Banking Updates

Staff College, Ahmedabad
Recent Updates in Banking Industry
Page Contents
Page Module
Module –– B A :: Updates on Key Banking
Recent Important Changes Segments
3 Profitability:
Amendments in Banking Regulation Act and its impacts
27
6 NIM – under stress:
Introduction How Banks
of Dynamic will respond
Loan Loss the situation
Provisioning Framework for
30 Productivity
Banks in India and Efficiency
9 Consumer
BASEL IIIProtection:
& Capital Management of Indian Banking Sector
31
14 Financial
Introduction Consumer
of FinancialProtection and its
Holding company Linkage
structure to Risk
in India
Page
18 Management
Module – C :Function
Liberalization Future
of Branchtrends / Challenges
Expansion Policy
82
21 Know
HR your Bank:
Challenges
Deregulation ofofInterest
Decade 2020
on Savings Bank
33
84
23 Awards
IT Vision
Union and accolades
for 2011
Budget for
to 2020
of India the Bank in FY 2012
– 2013-14
34
91
25 New
ScopeInitiatives
Banking ofby taken
the year
Merger by Bank
of 2015
Banks in India
36 Project “NAVNIRMAAN – Baroda Next”
39 Project Sparsh
SME & Wealth Management Services:
40 SME Banking – An overview & Important Guidelines
44 Wealth Management Services
e-Business
46 Bank’s e-Channel products
Baroda Academy Inventing Methods for Igniting Minds
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Priority Sector Lending & Financial Inclusion
63 Revised Priority Sector Guidelines
67 Financial Inclusion – Recent Updates
Credit Monitoring & NPA Management
71 RBI Guidelines for Restructuring
81 Non Performing Assets
MODULE – A: RECENT IMPORTANT CHANGES
Contemporary Banking Issues
 The Indian banking system has seen a complete transformation during the
last two decades, in sync with the progress made by the real economy.
Almost every aspect of banking operation has seen significant change during
this period as banks sought to reinvent themselves in an attempt to retain
their pre-eminent position in the financial system. The period saw banks
moving beyond brick and mortar branches to adopt innovative delivery
channels including internet banking, ATMs, call / contact centres, kiosks,
Business Correspondents (BCs), etc. Retail banking gained prominence. Banks
have sought to grow, not just in terms of balance sheet size, but also in
terms of greater penetration of banking services to the hitherto unbanked
segments of the population. It is reasonable to say that banks have
succeeded in rising up to the challenges posed by the unique needs of a
transforming economy and have, in no small measure, contributed to the
nation’s economic progress during this period.
 However, Indian Banking is also facing several challenges and they must
address these challenges to sustain their excellent performance. Following
are some Contemporary issues faced by Banking in India.
Amendments in Banking Regulation Act and its impacts
The Banking Regulation Act, 1949 being the law relating to banking has been in
force for more than six decades, which empowers the RBI to regulate and
supervise the banking sector. The banking companies are now operating in a
liberalized environment. In this scenario, it has become necessary that the banking
companies in India are enabled to raise capital in accordance with the international
best practices. Therefore the Banking Laws (Amendment) Bill 2011 was introduced
in order to amend the BANKING REGULATION ACT, 1949.
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Some of the salient features of amendments with the impacts are as under:-
New Power to RBI:-
Under the existing provision contained in section 36AA of the BR Act, 1949, The
RBI has , inter alia , power to remove any director or other officers of a banking
company , but such power is not adequate if the entire Board of directors of a
banking company is functioning in a manner detrimental to the interest of the
depositors or the banking company itself. It is therefore proposed to confer
power upon the RBI to supersede the Board of directors of a banking company for
a total period not exceeding twelve months and appoint an administrator to manage
the banking company during the said period.
Enactment of this bill will provide new power to RBI. It proposes to confer upon
the RBI the power to call for information and return from the associate
enterprises of banking companies and also to inspect the same, if necessary.
Impact: - Such power of RBI will help it in regulating new as well as existing
entities in a better manner.
To increase the cap on restrictions on Voting Rights:-
Another key feature of amendment is increasing the voting rights of all the
shareholders of nationalized bank to 10 per cent from 1 percent.
Impact:-
It is expected that higher voting rights will give investors more leeway. The
increase in voting cap will help drive increased investors interest and hence
facilitate raising additional capital.
To enable banking companies to issue preference share subject to regulatory

guidelines by the RBI

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Thus nationalized banks may access the capital market to raise capital required for
expansion of banking business.
To create a Depositors Education and Awareness Fund:-
Insertion of new section 26 A, the RBI shall establish a Fund to be called the
“Depositor Education and Awareness Fund” by utilizing the inoperative deposit
accounts. There shall be credited to the Fund the amount to the credit of any
account in India with a banking company which has not been operated upon for a
period of ten years, within a period of three months from the expiry of the said
period of ten years.
Impact: - This fund will be used for promotion of depositors’ interest and for such
other purpose as may be specified by the RBI from time to time.
To provide for special audit of cooperative banks at instance of RBI by

extending applicability of Section 30 to them
Impact:- To more vigilant by RBI to protect the depositors interest.
Overall impacts of changes in Banking Law (Amendment Bill) 2012 pertaining to

BR Act:-
This amendment for the banking sector is a long –term positive. This will gradually
pave the way for more competition in the sector and as it seen that new licenses
will given by RBI to start new banking business in India which will carve out a more
efficient and more valuable banking system.

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Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India
The prevailing “incurred loss model” for provision on impaired loans came under
severe criticism after the recent global financial crisis for delaying loss
recognition. There is a view that earlier recognition of loan losses based on
“expected losses” could have potentially reduced the cyclical impacts of the recent
crisis.
In the immediate aftermath of the Global Crisis, the G-20 leaders called upon the
accounting standard setters to work urgently with banking supervisors and
regulators to improve standards on valuation and provisioning and achieve a single
set of high quality global accounting standards.
Concepts and principles of Dynamic Provisioning
Dynamic provisioning is a technique that allows banks to build up loan loss provisions
when their profits are growing to draw on these provisions during an economic
downturn.
The underlying principle behind dynamic provisioning is that provisions should be

set in line with estimates of long-run, or through-the-cycle expected losses. This
will help in breaking pro-cyclicality and creating countercyclical provision buffers.
This concept advocates the Provisioning norms based on “Expected Loss” basis in
place of prevailing “incurred loss” method. Dynamic provisioning can be generally
expressed as:
Dynamic provision = Expected loss provision – Specific provision
Thus, a Dynamic Provisioning Framework for Loan Loss Provisions for banks in
India, consisting of two components, may be considered as under:

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a) Ex-post Specific Provisions “SP” made during a year as
required as per RBI guidelines. These provisions will be debited to P&L
account.
b) Dynamic Provisions “DP” equal to the difference between the
long run average expected loss of the portfolio for one year and the
incremental specific provisions made during the year.
Dynamic provisioning framework in India is more or less based on the FSA model
(UK model of dynamic provisioning).
Improvements in credit risk models have supported the concept of expected losses
and unexpected losses. From a conceptual point of view, loan loss provisions should
cover expected losses while capital provides an adequate buffer for unexpected
losses. The internal rating based (IRB) model approach under Basel II credit risk
capital computation gave a fillip to the expected loss based provisioning and
unexpected loss based capitalization.
The provisioning framework suggested by RBI has two components are:
(i) Specific provisions and

(ii) Dynamic provisions.
While specific provisions would be as per the RBI guidelines on NPA provisioning,
dynamic provisions would be the difference between the long run “average
expected loss” of the portfolio for one year and specific provisions made during
the year. Thus, this will ensure that every year the charge to profit and loss
account on account of specific provisions and dynamic provisions is maintained at a
level of expected losses.
Dynamic provisions are created only when the specific provisions are lesser than
the expected losses. The framework thus ensures that at any point of time,
provisioning equivalent to expected losses should be made. Thus, the objective of
the dynamic provisioning framework is to smoothen the impact of incurred losses

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on the profit and loss account through the cycle, and not to provide general
provisioning cushion for expected losses. That is the essence of Indian dynamic
provision framework.
Impact of Dynamic Provisioning on Indian banks
 It will help in earlier recognition of loan losses based on “expected losses”

could have potentially reduced the cyclical impacts of the recent crisis.
 Dynamic provisions are created only when the specific provisions are lesser
than the expected losses. The framework thus ensures that at any point of
time, provisioning equivalent to expected losses should be made.
 The objective of the dynamic provisioning framework is to smoothen the
impact of incurred losses on the profit and loss account through the cycle,
and not to provide general provisioning cushion for expected losses.
 Loss given default (LGD) used in the calculation of expected loss is based on
downturn LGD (instead of normal LGD) as used in the internal ratings-based
approach for credit risk (IRB) of Basel II which will give more accurate
provisions.
 Dynamic or expected loan loss provisioning can contribute to financial
stability by recognizing the losses early in the cycle at the time of loan
origination by building up buffers in good times that can be used in bad
times, thereby limiting the consequences during a downturn.

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BASEL III & Capital Management of Indian Banking Sector
Why Basel III?
1. Estimation of capital under Basel II is procyclical. During good time banks

are doing well and market is willing to invest capital in banks but there was
no provision in Basel II for additional capital for stress time which is
inevitable in a business cycle.
2. Basel II was more risk sensitive compare to Basel I, however the
composition of regulatory capital didn’t reflect the changing market
dynamics. This model was not capable to handle complex derivatives
products.
3. Basel II model demanded less capital on bank’s trading book exposure with
arguments that it is liquid in nature as bank can unwind the position rapidly.
Most of banks shifted their banking book exposure to trading book exposure
to optimize the capital.
4. Basel II didn’t have any explicit regulation governing leverage. Excessive
leverage was one of major causes for economic crisis. It assumed that risk
based capital requirement would automatically control excessive leverage.
5. Liquidity risk was not covered under Pillar I of Basel II framework. During
financial crisis it cascaded into solvency risk and became nightmare for most
of the banks.
6. The framework has neglected the systemic risk or the risk emanated from
interconnectedness of various institutes in a financial system.
7. Finally Basel III has strongly advocated in favour of more risk absorbing
common capital in capital structure of a bank.
How Basel III is superior to Basel II?

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1. Basel III is not a negation but an enhancement of Basel II. Lessons from
financial crisis have open the lids in four major areas viz, augmentation of
quality capitals, introduction of Liquidity standards, modifications in
provisioning norms & better & more comprehensive disclosure.
2. Higher quality capitals

Structure Particulars of Capitals Capital requirement as
% on RWA
Basel II Basel III
A= B+C+D Minimum Total capital 9.0 9.0
B Minimum Tier I capital 6.0 7.0
C Of which Common Equity 2.0 4.5
D Maximum Admitted Tier II capital 4.0 2.0
E Capital conversion Buffer (Common - 2.5
Equity)
F Minimum Common equity (Tier I +CCB) 2.0 7.0
Minimum Total capital + CCB 9.0 11.5
3. Provision for countercyclical Capital Conversion Buffer of 2.5 % of RWA in

terms of common equity has prescribed to absorb of extra shock without
breaching the minimum capital level as well as it has considered the hardship
of banks to raise capital under stress situation.
4. More common equity to absorb loss internally rather waiting for budgetary
bailout package.
5. To mitigate the risk of higher built up leverage ratio, Basel III
contemplating a minimum Tier I leverage ratio of 3% (33.3 times of own
fund) which will eventually a Tier I requirement as on January 1, 2018.
6. Unlike Basel II, Basel III enhances the loss absorbing capacity of banks
against market risk. Basel III strengthens the counterparty credit risk
framework in market risk instruments. It has included use of stressed input
parameters to determine capital requirements for counterparty credit
default risk. Besides Credit valuation Adjustment (CVA) risk capital charge

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for OTC derivatives to protect banks against the risk of decline in the
credit quality of the counter party.
7. To mitigate liquidity risk of bank, Basel III addressed both potential short
term liquidity stress and long term structural liquidity mismatch in bank’s
balance sheet.
For short term liquidity stress, bank will require to maintain sufficient high
quality unencumbered liquid assets to withstand any stress funding scenario
over a 30-days horizon as measured by the liquid coverage ratio (LCR)
For long term liquidity mismatches, banks are required to maintain net
stable fund ratio (NSFR). NSFR will be decided based on liquidity profile of
assets and liquidity needs arising from off balance sheet commitments over
a one year horizon.
8. The Basel committee is supporting the proposal for adopting Expected Loss
(EL) based measure of provisioning which capture actual losses more
transparently and is also less procyclical than the current “incurred loss”
approach.
What are Challenges for implementing Basel III in India?
1. The additional requirement under Basel III is based on some assumptions.

The RBI has made some estimate of additional Capital requirement as on
March 31 2018 of Rs. 5 trillion based on two assumptions: a) The RWA of
each bank will increase at a rate of 20% per annum till March 31,2018 . b)
Internal accrual will be of the order of 1% of RWA.
2. Further, the estimation of additional capital can be bifurcated between non

equity capital of Rs.3.25 trillion while common equity capital in tune of Rs.
1.75 trillion.
(Rs. In Billion)
Public Sectors Private Total
Bank Sector Bank
A Additional Equity Capital 1400-1500 200-250 1600-1750
Requirement under Basel III

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B Additional Equity Capital 650-700 20-25 670-725
requirement Under Basel II
C Net additional requirement 750-800 180-225 930-1025
under Basel III
Of additional equity capital
requirement under Basel III
for Public sector bank (A)
Government share (if 880-910 ------ ------
present share holding
pattern in maintained)
Government holding if share 660-690 ------ ------
holding is brought down to
51%
Market Share (if present 520-590 ------ ------
share holding pattern of
Govt. maintained)
3. The challenges in front of Indian Bank are to raising fund in a magnitude

from Capital market. If we consider the past trends of few years it may give
a clear picture. (Rs. In billions)
2007-08 2008-09 2009-10 2010-11

Resources 793 142 549 576
Mobilized from
Primary market
Resource 310 Nil 32 172
Mobilized by
Bank/FIs
(Hand books of statistics by SEBI)
4. Since 2000-2001 till 2010-11 the entire banking and financial sector raised
capital from primary market is about Rs. 1145 billion (Hand books of
statistics by SEBI). Considering the present estimate it is not an

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insurmountable task for Indian banking system to raise an amount of Rs. 700
billion for a span of five years.
5. Moving to the second challenge of capitalization by Government to PSBs, If
government want to maintain the same level of holding, it is required to be
infuse a fresh fund of Rs. 900 billion. Considering the gross combine fiscal
deficit of central & state government (about Rs. 6200 billions) , it is really a
significant challenge for PSBs. But if Government is contemplating the
concept of reducing its holding near to 51% or even less than that, then the
burden will be reduce to half.
6. Increase capital requirement will increase the cost of capital of bank at the
same time it will affect the return on equity for investors.
7. Introduction of two liquidity ratio will restrict bank to raise short term
funds for long term deployment as a result it will impacted the pricing and
margin of credit facilities
8. Widening Fiscal deposit may degrade sovereign rating of Country in turn
increase the cost of foreign funds.

