SBI MM Special Guide for MM II Confirmation (Screening Test for Pos / Tos / Jmgs) / MM III & Gr (A & B) / MM II - Ass

SBI MM Special Guide For MM II Confirmation (Screening Test for POs / TOs / JMGs) / MM III & Gr (A & B) / MM II - Ass. Banks.

G. Subraroanian

Jan 2017

J. S. INSTITUTE OF BANKING AND FINANCE PVT. LTD. BANGALORE ilL © G. Subramanian JAN' 17 16th Edition ... (Revised and Updated) „ , , ,

(

Published by : J. S. Institute of Banking and Finance Pvt. Ltd. P. B. No. 4126 No-19, 3rd Floor, Sneha Centre, Opp BHS College, 12th Main, 30th Cross, Jayanagar, 4th Block, Bangalore - 560011. Phone : 080-41307114. Emails: [email protected] /, [email protected] Website: www.jsinstitute.co.in

IPrinted at: Raja Printers Bangalore-560 027, Ph.: 22234066 CONTENTS

Pages From To

PART -1 Rationale 1-1 1-91

PART - 2 Banking Problems 2-1 2-71

PART - 3 Situational Analysis 3-1 3-31

PART - 4 Communication 4-1 4-38

PART - 5 Comprehension 5-1 5-78

PART - 6 Data Interpretation 6-1 6-8

PART - 7 For and Against Statements 7-1 7-30

PART - 8 Concept Briefs 8-1 8-149

PART - 9 Model Tests on Banking, Finance & Economy Areas (Jan 16 to Dec'16) 9-1 9-19

PART -10 Psychometric Tests 10-1 10-2 , PART -11 Very Latest Developments 11-1 11-3 Foreword to the 16th Edition

We are happy to publish the 16th edition of the MM Special Guide There has been a overwhelming response to the first 15 editions of the book. The book has been redesigned to suit the revised exam pattern for MMII Confirmation Test for POs/ TOs/JMGs and MM H and MM III exams of SBI. The book is also essential for Gr A/B and MM II exams of Associate Banks and Gr A/B of Ass. Banks. Under Concept Briefs, various topics of importance such as Sovereign Gold Bond Scheme, Small Payment Banks, Inflation Indexed Bonds, Virtual Currency, Rupay Card, Basel-III, FATCA, Framework for Revitalizing Distressed Assets, GST, etc., have been included. Questions on Situational Analysis and Data Interpretation will be asked in MMIII exam, MM II Confirmation exam and Gr A/B and Gr A & B and MMII exams of Associates Banks. Needless to add, the Institute's Banking Guide is an essential reading primer for the exams. This book is to be read as a supplement to the Banking Guide. English Language Comprehension exercises have been devised to meet the requirements of MM II exams and MMII Confirmation exam for POs / TOs / JMGs of SBI & Ass. Banks as also MMII exam of SBI. Communication exercises have also been included. A brief note on psychometric tests has been given in a separate section. Also, model tests based on developments in banking and finance (Jan'16 to Dec'16) are included. I trust and hope that my endeavour to make the book meet the requirements of the new pattern of exams would really help the aspirants. I thank Mr. C. Paramasivan, Dean of the Institute, and Shri S. Gnanavinayagam for their valuable contribution in the preparation of the book. I also thank Mr.K.Prabhu for the DTP support. Wishing the readers success in the exam and progress in their career

Bangalore G. Jan' 2017 RATIONALE A NEW SBI AND BPR I. Profitability planning is more important than business planning. R. The profitability of operations has been dwindling gradually. In the changed environment in the country, the public/International Banks attach prime importance to profits. Hence the profitability of operations has to be carefully planned for and achieved. International banks/institutions will not place business with our bank, accept our guarantees/LCs etc unless the profitability is high. 2. The Bank's objective is "profit with growth". R. Mere groivth in business does not lead to growth in profit. The new motto will act as a lode-star for the managers to increase profitability by getting suitable deposit-advances mix, non-fund based business, fee based services etc. This acts as a right signal to the staff that in the present competitive, almost de-regulated environment, "Profit" should be the chief objective combined with growth. 3. Importance is given for greater transparency in the operations of banks by RBI. R. a) This will put in place safe and sound banking practices and ensure against imprudent risk-taking by banks. b) To provide stability to the financial system by ensuring a systematic transparency of the operations of banks. It helps the investors and depositors in taking appropriate investment decisions. Also, it enables the banks to take timely and corrective steps as and when required. 4. Importance is given to the submission of 'P' Reports by branches. R. 'P' form which shows both the budgeted and actual business levels, income, expenses and profit will enable the branch as well as the controlling authorities to ascertain whether the predetermined objectives in regard to profits, business etc are being achieved. It will also help the branch as well as controllers to initiate appropriate corrective steps in the event of negative variance. 5. The comments on P Report are written by the AGM (Region). R. To provide ready and immediate comments/suggestions on the performance of the branch: this enables the BM to take prompt corrective action. The entire process will be fast so that quick action can be taken to tap business. Also, the BM will be happy that his performance has personally been seen by his Controller. 6. The branch has to budget for both "Operating result" and "Net result" R. Operating result is the actual profit earned by the branch through various business operations, whereas the net result is arrived at after adjustment of central office interest payable/receivable on advances/ deposits of the branch. Ideally the branch should make both operating profit and net profit. Hence, both should be budgeted. TDRs / Term Loans are reported in P report Maturity-wise and Interest rate wise This will help the Bank ascertain the extent of mismatches and plan ahead through better Asset Liability Management for achieving the desired liquidity and profitability. Importance is given to Relationship Banking. We can have close rapport and understanding with the high value customers; this will enable us to anticipate their needs in advance and meet them satisfactorily. To meet competition effectively. RMs can c ross-sell and up-sell products and improve business and profitability. Operational Risk has been given importance by banks. As per Basel-II guidelines. Due to significant growth and complexity in the banking transactions 'there is increase in operational risk' eg: inadequate/failed intemal processes, people, systems, external event etc. To strengthen the soundness and stability of banking system. It is an important component of risk management system.

