arty Insurance >roducts. Eith a view to
provide Done stop bankingD to their customers, banks distribute life insurance products and
general insurance products through their branches. anks have entered into agency agreements
with life and non=life companies to distribute their various insurance products, for which they are
paid a commission. ,he personnel involved in selling these insurance products have to be
authorized by the I!.1 regulations to act as specified persons for selling insurance products.
Life Insurance )olicies Sold "3 Banks
1ccording to I!.1 1nnual !eport, "##7=#6, out of the total new life insurance business
premium ac4uired by all the life insurance companies during "##7=#6, new business sold
through banks accounted for 7."6B of total new life insurance premium, with ?ife Insurance
Corporation of India being able to distribute only '.'3B of its total new business premium
through banks, while the other new life insurance ventures were able to sell '6."#B of their
new business premium through banks.
Source: I&2# #nnual &eport; 200-*0.
,elationship "etween Bank and +usto#er
In India, banks face a challenge of providing services to a broad range of customers,
varying from highly rated corporate and high net worth individuals to low=end depositors and
borrowers. anks usually place their customers into certain categories so that they are able to *a+
develop suitable products according to customer re4uirements and *b+ service customers
efficiently. ,he bank=customer relationship is influenced by several dimensions, notably5
Ehile banks are competing with each other to attract the most profitable businesses,
financial inclusion is increasingly becoming part of their agenda. 1n important issue in
India is that a large number of people, nearly half of the adult population, still do not
have bank accounts. 'Financial Inclusion' would imply bringing this large segment of
the population into the banking fold. Second, banks have started using innovative methods in
approaching the customersC technology is an important component of such efforts.
Finally, on account of security threats as well as black money circulating in the system,
care has to be taken to identify the customers properly, know the sources of their
funds and prevent money laundering.
Banker-+usto#er ,elationship*
anking is a trust=based relationship. ,here are numerous kinds of relationship between
the bank and the customer. ,he relationship between a banker and a customer depends on the
type of transaction. ,hus the relationship is based on contract, and on certain terms and
conditions. ,hese relationships confer certain rights and obligations both on the part of the
banker and on the customer. -owever, the personal relationship between the bank and its
customers is the long lasting relationship. Some banks even say that they have generation=to=
generation banking relationship with their customers. ,he banker customer relationship is
fiducially relationship. ,he terms and conditions governing the relationship is not be leaked by
the banker to a third party.
+lassification of ,elationship*
,he relationship between a bank and its customers can be broadly categorized in to &eneral
!elationship and Special !elationship. If we look at Sec +%"( of anking !egulation 1ct, we
would notice that bankLs business hovers around accepting of deposits for the purposes of
lending. ,hus the relationship arising out of these two main activities are known as &eneral
!elationship. In addition to these two activities banks also undertake other activities mentioned
in Sec.8 of anking !egulation 1ct. !elationship arising out of the activities mentioned in Sec.8
of the act is termed as special relationship.
General ,elationship*
)e"tor-+reditor* Ehen a 'customer' opens an account with a bank, he fills in and
signs the account opening form. y signing the form he enters into an
agreementMcontract with the bank. Ehen customer deposits money in his account the
bank becomes a debtor of the customer and customer a creditor. ,he money so
deposited by customer becomes bankLs property and bank has a right to use the
money as it likes. ,he bank is not bound to inform the depositor the manner of
utilization of funds deposited by him. ank does not give any security to the
depositor i.e. debtor. ,he bank has borrowed money and it is only when the depositor
demands, banker pays. ankLs position is 4uite different from normal debtors.
anker does not pay money on its own, as banker is not re4uired to repay the debt
voluntarily. ,he demand is to be made at the branch where the account e)ists and in a
proper manner and during working days and working hours. ,he debtor has to follow
the terms and conditions of bank said to have been mentioned in the account opening
form. Z,hough the terms and conditions are not mentioned in the account opening
form, but the account opening form contains a declaration that the terms and
conditions have been read and understood or has been e)plained. In fact the terms and
conditions are mentioned in the passbook, which is issued to the customer only after
the account has been opened.[ In the past while opening account some of the banks
had the practice of giving a printed handbill containing the terms and conditions of
account along with the account opening form. ,his practice has since been
discontinued. For convenience and information of prospective customers a few banks
have uploaded the account opening form, terms and conditions for opening account,
rate charge in respect of various services provided by the bank etc., on their web site.
Ehile issuing .emand .raft, 0ail M ,elegraphic ,ransfer, bank becomes a debtor as
it owns money to the payeeM beneficiary.
+reditor?)e"tor* ?ending money is the most important activities of a bank. ,he
resources mobilized by banks are utilized for lending operations. Customer who
borrows money from bank owns money to the bank. In the case of any loanMadvances
account, the banker is the creditor and the customer is the debtor. ,he relationship in
the first case when a person deposits money with the bank reverses when he borrows
money from the bank. orrower e)ecutes documents and offer security to the bank
before utilizing the credit facility. In addition to opening of a depositMloan account
banks provide variety of services, which makes the relationship more wide and
.+ Lala Lajpatrai Institute Of Management
comple). .epending upon the type of services rendered and the nature of transaction,
the banker acts as a bailee, trustee, principal, agent, lessor, custodian etc.
Special ,elationship*
Bank as a &rustee* 1s per Sec' 3 of Indian ,rust 1ct, '66" K 1 DtrustD is an
obligation anne)ed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owner, or declared and accepted by him, for the
benefit of another, or of another and the owner.L ,hus trustee is the holder of property
on behalf of a beneficiary. 1s per Sec' 1+ of the KIndian ,rust 1ct, '66" K1 trustee is
bound to deal with the trust=property as carefully as a man of ordinary prudence
would deal with such property if it were his ownC and, in the absence of a contract to
the contrary, a trustee so dealing is not responsible for the loss, destruction or
deterioration of the trust=property.L 1 trustee has the right to reimbursement of
e)penses *Sec.$" of Indian ,rust 1ct.+. In case of trust banker customer relationship
is a special contract. Ehen a person entrusts valuable items with another person with
an intention that such items would be returned on demand to the keeper the
relationship becomes of a trustee and trustier. Customers keep certain valuables or
securities with the bank for safekeeping or deposits certain money for a specific
purpose *:scrow accounts+ the banker in such cases acts as a trustee. anks charge
fee for safekeeping valuables
Bailee ? Bailor : Sec.'26 of Indian Contract 1ct, '67", defines DailmentD DbailorD
and DbaileeD. 1 DbailmentD is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering
them. ,he person delivering the goods is called the DbailorD. ,he person to whom
they are delivered is called, the DbaileeD. anks secure their advances by obtaining
tangible securities. In some cases physical possession of securities goods *>ledge+,
valuables, bonds etc., are taken. Ehile taking physical possession of securities the
bank becomes bailee and the customer bailor. anks also keeps articles, valuables,
securities etc., of its customers in Safe Custody and acts as a ailee. 1s a bailee the
bank is re4uired to take care of the goods bailed.
!essor and !essee* Sec.'#3 of K,ransfer of property 1ct '66"L defines lease, ?essor,
lessee, premium and rent. 1s per the section I1 lease of immovable property is a
transfer of a right to en9oy such property, made for a certain time, e)press or implied,
or in perpetuity, in consideration of a price paid or promised, or of money, a share of
crops, service or any other thing of value, to be rendered periodically or on specified
occasions to the transferor by the transferee, who accepts the transfer on such terms.J
(gent and Principal : Sec'1.2 of K,he Indian Contract 1ct, '67"L defines Ian agentJ
as a person employed to do any act for another or to represent another in dealings
with third persons. ,he person for whom such act is done or who is so represented is
called Ithe >rincipalJ. ,hus an agent is a person, who acts for and on behalf of the
principal and under the latterLs e)press or implied authority and the acts done within
such authority are binding on his principal and, the principal is liable to the party for
the acts of the agent.
., Lala Lajpatrai Institute Of Management
anks collect che4ues, bills, and makes payment to various authorities viz., rent,
telephone bills, insurance premium etc., on behalf of customers. . anks also abides
by the standing instructions given by its customers. In all such cases bank acts as an
agent of its customer, and charges for these services. 1s per Indian contract 1ct agent
is entitled to charges. ;o charges are levied in collection of local che4ues through
clearing house. Charges are levied in only when the che4ue is returned in the
clearinghouse.
(s a +ustodian : 1 custodian is a person who acts as a caretaker of something. anks
take legal responsibility for a customerLs securities. Ehile opening a demat account
bank becomes a custodian.
(s a Guarantor* anks give guarantee on behalf of their customers and enter in to
their shoes. &uarantee is a contingent contract. 1s per sec $',of Indian contract 1ct
guarantee is a D contingent contract D. Contingent contract is a contract to do or not to
do something, if some event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional
relationship.
&er#ination of relationship "etween a "anker and a custo#er*
,he relationship between a bank and a customer ceases on5
*a+ ,he death, insolvency, lunacy of the customer.
*b+ ,he customer closing the account i.e. Qoluntary termination
*c+ ?i4uidation of the company
*d+ ,he closing of the account by the bank after giving due notice.
*e+ ,he completion of the contract or the specific transaction.
,he relationship developed between a banker and customer involves some duties on the part of
both.
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)uties of a "anker*
1 'anker' has certain duties vis=U=vis his customer. ,hese are5
*a+.uty to maintain secrecyMconfidentiality of customers' accounts.
*b+.uty to honour che4ues drawn by customers on their accounts and collect che4ue,
bills on his behalf.
*c+.uty to pay bills etc., as per standing instructions of the customer.
*d+.uty to provide proper services.
*e+.uty to act as per the directions given by the customer. If directions are not
given the banker has to act according to how he is e)pected to act.
*f+.uty to submit periodical statements i.e. informing customers of the state of the
account
*g+1rticlesMitems kept should not be released to a third party without due
authorization by the customer
)ut% to #aintain secrec%*
anker has a duty to maintain secrecy of customers' accounts. 0aintaining secrecy is not
only a moral duty but bank is legally bound to keep the affairs of the customer secret. ,he
principle behind this duty is that disclosure about the dealings of the customer to any
unauthorized person may harm the reputation of customer and the bank may be held liable. ,he
duty of maintaining secrecy does not cease with the closing of account or on the death of the
account holder. 1s per Sec' 13 of Ianking Companies 1c4uisition and ,ransfer of
@ndertakings 1ct '(7#J= I:very corresponding new bank shall observe, e)cept as otherwise
re4uired by law, the practices and usages customary among bankers, and, in particular, it shall
not divulge any information relating to or to the affairs of its constituents e)cept in
circumstances in which it is, in accordance with law or practices and usages customary among
bankers, necessary or appropriate for the corresponding new bank to divulge such information.J
0aintaining secrecy is implied terms of the contract with the customer which bank enters into
with the customer at the time of opening an account. ank has not only to maintain secrecy of
transactions, but secrecy is also to be maintained in respect of operations through 1,0M debit
cards. ank has also to maintain secrecy of user I. pins with due care so that it does fall in
wrong hands.