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Introduction of Financial Holding company structure in India
Recommendations of the Working Group under the Chairpersonship of Smt Shyamala

Gopinath, Dy Governor (RBI):
Over the last two decades, India has seen the emergence of Financial
Conglomerates (FCs), each operating in a different segment of the financial
services sector– a bank, housing finance company, non-banking financial company,
and insurance company; or, in some cases, an industrial company.
In many countries, deregulation and financial consolidation led to the development

of Financial Holding Companies (FHCs) thereby allowing commercial banking,
insurance, investment banking, and other financial activities to be conducted under
the same corporate umbrella. The absence of the holding company structure in
financial conglomerates exposes investors, depositors and the parent company to
risks, strains the parent company’s ability to fund its own core business and could
restrict the growth of the subsidiary business.
Considering the complexity of the issues involved and implications of the FHC
model for the financial system in general and banking system in particular, the
Reserve Bank constituted a Working Group in June 2010 under the Chairpersonship
of Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India.
The Working Group approached the issue from two fundamental perspectives:
first, the risk to bank balance sheets from affiliate non-bank entities and

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second, the regulatory oversight of financial groups from a systemic
perspective.
Recommendations for moving to a full-fledged FHC Framework
- The Working Group concluded that a holding company model may be more suited
in the Indian context. It was conscious of the fact that banks cannot be totally
insulated from the risks of non-banking activities undertaken by their affiliates.
The Working Group also recognized that there are divergent ownership and
governance norms for various sectors; entities within the sectors; legacy issues
concerning the existing conglomerates etc.
Any framework to harmonise them at the level of the FHC would be a challenge and
therefore the FHC as a preferred model will need to be phased in gradually.
Recommendation 1: The Financial Holding Company (FHC) model should be

pursued as a preferred model for the financial sector in India.
Recommendation 2: The FHC model can be extended to all large financial groups –
irrespective of whether they contain a bank or not. Therefore, there can be
Banking FHCs controlling a bank and Non-banking FHCs which do not contain a bank
in the group
Recommendation 3: There should be a separate regulatory framework for

financial holding companies.
Recommendation 4: A separate new Act for regulation of financial holding

companies should be enacted.
Recommendation 5: Amendments should also be simultaneously made to other

statutes/Acts governing public sector banks
Recommendation 6: The Reserve Bank should be designated as the regulator for

financial holding companies.

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Recommendation 7: The function of FHC regulation should be undertaken by a
separate unit within RBI with staff drawn from both RBI as well as other
regulators.
Recommendation 8: The new FHC regulatory framework should also formalize a

consolidated supervision mechanism through Memorandum of Understanding
between regulators.
Recommendation 9: Intermediate holding companies within the FHC should not be

permitted due to their contribution to the opacity and complexity in the
organizational structure.
Recommendation 10: The FHC should primarily be a non-operating entity and

should be permitted only limited leverage as stipulated by RBI.
Recommendation 11: The FHCs should be permitted to carry out all financial
activities through subsidiaries.
Recommendation 12: The FHC should be well diversified and subject to strict
ownership and governance norms.
Recommendation 13: Appropriate limits should be fixed on cross-holding between

different FHCs. There should also be limits on cross holding between FHCs on one
hand and banks, NBFCs, and other financial institutions outside the group.
Recommendation 14: Presently, under the Bank-Subsidiary Model (BSM), the

banks’ total investment in their subsidiaries is capped at 20% of banks’ net worth.
Under the FHC structure, the allocation of equity capital by Banking FHCs to non-
banking subsidiaries should also be capped at a limit as deemed appropriate by RBI
to ensure that the banking continue to be a dominant activity of the group.
Recommendation 15: If the holding company is to function as an anchor for capital

support for all its subsidiaries, requisite space needs to be provided to the holding
company for capital raising for its subsidiaries.

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Recommendation 16: Suitable amendments to various taxation provisions may be
made to make the transition from Bank-Subsidiary Model to FHC model.
Recommendation 17: Dividends paid by subsidiaries to the FHC may be exempt

from the Dividend Distribution Tax (DDT) to the extent these dividends are used
by the FHC for investment in other subsidiaries.
Operational Arrangements till the Enactment of the FHC Act

- The Working Group recommends the following operational scheme till the
enactment of new Act:
(i) Pending enactment of a separate Act, the FHC model will be registered as an
NBFC with the RBI and the RBI will frame a suitable regulatory framework.
(ii) All identified financial conglomerates having a bank within the group will need
to convert to the FHC model in a time bound manner and in cases the above
conglomerates do not want to convert to FHCs, they should be required to confine
only to those activities which the banks are presently permitted by RBI.
(iii) All new banks and insurance companies, as and when licensed, will mandatorily
need to operate under the FHC framework.
(iv) Amendments to various taxation provisions to make the transition from Bank-
Subsidiary model to FHC model tax neutral would be a binding condition for
operationalising this framework.

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Liberalization of Branch Expansion Policy
Section 23 of Banking Regulation Act 1949 which states that “ without prior
permission of RBI, no banking company shall open a new place of business in India
or change otherwise than within the same city, town or village, the location of an
existing place of business situated in India. “
Bank plays a vital role in economic development of a country. Bank provides credit to various segments
in the society to start economic activities, thereby helps the people to raise their income and standard of
living. In our country 70% populations was staying in rural area. Prior to 1969 Bank branches were
mainly concentrated in Urban and Metro areas. To provide banking facilities to agriculture and small
industries and to mobilize the untapped resources in rural and semi urban areas, nationalisation of 14
banks was done in 1969. To encourage banks to open more and more branches in rural areas, RBI
introduced a policy to open 4 branches in rural unbanked centres to get a license to open a branch in
metro banked centre. This policy was successful and by 1991 around 60%of bank branches were in rural
and semi urban areas. Penetration of Branch net work had helped the Government to implement
subsidised schemes for self employment and for rural development for eradication of poverty,
successfully. The following table will show the impact of policy.
Rural Branches Semi Urban Brs Total (R+SU)

June 1969 1833 3342 5172
March 1991 35206 11344 46550

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In 1991 Financial sector reforms were introduced as per the recommendations of
Narasimham Committee recommendations. The liberal policy was framed for
foreign banks and for entry of private sector banks.
The Narahamsim committee also felt that the Bank Management takes its own
judgement for assessing need of additional bank branches. Hence RBI liberalised
the Branch Licensing Policy in 1995.
RBI while granting permission for new branch offices was considering the financial
condition and history of applicant bank, general character of its management,
adequacy of capital, earning prospects and whether new office will serve public
interest.
Keeping these aspects in mind, RBI issued following guidelines while liberalising the
branch expansion policy in 1995.
Bank fulfilling the following conditions can open new branch without prior
permission of RBI.
1. Net profit for three years in a row

2. Capital Adequacy Ratio Minimum 8%
3. NPA Less than 15%
4. Minimum Owned Funds Rs 100 crore
After liberalising the branch expansion policy as above, banks focus again shifted to Metro and Urban
centres. Banks also closed the loss making branches. The following the statistic will prove the impact of
liberalisation.
Rural Branches Semi Urban Brs Total (R+SU)

June 1969 1833 3342 5172
March 1991 35206 11344 46550
March 2005 32082 15403 47485
March 2007 30551 16361 46912

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During 1991 to 2007 total Rural and Semi Urban bank branches increased from
46550 to 46912. The alarming thing is that number of rural branches reduced
to 30551 from 35206 and semi urban branches increased to 16361 from 11344.
In view of above trend RBI revised the policy in 2005. Policy encouraged the
banks to open branches in unbanked and under-banked centres. Private Banks
were also asked to open 25% of their branches in semi urban and rural centres.
Recent Guidelines on Branch Expansion Policy
1 Bank to submit Annual Branch Expansion Plan duly approved by Board.

2 To open branches in Tier I centre ( area with population of 1 lac and above )
needs specific permission.
3 To open branches in Tier 2 to Tier 6 centers general Permission will be given.
4 25% of the branches should be opened in Tier 5 and Tier 6 centers which
do not have a brick and mortar structure of any schedule commercial bank.
5 Bank can open administrative office ,Processing Centre/Branches in Tier 2 to
Tier 6 centres without permission of RBI, subject to reporting.
6 Total number branches opened in Tier I will not generally exceed the total
number of branches to be opened in Tier 2 to Tier 6 centres.
7 Authorisation will be valid for one year.
Total deregulation of Branch authorization:
Advantages:
1. Time taken to approach RBI to obtain permission will be saved.

2. Operational work load of RBI will be reduced.

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Deregulation of Interest on Savings Bank
Facts / Guidelines:
Effective from October 25, 2011, Banks are free to determine their savings bank
deposit interest rate, subject to the following two conditions:
A. First, each bank will have to offer a uniform interest rate on savings bank
deposits up to Rs.1 lakh, irrespective of the amount in the account within this
limit.
B. Second, for savings bank deposits over Rs.1 lakh, a bank may provide
differential rates of interest, if it so chooses, subject to the condition that
banks will not discriminate in the matter of interest paid on such deposits,
between one deposit and another of similar amount, accepted on the same date,
at any of its offices.
Pros:
1. It will enhance the return on SB deposit to the customers, which in turn
will contribute to an increase in financial savings.
2. It may lead to volume of SB portfolio of the bank as a little more

interest earning decision (interest on daily product basis) increased the
SB deposit of the Bank within 2 yrs (Rs11367 billion in March 2010 to
Rs.15392 billion March 2012).
3. It will trigger the product innovations related to SB segment in the Bank

and a better opportunity for banks to cross-sell

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4. It will provide the multiple opportunities to the customers to place their
funds.
5. This move may improve the effect of transmission of monetary system of

the country, as at present, on any change in regulatory rate like Bank
rate, REPO rate etc., SB interest is not responding in tandem with those
changes due to its fixed rate nature.
Cons:
1. It will increase the cost of funds for the banks.
2. It may lead to unhealthy competition amongst the banks.
3. It may discriminate the return on investments of smaller & bigger

customers due to permitted ‘differential rate of interest’ on SB segment.
4. It may adversely affect the small savers and lead to the challenge of
‘financial exclusion’.
5. Banks may face higher risk of asset-liability mismatch/management.
6. There could be occasions, especially in a surplus liquidity situation, when

the savings deposit interest rate may decline even below the present
level.

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Union Budget of India 2013-14
Major Highlights of this Budget 2013-14 are:
 Fiscal deficit seen at 5.2 point of GDP in 2012/13

 Fiscal deficit seen at 4.8 point of GDP in 2013/14
 No Change in Income Tax Slabs
 Tax credit of Rs. 2,000 for income upto Rs. 5 lakh
 10 % surcharge on persons with taxable income of over Rs 1 crore
 Direct Taxes Code (DTC) bill to be introduced in current Parliament

session
 Income limit for the tax-saving Rajiv Gandhi Equity Savings Scheme
(RGESS) is raised to Rs. 12 lakh from Rs. 10 lakh
 First home loan of up to Rs 25 lakh to get extra interest deduction of up

to Rs 1 lakh
 Duty-free limits for Gold raised to Rs 50000 for men and Rs 1 lakh for
women
 Tax Deducted at Source to be fixed at 1% on land deals over Rs 50 lakh
 Proposal to launch Inflation Indexed Bonds or Inflation Indexed National

Security Certificates to protect savings from inflation.

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 All public-sector banks have assured the Finance Minister that they will all
have ATMs in their branch areas by 2014
 Propose to reduce securities transaction tax on equity futures to 0.01

point from 0.017 point
 Time to introduce commodities transaction tax (CTT). CTT on non-

agriculture futures contracts at 0.01 point
 Propose to impose withholding tax of 20 point on profit distribution to

shareholders
 No change in peak custom, excise rates.
 Excise duty on SUVs to be increased to 30 per cent from 27 per cent,

SUVs registered as taxis exempted
 18% rise in excise duty on Cigarattes, cigars and cheerots
 Service tax on all A/C restaurants
 To increase surcharge to 10 point on domestic companies with annual

income of more than 100 million rupees
 For foreign companies, who pay the higher rate of corporate tax, the
surcharge will increase from 2 pct to 5 per cent.
 To continue 15 point tax concession on dividend received by India

companies from foreign units for one more year

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SCOPE OF MERGER OF BANKS IN INDIA
 India is the second largest emerging market destination, after china.

Keeping in view the huge potential for raising world class infrastructure the
Govt. is targeting infrastructure investment of the scale of USD 1 trillion in
the 12th five year plan. Banks will be the primary debt provider for almost
half of this planned expenditure amount.
 Globalization has been a major driver of both Indian and Multinational
corporation (MNC) investments, merger and acquisition. Indian Banking
System must be in position to support & grab the business opportunities in
funding these M & A.
 Banks will be required to raise their equity base as per the provisions of
BASEL III norms. Banks with large capital base and huge size of Balance –
Sheet, equipped with all risk mitigating system as well as tools, offering good
return to investor can only attract new investors for further raising the
core capital base.

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 Being a member of WTO, India will have to allow foreign Banks to operate in
India as per the prescribed norms of WTO. Consequently Indian Banks will
have to compete with the big International Banks with huge capital and
capacity. Market Dynamics may create problem for small banks to survive in
those highly competitive environment.
These facts have once again opened the discussion for Merger of Banks for
creating Big Banks to compete at global levels.
Though this issue of consolidation of PSBs was first recommended by the
Narasimham Committee on Financial Systems (1991) and working group was
constituted by the government on bank mergers, which had submitted it
recommendation in October 2004.
Post liberalization a lot of changes took place in the banking sector and the biggest
development is the adoption of CBS operating platform in all Banks in India.
This uniform operating platform has made the consolidation task easy, because the
integration of operating tools and procedures was the major challenge in the way
of consolidation.
Objectives that may be achieved through merger will be:-

 Need for strengthening core capital base and diversifying of risk in line with
compliance of BASEL III guidelines in coming 5 years.
 To eliminate systemic risk due to failure of Bank.
 To meet the requirement of lending for infrastructure creation
 Stepping up size (market power) and maximizing value (revenue) by exploiting
economies of scale.

