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With immense pleasure I would like to present this report on
I would like to thank Welingkar Institute of Management for
providing me opportunity to present this report.
My special thanks to ___________ (Project Guide) for her invaluable
guidance, cooperation and for taking time out her busy schedule to
help me.

Acknowledgements are due to my parents, friend and all those who

help me directly or indirect in the successful completion of project.



This is to certify that the Project work titled INSRUMENTS OF
FOREIGN TRADE AN OVERVIEW is a confide work carried out
by _________ (Roll No. ______ ) a candidate for Post Graduate
Diploma Examination of the Welingkar Institution of Management
under my guidance and direction.


DATE : 10/04/2013

: Mumbai






History of Merchant & Commercial


Types of Merchant Bank


Functions of Commercial Bank


Need & Importance



Objectives of Commercial &


Merchant Bank

Obligations & Responsibilities of


Merchant & Commercial Banks


Leading Merchant & Commercial

Banks in India



Difference between Merchant &


commercial Banks




Bibliography & Webliography


Merchant banking is concerned with mobilizing savings of people
and directing the funds to business enterprise.
A Merchant Bank can be generally described as a financial services company with a private
equity investment arm offering investment banking and ancillary services as well. Because a
merchant bank acts not only as an advisor and broker but also as a principal, a merchant bank
has a longer term approach than a typical investment bank and is highly concerned with the
viability of each investment opportunity and providing the right advice for a strong

partnership with each client company.

In banking, a merchant bank is a traditional term for an Investment Bank. It can also be used
to describe the private equity activities of banking. This article is about the history of banking
as developed by merchants, from the Middle Ages onwards.
Amidst the swift changes sweeping the financial world, Merchant Banking has emerged as an
indispensable financial advisory package. Merchant banking is a service-oriented function
that transfers capital from those who own to those who can use it. They try to identify the
needs of the investors & corporate sector & advice entrepreneurs what to do to be successful.
The merchant banking has been defined as to what a merchant banker does.

A Merchant Bank is a British term for a bank providing various financial services such as
accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign
exchange, underwriting new issues, and portfolio management.

A merchant Banker has been defined by Securities Exchange Board Of India (Merchant
Banker) rules, 1992, as Any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or subscribing to securities or
acting as manager, consultant, advisor or rendering corporate advisory services in relation
to such issue management.
A British term for a bank that specializes not in lending out its own funds, but in providing
various financial services such as accepting bills arising out of trade, underwriting new
issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio
management, etc.
An investment bank that commits its own funds by taking a creditor position or equity
interest in another firm.
An activity that includes corporate finance activities, such as advice on complex financings,
merger and acquisition advice (international or domestic), and at times direct equity
investments in corporations by the banks.

A commercial bank is a type of bank that provides services such as accepting deposits,
making business loans, and offering basic investment products.

Commercial bank can also refer to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses, as opposed to individual members
of the public (retail banking).
In the US the term commercial bank was often used to distinguish it from an investment bank
due to differences in bank regulation. After the great depression, through the GlassSteagall
Act, the U.S. Congress required that commercial banks only engage in banking activities,
whereas investment banks were limited to capital markets activities. This separation was
mostly repealed in the 1990s.

A financial institution that provides services, such as accepting deposits, giving business
loans and auto loans, mortgage lending, and basic investment products like savings accounts
and certificates of deposit. The traditional commercial bank is a brick and mortar institution
with tellers, safe deposit boxes, vaults and ATMs. However, some commercial banks do not
have any physical branches and require consumers to complete all transactions by phone or
Internet. In exchange, they generally pay higher interest rates on investments and deposits,
and charge lower fees.


In late 17th and early 18th century Europe, the largest companies of the world was merchant

adventurers. Supported by wealthy groups of people and a network of overseas trading posts,
the collected large amounts of money to finance trade across parts of the world. For example,
The East India Trading Company secured a Royal Warrant from England, providing the firm
with official rights to lucrative trading activities in India. This company was the forerunner in
developing the crown jewel of the English Empire. The English colony was started by what
we would today call merchant bankers, because of the firm's involvement in financing,
negotiating, and implementing trade transactions. The colonies of other European countries
were started in the same manner. For example, the Dutch merchant adventurers were active in
what are now Indonesia; the French and Portuguese acted similarly in their respective
colonies. The American colonies also represent the product of merchant banking, as
evidenced by the activities of the famous Hudson Bay Company. One does not typically look
at these countries' economic development as having been fueled by merchant bank
adventurers. However, the colonies and their progress stem from the business of merchant
banks, according to today's accepted sense of the word. Merchant banks, now so called, are in
fact the original "banks". These were invented in the middle Ages by Italian grain merchants.
As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains
cereal crops many of the displaced Jews who had fled persecution after 613 entered the trade.
They brought with them to the grain trade ancient practices that had grown to normalcy in the
middle and Far East, along the Silk Road, for the finance of long distance goods trades.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of
Lombardy, alongside the local traders, and set up their benches to trade in crops. They had
one great advantage over the locals.
Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand,
could lend to farmers against crops in the field, a high-risk loan at what would have been
considered usurious rates by the Church, but did not bind the Jews. In this way they could
secure the grain sale rights against the eventual harvest. They then began to advance against
the delivery of grain shipped to distant ports. In both cases they made their profit from the
present discount against the future price. This two-handed trade was time consuming and
soon there arose a class of merchants, who were trading grain debt instead of grain.


The Commercial Bank of India, also known as Exchange Bank was a bank which was
established in Bombay Presidency (now Mumbai), in 1845 of the British Raj period. The
bank failed in the crash of 1866, after successfully operating for 20 years. The bank had eight
branches, exclusive of the head office at Bombay, viz: London, Calcutta, Hong Kong,
Foochow, Shangai, Hankow, Yokohama and Singapore, with an agency for the purchase of
bullion at San Francisco. Commercial Bank of India then was winded up as directed by the
Master of the Rolls, under the corresponding section of the Companies Act of England, where
the company was registered under the Indian law and was not registered in England, but was
carrying on business in England


Traditional Merchant Banking
Merchant Banking, as the term has evolved in Europe from the 18th century to today,
pertained to an individual or a banking house whose primary function was to facilitate the
business process between a product and the financial requirements for its development.
Merchant banking services span from the earliest negotiations from a transaction to its actual
consummation between buyer and seller.
The merchant banker acted as a capital sources whose primary activity was directed towards
a commodity trader/cargo owner who was involved in the buying, selling, and shipping of
goods. The role of the merchant banker, who had the expertise to understand a particular
transaction, was to arrange the necessary capital and ensure that the transaction would
ultimately produce "collectable" profits.

Modern Merchant Banking

During the 20th century, however, European merchant banks expanded their services. They
became increasingly involved in the actual running of the business for which the transaction
was conducted. Today, merchant banks actually own and run businesses for their own
account, and that of others.
Since the 18th century, the term merchant banker has, therefore, been considerably broadened
to include a composite of modern day skills. These skills include those inherent in an
entrepreneur, a management advisor, a commercial and/or investment banker plus that of a
transaction broker. Today a merchant banker is who has the ability to merchandise -- that is,
creates or expands a need -- and fulfill capital requirements. The modern European merchant
bank, in many ways, reflects the early activities and breadth of services of the colonial
trading companies. Most companies that come to a U.S. merchant bank are looking to
increase their financial stability or satisfy a particular, immediate capital need.

Functions of Merchant Bankers:

Consulting advice on going public and international business.

Advice and help in taking your company public. If they are unwilling to supply
Investment Banking bridge loans, they have a low cost strategy for taking your
company public.
They do PIPE (Private Investment in Public Equities) financings.
They can advise or help with a companys M&A strategy.
They are essential advisors for companies seeking to become multinational


The commercial banks serve as the king pin of the financial system of the country.
They render many valuable services. The important functions of the Commercial
banks can be explained with the help of the following chart.

The primary functions of the commercial banks include the following:

A. Acceptance of Deposits
1. Time Deposits:
These are deposits repayable after a certain fixed period. These deposits are not withdrawn able by cheque,
draft or by other means. It includes the following.

(a) Fixed Deposits:

The deposits can be withdrawn only after expiry of certain period say 3 years, 5 years or 10 years. The
banker allows a higher rate of interest depending upon the amount and period of time. Previously the rates
of interest payable on fixed deposits were determined by Reserve Bank.
Presently banks are permitted to offer interest as determined by each bank. However, banks are not
permitted to offer different interest rates to different customers for deposits of same maturity period, except
in the case of deposits of Rs. 15 lakhs and above.
These days the banks accept deposits even for 15 days or one month etc. In times of urgent need for
money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. Depositors


can also avail of loans against Fixed Deposits. The Fixed Deposit Receipt cannot be transferred to other

(b) Recurring Deposits:

In recurring deposit, the customer opens an account and deposit a certain sum of money every
month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along
with interest is paid to the customer. It is very helpful to the middle and poor sections of the
people. The interest paid on such deposits is generally on cumulative basis. This deposit
system is a useful mechanism for regular savers of money.
(c) Cash Certificates:
Cash certificates are issued to the public for a longer period of time. It attracts the people
because its maturity value is in multiples of the sum invested. It is an attractive and high
yielding investment for those who can keep the funds for a long time.
It is a very useful account for meeting future financial requirements at the occasion of
marriage, education of children etc. Cash certificates are generally issued at discount to face
value. It means a cash certificate of Rs. 1, 00,000 payable after 10 years can be purchased
now, say for Rs. 20,000.

2. Demand Deposits:
These are the deposits which may be withdrawn by the depositor at any time without
previous notice. It is withdraw able by cheque/draft. It includes the following:
(a) Savings Deposits:
The savings deposit promotes thrift among people. The savings deposits can only be held by
individuals and non-profit institutions. The rate of interest paid on savings deposits is lower
than that of time deposits. The savings account holder gets the advantage of liquidity (as in
current a/c) and small income in the form of interests.
But there are some restrictions on withdrawals. Corporate bodies and business firms are not
allowed to open SB Accounts. Presently interest on SB Accounts is determined by RBI. It is
4.5 per cent per annum. Co-operative banks are allowed to pay an extra 0.5 per cent on its
savings bank deposits.
(b) Current Account Deposits:
These accounts are maintained by the people who need to have a liquid balance. Current
account offers high liquidity. No interest is paid on current deposits and there are no
restrictions on withdrawals from the current account.
These accounts are generally in the case of business firms, institutions and co-operative
bodies. Nowadays, banks are designing and offering various investment schemes for deposit
of money. These schemes vary from bank to bank.
It may be stated that the banks are currently working out with different innovative schemes
for deposits. Such deposit accounts offer better interest rate and at the same time withdraw

able facility also. These schemes are mostly offered by foreign banks. In USA, Current
Accounts are known as 'Checking Accounts' as a cheque is equivalent to check in America.

B. Advancing of Loans
The commercial banks provide loans and advances in various forms. They are given below:
1. Overdraft:
This facility is given to holders of current accounts only. This is an arrangement with the
bankers thereby the customer is allowed to draw money over and above the balance in his/her
account. This facility of overdrawing his account is generally pre-arranged with the bank up
to a certain limit.
It is a short-term temporary fund facility from bank and the bank will charge interest over the
amount overdrawn. This facility is generally available to business firms and companies.
2. Cash Credit:
Cash credit is a form of working capital credit given to the business firms. Under this
arrangement, the customer opens an account and the sanctioned amount is credited with that
account. The customer can operate that account within the sanctioned limit as and when
It is made against security of goods, personal security etc. On the basis of operation, the
period of credit facility may be extended further. One advantage under this method is that
bank charges interest only on the amount utilized and not on total amount sanctioned or
credited to the account.
Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty
on money supply. Hence this method of lending is slowly phased out from banks and
replaced by loan accounts. Cash credit system is not in use in developed countries.
3. Discounting of Bills:
Discounting of Bills may be another form of bank credit. The bank may purchase inland and
foreign bills before these are due for payment by the drawer debtors, at discounted values,
i.e., values a little lower than the face values.
The Banker's discount is generally the interest on the full amount for the unexpired period of
the bill. The banks reserve the right of debiting the accounts of the customers in case the bills
are ultimately not paid, i.e., dishonoured.
The bill passes to the Banker after endorsement. Discounting of bills by banks provide
immediate finance to sellers of goods. This helps them to carry on their business. Banks can
discount only genuine commercial bills i.e., those drawn against sale of goods on Credit.
Banks will not discount Accommodation Bills.
4. Loans and Advances:


It includes both demand and term loans, direct loans and advances given to all type of
customers mainly to businessmen and investors against personal security or goods of
movable or immovable in nature. The loan amount is paid in cash or by credit to customer
account which the customer can draw at any time.
The interest is charged for the full amount whether he withdraws the money from his account
or not. Short-term loans are granted to meet the working capital requirements where as longterm loans are granted to meet capital expenditure.
Previously interest on loan was also regulated by RBI. Currently, banks can determine the rate
themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate

Classification of Loans and Advances

Loans and advances given by bankers can be classified broadly into the following categories:
(i) Advances which are given on the personal security of the debtor, and for which no tangible
or collateral security is taken; this type of advance is given either when the amount of the
advance is very small, or when the borrower is known to the Banker and the Banker has
complete confidence in him (Clean Advance).
(ii) Advances which are covered by tangible or collateral security. In this section of the study
we are concerned with this type of advance and with different types of securities which a
Banker may accept for such advances (Secured Advance).
(iii) Advances which are given against the personal security of the debtor but for which the
Banker also holds in addition the guarantee of one or more sureties. This type of advance is
often given by Banker to persons who are not known to them but whose surety is known to
the Banker. Bankers also often take the personal guarantee of the Directors of a company to
whom they agree to advance a clean or unsecured loan.
(iv) Loans are also given against the security of Fixed Deposit receipts.
5. Housing Finance:
Nowadays the commercial banks are competing among themselves in providing housing
finance facilities to their customers. It is mainly to increase the housing facilities in the
country. State Bank of India, Indian Bank, Canara Bank, Punjab National Bank, has formed
housing subsidiaries to provide housing finance.
The other banks are also providing housing finances to the public. Government of India also
encourages banks to provide adequate housing finance.
Borrowers of housing finance get tax exemption benefits on interest paid. Further housing
finance up to Rs. 5 lakh is treated as priority sector advances for banks. The limit has been
raised to Rs. 10 lakhs per borrower in cities.
6. Educational Loan Scheme:
The Reserve Bank of India, from August, 1999 introduced a new Educational Loan Scheme
for students of full time graduate/post-graduate professional courses in private professional

Under the scheme all public sector banks have been directed to provide educational loan up
to Rs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than
12 per cent per annum. This loan is on clean basis i.e., without calling for security.
This loan is available only for students whose annual family income does not exceed Rs. 1,
00,000. The loan has to be repaid together with interest within five years from the date of
completion of the course. Studies in respect of the following subjects/areas are covered under
the scheme.
(a) Medical and dental course.
(b) Engineering course.
(c) Chemical Technology.

(d) Management courses like MBA.

(e) Law studies.
(f) Computer Science and Applications.
This apart, some of the banks have other educational loan schemes against security etc., one
can check up the details with the banks.
7. Loans against Shares/Securities:
Commercial banks provide loans against the security of shares/debentures of reputed
companies. Loans are usually given only up to 50% value (Market Value) of the shares
subject to a maximum amount permissible as per RBI directives. Presently one can obtain a
loan up to Rs.10 lakhs against the physical shares and up to Rs. 20 lakhs against
dematerialized shares.
8. Loans against Savings Certificates:
Banks are also providing loans up to certain value of savings certificates like National
Savings Certificate, Fixed Deposit Receipt, Indira Vikas Patra, etc. The loan may be obtained
for personal or business purposes.
9. Consumer Loans and Advances:
One of the important areas for bank financing in recent years is towards purchase of
consumer durables like TV sets, Washing Machines, Micro Oven, etc. Banks also provide
liberal Car finance.
These days banks are competing with one another to lend money for these purposes as default
of payment is not high in these areas as the borrowers are usually salaried persons having
regular income? Further, bank's interest rate is also higher. Hence, banks improve their profit
through such profitable loans.
10. Securitization of Loans:
Banks are recently trying to securities a part of their part of loan portfolio and sell it to
another investor. Under this method, banks will convert their business loans into a security or

a document and sell it to some Investment or Fund Manager for cash to enhance their
liquidity position.
It is a process of transferring credit risk from the banker to the buyer of securitized loans. It
involves a cost to the banker but it helps the bank to ensure proper recovery of loan.
Accordingly, securitization is the process of changing an illiquid asset into a liquid asset.
11. Others:
Commercial banks provide other types of advances such as venture capital advances, jewel
loans, etc.
1. Effective October 18, 1994 banks were free to determine their own prime lending rates (PLRs) for
credit limit over Rs. 2 lakh. Data relate to public sector banks.