)ut% to provide proper accounts *
anks are under duty bound to provide proper accounts to the customer of all the
transactions done by him. ank is re4uired to submit a statement of accounts M passbook to the
customer containing all the credits and debits in the account.
)ut% to honour che$ues*
1s 'banking' means accepting of deposits withdrawable by che4ue, draft, order or
otherwise, the banker is duty bound to honour che4ues issued by the customers on their accounts.
Sec. $'of ;egotiable Instruments 1ct, '66' specifies the liability of drawee of che4ue. 1s per
Sec. $' I,he drawee of a che4ue having sufficient funds of the drawer in his hands properly
applicable to the payment of such che4ue must pay the che4ue when duly re4uired so to do, and,
in. default of such payment, must compensate the drawer for any loss or damage caused by such
default.J ,herefore it is the duty of a bank to honour the che4ues issued by the account holder if5
.. Lala Lajpatrai Institute Of Management
,he che4ue has been properly drawn and is in order in all respects i.e. it is properly dated,
amount in words and figures have been e)pressed properly, is neither stale nor post dated nor
mutilated and the signature of accountholder tallies with the specimen recorded with the bank.
,he che4ue should be drawn on the branch where the account is maintained. *.ue to
implementation of technology and core banking solution a customer can present che4ues on any
branch of a bank. !I has advised banks to issue multi cit3 che<ues to account holders.+
*a+,here is sufficient balance in the account and the balance is properly
applicable for payment of the che4ue.
*b+,he che4ue is presented for payment on a working day and during the business
hours of the branch.
*c+:ndorsements on the che4ue are regular and proper.
*d+,he payment of the che4ue is not countermanded by the drawer
,ights of a "anker*
It is not that the bank has only duties towards its customers, it too has certain rights vis=U=vis his
customers. ,he rights can broadly be classified as5
a(&ight of Lien
"(&ight of Set*Off
c(&ight of #ppropriation
d(#ct as per the mandate of customer
e(&ight to Charge Interest; Commission; Incidental Charges etc'
,ight of !ien*
1 lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid, provided that there is no contract
e)press or implied, to the contrary. It is a right to retain possession of specific goods or securities
or other movables of which the ownership vests in some other person and the possession can be
retained till the owner discharges the debt or obligation to the possessor. ,he creditor *bank+ has
the right to maintain the security of the debtor but not to sell it. ,here are two types of lien viz.
'.>articular ?ien and
".!ight of &eneral ?ien
ank has a right of lien only when goods, securities are received in the capacity as a creditor.
Ehile granting advances banks take documents. ,hese documents confer right to convert general
lien as an implied pledge. 1 bankerLs lien is more than a general lien, it is an implied pledge and
he has the right to sell the goods in case of default ank has a '!ight of Sale' of goods under lien.
anker's right of lien is not barred by the ?aw of ?imitation.
,ight of set-off*
,he banker has the right to set off the accounts of its customer. It is a statutory right
available to a bank, to set off a debt owed to him by a creditor from the credit balances held in
other accounts of the borrower. ,he right of set=off can be e)ercised only if there is no agreement
e)press or implied to the contrary. ,his right is applicable in respect of dues that are due, are
becoming due i.e. certain and not contingent. It is not applicable on future debts. It is applicable
in respect of deposits that are due for payment. ,he right of set off enables bank to combine all
kinds of credit and debit balances of a customer for arriving at a net sum due. ,he right is also
available for deposits kept in other branches of the same bank. ,he right can be e)ercised after
./ Lala Lajpatrai Institute Of Management
death, insolvency, and dissolution of a company, after receipt of a garnisheeM attachment order
.,he right is also available for time barred debts. .eposits held in the name of a guarantor cannot
be set off to the debit balance in borrowers account until a demand is made to the guarantor and
his liability becomes certain. anks cannot set off the credit balance of customer's personal
account for a 9oint loan account of the customer with another person unless both the 9oint
accountholders are 9ointly and severally liable. anks e)ercise the !ight of set off only after
serving a notice on the customer informing him that the bank is going to e)ercise the right of set=
off.
,ight of (ppropriation*
It is the right of the customers to direct his banker against which debt *when more than
one debt is outstanding+ the payment made by him should be appropriated. In case no such
direction is given, the bank can e)ercise its right of appropriation and apply it in payment of any
debt. Section 3(,8# and 8' of Indian Contract 1ct, '67" lays down the rules of appropriation
Banker's right to charge interest: co##ission: incidental charges etc1 5
anker has an implied right to charge for services rendered and sold to a customer. ank
charges interest on amount advanced, processing charges for the advance, charges for non=
utilization of credit facilities sanctioned, charges commission, e)change, incidental charges etc.
depending on the terms and conditions of advance banks charge interest at monthly, 4uarterly or
semiannually or annually. anks charge customers if the balance in deposit account falls below
the prescribed amount. @sually the bank informs such charges to the customer by various means.
/0 Lala Lajpatrai Institute Of Management
Strateg% for e9panding custo#er "ase
.riven by competition, banks are increasingly making their services customer=friendly.
,here are three key components of strategies to e)pand and retain the customer base5
>roduct life cycle strategy
1ppropriate targeting
:)panding product portfolio
Product !ife +%cle Strateg%*
>roduct life cycle strategy means addressing the concerns of the customers throughout
the life cycle of the banking products. ,he product life=cycle strategy of a banking product *such
as bank loans+ comprises5
Identifying target marketsC
.eveloping and designing suitable productsC
0arketing the productsC
Sales and advice processesC
1fter=sales serviceC and
Complaint handling.
(ppropriate targeting*
anks focus on customer profiles and offer differentiated deposit and credit products to
various categories of customers depending on their income category, age group and
background. For e)ample, banks may segment various categories of customers to offer
targeted products, such as >rivate anking for high net worth individuals, .efence anking
Services for defence personnel, and Special Savings 1ccounts for trusts. anks use multiple
channels to target specific segments of population. anks deliver their products and services
through a variety of channels, ranging from traditional bank branches, e)tension counters
and satellite offices, to 1,0s, call centers and the Internet. Some private banks also appoint
direct marketing agents or associates, who deliver retail credit products. ,hese agents help
banks achieve deeper penetration by offering doorstep service to the customer.
E9panding product portfolio*
,o ensure that their customers get 'one=stop solution', a key component of banks'
customer strategy is to offer an e)panded set of products and services. ,hrough their
distribution network, banks may offer &overnment of India savings bonds, insurance
policies, a variety of mutual fund products, and distribute public offerings of e4uity shares
by Indian companies. 1s a depository participant of the ;ational Securities .epository
?imited *;S.?+ and Central .epository Services *India+ ?imited *C.S?+, a bank may offer
depository share accounts to settle securities transactions in a dematerialized mode and so
on.
Services to different +usto#er Groups
.eveloping and properly categorizing a customer data base forms part of the core
strategy of a bank. 1 typical bank with a widespread network of branches aims at serving the
following broad customer groups.
retail customersC
corporate customersC
international customersC
rural customers.
1 bank formulates its overall customer strategy to increase profitable business keeping in
mind its strengths and weaknesses. ,he key strategy components and trends in each of these
customer groups are briefly discussed below.
,etail +usto#ers
Eith growing household incomes, the Indian retail financial services market has high
growth potential. ,he key dimensions of the retail strategy of a bank include customer focus, a
wide range of products, customer convenience, widespread distribution, strong processes and
prudent risk management. ,he fee income that banks earn while e)tending commercial banking
services to retail customers includes retail loan processing fees, credit card and debit card fees,
transaction banking fees and fees from distribution of third party products. Cross selling of the
entire range of credit and investment products and banking services to customers is often a key
aspect of the retail strategy.
,etail !ending (ctivities
,here is widespread acceptance by the average consumer of using credit to finance purchases.
&iven this background, retail credit has emerged as a rapidly growing opportunity for banks.
anks also focus on growth in retail deposit base which would include low cost current account
and savings bank deposits. !etail deposits are usually more stable than corporate bulk deposits
or wholesale deposits. anks offer a range of retail products, including home loans, automobile
loans, commercial vehicle loans, two wheeler loans, personal loans, credit cards, loans against
time deposits and loans against shares. anks also fund dealers who sell automobiles, two
wheelers, consumer durables and commercial vehicles. 1 few banks have set up home finance
subsidiaries in order to concentrate on this business in a more focused manner. >ersonal loans are
unsecured loans provided to customers who use these funds for various purposes such as higher
education, medical e)penses, social events and holidays. >ersonal loans include micro=banking
loans, which are relatively small value loans to lower income customers in urban and rural areas.
Credit cards have become an important component of lending to the retail segment in the case
of a number of banks. 1s the Indian economy develops, it is e)pected that the retail market
will seek short=term credit for personal uses, and the use of credit cards will facilitate further
e)tension of banks' retail credit business.
Share of retail loans in total loans
,he share of retail loans in total loans and advances of Scheduled Commercial anks *SCs+
was "'.$B at end=0arch "##(. ,he ma)imum share was accounted for by housing loans
followed by 'other personal loans', auto loans, credit card receivables, loans for commercial
durables, in that order.
Source5 !eport on ,rends and >rogress of anking in India, "##6=#(, !I.
!ending to s#all and #ediu# enterprises
0ost of the private and foreign banks have integrated the strategy with regard to small and
medium enterprises with their strategy for retail products and services. -ence, the retail
focus includes meeting the working capital re4uirements, servicing deposit accounts and
providing other banking products and services re4uired by small and medium enterprises. %f
late, public sector banks are also very active in lending to this business segment. anks often
adopt a cluster or community based approach to financing of small enterprises, that is,
identifying small enterprises that have a homogeneous profile such as apparel manufacturers or
9ewellery e)porters.
+orporate +usto#ers
Corporate business covers pro9ect finance including infrastructure finance, cross border
finance,working capital loans, non=fund based working capital products and other fee=based
services. anks often have to make special efforts to get the business of highly rated
corporations. ,he recent emphasis on infrastructure in India, including pro9ects being built on
private=public partnership basis, is leading to profitable business opportunities in this area.
Further, Indian companies are also going global, and making large ac4uisitions abroad. ,his
trend is likely to pick up momentum in future and banks which gear themselves up to meet such
re4uirements from their customers will gain. ,here is also a growing demand for foreign
e)change services from the corporate customers. anks offer fee=based products and services
including foreign e)change products, documentary credits *such as letter of credit or ?C+ and
guarantees to business enterprises. Corporate customers are also increasingly demanding
products and services such as forward contracts and interest rate and currency swaps.
International Presence
Indian banks while e)panding business abroad have usually been leveraging home
country links. ,he emphasis has been on supporting Indian companies in raising corporate and
pro9ect finance overseas for their investments in India and abroad *including financing of
overseas ac4uisitions by Indian companies+, and e)tending trade finance and personal financial
services *including remittance and deposit products+ for non=resident Indians.