1-1 MM Special Guide 10. The Bank has set up Asset Liability Management system. R. The bank faces many risks in its operations such as mismatch of assets and liabilities, interest rate risk, transaction risk etc. Under the de-regulated environment there is an imperative need to manage these risks in an integrated manner at the corporate level and improve profitability. 11. The Bank has entered credit card business. ( SBI through a subsidiry) R. Credit Card business offers considerable untapped potential which can be fully exploited with the help of the existing retail outlets. It will enhance customer satisfaction and coverage. It is highly profitable. To meet competition and provide essential services to high income earners. 12. SBI is promoting SBI card in a big way. R. a) Credit Card business has considerable unexploited potential. Card spending is expected to grow substantially in the coming years. b) With 22,000+ retail outlets in the State Bank Group to sell this product we are in an advantageous position vis-à-vis our competitors. c) The card market will provide an exciting opportunity to our Bank to improve the bottom line. 13. The bank has entered insurance sector. R. It is a profitable business in the long run. The Bank can leverage its brand equity and vast customer base to sell life and general insurance products. The skills/expertise of staff can be developed to cross- sell banking, insurance and other financial products. The customers' various needs can be satisfied. 14. Banks have entered Insurance business as a joint venture with foreign insurance companies. R. i) It is a profitable business diversification. ii) The wide net-work of their branches and their large clientele will place them in an advantageous position in marketing this product vis-à-vis their competitors. iii) Participation of foreign companies would provide not only equity but also latest technology coupled with products designed to meet global standards. 15. Cheque Drop Box facility has been introduced at branches. R. This facility is part of the BPR initiatives of the Bank. The customer can put the instruments to be credited to his account in the Drop Box even after the business hours; they will be processed without any loss of time. Also recommendation of the Committee on Procedures and Performance Audit on Public Services headed by SS Tarapore, former Dy Govemor, RBI. 16. Credit Audit has been introduced. R. a) To introduce quality in the area of credit appraisal systems in the commercial credit portfolio and to ensure a favourable impact on profitability and NPA management. b) To ensure a feed back mechanism in regard to compliances with RBI directives and Bank's loan policies. c) To ensure that the health of the credit portfolio is good. 17. Credit Committees have been set up on the recommendations of McKinsey & Co. R. Committee method of decision-making will be more objective; joint decision making will reduce the `pressure' on the individual executive; each can bring his experience/judgement to the process. The Local Board is relieved of this functional role so that it can concentrate on general superintendence over guidance of the circle executive management. 18. The Bank has adopted a new Ambience Policy. R. A good Ambience (character and atmosphere of a place) attracts customers, generates enthusiasm, radiates energy, improves efficiency and enhances the professional image. The Ambience Policy of the Bank is aimed at having a system in place for excellent maintenance of premises and furniture with an uniformity of approach to issues related to ambience and thereby create awareness in this regard. 19. Importance is given for Non fund based business. R. a) There is no outlay of funds except in cases where the customer fails to meet the commitment; also only a small percentage of such commitments may crystallise into liabilities over a period of time. 1-2 Rationale

b) The income earned by banks from such businesses is sizeable resulting in increased profitability. The servicing costs are low. c) On account of disintermediation, the rate of growth of fund-based business would be less compared to the growth in the past. 20. CAG branches have been set up. R CAG branches have been set up as an SBU for servicing very large corporates in the country through offering sophisticated services like Relationship Banking, Cash management Product, Remote Login facilities etc., 21. SBI attaches great importance to business from Mid-Corporates or MC Regions have been set up in the Bank. R. Mid corporates are large in number and about 25% of them only are banking with SBI. Thus mid-corporates offer immense potential to increase our market share taking advantage of our wide network of branches and skilled staff. With the setting up of separate Mid-Corporate structure the Turn Around Time for credit delivery is expected to improve and result in increase in our business, income and market share in this segment. 22. The Bank has adopted Planning and Budgeting System. R. Planning and Budgeting system aims at scanning the environment and planning for a challenging growth in business taking into account the historical perspective and potential for business. It is the key to growth and enables focussed action for the improvement in business and profits. 23. BPR has been introduced in the Bank R. There have been fundamental changes in competition, technology and customer expectations. Also there have been many changes in the delivery systems of products and services of the Bank. But the business processes (i.e., the tasks, procedures, documentation etc) have remained the same. BPR is the fundamental re-thinking and radical redesign of business processes to bring about dramatic improvement in performance. 24. The Bank has set up Central Processing Centres (CPC) R. CPCs are proposed to do the processing work for the branches. The branches are front office for the various businesses; CPCs will do the back office work. Different CPCs will carry out back office work for different types of business/transactions/activities eg: deposit business, clearing/collection business, loan processing, govt pension payment, cash management and cash supply to branches, Govt business, documentation and stationery etc. This enables the branch to focus on sales, marketing and customer service. 25. Branches have been redesigned post BPR. R. Branches have been relieved of credit appraisal and processing work. Processes have been set up to migrate large proportion of cash withdrawals to ATM, encourage use of cheque drop box for cheque deposits and to increase the usage of alternate channels of delivery by customers. The endeavour of the branch would be customer acquisition and customer retention through customer delight. 26. The post of Grahak Mitra (GM) - also called Meeter-Greeter has been created. R. To project a positive image of the Bank, to help the walk-in customers to get personal attention, ensure response for their basic enquiries, facilitate migration to alternate channels and increased focus in cross selling. 27. Retail Asset Central Processing Centres (RACPC) have been set up. R. RACPC will be responsible for appraisal of the loan , obtention of search/ valuation report centrally, sanctioning of 'P' segment loans (Home, Education and Car loans) and generation/obtention of documents. Consequent upon establishment of RACPC, the activities at the branch will be focussed more on sourcing loan applications and ensuring compliance with KYC norms. SBI is installing Cash Deposit Machines (CDM). Ms will accept cash 24x7 and also check for quality and quantity of the notes deposited. The bank 1-3 MM Special Guide also will be crowded with people visiting the branch for depositing small amounts. Installation of CDMs will reduce the footfalls in the branch thereby saving on the precious space and staff time involved in acceptance of such deposits. The quality of service to High Value/HNI/Affiunt customers can be enhanced. It will also attract SME customers because of the ease of depositing cash at a time of choice by customers. 29. It is proposed to have a super regulator for the financial sector. R. There are many institutions who have their presence in many financial sectors-banking, Term Lending, Insurance, Capital Market etc. Different regulators are overseeing their respective areas and coordination and integration may not be efficient and focussed. It may result in regulatory arbitrage. Convergence in the financial sector would require a super — regulator having a tab on all the spheres of financial activities. 30. Crisil has launched bank loan ratings for the first time. R. It could strengthen the banks' confidence in their borrowers. The ratings will provide uniform benchmarks for credit and pricing decisions in the bank loan market. They will also serve as an independent opinion on loan specific risk to the lending bank and can be used by banks for risk pricing, capital allocation and portfolio management. To meet Basel II requirements. 31. The Bank has introduced revised In-branch cash handling process. R. There will be no delay in starting cash transactions at the beginning of the day. The process will reduce the time spent by CO/CIC/SWO/Asst (Cash) in handing over and receiving cash at the beginning / close of the day. Aimed to enhance customer service. It is one of the BPR initiatives. 32. Activity budgets will have to be drawn up in addition to business budgets for each Business Group. R. Activity budget will spell out efforts/activities which will help in achieving the business budget. Suitable system of measurements of the efforts will have to be installed. The entire process will enable us to get a valuable insight and help in strategy building. It will also help in identifying personnel who put in best efforts even if budgets are not achieved due to external developments. 33. The bank should focus on Net Interest Margin. R. The Business volume/mix will change from year to year but the efficiency of operations will be judged by the Net Interest Margin. Our efforts should be to optimize yield on advances and minimize cost of deposits for getting maximum margin. Presently, the economy is experiencing a downswing. When interest rates get softened there would be pressure on the margins. 34. HR processes have been automated in the Bank. R. Automation will bring about efficiency, transparency and convenience in all the operations. Also, it will bring about uniformity in HR implementation. All HR processes like salary, pension, travel / medical reimbursements etc. take place on online real time basis. 35. The Bank has developed a systems policy. R. 'Systems' in the Bank is an important tool to do business in a customer friendly, secured and cost effective manner. It should impart the necessary sense of purpose and direction to translate vision and mission of the Bank into reality. 36. The Bank has introduced many incentive/award schemes for staff. R. The Bank's Chairman has been giving utmost importance in building up the sense of belongingness and involvement of staff. Under the present policy, performers and staff who contribute to business are granted significant monetary and other incentives. Also, many awards and recognition schemes have been designed to introduce healthy competition among managers and others. Both individual and group incentives are given; also the branch and controllers are covered. This would result in improved performance and profits of the Bank. These have delivered good results in the last 2/3 years Iparlino to imnrnveri market char/.