2. The stipulation of minimum maturity period of term deposits was reduced from 30 days to
15 days, effective April 29, 1998. Data relate to public sector banks.
3. The change in the Bank Rate was made effective from the close of business of respective
dates of change except April 29, 1998.
4. Effective April 29, 1998.
C. Credit Creation
Credit creation is one of the primary functions of commercial banks. When a bank sanctions a
loan to the customer, it does not give cash to him. But, a deposit account is opened in his
name and the amount is credited to his account. He can withdraw the money whenever he
Thus, whenever a bank sanctions a loan it creates a deposit. In this way the bank increases the
money supply of the economy. Such functions are known as credit creation.

The secondary functions of the banks consist of agency functions and general utility
A. Agency Functions
Agency functions include the following:
(i) Collection of cheques, dividends, and interests:
As an agent the bank collects cheques, drafts, promissory notes, interest, dividends etc., on
behalf of its customers and credit the amounts to their accounts.
Customers may furnish their bank details to corporate where investment is made in shares,
debentures, etc. As and when dividend, interest, is due, the companies directly send the
warrants/cheques to the bank for credit to customer account.


(ii) Payment of rent, insurance premiums:

The bank makes the payments such as rent, insurance premiums, subscriptions, on standing
instructions until further notice. Till the order is revoked, the bank will continue to make such
payments regularly by debiting the customer's account.
(iii) Dealing in foreign exchange:
As an agent the commercial banks purchase and sell foreign exchange as well for customers
as per RBI Exchange Control Regulations.
(iv) Purchase and sale of securities:
Commercial banks undertake the purchase and sale of different securities such as shares,
debentures, bonds etc., on behalf of their customers. They run a separate 'Portfolio Management
Scheme' for their big customers.
(v) Act as trustee, executor, attorney, etc:
The banks act as executors of Will, trustees and attorneys. It is safe to appoint a bank as a trustee
than to appoint an individual. Acting as attorneys of their customers, they receive payments and
sign transfer deeds of the properties of their customers.
(vi) Act as correspondent:
The commercial banks act as a correspondent of their customers. Small banks even get travel
tickets, book vehicles; receive letters etc. on behalf of the customers.
(vii) Preparations of Income-Tax returns:
They prepare income-tax returns and provide advices on tax matters for their customers. For this
purpose, they employ tax experts and make their services, available to their customers.
B. General Utility Services
The General utility services include the following:
(i) Safety Locker facility:
Safekeeping of important documents, valuables like jewels are one of the oldest services provided
by commercial banks. 'Lockers' are small receptacles which are fitted in steel racks and kept
inside strong rooms known as vaults. These lockers are available on half-yearly or annual rental
The bank merely provides lockers and the key but the valuables are always under the control of
its users. Any customer cannot have access to vault.
Only customers of safety lockers after entering into a register his name account number and time
can enter into the vault. Because the vault is holding important valuables of customers in lockers,
it is also known as 'Strong Room'.
(ii) Payment Mechanism or Money Transfer:
Transfer of funds is one of the important functions performed by commercial banks. Cheques and
credit cards are two important payment mechanisms through banks. Despite an increase in
financial transactions, banks are managing the transfer of funds process very efficiently.


Cheques are also cleared through the banking system. Correspondent banking is another method
of transferring funds over long distance, usually from one country to another. Banks, these days
employ computers to speed up money transfer and to reduce cost of transferring funds.
Electronic Transfer of funds is also known as 'Cheque less banking' where funds are transferred
through computers and sophisticated electronic system by using code words. They offer Mail
Transfer, Telegraphic Transfer (TT) facility also.
(iii) Travellers cheques:
Travellers Cheques are used by domestic travellers as well as by international travellers. However
the use of travellers cheques is more common by international travellers because of their safety
and convenience. These can be also termed as a modified form of travellers letter of credit.
A bank issuing travellers cheques usually have banking arrangement with many of the foreign
banks abroad, known as correspondent banks. The purchaser of travellers cheques can encase
the cheques from all the overseas banks with whom the issuing bank has such an arrangement.
Thus travellers cheques are not drawn on specific bank abroad. The cheques are issued in foreign
currency and in convenient denominations of ten, twenty, fifty, one hundred dollar, etc. The
signature of the buyer/traveler is written on the face of the cheques at the time of their purchase.
The cheques also provide blank space for the signature of the traveller to be signed at the time of
encashment of each cheque. A traveler has to sign in the blank space at the time of drawing
money and in the presence of the paying banker.
The paying banker will pay the money only when the signature of the traveler tallies with the
signature already available on the cheque.
A traveler should never sign the cheque except in the presence of paying banker and only when
the traveler desires to encash the cheque. Otherwise it may be misused. The cheques are also
accepted by hotels, restaurants, shops, airlines companies for respectable persons.
Encashment of a traveler cheque abroad is tantamount to a foreign exchange transaction as it
involves conversion of domestic currency into a foreign currency.
When a traveller cheque is lost or stolen, the buyer of the cheques has to give a notice to the
issuing bank so that stop order can be issued against such lost/stolen cheques to the banks where
they are permitted to be encased.
It is also difficult to the finder of the cheque to draw cash against it since the encasher has to sign
the cheque in the presence of the paying banker. Unused travellers cheques can be surrendered to
the issuing bank and balance of cash obtained.
The issuing bank levies certain commission depending upon the number and value of travellers
cheques issued.

(iv) Circular Notes or Circular Letters of Credit:

Under Circular Letters of Credit, the customer/traveller negotiates the drafts with any of the
various branches to which they are addressed. Thus the traveller can obtain funds from many of
the branches of banks instead only from a particular branch. Circular Letters of Credit are
therefore a more useful method for obtaining funds while travelling to many countries.
It may be noted that travellers letter of credit are usually paid for in advance. In other words, the
traveller first makes payments to the issuing bank before obtaining the Circular Notes.


(v) Issue "Travellers Cheques":

Banks issue travellers cheques to help carry money safely while travelling within India or abroad.
Thus, the customers can travel without fear, theft or loss of money.
(vi) Letters of Credit:
Letter of Credit is a payment document provided by the buyer's banker in favour of seller. This
document guarantees payment to the seller upon production of document mentioned in the
Letter of Credit evidencing dispatch of goods to the buyer.
The Letter of Credit is an assurance of payment upon fulfilling conditions mentioned in the Letter
of Credit. The letter of credit is an important method of payment in international trade. There are
primarily 4 parties to a letter of credit.
The buyer or importer, the bank which issues the letter of credit, known as opening bank, the
person in whose favour the letter of credit is issued or opened (The seller or exporter, known as
'Beneficiary of Letter of Credit'), and the credit receiving/advising bank.
The Letter of Credit is generally advised/sent through the seller's bank, known as Negotiating or
Advising bank. This is done because the conditions mentioned in the Letter of Credit are, in the
first instance; have to be verified by the Negotiating Bank. It is mostly used in international trade.
(vii) Acting as Referees:
The banks act as referees and supply information about the business transactions and financial
standing of their customers on enquiries made by third parties. This is done on the acceptance of
the customers and help to increase the business activity in general.
(viii) Provides Trade Information:
The commercial banks collect information on business and financial conditions etc., and make it
available to their customers to help plan their strategy. Trade information service is very useful
for those customers going for cross-border business. It will help traders to know the exact
business conditions, payment rules and buyers' financial status in other countries.
(ix) ATM facilities:
The banks today have ATM facilities. Under this system the customers can withdraw their money
easily and quickly and 24 hours a day. This is also known as 'Any Time Money'. Customers under
this system can withdraw funds i.e., currency notes with a help of certain magnetic card issued by
the bank and similarly deposit cash/cheque for credit to account.
(x) Credit cards:
Banks have introduced credit card system. Credit cards enable a customer to purchase goods and
services from certain specified retail and service establishments up to a limit without making
immediate payment. In other words, purchases can be made on credit basis on the strength of the
credit card.
The establishments like Hotels, Shops, Airline Companies, Railways etc., which sell the goods or
services on credit forward a monthly or fortnightly statements to the bank.
The amount is paid to these establishments by the bank. The bank subsequently collects the dues
from the customers by debit to their accounts. Usually, the bank receives certain service charges
for every credit card issued. Visa Card, BOB card are some examples of credit cards.
(xi) Gift Cheques:


The commercial banks offer Gift cheque facilities to the general public. These cheques received a
wider acceptance in India. Under this system by paying equivalent amount one can buy gift
cheque for presentation on occasions like Wedding, Birthday.
(xii) Accepting Bills:
On behalf of their customers, the banks accept bills drawn by third parties on its customers. This
resembles the letter of credit. While banks accept bills, they provide a better security for payment
to seller of goods or drawer of bills.
(xiii) Merchant Banking:
The commercial banks provide valuable services through their merchant banking divisions or
through their subsidiaries to the traders. This is the function of underwriting of securities. They
underwrite a portion of the Public issue of shares, Debentures and Bonds of Joint Stock
Such underwriting ensures the expected minimum subscription and also convey to the investing
public about the quality of the company issuing the securities. Currently, this type of services can
be provided only by separate subsidiaries, known as Merchant Bankers as per SEBI regulations.
(xiv) Advice on Financial Matters:
The commercial banks also give advice to their customers on financial matters particularly on
investment decisions such as expansion, diversification, new ventures, rising of funds etc.
(xv) Factoring Service:
Today the commercial banks provide factoring service to their customers. It is very much helpful
in the development of trade and industry as immediate cash flow and administration of debtors'
accounts are taken care of by factors. This service is again provided only by a separate subsidiary
as per RBI regulations.
Balance sheet is a statement of assets and liabilities on a given date. In India, banks have to
publish their balance sheets according to the preformed i.e., 'Form A' given in the III schedule of
the Banking Regulation Act, 1949. The study of the balance sheet along with its profit and loss
account reveals its financial soundness.
A customer has to carefully study these statements to choose his banks. The combined balance
sheet of all banks in the country reveals certain economic trends.

Need & Importance of Merchant Banking:

Important reason for the growth of merchant banking has been developmental activity
throughout the country, exerting excess demand on the sources of funds for ever expanding
industry and trade, thus, leaving a widening gap under bridged between the supply and
demand of inventible funds. All Indian financial institutions and experienced resources
constraint to meet the ever increasing demands for funds from the corporate sector
In the circumstances corporate sector had the only alternative to avail of the capital market
services for meeting their long-term financial requirements through capital issues of equity

and debentures. With the growing demand for funds there was pressure on capital market that
enthused the commercial banks, share brokers and financial consultant firms to enter into the
field of merchant banking and share the growing capital markets. With the result, all the
commercial banks in nationalized and public sector as well as in private sector including the
foreign banks in India have opened their merchant banking windows and are competing in
this field. There has been a mushroom growth of financial consultancy firms and broker firms
doing advisory functions as well as managing public issues in syndication with other
merchant bankers.
Notwithstanding the above facts, the need of merchant banking institutions is felt in the wake
of huge public savings lying still untapped. Merchant banks can play highly significant role
in mobilizing funds of savers to investible channels assuring promising return on investments
and thus can help in meeting the widening demand for investible funds for economic activity.
With the growth of merchant banking profession corporate enterprises in both public and
private sectors would be able to raise required amount of funds annually from the capital
market to meet the growing requirements for funds for establishing new enterprises,
Expansion/modernization/diversification of the existing enterprises. This reinforces the need
for a vigorous role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital market for the
corporate sector for financing their projects. This is evidenced from the increasing amount
raised form the capital market by the corporate enterprises year after year. In view of
multitude of enactments, rules and regulations, guidelines and offshoot press release
instructions brought out by the government from time to time imposing statutory obligations
upon the corporate sector to comply with all those requirements prescribed therein, the need
of skilled agency existed which could provide counseling in these matters in a package form.
Merchant bankers, with their skills, updated information and knowledge, provide this service
to the corporate units and advise them on such requirements to be complied with for raising
funds from the capital market under different enactments viz. Companies Act, Income-tax
Act, Foreign Exchange Regulation Act, Securities Contracts (Regulation) Act and various
other corporate laws and regulations. Merchant bankers advise the investors of the incentives
available in the form of tax reliefs, other statutory relaxations, good return on investment and
capital appreciation in such investment to motivate them to invest their savings in securities
of the corporate sector.

Need & Importance of Commercial banking:

Banks have become an essential part of economic life in every field. The development of agriculture
and industry are not possible without banks. Modern trade also cannot be thought of without
commercial banks.
Economic activities in the fields of consumption, production, distribution and other branches of
economics cannot be carried on properly without banks. Government also cannot effectively use
various monetary and fiscal measures without banks for the accomplishment of various socioeconomic objectives.

Therefore, the statement of Wicksell seems to be perfectly appropriate when he says that bank is the
heart and central point of modern exchange economy. The significance of banks becomes clear
looking at the following points.
1. Banking and Capital Formation:
Capital formation is the basic factor for economic development. Capital formation means creation of
physical assets like machines and buildings which increase productive capacity of a country. For
capital formation savings are required which are largely mobilised by commercial banks.
2. Banking and Investment:
The pattern of investment and its quantum that are carried on depend to a large extent on the banking
system. An entrepreneur may wish to introduce innovations and this affects economic development
positively. Bank credit enables entrepreneurs to innovate and invest, and thus promote economic
3. Banking and Industry:
Banks are helping industries by providing them credit for establishing new units and updating and
expanding the old units.
4. Banking and Agriculture:
Banks are helping farmers to develop agriculture for providing them long term finance for buying
tractors and installing tube-wells.
5. Banking and Trade:
Banks are helping trade by providing short-term and long-term finance.

The Growth of Merchant Banking in India

In India Merchant Banking activities started from the year 1967, following the footsteps of
similar activities in UK & USA. Currently Merchant Banking activity has mushroomed in the
Indian capital market with both public & private sector settings up their respective merchant
Banking divisions. Currently, the total no. of merchant bankers in India is approx. 1450 with
more than 930 registered with SEBI. The SEBI authorized Merchant Bankers Include
merchant Banking divisions of All India Financial Institutions, nationalized & foreign banks,
subsidies of the commercial banks, private merchant banks engaged in stock broking,
underwriting activities & financial consultancy & investment advisory service firms.

Grindlays Banks 1967

Citi banks 1970
SBI 1973
ICICI 1974
Companies raise capital by issuing securities in the market. Merchant bankers act as
intermediaries between the issuers of capital and the ultimate investors who purchase these
Merchant banking is the financial intermediation that matches the entities that need capital
and those that have capital. It is a function that facilitates the flow of capital in the market.
In India a common organizational setup of merchant bankers to operate is in the form of
divisions of Indian and foreign banks and financial institutions, subsidiary companies
established by bankers like SBI, Canara Bank, Punjab National Bank, Bank of India, etc.
Some firms are also organized by financial and technical consultants and professionals.
Securities and
Exchange Board of India has divided the merchant bankers into four categories based on their
capital adequacy. Each category is authorized to perform certain functions. From the point of
organizational setup Indias merchant banking organizations can be categorized into four
groups on the basis of their linkage with parent activity. They are:
(A) Institutional Base
Where merchant banks function as an independent wing or as subsidiary of various
private/Central Governments/State Governments financial institutions. Most of the financial
institutions in India are in public sector and therefore such setup plays a role on the lines of
government priorities and policies.
(B) Banker Base
These merchant bankers function as division/subsidiary of banking organization. The parent
banks are either nationalized commercial bank or the foreign banks operating in India. These
organizations have brought professionalism in merchant banking sector and they help their
parent organization to make a presence in capital market.
(C) Broker Base
In the recent past there has been an inflow of qualified and professionally skilled brokers in
various stock exchanges of India. These brokers undertake merchant banking related
operations also like providing investment and portfolio management services.
(D) Private Base
These merchant banking firms are originated in private sector. These organizations are the
outcome of opportunities and scope in merchant banking business and they are providing
skill-oriented specialized services to their clients. Some foreign merchant bankers are also
entering either independently or through some collaboration with their Indian counterparts.
Private sector merchant banking firms have come up either as the sole proprietorship or
public limited companies. Many of these firms were in existence for quite some times before
they added a new activity in the form of merchant banking services by opening new divisions

on the lines of commercial banks and All India Financial Institutions.