,ural Banking +usto#ers
%ver 7#B of India's citizens live in rural areas. -ence, there is a need for banks to
formulate strategies for rural banking, which have to include products targeted at various
customer segments operating in rural areas. ,hese customer segments include corporate, small
and medium enterprises and finally the individual farmers and traders. >rimary credit products
for the rural retail segment include farmer financing, micro=finance loans, working capital
financing for agro=enterprises, farm e4uipment financing, and commodity based financing. %ther
financial services such as savings, investment and insurance products customized for the rural
segment are also offered by banks.
+o#petition a#ongst Banks for +usto#ers
anks seek to gain advantage over their competitors by offering innovative products and
services, use of technology, building customer relationships and developing a team of highly
motivated and skilled employees. ,he relative strengths and weaknesses of different classes
of banks=such as public sector banks, new private sector banks, old private sector banks and
foreign banks=are described below.
+o#petition for ,etail Products and Services
In the retail markets, competition is intense among all categories of banks. -owever,
even though foreign banks have product and delivery capabilities, they are constrained by limited
branch network. %ver the last decade, because of their stronger technology and marketing
capabilities, the new private sector banks have been gaining market share at the e)pense of
public sector banks. ,hey are slowly moving towards the ,ier II cities to tap potential business.
+o#petition for +orporate Products and Services
In the case of corporate business, public sector banks and the new private sector banks
have developed strong capabilities in delivering working capital products and services. >ublic
sector banks have built e)tensive branch networks that have enabled them to raise low cost
deposits and, as a result, price their loans and fee=based services very competitively. ,heir wide
geographical reach facilitates the delivery of banking products to their corporate customers
located all over the country. ,raditionally, foreign banks in India have been active in providing
trade finance, fee=based services and other short=term financing products to highly rated Indian
corporations. 1 few Indian public sector and private sector banks effectively compete with
foreign banks in these areas. ,he larger Indian commercial banks also compete with foreign
banks in foreign currency lending and syndication business. -owever, foreign banks are at an
advantage due to their larger balance sheets and global presence.
In pro9ect finance, a few large Indian commercial banks have entered the infrastructure finance
space. ICICI ank and I.I ank have an advantage in this area as they were already in this
business in their previous avatar. -owever, given their strong deposit base, the larger banks have
decided to e)pand their presence in this market. In pro9ect finance, foreign banks
have an advantage where foreign currency loans are involved.
+o#petition for International Banking
Indian commercial banks have limited access to foreign currency resources, and hence,
face difficulty in participating in global takeovers and ac4uisitions being undertaken by Indian
companies, although some leading Indian banks are participating in financing such cases in a
limited manner. In delivering sophisticated foreign e)change products like derivatives, a few
Indian banks in the private sector are competing with their foreign counterparts. For products and
services targeted at non=resident Indians and Indian businesses, there is intense competition
among a large number of banks, both Indian and foreign.
+o#petition for ,ural +usto#ers
In the agriculture and priority segments, the principal competitors are the large public
sector banks, regional rural banks *!!s+ and cooperative banks. ,his is due to the e)tensive
physical presence of public sector banks and !!s throughout India via their large branch
networks and their focus on agriculture and priority sectors.
+usto#er ,elationship .anage#ent
%ver the years, the !I has taken a number of initiatives to improve the 4uality of
customer service. ,hese steps include grievance redress through the anking %mbudsman
Scheme2" and setting up a Customer Service .epartment within !I. !I has set up a full=
fledged Customer Service .epartment with a view to making banks more customer=friendly and
has taken a number of steps to disseminate instructionsM guidelines relating to customer service
and grievance redressal by banks by placing all customer related notifications and press releases
on its multi=lingual Internet site. Customers of commercial banks can also approach the !I with
their grievances. In February "##8, !I set up the anking Codes and Standards oard of India
*CSI+ as an independent autonomous watchdog to ensure that customers get fair treatment in
their dealings with banks. ,he CSI has published the DCode of anks' Commitments to
Customers D*the Code+D which sets minimum standards of banking practice and benchmarks in
customer service for banks to follow. Commercial banks have become members of the CSI
and have adopted the Code as their Fair >ractice Code in dealings with customers. ,he main !I
directives on customer services include the following.
+o##ittees on +usto#er Service
anks are re4uired to constitute a Customer Service Committee of their respective oards
and include e)perts and representatives of customers as invitees to enable improvements in the
4uality of customer service. Further, banks have to establish Customer Service Committee at
branch level. :ach bank is also e)pected to have a nodal department M official for customer
service in the -ead %ffice and each controlling office whom customers with grievances can
approach in the first instance and with whom the anking %mbudsman and !I can liaise.
Board-approved Policies on +usto#er Service
Customer service is pro9ected as a priority ob9ective of banks along with profit, growth and
fulfillment of social obligations. anks need to have a board approved policy for the following5
Comprehensive .eposit >olicy.
Che4ue Collection >olicy.
Customer Compensation >olicy in areas such as erroneous debits, payment of interest
case of delays in collection, etc. and
Customer &rievance !edressal >olicy
anks should provide a complaintsM suggestions bo) at each of their offices. Further, at every
office of the bank, a notice re4uesting the customers to meet the branch manager may be
displayed regarding grievances, if the grievances remain unattended. 1 complaint book with
perforated copies in each set may be introduced, so designed as to instantly provide an
acknowledgement to the customers and intimation to the controlling office. -owever, the
banking system cannot depend only on regulatory steps to improve customer service. 0arket
based
/+ Lala Lajpatrai Institute Of Management
solutions are also necessary. 1ccording to !I guidelines, in the case of delays in collection of
bills, the concerned bank should pay interest to the aggrieved party for the delayed period in
respect of collection of bills at the rate of "B per annum above the rate of interest payable on
balances of Savings ank accounts.
Giving Pu"licit% to the Policies
anks should ensure that wide publicity is given to the customer policies formulated by them
by placing them prominently on their web=site and also disseminating the policies through
notice board in their branches, issuing bookletsM brochures, etc.
-perations of (ccounts "% Special +ategor% of +usto#ers
anks should develop policies for special categories of customers including sickM oldM
incapacitated persons, persons with disabilities, visually impaired persons, etc. Such a customer
may re4uire identification through the customer's thumb or toe impression by two independent
witnesses known to the bank, one of whom should be a responsible bank official.
+usto#er +onfidentialit% -"ligations
,he scope of the secrecy law in India has generally followed the common law principles
based on implied contract. ankers' obligation to maintain secrecy about customers' accounts
arises out of the contractual relationship between the banker and customer, and as such no
information should be divulged to third parties e)cept under circumstances which are well
defined. ,he following e)ceptions are normally accepted, where5
disclosure is under compulsion of law
there is duty to the public to disclose
interest of bank re4uires disclosure, and
disclosure is made with the e)press or implied consent of the customer.
Collecting Information from Customers for Cross*selling )urposes
1t the time of opening of accounts of the customers, banks are re4uired to collect certain
informationC but they also collect a lot of additional personal information, which can be
potentially used for cross selling various financial services by the banks, their subsidiaries
and affiliates. Sometimes, such information is also provided to other agencies. !I has
advised banks that the information provided by the customer for /now Hour Customer
*/HC+ compliance while opening an account is confidential and divulging
any details thereof for cross selling or any other purpose would be in breach of customer
confidentiality obligations. Eherever banks desire to collect any information about the customer
for a purpose other than /HC re4uirements, it should not form part of the account opening form.
Such information may be collected separately, purely on a voluntary basis, after e)plaining the
ob9ectives to the customer and taking his e)press approval for the specific uses to which such
information could be put.
Source* ,BI Guidelines
National )o Not +all ,egistr%
Eith a view to reducing the number of unsolicited marketing calls received by customers, the
!I has advised banks that all telemarketers, viz., direct selling agentsM direct marketing
agents engaged by them should be registered with the .epartment of ,elecommunications
/, Lala Lajpatrai Institute Of Management
*.o,+.
Banking -#"uds#an Sche#e
,he anking %mbudsman Scheme makes available an e)peditious and ine)pensive
forum to bank customers for resolution of complaints relating to certain services rendered by
banks. ,he anking %mbudsman Scheme was introduced under Section $3 1 of the anking
!egulation 1ct *! 1ct+, '(2( with effect from '((3. 1ll Scheduled Commercial anks,
!egional !ural anks and Scheduled >rimary Co=operative anks are covered under the
Scheme.
(ppoint#ent of Banking -#"uds#an
,he anking %mbudsman is a senior official appointed by the !I to receive and redress
customer complaints against deficiency in certain banking services *including Internet banking
and loans and advances+. 1t present, fifteen anking %mbudsmen have been appointed, with
their offices located mostly in state capitals.
'iling a +o#plaint to the Banking -#"uds#an
%ne can file a complaint before the anking %mbudsman if
*a+ the reply to the representation made by the customer to his bank is not received from the
concerned bank within a period of one month after the bank has received the representation, or
*b+ the bank re9ects the complaint, or
*c+ if the complainant is not satisfied with the reply given by the bank.
,he anking %mbudsman does not charge any fee for filing and resolving customers'
complaints.
!i#it on the (#ount of +o#pensation as Specified in an (ward
,he amount, if any, to be paid by the bank to the complainant by way of compensation
for any loss suffered by the complainant is limited to the amount arising directly out of the act or
omission of the bank or !s '# lakhs, whichever is lower. Further, the anking %mbudsman may
award compensation not e)ceeding !s ' lakh to the complainant only in the case of complaints
relating to credit card operations for mental agony and harassment. ,he anking %mbudsman
will take into account the loss of the complainant's time, e)penses incurred by the complainant
and harassment and mental anguish suffered by the complainant while passing such award.
'urther recourse availa"le
If a customer is not satisfied with the decision passed by the anking %mbudsman, he
can approach the 1ppellate 1uthority against the anking %mbudsman's decision. 1ppellate
1uthority is vested with a .eputy &overnor of !I. -e can also e)plore any other recourse
available to him as per the law. ,he bank also has the option to file an appeal before the
appellate authority under the scheme.
/- Lala Lajpatrai Institute Of Management
2now @our +usto#er /2@+5 nor#s
anks are re4uired to follow /now Hour Customer */HC+ guidelines. ,hese guidelines
are meant to weed out and to protect the good ones and the banks. Eith the growth in organized
crime, /HC has assumed great significance for banks. ,he !I guidelines on /HC aim at
preventing banks from being used, intentionally or unintentionally, by criminal elements for
money laundering or terrorist financing activities. ,hey also enable banks to have better
knowledge and understanding of their customers and their financial dealings. ,his in turn
helps banks to manage their risks better. ,he !I e)pects all banks to have comprehensive
/HC policies, which need to be approved by their respective boards. anks should frame their
/HC policies incorporating the following four key elements5
Customer 1cceptance >olicyC
Customer Identification >roceduresC
0onitoring of ,ransactionsC and
!isk 0anagement.
+usto#er (cceptance Polic%
:very bank should develop a clear Customer 1cceptance >olicy laying down e)plicit criteria
for acceptance of customers. ,he usual elements of this policy should include the following.
anks, for e)ample, should not open an account in anonymous or fictitiousM benami name*s+.