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Module – B: Updates on Key Banking Segments
PROFITABILITY
NIM – under stress: How Banks will respond the situation
 Profitability is sine qua non for any commercial organization and banking is not its
exception. The most known indices of measuring the efficiency on capacity
utilization in banks are spread, net interest margin, and intermediation ratio.
 Spread and net interest margin are loosely interpreted one and same thing but
both terms are defined differently for productivity and profitability measurement

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of banks. Spread indicates efficiency of generating net interest income from the
assets owned by the banks, while net interest margin (NIM) is defined as the
difference between the total interests earned on advances & investment and total
interest paid on deposits & borrowings divided by earning assets of bank .
 This ratio indicates as to how effectively the banks deploy all their deployable
funds i.e. both deposit and borrowings to generate income from credit and
investment operations.
 However, there is a classical argument which reinforce that banks should strive to
lower their NIMs to benefit their borrowers and depositors i.e. lend at lower rate
for economic growth and pay high on deposits to reward the savers. The present
NIM of Indian banks is expected to hit about 2 percent by 2020 owing to highly
deregulated and competitive environment. But an emerging economy like India with
inclusiveness as a national priority, it is not clear whether low banking margin
(NIM) would be a worthy goal for survival of industry.
 NIM for all banks fell down from 3.04% (2007) to 2.74% (2010). During the year
2011, NIM grew to 3.10% in year 2011 but further declined to 3.07% for the year
end March 2012 with highest of 4.91% for foreign banks. As observed from the
Table- that NIM had increased during the year 2011 as compared to previous year
level in 2010 for all categories of banks except foreign banks, with a recovery in
economy and higher credit growth but further declined due to tighten interest
rate policy of regulators.

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 The increase in NIM from core banking business indicates that the cost of
financial intermediation increased in the economy . Based on this rationale, there
is a need to bring down NIM from an efficiency point of view, nevertheless, from a
profitability point of view; there is a need to increase it.
 To achieve collective aspiration of double digit and inclusive growth, a nation needs
to raise the level of national savings and channel those savings into investment.
This means banks need to raise the interest rates on deposits and reduce the
lending rates charged from borrowers - in other words, reduce their
intermediation costs, or in technical terminology, reduce the net interest
margin.
 A balanced approach would be to bring down NIM, which will improve efficiency of
financial intermediation, along with an increase in income from other sources and
reduction in operating expenses to maintain profitability. The efficient financial
intermediation is important from the point of view of economic growth.
Table –: NIM Analysis of Indian Banks

Bank Group – Net Interest Margin
31 March (%age)
st
(Net Interest Income / Earning
Assets)
2007 2008 2009 2010 2011 2012
SBI & Its Associates 3.00 2.64 2.50 2.55 3.10 3.48
Nationalized Banks 2.93 2.39 2.40 2.33 2.84 2.66
Public Sector Banks 2.96 2.47 2.43 2.40 2.92 2.90
Old Private Banks 3.24 2.81 2.96 2.70 3.08 2.97
New Private Banks 2.49 2.83 3.25 3.36 3.31 3.22
Private Sector Banks 2.66 2.82 3.19 3.20 3.26 3.16
Foreign Banks 5.22 5.31 5.92 5.41 4.96 4.91

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All SCBs 3.04 2.75 2.82 2.74 3.10 3.07
Source: Computed from published data of banks in “Profile of Banks” by Reserve

Bank of India (RBI)
Productivity and Efficiency
Banks play the critical role of financial intermediation by performing the task of
maturity and risk transformation, besides providing payment and settlement
services. In order to effectively perform these functions, banks need to ensure
that they maintain high levels of productivity and efficiency in their operations.
Two kinds of efficiency are essential for banks:
 Allocational Efficiency: This requires banks to ensure that the precious

societal resources are allotted to the most productive activities. Besides,
while taking allocation decisions, the interests of the most vulnerable
sections of the society should also be taken into account.

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 Operational Efficiency: Operational Efficiency requires banks to perform
the financial intermediation function in a safe, secure and speedy manner
while ensuring that the cost of performing the intermediation function is
minimized. While profit margins are important for sustaining banking
operations, the cost of operational inefficiencies of banks should not be
passed on to customers by way of higher service charges and fees.
Indian banks need to improve both, allocational and operational efficiency, so that
the financial intermediation function is effectively performed. This would include
reengineering of all critical products and processes by leveraging on innovative
technology-based solutions, while retaining a strong customer-centric focus.
CONSUMER PROTECTION
Financial Consumer Protection and its Linkage to Risk Management Function

 Financial Consumer Protection has emerged as a key area of supervisory
focus globally. The global financial crisis has highlighted the vulnerability of
the consumer class, which has been worst hit in the crisis.
 The key feature of the exploitation has been the discriminatory, non-
transparent and illogical pricing which has affected the poor and vulnerable
consumers most emphatically. The product innovations have not focused on
customer requirements and have, instead, aimed at serving the interests of
the service provider.

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 The basic fact, that the well being of the consumer is essential for the
sustainability and growth of the service provider, has been lost sight of.
 As part of its regulatory reform agenda, G 20 Finance Ministers and Central
Bank Governors have also endorsed a set of High-level Principles on Financial
Consumer Protection, underlining its overall importance for financial
stability.
 The principles enjoin upon the supervisors and oversight bodies to ensure an
equitable and fair treatment of consumers, disclosure and transparency in
product and service offerings along with promotion of financial education
and awareness amongst the consumers.
In this context, some important aspects of consumer protection and risk

management that banks need to imbibe in their business processes are as under:
 Pricing of asset and liability products should be transparent and non-

discriminatory. At a minimum, it must be ensured that poor do not subsidize
the provision of banking services to the rich.
 The business operations of banks should be customer-centric in nature. This
should be reflected in all aspects of banking operations including creation of
customized products and services, pricing of services, delivery channels, etc.
Banks should, inherently, be flexible in their operations so that they have
the ability to meet the evolving stakeholder expectations.
 Banks should be able to appreciate the risk-return trade-off involved in

various activities. The basic premise that greater return would invariably
come from assumption of higher risk, needs to be appreciated and
disseminated, both within the organization and to banks’ customers. Banks
need to develop the ability to discern good risk from bad so that they
selectively take on only those risks that are in alignment with the bank’s long
term strategic vision.
 The culture of efficient risk management needs to be imbibed in the

organization’s ethos so that everyone from the top management to frontline
managers in the field shares a common vision of risk management.

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A key related issue is the integrity of MIS in banks. Each bank claims to be
oriented towards its customers. Are the banks aware of the number of customers
they have? Moreover, most of the banks do not have a system of working out
activity wise costs and returns. Unless banks know the return on each and every
product, they cannot arrive at a truly risk based pricing.
KNOW YOUR BANK
“AWARDS AND ACCOLADES FOR THE BANK IN FY‟12”
 Best Public Sector Bank (PSB) by CNBC-TV18 & MCX

 Golden Peacock Award for Excellence in Corporate Governance by Institute
of Directors & World Forum for Corporate Governance received in London
 Dainik Bhaskar India Pride Award for 2011
 Most Efficient Bank in Kenya
 Best Initiatives in Inclusive Banking – FIBC Banking Award
 Dun & Bradstreet‘s Leading PSB in ―Global Business Development Category‖
 National Award for Performance under SME Business
 Award for Best Utilisation of Intellectual Resources

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 Best Growing Large Bank by Business World-PWC
 Business Leadership Award by NDTV- Best PSB in 2011
 Award for Excellence in Financial Reporting by ICAI in PSB category
 Fastest Growing Large Bank by Business World-PWC
 UTV-Bloomberg Financial Leadership Award
 FM Stars Industry Brand Leadership Award
 BOB‘s Brand Ranking has increased by 47 notches in a year‘s time in Top 500
Banking Brands by The Banker, London
 Best Bank Award-2012
Awards for the Bank‟s CEO (CMD)

 Outstanding Financial Professional-2010 by CNBC-TV18 & MCX
 Best Banker Award (T. A. Pai Memorial Award) by Karnataka State Open
University
 Lifetime Achievement Award by Dainik Bhaskar India Pride Awards
 Banker of the Year by Business World-PW
“NEW INITIATIVES TAKEN BY BANK”
Major technology Initiatives:
 As on 31st Dec 2011, the Bank‘s entire domestic, overseas and RRBs [i.e.,
five sponsored RRBs] related operations were on the CBS platform.
 Bank has developed IT facilities for online/offline account opening through
Business Correspondents under Financial Inclusion.
 Bank‘s retail & corporate customers enjoy several facilities under its
Internet Banking Delivery Channel. The SMS alerts of transactions are
also implemented in the Internet Banking Portal.

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 Bank has implemented Internet Banking in 13 of its overseas territories,
notably Oman, Tanzania, Uganda, Kenya, Mauritius, Seychelles, Botswana,
New Zealand, UAE, Fiji, UK, Ghana &Australia
 Bank has also implemented RapidFunds2India solution in all the major
territories.
 Bank has built a State-of-the-Art Data Centre conforming to Uptime
Institute Tier-3 standard & a Disaster Recovery Site in different seismic
zones to ensure uninterrupted banking services delivery to customers.
 Bank‘s Mobile Banking (Baroda M-Connect) provides various facilities to its
customers.
 Anti Money Laundering (AML) has been implemented in India and 23 of
Bank‘s overseas territories.
 Bank has developed an Integrated Global Treasury Solution in its major
territories like U.K., UAE, Bahamas, Bahrain, Hong Kong, Singapore, Belgium,
USA and India to achieve reduced cost of operations & better fund
management.
 Bank has a centralised SWIFT system for India & its 23 overseas
territories.
 Internet Payment Gateway has been implemented to facilitate e-commerce
transactions in multi currencies across the globe.
 Bank has introduced the facility of Multiple Accounts being linked to a
single Debit Card (verified by Visa, CVV2) and also Mobile Number
registration thru‘ ATMs in CBS for SMS Alerts.
 E-tax payments thru‘ ATMs are also facilitated and Mobile ATMs are
introduced in several cities.
 To provide safe online banking services to its customers & protect them
from phishing attacks, Bank has implemented a Fraud Management Solution.
 Bank has set up two Contact Centres in Lucknow & Baroda to fast addresse
the customer queries & grievances.
 Back Office functions have been centralised in the Bank at City Back
Offices & ten Regional Back Offices ( at Baroda, Jaipur, Lucknow, Bhopal,
Coimbtore, Kolkata, Mumbai, Jamshedpur, New Delhi & Pune) to improve the
delivery of services.

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 Cash Management Solution is implemented to provide operational support to
customers‘ ALM.
 Baroda e-trading has been launched for Retail and Corporate customers.
 Roll out of HRMS and Payroll.
 Baroda e- Pay - Electronic Utility Bill Payment
 Online Loan Application – Educational Loan, Home Loan, Car Loan
 Launching of Baroda Gift Card
 Introduced “Visa Platinum” Premium Debit Card•
 Travel Card in foreign currency is introduced.
 CTS -Cheque Truncation System implemented in Delhi and Grid based CTS
was implemented in Chennai, Coimbatore and Bangalore.
 CTS will be shortly implemented in Western Grid also.
Project “NAVNIRMAAN – Baroda Next”
A comprehensive transformation programme called “NAVNIRMAAN” has

launched by our Bank for its domestic operations on 22 June 2009. The
Bank has partnered with Mckinsey & Company for this programme, which
is centered around our customers and our employees, and has two core
elements– Business Process Re-engineering (BPR) & Organization
Restructuring (OR).
Why Navnirmaan?

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1. Less time spent on relationship management and business development
2. Low utilization of technology
3. To reach at no.1 among PSU Banks
4. High aspirations
5. In previous 20 years, banking sector underwent sea changes, so, it needs
immediate attention to realign process change.
BPR (Business Process Re-engineering) – Main Objectives

 Improvement in branch productivity on sales
 Best-in-class service levels for customer delight
 Redesign of front and back office processes and roles to reduce
turnaround time
 Reduction in operating costs
Organization restructuring – Main Objectives

 Appropriate organization structure and systems to support BPR and be in line
with future business plans, at corporate, zonal and regional offices & at
branches
 Sustainability of change program through capability building.
Navnirmaan having 5 key elements:

1. Simplified systems and processes at branches and other offices
2. World-class back offices to support branch operations
3. Alternate Channel usage
4. Redefined organization structure and roles
5. Training to Barodians for new roles
Development /Repositioning under Navnirmaan project:
 Project Navnirmaan has altogether 18 activities covering both BPR &

Organisational Restructuring, aimed at transforming the Bank’s branches into a
sales & service centres to make possible a sustained sales growth, superior
customer experience and alternate channel migration.

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 The most important initiatives covers :
o Conversion of all metro & urban branches into Baroda Next branches
within a timeline [ over 1328 branches rolled out so far ]
o Creation of automated & leaner Back Offices like:
 City Back Office
 Regional Back Office (10 functioning)
 Establishment of two Call Centres
 Introduction of frontline automation [viz. Queue Management System and
Cheque deposit Machines] at select branches for customer convenience
 Conducting Trainings and Boot camps.
 Organization Re-structuring [creation of Selling roles at branch, R.O. and
Z.O.]
 The initial impact of Baroda Next migration has been found to be rewarding
both in terms of increased customer satisfaction and CASA growth.
 The said impact has been sustained at 110 Baroda Next branches evaluated
on (a) sales and (b) customer satisfaction during first stage of evaluation.
 Another evaluation carried out recently on (a) Customer satisfaction [at
-177-] and (b) Employee satisfaction [at -171] Baroda Next branches, shows
significant improvement.
 A certification procedure for Baroda Next branches have been introduced in
terms of which process compliance/ adherence are being evaluated by Bank’s
Internal inspectors and CSAT / ESAT externally evaluated by engaging
Market Research Agencies.
 To sustain Sales Growth, a new Sales Operating Model has been rolled out in
-629- branches in -25- Regions over 20 cities.
 Out of -15- Mid-corporate branches planned, all are functional.
 Further centralization initiatives are being piloted to enable the branches to
become a “Sales-cum-Service Outlet”.
 Bank’s Hi-tech City branch, Hyderabad has been transformed into an e-
branch.

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Project SPARSH
A dedicated HR transformation project – ‘SPARSH has been initiated by the Bank -

to revamp its existing HR processes, structures and policies. Various measures in
the direction of talent management, succession planning, creating a scientific
staffing model & manpower planning, development and capability building,
performance management, etc. have been initiated.
Baroda Manipal School of Banking

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Opening of the ‘Baroda Manipal School of Banking’ as an innovative and new channel
of resourcing of trained manpower in the Bank. Around 180 students are being
inducted into this school every quarter for a focussed grooming and for a one-year
full-time PG course in banking which is tailored to the Bank’s specific requirements.
SME & WEALTH MANAGEMENT SERVICES
SME Banking – An Overview & Important Guidelines
 SME is a growth engine of economy for any nation across the world. The
importance of this sector in India as compared to corporate giants with respect
to its contribution towards Indian economy can be best understood that they
contribute 8% in Gross Domestic Product (GDP), 45% of manufactured output,
40% of exports, manufacture over 6000 products and provide employment to
around 60 million person through 26 million enterprises as per latest 4 th all
India census of MSMEs.