1-4 Rationale

37. Many banks publish quarterly operating results now-a-days. R. a) As per the listing requirements of the stock exchange it is mandatory to publish the quarterly results within one month from the end of the quarter. b) Shareholders, depositors etc are kept informed of the bank's performance so that the investors' interest in the bank's shares can be kept up. 38. All major banks have adopted Core Banking Solutions. R. The customer will become the Bank-Customer from Branch-Customer. Highly cost-effective. The customer can access his a/c from any place / any time / any mode. Reconciliation will be automatic. Targeted marketing of customers can be done effectively . Has resulted in improved customer service and efficiency in transaction processing. Uniform adoption of CBS by banks has made Collections and Remittances between them very efficient, fast and cost-effective through electronic mode. 39. Concurrent auditors are appointed at branches with large volume of business . R. As volume of work is heavy at large branches, mistakes, omissions etc, could be rectified then and there; it helps in accounting efficiency. Also, there is educative value for the staff. 40. The deposits of bank should be invested and lent prudently. R. Bank lending is made out of the resources of deposits most of which are repayable on demand. Therefore a Bank is required to maintain liquidity at all times by prudent lending and investment practices. Also a bank is required to pay interest to depositors out of its interest earnings on advances which require to be safe and sound. 41. Comprehensive banking service through mobile banking has been launched by the Bank. R. RBI had issued guidelines regarding Mobile Banking in Oct'08. SBI has introduced SBI Freedom-the mobile banking service of the Bank and has been improving its features regularly. SBI Freedom offers convenient, simple, secure, anytime and anywhere banking. Besides enabling the Bank to reduce cost of operations it also enables the Bank to concentate on business as the foot-fall of the customers is reduced. 42. The Bank is not responsible for the transactions of the customers put through Internet Banking. R. The Bank has responsibility to safeguard the personal data of the customer by employing highest security features. However, it is the responsibility of the user to protect the user name and pass word and any attempt of attack to hijack the banking information by unscrupulous elements. Since all interne transactions are conducted through virtual banking (without direct involvement of bank staff) the responsibility for intemet transactions lies solely with the customers. 43. SBI restructures its organizational structure periodically. R. Continuous changes are taking place in the economy due to reasons such as competition, changes in the needs and preferences of the customers, technology etc. These areas pose challenges to the Bank and warrant appropriate, effective and periodic restructuring to maintain its premier position. 44. Small and Medium Enterprises Credit centre (SMEC) has been set up in all circles. R. It is set up as part of BPR initiatives. SMEC will report to DGM (B & 0) for control. The cell will process and sanction SME and Agri loan proposals received from identified branches. The identified branches would do the canvassing/marketing of these advances. The cell can acquire speed and efficiency in disposing of such cases due to specialisation.The Bank can acquire better risk perception of such advances at a centralized place in a region (originally named SMECCC). 45. The bank has set up Swayam (self-kiosk) for printing of pass-books. R i) This will enable auto updation of pass books by the customers themselves with ease and without waiting at the counter for this purpose. It adds to good customer service and customer satisfaction. Bar Coding has made the process faster and simpler for customers.

1-5 MM Special Guide

ii) The staff who will be relieved of this work can be gainfully employed in development of business like cross-selling of various products to customers. 46. SBI has formulated Customer Rights Policy. R It is based on the 'Charter of Customer Rights' framework of RBI. Customer protection is an integral aspect of financial inclusion. [RBI's Charter of Customer Rights: The Reserve Bank of India has released a Charter of Customer Rights, which enshrines broad, overarching principles for protection of bank customers and enunciates the 'five' basic rights of bank customers. These are: (i) Right to Fair Treatment; (ii) Right to Transparency; Fair and Honest Dealing; (iii) Right to Suitability; (iv) Right to Privacy; and (v) Right to Grievance Redress and Compensation.] Rationale

ADVANCES - GENERAL

bank cannot sanction loan against its own shares. -ending against its own shares would amount to virtual reduction of the capital of the Bank. S 20 of 3R Act prohibits the same. 3anks do not grant advance against shares of a Private Limited Company. the shares of private limited companies are not listed in the Stock Exchange and hence cannot be :asily sold in the market; further, it will be very difficult to assess the value of such shares. Also, ransferability is restricted as the number of share-holders cannot exceed 200 (under companies Act 2013). 3. Banks grant advances against shares of Public Limited Companies. R. There are no restrictions in regard to transferability. Further these shares are listed and quoted in the stock market. Hence, advance value can be easily determined. Sale of such shares will be easy. More over, banks lend against shares of only first class companies. 4. Banks grant advance only against stock exchange quoted shares. R. In case the borrower defaults in repayment of the loan, the Bank would be able to easily sell the security and adjust the loan .The shares of private limited companies, partly paid shares, shares of companies which do not have steady trading are not quoted in the stock exchanges. Therefore, it is difficult to dispose of them in the stock market. 5. Normally Banks do not advance against partly paid shares and private limited company shares. R. It is difficult to sell partly paid shares; also, the bank may have to pay the call money when called upon by the company in respect of such shares in case the borrower fails to pay the calls. Otherwise the shares will be forfeited by the company. The shares of private limited companies are not listed in the Stock Exchange and hence cannot be easily sold in the market; further, it will be very difficult to assess the value of such shares. Also, transferability is restricted as the number of share-holders cannot exceed 200. RBI has prohibited lending against partly paid shares. 6. Before granting an advance against shares of a Company, a reference is made to the DGM (Compliance), Global Market Dept, Corporate Centre. R. Under S 19(2) of the Banking Regulation Act, the Bank cannot grant loans in excess of 30% of the paid up share capital of the company or 30% of its own paid up capital and reserves whichever is less. This department monitors advances (granted by all branches of the bank) against the shares of the company concemed to ensure that this stipulation is complied with. 7. The ceiling for advances against dematerialised shares has been fixed at Rs. 20 lakhs. R. Risk in respect of physical shares is high (tampering, substitution etc); further, the noting of charge with the depository is a relatively simple process in respect of demat shares; further, no stamp duty is involved for transfer of shares. (Note: Now, practically all large companies have dematted their shares. Also, now branches do not have the power to grant loans against shares. OD against dematted shares is granted online keeping in mind the above aspects). 8. No advance is granted against term Deposits of other Banks. R. The deposit is subject to the paramount lien of the issuing bank; also, it may refuse to register our lien. It will also act as a disincentive for public to have a deposit account with us. RBI has reiterated this instruction time and again in view of many frauds in this area. 9. When overdrafts/demand loans are granted against TDR (issued in the security form) it should bear a stamped, undated discharge. R. This will enable the bank to prove against the legal representatives of the depositor that the depositor has given proper receipt for the amount and authority to the Bank to dispose of the proceeds. The loan