Merchant Banking in India

Requirements for setting up a merchant banking outfit

Formation of the Business Organization
SEBI act, 1992 does not prescribe any specific form of business organization to carry on the
activities as merchant banker. However, the types of organizations are listed below:
a. Sole proprietorship
b. Partnership firm
c. Hindu Undivided Family (HUF)
d. Corporate Enterprises
e. Co-operative Society
Generally it is preferred that the Merchant Banking outfit be a registered company. Merchant
Banks are generally setup as subsidiary companies of banks (Public or Private). For example,
SBI caps, ICICI Securities etc.


A commercial bank has to manage its assets and liabilities with three objectives in mind,
namely :- Liquidity, profitability and solvency.
Liquidity means the capacity of the bank to give cash on demand in exchange for
deposits. But a commercial bank is a profit seeking institution. It has to arrange its assets in
such a way that it makes maximum profits. The bank should also maintain the confidence of
public by making cash available on demand. Liquidity and profitability are, therefore,
conflicting considerations for bankers.


Cash has perfect liquidity but yields no return at all, while other income-yielding
assets such as loans are profitable but have no liquidity. The bank should strike a balance
between liquidity and profitability.
Another consideration of the bank is its own solvency and security. This refers to
liquidity and shiftability. Liquidity is the capacity to produce cash on demand. Shiftability
means the assets acquired by bank should be easily shiftable to other banks or central bank.
Those securities would be preferred by a bank which can be shifted easily without any loss to
the bank than the risky and more profitable ones.
A bank which is solvent may not be liquid. Its assets may exceed its liabilities, but the
assets may not be in such a form that they are readily convertible in to cash. Thus, the two
motives of a banks liquidity and profitability are contradictory, but have to be reconciled. A
good banker is one who follows a wise investment policy and distributes the assets in such a
way that both the requirements of liquidity and profitability are satisfied. The assets should
bring in maximum profits and should provide maximum security to the depositors. The secret
of success of a bank lies in striking a sound balance between liquidity and profitability.
B. RECONCILING TWIN OBJECTIVES :A good banker is one who follows a wise investment policy and distributes the assets
in such a way that both the requirements of liquidity and profitability are satisfied. The secret
of success of a bank lies in striking a balance between liquidity and profitability. The
commercial bank arranges its assets in an ascending order of profitability and descending
order of liquidity. As we move down the balance sheet the assets become less and less liquid
and more and more profitable. The more liquid the assets, the less profitable it is. Let us
Explain :1) Cash :Cash balance have perfect liquidity, but no profitability. Cash is held to meet the
withdrawl needs of depositors.
2) Money At Call :Surplus cash of commercial banks is lend to each other. This earns some interest and
is also very liquid.
3) Investment In Securities :Statutorily banks have to invest a part of their assets in government securities. These
securities have low rate of interest but banks can borrow from RBI against these securities.
Thus investment in securities provide returns as well as liquidity to bank.
4) Loans And Advances :Here liquidity is low but profitability is high.
Thus banks hold various assets in such a way that the requirements of liquidity and profitability are



1. To act as a Merchant Bankers, Portfolio Managers, Underwriters, Sub-Underwriters,

Consultants for Capital Issues, Advisors to Capital Issues, Registrars to the issue, Share
Transfer Agents, Investment Consultants, Consultants and Management Advisors to
Corporate Bodies, Individuals and Promoters in commercial, industrial management and
policy matters and to make project evaluation, feasibility studies, project report, and surveys
and to give expert advice and suggest ways and means for improving efficiency in business
organization and concerns and industries of all kinds and/or to act as lead managers, comanagers to issue of shares, stocks, bonds, debentures, commercial paper or other securities
of bodies corporate or industrial undertaking and/or shares ,stocks, bonds, debentures,
commercial paper or other securities issued to any government or semi-government authority
or public authority of government under taking or stocks, bonds, debentures or of the
2. To carry on business of investment and to undertake and transact and deal in bills of
exchange, hundies, promissory notes and other negotiable instruments and securities and also
to issue on commission, to subscribe for, underwrite, take, acquire and hold, sell and
exchange and deal in shares, stocks, bonds or debentures or securities of any government or
public authority and/or to acquire any such shares, stocks, debentures, bonds by original
subscriptions, exchange or otherwise and to subscribe for the same either conditionally or
otherwise and to guarantee the subscription thereof.
Merchant banker registered with SEBI:
Public Sector: - Commercial banks (24), Financial Institutions (6), State Institutions (4)
Private sector: - International bankers (10), Banks (10), finance & investment (231).

The following comprise the main functions of a merchant banker in India:

1. Management of debt and equity offerings.
2. Placement and distribution.
3. Issue Management.
4. Underwriting of Public Issue.
5. Project Counseling.
6. Institutions and obtaining government approval.
7. Providing venture capital and mezzanine financing.
8. Portfolio Management.
9. Off Shore Finance.
10. Corporate Counseling and advisory services.
11. Non-resident Investment.
12. Loan Syndication.
13. Placement and distribution.
14. Working Capital Finance.
15. Venture Capital.
16. Lease Financing.
17. Fixed Deposit Broking.

18. Mutual Funds.

19. Accepting Credit & Discounting of Bills.
20. Relief to sick Industries.
21. Project Appraisal.
22. Financial Appraisal.
23. Technical Appraisal.
24. Economical Appraisal.
1. Management of debt and equity offeringsThis forms the main function of the merchant banker. He assists the companies in raising
funds from the market. The main areas of work in this regard include: instrument designing,
pricing the issue, registration of the offer document, underwriting support, and marketing of
the issue, allotment and refund, listing on stock exchanges.
2. Placement and distributionThe merchant banker helps in distributing various securities like equity shares, debt
instruments, mutual fund products, fixed deposits, insurance products, commercial paper to
name a few. The distribution network of the merchant banker can be classified as institutional
and retail in nature. The institutional network consists of mutual funds, foreign institutional
investors, private equity funds, pension funds, financial institutions etc. The size of such a
network represents the wholesale reach of the merchant banker. The retail network depends
on networking with investors.
3. Issue Management:
Management of issue involves marketing of corporate securities viz. equity shares, preference
shares and debentures or bonds by offering them to public. Merchant banks act as an
intermediary whose main job is to transfer capital from those who own it to those who need
it. After taking action as per SEBI guidelines, the merchant banker arranges a meeting with
company representatives and advertising agents to finalize.
Arrangements relating to date of opening and closing of issue, registration of prospectus,
launching publicity campaign and fixing date of board meeting to approve and sign
prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in
consultant with the merchant bankers.

4. Underwriting of Public Issue:

Underwriting is a guarantee given by the underwriter that in the event of under subscription,
the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries
cannot underwrite more than 15% of any issue.
Financial structuring includes determining the right debt-equity ratio and gearing ratio for the
client; the appropriate capital structure theory is also framed. Merchant bankers also explore
the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area
of advice is rehabilitation and turnaround management. In case of sick units, merchant
bankers may design a revival package in coordination with banks and financial institutions.
Risk management is another area where advice from a merchant banker is sought. He advises
the client on different hedging strategies and suggests the appropriate strategy.


5. Project Counseling:
Project counseling includes preparation of project reports, deciding upon the financing
pattern to finance the cost of the project and appraising the project report with the financial
institutions or banks. It also includes filling up of application forms with relevant information
for obtaining funds from financial.
6. Institutions and obtaining government approval:
Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes place
in a series of steps. Firstly they analyses the pattern of the clients cash flows, based on which
the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan
memorandum, which is circulated to various banks and financial institutions and they are
invited to participate in the syndicate.
7. Providing venture capital and mezzanine financingMerchant bankers help companies in obtaining venture capital financing for financing their
new and innovative strategies.
8. Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares, debentures or
bonds issued by different companies and government securities. Portfolio management refers
to maintaining proper combinations of securities in a manner that they give maximum return
with minimum risk.
9. Off Shore Finance:
The merchant bankers help their clients in the following areas involving foreign currency.
(a) Long term foreign currency loans
(b) Joint Ventures abroad
(c) Financing exports and imports
(d) Foreign collaboration arrangements
Non-resident Investment: The services of merchant banker includes investment advisory
services to NRI in terms of identification of investment opportunities, selection of securities,
investment management, and operational services like purchase and sale of securities.
10. Corporate Counseling and advisory services:
Corporate counseling covers the entire field of merchant banking activities viz. project
counseling, capital restructuring, public issue management, loan syndication, working capital,
fixed deposit, lease financing acceptance credit, etc. Merchant bankers also offer customized
solutions to their clients financial problems.
11. Corporate Counseling and advisory services:
The services of merchant banker includes investment advisory services to NRI in terms of
classification of investment opportunities, selection of securities, investment management,
and operational services like purchase and sale of securities.
12. Loan Syndication
Loan syndication is an assistance provided by merchant bankers to get mainly term loans
for projects. Such loans may be obtained from a single development finance institution or a
syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans

from banks and other financial institutions.

13. Placement and distribution
The merchant banker helps in distributing different securities like equity shares, debt
instruments, mutual fund products, fixed deposits, insurance products, commercial paper, etc.
The distribution network of the merchant banker can be classified as institutional and retail in
character. The institutional network consists of mutual funds, foreign institutional investors,
private equity funds, pension funds, financial institutions etc. The size of such a network
signifies the wholesale reach of the merchant banker. The retail network is purely depends on
networking with investors.
14. Working Capital Finance
The finance required for day to day expenses of enterprises is known as Working Capital
a) Assessment of working capital requirement.
b) Preparing the necessary application to negotiation for the sanction of appropriate credit
c) Co-ordinating, Assisting
15. Venture Capital
Leasing is important alternative source of financing a capital outlay. The concept of venture
capital originated in U.S.A in 1950s.

16. Lease Financing

In India, lease financing is non-banking activity. Commercial Banks like State Bank of India
& Canara Bank also provided lease financing by forming subsidiary under the amended
Banking Regulation Act 1949.

17. Fixed Deposit Broking

Following are the services rendered by the merchant bankers
a) Computation of amount that could be raised in the form of deposits from the public and
loans for shareholders.
b) Drafting of advertising for invitation of deposits.
c) Filing of a copy of advertisement with Registrar of Companies.
d) Helping the company by observing whether the rules & regulations are followed.
18. Mutual Funds
Mutual funds are institutions of mobilizing of saving of investors towards productive
investments in wide variety of corporate & other securities.


Following are some services rendered by mutual funds

a) Mopping up public savings.
b) Investing the fund in diversified portfolio of shares & debentures belonging well managed
& growing companies.
Fundamentally, merchant banking division is regarded as a project-evaluation instrument.
It provides expert knowledge and help in the floatation of new companies, the preparation,
planning and execution of new projects, and the management and promotion of industrial
enterprises as well as their financing. Basically, however, merchant banks are more serviceoriented.

Their main function is to guide the preparation, planning, evaluation and execution of
projects which are helpful to the growth of industries.
In specific terms, however, the main function assumed by the merchant banking division of
the National & Grindlays Bank are as under:
(i) To give advice and assistance to entrepreneurs in planning their finances.
(ii) To match the needs of the customer for all types of finance with available resources for
such finances, national or international.
(iii) To act as an intermediary and expert for advising and assisting in raising share capital or
loan capital.
(iv) To assist customers in long-range planning for growth and effectiveness.
(u) To promote international investment.
(vi) To provide specialized services and assistance to small and medium-sized industries, as
well as to the joint sector industries.
Similarly, the following functions have been specified for the merchant banking division of
State Bank of India.
(a) To furnish advice, assist and liaison in meeting with allied government formalities,
required in establishing or expanding industrial projects.
(b) To prepare economic, technical and financial feasibility reports and survey reports for
setting up new industrial projects.
(c) To render assistance in raising rupee loans from term lending institutions, development
banks, commercial banks and such other institutions.
(d) To give assistance in raising foreign exchange resources.
(e) To provide assistance and advice in determining the capital structure, in obtaining official

consent and in handling and floating capital issues and such other activities as are engaged in
by the registrars or issues houses.
(f) To advise and assist in restructuring of capital, amalgamation, mergers, etc.
(g) To advise and assist in adopting the best form of industrial organisation.
(h) To help in financing foreign trade.
In general, however, the merchant banking activities of the Indian banks have been largely
confined to the management of public issues and loan syndications.
They have yet to develop expertise in the fields of projects counseling, corporate counseling,
capital restructuring, portfolio management, etc.
22. Financial Appraisal
Financial Appraisal involves assessing the feasibility of new proposal for setting up new
project for the expansion of the existing production facilities.
Financial Appraisal is undertaken through an analysis which takes in to account the financial
feature of the product, including source of financing. It helps in tracing of smooth operation
of the project over its entire life cycle.
23. Technical Appraisal
Technical Appraisal is the primary concern with the project concept in terms of it technology,
design, scope & content of plant, as well as the input are infrastructure facilities envisage the
project. Basically, the project should be able to deliver a marketable product for the resources

24. Economic Appraisal

Economic Appraisal of a project deals with the impact of project on economics
Merchant bankers render their specialized assistance in achieving the main objectives which
are presented below:
To carry on the business of merchant banking, assist in the capital formation, manage advice,
underwrite, provide standby assistance, securities and all kinds of investments issued, to be
issued or guaranteed by any company, corporation, society, firm, trust person, government,
municipality, civil body, public authority established in India.
The main object of merchant banker is to create secondary market for bills and discount or rediscount bills and acts as an acceptance house.
Merchant bankers another objective is to set up and provide services for the venture capital
technology funds.


They also provide services to the finance housing schemes for the construction of houses and
buying of land.
They render the services like foreign exchange dealer, money exchange, and authorized
dealer and to buy and sell foreign exchange in all lawful ways in compliance with the
relevant laws of India.
They will invest in buying and selling of transfers, hypothecate and deal with dispose
of shares, stocks, debentures, securities and properties of any other company.

Obligations and Responsibilities Of merchant bank

Merchant bankers have the following obligations and responsibilities.
Merchant banker should maintain proper books of accounts, records and submit half
yearly/annual financial statements to the SEBI within stipulated period of time.
No merchant banker should associate with another merchant banker who is not
registered in SEBI.
Merchant bankers should not enter into any transactions on the basis of unpublished
information available to them in the course of their professional assignment.
Every merchant banker must submit himself to the inspection by SEBI when required

for and submit all the records.

Every merchant banker must disclose information to the SEBI when it requires any
information from them.

All merchant bankers must abide by the code of conduct prescribed for them.
Every merchant banker who acts as lead manager must enter into an agreement with the
issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc.

Obligations and Responsibilities of commercial bank

The commercial Banks
The commercial bank is an organized financial institution that deals with the business of
credit (borrowing and lending of money). The commercial banks are financial intermediaries
between savers and investors. Like other business firms, the main objective of commercial
banks is to earn profits. The bank accepts deposits from its customers and thus raises large
funds that can be loaned out. These may be in the form of demand deposit (readily available
for checking: often called current accounts on which the banks pay no interest), or time
deposits (which can be available only for business/loan extension). The saving deposits fall in
between the two, which can be withdrawn occasionally. The deposits accepted by a bank are
its liability and the loan extended to the clients as well as the bonds/shares of firms held by
the bank constitute its assets. The bank earns interest/profit on its investment a part of which
is passed on to the depositors and the remaining is appropriated.
The Process of Credit Creation
The commercial banks provide an easy medium of exchange in the form of checks, drafts,
credit cards etc. These are called bank notes or instruments of credit. These constitute a
considerable part of the total money supply in the economy. Anyhow, the banks cannot create
money from thin air; they convert physical wealth into liquid money. There must be an initial
deposit with the bank to start the process. Further, the power of the banks to create credit is
limited by the reserve requirements.