;or should any account be opened where the bank's due diligence e)ercises relating to identity
has not been carried out. anks have to ensure that the identity of the new or e)isting
customers does not match with any person with known criminal background. If a customer
wants to act on behalf of another, the reasons for the same must be looked into.
-owever, the adoption of customer acceptance policy and its implementation should not become
too restrictive and should not result in denial of banking services to general public, especially
to those who are financially or socially disadvantaged.
+usto#er Identification Procedures
Customer identification means identifying the customer and verifying hisMher identity by
using reliable, independent source documents, data or information. For individual customers,
banks should obtain sufficient identification data to verify the identity of the customer, his
address and a recent photograph. ,he usual documents re4uired for opening deposit accounts are
given below. For customers who are legal persons, banks should scrutinize their legal
status through relevant documents, e)amine the ownership structures and determine the
natural persons who control the entity.
)ocu#ents for opening deposit accounts under 2@+ guidelines
/. Lala Lajpatrai Institute Of Management
,he Customer identification will be done on the basis of documents provided by the
prospective customer as under5
a+ >assport or Qoter I. card or >ension >ayment %rders *&ovt.M>S@s+ alone, where on the
address is the same as mentioned in account opening form.
b+ 1ny one document for proof of identity and proof of address, from each of the under
noted items5
>roof of Identity
i+ >assport, if the address differs from the one mentioned in the account opening form
ii+ Qoter I. card, if the address differs from the one mentioned in the account opening
form
iii+ >1; Card
iv+ &ovt.M .efence I. card
v+ I. cards of reputed employers
vi+ .riving ?icense
vii+ >ension >ayment %rders *&ovt.M>S@s+, if the address differs from the one mentioned
in the account opening form
viii+ >hoto I. card issued by >ost %ffices
viii+ >hoto I. card issued to bonafide students of @niversitiesM Institutes approved by @&CM
1IC,:
>roof of address
i+ Credit card statement
ii+ Salary slip
iii+ Income ta)M wealth ta) assessment
iv+ :lectricity bill
v+ ,elephone bill
vi+ ank account statement
vii+ ?etter from a reputed employer
viii+ ?etter from any recognized public authority
i)+ !ation card
)+ Copies of registered leave < license agreementM Sale .eedM ?ease 1greement may be
accepted as proof of address
)i+ Certificate issued by hostel and also, proof of residence incorporating local address, as
well as permanent address issued by respective hostel warden of aforesaid @niversityM
institute where the student resides, duly countersigned by the !egistrarM >rincipalM
.ean of Student Eelfare. Such accounts should be closed on completion of educationM
leaving the @niversityM Institute.
)ii+ For students residing with relatives, address proof of relatives along with their identity
proof, can also be accepted provided declaration is given by the relative that the
student is related to him and is staying with him.
Source5 State ank of India website
.onitoring of &ransactions
%ngoing monitoring is an essential element of effective /HC procedures. anks can
effectively control and reduce their risk only if they have an understanding of the normal and
// Lala Lajpatrai Institute Of Management
reasonable activity of the customer so that they have the means of identifying the transactions
that fall outside the regular pattern of activity. anks should pay special attention to all comple),
unusually large transactions and all unusual patterns which have no apparent economic or
visible lawful purpose. anks may prescribe threshold limits for a particular category of accounts
and pay particular attention to the transactions which e)ceed these limits. anks should ensure
that any remittance of funds by way of demand draftM mailM telegraphic transfer or any other
mode and issue of travellers' che4ues for value of !s 3#,### and above is effected by debit to the
customer's account or against che4ues and not against cash payment. anks should further ensure
that the provisions of Foreign Contribution *!egulation+ 1ct, '(78 as amended from time to
time, wherever applicable, are strictly adhered to.
,isk .anage#ent
anks should, in consultation with their boards, devise procedures for creating risk profiles
of their e)isting and new customers and apply various anti=money laundering measures keeping
in view the risks involved in a transaction, account or bankingM business relationship. anks
should prepare a profile for each new customer based on risk categorization. ,he customer
profile may contain information relating to customer's identity, socialM financial status, nature
of business activity, information about his clients' business and their location etc. Customers
may be categorized into low, medium and high risk. For e)ample, individuals *other than high
net worth individuals+ and entities whose identities and sources of wealth can be easily identified
and transactions in whose accounts by and large conform to the known transaction profile of
that kind of customers may be categorized as low risk. Salaried employees, government owned
companies, regulators etc fall in this category. For this category of customers, it is sufficient to
meet 9ust the basic re4uirements of verifying identity. ,here are other customers who belong to
medium to high risk category. anks need to apply intensive due diligence for higher risk
customers, especially those for whom the sources of funds are not clear. :)amples of customers
re4uiring higher due diligence include
nonresident customersC
high net worth individualsC
trusts, charities, ;&%s and organizations receiving donationsC
companies having close family shareholding or beneficial ownershipC
firms with 'sleeping partners'C
politically e)posed persons *>:>s+ of foreign originC
non=face=to=face customers and *h+ those with dubious reputation as per public
information available etc.
anks' internal audit and compliance functions have an important role in evaluating and ensuring
adherence to the /HC policies and procedures. ConcurrentM Internal 1uditors should specifically
check and verify the application of /HC procedures at the branches and comment on the
lapses observed in this regard.
Prevention of .one% !aundering (ct /P.!(5: <==<
,he >0?1, "##" casts certain obligations on the banking companies in regard to
maintenance and reporting of the following types of transactions5
all cash transactions of the value of more than !s '# laky or its e4uivalent in foreign
currencyC
all series of cash transactions integrally connected to each other which have been valued
below !s '# ?aky or its e4uivalent in foreign currency where such series of transactions
have taken place within a month and the aggregate value of such transactions e)ceeds !s
'# ?akyC
all cash transactions were forged or counterfeit currency notes or bank notes have
been used as genuine and where any forgery of a valuable security or a document has
taken place facilitating the transactionC and
all suspicious transactions whether or not made in cash
Evolving &rends in .odern Banking
,here are a number of trends evolving in modern banking, the most important of which relate
to
technology,
outsourcing of services and
financial inclusion
&echnolog%
anks in India have started using technology in a proactive manner. ,he huge number of
bank customers and their myriad needs are being met in increasingly sophisticated ways. In a
number of areas, the foreign banks and the new private sector banks have been the first
movers in the application of technology, but public sector banks are also catching up. %ne
ma9or advantage that Indian banks have is the availability of ma9or I, companies in India who
are the world leaders in I, applications.
Internet Banking
,hrough its website, a bank may offer its customers online access to account information and
payment and fund transfer facilities. ,he range of services offered differs from bank to bank
depending mainly on the type and size of the bank. Internet banking is changing the banking
industry and affecting banking relationships in a ma9or way *see bo) 6.'+.
:)amples of %nline >ayment Services offered by some banks
Shopping -nline 5 %ne can shop securely online with the e)isting debitMcredit card. ,his
can also be done without revealing the customer's card number.
Prepaid .o"ile ,efill 5 1 bank's account holder can recharge his prepaid mobile phone
with this service.
Bill Pa% 5 1 customer can pay his telephone, electricity and mobile phone bills through
the Internet, 1,0s, mobile phone and telephone.
,egister A Pa% 5 %ne can view and pay various mobile, telephone, electricity bills and
insurance premiums on=line. 1fter registering, customers can get sms and e=mail alerts
every time a bill is received.
,&GS 'und &ransfer 5 !,&S is an inter=bank funds transfer system, where funds are
transferred as and when the transactions are triggered *i.e. real time+.
-nline Pa%#ent of &a9es 5 1 customer can pay various ta)es online including :)cise
and Service ,a), .irect ,a) etc.
.o"ile Banking &ransactions
Some banks have started offering mobile banking and telebanking to customers. ,he
e)pansion in the use and geographical reach of mobile phones has created new opportunities for
banks to use this mode for banking transactions and also provide an opportunity to e)tend
banking facilities to the hitherto e)cluded sections of the society. ,he !I has adopted ank ?ed
0odel in which mobile phone banking is promoted through business correspondents of banks.
,he operative guidelines for banks on 0obile anking ,ransactions in India were issued on
%ctober 6, "##6. %nly banks who have received one=time approval from the !I are permitted
to provide this facility to customers.
.o"ile Banking in India
,ill Aune $#, "##(, $" banks had been granted permission to operate 0obile anking in
India, of which 7 belonged to the State ank &roup, '" to nationalized banks and '$ to
privateM foreign banks.
Source: &eport on =rends and )rogress of Banking in India 200.*0/; &BI'
Point of Sale /PoS5 &er#inals
,o use smart cardsMdebit cardsMcredit cards for the purchase of an item or for payment of
a service at a merchant's store, the card has to be swiped in a terminal *known as >oint of Sale
or >%S terminal+ kept at the merchant's store. 1s soon as the card is put on the terminal, the
details of the card are transmitted through dial=up or leased lines to a host computer. %n
verification of the genuineness of the card, the transaction is authorized and concluded. It is
thus a means to 'check out' whether the cardholder is authorized to make a transaction using
the card. >%S terminal is a relatively new concept. 1 >oint of Sale *>oS+ terminal is an
integrated >C=based device, with a monitor *C!,+, >oS keyboard, >oS printer, Customer
.isplay, 0agnetic Swipe !eader and an electronic cash drawer all rolled into one. 0ore
generally, the >%S terminal refers to the hardware and software used for checkouts. In recent
years, banks are making efforts to ac4uire >oint of Sale *>oS+ terminals at the premises of
merchants across the country as a relatively new source of income. '1c4uiring' a >%S terminal
means installing a >%S terminal at the merchant premises. >oS terminals is the ac4uirer of the
terminal and the merchants are re4uired to hold an account *merchant account+ with the ac4uirer
bank. ,he ac4uirer bank levies each transaction with a charge, say 'B of the transaction value.
,his amount is payable by the merchant. 0ost merchants do not mind absorbing this cost,
because such facilities e)pand their sales. Some merchants, however, pass on the cost to the
customer. ,his business is known as merchant ac4uisition business. anks are vying with one
another for >oS machine ac4uisition, since it offers a huge opportunity to generate additional
income by increasing the card base and encouraging card holders to use them for their merchant
transactions. ?eading banks==both in the public and private sectors== are planning to install
hundreds of thousands of these terminals across the country. Some banks are planning 9oint
ventures with global companies who have e)perience and e)pertise in this area. >oS terminals
are predominantly used for sale and purchase transactions. ,he >oS terminals have proved to be
very effective in combating fraudulent transaction by on=line verification of cards. 1lso, the !I
is e)pected to permit cash withdrawal transactions to cardholders from >oS terminals installed
with shopkeepers, mall stores, etc. >oS terminals, having gained significant acceptance in
metros, need to become more popular in tier=" and tier=$ cities. >ublic sector banks appear to be
more interested in targeting the smaller towns and cities where they have strong branch presence.
,he challenges of setting up a widespread >oS network will be primarily
*a+ operational costs and
*b+ viability in smaller towns and cities.