1-7 MM Special Guide application letter together with the DPN/discharged TDR and the ledger account will constitute evidence of the loan. If it is dated, it may be contended that the bank had agreed to make premature payment. Also, RBI has advised that the discharge should be over a revenue stamp. It operates as an equitable assignment in favour of the bank. 10. A non-profit making association cannot be a partnership firm. R. Sec 4 of Indian Partnership Act defines a partnership as the relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all. Profit is the essential purpose of a partnership.Hence a non-profit making association cannot be a partnership firm. 11. No advance is granted against Life Policies that are issued under Married Women's Property Act. R. Such policies are taken for the benefit of the family and in such policies the policy-holder creates a Trust in favour of his wife and children; and hence he cannot encumber them for his benefit. 12. Insurable interest in an LIC policy is important. R. In a contract of insurance, insurable interest must be present. Otherwise, the Insurance Company will repudiate its liability. This concept ensures that no life is insured for purposes of gambling, speculation etc. ( Note: Bank has insurable interest in the life of a debtor; employer in the life of employee) 13. Surrender Value is important in a Life policy R. Surrender Value is the amount which the insurance company would pay in case the policy holder surrenders the policy to the insurance company before its maturity. This sum will be less than the aggregate value of the premiums paid. Hence the OD limit is linked to the surrender value. 14. Advances against LIC Policies are treated as unsecured advances. R. It is not one of the specified securities under the SBI Regulations. If the policy holder has misrepresented his age, illness etc, LIC can avoid the policy. Hence, the Bank does not make advances against LIC Policy as a primary security. 15. While advancing against LIC policy, the signature of the nominee is not obtained. R. The nominee does not acquire any right over the policy till the death of the policy holder. During the life-time of the policy holder, only he has the right over the policy. Further the nominee can be changed any time. Also, when a policy is assigned, the nomination is cancelled automatically. 16. Assignment of LIC Policy is done on the Policy itself. R. If it is done on a separate paper, it will attract stamp duty. Moreover, it is convenient to obtain the assignment on the policy itself. 17. When a life insurance policy is reassigned after the advance has been repaid, the policyholder is advised to make a fresh nomination. R. Under S 39 (4) of the Insurance Act the nomination would stand automatically cancelled if the policy is assigned to third party. But, cancellation of an assignment does not revive earlier nomination. Hence, as a measure of good customer service such a letter is sent. 18. Before granting an advance against LIC Policy the latest premium receipt should be obtained. R. If the policy has lapsed for non-payment of the premium, the policy is of no use as security. LIC will not pay any moneys under a lapsed policy. This ensures that all premiums have been paid up to date and that the policy is in force. 19. Assignment of LIC policy is to be registered with LIC. R. In terms of S 3 of Transfer of Property Act, an Assignment of an Actionable claim should be in writing and the notice of assignment should be given to the debtor. Only then the Assignment can be enforced against the debtor. The benefits under an LIC policy is an actionable claim and hence notice should be given to LIC for registration. 20. Overdraft against SBI Cap's Magnum is to be treated as a secured advance. R. The General Regulations (R61) under the SBI Act specifically details the securities against which the

1-8

• ri Rationale

Bank can grant overdraft. The SBI Cap's Magnum has been included in the Regulations as a specified security. 21. Advances against Gold ornaments can be granted only to customers for whom KYC has been done and who have minimum capacity to service the interest. R. KYC due diligence exercise is necessary as the bank should deal with only bona-fide/honest individuals. Also, to obviate the risk of dealing with any unscrupulous person who may pledge stolen ornaments / spurious ornaments. The advance value is fixed with adequate margin; hence capacity to pay interest is now taken as a criterion for the loan with a view to make the scheme more customer- friendly. 22. The advance value of gold is shown in the SBI Times by Precious Metals Dept. Coporate Centre. R. The value of gold has become volatile. Hence, frequent changes in the advance value have to be made, and excess finance has to be recovered. The advice helps in prompt adjustment of clean drawings. Also, it enables the branch to relate the advance value to the market value while sanctioning fresh advances. Instant posting of the advance value in SBI Times enables swift/uniform action by all branches of the Bank without loss of time. 23. Interest on demand loans and gold loans is applied at every calendar month-end irrespective of the date of granting the loan. R. This has eliminated maintenance of daily list, carry over of entries and other associated tasks; it has minimised income leakage also. 24. Normally Banks do not grant advance to Trust accounts. R. Trustees have to act as per the Trust deed and for the sole benefit of the beneficiary of the Trust. The Bank has to ensure that it does not even inadvertently become a party in the misapplication of funds. The Trust deed must provide for the borrowings. (Hence, advances to Trusts are granted only in very exceptional cases and only if the trustees are respectable persons of good means and against their personal guarantees). 25. Banks have to exercise care while granting advances to Trusts. R. The Trustee has to manage the funds of the Trust with utmost good faith and as per the Trust Deed. The Bank should not become a party in any misuse /misapplication .The Bank will be held liable for negligence or connivance, in case of misapplication of trust funds. 26. No overdraft is now sanctioned against gold ornaments. R. If the DP comes down due to fall in value of gold etc, the a/c will become technically irregular and an NPA. Already the NPAs of the Bank are high. (Note: Very recently SBI Personal Liquid Gold Loan Scheme has been launched in 3 Circles as overdraft with bullet repayment after 36 months). 27. In general no concessionary rates of interest are extended to units in all segments for limits above Rs. 2 lakhs. R. The units require adequate and timely credit and other services and not cheap credit. The Bank's operational costs have been mounting up and profitability has been decreasing steadily. Moreover interest rate for limits of Rs.25.00 lac and above are fixed based on Credit rating of the unit. 28. COS 57 is taken when overdraft is sanctioned on a joint a/c (E or S). R. COS 57 provides for the several and joint liability of both the account holders. Otherwise, only the person who signed the cheque (which created the overdraft) would be liable. 29. Advances are not granted against the security of National Savings Scheme. R. There is no provision to pledge the savings pass-book under the scheme and hence the bank cannot get enforceable right against the deposit. 30. Generally, advances against clearing cheques are not permitted. R. The cheques may be returned unpaid which will result in overdraft in the account. It may be difficult to recover the same.

1-9 0 MM Special Guide

31. No loan will be sanctioned to a company against the company's fixed deposit in the Bank. R. Advances against TDR are essentially for personal segment customers to meet their emergency needs. These advances are not cost-effective for banks. Hence such advances are not extended to companies. 32. "Mr. Ramu I owe you Rs. 100/-" SDI- (XYZ). This is not a promissory note. R. 'I owe you' is merely an acknowledgement of money received. It does not show any intention or promise to pay the money. As per NI Act, Sec 4(a) Promissory Note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of certain person or to the bearer of the instrument.