Developments in Merchant banking Establishments in India

Setting up of banks Subsidiaries:
In order to meet the growing demand for broad-based financial services from the corporate
sector more effectively, the merchant banking division of the nationalize banks have stated
forming independent subsidiaries. These subsidiaries offer more specialized services with
professional, expertise & skills. SBI capital market ltd. was incorporated as the first such
subsidiary of SBI on 2 July, 1986. Then CAN BANK financial services ltd was set up as

wholly owned subsidiary of Canara bank in 1987. PNB Capital Market was promoted by
PNB during Mid-1988. Many more subsidiaries are being set up by another nationalize
Reorganization of private Firms:
Expecting tough Competition from growing number of merchant banking subsidiary of
nationalized banks, private merchant bankers have also started reorganizing their activities
e.g., J.M Financial & Investment Consultancy Ltd., 20th century finance corporation ltd.,
LKP merchant financing ltd are some of the private sector firms of merchant bankers who
have taken steps to reorganize their activities.
Establishment of SUA:
In order to educate and protect the interest of investor, to provide information about new
issues of capital market, to evolve a code of conduct for underwriters & to render legal &
other services to members & public, the STOCKBROKER UNDERWRITER
ASSOCIATION (SUA) was established in 1984.
Discount & Finance House of India (DFHI)
DFHI was incorporated as a company under the company act 1956 with an authorized & paid
up capital of Rs 100 crores. Out of this Rs 51 crores has been contributed by RBI, Rs 16
crores but financial institutions & 33 crores by public sector banks. It would also have line of
credit from public sector banks; refinance facility from the RBI in order to meet the working
capital requirement. DFHI aims at providing liquidity in money market as it deals mainly in
commercial bills.
Credit Rating Information Services of India Ltd. (CRISIL)
CRISIL has been set up in 1987 to provide help to investors, merchant bankers, underwriters,
brokers, banks & financial institutions etc. CRISIL rates various types of instruments such as
debt, Equity, & Fixed return security offered to the public. It helps the investor in taking
investment decisions.
Stock-Holding Corporation of India Ltd. (SHC)
SHC was set up in 1986 by the all Indian financial institutions to take care of safe custody,
delivery of shares & collection of sale proceeds of the securities. The setting up of SHC is
bound to affect the capital market aim future.

Development of commercial bank in India

The Second World War had a tremendous impact on the Indian banking system. There
was a phenomenal growth of banking, in terms of resources as well as number of offices,
under the stimulus of monetary expansion and the large-scale war effort. The Indian
banking system as a whole withstood the strains of the war period very well and displayed

remarkable resilience and vigour in several directions. There is no doubt that there
was also growth of the banking habit in the country. However, the war-time banking
structure presented several disquieting features too, which were particularly marked in
the case of the newly established units. While the needs of the economy during the war
warranted a rapid expansion of banking and there was certainly room for some new
institutions, there was a pronounced tendency for opening banks with little intrinsic
strength in the form of a sound capital structure and liquidity of assets; more serious was
the rather indiscriminate opening of branches and the employment of unsound methods to
attract deposits. The motives behind several of the new banking ventures were not
altogether legitimate or worthy. There was evidently a desire to get control over public
funds for speculative investments and trading activities and also for pecuniary gains in
many ways through excessive salaries, bonus, commission, etc. There was again, in some
cases, a desire on the part of industrial houses to have under their control sizeable
banking and insurance establishments; this interlocking of interests between banks,
insurance companies and industrial concerns was generally detrimental to the interests of
bank depositors. There was moreover, in some cases, the dressing up of accounts to give
a misleading impression of the financial position of the bank. A number of banks also
engaged in dubious devices to become eligible for inclusion in the Second Schedule.
These developments lent urgency to the passing of comprehensive banking
legislation. Unfortunately, this did not materialise during the war period. In the early
years of the war, the Bank itself desired postponement of such legislation; in the later war
years, the new Governor made every possible effort to get the measure enacted but this
did not prove possible owing to circumstances beyond the Banks control. However,
some ad hoc enactments were made to deal with some specific abuses and shortcomings
of the banking system. The Reserve Bank spared no pains to have an adequate statutory
base for the regulation of the banks on sound yet progressive lines. The Banks contacts
with the commercial banks, both scheduled and non-scheduled, became much closer
during the war; these would in any case have taken place, but the war developments made
it all the more imperative on the part of the Bank to be in a position to keep a close watch on
the banking system.

Recent Banking Developments in India

The Indian banking sector has witnessed wide ranging changes under the influence of the
financial sector reforms initiated during the early 1990s. The approach to such reforms in
India has been one of gradual and non-disruptive progress through a consultative process.
The emphasis has been on deregulation and opening up the banking sector to market forces.
The Reserve Bank has been consistently working towards the establishment of an enabling
regulatory framework with prompt and effective supervision as well as the development of
technological and institutional infrastructure.
Persistent efforts have been made towards adoption of international benchmarks as
appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to

be effected, the developments so far have brought the Indian financial system closer to global

Statutory Pre-emption
In the pre-reforms phase, the Indian banking system operated with a high level of statutory
preemptions, in the form of both the Cash Reserve Ratio (CRR) and the Statutory Liquidity
Ratio (SLR), reflecting the high level of the countrys fiscal deficit and its high degree of
monetisation. Efforts in the recent period have been focused on lowering both the CRR and
SLR. The statutory minimum of 25 per cent for the SLR was reached as early as 1997, and
while the Reserve Bank continues to pursue its medium-term objective of reducing the CRR
to the statutory minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks
(SCBs) is currently placed at 5.0 per cent of NDTL (net demand and time liabilities). The
legislative changes proposed by the Government in the Union Budget, 2005-06 to remove the
limits on the SLR and CRR are expected to provide freedom to the Reserve Bank in the
conduct of monetary policy and also lend further flexibility to the banking system in the
deployment of resources.

Interest Rate Structure

Deregulation of interest rates has been one of the key features of financial sector reforms. In
recent years, it has improved the competitiveness of the financial environment and
strengthened the transmission mechanism of monetary policy. Sequencing of interest rate
deregulation has also enabled better price discovery and imparted greater efficiency to the
resource allocation process. The process has been gradual and predicated upon the institution
of prudential regulation of the banking system, market behavior, financial opening and, above
all, the underlying macroeconomic conditions.
Interest rates have now been largely deregulated except in the case of: (i) savings deposit
accounts;(ii) non-resident Indian (NRI) deposits; (iii) small loans up to Rs.2 lakh; and (iv)
export credit. After the interest rate deregulation, banks became free to determine their own
lending interest rates.
As advised by the Indian Banks Association (a self-regulatory organisation for banks),
commercial banks determine their respective BPLRs (benchmark prime lending rates) taking
into consideration:
(i) actual cost of funds; (ii) operating expenses; and (iii) a minimum margin to cover
regulatory requirements of provisioning and capital charge and profit margin. These factors
differ from bank to bank and feed into the determination of BPLR and spreads of banks. The
BPLRs of public sector banks declined to 10.25-11.25 per cent in March 2005 from 10.2511.50 per cent in March 2004. With a view to granting operational autonomy to public sector
banks, public ownership in these banks was reduced by allowing them to raise capital from
the equity market of up to 49 per cent of paid-up capital. Competition is being fostered by
permitting new private sector banks, and more liberal entry of branches of foreign banks,
joint-venture banks and insurance companies. Recently, a roadmap for the presence of foreign
banks in India was released which sets out the process of the gradual opening-up
of the banking sector in a transparent manner. Foreign investments in the financial sector in
the form of Foreign Direct Investment (FDI) as well as portfolio investment have been
permitted. Furthermore, banks have been allowed to diversify product portfolio and business
activities. The share of public sector banks in the banking business is going down,

particularly in metropolitan areas. Some diversification of ownership in select public sector

banks has helped further the move towards autonomy and thus provided some response to
competitive pressures. Transparency and disclosure standards have been enhanced to meet
international standards in an ongoing manner.

Prudential Regulation
Prudential norms related to risk-weighted capital adequacy requirements, accounting, income
recognition, provisioning and exposure were introduced in 1992 and gradually these norms
have been brought up to international standards. Other initiatives in the area of strengthening
prudential norms include measures to strengthen risk management through recognition of
different components of risk,assignment of risk-weights to various asset classes, norms on
connected lending and risk concentration, application of the mark-to-market principle for
investment portfolios and limits on deployment of funds in sensitive activities.
Keeping in view the Reserve Banks goal to achieve consistency and harmony with
international standards and our approach to adopt these standards at a pace appropriate to our
context, it has been decided to migrate to Basel II. Banks are required to maintain a minimum
CRAR (capital to risk weighted assets ratio) of 9 per cent on an ongoing basis. The capital
requirements are uniformly applied to all banks, including foreign banks operating in India,
by way of prudential guidelines on capital adequacy. Commercial banks in India will start
implementing Basel II with effect from March 31,2007. They will initially adopt the
Standardised Approach for credit risk and the Basic Indicator Approach for operational risk.
After adequate skills have been developed, at both bank and supervisory level, some banks
may be allowed to migrate to the Internal Ratings-Based (IRB) Approach. Banks have also
been advised to formulate and operationalise the Capital Adequacy Assessment Process
(CAAP) as required under Pillar II of the New Framework.
Some of the other regulatory initiatives relevant to Basel II that have been implemented by
the Reserve Bank are:
Ensuring that banks have a suitable risk management framework oriented towards their
requirements and dictated by the size and complexity of their business, risk philosophy,
market perceptions and expected level of capital.
Introducing Risk-Based Supervision (RBS) in select banks on a pilot basis.
Encouraging banks to formalise their CAAP in alignment with their business plan and
performance budgeting system. This, together with the adoption of RBS, should aid in
fulfilling the Pillar II requirements under Basel II.
Expanding the area of disclosures (Pillar III) so as to achieve greater transparency
regarding the financial position and risk profile of banks.
Building capacity to ensure the regulators ability to identify eligible banks and permit
them toadopt IRB/Advanced Measurement approaches.
With a view to ensuring migration to Basel II in a non-disruptive manner, a consultative and
participative approach has been adopted for both designing and implementing the New
Framework. A Steering Committee comprising senior officials from 14 banks (public, private
and foreign) with representation from the Indian Banks Association and the Reserve Bank
has been constituted. On the basis of recommendations of the Steering Committee, draft

guidelines on implementation of the New Capital Adequacy Framework have been issued to
In order to assess the impact of Basel II adoption in various jurisdictions and re-calibrate the
proposals, the BCBS is currently undertaking the Fifth Quantitative Impact Study (QIS 5).
India will be participating in the study, and has selected 11 banks which form a representative
sample for this purpose. These banks account for 51.20 per cent of market share in terms of
assets. They have been advised to familiarise themselves with the QIS 5 requirements to
enable them to participate in the exercise effectively. The Reserve Bank is currently focusing
on the issue of recognition of the external rating agencies for use in the Standardised
Approach for credit risk.
As a well-established risk management system is a pre-requisite for implementation of
advanced approaches under the New Capital Adequacy Framework, banks were required to
examine the various options available under the Framework and draw up a roadmap for
migration to Basel II. The feedback received from banks suggests that a few may be keen on
implementing the advanced approaches.
However, not all are fully equipped to do so straightaway and are, therefore, looking to
migrate to the advanced approaches at a later date. Basel II provides that banks should be
allowed to adopt/migrate to advanced approaches only with the specific approval of the
supervisor, after ensuring that they satisfy the minimum requirements specified in the
Framework, not only at the time of adoption/migration, but on a continuing basis. Hence,
banks desirous of adopting the advanced approaches must perform a stringent assessment of
their compliance with the minimum requirements before they shift gears to migrate to these
approaches. In this context, current non-availability of acceptable and qualitative historical
data relevant to internal credit risk ratings and operational risk losses, along with the related
costs involved in building up and maintaining the requisite database, is expected to influence
the pace of migration to the advanced approaches available under Basel II.

Exposure Norms
The Reserve Bank has prescribed regulatory limits on banks exposure to individual and
group borrowers to avoid concentration of credit, and has advised banks to fix limits on their
exposure to specific industries or sectors (real estate) to ensure better risk management. In
addition, banks are also required to observe certain statutory and regulatory limits in respect
of their exposures to capital markets.

Asset-Liability Management
In view of the growing need for banks to be able to identify, measure, monitor and control
risks, appropriate risk management guidelines have been issued from time to time by the
Reserve Bank, including guidelines on Asset-Liability Management (ALM). These guidelines
are intended to serve as a benchmark for banks to establish an integrated risk management
system. However, banks can also develop their own systems compatible with type and size of
operations as well as risk perception and put in place a proper system for covering the
existing deficiencies and the requisite upgrading.


Detailed guidelines on the management of credit risk, market risk, operational risk, etc. have
also beenissued to banks by the Reserve Bank. The progress made by the banks is monitored
on a quarterly basis. With regard to risk management techniques, banks are at different stages
of drawing up a comprehensive credit rating system, undertaking a credit risk assessment on
a half yearly basis, pricing loans on the basis of risk rating, adopting the Risk-Adjusted
Return on Capital (RAROC) framework of pricing, etc. Some banks stipulate a quantitative
ceiling on aggregate exposures in specified risk categories, analyse rating-wise
distribution of borrowers in various industries, etc.
In respect of market risk, almost all banks have an Asset-Liability Management Committee.
They have articulated market risk management policies and procedures, and have undertaken
studies of behavioural maturity patterns of various components of on-/off-balance sheet

NPL Management
Banks have been provided with a menu of options for disposal/recovery of NPLs (nonperforming loans). Banks resolve/recover their NPLs through compromise/one time
settlement, filing of suits, Debt Recovery Tribunals, the Lok Adalat (peoples court) forum,
Corporate Debt Restructuring (CDR), sale to securitisation/reconstruction companies and
other banks or to non-banking finance companies (NBFCs). The promulgation of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002 and its subsequent amendment have strengthened the position of
creditors. Another significant measure has been the setting-up of the 240 BIS Papers No 28
Credit Information Bureau for information sharing on defaulters and other borrowers. The
role of Credit Information Bureau of India Ltd. (CIBIL) in improving the quality of credit
analysis by financial institutions and banks need hardly be overemphasised. With the
enactment of the Credit Information Companies (Regulation) Act, 2005, the legal framework
has been put in place to facilitate the fullfledged operationalisation of CIBIL and the
introduction of other credit bureaus.

Board for Financial Supervision (BFS)

An independent Board for Financial Supervision (BFS) under the aegis of the Reserve Bank
has been established as the apex supervisory authority for commercial banks, financial
institutions, urban banks and NBFCs. Consistent with international practice, the Boards
focus is on offsite and on-site inspections and on banks internal control systems. Offsite
surveillance has been strengthened through control returns. The role of statutory auditors has
been emphasised with increased internal control through strengthening of the internal audit
function. Significant progress has been made in implementation of the Core Principles for
Effective Banking Supervision. The supervisory rating system under CAMELS has been
established, coupled with a move towards risk-based supervision.


Consolidated supervision of financial conglomerates has since been introduced with biannual discussions with the financial conglomerates. There have also been initiatives aimed at
strengthening corporate governance through enhanced due diligence on important
shareholders, and fit and proper tests for directors.
A scheme of Prompt Corrective Action (PCA) is in place for attending to banks showing
steady deterioration in financial health. Three financial indicators, viz. capital to riskweighted assets ratio (CRAR), net non-performing assets (net NPA) and Return on Assets
(RoA) have been identified with specific threshold limits. When the indicators fall below the
threshold level (CRAR, RoA) or go above it (net NPAs), the PCA scheme envisages certain
structured/discretionary actions to be taken by the regulator.
The structured actions in the case of CRAR falling below the trigger point may include,
among other things, submission and implementation of a capital restoration plan, restriction
on expansion of risk weighted assets, restriction on entering into new lines of business,
reducing/skipping dividend payments, and requirement for recapitalisation.
The structured actions in the case of RoA falling below the trigger level may include, among
other things, restriction on accessing/renewing costly deposits and CDs, a requirement to take
steps to increase fee-based income and to contain administrative expenses, not to enter new
lines of business, imposition of restrictions on borrowings from the inter bank market, etc.
In the case of increasing net NPAs, structured actions will include, among other things,
undertaking a special drive to reduce the stock of NPAs and containing the generation of
fresh NPAs, reviewing the loan policy of the bank, taking steps to upgrade credit appraisal
skills and systems and to strengthen follow-up of advances, including a loan review
mechanism for large loans, following up suitfiled decreed debts effectively, putting in place
proper credit risk management policies/processes/procedures/prudential limits, reducing loan
concentration, etc. Discretionary action may include restrictions on capital expenditure,
expansion in staff, and increase of stake in subsidiaries. The Reserve Bank/Government may
take steps to change promoters/ ownership and may even take steps to
merge/amalgamate/liquidate the bank or impose a moratorium on it if its
position does not improve within an agreed period.