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 Recognizing the significant contribution of this sector in economic growth and
also in employment generation in our country, Government of India has taken
good number of initiatives to develop the sector such as erstwhile definition of
‘Small Scale Industries’ was enlarged by increasing investment ceiling in plants &
machineries from Rs. One crore and trading activities have taken in the ambit
of MSMEs by enactment of Micro, Small & Medium Enterprises Development
(MSMED) Act from 2nd October 2006. Also the Act recognizes the term
‘Enterprises’ instead of ‘Industry’ to include service in MSME segment.
 The units engaged in manufacturing or producing and providing or rendering of

services has been defined as micro, small & medium under MSMED Act on basis
of original investment in plant & machinery and equipment as under –
Enterprises Manufacturing Service
Micro Enterprises Up to Rs.25.00 lacs Up to Rs.10.00 lacs
Small Enterprises Above Rs.25.00 lacs to Above Rs.10.00 lacs to

Rs.500.00 lacs Rs.200.00 lacs
Medium Above Rs.500.00 lacs Above Rs.200.00 lacs to

Enterprises to Rs.1000.00 lacs Rs.500.00 lacs
Looking to the significance of SME sector, it is estimated that if India wishes to

have growth rate of 8-10% for next couple of decades, it needs a strong SME
sector, without which it would be difficult to realize. Today there are about 30
million MSMEs in the country and this sector has shown an average growth of 18%
over the last five years. In this backdrop, MSME is considered to be fast growing
sector of economy and the sector gaining more importance to realize theme of 12 th
Five Year Plan (2012-2017) approach paper “faster, sustainable & more inclusive
growth”.
Institutional, Policy & Government incentives: Enhance viability of SME Finance

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1) Banks have set up dedicated processing cell, SME Loan Factory & SME Loan Hub
with a pool of specialized skills of SME credit. Also set up regional SME care
center giving different nomenclature by the banks to facilitate SMEs for quick
redressed of their grievances.
2) Banks to achieve mandatory lending to SME for inclusive growth such as 20% YoY
growth in credit to Micro & Small enterprises, 60% of MSE advance to Micro
enterprises by 2012-13
3) Statutory provisions requirement for standard advances under SME advances is
merely 0.25% as against 1.00% in case of real estate and 0.40% for other
advances which is a reward for banks to make lower provision towards buffer
capital on SME advances
4) Collateral free loans up to Rs. One crore are secured by CGTMSE guarantee which
is highly liquid at par with cash security as compared to any other collateral in loan
accounts
5) Allocation of Zero risk weight to SME loans guaranteed by CGTMSE for capital
adequacy requirement
6) Simplified computation of working capital limit to MSE units on basis of minimum
20% of their estimated annual turnover up to limit of Rs.500 lacs.
7) Union Government has schemes of felicitating Best Bank awards in recognition of
contribution made by banks for promoting SME sector that builds Corporate
Brand which is invaluable and add new feathers to the business of winner banks
8) Public Procurement Policy introduced with a provision that every Central Ministry /
Department / PSU shall set an annual goal for procurement from MSE sector at
the beginning of every financial year. Objective is to achieve an overall
procurement goal of minimum 20% of total annual purchases of products or
services produced or rendered by MSEs.
9) Limit of turnover for compulsory tax audit of account has been raised to Rs.100
lacs (from Rs.60 lacs) in budget of 2012-13
10)Capital gain tax is exempted on sale of residential property if sales consideration
is used for subscription in equity of a manufacturing SME company for purchase
of plant & machinery.

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11) National Manufacturing Policy has aim to increase share of manufacturing in GDP
to 25% and create 100 Mn new jobs by 2022; to achieve this target, SME growth
is considered to be an answer.
Important Committees
Nayak Committee - To Examine the Adequacy of Institutional Credit to SSI

Sector (now MSE) -
The Committee was constituted by Reserve Bank of India in December 1991 under
the Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the
issues confronting SSIs (now MSE) in the matter of obtaining finance. All the
major recommendations of the Committee have been accepted and the banks have
been inter‐alia advised to:
 give preference to village industries, tiny industries and other small scale units
in that order, while meeting the credit requirements of the small scale sector;
 grant working capital credit limits to SSI (now MSE) units computed on the
basis of minimum 20% of their estimated annual turnover whose credit limit in
individual cases is upto Rs.2 crore [ since raised to Rs.5 crore ];
 prepare annual credit budget on the `bottom‐up’ basis to ensure that the
legitimate requirements of SSI (now MSE) sector are met in full;
 extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial
requirements (both working capital and term loan) of SSIs(now MSE);
 Ensure that there should not be any delay in sanctioning and disbursal of
credit. In case of rejection/curtailment of credit limit of the loan proposal, a
reference to higher authorities should be made;
 not to insist on compulsory deposit as a `quid pro‐quo’ for sanctioning the
credit;
 open specialised SSI (now MSE) bank branches or convert those branches
which have a fairly large number of SSI (now MSE) borrowal accounts, into
specialised SSI (now MSE) branches;

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 identify sick SSI (now MSE) units and take urgent action to put them on
nursing programmes;
 standardise loan application forms for SSI (now MSE) borrowers;
Working Group to Review the Credit Guarantee Scheme for Micro and Small
Enterprises
A Working Group was constituted by the Reserve Bank of India under the
Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of
the Credit Guarantee Scheme of CGTMSE and suggest measures to enhance its
usage and facilitate increased flow of collateral free loans to MSEs. The
recommendations of the Working Group included, inter alia, mandatory doubling of
the limit for collateral free loans to micro and small enterprises (MSEs) sector
from Rs.5 lakh to Rs.10 lakh and enjoining upon the Chief Executive Officers of
banks to strongly encourage the branch level functionaries to avail of the CGS
cover and making performance in this regard a criterion in the evaluation of their
field staff, etc. have been advised to all banks.
Wealth Management Services
Our Bank as part of customer centric measure initiated Wealth Management

Services to provide to our HNI and affluent customer a complete financial
solution at one stop. The service has enabled our customers to buy various
investment products through our branches and is positioning our Bank as
“One Stop Financial Super Market”.

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Under Wealth Management Services currently we are offering 3 rd party
products in Bancassurance, Mutual Fund, e-Trading etc. under tie up
arrangement with various partners.
Segment Name of Tie-up Partner Products
Life IndiaFirst Life Insurance Co. Unit Linked Insurance Plan
Insurance Ltd. (Joint Venture Co. of the Term Insurance Plan
Bank) Endowment Plan
Group Insurance Plan &
Health Insurance……
General National Insurance Co. Ltd. “Baroda Health” co-branded
Insurance medi-insurance products for
hospitalization expenses
Insurance covered for assets
such as vehicle, business &
industries, live stock etc.
from various risks.
Mutual Baroda Pioneer Mutual Fund  Growth/Equity Scheme
Fund (Joint venture Co. of the Bank)  Income / Debt Scheme
UTI Mutual Fund  Balance Fund
Birla Sunlife Mutual Fund  Money Market or Liquid
Reliance Mutual Fund Fund
Sundaram BNP Paribas  Gilt Fund
Franklin Templeton  Index Fund
Investments  Tax Saving Scheme
Kotak Mahindra Mutual Fund  Fixed Maturity Plan
IDFC Mutual Fund
E-Broking India Infoline Ltd Trading in equity,
commodities and its
derivatives
Other Major tie up / MOU of Bank with other Service providers
 EXIM Bank, IDFC and SIDBI for co-financing of projects.

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 IFCL for infrastructure development finance
 Bank of Baroda enters into an agreement with Bombay Stock Exchange for
clearing and settlement
 M/s Avenue (India) Pvt. Ltd will enable customers of the Bank to shop
opline, and make payments through Net Banking account.
 M/s Techprocess Ltd. For providing online payment solution and direct debit
credit to its customers. This tie-up will enable Banks customers to shop on-
line through Banks e-banking portal and also make utility bill payments like
telephone bills, electricity bills etc.
 Car Finance with Tata Motors Ltd., Hyundai Motors India Ltd., Mahindra &
Mahindra Ltd., Maruti Suzuki India Ltd.
 Tie up with Kotak Mahindra Old Mutual Life Insurance Ltd. For providing
Life Insurance Cover to Education Loan borrowers and Home Loan
borrowers sanctioned under a special package.
 MOU with CGTMSE for extending collateral free loans up to Rs. 100 lacs
under Risk Sharing Facility scheme launched by CGTMSE.
e-BUSINESS
“BANK’S e-CHANNEL PRODUCTS”
“Bank is providing various Alternate Delivery channels apart from Brick and mortar
Banking. The purpose of these alternate delivery channels is to provide anywhere
any time banking by using technology. Anywhere banking means no geographical

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restriction of banking transactions whether within banking hours or out side
banking hours, whether from the bank premises or out side of the banks premises.
Details of such alternate channels and Bank’s e business products are
1 Automate Teller Machine (ATM)

2 Prepaid & Debit Cards
3 Real Time Gross Settlement System (RTGS)
4 National Electronics Fund Transfer (NEFT)
5 Baroda Connect ( Internet Banking)
6 Baroda M – Connect (Mobile Banking)
7 Contact Centre
8 Baroda e-Gateway
9 Baroda Cash Management Services (BCMS)
1 AUTOMATED TELLER MACHINES (ATMs)

Banking sector is undergoing major transformation towards convenience banking
through technology products and customer centric initiatives. Value added
services, especially in the area of any time anywhere banking, are essential to
retain existing clientele and expand business. Keeping this in view our bank has
introduced ATM (Automated Teller Machine) facility in 1995. All our ATMs prior
to introduction of Debit Card were stand alone ATMs.
ISSUER: In the card industry, the issuer is an entity, which issues the card. In
the debit card segment, this normally is a Banker, who maintains the account of the
customer.
ACQUIRER: The acquirer is an entity, which makes the payment e.g. owners of
ATMs (mostly banks) to the Card holders to the member establishments
SWITCH: Switch is a Computer with specially developed software, the main

function of which is to route the transactions.

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HOST: Host is another computer, which is installed at branches/central location
which maintains the Data and also issues the authorisations
2 Prepiad Cards & Debit Cards
Features Existing Classic VISA

Gold ‘Combi’
SN VISA Classic Maestro ‘Platinum’
Debit card
Debit Debit card Debit card
Cash limit at Rs..25,000 Rs..25,000 Rs..50,000 per Rs..1,00,000
1
ATM in Rs. per day per day day per day
Limit at POS Rs..50,000 Rs..50,000 Rs..1,00,000 Rs..2,00,000
2
in Rs. per day per day per day per day
3 CVV2 feature Yes Yes Yes Yes
Authenticatio
4 Signature PIN PIN/ Signature Signature
n at POS
Segmentation Annual income
of customers All Annual Income > Rs..5,00,000
5 All customers
in Rs. customers > Rs..3,00,000. / HNI / NRI
customers
Annual fees First year First year First year free
Rs. 250/- per
6 In Rs. free & then free & then & then Rs..100
year*
Rs..100 p.a. Rs..100 p.a. p.a.
PIN change
7 Yes Yes Yes Yes
utility at ATM
PIN change/
Mini
8 Statement at Rs..10** Rs..10** Rs..10** Rs..10**
other Bank
ATM
PIN
9 regeneration Rs..150** Rs..150** Rs..150** Rs..150**
charges in Rs.

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Card renewal
10 Free Free Free Free
charges
Card
replacement
11 Rs..200** Rs..200** Rs..200** Rs..200**
charges
(India) in Rs.
Card number
12 16 16 16 16
(digits)
Cash at POS in
13 Rs..1,000 Rs..1,000 -N.A- -N.A-
Rs.
International
Mark up fee Mark up fee Mark up fee of Mark up fee
14 usage charges
of 3% of 3% 3% of 3.5%
(ATM)
Charges for
retrieval of
15 Rs..400** Rs..400** Rs..400** Rs..400**
charge slip in
Rs.
Number of
transactions
16 4 5 10 10
per day at
ATMs
Accident Accident /
Insurance theft or
17 No No No misuse
insurance of
Rs..5,00,000/-
18 Card validity 10 years 10 years 10 years 10 years
* Waived after reaching a threshold spending of Rs. 50,000/- in POS/ e-commerce

in a calendar year.
** Excluding Service charges
Additional benefits/concessions (Visa Platinum):

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In addition to support provided by our Debit Card operations team, VISA also
offers the following which are useful to the Card holders when traveling outside
India.
 Visa concierge for providing personalized customer service

 24/7 Global customer assistance service provided by VISA
a. Lost/stolen card reporting (through VISA on International travel)
b. Emergency card replacement (through VISA on International travel)
c. Emergency cash disbursement (through VISA on International travel)
d. Travel assistance (through VISA on International travel)
 Various reward/promotional offers made available by Visa (in and outside
the country)
Target customers (Visa Platinum):
 Super Saving Account holders (existing & new).