MISCELLANEOUS: 1. No overdraft should be granted to a Minor even by mistake OR An account of a minor should not be allowed to go into debit. R. Minor is incapable of entering into a contract and a contract entered with a minor is void ab initio.(S11 Indian Contract Act). Minor is not liable for any borrowings from the Bank. If an overdraft is created, the Bank will not have legal recourse to recover the same. (Note: Hence no current account is opened in the name of the minor). 2. Utmost Caution has to be exercised while granting loans against minor's deposits. R. The guardian can borrow only for the 'benefit' of the minor. If there is misapplication of funds by the Guardian and if the bank is deemed to have knowledge of the same, the bank may be obliged to pay the amount to the minor. 3. Banks do not sanction advances to a minor, even though a major person is agreeable to guarantee the loan. R. A contract entered into by a minor is void ab initio as per Section I 1 of the Indian Contract Act. As the primary contract is void, the guarantee is also void. 4. Banks prefer to make advances against debentures than against equity shares. Debentures are debt instruments. The issuing company is bound to repay the principal and interest as embodied in the instrument. The value is not subject to change. The price of equity shares undergoes frequent changes and may even go below the advance value endangering the safety of the advance. 5. Assignment is not a very good security for a bank advance. R. Assignment is subject to the right of set off etc by the original debtor; also the safety depends upon his financial soundness; procedure of completing the security is also cumbersome. (Note: However, As- signment is better than Hypothecation as it provides for notice to the debtor and his acknowledgement). 6. The Bank prefers premature repayment of a fixed deposit rather than sanctioning of an advance if the deposit has not run for at least 50% of its maturity period. R. Generally, the loans against fixed deposits are repaid out of the proceeds on the maturity date. It is uneconomical for the Bank to lend against TDR as the cost of funds is high after taking into account CRR/SLR requirements and compulsory PS credit/ food credit. Further, it will be advantageous for the depositor to take premature payment rather than pay interest on a loan for a long period. Compounding of interest on loan ales takes place monthly whereas in TDR compounding takes place quarterly. 7. The Law of Limitation has to be scrapped to help banks recover their dues. R. In agricultural advances/small value advances, often banks are not able to get revival letters from borrowers/guarantors in time. Hence, they are not able to proceed against them based on DPN. Also, avoidable heavy cost is incurred and valuable time is spent in obtaining revival letters. Banks can proceed against borrowers/guarantors legally any time after sufficient time is given to them for repayment, in case the law of limitation is abolished.

1-10 Rationale

8. TDR is not a negotiable instrument. 4, R. It is a Receipt undertaking to pay a sum of money to a certain person on a future date. A Negotiable Instrument is an unconditional undertaking / order to pay a certain sum of money to a certain person or his order. Hence, TDR is not transferable by endorsement and delivery. , 10. In case of gold loans, DPN is obtained in addition to pledge of ornaments.

u i R. In case the loan amount is not fully recovered from the sale of the ornaments or if the ornaments turn J 4r out to be spurious or stolen, the Bank can proceed against the borrower on the DPN. DPN ensures personal liability of the borrower. MM Special Guide C & I SEGMENT RATIONALE

SYSTEMS AND PROCEDURES: 1. No consent letter should be given to a prospective borrower agreeing to finance him before the proposal is appraised and formal sanction given. R. The courts have held that the borrower gets a legal right for getting finance from the bank in such cases based on the principle of Estoppel; in such a case, if the project is not found acceptable on appraisal, the bank cannot refuse the advance. To prevent dispute and litigation. (Principle of Estoppel: Law will stop you from denying your statement / commitment). 2. Memorandum of Association and Articles of Association are obtained for sanctioning company advances. R. A Company acquires legal status once it obtains the Certificate of Incorporation. Scrutiny of the MA and the AA. will show whether the company is authorised to open an account. The Resolution of the Board of Directors empowers the company to open the account. Loans can be given only for purposes listed in the MA; AA contains the borrowing powers of the directors. 3. FFR 1 and FFR II are obtained for follow up of advances. R. i) This system enables the Bank to verify the end use of bank finance. It ensures that the overall financial management of the borrower's operations is in order. ii) To verify whether operations are in line with the estimates made at the time of sanction of the credit facilities.lf there are variations the bank can initiate follow up measures for corrective action. iii) Enables the Bank to know the liquidity and profitability of the units. 4. Advances against book debts are not granted on pledge basis. R. A book debt is merely an entry made by the seller in his books regarding a credit sale. Book debt is an actionable claim which can only be assigned or hypothecated as security. It is not a 'physical commodity'. As per law, only movable goods can be secured by pledge. 5. WCDL system has been introduced OR Loan system of credit has to be adopted for financing borrowers with assessed maximum permissible bank finance of Rs.10 cr. and above along with cash credit system. R. a) This system can bring about better discipline in the utilisation of bank credit. b) It enables the bank to gain better control over the flow of credit. c) It is easier and cost effective to manage bank's funds position. [Note: Cash Credit system of advance poses cash management problems to the banks, as they do not have the mechanism to regulate the drawings of the borrowers. Under the loan system, major portion of the advance is committed for a definite period. It will enable the bank to earn interest and review at the time of maturity of WCDL whether roll-over of the loan for the next period is justified or not]. 6. Break even level of sales is an important concept in appraising term loans. R. A unit will make profit only if it operates above the break even level; it will make loss if it operates below this level. Hence, it is necessary to ensure that projections are based on operations at a viable level above the break even point. The unit cannot repay the instalment if it works at or below the BE level. The Working Capital limit will become irregular. 7. Funds flow statement is scrutinised before sanction of term loans. R. Term loan is repaid out of cash accruals. The funds flow statement would indicate whether adequate funds would be available to meet the maturing term loan instalments. 8. Appraisal for issue of a DPG is done on the same basis as that of a Term Loan. R. Deferred Payment Guarantees carry the same risks as a term loan even though there is no outlay of 1-12