Technological Infrastructure
In recent years, the Reserve Bank has endeavoured to improve the efficiency of the financial
system by ensuring the presence of a safe, secure and effective payment and settlement
system. In the process, apart from performing regulatory and oversight functions the Reserve
Bank has also played an important role in promoting the systems functionality and
modernisation on an ongoing basis. The consolidation of the existing payment systems
revolves around strengthening computerised cheque clearing, and expanding the reach of
Electronic Clearing Services (ECS) and Electronic Funds BIS Papers No 28 241
Transfer (EFT). The critical elements of the developmental strategy are the opening of new
clearing houses, interconnection of clearing houses through the Indian Financial Network

(INFINET) and the development of a Real-Time Gross Settlement (RTGS) System, a

Centralised Funds Management System (CFMS), a Negotiated Dealing System (NDS) and
the Structured Financial Messaging System (SFMS). Similarly, integration of the various
payment products with the systems of individual banks has been another thrust area.

An Assessment
These reform measures have had a major impact on the overall efficiency and stability of the
banking system in India. The dependence of the Indian banking system on volatile liabilities
to finance its assets is quite limited, with the funding volatility ratio at -0.17 per cent as
compared with a global range of -0.17 to 0.11 per cent. The overall capital adequacy ratio of
banks at end-March 2005 was 12.8 per cent as against the regulatory requirement of 9 per
cent which itself is higher than the Basel norm of 8 per cent. The capital adequacy ratio was
broadly comparable with the global range. There has been a marked improvement in asset
quality with the percentage of gross NPAs to gross advances for the banking system declining
from 14.4 per cent in 1998 to 5.2 per cent in 2005.
Globally, the NPL ratio varies widely from a low of 0.3 per cent to 3.0 per cent in developed
economies, to over 10.0 per cent in several Latin American economies. The reform measures
have also resulted in an improvement in the profitability of banks. RoA rose from 0.4 per cent
in the year 1991-92 to 0.9 per cent in 2004-05. Considering that, globally, RoA was in the
range -1.2 to 6.2 percent for 2004, Indian banks are well placed. The banking sector reforms
have also emphasised the need to review manpower resources and rationalise requirements by
drawing up a realistic plan so as to reduce operating cost and improve profitability. The cost
to income ratio of 0.5 per cent for Indian banks compares favourably with the global range of
0.46 per cent to 0.68 per cent and vis--vis 0.48 per cent to 1.16 per cent for the worlds
largest banks.
In recent years, the Indian economy has been undergoing a phase of high growth coupled
with internal and external stability characterised by price stability, fiscal consolidation,
overall balance of payments alignment, improvement in the performance of financial
institutions and stable financial market conditions and the service sector taking an increasing
share, enhanced competitiveness, increased emphasis on infrastructure, improved market
microstructure, an enabling legislative environment and significant capital inflows. This has
provided the backdrop for a more sustained development of financial markets and reform.

Guidelines of SEBI for Merchant Bank

After the obligations of the CCI, the place was occupied by a legal organ called as Securities
and Exchange Board of India. The issue of capital and pricing of issues by companies has
become free of prior approval. The SEBI has issued guidelines for the issue of capital by the
companies. The guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue by the existing
private companies and public issues by the existing listing companies. The SEBI is the most
powerful organization to control and lead both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the Companies leading to

the investor protection. They are presented below:

1. If any Companys other income exceeds 10 per cent of the total income, the details should
be disclosed.
2. The Company should disclose any adverse situation which affects the operations of the
Company and occurs within one year prior to the date filing of the offer document with the
Registrar of Companies or Stock Exchange.
3. The Company should also disclose the information regarding the capacity utilization of the
plant for the last 3 years.
4. The Promoters of the Company must maintain their holding at least at 20 per cent of the
expanded capital.
5. The minimum application money payable should not be less than 25 per cent of the issue
6. The number of Lead Managers to the issue is restricted to 2 for issues less than Rs. 50
3 for less than Rs. 100 crores and 4 for above 100 crores.
7. The company should disclose the time normally taken for the disposal of various types of
investors grievances.
8. Those with minimum net worth of Rs. 1 crore are authorized to act as Lead Managers,
Managers to the issue.
9. Minimum net worth of Rs. 50 lakh as co-managers to the issue.
10. Minimum net worth of Rs. 25 lakh as consultant's advisers to the issue.

The Company can make firm allotments in public issues as follows:

Indian mutual funds (20%),
FIIS (24%),
Regular employees of the company (10%),
Financial institution (20%).
The Company should disclose the safety net scheme or buy back arrangements of the shares
proposed in public issue. This scheme is applicable to a limited number of 500 shares per
allotted and the offer should be valid for a period of at least 6 months from the date of
dispatch of securities.
According to the guidelines, in case of the public issues, at least 30 mandatory collection
centers should be established.

According to the SEBI guidelines regarding rights issue, the Company should give
advertisements in not less than two newspapers about the dispatch of letters of offer.
No preferential allotment may be made along with any rights issue.
The Company should also disclose about the fee agreed between the lead managers and the
Company in the memorandum of understanding.

Factoring Service
In an economy where competition is tough, it is natural for the weaker units, small scale and
medium scale sectors to be left behind. This has been the matter of concern for bankers,
creditors, government and society in general. Delay in payments of sales bills leads to
inadequate tie-up of working capital which results in industrial sickness.
Despite several measures taken by banks like inventory related finance against pledge of
goods like loans and cash credits and receivables related finance, i.e., discounting bills of
exchange, supply bills finance or overdraft against book debts, the problems continued.
In this context the policy makers thought of helping the small and medium scale sectors to
recover their dues from buyers of its goods more quickly by establishing "Factoring Services"
as an alternative.
The term 'factor' has its origin in the Latin word 'Facere' meaning' to make or do' i.e., to get
things done '. During the 15th and 16th centuries, Factors were appointed by manufacturers in
England, France and Spain to arrange for the sale and distribution of their goods and to
collect the proceeds thereof. Factors never received title, but were responsible for the safe
keeping of the goods as well as the proceeds of sale.
During the 19th and 20th centuries, the manufacturers retained their distribution function, but
transferred the financing, credit and collection functions to the Factor. A' Factor' is an agent
who finances the seller through the purchase of accounts receivables.
Though this form was prevalent earlier through travelling merchants, it became significant
during 16th century in UK, France and Spain.

Characteristic- Features of Factoring Services

Factoring Service has the following important features:
1. Factoring is different from bill discounting.
2. It is a financial service product.
3. Factor takes care of the collection of sales bills of clients.
4. It offers a continuous relationship between factor and his client.

5. It also includes a package of services like, collection and follow- up of each invoice, credit
insurance, MIS support, etc.
6. It aims at replacing high cost market credit.
7. Lesser service charges.
8. It is classified as other current liability.
9. Its rate of interest is comparable to that of banks.
10. Its services are available to all sectors, viz., manufacturing Trading and services.
11. It substitutes sundry creditors.
"Factoring is a new financial service that is presently being developed in India. It is not just
a single service, rather a portfolio of complimentary financial services available to clients i.e.,
sellers. The sellers are free to avail of any combination of services offered by the factoring
organizations according to their individual requirements.
Factoring is a mechanism under which a financial organization called Factor purchases the
accounts receivable of a party, called client and makes cash payment to the client immediately or from time to time after collecting the money from client's debtor. For the services
rendered and the risk assumed by the Factor, he collects fees known as factor age.
The International Institute for the Unification of Private Law in 1988 defined " Factoring
means an arrangement between a Factor and his Client which includes at least two of the
following services to be provided by the Factor : (1) Finance, (2) Maintenance of Accounts,
(3) Collection of Debts, and (4) Protection against Credit Risks".

Place of operation of factoring service

To know about the operation of the factoring service, we should know about the place or state
where the factor is operating. Let us see the background of this operation hereunder.
Generally the credit sales are made in any one of the following ways.

Guidelines of RBI for commercial Bank

With the slowdown of the Indian economy, a number of companies/projects are under stress.
As a result, the Indian banking system has seen increase in NPAs and restructured accounts
during the recent years. Not only do financially distressed assets produce less than
economically possible, they also deteriorate quickly in value. Therefore, there is a need to
ensure that the banking system recognises financial distress early, takes prompt steps to
resolve it, and ensures fair recovery for lenders and investors. This Paper outlines a corrective
action plan that will incentivize early identification of problem cases, timely restructuring of
accounts which are considered to be viable, and taking prompt steps by banks for recovery or
sale of unviable accounts.


The main proposals are:

Early formation of a lenders committee with timelines to agree to a plan for resolution.
Incentives for lenders to agree collectively and quickly to a plan better regulatory treatment
of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement
can be reached. Improvement in current restructuring process: Independent evaluation of
large value restructurings mandated, with a focus on viable plans and a fair sharing of losses
(and future possible upside) between promoters and creditors.
More expensive future borrowing for borrowers who do not co-operate with lenders in
More liberal regulatory treatment of asset sales.
Lenders can spread loss on sale over two years provided loss is fully disclosed.
Takeout financing/refinancing possible over a longer period and will not be construed as
Leveraged buyouts will be allowed for specialised entities for acquisition of stressed
Steps to enable better functioning of Asset Reconstruction Companies mooted.
Sector-specific Companies/Private equity firms encouraged to play active role in stressed
assets market.
Going forward, while some regulatory and governmental measures may be required to
address the factors that are leading to deteriorating asset quality, there is an equal need for
proper credit discipline among lenders. That is, however, not the focus of this Paper.

Corrective Action Plan to Arrest Increasing NPAs

Early Recognition of Stress and Setting up of Central Repository of Information on Large
Credits (CRILC)
Before a loan account turns into an NPA, banks should identify incipient stress in the account
by creating a new sub-asset category viz. Special Mention Accounts (SMA) in line with
instructions issued vide RBI Circular DBS.CO.OSMOS/B.C./4/33.04.006/2002-2003 dated

September 12, 2002. Further, within SMA category there should be three sub-categories as
given below:
SMA Sub-category
Non-financial (NF) signals of incipient stress
2. SMA-1
Principal or interest payment overdue between 31-60 days
Principal or interest payment overdue between 61-90 days
The Reserve Bank of India will set up a Central Repository of Information on Large Credits
(CRILC) to collect, store, and disseminate credit data to lenders. The credit information
would also include all types of exposures as defined under RBI Circular on Exposure Norms
and will therefore, inter alia, include data on lenders investments in bonds/debentures issued
by the borrower/obligor.
Banks will have to furnish credit information to CRILC on all their borrowers having
aggregate fund-based and non-fund based exposure of Rs.50 million and above. While all
scheduled commercial banks will mandatorily contribute their credit information on their
borrowers/customers as above, systemically important non-banking financial companies
(NBFC-SI) will also be asked to furnish such information. In addition, banks will have to
furnish details of all current accounts of their customers with outstanding balance (debit or
credit) of Rs.10 million and above.
Banks will be required to report, among others, the SMA status of the borrower to the
CRILC. Individual banks will have to closely monitor the accounts reported as SMA-1 or
SMA-NF as these are the early warning signs of weaknesses in the account. They should take
up the issue with the borrower with a view to rectifying the deficiencies at the earliest.
However, to start with, reporting of an account as SMA-2 by one or more lending
banks/NBFC-SIs will trigger the mandatory formation of a Joint Lenders Forum and
formulation of Corrective Action Plan (CAP) as envisioned in the subsequent paragraphs.
Banks must put in place a proper Management Information and Reporting System so that any
account having principal or interest overdue for more than 60 days gets reported as SMA-2
on the 61st day itself.

It is the intention of the RBI that banks recognise warning signs of weakness in a borrowal
account early and in due course would require banks to mandatorily form Joint Lenders
Forum (JLF) and formulate CAP if an account is reported as SMA-NF for three quarters
during a year to date or SMA-1 for any two quarters during a year to date, in addition to
reporting as SMA-2 during any time. Banks should, therefore, prepare themselves for this
Formation of Joint Lenders Forum
As soon as an account is reported to CRILC as SMA-2, all lenders, including NBFC-SIs,
should form a lenders committee to be called Joint Lenders Forum (JLF) under a convener
and formulate a joint corrective action plan (CAP) for early resolution of the stress in the
account. While the existing Consortium Arrangement for consortium accounts will serve as
JLF and the Consortium Leader as convener, for accounts under Multiple Banking
Arrangements (MBA), the lender with the highest exposure (fund-based plus non-fund based)
will convene JLF at the earliest and facilitate exchange of credit information on the account.
Alternatively, the borrower may request its lender/s, with substantiated grounds, for
formation of a JLF if it senses imminent stress. When such a request is received by a bank,
the account may be reported as SMA-NF under CRILC. The lenders may then form the JLF
With a view to limiting the number of JLFs to be formed, it is proposed that JLF formation
would be made mandatory for distressed corporate borrowers, engaged in any type of
activity, with aggregate fund based and non-fund based exposure of Rs.1000 million and
above. Lenders, however, have the option of formation of JLFs even when the aggregate
fund-based and non-fund based exposures in an account are less than Rs.1000 million.
All the lenders should formulate and sign an Agreement (which may be called JLF
agreement) incorporating the broad rules for the functioning of the JLF. The JLF should
explore the possibility of the borrower setting right the irregularities/weaknesses in the
account. The JLF will have the capability/option to invite representatives of the Central/State
Government/Project authorities/Local authorities, if they have a role in the implementation of
the project financed.
JLF formation and subsequent corrective actions will be mandatory in accounts having
aggregate fund-based and non-fund based exposures of Rs.1000 million and above. Even in
other cases lenders have to monitor the asset quality and take corrective actions for effective
resolution as deemed appropriate, under our extant guidelines.


Corrective Action Plan (CAP) by JLF

JLF may explore various options to resolve the stress in the account. The intention of this
Framework is not to encourage a particular resolution option, e.g. restructuring or recovery,
but to arrive at an early and feasible resolution to preserve the economic value of the
underlying assets as well as the lenders loans. The options under Corrective Action Plan
(CAP) by the JLF would generally include:
Rectification- Obtaining a specific commitment from the borrower to regularise the account
so that the account comes out of SMA status or does not slip into the NPA category, within a
specific time period acceptable to the JLF without involving any loss or sacrifice on the part
of the existing lenders. If the existing promoters are not in a position to bring in additional
money or take any measures to regularise the account, the possibility of getting some other
investors to the company may be explored by the JLF in consultation with the borrower.
These measures are intended to turn-around the company without any change in terms and
conditions of the loan.
Restructuring - Consider the possibility of restructuring the account if it is prima facie
viable and the borrower is not a wilful defaulter, i.e., there is no diversion of funds, fraud or
malfeasance, etc. At this stage, commitment from promoters for extending their personal
guarantees along with their net worth statement supported by copies of legal titles to assets
may be obtained along with a declaration that they would not undertake any transaction that
would alienate assets without the permission of the JLF. Any deviation from the commitment
by the borrowers affecting the security/recoverability of the loans may be treated as a valid
factor for initiating recovery process. For this action to be sustainable, the lenders in the JLF
may sign an Inter Creditor Agreement (ICA) and also require the borrower to sign the Debtor
Creditor Agreement (DCA) which would provide the legal basis for any restructuring
process. The formats used by the CDR mechanism for ICA and DCA could be considered, if
necessary with appropriate changes. Further, a stand still clause as in the case of CDR
mechanism could be stipulated in the agreement to enable a smooth process of restructuring.
The ICA may also stipulate that both secured and unsecured creditors need to agree to the
final resolution.
Recovery - Once the first two options at (a) and (b) above are seen as not feasible, due
recovery process may be resorted to. The JLF may decide the best recovery process to be
followed among the various legal and other recovery options available with a view to
optimising the efforts and results.
The decisions agreed upon by a minimum of 75% of creditors by value and 60% of creditors
by number in the JLF would be considered as the basis for proceeding with the restructuring

or recovery action of the account, and will be binding on the lenders under the terms of the
The JLF is required to arrive at an agreement on the option to be adopted for CAP within 30
days from (i) the date of an account being reported as SMA-2 by one or more lending
banks/NBFC-SIs, or (ii) receipt of request from the borrower to form a JLF, with
substantiated grounds, if it senses imminent stress. The JLF should sign off the detailed final
CAP within the next 30 days from the date of arriving at such an agreement.
If the JLF decides on options (a) or (b), but the account fails to perform as per the agreed
terms under option (a) or (b), JLF should initiate recovery under option (c) and accelerated
provisioning [as indicated in para 6.3.1] will be applicable in these accounts depending on the
asset classification.
Restructuring Process
RBIs extant prudential guidelines on restructuring of advances lay down detailed
methodology and norms for restructuring of advances under sole banking as well as multiple/
consortium arrangements. Corporate Debt Restructuring (CDR) mechanism is an institutional
but voluntary framework for restructuring of multiple/ consortium advances of banks where
even creditors who are not part of CDR system can join by signing transaction to transaction
based agreements.
If the JLF decides on restructuring the account as a CAP, it will refer the account to CDR Cell
for restructuring after preliminary viability study.