 Premium Current Account Holder (existing & new).
 Non resident A/c holders, whose accounts are active, with a minimum
turnover of Rs.4,00,000 an year, or who holds Fixed deposit with our Bank to
the tune of > Rs.Rs. 4,00,000.
 Saving Bank Account holders with average monthly balance of Rs. 25,000/-
(previous twelve months)
 Current Account holders with average monthly balance of Rs. 1,00,000/-
(previous twelve months)
 Staff members: Chief Managers and above.
Target customers (Gold ’Combi’ MasterCard):
 Salary Accounts (Branches should ensure that salary is getting credited to

this account and the total salary per year is > Rs. 3,00,000/-)
 All Staff members.
 NRI Account holders (existing & new)

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Pre Paid Cards
Introduction: Over the years we have witnessed growth of credit cards and Debit
Cards as alternate payment options to conventional cash, cheque and demand draft.
Pre paid cards are next development in card business which is gaining momentum in
Indian market .Prepaid cards are pre-funded cards mainly used for gift purpose,
making adhoc payment, for online purchase etc and can be used till balance is
available in the card. In pre-paid cards, he Account is not exposed and hence it
protected. Ownership can be transferred and prepaid cards are safe and easy to
handle.
Open Ended and Close Ended cards: Prepaid cards are available in non reloadable
(use and throw) as well as reloadable (multi use) category based on the type of
card and associated regulation. Prepaid variants which can be used at large number
of merchant locations are called open ended cards and the ones which have
accessibility at select centers/outlets/CUG are classified under close/semi close
cards
Baroda Gift Cards:

Bank of Baroda has launched gift variant of prepaid cards called “Baroda Gift
Card” on 20th July 2011. This ‘Verified by VISA’ enabled prefunded card can be
used to make purchases at merchant outlets and online stores which accepts VISA
till available amount on the card. Pre-paid cards can be issued to anybody with a
valid Bank of Baroda A/c or to a non customer for purchase of card up to
Rs.5000/- having a valid Government issued Photo Id card , For non customer , for
amount higher than Rs.5000/-, regular KYC is required.
Baroda Gift cards can be good revenue stream for branches by way of increase in
non interest income, breakage income, and float funds. It also helps in increasing
the foot falls at the branches and thereby helps the branches for up selling &
cross selling of other products

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Salient features of Baroda Gift Card
 Issued in Indian Rupee for a minimum amount of Rs500/- and up to a
maximum amount of Rs.50000/- in multiples of Rs.1
 Card is valid for a period of one year
 Usable at VISA card accepting merchant outlet across India.
 Baroda Gift cards can be used for making online purchase which would be
fully secured with ‘Verified by VISA authentication’
 Cash withdrawal at ATM is not allowed as per RBI guidelines
 Cards can be activated on the same day of purchase
 No balance transfer from one card to another card is permitted
 KYC/AML/CFT provisions of RBI will apply
 Card holders can reach the support team through the dedicated 24x7 toll
free number or through e-mail to customer care team
Baroda Travel Easy Cards: Bank has launched foreign currency pre-paid card
Baroda Travel Easy Card and the first release is US Dollar card. Baroda
TravelEasy card is presently issued in US$ for minimum US$200 and maximum
as per FEMA guidelines issued from time to time. Travel easy card is valid for
three years from the date of issue.
Baroda Travel Easy card is issued to Resident Indians and are usable abroad for
ATM cash withdrawal and making merchant payments at physical/online stores
from the loaded currency. Baroda TravelEasy Card will be available at – B Category
branches for issuance.
Salient features of Baroda TravelEasy Card:
 Issued in US Dollar; minimum load value of USD 200

 Activation within 24 hours of purchase
 Travelers are relieved of the risk of carrying cash & travelers’ cheque
during foreign visits
 Fees/charges are lower than applicable charges on domestic debit/credit
cards used abroad

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 Cards are valid for -3- years. In this period, the card can be reloaded
 Cardholder will have access to 24x7 Customer Care team as well as
secured online portal for
 viewing their card balance and transaction details
 Accounting, reconciliation and customer support shall be provided by the
Operations team, based
 at e-Business Department, in collaboration with the service provider
 KYC, AML/CFT requirement are as per RBI guidelines
 Cards cannot be used in India, Nepal & Bhutan
3 Real Time Gross Settlement System (RTGS)
 RTGS was introduced in India by RBI on 26 th March, 2004 and our bank
became a RTGS member from 8th May, 2004.
 Real Time Gross Settlement System (RTGS) is an efficient, secure,
economical and reliable system of transfer of funds from bank to bank as
well as from a remitter’s account in a particular bank to the beneficiary’s
account in another bank across the country. The minimum amount of txn
under RTGS for the customer is Rs. 2 lakh.
 Another difference between NEFT and RTGS is that transfer of funds up to
a limit of Rs. 50000 is allowed by cash under NEFT while it is strictly an
account to account transfer in RTGS.
 The funds are made available for immediate use. It is a cheaper remittance
facility as compared to conventional remittance like DD or Collection of
cheques.
 RTGS system can require relatively large amounts of intra-day liquidity
because participants need sufficient funds in the settlement account to
cover their outgoing payments. Liquidity can come from various sources,
including opening balances, or reserve balances at the central bank, incoming
payments and intraday credit (which is usually provided by the central bank).
Adequate liquidity, relative to the value and distribution of payments, makes
a smooth flow of payments possible through such systems, helping to avoid
delays in individual payments and minimizing liquidity risks. The cost of intra-

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day liquidity depends on variables such as amount required, the opportunity
cost of maintaining liquid balances and the cost of intra-day credit.
Following are the pre-requisite for putting through a funds transfer transaction
using RTGS
 Originating and destination bank branches should be part of the RTGS
network
 Amount to be remitted
 Remitting customer’s account number which is to be debited
 Name of the beneficiary bank
 Name of the beneficiary customer
 Account number of the beneficiary customer
 Sender to receiver informations, if any
 The IFSC number of the receiving branch
 Foe net banking customers, some banks provide the facility to
automatically pop-up the IFSC once name of the destination bank and
branch is highlighted / chosen / indicated / keyed in.
IFSC – The IFSC is Indian Financial System Code is an alpha numeric code that
uniquely identifies a bank-branch participating in the RTGS system.
IFSC is used by the RTGS system to identify the originating / destination banks /
branches and also to route the messages appropriately to the concerned banks /
branches.
This is an -11- digit code with the first four alpha characters indicate the Bank.
(For our Bank it is BARB). The fifth character is numeral Zero (0) reserved by RBI
for future use. The last six characters identify the respective bank’s branch. (Our
Bank has adopted ALPHA code of the respective branch for these last six
characters). In case the ALPHA code is less than six alphabets, then suffix by X’s
so as to make it six characters. For example in the case of Agra main branch, the
alpha code is AGRA and the IFS Code, thus, shall be:- BARB0AGRAXX.

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4 National Electronics Fund Transfer (NEFT)
 The National Electronic Funds Transfer (NEFT) is a nation wide Inter-bank

remittance system of Reserve Bank of India facilitating one-to-one funds
transfer and has been in operation since 21 November 2005.
 The facility is currently being offered across the country by more than
74,000 branches of various 121 member banks.
 NEFT is basically for transferring funds between Banks only and not for
inter-branch transfer within our Bank. Transaction per day in Rs. 38081
billion and number of per day transaction is 3805814.
 This is a secure and trusted electronic funds transfer system and the credit
has to be passed on to the beneficiary on the same day or at the most on
next working day on receipt of the message. In case beneficiary details are
found to be incorrect then the funds have to be returned to the sending
bank/ branch.
 The NEFT is electronic fund transfer which operates on a deferred net
settlement (DNS) basis which settles transactions in batches.
 There is no minimum or maximum amount ceiling in case of NEFT
transactions.
 Each bank’s branch, participating in NEFT, is allotted a unique -11- digit
Indian Financial System Code (abbreviated as IFSC). The fifth digit is Zero.
For e.g. our Ashram Road br Ahmedabad will have the IFS Code as
BARB0ASHRAM
 NEFT is an account to account funds transfer system. However, it has been
decided by RBI to provide remittance facility up to Rs. 50,000/- in cash
to walk-in customers i.e. customers not having an account with remitting
banks.
 Full details of such remitters such as addresses, telephone numbers etc. are
to be collected, if cash deposited is for an amount less than Rs. 20,000/-
 In case of of amount of Rs. 20,000/- to Rs. 50,000/- in addition to the
above collect photo ID from the customer such as PAN card, Driving licence,
Election card, Adhar card etc.

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Timings:
Presently, NEFT operates in hourly batches – there are twelve settlements from 8
am to 7 pm on week days (Monday through Friday) viz. 8 A.M; 9 A.M.; 10 A.M.; 11
A.M.; 12 Noon; 1 P.M.; 2 P.M.; 3 P.M.; 4 P.M.; 5 P.M.; 6 P.M. and 7 P.M. and six
settlements from 8 am to 1 pm on Saturdays viz. 8 A.M; 9 A.M.; 10 A.M.; 11 A.M.; 12
Noon and 1 P.M. Accordingly, the NEFT Cell at Mumbai downloads the outward
messages from CBS at suitable intervals and sends to RBI for settlement.
In case of on-line NEFT through Baroda connect or through M-connect after the
above cut-off time, the account will be debited on the same day but the funds will
be transferred in the first batch of the next working day.
5 Baroda Connect (Internet Banking)
Internet Banking (Baroda Connect): Baroda Connect was launched in our bank on
14/09/2006. It provides 24*7*365 service to our Retail & Corporate customers.
Baroda connect can be accessed from any where using Internet.
Features available:
 Mobile and Utility Payments

 Online booking of Railway tickets
 Online Direct/Indirect taxes & state VAT payment.
 Online RTGS/NEFT Interbank Fund transfer.
 Institution Fee Payment.
 Self linked account & Third Party Fund transfer within BOB.
 Baroda e Shoppe.
 Online Temple Donation.
 Application supported by blocked account (ASBA)/ IPO
 Baroda easy pay, Bill Payment for various vendors.
 Account summary, Mini Statement (last 10 transactions), Statement of
accounts in excel, PDF format, max 400 transaction statement, TDS inquiry,

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Nominee details, Cheque status inquiry, Joint holder details, TOD, Lien
inquiry etc.
 Request available for FDR Renewal, issue cheques through RLMs.
 SMS alerts can receive on registered mobile for all subscribed alerts
transactions.
 Financial & Nonfinancial activities inquiry through activity option.
 Modelling of Loan & FDR is also available.
 Form 26AS for TDS Certificate from NSDL
 Fraud Management Solutions
 Online FDR Opening
 Online Loan Payment
Security: Baroda Connect is secured by 128 bit Secured Socket Layer (SSL)
provided by VeriSign.
6 Baroda M – Connect (Mobile Banking)
Bank of Baroda offers you BARODA M-CONNECT, the most convenient and secure
way to bank on the move 24X7. BARODA M-CONNECT is a banking application that
can be downloaded on your mobile phone and can be used to conduct banking
transactions in your Bank of Baroda account using your registered mobile phone.
With BARODA M-CONNECT you can access account information, transfer funds,
pay utility bills, recharge mobile, do airline/movie ticketing and many more.
Details of Services Offered
BALANCE ENQUIRY
MINI STATEMENT
FUND TRANSFER (WITHIN BANK)
1. MOBILE TO MOBILE
2. MOBILE TO ACCOUNT
FUND TRANSFER (OUTSIDE BANK)
1. NEFT (National Electronic Fund Transfer)
2. IMPS (Interbank Mobile Payment Service)

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BILL PAYMENT
AIRLINE TICKETING
MOVIE TICKETING
SHOPPING (NEXT PHASE)
MOBILE RECHARGE
STOP CHEQUE
CHEQUE STATUS
BLOCK CARD
LOCATOR
USSD BASED MOBILE BANKING SERVICE

Unstructured Supplementary Services Data (USSD) is a GSM service which allows
high speed interactive communication between the subscriber and application.
Unlike SMS, USSD is a session oriented service. USSD gateway enables operator
to introduce messaging services and allow up-to 182 characters on a network
between mobile stations and applications. USSD gateway uses the same application
programming interface that the Short Message Service (SMS) center does.
Currently the facility is available with daily transaction limit of Rs. 5,000/- per
customer.
NUUP (National Unified USSD Platform) is real-time and session oriented platform
for Mobile Banking transactions. It works on mobiles without downloading
application software. It is initiated by *99# short code and is available across
mobile operators and banks through a common integration of NPCI. It has better
adoption rate due to non dependency on application and is expected to broad-base
Mobile Banking and promote Financial Inclusion
Difference between applications based service and USSD based service

Application based service USSD based service
Mobile Banking application has to be No application is required
downloaded and installed onto the mobile
handset
Mobile handset must be java enabled Available on any GSM mobile handset

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Mobile connection can be CDMA or GSM Mobile connection to be GSM
7 Contact Centre
The Call Center, christened as “Contact Centre” that bank has recently introduced
is delivery of banking services through TOLL FREE PHONE.
Through these Toll Free Numbers, Bank’s customers and members of general public
can call the Bank’s Contact Centre and seek information on their accounts,
request for banking services, enquire on bank’s products, interest rates, etc.
All customers can avail contact centre services by dialing any one of the following
Toll Free Numbers.
1800 22 33 44 1800 102 44 55
It works for 365 days in a year (Except national holidays), from 8.00 am to
8.00 pm.
Though these two centers are housed in two geographies, they are complimentary
to each other and function as a single unit.
These contact centers are provided with necessary access to software applications like
CBS, CRM, Net banking portal, etc, for enabling them to service bank’s customers.
The resources deployed, called agents have been trained to service the Bank’s customers.
Benefits to the Bank:
Contact centre helps branches by providing customer service over PHONE without
intervention of the branches.

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 Provides information on routine queries such as – Account Balance,
transactions, cheque status, product enquiry, interest rate enquiry, gold rate
enquiry, etc. – instantly.
 Provides guidance to customers on Baroda Connect services. It can also (a)
activate passwords and (b) take request for regeneration of passwords.
 Stops the payment of cheque and can take the request for issuance of
cheque book in respect of RBO covered branches.
 Hotlists the Debit Card and takes request for reissuance of PIN or Debit
Card.
 As the Contact Centers will be able to address most of the common ‘queries’
and ‘service requests’, Branches will be relieved from such workload and
would be in a position to focus their attention more for business promotion /
development.
 Further, Bank proposes to extend functions like
(a) Registration of Debit Card related complaints (cash not dispensed),
(b) outbound recovery calls, and
(c) outbound sales calls.
 The contact centre will work as extended arm of the branch facilitating
marketing and sales of the bank’s various products.
Benefits to the Customers:
 Most convenient delivery channel

 Services are available from 8 am to 8 pm
 365 days a year, (excluding Independence Day and Republic Day)
 Free of Cost. Toll Free Number and hence No Cost
 TWO Toll Free Numbers are available to ensure uninterrupted service
 Customers are not required to visit branch for any services.
 Emergency Services – Debit Card Hot-listing – is easy, simple, authentic
 All service requests are supported by Docket Number, for further enquiry.
 Services for all linked accounts are available
 Professionally managed and Technology driven services

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8 Baroda e-gateway (Internet Payment Gateway)
Internet payment gateway is an internet based payment system under e-commerce

business, christened as “Baroda e-Gateway” by Bank of Baroda.
It allows merchants to offer their goods and services through websites.
The consumer is provided an opportunity to know, compare and shop products on

virtual stores round the clock from the convenience of their home. Since the
concept of visiting a physical store is becoming time consuming and inconvenient
especially at major centers.
The IPG infrastructure is usually complex and expensive. It provides an easy and
secure mechanism to merchants for processing online payments by shielding them
from underlying complexity of payment transactions and integration with electronic
fund transfer switches.
IPG service provider is responsible for settlement, accounting, reconciliation

between various agencies involved and merchant is free to concentrate on his
business.
Target Customer:
 Merchants, who have their website and are in the business of selling
products / services through internet.
 Merchants, who are interested in expanding their existing business using
internet technology.
Benefits of Baroda e-Gateway:

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 Owned infrastructure of hardware, software and dedicated support system
for Baroda e-Gateway. Hosted from Bank’s tier-3 data centre providing
24x7x365 Global support.
 Exclusive business vertical for e-Business, headed by General Manager,
emphasizing Bank’s focus towards e-channels.
 Best available technology and time bound support in integration and
operations at competitive rates.
 Dedicated operations team to provide assistance in configuration, day-to-day
processing, settlement and associated reconciliation.
 Merchants get credit as early as next working day for INR, though Bank
receives settlement subsequently after 1-2 days.
 Merchant is shielded from installing and maintaining complex technology and
interacting with various agencies.
 Payment is received in stipulated timeframe even though Bank receives the
amount subsequently.
 Merchant can themselves view/print transactions carried out from their
website.
 Simple interface with Bank’s system. Dedicated support is provided to
configure and test the setup.
 Cardholder is assured of the safety of their card details/usage. In addition,
they get convenience of purchasing goods/services from the comfort of
their home/office.
 Round the clock hassle free service.
 At present it is only accepting Master / Visa, Credit / Debit Cards issued by
any bank in India.
 It has got Security feature such as CVV2 & 3D security for transactions.
Security Features:
 Utilizes strong industry standard 128 bit SSL encryption

 3-D Secure : Additional password compliant with Visa and MasterCard
protocol specifications and Reserve Bank of India guidelines (reduces
chances of fraud to almost negligible)

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 McAfee Secure : To prevent from Internet worms and credit card thefts,
we are using McAfee Secure certified system. It continuously scan
messages coming to the server and send alerts to administrator.
 The data transmission is encrypted and storage is under strict data centre
environment.
9 Baroda Cash Management Services (BCMS)

While Core Banking Solution (CBS) provides a means to swifter collections but
there are a number of gaps vis-à-vis the corporate customers’ requirements.
Baroda Cash Management Solution empowers the Bank to offer its corporate
customers optimized Cash Management services by drastically improving their
 Funds Collection
 Inflow forecasting
 Speed & quality of information assisting the process – Customized Reports
with additional information
 Payment dispatch
 Funds utilization to minimize interest outflow
Baroda Cash Management Services is divided into two broad categories –

(1) On-site Bank Operations and
(2) Web driven Operations.
Cash Management Services consist of three functional modules:

 Collections Module
 Payment Module
 Liquidity Management

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PRIORITY SECTOR LENDING & FINANCIAL INCLUSION
Revised Priority Sector Guidelines:
Target for the Priority sector Lending

Priority Sector credit should be minimum 40 % for Domestic commercial banks /
Foreign banks with 20 and above branches & 32 % for Foreign banks with less
than 20 branches , of their Adjusted Net Bank Credit (ANBC) or credit equivalent
amount of Off-Balance sheet exposure whichever is higher of previous financial
years (as on 31st March).
Adjusted Net Bank Credit (ANBC):

For the purpose of priority sector lending, ANBC denotes the outstanding Bank
Credit in India minus bills rediscounted with RBI and other approved Financial
Institutions plus permitted non SLR investments in Held to Maturity (HTM)
category plus investments in other categories, which are eligible to be treated as
part of priority sector lending (eg. investments in securitised assets).
Different Components of P/S Lending
The following categories of advances as mentioned below would be included in the

Priority Sector Lending.
Agriculture (Direct/Indirect)
Micro & Small Enterprises (Direct/Indirect Finance)
Educational Loans
Housing Loans
Export Credit
Others

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Within the overall main lending target of 40 per cent of Adjusted Net Bank
Credit (ANBC) or equivalent amount of Off-Balance sheet exposure, it should be
ensured that:
Total agriculture:
18 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure,
whichever is higher. Of this, indirect lending in excess of 4.5% of ANBC or credit
equivalent amount of Off-Balance Sheet Exposure, whichever is higher, will not be
reckoned for computing achievement under 18 percent targ et. However, all
agricultural loans under the categories 'direct' and 'indirect' will be reckoned in
computing achievement under the overall priority sector target of 40 percent of
ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is
higher.
Micro & Small Enterprises (MSE):

(i) Advances to micro and small enterprises sector will be reckoned in computing
achievement under the overall priority sector target of 40 percent of ANBC or
credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
(ii) 40 percent of total advances to micro and small enterprises sector should go
to Micro (manufacturing) enterprises having investment in plant and machinery
up to 5 lakh and micro (service) enterprises having investment in equipment up
to Rs 2 lakh;
(ii) 20 percent of total advances to micro and small enterprises sector should go
to Micro (manufacturing) enterprises with investment in plant and machinery
above Rs 5 lakh and up to Rs 25 lakh, and micro (service) enterprises with
investment in equipment above Rs 2 lakh and up to Rs.10 lakh
Particulars In case of Mfg. sector, In case of Service sector (Loan

original investment in P & upto Rs.2.00 cr), original
M investment in Equipments
Micro Upto Rs.25 lacs Upto Rs.10 lacs

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Enterprises
Small Above Rs.25 lacs and Above Rs.10 lacs and upto
Enterprises upto Rs.500 lacs Rs.200 lacs
Loans for food and agro processing will be classified under Micro and Small
Enterprises, provided the units satisfy investments criteria prescribed for
Micro and Small Enterprises, as provided in MSMED Act, 2006.
Education Loan: Study in India up to Rs.10 lacs and Study abroad – up to Rs.20
lacs
Housing Loans:
Upto Rs.25 lac in Metro and Rs.15 lac in other centres, for constructions of houses.
For EWS, Rs.5 lac per dwelling unit (irrespective of area ) will qualify for P.S.
classification. Loans for repair and renovations up to Rs. 2 lac in Rural and Semi
Urban Area and upto Rs. 5 lacs in Urban Areas.
Export Credit:
Export Credit extended by foreign banks with less than 20 branches will be
reckoned for priority sector target achievement.
As regards the domestic banks and foreign banks with 20 and above branches,
export credit is not a separate category under priority sector.
Others:
Loans, not exceeding Rs 50,000 per borrower provided directly by banks to
individuals and their SHG/JLG, Overdrafts, up to Rs 50,000 (per account),
granted against 'no-frills' / basic banking / savings accounts provided the
borrower’s household annual income in rural areas does not exceed Rs 60,000/- and
for non-rural areas it should not exceed Rs 1,20,000/-.
Loans to distressed persons not exceeding Rs 50,000 per borrower to prepay their
debt to non-institutional lenders.

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Loans outstanding under loans for general purposes under General Credit Cards
(GCC). If the loans under GCC are sanctioned to Micro and Small Enterprises, such
loans should be classified under respective categories of MSE.
Loans sanctioned to State Sponsored Organisations for SC/ST for the specific
purpose of purchase and supply of inputs to and/or the marketing of the outputs of
the beneficiaries of these organisations.
Loans sanctioned by banks directly to individuals for setting up off-grid solar and
other off-grid renewable energy solutions for households.
Weaker section:
In order to ensure proper attention in the matter of allocation of credit to

following preferred sector, (known as WEAKER SECTION as per the
recommendations of Shri Krishnaswami Committee) RBI has stipulated that 25 %
of Priority Sector advances i.e. 10 % of net bank credit should go to these weaker
sections beneficiaries.
Following types of finance are included under Weaker Section finance:
Small and Marginal Farmers: Farmers with landholding of up to 1 hectare is
considered as Marginal Farmers. Farmers with a landholding of more than 1 hectare
but less than 2 hectares are considered as Small Farmers. For the purpose of
priority sector loans ‘small and marginal farmers’ include landless agricultural
labourers, tenant farmers, oral lessees and share-croppers, whose share of
landholding is within above limits prescribed for “Small and Marginal Farmer”.

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Financial Inclusion – Recent Updates
 A large section of the rural poor still does not have access to the formal
banking channel. Further, the backward regions of the country, too, lack basic
financial infrastructure.
 Financial Inclusion is aimed at providing banking services at an affordable cost
to the disadvantaged and low-income groups.
 Capital formation through credit and financial services essential prerequisite
for inclusive and sustainable growth can be achieved through access to a well-
functioning financial system resulting into better integration of economically
and socially excluded people into the economy.
 Globally, the triad of Financial Inclusion, Financial Literacy and Consumer
Protection has been recognized as intertwining threads in pursuit of Financial
Stability.
Extent of Financial Inclusion (Source: RBI)

Parameter
Number of habitations 600000
Habitations having access to commercial Bank 5%
Branch
Population having bank account 57%
Population having debit card 13%
Population having credit card 2%
 The penetration of financial services is very low in North Eastern states.

 Low level of financial penetration compared to OECD countries.

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 Access of bank branches better compared to china but worse off compared to
Malaysia and Thailand.
 ATM penetration poor compared to Asian peer group countries.
 In view of poor financial inclusion status RBI accorded top priority to it and
accordingly commercial banks were advised to:
 Formulate specific Board approved Financial Inclusion Plans (FIP) and to act on
them on a mission mode.
 To provide banking services in every village having a population of over 2000 by
31 March 2012, through bank branches as well as through various ICT-based
models including through Business Correspondents (BCs).
 Despite increased outreach of the branches in rural and semi urban areas and
the implementation of directed credit, farmers and rural artisans still did not
receive adequate credit from banks and accessibility of avenues for savings in
formal banking channels were limited.
 In order to address this issue RBI liberalised the branch authorisation policy in
December 2009 and domestic scheduled commercial banks were given freedom
to open branches in tier 3 to tier 6 centres (having population up to 49,999 as
per 2001 census) without obtaining permission from RBI, subject to reporting.
 Committee on Financial Sector Reforms (Government of India, 2009), proposed
that instead of focussing primarily at expanding credit, financial inclusion
should be viewed as expanding access to financial services, such as payments
services, savings products, insurance products, and inflation-protected pensions.
 The focus also shifted from social banking without profitability concerns to
profitable business propositions for the banks. The delivery models instead of
being cost centric should aim at generating revenue aimed at providing quality
banking service to customers at their doorstep with a profitable proposition for
the banks. (RBI 2011).
Concept of ultra small branch (USB):

 Ultra small branches be set up in all villages covered through BCA ( Business
correspondent agent)

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 Branch to consist of small area 100-200 sq. feet where officer designated
by the bank will be available with a laptop on predetermined day and time in
a week.
 This would ensure close supervision and mentoring of BCA and availability of
range of banking services in villages.
 Cash services would be offered by the BCA from the USB premises.
 The bank officer would offer other services, undertake field verification
and follow up the banking transactions.
 After periodic review the periodicity and duration of visit can be
progressively enhanced depending upon business potential.
 Presence of bank officer at USB will create confidence in the rural masses
prompting them to shift to banking channels and thereby reducing their
dependency on non institutional financial channels specially the
moneylenders.
Progress of financial inclusion plan
 Banking connectivity has been extended to more than 1, 99,702 villages up to

September 2012 from 67,694 villages in March 2010.
 4848 rural branches have been opened.
 Numbers of Business Correspondents have increased from 34,532 to 128,054.
 83.70 million Basic Savings Bank Accounts (NFAs) have been added.
 7.35 million KCCs and about 0.98 million GCCs have been added.
 About 37 million people/families have been credit-linked.
 Share of ICT based accounts have increased substantially - % of ICT accounts
to NFAs has increased from 25% to 45%.
Urban Financial Inclusion
 Urban Financial Inclusion is an initiative by the Government of India to

inculcate saving habits and to extend financial services to migrant labourers and
street vendor/hawkers in urban areas.
 The account opening drive is of paramount importance in achieving the broader
objective of Financial Inclusion, which is very high on the agenda of the
Government.

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 The Government desires to open bank accounts for all migrant labors and street
vendors/hawkers who are working within 500 meters of the branches, in urban
and metro areas.
 To achieve the Urban Financial Inclusion, marketing staff of branches should
personally contact all street vendors/hawkers who are working within 500
meters of branches, to open their accounts.
Progress of our Bank in Urban Financial Inclusion
 Campaign launched in our SLBCs UP and Rajasthan.

 For convenience of customers, a call centre is established by putting up a
Toll-free line at SLBCs cell at Jaipur and Lucknow.
 Mobile phones at Lead District Managers Office are being provided for SMS
facility
 Separate email-id created for UP and Rajasthan SLBC.
 Wards allocated to the member banks of SLBC in UP and Rajasthan.
 Publicity is being given to campaign by issuing advertisement in the
newspapers.
Why financial inclusion should be seen as an opportunity by the Banks?
 It will help the banks to increase the customer base and reduction of
dependency of rural masses on non institutional financial channels.
 This will be helpful in increasing the CASA base of the banks.
 As per CRISIL survey the consumption in rural area is growing faster than in
urban area, during 2009-10 to 2011-12, additional spending by rural India was
Rs. 3750 billion, significantly higher than Rs. 2,994 billion by urban population.
This untapped potential in rural area can be utilised by the banks in increasing
their business.
 The lack of easy access to financial products and services creates demand for
non financial products like gold and real estate. Through combined effect of

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financial inclusion and financial literacy demand for financial products and
services can be created leading to a more sustainable growth of the financial
sector.
 Financial inclusion will facilitate economic growth and financial deepening of the
Indian economy thereby leading to banking growth.
CREDIT MONITORING & NPA MANAGEMENT
Reserve Bank of India guidelines for Restructuring
General Principles and Prudential Norms for Restructured Advances
The principles and prudential norms laid down here are applicable to all advances
including the borrowers, who are eligible for special regulatory treatment for
asset classification.
Eligibility criteria for restructuring of advances
1 Banks may restructure the accounts classified under 'standard', 'sub-

standard' and 'doubtful' categories.
2 Banks can not reschedule / restructure / renegotiate borrowal accounts with

retrospective effect. While a restructuring proposal is under consideration, the
usual asset classification norms would continue to apply. The process of re-
classification of an asset should not stop merely because restructuring proposal
is under consideration. The asset classification status as on the date of approval
of the restructured package by the competent authority would be relevant to
decide the asset classification status of the account after restructuring /
rescheduling / renegotiation. In case there is undue delay in sanctioning a

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restructuring package and in the meantime the asset classification status of the
account undergoes deterioration, it would be a matter of supervisory concern.
3 Normally, restructuring can not take place unless alteration / changes in the
original loan agreement are made with the formal consent / application of the
debtor. However, the process of restructuring can be initiated by the bank in
deserving cases subject to customer agreeing to the terms and conditions.
4 No account will be taken up for restructuring by the banks unless the financial
viability is established and there is a reasonable certainty of repayment from the
borrower, as per the terms of restructuring package. The viability should be
determined by the banks based on the acceptable viability benchmarks
determined by them, which may be applied on a case-by-case basis, depending on
merits of each case. Illustratively, the parameters may include the Return on
Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate
of Return and Cost of Funds and the amount of provision required in lieu of the
diminution in the fair value of the restructured advance. The accounts not
considered viable should not be restructured and banks should accelerate the
recovery measures in respect of such accounts. Any restructuring done without
looking into cash flows of the borrower and assessing the viability of the
projects / activity financed by banks would be treated as an attempt at ever
greening a weak credit facility and would invite supervisory concerns / action.
5 While the borrowers indulging in frauds and malfeasance will continue to

remain ineligible for restructuring, banks may review the reasons for
classification of the borrowers as willful defaulters specially in old cases where
the manner of classification of a borrower as a willful defaulter was not
transparent and satisfy itself that the borrower is in a position to rectify the
wilful default. The restructuring of such cases may be done with Board's

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approval, while for such accounts the restructuring under the CDR Mechanism
may be carried out with the approval of the Core Group only.
6 BIFR cases are not eligible for restructuring without their express approval.
CDR Core Group in the case of advances restructured under CDR Mechanism /
the lead bank in the case of SME Debt Restructuring Mechanism and the
individual banks in other cases, may consider the proposals for restructuring in
such cases, after ensuring that all the formalities in seeking the approval from
BIFR are completed before implementing the package.
Asset classification norms
Restructuring of advances could take place in the following stages :
(a) before commencement of commercial production / operation
(b) after commencement of commercial production / operation but before the

asset has been classified as 'sub-standard'
(c) after commencement of commercial production / operation and the asset has
been classified as 'sub-standard' or 'doubtful'.
1 The accounts classified as 'standard assets' should be immediately re-

classified as 'sub-standard assets' upon restructuring.
2 The non-performing assets, upon restructuring, would continue to have the

same asset classification as prior to restructuring and slip into further lower
asset classification categories as per extant asset classification norms with
reference to the pre-restructuring repayment schedule.