:)perts feel that once the technology stabilizes and costs per unit comes down, >oS terminals
will become popular all over India.
-utsourcing of Non-core (ctivities
%utsourcing can enable banks to stay ahead of competition. &rowing competition in the
banking sector has forced banks to outsource some of their activities to maintain their
competitive edge. .ecision to outsource could be on cost considerations as well as lack of
e)pertise in banks in delivering certain services. anks typically outsource their non=core
functions so that they can concentrate on their core functions. -owever, there are risks involved
in the process of outsourcing to a third party. ,hese risks include non=compliance with
regulations, loss of control over business, leakage of customer data, lack of e)pertise of the third
party, poor service from third party, etc. ,he key driving force behind outsourcing activities by
any firm, irrespective of the nature of its business, is cost saving. Initially, foreign banks were
involved in outsourcing their activities in order to leverage India's significant cost advantages.
%rganizations such as 1merican :)press, Citibank, Standard Chartered ank, 1;P &rindlays,
-SC, and 1; 1mro have been outsourcing their Information ,echnology %utsourcing
*I,%+Musiness >rocess %utsourcing *>%+ re4uirements to leading Indian I, companies.
-utsourcing (ctivities of Indian Banks
.uring the recent years, Indian banks also have started outsourcing their non=core activities. ,he
outsourced services may include software application support, maintenance of hardware and software,
hosting services, managing data centers, managing 1,0 networks across the country, and disaster
management. Further, banks are also giving contracts to third parties in order to manage other support
services such as call=support services, help=desk support, credit card processing, che4ue processing and
clearing, 1,0 cash replenishment, che4ue clearing and collection, loan servicing, data processing, etc.
,he two main reasons for Indian banks outsourcing non=core activities are similar to the overseas banks,
i.e. cost consideration and lack of e)pertise in certain areas. ,hrough outsourcing, banks can also benefit
from the domain e)pertise of the service providers. %utsourcing helps banks not only to focus on their
core activities, but also in certain cases to reduce the capital investment in developing the re4uired
infrastructure. Further, in=house provision of services may be more e)pensive because they do not en9oy
any economy of scale. Service providers on the other hand may en9oy economies of scale because they
cater to the outsourcing re4uirements of a number of banks and companies and pass on some of the
benefits of scale to the outsourcing banks. It is not only the small banks who have started outsourcing
non=core activitiesC large public sector banks are also outsourcing their non=core services. Certain
precautions need to be taken while outsourcing non=core functions. ,he legal contract entered into with
the vendors should be approved only after the 4uantification of benefits through a thorough analysis. ,he
vendor's domain knowledge is important for delivering the services as per contractC for e)ample
customizing the bank's I, re4uirements. It is therefore important for banks to verify whether the vendors
have the re4uired domain knowledge. Ehile outsourcing, the ma9or concern for banks relates to security.
,here have been case instances where the employees of vendors have leaked confidential information of
clients. For banks, such leakage of customer's account details can be disastrous, with huge fallout in terms
of monetary losses as well as severe damage to the bank's reputation.
,o cope with the challenges, the !I has proposed that the board of directors of a bank should
be responsible for the outsourcing policy as well as approving such activities undertaken by a
bank. In addition, the Information ,echnology 1ct, "### aims at tackling some aspects of
cyber crimes such as leakage of confidential information by vendors. 1s part of internal
inspectionMaudit, internal inspectorsM auditors in banks look into security related aspects of
outsourcing. &oing forward, it is e)pected that outsourcing in the banking sector in India will increase as
competition in the industry grows and support services increasingly becomes more sophisticated and
e)pensive.
'inancial Inclusion
.espite the e)pansion of the banking network in India since independence, a sizeable
proportion of the households, especially in rural areas, still do not have a bank account.
Considerable efforts have to be made to reach these unbanked regions and population. Financial
Inclusion implies providing financial services viz., access to payments and remittance facilities,
savings, loans and insurance services at affordable cost to those who are e)cluded from the
formal financial system. o) 6.$ gives indications of the low access to banking services in India.
'inancial Inclusion Statistics
;ational Sample Survey %rganization *;SS%+ data reveal that 23.( million farmer
households in the country *or 3'.2B of the total+ do not access credit, either from institutional or
no institutional sources. Further, despite the vast network of bank branches, only "7B of total
farm households are indebted to formal sourcesC of which one=third also borrow from informal
sources. Farm households not accessing credit from formal sources as a proportion to total farm
households is especially high at (3.('B, 6'."8B and 77.3(B in the ;orth :astern, :astern and
Central !egions respectively. ,hus, apart from the fact that e)clusion in general is large, it also
varies widely across regions, social groups and asset holdings. ,he poorer the group, the greater
is the e)clusion.
Source: &eport of the Committee on >inancial Inclusion; 8anuar3 200.
Initiatives taken "% the ,BI
,he ?ead ank Scheme introduced by the !I in '(8( is the earliest attempt by the !I
to foster financial inclusion. @nder the scheme, designated banks are made key instruments for
local development and entrusted with the responsibility of identifying growth centres, assessing
deposit potential and credit gaps and evolving a coordinated approach for credit deployment
in each district, in concert with other banks and other agencies. 1s at 0arch "##(, there were
"8 banks, mostly in the public sector, which have been assigned lead responsibility in 8""
districts of the country. ,he !I's recent measures to promote financial inclusion includes5
advising banks to open 'no frills' accounts, introduction of usiness Correspondent *C+M
usiness Facilitator *F+ model and adoption of Information and Communication ,echnology
*IC,+ solutions for achieving greater outreach.
Basic "anking 'no-frills' account
,o achieve the ob9ective of greater financial inclusion, all banks have been advised by the !I
to make available a basic banking 'no=frills' account either with 'nil' or very low minimum
balances. ,hey have also been advised to keep the transaction charges low, which would
make such accounts accessible to vast sections of population. ,he nature and number of
transactions in such accounts could be restricted by the banks, but such restrictions must be
made known to the customer in advance in a transparent manner. ,he growth of such deposits
should be encouraged with affordable infrastructure and low operational costs through the use
of appropriate technology.
No-frill accounts
Scheduled Commercial anks *SCs+ are making considerable efforts towards opening no=frills
accounts. ,he number of no=frills accounts opened by SCs during "##8=#7, "##7=#6,
and "##6=#( were 8.7$ million, '3.7( million and $$.#" million respectively.
3se of Business 'acilitators and +orrespondents
Eith the ob9ective of ensuring a greater financial inclusion and increasing the outreach of the
banking sector, the !I has introduced business facilitators and business correspondent models
to enable banks to use the services of ;&%s, Self -elp &roups *S-&s+ and micro finance
institutions as intermediaries in providing financial and banking services. ,hese intermediaries
serve as the facilitators Mcorrespondents of the banks. In the business facilitator model, these
intermediaries help the banks facilitate services such as identification of borrowers, collection
and preliminary processing of loan applications, creating awareness about savings and other
products, processing and submission of applications to banks and post=sanction monitoring.
In addition to activities which the intermediaries can engage in the business facilitator model,
the scope of activities under the business correspondent's models include disbursal of small
value credit, recovery of principalMcollection of interest, collection of small value deposits,
receipt and delivery of small value remittances etc. 1s the engagement of intermediaries as
business facilitatorsMcorrespondents involves a significant reputational, legal and operational
risks, banks need to give due consideration to those risks. ,he bank's arrangement with the
business correspondents should5
Specify the suitable limits on cash holding by intermediaries, as also limits on individual
customer payments and receipts.
!e4uire that the transactions are accounted for and reflected in the bank's books by
the end of the day or ne)t working day.
!e4uire all agreementsMcontracts with the customer to clearly specify that the bank is
responsible to the customer for acts of omission and commission of the business
facilitator M correspondent.
anks pay reasonable commissionM fees to the usiness FacilitatorsM Correspondents. ,he
banks' agreement with them however should specifically prohibit them from charging any fees
to the customers for the services rendered by them on behalf of the banks.
(doption of technolog%
,o give an impetus to financial inclusion, the !I has formulated a scheme to accelerate the
pace of adoption of the biometric accessM smart card based :lectronic enefit ,ransfer *:,+
mechanism by the banks and roll out the :, system in the States that are ready to adopt the
scheme. 1s per the scheme, !I would partially reimburse the banks, for a limited period, the
cost of opening accounts with biometric accessM smart cards. ,hrough these accounts, payment
of social security benefits, ;ational !ural :mployment &uarantee 1ct *;!:&1+ payments and
payments under other government benefit programmersL would be routed. ,he potential of
information technology *I,+ in e)tending banking services to under=served markets in rural and
semi=urban areas is enormous. ,he use of Smart Card technology, mobile 1,0s, coverage of
rural post offices under electronic payments networks = all could contribute to providing
financial services to more people and thereby serve financial inclusion. India is e)periencing an
e)plosion in the use of mobile communication technology, and this could be e)ploited by the
financial sector for spreading the banking habit. 0obile phone users belong to all strata of
society, spread across urban, semi=urban and rural areas. -owever, while encouraging the spread
of cost=effective banking through mobile communications, it has to be ensured that essential
security features are maintained.
.icro +redit
0icro Credit is defined as provision of credit and other financial services and products of
very small amount to the poor in rural, semi=urban and urban areas for enabling them to raise
their income levels. 0icro Credit Institutions *0CIs+ are those which provide these facilities.
anks are allowed to devise appropriate loan and savings products and the related terms and
conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins,
etc. Such credit covers not only consumption and production loans for various farm and nonfarm
activities of the poor but also includes their other credit needs such as housing and shelter
improvements.
Self-8elp Groups /S8Gs5
1s stated earlier, despite the e)pansion of the banking sector, the rural poor==particularly the
marginal farmers and landless labourers==depend to a very large degree on the moneylenders
for credit. Several studies have shown that Self -elp Savings and Credit &roups have the
potential to bring together the banks and the rural poor. 1 Self=-elp &roup *S-&+ is a registered
or unregistered group of '3="# people who voluntarily 9oin together to save small amounts
regularly. ,hese pooled savings are used to make interest bearing loans to group members. In
addition to inculcating the habit of thrift, S-& activity develops among its members the capacity
to handle resources. Ehen the group matures and stabilizes, it gets linked to the banks under a
S-&=banks linkage program and banks start providing credit to S-&s. ;ote that banks provides
credit to S-&s and not to individuals belonging to the S-&. It is the S-&s who pass on the
loans to the individuals. ,hus, the S-&s become responsible for repayment to the banks.
,he group members use collective wisdom and peer pressure to ensure proper end=use of
credit and timely repayment thereof. >eer pressure acts as an effective substitute for collaterals.
Self 8elp Groups
@nder the S-&s=ank ?inkage >rogramme *S?>+ 1pproach, as on 0arch $', "##(, 2."
million S-&s had outstanding loans of !s."", 86# crores from commercial banks, regional
rural banks and co=operative banks together. ,he share of commercial banks in total
outstanding loans is 7' per cent. Further, as on 0arch $', "##(, the number of S-&s
maintaining savings bank accounts with the banking sector was 8.' million with outstanding
savings of !s. 3,328 crores.