In cases of accounts referred to CDR Cell by JLF, lenders who are not members of CDR
mechanism will be required to sign transaction to transaction agreement under CDR
mechanism for restructuring of a particular account.
Under extant instructions, CDR Cell is required to make the initial scrutiny of the
restructuring proposals. As the preliminary viability of account has already been decided by
JLF, CDR Cell need not duplicate this process and should directly prepare the TechnoEconomic Viability (TEV) study and restructuring plan in consultation with JLF within 30
days from the date of reference to it by JLF.
For accounts with aggregate exposure of less than Rs.5000 million, the above-mentioned
restructuring package should be submitted to CDR Empowered Group (EG) for approval.
Under extant instructions, CDR EG can approve or suggest modifications but ensure that a

final decision is taken within a total period of 90 days, which can be extended up to a
maximum of 180 days from the date of reference to CDR Cell. However, the cases referred to
CDR Cell by JLF will have to be finally decided by the CDR EG within the next 30 days. If
approved by CDR EG, the restructuring package should be approved by all lenders and
conveyed to the borrower within the next 15 days for implementation.
For accounts with aggregate exposure of Rs.5000 million and above, the TEV study and
restructuring package prepared by CDR Cell will have to be subjected to an evaluation by an
Independent Evaluation Committee (IEC)1 of experts fulfilling certain eligibility conditions.
The IEC will look into the viability aspects after ensuring that the terms of restructuring are
fair to the lenders. The IEC will be required to give their recommendation in these aspects to
the CDR Cell under advice to JLF within a period of 30 days. Thereafter, considering the
views of IEC if the JLF decides to go ahead with the restructuring, the same should be
communicated to CDR Cell. Thereafter, CDR EG should decide on the
approval/modification/rejection within the next 30 days. If approved by CDR EG, the
restructuring package should be approved by all lenders and conveyed to the borrower within
the next 15 days for implementation.
Restructuring cases will be taken up by JLF only in respect of assets reported as Standard,
SMA or Sub-Standard by one or more lenders of the JLF.
3.8 Wilful defaulters will normally not be eligible for restructuring. However, the JLF may
review the reasons for classification of the borrower as a wilful defaulter and satisfy itself
that the borrower is in a position to rectify the wilful default. The decision to restructure such
cases should however also have the approval of the board/s of individual bank/s within the
JLF who have classified the borrower as wilful defaulter.
The viability of the account should be determined by the JLF based on acceptable viability
benchmarks determined by them. Illustratively, the parameters may include the Debt Equity
Ratio, Debt Service Coverage Ratio, Liquidity/Current Ratio and the amount of provision
required in lieu of the diminution in the fair value of the restructured advance, etc. Further,
the JLF may consider the benchmarks for the viability parameters adopted by the CDR
mechanism and adopt the same with suitable adjustments taking into account the fact that
different sectors of the economy have different performance indicators.

Other Issues/Conditions Relating to Restructuring


The general principle of restructuring should be that the equity holders bear the first loss
rather than the debt holders. With this principle in view and also to ensure more skin in the
game of promoters, JLF/CDR may consider the following options when a loan is
Possibility of transferring equity of the company by promoters to the lenders to compensate
for their sacrifices;
Promoters infusing more equity into their companies;
Transfer of the promoters holdings to a security trustee or an escrow arrangement till
turnaround of company. This will enable a change in management control, should lenders
favour it.
In case a corporate has undertaken diversification or expansion of the activities which has
resulted in the stress on the core-business of the group, a clause for sale of non-core assets or
other assets may be stipulated as a condition for restructuring the account if under the TEV
study, the account is likely to become viable on hiving-off of non-core activities and assets.
For restructuring of dues in respect of listed companies, lenders may be ab-initio
compensated for their loss/sacrifice (diminution in fair value of account in net present value
terms) by way of issuance of equities of the company upfront, subject to the extant
regulations and statutory requirements. In such cases, the restructuring agreement shall not
incorporate any right of recompense clause. For unlisted companies, the JLF will have option
of either getting equities issued or incorporate suitable right to recompense clause.
In order to safeguard promoters control over companies, the equity so issued may bestow
call option/right of first refusal to the promoters group before the banks sell the same.
However, such call option/right of first refusal can only be exercised, after the entire loan and
the recompense has been repaid. Further, the price of shares under such call has to be equal to
the fair value of the shares at the time of exercise.
If acquisition of such equity shares results in breaching the extant regulatory Capital Market
Exposure (CME) limit, RBI will give exemption to the lenders from the CME limit on a caseby-case basis.
In order to distinguish the differential security interest available to secured lenders, partially
secured lenders and unsecured lenders, the JLF/CDR could consider various options like:
Prior agreement in the ICA among the above classes of lenders regarding repayments,
say, as per an agreed waterfall mechanism;

A structured agreement stipulating priority of secured creditors;

Appropriation of repayment proceeds among secured, partially secured and unsecured lenders
in certain proportion, say, 50%, 30% and 20%.
The above is only an illustrative list and the JLF may decide on a mutually agreed option. It
also needs to be emphasised that while one bank may have a better security interest when it
comes to one borrower, the case may be vice versa in the case of another borrower. So, it
would be beneficial if lenders appreciate the concerns of fellow lenders and arrive at a
mutually agreed option with a view to preserving the economic value of assets. Once an
option is agreed upon, the bank having the largest exposure may take the lead in ensuring
distribution according to agreed terms once the restructuring package is implemented.
As regards prudential norms and operational details, RBIs guidelines on CDR Mechanism,
including OTS, will be applicable to the extent that they are not inconsistent with this
proposed Framework. RBI will also further examine measures to strengthen the capacity
under CDR Mechanism.
Refinancing of Project Loans
In terms of extant instructions (circular DBOD.No.BP.BC.144/21.04.048-2000 dated
February 29, 2000 on Income Recognition, Asset Classification, Provisioning and other
related matters and Capital Adequacy Standards - Takeout Finance), banks can refinance
their existing infrastructure project loans by entering into take-out financing agreements with
any financial institution on a pre-determined basis. Henceforth, RBI may allow infrastructure
and other project loans to be refinanced by other institutions which substantially (60% or
more of the outstanding loan by value) take over the loan from the existing set of financing
banks of the borrowers and the refinancing institution(s) can fix a repayment period by taking
into account the life cycle of the project and cash flows from the project. In such cases, even
if the revised repayment period is longer than the residual repayment period in the earlier
banks books the account will not be considered as restructured, as long as a proper due
diligence has been done by the refinancing bank/institution.
Prudential Norms on Asset Classification and Provisioning
While a restructuring proposal is under consideration by the JLF/CDR, the usual asset
classification norm would continue to apply. The process of re- classification of an asset
should not stop merely because restructuring proposal is under consideration by the


However, as an incentive for quick implementation of a restructuring package, the special

asset classification benefit on restructuring of accounts as per extant instructions would be
available for accounts undertaken for restructuring under the JLF framework, subject to
adherence to the overall timeframe for approval of restructuring package detailed in
paragraphs 3.4 to 3.6 above and implementation of the approved package within 120 days
from the date of approval. The asset classification status as on the date of formation of JLF
would be the relevant date to decide the asset classification status of the account after
implementation of the final restructuring package. As advised to banks vide RBI circular
dated May 30, 2013, the special asset classification benefit as above will however be
withdrawn for all restructurings with effect from April 1, 2015 with the exception of
provisions related to changes in Date of Commencement of Commercial Operations (DCCO)
in respect of infrastructure and non-infrastructure project loans.
Penal Measures for non-adherence
In cases where banks/NBFCs-SIs fail to report SMA status of the accounts to CRILC or
resort to methods with the intent to conceal the actual status of the accounts e.g., sanctioning
additional facilities without genuine reasons, and the accounts subsequently turn into NPAs,
RBI may prescribe accelerated provisioning as appended below for these accounts and/or
other supervisory actions. The current provisioning requirement and the proposed accelerated
provisioning in respect of such non performing accounts are as under:
Asset Classification:1.Period as NPA
2.Current provisioning (percentage)
3.Proposed accelerated provisioning (percentage)
Any of the lenders who has agreed to the restructuring decision under the CAP by JLF and is
a signatory to the ICA and DCA, but changes their stance later on, or delays/refuses to
implement the package, may also be subjected to accelerated provisioning requirement as
indicated in above para.above, on their exposure to this borrower i.e., if it is classified as an
NPA. If the account is standard in those lenders books, the provisioning requirement will be
5%. Further, any such backtracking by a lender might attract negative supervisory view
during Supervisory Review and Evaluation Process.
Presently, asset classification is based on record of recovery at individual banks and
provisioning is based on asset classification status at the level of each bank. However, if

lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated
time frame, the account will be subjected to accelerated provisioning as indicated at above
para.If the escrow maintaining bank under JLF/CDR Mechanism does not appropriate
proceeds of repayment by the borrower among the lenders as per agreed terms resulting into
downgradation of asset classification of the account in books of other lenders, the account
with the escrow maintaining bank would attract the asset classification which is lowest
among the lending member banks.
Wilful Defaulters, Accountability of Promoters / Directors / Auditors
With a view to ensuring better corporate governance structure in companies and ensuring
accountability of independent/professional directors, promoters, auditors, etc. henceforth, the
following prudential measures will be applicable:
The provisioning in respect of existing loans/exposures of banks to companies having
director/s (other than nominee directors of government/financial institutions brought on board
at the time of distress), whose name/s appear more than once in the list of wilful defaulters,
will be 5% in cases of standard accounts; if such account is classified as NPA, it will attract
accelerated provisioning as indicated at above para of Master Circular on Wilful Defaulters
dated July 1, 2013, no additional facilities should be granted by any bank/FI to the listed
wilful defaulters.) This is a prudential measure since the expected losses on exposures to such
borrowers are likely to be higher.
With a view to discouraging borrowers/defaulters from being unreasonable and noncooperative with lenders in their bonafide resolution/recovery efforts, banks may classify
such borrowers as non-cooperative borrowers2, after giving them due notice if satisfactory
clarifications are not furnished. Banks will be required to make higher/accelerated
provisioning in respect of new loans/exposures to such borrowers as also new
loans/exposures to any other company promoted by such promoters/ directors or to a
company on whose board any of the promoter / directors of this non-cooperative borrower is
a director. The provisioning applicable in such cases will be at the rate of 5% if it is a
standard account and accelerated provisioning as per para 6.3.1 if it is an NPA. This is a
prudential measure since the expected losses on exposures to such non-cooperative borrowers
are likely to be higher.
RBI will create a database of directors on the boards of companies classified as noncooperative borrowers for dissemination to lenders.
At present, the list of Suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) is
submitted by banks to the Credit Information Companies (CICs) of which they are

member(s), who display the same on their respective websites as and when received. The list
of non-suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) is confidential and
is disseminated by RBI among banks and FIs only for their own use. The current system of
banks/FIs reporting names of suit filed accounts of Wilful Defaulters and its availability to
the market by CICs/RBI will be enhanced to make it as current as possible, as against the
current 3-4 months time lag from the date of reporting by a bank.
Banks will have to strictly comply with the existing instructions about formal lodging of
complaints with ICAI against company auditors in case of observance of falsification of
accounts/wrong certification of stock statement/end-use certificate etc. Pending disciplinary
action by ICAI, the complaints will also be received in the RBI for records. The names of the
CA firms against whom many complaints have been received from different banks may be
flagged for information of all banks. Banks should consider this aspect before assigning any
work to them. The names may also be shared with other regulators/MCA/CAG for
Further, banks may seek explanation from advocates who wrongly certify as to clear legal
titles in respect of assets or valuers who overstate the security value, by negligence or
connivance, and if no reply/satisfactory clarification is received from them within one month,
they may report their names to IBA for record and necessary action. IBA may circulate the
names of such advocates/valuers among its members for consideration before availing of
their services in future.

Credit Risk Management

Lenders should carry out their independent and objective credit appraisal in all cases and
must not depend on credit appraisal reports prepared by outside consultants, especially the inhouse consultants of the borrower company.
Banks/lenders should carry out sensitivity tests/scenario analysis, especially for infrastructure
projects, which should inter alia include project delays and cost overruns. This will aid in
taking a view on viability of the project at the time of deciding CAP.
Lenders should ascertain the source and quality of equity capital brought in by the
promoters /shareholders. Multiple leveraging, especially, in infrastructure projects, is a matter
of concern as it effectively camouflages the financial ratios such as Debt/Equity ratio, leading

to adverse selection of the borrowers. Therefore, lenders should ensure at the time of credit
appraisal that debt of the parent company is not infused as equity capital of the
While carrying out the credit appraisal, banks should verify as to whether the names of any of
the directors of the companies appear in the list of defaulters/ wilful defaulters by way of
reference to DIN / PAN etc. Further, in case of any doubt arising on account of identical
names, banks should use independent sources for confirmation of the identity of directors
rather than seeking declaration from the borrowing company.
With a view to ensuring proper end-use of funds and preventing diversion/siphoning of funds
by the borrowers, lenders could consider engaging auditors for specific certification purpose
without relying on certification given by borrowers auditors. However, this cannot substitute
banks basic minimum own diligence in the matter.
Reinforcement of Regulatory Instructions
RBI reiterates instructions regarding restrictions placed on banks on extending credit
facilities including non-fund based limits, opening of current accounts, etc. to constituents
who are not their regular borrowers. Banks must take necessary corrective action in case the
above instructions have not been strictly followed. Further, RBI will ensure strict adherence
by banks to these instructions. As any breaches of RBI regulations in this regard are likely to
vitiate credit discipline, RBI would consider penalising the banks in case of breaches.
Banks are custodians of public deposits and are therefore expected to make all efforts to
protect the value of their assets. Banks are required to extinguish all available means of
recovery before writing off any account fully or partly. It is observed that many banks are
resorting to technical write off of accounts, which reduces incentives to recover. Banks
resorting to partial and technical write-offs should not show the remaining part of the loan as
standard asset. With a view to bring in more transparency, henceforth banks would be
required to disclose full details of write offs including separate details about technical write
Sale of NPAs and ARCs
ARCs should be construed as a supportive system for stressed asset rather than the last resort
to dispose of NPAs by banks. Sale of assets to ARCs at a stage when the assets have good
chance of revival and fair amount of realizable value, for rehabilitation and reconstruction is


According to current instructions on sale of financial asset by a bank to ARCs, if the sale is
for a value higher than the Net Book Value (NBV), the excess provision is not allowed to be
reversed but banks will have to utilise the same to meet the shortfall / loss on account of sale
of other financial assets to Securitisation Company (SC) / Reconstruction Company (RC).
However, banks are required to provide for any shortfall if the sale value is lower than the
NBV. With a view to bringing in uniformity as also incentivising banks to recover appropriate
value in respect of their NPAs promptly, the Reserve Bank will allow banks to reverse the
excess provision on sale of NPA if the sale is for a value higher than the NBV to its P&L
account in the year the amounts are received. Further, as an incentive for early sale of NPAs,
the Reserve Bank will allow banks to spread over any shortfall, i.e., if the sale value is lower
than the NBV, over a period of two years. This facility of spreading over the shortfall would
however be available for NPAs sold up to March 31, 2015 and will be subject to necessary
In terms of extant instructions, floating provisions can be used by banks only for
contingencies under extraordinary circumstances for making specific provisions in impaired
accounts after obtaining board's approval and with prior permission of RBI. The Reserve
Bank will allow banks to use floating provisions towards accelerated provisioning /additional
provisions incurred at the time of sale of NPAs as per their approved internal policy without
obtaining prior permission of RBI.
The promoters of the company/defaulting borrowers shall be barred from directly/ indirectly
buying back the asset from the ARCs. Legal issues involved, if any, would be examined by
Current restrictions of Government of India (GOI)/Central Vigilance Commission (CVC) on
bilateral sale of assets (by way of private treaty) would be taken up with the Government by
suggesting controls as follows:
Price being not less than the Reserve Price fixed for the asset and after price discovery
through one auction.
Public advertisements of sale in at least 2 leading newspapers inviting offers from anyone
who is willing to offer a higher amount.
If the bilateral sale covers the entire dues to the bank and is with the consent of the borrower,
the auction process may be dispensed with.