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3 All restructured accounts which have been classified as non-performing assets
upon restructuring, would be eligible for up-gradation to the 'standard' category
after observation of 'satisfactory performance' during the 'specified period'.
4 In case, however, satisfactory performance after the specified period is not

evidenced, the asset classification of the restructured account would be
governed as per the applicable prudential norms with reference to the pre-
restructuring payment schedule.
5 Any additional finance may be treated as 'standard asset', up to a period of

one year after the first interest / principal payment, whichever is earlier, falls
due under the approved restructuring package. However, in the case of accounts
where the prerestructuring facilities were classified as 'sub-standard' and
'doubtful', interest income on the additional finance should be recognised only on
cash basis. If the restructured asset does not qualify for upgradation at the end
of the above specified one year period, the additional finance shall be placed in
the same asset classification category as the restructured debt.
6 In case a restructured asset, which is a standard asset on restructuring, is

subjected to restructuring on a subsequent occasion, it should be classified as
substandard. If the restructured asset is a sub-standard or a doubtful asset and
is subjected to restructuring, on a subsequent occasion, its asset classification
will be reckoned from the date when it became NPA on the first occasion.
However, such advances restructured on second or more occasion may be allowed
to be upgraded to standard category after one year from the date of first
payment of interest or repayment of principal whichever falls due earlier in
terms of the current restructuring package subject to satisfactory performance.
Income recognition norms

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Interest income in respect of restructured accounts classified as 'standard
assets' will be recognized on accrual basis and that in respect of the accounts
classified as 'non-performing assets' will be recognized on cash basis.
Provisioning norms
1 Normal provisions
Banks will hold provision against the restructured advances as per the existing
provisioning norms.
2 Provision for diminution in the fair value of restructured advances
(i) Reduction in the rate of interest and / or reschedulement of the repayment of

principal amount, as part of the restructuring, will result in diminution in the fair
value of the advance. Such diminution in value is an economic loss for the bank
and will have impact on the bank's market value of equity. It is, therefore,
necessary for banks to measure such diminution in the fair value of the advance
and make provisions for it by debit to Profit & Loss Account. Such provision
should be held in addition to the provisions as per existing provisioning norms and
in an account distinct from that for normal provisions.
For this purpose, the erosion in the fair value of the advance should be computed
as the difference between the fair value of the loan before and after
restructuring. Fair value of the loan before restructuring will be computed as the
present value of cash flows representing the interest at the existing rate
charged on the advance before restructuring and the principal, discounted at a
rate equal to the bank's BPLR as on the date of restructuring plus the
appropriate term premium and credit risk premium for the borrower category on
the date of restructuring. Fair value of the loan after restructuring will be
computed as the present value of cash flows representing the interest at the

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rate charged on the advance on restructuring and the principal, discounted at a
rate equal to the bank's BPLR as on the date of restructuring plus the
appropriate term premium and credit risk premium for the borrower category on
the date of restructuring.
The above formula moderates the swing in the diminution of present value of
loans with the interest rate cycle and will have to follow consistently by banks in
future. Further, it is reiterated that the provisions required as above arise due
to the action of the banks resulting in change in contractual terms of the loan
upon restructuring which are in the nature of financial concessions. These
provisions are distinct from the provisions which are linked to the asset
classification of the account classified as NPA and reflect the impairment due to
deterioration in the credit quality of the loan. Thus, the two types of the
provisions are not substitute for each other.
(ii) In the case of working capital facilities, the diminution in the fair value of
the cash credit / overdraft component may be computed as indicated above,
reckoning the higher of the outstanding amount or the limit sanctioned as the
principal amount and taking the tenor of the advance as one year. The term
premium in the discount factor would be as applicable for one year. The fair value
of the term loan components (Working Capital Term Loan and Funded Interest
Term Loan) would be computed as per actual cash flows and taking the term
premium in the discount factor as applicable for the maturity of the respective
term loan components.
(iii) In the event any security is taken in lieu of the diminution in the fair value
of the advance, it should be valued at Re.1/- till maturity of the security. This will
ensure that the effect of charging off the economic sacrifice to the Profit &
Loss account is not negated.

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(iv) The diminution in the fair value may be re-computed on each balance sheet
date till satisfactory completion of all repayment obligations and full repayment
of the outstanding in the account, so as to capture the changes in the fair value
on account of changes in BPLR, term premium and the credit category of the
borrower. Consequently, banks may provide for the shortfall in provision or
reverse the amount of excess provision held in the distinct account.
(v) If due to lack of expertise / appropriate infrastructure, a bank finds it

difficult to ensure computation of diminution in the fair value of advances
extended by small / rural branches, as an alternative to the methodology
prescribed above for computing the amount of diminution in the fair value, banks
will have the option of notionally computing the amount of diminution in the fair
value and providing therefore, at five percent of the total exposure, in respect
of all restructured accounts where the total dues to bank(s) are less than rupees
one crore till the financial year ending March 2013. The position would be
reviewed thereafter.
3 The total provisions required against an account ( normal provisions plus

provisions in lieu of diminution in the fair value of the advance) are capped at
100% of the outstanding debt amount.
Special Regulatory Treatment for Asset Classification
1 The special regulatory treatment for asset classification, in modification to

the provisions in this regard stipulated, will be available to the borrowers
engaged in important business activities, subject to compliance with certain
conditions as enumerated below. Such treatment is not extended to the following
categories of advances:
i. Consumer and personal advances;

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ii. Advances classified as Capital market exposures;
iii. Advances classified as commercial real estate exposures
The asset classification of these three categories accounts as well as that of

other accounts which do not comply with the conditions enumerated below, will be
governed by the prudential norms in this regard described above.
Elements of special regulatory framework
The special regulatory treatment has the following two components :
(i) Incentive for quick implementation of the restructuring package.
(ii) Retention of the asset classification of the restructured account in the pre-
restructuring asset classification category
Incentive for quick implementation of the restructuring package
During the pendency of the application for restructuring of the advance with the
bank, the usual asset classification norms would continue to apply. The process of
reclassification of an asset should not stop merely because the application is
under consideration. However, as an incentive for quick implementation of the
package, if the approved package is implemented by the bank as per the following
time schedule, the asset classification status may be restored to the position
which existed when the reference was made to the CDR Cell in respect of cases
covered under the CDR Mechanism or when the restructuring application was
received by the bank in non-CDR cases:
(i) Within 120 days from the date of approval under the CDR Mechanism.

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(ii) Within 90 days from the date of receipt of application by the bank in cases
other than those restructured under the CDR Mechanism.
Asset classification benefits
Subject to the compliance with the under noted conditions in addition to the
adherence to the prudential framework laid down:
(i) an existing 'standard asset' will not be downgraded to the sub-standard

category upon restructuring.
(ii) during the specified period, the asset classification of the sub-standard /
doubtful accounts will not deteriorate upon restructuring, if satisfactory
performance is demonstrated during the specified period.
However, these benefits will be available subject to compliance with the following
conditions:
i) The dues to the bank are 'fully secured'. The condition of being fully secured
by tangible security will not be applicable in the following cases:
(a) SSI borrowers, where the outstanding is up to Rs.25 lakh.
(b) Infrastructure projects, provided the cash flows generated from these
projects are adequate for repayment of the advance, the financing bank(s) have
in place an appropriate mechanism to escrow the cash flows, and also have a clear
and legal first claim on these cash flows.
(c) Micro Finance Institution accounts, which are standard at the time of
restructuring, even if they are not fully secured. However, this relaxation is
granted purely as a temporary measure and would be applicable to standard MFI
accounts restructured by banks upto 31st March 2011.

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ii) The unit becomes viable in 10 years, if it is engaged in infrastructure
activities, and in 7 years in the case of other units.
iii) The repayment period of the restructured advance including the moratorium,
if any, does not exceed 15 years in the case of infrastructure advances and 10
years in the case of other advances. The aforesaid ceiling of 10 years would not
be applicable for restructured home loans; in these cases the Board of Director
of the banks should prescribe the maximum period for restructured advance
keeping in view the safety and soundness of the advances. Lending to individuals
meant for acquiring residential property which are fully secured by mortgages on
residential property that is or will be occupied by the borrower or that is rented
are risk weighted as under the new capital adequacy framework, provided the
LTV is not more than 75% , based on board approved valuation policy. However,
the restructured housing loans should be risk weighted with an additional risk
weight of 25 percentage points to the risk weight prescribed already.
iv) Promoters' sacrifice and additional funds brought by them should be a

minimum of 15% of banks' sacrifice. The term 'bank's sacrifice' means the
amount of "erosion in the fair value of the advance above. Further, the additional
funds required to be brought in by the promoter should generally be brought in
up front . However, if the banks are convinced that the promoters face genuine
difficulty in bringing their share of the sacrifice immediately and need some
extension of time to fulfill their commitments, the promoters could be allowed to
bring in 50% of their sacrifice , i.e. 50% of 15%, upfront and the balance within
a period of one year. Further, in case the promoters fail to bring in their balance
share of sacrifice within the extended time limit of one year, the asset
classification benefits derived by banks will cease to accrue and the they will
have to revert to classifying such accounts as per the asset classification norms.

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v) Personal guarantee is offered by the promoter except when the unit is
affected by external factors pertaining to the economy and industry.
vi) The restructuring under consideration is not a 'repeated restructuring'.
Non Performing Assets
 Another issue which is generating considerable concern and is likely to

impact banks’ ability to serve its stakeholders is the rising portfolio of non-
performing assets (NPAs) and restructured loans.
 While the downturn in business environment globally and in India has
contributed to this rise, we need to reflect on why our risk management
practices during boom time were unable to anticipate future downturns and
build up suitable safeguards while giving loans.
 The rising impaired assets is a “governance” issue as banks have forgotten
the art of saying ‘no’, except, may be, to small borrowers.
 Banks need to significantly improve their risk assessment capability and
their ability to price risks, so that they take on only those risks that they
understand and can effectively manage.
 This need is all the more pronounced in the case of public sector banks,
which, at times, end up with assets that have been exited by private sector/
foreign banks on account of inherent weaknesses.

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 The ability to manage NPAs is important in order to preserve the strength
of bank balance sheets and to retain the appetite to take on good risks. An
attitude of complete risk aversion would not be appropriate as banks are in
the business of taking risks, but with adequate safeguards. .
 Another issue is the element of discrimination practiced by the banks in
restructuring of loans. Analysis of available data indicates that the larger
borrowers have invariably received the benefit of restructuring of loans,
while the restructuring in case of SME/ agriculture loans has remained
abysmally low.
Timely intervention and support from the banks, this sector would have definitely
shown much lower levels of impaired assets than it presently does.
MODULE – C : FUTURE TRENDS / CHALLENGES
HR Challenges of Decade 2020
Development of knowledge and talent marketplace
Though the face of banking industry has undergone a sea change in the years that
have gone by, one characteristic of the industry that has remained unchanged is
people. The banks succeed or fail depending on the quality of their workforce
talent at every level—the front lines, middle management and executive leadership.
Banks should look at workforce talent as the primary engine for sustained,
competitive advantage and for creating a workforce in which people at every level
are capable of contributing with high levels of performance leveraging on
technology. It's about creating a IT culture of excellence. It is the HR teams that
will give banks the competitive advantage in the years to come.
Skilling of workforce

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There is shortage of trained manpower for the industry, both at the bottom of the
pyramid and higher up the ladder. India is often considered to be a source for
skilled labour supply to the rest of the world, given its sheer size of manpower. It
is often not recognized that over four-fifths of our rural population and over half
of our urban population remains unskilled. Women participation rate in the labour
market remains poor. The biggest problem is the lack of focus on technical
education that could absorb a large chunk of unskilled labour, if backed by greater
push to primary education. Less than 11 per cent of the job-seeking population in
the age group of 15-29 receives any form of vocational training in India and only
one of every three who do get vocational training receive it from specialized
training institutes. Furthermore, even in the value added segment, where we have
the largest pool of skilled manpower i.e. in the area of information technology, real
wages are rising at a pace that may impact our competitiveness.
Improve productivity and efficiency
Productivity is an important driver of growth. Productivity depends on the

efficiency with which scarce resources are allocated – be it your time, work
effort, natural resources, capital or any other inputs. A great deal of the growth
for most countries can be explained by productivity growth, especially total factor
productivity growth (TFPG). Factor accumulation (such as increase in labour or
capital) explains a smaller part of the growth. Given this experience, India would
need to focus on technological developments to improve its rate of TFPG. Capital
deepening may also help, but the key lies in overall productivity enhancements.
In India, output per worker has increased at an impressive rate in the services
sector after the reforms initiated in early 90s. In this period, TFPG growth has
also been impressive for this sector. TFPG growth has also improved for the
manufacturing sector since the 1980s. So, progress is being made. However, the
rate of this technical change, still, has been lower than that for the East Asian
economies during the period in which they earned the tag of being East Asian
tigers.