What are the advantages of financing through S8Gs?
1n economically poor individual gains strength as part of a group. esides, financing through S-&s
reduces transaction costs for both lenders and borrowers. Ehile lenders have to handle only a single S-&
account instead of a large number of small=sized individual accounts, borrowers as part of a S-& cut
down e)penses on travel for completing paper work and on the loss of workdays in availing loans. Since
'(('=(", the ;ational ank for 1griculture and !ural .evelopment *;11!.+ has been encouraging
banks to e)tend micro credit loans to S-&s. ,he scheme was then e)tended to !!s and co=operative
banks. 0ore than (# per cent of the groups linked with banks are e)clusive women's groups.
,esearch -";ective*
,o study whether the customers are satisfied with their services among ICICI bank and
SI bank
,o know about the Customer preferences among ICICI and SI bank
,o give Suggestions to improve the services
,eview of !iterature*
,he banking sector in India has made remarkable progress since the economic reforms in '(('.
;ew private sector banks have brought the necessary competition into the industry and
spearheaded the changes towards higher utilization of technology, improved customer service
and innovative products. Customers are now becoming increasingly conscious of their rights and
are demanding more than ever before. ,he recent trends show that most banks are shifting from a
Iproduct=centric modelJ to a Icustomer=centric modelJ as customer satisfaction has become one
of the ma9or determinants of business growth. In this conte)t, prioritization of preferences and
close monitoring of customer satisfaction have become essential for banks. /eeping these in
mind, an attempt has been made in this study to analyze the factors that are essential in
influencing the investment decision of the customers of the public sector banks. For this purpose,
Factor 1nalysis, which is the most appropriate multivariate techni4ue, has been used to identify
the groups of determinants. Factor analysis identifies common dimensions of factors from the
observed variables that link together the seemingly unrelated variables and provides insight into
the underlying structure of the data. Secondly, this study also suggests some measures to
formulate marketing strategies to lure customers towards banks.
2e% Words*
.o"ile Banking : 0obile banking *also known as 0=anking, mbanking, S0S anking
etc.+ is a term used for performing balance checks, account transactions, payments etc.
via a mobile device such as a mobile phone. 0obile banking today *"##7+ is most often
performed via S0S or the 0obile Internet but can also use special programs called
clients downloaded to the mobile device.
Internet Banking : %nline banking *or Internet banking+ allows customers to conduct
financial transactions on a secure website operated by their retail or virtual bank, credit
union or building society.
+ore Banking S%ste# : Core anking is a general term used to describe the services
provided by a group of networked bank branches. ank Customers may access their
funds and other simple transactions from any of the member branch offices.
(t# : 1n automated teller machine *1,0+ is a computerized telecommunications device
that provides the customers of a financial institution with access to financial transactions
in a public space without the need for a human clerk or bank teller. %n most modern
1,0s, the customer is identified by inserting a plastic 1,0 card with a magnetic stripe
or a plastic smartcard with a chip, that contains a uni4ue card number and some security
information, such as an e)piration date or CQC *CQQ+. Security is provided by the
customer entering a personal identification number *>I;+. @sing an 1,0, customers can
access their bank accounts in order to make cash withdrawals *or credit card cash
advances+ and check their account balances as well as purchasing mobile cell phone
prepaid credit. 1,0s are known by various other names including automated banking
machine, money machine, bank machine, cash machine, hole=in=the=wall, cash point,
ancomat *in various countries in :urope and !ussia+, 0ultibanco *after a registered
trade mark, in >ortugal+, and 1ny ,ime 0oney *in India+.
,esearch #ethodolog%
Sa#pling )esign*
&arget Population : ,he target population in this research refers to the bank customers
who are having an account in SI bank and ICICI bank due to the convenience in
collecting the data. ,he respondents can be any gender, any income level, any
occupation and any education level.
Sampling ?nit : ,he sampling units are customers of ICICI bank and SI bank.
Sa#pling .ethod : For this research we use non=probability sampling. Pikmund *'((7+
stated that in non=probability sampling, the probability of any particular member of the
population being chosen is unknown. ,he element in the population does not have any
probability attached to their being chosen as sample sub9ects. Snow ball sampling will be
applied in this research. Snow ball sampling is used to collect the data from the
customers. Snow ball sampling refers to the procedure that involves the selection of
additional respondents based on referrals of initial respondents.
Sa#ple Sie : Sample size depends on the desired precision from the estimate. >recision
is the size of the estimating interval when the problem is one of estimating a population
parameter. ,his research selects 8# respondents as the sample size due to limited of time
by asking them that they are having an account in SI bank and ICICI bank due to the
convenience in collecting the data. ,he respondents can be any gender, any income
level, any occupation and any education level.
Sa#pling Plan : ,he researcher is going to collect the data from the 1,0S and also by
visiting the bank.
Pilot Stud% : 1 pilot study can refer to many types of e)periments, but generally the goal
of study is to replicate the full scale e)periment, but only on a smaller scale. 1 pilot is
often used to test the design of the full=scale e)periment. ,he design can then be ad9usted
in time. ,his can turn out to be valuable5 should anything be missing in the pilot, it can be
added to the e)periment and chances are that the full=scale *and more e)pensive+
e)periment will not have to be re=done.
>alidit%* ,he ability of a scale or a measuring instrument to measure what it is intended
to measure can be termed as the validity of the measurement. Qalidity can be measured
through several methods like face validity, content validity, criterion N related validity
and construct validity. For this comparative study the researcher has taken the face
validity.
'ace >alidit% : Face validity refers to the collective agreement of the e)perts and
researchers on the validity of the measurement scale. ,he researcher has gave the
4uestionnaire to the e)perts in banking field.
,esearch .ethodolog%
Sources of )ata*
,he data is basically primary in nature.
It was obtained from the customers.
)ata +ollection .ethod* %ur communication approach was basically structured
4uestioning, that is personal interview with the aid of printed 4uestionnaires.
)ata (nal%sis* 1ppropriate statistical analysis will be adopted. ,he data will be
tabulated and analyzed.
!i#itations of the Stud%*
,he study is limited to a particular branch of SI and ICICI bank.
Since the time is less the researcher has taken a sample of $# people and it will not reveal
the whole population of a country.
)ata (nal%sis and Interpretation*
,he following information contains the data interpretation of the 4uestionnaires. ,he
respondentLs responses for the 4uestions have been interpreted and a finding has been made
based on the respondents responses.
're$uenc% &a"le for the )e#ographic )etails of the SBI ,espondent4s
=a"le: 1
#ge of the &espondents
>re<uenc3 )ercentage
"3=$3 yrs '" $6.7
$8=23 yrs 3 '8.'
28=33 yrs 3 '8.'
1bove 33 yrs 6 "3.6
=otal 30 100
Interpretation:
From the above table $6.7B respondents are belonging to the age category of "3yrs=$3yrs. 1nd
'8.'B respondents are belonging to the category of $8yrs=23yrs and 28yrs=33yrs. 1nd "3.6B
respondents are belonging to the category of above 33yrs.
=a"le: 2
@ender of the &espondents
Female '3 26.2
0ale '3 26.2
=otal 30 100
Interpretation:
From the above table 26.2B respondents are belonging to the category of female. 1nd the
remaining 26.2B respondents are belonging to the category of male.
=a"le: 3
6ducational Aualification of the &espondents
School $ (.7
@& ( "(.#
>& '2 23."
>rofessional Course $ (.7
0.philM>h. ' $."
=otal 30 100
Interpretation:
From the above table (.7B of respondents are belonging to the category of school and
professional course. 1nd "(.#B of respondents are belonging to the category of @&. 1nd 23."B
of respondents are belonging to the category of >&. 1nd $."B of respondents are belonging to
the category of 0.philM>h..
=a"le:4
Occupation of the &espondent
Salaried >erson "3 6#.8
>rofessionals ' $."
Supervisor ' $."
0anagerial $ '#.#
=otal 30 100
Interpretation:
From the above table 6#.8B of respondents are falling under the category of salaried person.
1nd $."B of respondents are falling under the category of professionals and supervisor. 1nd
'#B of respondents are belonging to the category of managerial.
=a"le: +
Income le4el of the &espondents
!s.3,###=!s.'3,### '7 32.6
!s.'3,##'=!s."3,### 6 "3.6
!s."3,##'=!s.$3,### 2 '".(
1bove !s.23,### ' $."
=otal 30 100
Interpretation:
From the above table 32.6B of respondents are falling under the income range between !s.3,
###=!s.'3, ###. 1nd "3.6B are falling under the income range between !s.'3, ##'=!s."3, ###.
1nd '".(B of respondents are falling under the income range between !s."3, ##'=!s.$3, ###.
1nd $."B of respondents are falling under the income range between 1bove !s.23, ###.
=a"le: ,
&easons to Choose the Ser4ice
:fficient Customer Service '2 23."
,ime Saving 6 "3.6
,ransaction Cost $ (.7
,echnology ' $."
0ore 1,0s 2 '".(
=otal 30 100
Interpretation:
From the above table 23."B of respondents are saying that the reason to choose SI is they are
providing efficient customer service. 1nd "3.6B of respondents are saying that the reason to
choose SI is they are reducing our waiting time. 1nd (.7B of respondents are saying that the
reason to choose SI is ,ransaction costs. 1nd $."B of respondents are saying that the reason to
choose SI is ,echnology. 1nd '".(B of respondents are saying that the reason to choose SI is
they are provided more 1,0 facility.
=a"le: -
=3pe of Ser4ice )refer the Most
1,0 Service '( 8'.$
Internet anking $ (.7
0obile anking $ (.7
Core anking System 3 '8.'
=otal 30 100
Interpretation: From the above table 8'.$B of respondents prefer the 1,0 service. 1nd (.7B
of respondents are preferred the internet banking and mobile banking. 1nd '8.'B of respondents
prefer the core banking system.
>re<uenc3 @raph for the 2emographic 2etails of the SBI &espondentBs
Graph: 1
Graph: 2
Graph: 3
Graph: 4
Graph: 5
Graph: 6
Graph: 7
>re<uenc3 =a"le for the 2emographic 2etails of the ICICI &espondentBs
=a"le: .
#ge of the ICICI &espondents
"3=$3 yrs "( (8.7
1bove 33 yrs ' $.$
=otal 30 100
Interpretation:
From the above table (8.7B of respondents are falling under the age group of "3yrs=$3yrs. 1nd
$.$B of respondents are falling under the group of above 33yrs.
=a"le: /
@ender of the ICICI &espondents
Female '" 2#
0ale '6 8#
=otal 30 100
Interpretation:
From the above table 2#B of respondents are belonging to the female category. 1nd 8#B of
respondents are belonging to the male category.
=a"le: 10
6ducation Le4el of ICICI &espondents
@& " 8.7
>& "' 7#.#
>rofessional 8 "#.#
0.>hilM>h. ' $.$
=otal 30 100
Interpretation: From the above table 8.7B of respondents are belonging to the category of @&.