Sale of assets between ARCs is not permitted under the SARFAESI Act provisions. In order
to encourage liquidity and price discovery of stressed assets, sale of assets between ARCs
may be permitted. The issue will be taken up with the Government.
The ability of the ARCs to raise limited debt funds to rehabilitate units will be considered.
This will be accompanied by increasing their minimum level of capitalisation in view of
recent liberalisation of FDI ceilings and enhancement of working funds. The ARCs will be
encouraged to reach certain minimum level of AUM targets.
Banks using ARCs as a price discovery vehicle should be more transparent, including by
disclosing the Reserve Price and specifying clauses for non-acceptance of bids, etc. If a bid
received is above the Reserve Price and also fulfils the other conditions specified, acceptance
of that bid would be mandatory.
Methodologies for Independent Valuation of NAVs of Security Receipts (SRs) will be
examined / considered. Further work on this will be done by looking at the valuation
methodologies used in this regard and discussion with SEBI, Institution of Valuers, etc.
Large designated NBFCs could be allowed to assign stressed assets to ARCs. If any of these
designated NBFCs are not notified under the SARFAESI Act, the issue of their notification
will be taken up with the Government. However, a bank /NBFC cannot sell assets to its own
promoted ARC or an ARC where it owns at least 10% equity.
PE firms and large NBFCs with proven expertise in resolution/recovery may be allowed to
participate in auctions through explicit regulatory affirmation. Such entities will have to be
provided authority under SARFAESI Act on selective basis to deal with specific assets.
Appropriate incentive structures (e.g. please see para 10.13 and 11.3) may be built so as to
provide greater role to PE firms and other institutions in restructuring of troubled company
accounts. These institutions can be expected not only to bring additional funds for
restructuring but also bring in expertise for management of the business unit in question.
In terms of extant instructions, banks are generally not allowed to finance acquisition of
promoters stake in Indian companies. The underlying reasoning being promoters should
acquire equity stake from their own sources and not through borrowings. The Reserve Bank
would allow banks to extend finance to specialized entities put together for acquisition of
troubled companies. The lenders should however ensure that these entities are adequately


Alternatively (or additionally), a specialized institution may be created with equity/ quasiequity participation of the above entities or international institutions with the Government of
India holding a part of the stake. This institution may participate in restructuring of borrowal
accounts along with banks and other lenders. Government may take a view on this matter.
In terms of extant instructions, an NPA in the books of a bank is eligible for sale to other
banks only if it has remained as NPA for at least two years in the books of the selling bank.
The Reserve Bank will withdraw this minimum holding period for any initial loan sale.
However, the bank purchasing the NPA will, have to hold the asset in its books for at least
one year before selling the asset.
DRTs and Other Recovery Infrastructure
The issues of large scale vacancies in DRTs and creating of special cadre of officers will be
taken up with the Government. The post of Presiding Officers (POs) can be sought to be
filled through experienced ex-bankers fulfilling certain eligibility norms.
Additional DRT benches at centres with large backlogs may be created. A separate bench for
speedy disposal of SARFAESI related cases may be established in DRTs. Further, adequate
staffing of Recovery Officers may have to be ensured by the Government.
It is learnt that certain issues relating to acquisition/restructuring of stressed companies where
CLB involvement may help have been taken up by IBA. In cases of companies involved in /
potentially involved in frauds etc., special privileges by CLB may be considered to protect
the new management. The issue will be taken with the Government.
Recommendation will be made to the Government for establishing Special Courts/ Tribunals
to deal with cases involving Section 138 of Negotiable Instruments Act, 1881.
Recommendation may also be made to the Government to expedite setting up of special
benches in every High Court for corporate cases.
Currently security registration, especially registered mortgages, is done at district level and
Central Registry of Securitisation Asset Reconstruction and Security Interest of India
(CERSAI) is generally used to register equitable mortgages. The Government mandate to
register all types of mortgages with CERSAI will have to be strictly enforced among banks
and NBFCs.
To address resource issues of CERSAI, RBI will take up the issue of funding with GOI for
enhancing its human resource and technology upgradation.


The issue of tax claims and other authorities, workers claims etc. getting raised at the last
moment and seeking priority over secured creditors or getting stay order distort the
recovery measures initiated by the lenders. The matter will be taken up with Government for
fixing limits to such claims.
In case of default in infrastructure project loans, where termination notice is issued to the
project authority calling for payment of Debt Due, the termination payment is received after a
lengthy procedure.The Government may be requested to review the procedure.
Board oversight
The Board of Directors should take all necessary steps to arrest the deteriorating asset quality
in banks and should focus on improving the credit risk management system. Early
recognition of problems in asset quality and resolution envisaged in this paper requires the
lenders to be proactive and make use of CRILC as soon as it becomes functional.
Boards should put in place a policy for timely providing of credit information to and access
of credit information from CRILC, prompt formation of JLFs, monitoring the progress of
JLFs and periodical review of the above policy.
The boards of banks should put in place a system for proper and timely classification of
borrowers as wilful or/and non-cooperative. Further, boards should review the accounts
classified as such.
Non-financial Signals of Stress
Illustrative list of any one of the following signals that may lead to categorise an account as
Delay of 90 days or more in (a) submission of stock statement / other stipulated operating
control statements or (b) credit monitoring or financial statements or (c) non-renewal of
facilities based on audited financials.
Actual sales / operating profits falling short of projections accepted for loan sanction by 40%
or more; or a single event of non-cooperation / prevention from conduct of stock audits by
banks; or reduction of Drawing Power (DP) by 20% or more after a stock audit; or evidence
of diversion of funds for unapproved purpose; or drop in internal risk rating by 2 or more
notches in a single review.


Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days,
on grounds of non-availability of balance / DP in the account or return of 3 or more bills /
cheques discounted or sent under collection by the borrower.
. Devolvement of Deferred Payment Guarantee (DPG) instalments or LCs or invocation of
BGs and its non-payment within 15 days.
Third request for extension of time either for creation or perfection of securities as against
time specified in original sanction terms or compliance with any other terms and conditions
of sanction.
Increase in frequency of overdrafts in current accounts.
The borrower reporting stress in the business and financials.

Leading Merchant Bankers in India

In Public Sector: SBI Capital Markets Ltd., Merchant Banking Divisions of IDBI & IFCI,
PNB Capital Services Ltd., Bank of Maharashtra, etc.
In Private Sector: ABN AMRO, ICICI Bank Ltd, Axis Bank Ltd., Kotak Mahindra Capital
Co., Bajaj Capital, Reliance Security Ltd., Yes Bank Ltd, Tata capital market ltd., JM
Financial Co. and DCM Financial Services Ltd etc.
Foreign Players: Goldman SACH (India) Security Pvt. Ltd., Morgan Stanley Indian co. Pvt.
Ltd., Barclays Security Indian Pvt. Ltd., Bank of America, Deutsche Bank, Citi Group Global
Market Indian Pvt. Ltd., FedEx Security Ltd.

As of now there are 135 Merchant bankers who are registered with SEBI in India. It includes
Public Sector, Private Sector and foreign players some of them are
Public Sector Merchant Bankers

SBI capital markets ltd

Punjab national bank

Bank of Maharashtra

IFCI financial services ltd

Karur Vysya bank ltd,

State Bank of Bikaner and Jaipur


Private Sector Merchant Bankers

ICICI Securities Ltd

Axis Bank Ltd (Formerly UTI Bank Ltd.)
Bajaj Capital Ltd
Tata Capital Markets Ltd
ICICI Bank Ltd
Reliance Securities Limited
Kotak Mahindra Capital Company Ltd
Yes Bank Ltd.

Foreign Players in Merchant Banking

Goldman Sachs (India) Securities Pvt. Ltd.

Morgan Stanley India Company Pvt. Ltd
Barclays Securities (India) Pvt. Ltd
Bank of America, N.A
Deutsche Bank
Deutsche Equities India Private Limited
Barclays Bank.
Citigroup Global Markets India Pvt. Ltd.
DSP Merrill Lynch Ltd
FEDEX Securities Ltd

Leading commercial banks in India:Banks are the major financial institution which accepts deposits directly by loaning or
indirectly through capital markets. It forms a bond between customers having capital deficits
and capital surplus.
The following banks are crowned as best 10 leading bank:

State Bank of India

SBI was established in July 1955 for providing services to India. It consists of 7 associate
banks such as State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of
Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank
of Travancore. It has non-banking subsidiaries and joint ventures, such as SBI Capital
Markets Ltd, SBI DFHI Ltd, SBI Funds Management Pvt Ltd., SBI Factors & Commercial
Services Pvt Ltd. and SBI Life Insurance Company Ltd. It consists of 9373 branches and
5826 ATMs among 73 overseas branches.

ICICI Bank Ltd

ICICI was formed in 1994. In 1998 it formed as an IPO and acquired bank in Madhura in
2001. Its parent ans subsidiaries merged with it in 2002. Its one of the characterized feature
is that it provides a saving habit induced by children -Young stars. ICICI Bank provides
Home Loans and Personal Loans for meeting personal credit requirements. From Dec 2006,
the bank had a total of 667 branches and 2681 ATMs.


HDFC Bank Ltd

HDFC bank is a financial service bank established in 1994. It is a scheduled commercial bank
. It provides financial products and services. Kids Advantage Account- an account established
for savings of children. Retail Trust account-a higher interest is earned on trusts and societies.
HDFC provides wholesale banking services to Blue-chip manufacturing companies in the
Indian corp to small & mid-sized corporate and agri-based businesses. It is the first bank to
launch international Debit card along with VISA. Besides these facilities it has three main
product areas like foreign exchange,local currency money market,Debt securities and
equities.It is a part of treasury to the bank.

Punjab National bank

It was formed in 1895 at Lahore by one of Indias most prominent reformists, Late Lala
Lajpat Rai. It is the first bank with sole and indigenous enterprise. In 1944 it introduces first
teller system. PNB consists of several banks viz., Bhagwan Das Bank Ltd (1940), Bharat
Bank (1951), Indo Commercial Bank Ltd; and Universal Bank Ltd, (in 1960s). It was
nationalized in 1969.
It also has wide variety of products and services for meeting needs of customer. A number of
deposit and loan schemes has been inculcated such as housing loans, car nance, customer
nance, personal and several types of educational loans. Punjab National Bank has initiated
the Gold Card Scheme for its exporter clients as per RBI. Besides these bank provides 12
hour banking services among 77 branches. Electronic Clearing Service is offered at 13
centers in India.
Total number of branches of the bank are 4066 comprising 1944 rural, 801 semiurban, 792
urban and 528 metropolitan branches and one foreign branch at Kabul, Afghanistan. 40
additional banks has been opened out of which 17 are merged as network nationalization.

Canara Bank
Canara Bank was found in Jul 1, 1906 in Mangalore by Late A Subba Rao Pai. It was
nationalized in 1969. 800 branches of the bank are ISO certified. The bank has seven
subsidiaries/sponsored institutions. It provides regular savings, xed and current account
deposits the Bank offers niche based products like SB Can Champ a deposit scheme
encouraging savings amongst the children; Ashraya Deposit specially meant for meeting the
requirements of senior citizens; Can-Tax Saver Scheme to provide tax saving benets; and
the Vidyasagar Loan for funding education.
Canara Bank has branches and ofces spread across country. The Bank has a network of 2552
branches, inclusive of its branch at London and an Special Economic Zone, Noida, in the
state of Uttar Pradesh.

Union Bank of India

It is a public sector bank. It has also established core banking system. It offers products like
New India Insurance which provides basic necessities for healthcare and mediclaim policies.
It has 4129 ATM facility. Telebanking services are also provided. Revenue initiated through
the bank is Rs 21,144.


Bank of Baroda
BOB was formed in Jul 20, 1908 by Maharaja Sayajirao Gaekwad III of Baroda State. It first
opened its branch in Ahmadabad and another in Mumbai. It provides safe deposit lockers to
its customers. It offers products and services to the customers. the major product it includes
are export nance, bill nance, advance against shares, infrastructure nance, foreign
currency loans and sub-PLR loans. Besides these facilities it offers Multi - city cheques at
centers like local cheques. Baroda Health and Baroda money express are the other schemes
which is provided by the bank which ensure better payment and transferrment of funds.
Special loan schemes has been given by the bank for the small scale industries and medium
The network of the bank has been spread to almost 2,732 branches and 61 offices to abroad.
Some new liability programmes being introduced by the bank are Baroda premium account,
Baroda salary advantage account,Baroda tax saving term deposit, Baroda super sixer,Baroda
square drive account. 1,050 CBS branches, 1,000 ATMS, 8 AM to 8 PM banking, 24 hr
human banking, retail loan factories, SME loan factories, Wealth Management Services is
being initiated.

Bank of India
Bank of India was formed in 1906 and in 1969 it was further nationalized along with 13 other
banks. It has network with 20 foreign branches . It provides Medi Mobile Scheme-allowing
practitioner to buy vehicles of their choice. Other liability like BOI Saving plus scheme is
being offered , a sweep in and sweep out facility. It has almost 2672 branches supporting 325
ATMs and 24 overseas branches.

Industrial Development Bank of India Ltd.

IDBI bank Ltd. is a subsidiary of RBI with an aim of providing industrial development in the
country. It is a financial service bank. IDBI is the 10th largest development bank in world.
The major products it offers are Sabka Account-minimum balance account. Citizenidbibank
-for the development of economically deprived nations in India. The bank is having a mutual
co-operation with Bajaj alliance and Birla Sun Life insurance. It has 1000 branches, 678
centers and 1594 ATMs as on November 16, 2012.

Syndicate Bank
Syndicate bank was organised in 1925 in Udupi and the main objective of Syndicate bank is
to extend financial assistance to local weavers in the handloom industry. It is one of the oldest
commercial bank in India. Syndicate bank offers services like Cash Mangement , RTGS,
NEFT, speed clearing and electronic fund transfer system.
Delivery channels like ATM, Internet banking, SMS banking services are provided by this
Syndicate bank. All the services and products are achieved through centralized banking
solution. Unemployed youths are trained with self employment ventures at Syndicate bank of
Rural Entrepreneurship development out of which 59,764 are women candidates.