. .. . . , M g •:;,--:.' .' - . , -

; ,;,;,?:q,,.,'•,':'/' ,:,.. : . , 4',V-':',"'./,- • . ,,I;•,I

:!.. IL: Rationale PJ.1. r . funds except when there is failure on the part of the customer to meet the commitment. The borrower can repay the instalments under DPG from cash accruals only. Hence, they are treated on the same footing as a term loan for the purpose of appraisal. The bank's credit risk extends for a long term. ii,, ,.: t C 9. cCaasshhbbabundukgdhegta budgets are soobtainedhbo t wa i h fe o r establishment ar avat i oab f l eL te effect s. R. The has ensure that applicant has the ability tomeet the commitments under the LC. The would whether funds are payment of bills drawn under the LC when they are received for payment. 10. Opening of LC is considered a credit decision. R. The unit has to meet the bills under L.C. in due course. If it fails to do so, the bank has to meet the commitment and recover the same from the customer. Hence, it is treated as a credit decision. 11. Pro-forma entries are passed when letters of credit are issued by the bank. R. Accounting control has been introduced over the letters of credit transactions with a view to ensure that the contingent liability in respect of LCs is correctly recorded and followed up. Exact figures are required to keep control over the contingent liability. The bank has to meet capital adequacy on off-balance sheet items like BGs, LCs etc. RBI has laid down broad parameters for contingent liability of Banks. 12. Bank guarantees are not issued for an indefinite period. R. a) These are contingent liabilities which may crystallise into actual liabilities. The risk of crystallisation is very high when guarantees are issued for long/indefinite period. b) The bank has to provide for Capital Adequacy. c) There are also restrictions by RBI in this regard. 13. Counter guarantee is obtained from customers on whose behalf guarantee is given by the bank. R. In the counter guarantee the applicant undertakes to indemify the Bank against any costs /damages if the guarantee is invoked by the beneficiary. Counter guarantee is the legal basis for proceeding against the customer. The Bank's claim in a court can be proved easily in case the guarantee is invoked. 14. If a guarantee is invoked, the commitment under the guarantee has to be met immediately by the bank. R., If the guarantee is invoked, the beneficiary need not satisfy the bank regarding default or quantum of actual loss suffered by him. The Bank's obligation is absolute and therefore it should pay without delay or demur as otherwise it would reflect adversely on the image of the bank. RBI directions; Court judgements. 15. Commitment charge has been selectively introduced. R. a) Levy of commitment charge is an internationally accepted cost for the borrowers. b) This will be a disincentive for the borrowers to inflate their requirements. c) It will be a notional compensation for committing bank funds towards sanctioned limits. 16. All guarantees issued by the Bank must have a limitation clause at the end. R. But for the limitation clause, the normal limitation period under the Limitation Act (which is rather long) will apply necessitating higher capital adequacy ratio. Further, the bank should try to keep its liability not longer than it is absolutely essential. The limitation clause puts a cap on the amount of i liability and the period of the liability. j PRODUCTS i 1. Banks are financing film production. R. Film making has been declared as an industry. Films are major source of entertainment and education IT ,..$,-eq for poor/rural population. Will help film-producers to get away from the clutches of the Underworld. ,,'' .4" ,,. Kalman (former Chairman, BOB) committee recommendations. :,.. 1-13 / I., ...... , .. . . _ ...... , ,...... ,.

MM Special Guide MISCELLANEOUS 1. Credit appraisal is carried out even for non-fund based business. R. Non-fund based liabilities always have the inherent risk of crystallizing into fund based liabilities. Hence, it becomes necessary for the bank to examine in detail the ability of the borrower to meet such commitments and his competence to perform the contract. There should also be a reasonable correlation between fund based and non fund based facilities. 2. What is the present Credit delivery Process? R. The Working Capital loan for Rs. 10 cr and above is now sanctioned as cash credit and WC Demand Loan. This has enabled better funds management for the bank. Also, there is better credit discipline on r the part of corporates in availing cash credit component. Flexibility in fixing the limits has enabled the Bank to fix the proportion between C/C and WCDL to suit the needs of units. 3. RBI changes its instructions regarding selective credit control measures periodically. R. S.C.C. measures relate to sensitive commodities like sugar, oil and oilseeds, cotton and kapas, foodgrains etc. Depending upon the quantum of buffer stock, production prospects, price level etc., RBI varies its instructions periodically with a view to stabilise prices and prevent hoarding and black-marketing. [Note: As agricultural production has improved / stabilised in the recent years, and also as liberal / timely imports are allowed, RBI has removed the controls on all commodities except sugar). 4. Non-fund based business such as issue of Bank guarantees, Letters of credit etc are encouraged by banks. R. a) There is no outlay of funds; also only a small percentage of such commitments may crystallise into liabilities over a period of time. b) The income earned by banks from such businesses is sizeable resulting in increased profit ability. The servicing costs are low. c) On account of disintermediation, the rate of growth of fund-based business would be less compared to the growth in the past. 5. RBI has prescribed 'exposure norms' for Banks. R. The concentration of credit risk is avoided. Failure of a single advance or advance to a single group will not affect the capital stability of the Bank. It will enable availability of credit for all sectors of the economy. It is a prudential control measure aimed at minimising credit risk for banks. 6. Board for Bank Supervision has been set up by RBI. R. To enable RBI to concentrate on supervision and control of Banks, Fls and NBFCs; will enable it to identify emerging symptoms of malfunctioning of banks, pressure on financial system etc and initiate quick and decisive actions. Narasimham committee recommendations. 7. Now the Annual Policy Statement is reviewed by RBI every 2 months. R. Indian economy has grown very fast since 1990s. The services and manufacturing sectors now dominate the economy. The impact of external factors is also high and continuous. Hence RBI has 0- decided to review the economy / monetary policy very frequently. International practice. RBI can control money supply based on data on monsoon/growth-needs of the economy, inflation, capital flows etc. 8. Leasing is preferable to Term Loan from the angle of the borrower. R. a) Leasing is 100% finance without any margin amount. Hence, there is no capital outlay of funds. Also, leasing being an off balance sheet item, the borrower can present a better Debt/Equity ratio. b) Lessee secures tax advantages for the lease rentals, repairs, maintenance charges etc. c) There is no risk of obsolescence for the borrower as he is not the owner of the asset. 9. CRA model has been introduced for loan A/Cs. R. Credit rating system enables the bank to assess the credit quality / risk of various loans and provide for appropriate risk-mitigation covenants. The bank can also avoid financing units with unacceptable risk. Also, it enables the bank to fix appropriate rate of interest for the borrowings by large borrow- 1-14 Rationale

ers. The ratings are arrived based on various risks such as business risk, industry risk, financial and management risks associated with lending. 10. Take out finance is gaining importance. R. This will help the banks to ensure a better asset liability management. Also, it is an incentive for banks to participate in funding infrastructure projects. The outstandings can be transferred by effecting sale of such assets, when there is an asset liability mismatch. 11. The system of 'Syndication Loans' has been introduced. R. Customer gets the freedom to choose a bank; the participating banks can quote different terms to the borrower; it need not be uniform for all banks. Further, consortium advances have been found to be not in favour due to delay, need for same terms by all banks, different approaches of banks etc. 12. Credit exposure norms are progressively tightened by RBI. R. The banks have to develop proper 'Risk perception' in their lendings and provide adequate capital for the credit risks assumed by //them. Indian banks will have to achieve international standards in view of the rapid globalisation of financial services sector. Requirements under Basel norms are being tightened. 13. Security documents for consortium advances are obtained by the Lead Bank only. R. This will speed up the documentation process and credit delivery. Completion of legal formalities like registration of charges will be faster. The companies need execute only one document. Mahadevan (former MD,SBI) committee recommendations. 14. At the time of issue of Bank Guarantees, Bank Guarantees Issued a/c is debited with the amount of the guarantee. R. The outstandings in this account show the bank's exposure on account of guarantees issued. The procedure enables us to have an accounting control over the Guarantee transactions; also it is necessary to conform to the statutory format of the balance sheet. The contingent liability of the Bank in respect of Deferred Payment Guarantee is also reflected in the account now. 15. Expired Guarantees should be reversed from the Guarantees Issued Account after 7 days and after giving notice to the beneficiaries. R. The letter is sent to the beneficiary to make it clear that he is no longer entitled to invoke the guarantee. It is necessary to keep the contingent liability to the barest minimum, as capital adequacy norms are applicable for the same. 16. RBI has prescribed ceilings for Capital market exposure of banks. R. Banks are permitted to invest in capital market securities like shares, bonds etc with a view to enable them to broaden their income-stream. However, capital market is volatile and therefore RBI has prescribed prudential limit on such exposure linked to bank's capital. 17. Stock audit should be conducted for large advances. R Stock-Audit will throw out facts such as a) Whether the quantity / quality, value declared in the stock-Statement is correct and that proper and consistent valuation method is followed by the enterprise. b) There are no obsolete / slow moving / rejected / returned stocks with the enterprise and stocks received for job work etc are not included in the stock statement. Stocks have been insured for full market value against all major risks and the policies are current and in order in all respects. c) Any adverse features coming to light through stock audit can be taken up with the enterprise and rectified early to prevent the account becoming irregular / NPA. MM Special Guide ADVANCES - SME RATIONALE