1nd 7#B of respondents are belonging to the category of >&. 1nd "#B of respondents are
belonging to the category of professionals. 1nd $.$B of respondents are belonging to the
category of 0.>hilM>h...
=a"le 3'11
Occupation of the ICICI &espondents
Salaried >erson "$ 78.7
usinessman $ '#.#
>rofessionals $ '#.#
0anagerial ' $.$
=otal 30 100
Interpretation: From the above table 78.7B of respondents belong to the category of salaried
person. 1nd '#B of respondents are belonging to the category of businessman and professionals.
1nd $.$B of respondents are belonging to the category of managerial.
=a"le: 12
Income Le4el of the ICICI &espondents
!s.3,###=!s.'3,### '8 3$.$
!s.'3,##'=!s."3,### " 8.7
!s."3,##'=!s.$3,### ( $#.#
!s.$3,##'=!s.23,### " 8.7
1bove !s.23,### ' $.$
=otal 30 100
Interpretation:
From the above table 3$.$B of respondents are falling under the income level of !s.3, ###=
!s.'3, ###. 1nd 8.7B of respondents are falling under the income level of !s.'3, ##'=!s."3, ###
and !s.$3, ##'=!s.23, ###. 1nd $#B of respondents are falling under the income level of !s."3,
##'=!s.$3, ###. 1nd $.$B of respondents are falling under the income level of above !s.23,
###.
=a"le: 13
&eason for Choosing ICICI Ser4ices
:fficient Customer Service 6 "8.7
:fficient Complaints -andling 6 "8.7
,ime Saving 2 '$.$
,ransaction Costs " 8.7
,echnology 2 '$.$
!eliable 2 '$.$
=otal 30 100
Interpretation:
From the above table "8.7B of respondents are saying that the reason to choose ICICI is they are
providing efficient customer service and efficient complaint handling. 1nd '$.$B of respondents
are saying that the reason to choose ICICI is they are reducing our waiting time, technology and
reliable. 1nd 8.7B of respondents are saying that the reason to choose ICICI is ,ransaction
costs.
=a"le: 14
=3pe of Ser4ices )refer the Most
1,0 Service '$ 2$.$
Internet anking ( $#.#
0obile anking 2 '$.$
Core anking System 2 '$.$
=otal 30 100
Interpretation:
From the above table 2$.$B of respondents prefer the 1,0 service. 1nd $#B of respondents are
preferred the internet banking. 1nd '$.$B of respondents prefer the core banking system and
mobile banking.
Graph: 8
Graph: 9
Graph: 10
Graph: 11
Graph: 12
Graph: 13
Graph: 14
Conclusion:
Since both the banks are competing e4ually with each other.
ut SI bank is little bit below the line in customer complaints handling when
compared to ICICI bank.
,he ICICI bank is little bit below the line in concentrating on female customers when
to SI bank.
>indings:
Sum %f the respondents to choose the SI bank is because the bank is proving more
1,0 facility to the customers.
0any of the respondents are saying the reason to choose the services of the SI bank is
because they are good in efficient customer service.
,he income level of the respondents who are having an account in SI bank falling under
the income level of !s. 3,### N !s.'3.###.
,he age group of "3yrs N $3yrs respondents mostly is having an account in SI bank.
,he both gender are e4ually having an account in SI bank.
0any of the respondents are not aware of the many services rendered by the SI bank.
,he few are deposit of cash in 1,0, re4uest for che4ue book in 1,0, end of the day
balance in mobile, etc.
Sum %f the respondents to choose the ICICI bank is because the bank is more reliable to
the customers.
0any of the respondents are saying the reason to choose the services of the ICICI bank is
because they are good in efficient customer service and efficient complaint handling.
,he income level of the respondents who are having an account in ICICI bank falling
under the income level of !s. 3,### = !s.'3.###.
,he age group of "3yrs = $3yrs respondents mostly is having an account in ICICI bank.
,he male gender is mostly having an account in ICICI bank.
0any of the respondents are not aware of the many services rendered by the ICICI bank.
,he few are deposit of cash in 1,0, re4uest for che4ue book in 1,0, end of the day
balance in mobile, etc.
&ecommendation:
Since many of the respondents are not aware of their key services. ,he bank has to take
some initiatives.
,he bank can post a list of services that they are rendered to the customers inside the
bank >remises.
,hey can post demo of all these services in their bank website.
,hey can concentrate more on the respondents are falling under the age group "3yrs N
$3yrs.
,he SI bank can concentrate on customer complaints handling.
,he ICICI bank can concentrate on the female gender.
,he bank can also send a post to their customers by informing there services and how to
proceed with that and all details they can mention it in the post.
>O&M O> CO!SOLI2#=62 B#L#!C6 SC66= O> # B#!D #!2 I=S
S?BSI2I#&I6S 6!@#@62 I! >I!#!CI#L #C=I9I=I6S
alance Sheet of \\\\\\\\\\\\\\\\\\\\\\\\ *here enter name of the banking
group+
*###Ls omitted+
Balance Sheet as on .arch BC /@ear5
Schedule #s on 31'3'EE
%current 3ear(
#s on 31'3'
%pre4ious 3ear
+(PI&(! A !I(BI!I&IES
Capital C
!eserves < Surplus <
0inorities Interest <(
.eposits B
orrowings D
Sundry >ayables'
%ther ?iabilities and >rovisions 0
&otal
(SSE&S
Cash and alances with !eserve ank
of India
E
alances with banks and money at call
and short notice
F
Investments G
?oans < 1dvances H
Sundry !eceivables"
Fi)ed 1ssets C=
%ther 1ssets CC
&oodwill on Consolidation$
.ebit alance of >rofit and ?oss 1MC
&otal
Contingent liabilities C<
ills for collection
' ,his head would include payables of the nature of trading items e.g., those arising
from purchasing of securities by a subsidiary carrying on the business of purchase and
sale of investments, etc., to the e)tent not covered by the head '%ther ?iabilities and
>rovisions'. 1 separate schedule may be added to disclose the nature of the various
items included in this head.
" ,his head would include receivables of the nature of trading items, e.g., those arising
from sale of securities by a subsidiary carrying on the business of purchase and sale of
investments, etc., to the e)tent not covered by the head '%ther 1ssets'. 1 separate
schedule may be added to disclose the nature of the various items included in this
head.
$ Ehere there is more than one subsidiary and the aggregation results in &oodwill in
some cases and Capital !eserves in other cases, net effect to be shown in Schedule "
and 1ssets side after giving separates notes.
>O&M O> CO!SOLI2#=62 )&O>I= #!2 LOSS #CCO?!= O> # B#!D #!2 I=S
S?BSI2I#&I6S 6!@#@62 I! >I!#!CI#L #C=I9I=I6S
>rofit and ?oss 1ccount of \\\\\\\\\\\\\\\\\\\\\\\\ *here enter name of the
banking group+
*###Ls omitted+
Profit A !oss (ccount for the %ear ended .arch BC III
Schedule ear ended
31'3'EE
%current 3ear(
ear ended
31'3'EE
%pre4ious
3ear(
I1 Inco#e
Interest and dividend earned'
Share of earnings in 1ssociates
%ther income
'
CB A CD
&otal
II1 E9penditure
Interest e)pended
%perating e)penses
>rovisions and contingencies
C0 A CE
&otal
Consolidated ;et profitM*loss+ for the year
before deducting 0inorities' Interest
#ess: 0inorities' Interest
Consolidated profitM*loss+ for the year
attributable to the group
$!!: rought forward consolidated
profitM*loss+ attributable to the group
III1 (ppropriations
,ransfer to statutory reserves
,ransfer to other reserves
,ransfer to &overnmentM>roposed
dividend
alance carried over to consolidated
balance sheet
&otal
Earnings per Share
' Interest and dividends earned should be disclosed separately.
S+8E)3!E C ? +(PI&(!
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear
$uthorize! %apital
*.... Shares of !s ... each+
&ssue! %apital
Subscribe! %apital
%alle!-up %apital
?ess5 Calls unpaid
1dd5 Forfeited shares
&otal
S+8E)3!E < ? ,ESE,>ES A S3,P!3S C
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
Statutory !eserves
Capital !eserves
Capital !eserve on Consolidation"
Share >remium
%ther !eserves *specify nature+
!evenue and other !eserves
alance in >rofit and ?oss 1ccount
&otal
S+8E)3!E <(-.IN-,I&IES IN&E,ES&
:4uity *] Shares of !s. ] ..each+
] ..B in pre=ac4uisition !eserves <
Surplus
] ..B in post=ac4uisition !eserves <
Surplus$
alance in >rofit and ?oss 1ccount
&otal
'. %pening balances, additions and deductions since the last consolidated balance
sheet, shall be shown under each of the specified heads
". Ehere there is more than one subsidiary aggregation results in &oodwill in some
cases and Capital !eserves in other cases, net effect to be shown in Schedule " or
1ssets side after giving separates notes.
$. .isclose opening balance, additions and closing balance.