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Creating Synergy Between Seniors and Gennext
Banking Industry is witnessing the enormous diversity in the composition of the

workforce. More young officers including women are entering the workforce who
are more technology-savvy, people in hurry and difficult to satisfy. Bank is having
biggest challenge for creating synergy between young workforce and experienced
seniors.
Retention of Talent
During last one & two years Banking Industry is experiencing that the rate of
attrition is increasing due to various reasons and almost all PSBs are facing some
degree of uncertainties in their humane base planning due to this attrition behavior
prevalent in the market. Attrition not only cost us in the form of time and money
but also affects the momentum of our business growth.
IT Vision for 2011 to 2020
Focus for Banks
Although banks have deployed technology for transaction processing, analytical

processing by banks is still in a nascent stage. It is now essential for banks to look
at improving the efficiency and effectiveness of the IT Infrastructure created.
Technology has its own set of challenges to be addressed. These are the need to
have high availability of IT systems, efficient and effective business continuity
plans, system of periodical assessment of the risks for IT and IS systems, conduct
of regular audit, taking care of IT obsolescence and the likes. Newer areas of
technology initiatives apart from risk management of the enterprise include, CRM
using business intelligence, improving internal effectiveness and managing risks
arising out of IT implementation.

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Indian payment systems
Indian payment systems thus pose significant opportunities and challenges/
threats in the coming years. An indication of the scope of the challenges and
opportunities can be gathered from the following few pointers:
(i) There is a huge potential of migrating government transactions (payments

and receipts) to electronic mode. It is estimated that Government subsidies
alone constitute more than Rs. 2.93 trillion and if these payments are
effected electronically, it may translate to 4.13 billion electronic
transactions in a year. In addition, there is a large scope for further
electronification of collection of Government receipts.
(ii) A fraction of the 10 million plus retailers in India have card payment
acceptance infrastructure – presently this number stands at just 0.6 million
- and this infrastructure needs to be grown exponentially. A "point of
purchase" terminal has also been envisioned to ensure seamless e-payments
to sellers of goods/farm products at wholesale markets and government
procurement programs.
(iii) The e-commerce and m-commerce platforms are poised for a big stride
in coming years. Similarly, electronic bill presentment and payments involving
insurance, utility bills, taxes, school fees, etc. present a huge opportunity.
(iv) Currently, the number of non-cash transactions per person stands at
just 6 per year. If the efforts of financial inclusion bear fruit and if each
citizen of the country undertakes a minimum of one transaction in month,
the total transactions in the country would reach an astronomical 12 billion
transactions per annum.
(v) To accomplish the vision of a less-cash society, if not cashless society,
the key elements which would impact all our efforts towards creation of a
modern and widespread payment system.
Efficiency enhancement in the payment systems:

Cheque Clearing:
Opportunity: Over the years efficiency in Cheque clearing has been brought by
way of introduction of MICR processing, computerised clearing using the

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Express Cheque Clearing System (ECCS) which also facilitates speed clearing
and introduction of cheque truncation system (CTS). The CTS projects have
been entrusted to NPCI – the umbrella organisation for retail payments in the
country.
Challenges: The focus of cheque clearing operations in the coming years would
be consolidation, rationalisation and centralisation, through the implementation
of grid-based CTS solution (which is Information Technology Act compliant)
across the country by NPCI. The grid-based CTS will usher in a standardised
cheque clearing scenario across the country. The issuance of CTS 2010
standard cheques will further facilitate this process. Dialogue with the
Government will continue to be pursued for issuance and adoption of CTS 2010
standard cheques at the earliest and discontinue the existing practice of "paper
to follow" in CTS by seeking amendment of the treasury rules.
National Electronic Funds Transfer System (NEFT):

Given the reach of the system and increasing volumes being handled every day,
the system has become an important payment system. Introduction of user /
customer friendly features and increasing the number of settlement cycles in
NEFT would be further examined. .
Opportunity: The positive confirmation feature in NEFT has been well
appreciated by the customers.
Challenges: there is a need for improving the visibility of the payment
transaction. This would require that the transaction reference number is unique
and same throughout the life cycle of the transactions - from the point of
origin to the destination. Further, return transactions should carry the original
transaction reference number to aid the reconciliation process.
National Electronic Clearing Services (NECS):

Currently there are many avatars of ECS operating in the country with ECS on a
standalone mode available in 81 centres. The way forward would be to consolidate
local ECS into RECS and ultimately to NECS.

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Opportunity: Redesigning ECS suite of products to function as an Automated
Clearing House (ACH) for bulk transactions including both credit and debit, is an
option that needs further examination. However, this needs to be weighed against
the roll out of ACH by NPCI as also the need to provide a backstop in the event of
failure of any system.
Challenges: One of the major challenges faced in the ECS schemes relates to
mandate management and the ease with which the customers can manage their
mandates. Efforts would be made to rationalise and strengthen the mandate
management systems. This could be achieved through business process re-
engineering resulting in an electronic (centralised/ decentralised) mandate
management system. In addition, an electronic GIRO5 instrument for effecting
credit transfer by a payer from any branch of a bank or from any other authorised
non-bank would also be explored. Further, considering the fact that cheque
continues to be a dominant payment instrument in India, the scope of implementing
a cheque based GIRO system would be examined.
Harmonisation of routing codes:

Opportunity: Currently different payment systems use different routing codes.
The MICR code is used for cheque clearing and ECS operations, the IFSC code
is used for NEFT and RTGS operations and the BSR code is used for
identification of a bank branch for submission of returns to the RBI and is now
being used for reporting government business details to Government.
Additionally, Aadhaar number is sought to be populated along with bank account
numbers to enable electronic transfer of Government benefits. With the in-
principle approval for using SWIFT for domestic financial transactions, the
participants in the payment system should not be burdened with yet another
routing code.
Challenges: There is, therefore, a need to harmonise all these routing codes in
co-operation and collaboration with the stakeholders’ viz., banks, Government,
IBA, IDRBT, NPCI, SWIFT, etc. and the departments concerned within RBI.
Further, any such exercise would involve business process re-engineering at the
application level for various payment systems as well as the core banking
solution of banks. While this has major cost implications the fructification of

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efforts towards a uniform routing code for both domestic as well as cross
border transactions would deliver major cost savings in terms of enhancing STP
and minimising operational risks.
Standardisation of account numbers:

Opportunity: Currently the account numbers maintained across various banks are
different based on their requirements and range from 10 digits to 17 digits. Lack
of uniformity in account numbers hinders STP and banks have to either mask
excess digits or add extra digits to facilitate this process. There is therefore a
business case for examining the need for developing a common account number
across payment systems.
Challenges: the adoption of International Bank Account Number (IBAN)/ Basic
Bank Account Number (BBAN) could be explored. IBAN/BBAN provides a format
for account identification and also contains validation information in the form of
check digits which can be validated at source based on a prescribed single standard
procedure. The IBAN/BBAN in itself contains all the routing information needed
to get a payment from one bank to another.
Standardisation of bill payments:
Opportunity: It is estimated that a large portion of the bill payments are done
at biller’s location (generally walk-in customers). Thus there is a huge
opportunity for developing a bill payment system for payments towards
insurance premia, utility payments, taxes, school fees.
Challenges: Towards this end, there is a need for developing an electronic
GIRO system. One of the prerequisites for developing an electronic GIRO
system is the standardisation of biller information.
Payment Hub:

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Opportunity: The concept of a “payment hub” is being perceived to allow
consolidation of multiple payment systems into one centrally managed mid-office
payment system. This would necessitate putting in a streamlined IT architecture
which would eliminate point to point interfaces for various payment products. Such
a “payment hub” with the latest technology would result in facilitating faster and
smoother electronic payment transfers as opposed to the current system of
individual interfaces being responsible for inputting electronic payment
instructions into various systems. Once a payment hub becomes functional an
individual bank would simply need to input an electronic payment instruction to the
hub which would then automatically route the instructions to various payment
systems.
Challenges: The concept of payment hub is very much dependent on standardised
message formats and uniform routing codes. This would also enable rationalisation
of costs for the banks.
Manage Mobile
The mobile revolution has created a sort of new world order. It has the potential
to change the way banks do business. It is up to the banks to take cue. While banks
are embracing the mobile channel -- and continuing to support the old standby of
online banking -- they are not integrating the technologies used to build e-banking
solutions. Also as more people conduct their banking on mobile devices, these
devices also will become the growing focus of hackers and fraudsters, who are
always on the hunt for ripe targets. Banks can work on two areas within the mobile
channel, fraud prevention and marketing to customers. In fact, world over mobile
banking already is playing a role in reducing fraud in a variety of ways -- ranging
from simple transaction and security alerts to mobile authentication for bank
transfers.
White Label ATMS:
The Automated Teller Machine (ATM) has been hailed as one of the most
innovative and revolutionary technological developments in the history of banking.

3
The channel, which was initially a medium for disbursal of cash to customers at
bank branches, has now developed into a touch-point for delivery of a wide variety
of banking services at branches and convenient off-site locations. Though banks
initially owned and deployed their own ATMs, over time this has undergone a broad
change, with banks now preferring outsourcing all or many of the activities
associated with ATM operations - starting from deployment, maintenance, cash
loading and technology upgrading. This has helped them reduce their operational
costs and stay more focused on their core business.
Internationally, in addition to bank-owned and deployed ATMs, Independent ATM

Deployers (IADs) and Independent Service Organisations (ISOs) are engaged in
the ATM business. Such ATMs are called White-label ATMs (WLAs).
IADs and ISOs are almost similar in their operations, barring the following
differences:
(i) ISOs are usually larger operators that own and deploy ATMs and the entire
related infrastructure. They have a sponsorship arrangement with the banks for
cash loading and services. The relationships with sponsor banks are guided by local
regulatory requirements. The ISO scheme works either through a single sponsor
bank or the multisponsor bank model.
(ii) In the IAD model, the entities concentrate on investment in the assets (ATMs).
They own the ATM and connect to any existing network provider for the payment
infrastructure. The IADs can include entities ranging from individual business
owners to large retail outlets/ supermarkets. Such entities do not have a direct
arrangement with any bank for any aspect related to the operation of such ATMs,
including cash loading.
ATMs and WLA Scheme in India

3
The number of ATMs in the country stands at more than 1 lac, of which 38 per
cent are owned by private sector banks, 33 per cent by public sector banks, 27 per
cent by the SBI and Associates, and 2 per cent by foreign banks. There has been a
30 per cent year-on-year growth in the number of ATMs deployed in the country
since 2008, but the penetration of ATMs in Tier III to Tier VI centres remains
below the desired level. In order to ensure deeper penetration of ATMs
in unbanked/ under-banked areas, the Reserve Bank has permitted White-Label

ATMs in the country to supplement the existing ATM schemes operated by banks.
Under the policy guidelines, non-bank entities incorporated in India under the
Companies Act, 1956 would be authorised to set up, own and operate ATMs in
India, which will provide banking services to the customers of banks in India, based
on the cards (debit/ credit/ pre-paid) issued by banks. Such non-bank entities
should have a minimum net worth of Rs 1 billion as per the latest financial year’s
audited balance sheet, which is to be maintained at all times. The model envisages
that cash management and customer redressal would continue to be the
responsibility of the sponsor banks. The scheme offers scope for large volumes,
especially in unbanked/ under-banked areas. It is expected that WLA operators in
India will use the features of the IAD and ISO models, as permitted under the
guidelines, and collaborate closely with the sponsor banks.
Banking by the year 2015:
The survey was conducted by IBM research unit on future banking scenario,
which revealed five key trends that will determine market success in 2015:
 Customers take control- Customers will be smart, informed and savvy

users of financial services. They will only be interested in service providers
that can meet their very specific individual needs.

3
 Specialized niche competitors- Market consolidation will continue, making
the mega banks even bigger. But they will face many competitors including
community banks, industry specialists and non-bank banks that specialize in
providing specific services. Partner-competitor relationships will arise.
 A new workforce- The need for productivity and efficiency will create new
labour and work practices. But there will also be intense competition to
attract and retain talent.
 Regulated transparency- The need to comply with globally enforced

standards of transparency and accountability will force the adoption by
banks of integrated, enterprise-wide systems and processes.
 Sharply focused technology- The enabler of all this change will be

technology that supports rapid, accurate decision making and greater
operational flexibility and efficiency. The successful specialists will be
those who can track and analyze specific customer needs and speedily meet
them with profitable, reliable products.
Even, banks will source products and services from many specialized and best-in-
class service providers, including independents and other banks providing white-
label products and services. Innovation in products, processes, relationships and
business models will be the primary path to sustainable growth.

3

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Staff College, Ahmedabad

Recent Updates in Banking Industry

Contemporary Banking Issues

Amendments in Banking Regulation Act and its impacts

New Power to RBI:-

To increase the cap on restrictions on Voting Rights:-

To enable banking companies to issue preference share subject to regulatory

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To provide for special audit of cooperative banks at instance of RBI by

Impact:- To more vigilant by RBI to protect the depositors interest.

Overall impacts of changes in Banking Law (Amendment Bill) 2012 pertaining to

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Concepts and principles of Dynamic Provisioning

The underlying principle behind dynamic provisioning is that provisions should be

Dynamic provision = Expected loss provision – Specific provision

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The provisioning framework suggested by RBI has two components are:

(i) Specific provisions and

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Impact of Dynamic Provisioning on Indian banks

 It will help in earlier recognition of loan losses based on “expected losses”

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Why Basel III?

1. Estimation of capital under Basel II is procyclical. During good time banks

How Basel III is superior to Basel II?

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2. Higher quality capitals

3. Provision for countercyclical Capital Conversion Buffer of 2.5 % of RWA in

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1. The additional requirement under Basel III is based on some assumptions.

2. Further, the estimation of additional capital can be bifurcated between non

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3. The challenges in front of Indian Bank are to raising fund in a magnitude

2007-08 2008-09 2009-10 2010-11

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Recommendations of the Working Group under the Chairpersonship of Smt Shyamala

In many countries, deregulation and financial consolidation led to the development

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Recommendations for moving to a full-fledged FHC Framework

Recommendation 1: The Financial Holding Company (FHC) model should be

Recommendation 3: There should be a separate regulatory framework for

Recommendation 4: A separate new Act for regulation of financial holding

Recommendation 5: Amendments should also be simultaneously made to other

Recommendation 6: The Reserve Bank should be designated as the regulator for

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Recommendation 8: The new FHC regulatory framework should also formalize a

Recommendation 9: Intermediate holding companies within the FHC should not be

Recommendation 10: The FHC should primarily be a non-operating entity and

Recommendation 13: Appropriate limits should be fixed on cross-holding between

Recommendation 14: Presently, under the Bank-Subsidiary Model (BSM), the

Recommendation 15: If the holding company is to function as an anchor for capital

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Recommendation 17: Dividends paid by subsidiaries to the FHC may be exempt

Operational Arrangements till the Enactment of the FHC Act

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Rural Branches Semi Urban Brs Total (R+SU)

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1. Net profit for three years in a row

Rural Branches Semi Urban Brs Total (R+SU)

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Recent Guidelines on Branch Expansion Policy