Role of Merchant Bank in India

Potential Scope of Merchant Banking Client Relationship.
Private Placement
PIPE financing
Late stage venture financing
M & A financing
Creating new company or merger in to an established entity.
New Co financing for Pharama & Biotech.
M& A Transactions
Transaction across life science for public & private clients.
Reverse Merger
Strategic Partnership
Early stage research to product development and commercialization
Out-license co-development, co-promotion.
Preclinical through marketed products.
Representing Pharama & Biotech.
The merchant banker are those financial intermediary involved with the activity of
transferring capital funds to those borrowers who are interested in borrowing. The activities
of the merchant banking in India are very vast in nature of which includes the following

The management of the customers securities

The management of the portfolio
The management of projects and counseling as well as appraisal.
The management of underwriting of shares and debentures.
The circumvention of the syndication of loans.
The management of the interest and dividend etc.

Factors responsible for changes:

Globalization of Indian Economy has made the whole economy open, which has more
multinational player in the era of the financial services? This has resulted in to the emergence
of the global investment in financial sector. Govt. has now open up the doors of investment
especially in the area of banks and insurance, which leads to competitive environment for the
present players. Now they have to bring something new which is efficient and best services to
live in the competitive environment. Competition arising out of Private Company

participation is due to liberalization of the economy.

Role of commercial bank in India

Commercial banks engage in the following activities:

processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other


issuing bank drafts and bank cheques

accepting money on term deposit

lending money by overdraft, installment loan, or other means

providing documentary and standby letter of credit, guarantees, performance bonds, securities
underwriting commitments and other forms of off balance sheet exposures

safekeeping of documents & other items in safe deposit boxes

sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar
financial products as a financial supermarket

cash management and treasury

merchant banking and private equity financing

traditionally, large commercial banks also underwrite bonds, and make markets in currency,
interest rates, and credit-related securities, but today large commercial banks usually have an
investment bank arm that is involved in the mentioned activities.

Scope for growth of Merchant Banking in India

As planning and industrial policy of the country envisaged the setting of up of new industries
and technology, greater financial sophistication and financial services are required. There is a
well proven link between economic growth and financial technology.
Economic development requires specialist financial skills: savings banks to marshal
individual savings; finance companies for consumer lending and mortgage finance; insurance
companies for life and property cover; agricultural banks for rural development; and a range
of specialized government or government sponsored institutions. As new units have been set
up and business is expanding, they require additional financial services. A public equity or
debt issue is the logical source of fund in this situation and merchant banks can tap this
opportunity of growth.
Growth of Primary market:


If the primary market grows and number of issues increases, the scope of merchant banking
will be enhanced.
Entry of Foreign Investors:
Now India capital market directly taps foreign capital through euro issues.FDI is increased in
capital market. So Merchant bankers are required to advise them for their investment in India.
The increasing number of joint ventures also requires expert services of Merchant Bankers. If
more and more NRIs participate in capital market, there will be great demand for merchant
banker services.
Changing policy of Financial Institutions:
Now the lending policies of financial institutions are based on project orientation, so the
merchant banker services will be needed by corporate enterprise to provide expert guidance.
Development of debt markets:
If the debt market is enhanced, there will be tremendous scope for Merchant bankers. Now
NSE and OTCEI are planned to raise their fund through debt instruments.
Corporate restructuring:
Due to liberalization and globalization Companies are facing lot of competition. In order to
compete, they have to go for restructuring, merger, acquisitions or disinvestments. They may
offer good opportunities to merchant bankers
The scope could be extended to:1. Advising the company on designing of its Capital Structure.
2. Advising the company on the instrument to be offered to the public.
3. Pricing of the instrument.
4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ ROC/
5. Exchanges and other regulatory authorities.
6. Assisting the company in marketing the issue.
7. In channelizing the financial surplus of the general public into productive investment
8. To coordinate the activities of various intermediaries to the share issue such as the registrar,
Bankers, advertising agency, printers, underwriters, brokers etc.
9. To ensure the compliance with rules and regulations governing the securities market.
Factors on which growth of merchant banking depends:

Planning and industrial policy of the country i.e. India in this case

Prevailing Economic condition of the country.

Regulatory system of the market and economy prevailing in India.

Confidence of the people, traders, buyers, marketers, business houses, financial


institutions etc.

The economic environment of the outside world.

Competition among the existing players and the upcoming entrants.

Problems of Commercial Banks:Banks are facing a twin-crisis of high bad loans and a very small margin between their lending and
deposit rates, because of the prevailing high interest rate scenario in the country,
"The best of the days for the banks in terms of enjoying a huge margins between the fixed deposit and
lending rates have disappeared with the spreads narrowing down to 125-150 basis points (bps) in the
last few months from a peak of 875 bps in 2009-10," it said.
Assocham said the scheduled commercial banks have never saw such a narrow spread between the
fixed deposit rates (FDRs) and the lending rates since 2000-01.
"The trend does not seem to augur well for the industry as it wants the RBI to cut interest rates which
are eating into growth," it said.
The industry body said that under the given set of market, cutting deposit rates would not be easy as
banks are finding it difficult to mobilise savings from people.
"In a way, it seems to be a vicious circle- high inflation particularly of food and the wage inflation
dissuades the public from investing in the fixed deposit rates," it added.
The study said that the banks find a twin problem of increasing NPAs and the narrowing spread
between the FDRs and the lending rates.
"We are facing a peculiar difficult position that even though the RBI may be willing now to tweak the
policy rates along with the Finance Ministry keeping a leash on the fiscal situation, high deposit rates
are an issue. ," Assocham President Rajkumar Dhoot said in a statement.

Problems of Merchant Banks:

Restriction of merchant banking activities:
SEBI guidelines have authorized merchant bankers to undertake issue related activities and
made them restrict their activities or think of separating these activities from present one and
float new subsidiary and enlarge the scope of its activities.
Minimum net worth of Rs.1 crores:
SEBI guidelines stipulate that a minimum net worth of Rs.1 crores for authorization of

merchant bankers.
Non co-operation of issuing companies:
Non co-operation of the issuing companies in timely allotment of securities and refund of
application money is another problem faced by merchant bankers.
Merchant Bankers Commission:
Maximum: - 0.5%
Project appraisal fees
Lead Manager:- 0.5% up to Rs.25 crores
- 0.2% more in excess of Rs.25 crores
Underwriting fees
Brokerage commission: - 1.5%
Other expenses:o Advertising
o Printing
o Registrars expenses
o Stamp duty

Difference between merchant banking & commercial banking

Merchant banking often focuses on investing a depositors assets in a finance portfolio and
managing these investments. In the US, banks that offer these services are typically called
investment banks. Apart from investing and managing the assets of wealthy clients, they
also offer counsel and advice to large corporations. This advice is particularly useful when a
company is considering merging with or acquiring another business.

Merchant banks and Commercial banks


Merchant banks

Commercial banks

1) Assist in raising capital in the form of equity,

preference shares, and syndicated loan working
capital instruments.

Provide funds in the form of term

loan and working capital.

2) Advisor not financer.

Financing is the main business.

3) Do not accept chequable deposits.

Demand deposits are the key feature.

4) Mainly fees based business.

Mainly fund based business

5) Being advisors, they are closer to the

customers and get to know risks of the
transaction are properly. They work on risks
shields i.e. mitigation measures

Being lenders, they are more

cautions, assess risks in lending
proposal and cannot afford to be
grossly relationship based and close
to the customer.

6) Most of work they get is about management

of equity issues in the capacity of lead manager,
underwriter, piercing of issue, book running, and
liaising with SEBI.

Commercial banks majority business

is of terms lending and bank deposits.

Commercial banking courses and career opportunities

Various Universities offer a wide range of commercial banking courses. Aspirants can pursue
the graduate and postgraduate courses in the relevant fields with specializations of their
choice. Since it is a developing industry, so many opportunities are also prevailing in the
commercial banking sector. All the postings in commercial banks are made through
competitive tests. Those who complete the PhD or M.Phil programs in commercial banking
can seek out for career in the sector as research analysts. A pass in the intermediate exam is a
prerequisite for the entry-level jobs in commercial banks. Professionals can get placements in
the higher posts of banks through promotions and according to their seniority. Those who
have completed the course can search out for employments in banks from entry-level leasing
agents to international finance officers and much more.

Merchant banking courses and career opportunities

As there are so many courses in merchant banking, aspirants can choose their interesting
topics in merchant banking for study. There are Bachelors and Masters programs in
concerned areas. Aspirants can pursue the program in an acknowledged University. Those
who are interested in doing MBA, can pursue the same with specialization in merchant

banking. Various institutes also provide short-term Certificate programs in merchant banking
for working professionals. On completion of the programs, they can seek out for occupations
in public or private undertakings. Most of these merchant bankers find jobs in investment
banking sector, Corporate Finance, Capital Markets, Equity and Fixed Income Research and
so on.

Progress of Merchant Banking in India:Up to 1970, there were only two foreign banks which performed merchant banking
operations in the country. SBI was the first Indian commercial bank and ICICI the first
financial institution to take up the activities in 1972 and 1973 respectively. As a result of
buoyancy in the capital market in 1980s some commercial banks set up their subsidiaries
to operate exclusively in merchant banking industry. In addition, a number of large stock
broking firms and financial consultants also entered into business. Thus, by the end of the end
of 1980s there were 33 merchant bankers belonging to three major segments viz.,
commercial banks, all India financial institutions, and private firms. Merchant banking
functions of these institutions was related only to management of new capital issues.
Merchant banking industry which remained almost stagnant and stereotyped for over two
decades, witnessed an astonishing growth after the process of economic reforms and
deregulation of Indian economy in 1991.The number of merchant banks increased to 115 by
the end of 1992-93 300 by the end of 1993-94 and 501 by the end of August, 1994. all
merchant bankers registered with SEBI under four different categories include 50 commercial
banks, 6 all Indian financial institutions ICICI, IFCI, IDBI, IRBI, Tourism Finance
corporation of India, infrastructure Leasing and Financial Services Ltd. and private merchant
bankers. In addition to Indian Merchant Bankers, a large number of reputed international
Merchant Bankers like Merrill Lynch, Morgan Stanley, Goldman Sachs, Jardie Fleming
Kleinwort Benson etc. are operating in India under authorization of SEBI. As a result of
proliferation, Indian Merchant Bankers are faced with severe competition not only among
themselves but also with the well-developed global players.

Merchant banking industry which remained almost stagnant and stereotyped for over two
decades, witnessed an astonishing growth after the process of economic reforms and
deregulation of Indian economy in 1991. The number of merchant banks increased to 115 by
the end of 1992-93 300 by the end of 1993-94 and 501 by the end of August, 1994. all
merchant bankers registered with SEBI under four different categories include 50 commercial
banks, 6 all Indian financial institutions ICICI, IFCI, IDBI, IRBI, Tourism Finance
corporation of India, infrastructure Leasing and Financial Services Ltd. and private merchant

Progress of Commercial Banking in India:A banking revolution occurred in the country during the post-nationalisation era. The
commercial banks, especially public sector banks, have drastically changed from their

traditional money dealing business to innovative banking and sub-served their operations to
the needs of nation-building activities and socio-economic upliftment of the Indian masses.
It is rightly said that Indian banking has changed from class-banking to mass-banking or
social banking.
There has been a marked diversification of banking business from traditional to nontraditional and even to non-financial areas of operation during the last two decades.
In recent years, there has been a conscious reorientation of banking policy towards the
attainment of social goals. The following have been the major shifts in the banking policy of
the country:
Urban to rural orientation;
Profit motive to mass banking;
Class banking to mass banking;
Big customers to small customers;
Traditional banking to innovative banking;
Short-term finance to development finance;
Security based lending to purpose oriented lending;
Creditworthiness of the borrower to the purpose of borrowing; and
Self-interest to social perspectives.
Indian banking has become development oriented. There are both quantitative and qualitative
dimensions to the progressive changes that have taken place in our banking industry, ushering
in a new era in the county's economic progress.
Some of these changes, along with the progress of nationalised banks, have been briefly
discussed in the following sections.
Regional Development :
Prior to nationalisation, there has been an uneven geographical coverage by the banking
institutions. There were gross regional imbalances in the development of banking sector in
the country.
Regional imbalances of banking development have been noticed at two levels:
(i) Between urban and rural areas; and
(ii) Among different states of the county.
Urban-Rural Disparities and Development :


The private sector commercial banks were urban- oriented in their growth. Rural areas were
starved of banking facilities. Many villages did not have any bank branches and were thus
starved of banking facilities.
To improve the situation, therefore, the commercial banks, especially the public sector banks,
undertook a programme of massive expansion of bank branches in the rural, under-banked
and unbanked areas, which aimed at ensuring balanced regional development of the banking
sector in the country.
A comparable picture of the regional disparities which existed prior to bank nationalisation
and the trend of development in the post-nationalisation period can be visualised from the
data pertaining to the population group-wise position of branches of commercial banks.
In June, 1969, there were 8,262 total branches of the commercial banks. Their number has
increased to 61,742 in June 1994. Of these, the rural areas accounted for over 57 per cent in
1994 as against that of 22 per cent in 1969.
The Public Sector Banks (PSB) have done remarkable job in opening a large number of
branches in unbanked areas Unbanked centers accounted for nearly 65 per cent of the total
number of new bank branches opened during last two decades. By 2007, there are 71,781
total bank branches in India.
State-wise Disparities and Development :
There has been an uneven growth of banking in different states of the country. Only a few
advanced states were fairly served while a majority of them has poor banking facilities.
In June 1969, the all-India average population- bank office (P-B) ratio was 65,000. But most
states were having a much higher P-B ratio than the national average.
For instance, the P-B ratios of some of the states were as follows: Andhra Pradesh 75,000,
Assam 198,000, Bihar 207,000, Jammu & Kashmir 114,000, Madhya Pradesh 116,000,
Manipur 497,000, Nagaland 205,000, Orissa 212,000 and Uttar Pradesh 119,000.
These figures reveal the great deficiency in banking facilities obtained in these states in 1969.
On the other hand, only a few states were in a better position. For instance, the P-B ratio for
Gujarat was 34,000, Haryana 57,000, Kamataka 38,000, Maharashtra 44,000, Punjab 42,000
and Tamil Nadu 37,000.
To correct regional imbalances in banking development, the bank adopted the area approach
and the lead bank scheme in their branch expansion programme. Presently, the situation has
improved very much.
In June 1994, the all-India P-B ratio came down to 14,000. The P-B ratio for Andhra Pradesh
has also dropped to 14,000 which matches with the national average.
The P-B ratios for other states have also dropped to the following figures: Assam 18,000,
Bihar 18,000, Jammu & Kashmir 10,000, Madhya Pradesh 12,000, Orissa 13,000, Uttar
Pradesh 13,000.


Similarly, the P-B ratios of advanced states also have further declined. For instance, the ratio
of Gujarat has come down to 12,000, Maharashtra 14,000, Haryana 13,000, and Punjab
Thus, the range of disparities between the rich and poor states has considerably narrowed
down. In 1969, for instance, Gujarat has the lowest P-B ratio (34,000) while Manipur had the
highest P-B ratio (4, 97,000). But, in 1994, P-B ratio of Gujarat dropped to 12,000 while that
of Manipur to 22,000.
Analysing the relative growth of commercial banking in terms of various indicators like
branch expansion, deposits and advances in the various states during 1969- 79, Dr. Chhipa. 4
however, arrives at the following classification of states:
I. Highly Developed States: Kerala, Maharashtra, Punjab and West Bengal.
II. Moderately Developed States: Gujarat, Haryana, Kamataka, and Tamil Nadu.
III. Low Developed States: Andhra Pradesh, Assam, Bihar, Himachal Pradesh, J & K, M.P.,
Rajasthan and U.P.
IV. Very Low Developed States: Orissa and Tripura.
By and large, however, the overall growth of bank branches in the last 21 years has been
remarkable in its geographical coverage and removal of regional imbalances in the country.

Both commercial banking and merchant banking have roots that go back hundreds of years, if not
more. Merchant banks were actually the original banks, and they were invented in the middle Ages
by Italian grain merchants. These merchants, as well as Jewish traders fleeing persecution in Spain,
used merchant banking to finance long trading journeys as well as the production of grain.
Commercial & Merchant Banking serves the business market. Its a market thats so diverse that we
serve it from different Business Lines, each completely set up and equipped to deal with the
questions and needs of our customers. The service ranges from helping sole traders to supporting
large organizations with stock market flotation. This breadth of services means we are on the
lookout for the most diverse talents and professionals, both locally and internationally, from
relationship-builders to specialist advisors.