S+8E)3!E B ? )EP-SI&S
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
1. I. eman! eposits
*i+ From banks
*ii+ From others
II. Savings Bank eposits
III. "erm eposits
*i+ From banks
*ii+ From others
&otal /I: II and III5
. *i+ .eposits of subsidiaries in India
including foreign offices, if any^
*ii+ .eposits of subsidiaries outside India
including Indian offices, if any^
*iii+ .eposits of >arent
&otal /I: II and II
C. *i+ .eposits of parent in India
*ii+ .eposits of subsidiaries in India
*iii+ ,otal .eposits in India *I Yii+
*iv+ .eposits of parent outside India
*v+ .eposits of subsidiaries outside India
*vi+ ,otal .eposits outside India
&otal /iii J vi5
S+8E)3!E D ? B-,,-WINGS
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. Borrowings in &n!ia
*i+ From the !eserve ank of India
*ii+ From other banks
*iii+ From other institutions and agencies
*iv+ .ebentures
*v+ %ther ?ong=term borrowings *indicate
source of borrowing+
II. Borrowings outsi!e &n!ia
&otal /I A II5
*Secured borrowings included in I < II above N !s.\\\\ from India and !s.\\\ from
outside India+
S+8E)3!E 0 ? -&8E, !I(BI!I&IES (N) P,->ISI-NS
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear
II Subordinated .ebt for ,ier II Capital
II. ills payable
III. Inter=office *Inter=branch+ad9ustments
*net+
a+ >arent
b+ Subsidiaries
IQ. Intra=&roup 1d9ustment *net+
Q. Interest accrued
QI. ,a) ?iabilities
a+ Current ta) liabilities
b+ .eferred ta) liabilities
Q. %thers *including provisions, give
details+
&otal
!ote: =he net de"its of each su"sidiar3 should "e aggregated'
S+8E)3!E E ? +(S8 (N) B(!(N+ES WI&8 ,ESE,>E B(N2 -' IN)I(
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear
I. %ash in han! *including foreign
currency
notes+
II. Balances with 'eserve Bank of &n!ia
*i+ in Current 1ccount
*ii+ in other 1ccounts
&otal /I A II5
S+8E)3!E F ? B(!(N+ES WI&8 B(N2S (N) .-NE@ (&
+(!! A S8-,& N-&I+E
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. &n &n!ia
*i+ alances with banks
*a+in Current accounts
*b+in other .eposit accounts
*ii+ 0oney at call and short notice
*a+ with banks
*b+ with other institutions
&otal /I A II5
II. (utsi!e &n!ia
*i+ in Current accounts
*ii+ in other .eposit accounts
*iii+ 0oney at call and short notice
&otal
Grand &otal /I A II5
S+8E)3!E G ? IN>ES&.EN&S
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. &nvestments in &n!ia in
*i+ &overnment securities
*ii+ %ther approved securities
*iii+ Shares
*iv+ .ebentures and onds
*v+ %thers *to be specified+
&otal
II. &nvestments outsi!e &n!ia in
*i+ &overnment securities *including local
authorities+
*ii+ %ther investments *to be specified+
&otal
Grand &otal /I A II5
III. &ross value of Investments
1ggregate of >rovisions for .epreciation
;et Investment
+lassification of Invest#ents as per ,BI
Guidelines
I. -eld for ,rading
II. -eld to 0aturity
III. 1vailable for Sale
=otal
2etails of in4estments
I. Investments in associates *disclose
goodwillM capital reserves separately as
per 1S "$+
II. %ther investments
=otal
S+8E)3!E H ? !-(NS A ()>(N+ES
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
1. *i+ ills purchased and discounted
*ii+ Cash credits, overdrafts and loans
repayable on demand
*iii+,erm loans
*iv+ ?ease !eceivables
&otal
. *i+ Secured by tangible assets
*ii+ Covered by ankM&overnment
&uarantees
*iii+ @nsecured
&otal
C.I$!vances in &n!ia
*i+ >riority sectors
*ii+ >ublic sector
*iii+ anks
*iv+ %thers
&otal
C.II $!vances outsi!e &n!ia
*i+ .ue from banks
*ii+ .ue from others
*a+ ills purchased and discounted
*b+ Syndicated loans
*c+ %thers
&otal
Grand &otal /+1I1 A +1II5
S+8E)3!E C= ? 'IKE) (SSE&S
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. )remises
1t cost as on $'st 0arch of the preceding
year
1dditions during the year
.eductions during the year
.epreciation to date
I1. >remises under construction
II. (ther *i+e! $ssets *including
furniture
and fi)tures+
1t cost *as on $' 0arch of the preceding
year
II1. ?eased 1ssets
1t cost as on $'st 0arch of the preceding
year
&otal /I: I(:II AII(5
III. Capital=Eork=in progress *?eased
1ssets+ net
provisions
&otal /I: I(: II: II( A III5
S+8E)3!E CC ? -&8E, (SSE&S
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. Inter=office *Inter=branch+ ad9ustments
*net+^
a+ >arent
b+ Subsidiaries
II. Intra=&roup 1d9ustments *net+
III. Interest accrued
IQ.,a) paid in advanceMta) deducted at
source
Q. Stationery and stamps
QI. ;on=banking assets ac4uired in
satisfaction of
claims
QI. >repaid e)penses
QII. .eferred ,a) assets
QIII. %thers
&otal
!ote: F=he net credits of each su"sidiar3 should "e aggregated'
S+8E)3!E C< ? +-N&INGEN& !I(BI!I&IES
#s on 31'3'EE
%current 3ear(
#s on 31'3'EE
%pre4ious 3ear(
I. Claims against the bank not
acknowledged
as debts
II. ?iability for partly paid investments
III. ?iability on account of outstanding
forward e)change contracts
IQ.&uarantees given on behalf of
constituents
*a+In India
*b+%utside India
Q. 1cceptances, endorsements and other
obligations *give details+
QI.%ther items for which the &roup is
contingently liable
&otal
S+8E)3!E CB ? IN&E,ES& (N) )I>I)EN)S E(,NE)
ear ended 31'3'EE
%current 3ear(
ear ended
31'3'EE
%pre4ious 3ear(
I. InterestMdiscount on advancesMbills
II. Interest and dividends on investments
III. Interest on balances with !eserve
ank of India
and other inter=bank funds
IQ.%thers *give details+
&otal
S+8E)3!E CD ? -&8E, IN+-.E
ear ended
31'3'EE
%current 3ear(
ear ended
31'3'EE
%pre4ious 3ear(
I. Commission, e)change and brokerage
II. >rofit on sale of land, buildings and
other assets
?ess5 ?oss on sale of land, buildings and
other assets
III. >rofit on e)change transactions
?ess5 ?oss on e)change transactions
IQ. >rofit on sale of investments*net+
?ess5 ?oss on sale of investments
Q. >rofit on revaluation of investments
?ess5 ?oss on revaluation of investments
QI. a+ ?ease finance income
b+ ?ease management fee
c+ %verdue charges
d+ Interest on lease rent receivables
QII 0iscellaneous income
&otal
S+8E)3!E C0 ? IN&E,ES& EKPEN)E)
ear ended
31'3'EE
%current 3ear(
ear ended
31'3'EE
%pre4ious 3ear(
I. Interest on deposits
II. Interest on !eserve ank of IndiaM
inter=bank borrowings
III. %thers *give details+
&otal
S+8E)3!E CE ? -PE,(&ING EKPENSES
ear ended 31'3'EE
%current 3ear(
ear ended
31'3'EE
%pre4ious 3ear
I. :mployees' costs
II. !ent, ta)es and lighting
III. >rinting and stationery
IQ. 1dvertisement and publicity
Q. .epreciation on bankLs property
a+%ther than ?eased 1ssets
b+?eased 1ssets
QI. .irectorsL fees, allowances and
e)penses
QII. 1uditorsL fees and e)penses
*including branch
auditorsL fees and e)penses+
QIII. ?aw charges
IO. >ostage, telegrams, telephones, etc.
O. !epairs and maintenance
OI. Insurance
OII 1mortization of &oodwill, if any
OIII %ther e)penditure *give details+
&otal
;otes5
'. 1dditional line items, headings and sub=headings should be presented in the
consolidated balance sheet and consolidated profit and loss account and
schedules thereto when re4uired by a statute, 1ccounting Standards or when
such a presentation is necessary to present the true and fair view of the groupLs
financial position and operating results. In the preparation and presentation of
consolidated financial statements 1ccounting Standards issued by the IC1I, to
the e)tent applicable to banks, should be followed.
". In case of 9oint ventures, separate disclosures of line items as per proportionate
consolidation should be made both in the consolidated balance sheet and
consolidated profit and loss account.
+onclusions
,he face of banking is changing rapidly. Competition is going to be tough and with
financial liberalization under the E,%, banks in India will have to benchmark themselves
against the best in the world. For a strong and resilient banking and financial system, therefore,
banks need to go beyond peripheral issues and tackle significant issues like improvements in
profitability, efficiency and technology, while achieving economies of scale through
consolidation and e)ploring available cost=effective solutions. ,hese are some of the issues that
need to be addressed if banks are to succeed, not 9ust survive, in the changing milieu. ,he
banking system in India is significantly different from that of other 1sian nations because of the
countryLs uni4ue geographic, social, and economic characteristics. India has a large population
and land size, a diverse culture, and e)treme disparities in income, which are marked among its
regions. ,he countryLs economic policy framework combines socialistic and capitalistic features
with a heavy bias towards public sector investment. India has followed the path of growth=led
e)ports rather than the Ie)ported growthJ of other 1sian economies, with emphasis on self=
reliance through import substitution.
BIB!I-G,(P8@
Books
Indian Institute of anking
!esearch 0ethodology
Statistical 1nalysis N S.>. &upta
1nnual !eport of the !eserve ank of India for the Hear
!eport on ,rend and >rogress of anking in India
!eserve ank of India 0aster Circulars

Ge"sites:
www.rbi.com
www.iba.org.in
www.wikipedia.com
www.googlesearchengine.com
www.scribd.com
www.finance.indiamart.com
www.investopedia.com
Luestionnaire
)ersonal details
'. ;ame5
". 1ge5 a+ _ "3yrs= $3 yrs b+ _ $8 yrs = 23yrs c+ _ 28 N 33 yrs d+ _ above 33 yrs
$. &ender5 a+ 0ale _ b+ Female _
2. :ducational Wualification5 a+ Illiterate _ b+ School _ c+ @& _ d+ >& _
e+ >rofessional Course _ f+ %thers _
3. %ccupation5 a+ -ouse wife _ b+ Students _ c+ Salaried person _
d+ usiness man _ e+ >rofessionals _ f+ Supervisor _
g+ 0anagerial _ h+ pensioner _
8. Income level5
a+ !s.3,### N !s.'3,### b+ !s.'3,##'=!s."3,###
c+ !s."3,##'= !s.$3,### d+ !s.$3,##'=!s.23,###
e+ 1bove !s. 23,###
7. In which bank do you have an accountR
a+ ICICI bank _ b+ SI bank _
6. Ehat is the reason to choose the services of the bankR
a+ :fficient customer service _ b+ efficient complaints handling _
c+ ,ime saving _ d+ transaction costs _ e+ technology
f+ %thers \\\\\\\\\ please specify
(. Ehat type of services do you prefer the mostR
a+ 1,0 service b+ Internet anking c+ 0obile anking
d+ Core banking system e+ %thers \\\\\\\\\\\\\ please specify
Customer ser4ice <uestionnaire
>lease use *M+ mark to give your responses for the following 4uestions
1Sstrongly disagree, 2S disagree, 3S neutral, 4S agree, +S strongly agree
&eno 1 2 3 4 +
#=M Ser4ice
1 I am facing problems in withdrawing cash from 1,0.
2 I am facing problems like insufficient cash in 1,0.
3 1,0 services are useful for me to deposit cash and che4ues
4 1,0 services are useful for me to re4uest for che4ue book
+ 1,0 services are useful for me to get the en4uiry statement
of my account.
Internet Banking
1 Internet banking helps me to transfer funds from the bank to
the personalized transactions
2 Internet banking saves me time for the banking transactions
3 Internet banking helps me in bill payments
4 Internet banking secures the money transactions
+ Internet banking helps in online trading
Mo"ile "anking
1 0obile banking is useful for me to know the end of day
account balance.
2 0obile banking is useful for me to know the che4ue details
3 0obile banking is useful for me to know the .ebitMcredit
above certain limit in my account.
4 0obile banking is useful for me to Stop inwardMoutward
che4ues.
+ 0obile banking is useful for my bill payments
, 0obile banking helps me to know about the debitMcredit
details
- 0obile banking provides me a support for ticketing,
recharging mobiles etc.
Core Banking s3stem
1 Core banking system helps me to transfer funds from
different branches
2 Core banking system makes me convenient to know about
the deposit details
3 Core banking system helps me to protect my personal
information
4 Core banking system helps me for the 1,0 service
transactions
+ Core banking system helps me for the internet banking
transactions
1+0 Lala Lajpatrai Institute Of Management

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Banking Sector In India

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