Systems and Procedures: 1. Nayak Committee recommendations for working capital advances for SSI (up to Rs.5 crore) have been implemented. R. It is simple to calculate the working capital requirements based on projected turnover. It is transparent and easy for customer to understand. it is uniform throughout the Banking System. RBI Instructions. 2. Banks offer concessional interest rates for export credit advances (pre shipment and post shipment). R. Exports enable the country to earn foreign exchange which can be used for meeting heavy imports like oil etc besides servicing huge foreign debt. Export credit guarantee from ECGC provides safety for banks in providing export finance. 3. Additional credit facilities are not extended by the bank to wilful defaulters. R. Wilful defaulters are those who have not repaid the loans despite generating profits. They divert funds. They do not follow the terms and conditions of the advance and are not desirable / dependable customers. RBI has also advised that the borrower whose name appears in the list of wilful defaulters released by them should not be financed for at least 5 years from the date of the list. 4. Advances to export-oriented Small (manufacturing) enterprises are covered under the guarantees of ECGC. R. There is no ceiling on the claims under ECGC guarantees. (For eg: If an S.S.I. unit enjoying a packing credit of Rs.40 lakh failed, the entire amount of the advance can be claimed from ECGC subject to the prescribed percentage). 5. In the preamble to security documents the name of the Branch where documents have been executed is not mentioned. R. The effect is that the advance is availed from the Bank and not from any specific branch. For administrative reasons, the loan accounts of a borrower may be transferred from one branch of the Bank to another. If the branch name is mentioned we will not be able to transfer the a/c to another branch or file a suit in another branch name. Fresh documentation would be needed. 6. Even though bills are accompanied by documents of title to goods banks extend bill financing facilities only to customers well known to them. R. S 131 of NI Act does not provide protection for collection of bills. Hence the Bank collects bills only for well known customers so that in case of any dispute / liability the bank can recover the amount from the customer. 7. No separate opinion report is compiled on small (manufacturing) enterprise borrowers. R. The details of the assets of the proprietors, partners etc., as also their honesty and integrity are incorporated in the application/appraisal form and commented upon. Advances to Partnership Firms: 1. The Bank does not insist on registration of the partnership firm while opening an account (SBI). R. Registration is optional and not compulsory under the Partnership Act. The bank can always sue a firm whether registered or unregistered to realise its dues and claims. (Note: Many banks insist on registration; so also many government depts). 2. The partnership deed is obtained while financing a partnership. R Partnership deed contains the details of partners, share-capital, the objectives, borrowing powers, and mutual rights and duties of partners. It will enable us to ensure that it does not contain any provisions affecting the interest of the bank. It is obtained in addition to the partnership letter

1-16 ..„ ., :fot-' Rationale

3. A partner cannot give guarantee to a third party on behalf of the firm. (unless the business of the firm is that of giving guarantees). R. The partner's implied powers to bind the firm does not include the power to give guarantees on behalf of the firm, unless specially provided for in the partnership deed. Guarantees are contingent liabilities and if they crystallise, they will become actual liabilities for the firm. 4: Even though a partner has delegated his powers to other partners, signature of all the partners will be obtained on security documents while sanctioning an advance. R. Signatures of all partners are obtained on loan documents as borrowers even if one partner is authorised to borrow, as a measure of abundant caution. Further, it will be easy to prove the personal liability of each of the partners for the loan. The guarantee of all the partners will also be obtained. 5. While granting advances to partnership firms, the personal guarantee of partners is also obtained. R. In the event of the insolvency of the firm and its partners, the Bank could rank as a first creditor along with the personal creditors in respect of the personal assets of the partners, if personal guarantee is obtained. Otherwise, it will be an unsecured creditor and may not be able to get any amount from the personal assets. 6. When a partner dies, the operations on the cash credit account of the partnership firm is stopped forthwith. R. If the operations are continued, the credits will reduce the liability of the partners; subsequent debits will not bind the estate of the deceased on account of operation of Clayton's Rule. [According to S.42 of Partnership Act, the death of a partner dissolves the partnership. Hence operations on the a/c are stopped in order to retain claim over the estate of the deceased partner. Otherwise Clayton's rule will apply as per S59 to S61 of the Indian Contract Act]. 7. We take recourse to partners' personal assets for the dues of partnership firm. R. Partners have unlimited liability for the payment of the partnership debt; i.e. the partners' personal assets are liable to meet the partnership debt. Hence, if partnership assets are not adequate to meet the partnership liabilities, the personal assets of the partners will be liable, in proportion to their capital in the firm. Advances to Corporates: 1. No opinion is compiled on a limited company. R. A company is a legal entity deriving its powers and limitations from the Memorandum and Articles. The capital base, the address, the details of directors etc. are available in these documents. The identity, bona-fides etc of the company can be established through these documents and market enquiries. Hence, no opinion is compiled on limited companies. 2. No 'CertVcAte to commence business' has been prescribed under the Companies Act, 2013 for Public and Private Ltd Companies. R. S 11 of the Act provid.:s- that a declaration has to be filed by a director with ROC that every subscriber to the memorandum has paid the value of shares agreed to be taken by him and the paid up capital is not less than Rs.1 lakh and Rs.5 lakh in respect of private and public limited companies respectively. If the declaration is not made within 180 days of the incorporation of the company, and the Registrar reasonably believes that the company is not carrying on any business he may initiate action to delete the name of the company from the Register of companies. 3. Before making an advance to a company, e search should be made at the web site of the Registrar of companies for prior charges. R. To check that the assets proposed to be charged to the Bank have not been already charged to any other creditor. If a charge exists, the Bank's charge will not rank in priority to the existing charge. 4. E-search of charges is to be made before and after the registration of our charge. R. a) The first Search is made before creation of charge to ensure that no charge exists on the assets

1-17 MM Special Guide of the company. b) The second Search is made to ensure that no charge is registered by any third party on the assets of the company after sanction of the loan by us; and to satisfy ourselves that the Bank's charge has been registered. 5. While advancing to a company the directors' personal guarantee is obtained but partners' guarantee is not obtained in the case of partnership firm. (IBPS rationale). R. The company is an independent legal entity. Hence, unless the promoter-directors guarantee the advance, they will not be liable. Under the Partnership Act, all partners are liable, jointly and severally, for the partnership debt; also, the personal assets of the partners are also liable to meet the partnership debt after meeting the personal debts. (Note: SBI instruction is that guarantee of partners must be obtained for advances to partnership firms in order to rank as secured creditors in respect of partners' personal assets). 6. A floating charge which the Bank has over the goods of a company is to be registered with the Registrar of Companies. R. Otherwise, the charge will become void against the liquidator or any creditor of the company. Also, it serves as a notice to the subsequent creditors. The Bank's prior charge will be protected. (Note: It is to be noted that the debt is valid against the company but becomes unsecured). 7. COS 245 is obtained from a Company (while granting advances to it). R. This is obtained as a matter of safeguard. The company undertakes not to create any mortgage, lien or charge over its assets including uncalled capital. (This information is also included in the 'Particulars of charges registered with the Registrar of Companies so as to prevent any subsequent charge having priority over the Bank's Hypothecation charge.) 8. It is preferable to grant advances to companies against hypothecation of stocks rather than pledge. R. S 77 of the Companies Act 2013 provides for registration of the hypothecation charge; it serves as an automatic notice to third parties as also to the subsequent creditors; As regareds registration of pledge charge, the Companies Act 2013 is silent. However SBI is of the opinion that pledge charge may also be registered. 9. Banks prefer to grant advances to limited companies rather than to partnerships. (IBPS rationale) R. The charge (such as hypothecation, mortgage etc.) can be registered with the Registrar of Companies under S77 of the Companies Act, 2013 which serves as a notice to third parties about our charge. Bank's rights would be protected as a first charge over the assets. A similar provision is not available for advances to partnership. Further, death of a partner etc, will dissolve the partnership whereas, the company is a legal entity with perpetual existence. 10. A Company cannot mortgage its immovable properties for obtaining a loan in excess of its PC (Paid-up capital) and reserves without the approval of the shareholders in the General Body Meeting by way of special resolution. R. If a public Ltd Company or a private Ltd Co which is a subsidiary of Public Ltd company proposes to borrow against mortgage of its assets in excess of its own paid up capital plus reserves, it can only do so under the authority of a special resolution passed by the shareholders in a meeting as per section 180 of the Companies Act, 2013 (The Board has powers to borrow up to a maximum of paid up capital and reserves). 11. A board resolution is obtained by the Bank from a company ratifying the excess drawings permitted to the company, in case drawings in excess of the limit are permitted. R. As per Section 179 of the Companies Act, 2013 the power to borrow is vested with the Board of Directors. They should exercise this power by means of resolutions passed at meetings of the Board. Any excess drawings have to be authorised by a board resolution. Otherwise, it will not be binding on 1-18 • Rationale

the company; also it may not bind the company even if the excess drawings have been liquidated subsequently. Documentation, Mortgage etc: 1. Security documents for advances shall be completely filled up before obtaining signatures of borrowers/guarantors. R. The borrowers/guarantors will be able to repudiate their liability on incomplete/blank documents at the time of execution on the ground that they were not aware of/did not agree to the terms and conditions of the advance. It is also a correct/transparent practice as the Borrower will be aware of the details of the terms and conditions of the bank's advances. 2. The words 'value received' are incorporated in the DP note. R. These words explicitly state that the consideration for the DPN has been received by the borrower. Proving the DPN in a Court will be easier, as the burden of proof will be on the borrower if he disputes it. It also contains a promise to pay, on demand, the value received with interest. 3. Two signatures of the executant are obtained on a DP note, one on the revenue stamp and another by the side of it. R. Though very rare, the stamp may fall off from the DP note due to defective gumming etc. In such cases, the additional signature can be relied upon as ready evidence for proving the execution of the DPN (It is a widespread practice to obtain the additional signature). 4. Provision has been made in the DP Note and the DPN TDL to show the place of execution. R. The place of execution will determine the place where the 'cause of action' has arisen and the court in which the cases have to be filed in respect of the DPN. To ensure that this important information is not omitted to be entered in the DPN leading to protracted litigation. 5. A Promissory Note can be cured even if it is under-stamped. R. The Stamp Act has been amended some time ago. Now the court may permit payment of penalty and affixing of appropriate value of stamp in case of BE/PN, if it is under-stamped due to genuine reasons. 6. No DPN is obtained for a Term Loan. R. The borrower agrees to repay a term loan over a period of time. It is not repayable on demand. It is not appropriate to obtain DPN as such a loan is not repayable on demand. 7. In a demand loan a/c secured by a DPN, no debits are permitted after the initial advance (except for periodical interest, insurance premia and sundry charges). R. It is an advance for a fixed amount repayable on demand. The disbursement of the loan is also in one lump-sum. If debits are raised in the account subsequently, the borrower may contend that there has been no consideration for the subsequent debits. Also, credits will wipe off the debits; subsequent debits will not be covered by the DPN. (Note : A cash credit account is a running and open a/c. The cash credit documents provide for this). 8. Standard Revival letter is not obtained for a time-barred DPN. R. The standard revival letter does not contain a fresh promise to pay a time barred debt, which is essential under S 25(3) of the Contract Act to revive a time-barred debt. Mere acknowledgement of debt is not sufficient. (Note 1: Hence revival letters on Forms 157, 158 and 159 should be obtained within the limitation period. To allow a reasonable time for obtaining the revival letters from the borrowers/guarantors, a diary note is made 2 years and 3 months from the date of the DPN. Note 2: In case the revival letter could not be obtained before the limitation period, a fresh promise to pay the time-barred debt has to be obtained. (Under S 25 (3) of the Contract Act, such an agreement is valid.) 9. Balance confirmation of borrowalloverdraft accounts has to be obtained annually. R. It acts as an acknowledgement of debt by the customer and extends the limitation period. If he disputes the balance thereafter, the onus of proof is shifted to him. The customer would scrutinize his ,!' -,,,,, 149 MM Special Guide account before he signs the confirmation form; hence, any omission/mistake can be rectified. (Note! Now, no balance confirmation need be obtained for standard accounts in all segments.) 10. Confirmation of debit balances in cash credit accounts on COS 48 must be obtained over a revenue stamp. R. Confirmation of debit balances which is an effective revival of the advance, is legally an acknowledgement of debt attracting stamp duty. Also, borrowers tend to go through the accounts before confirming the balance and point out any discrepancies. Non - stamping is treated as an offence under the Stamp Act. 11. The balance confirmation format in respect of cash credit a/c has been revised some time ago. R. Now the borrower agrees to be liable for interest due but not applied to the account in addition to the outstanding balance. 12. Even though DPN is obtained for borrowal accounts, revival letters are obtained periodically for non-standard a/cs. R. In terms of Limitation Act, the limitation period for a DPN is 3 years from the date of the DPN. If the account is not revived by credit to the account, by acknowledgement of debt etc. before limitation sets in, the bank cannot proceed against the borrower in a court. Similarly, if revival letter is not obtained, the bank cannot proceed against the DPN as it will get time-barred. 13. Revival letters are obtained even in respect of cash credit accounts without guarantee. R. In order to keep alive the liability of borrowers under the cash credit documents. 14. Revival letters are obtained for Term loans, if they are not standard accounts. R. So long as the term loan instalments are regularly repaid, the limitation does not commence; but, if default takes place, the entire amount becomes due, as per document and limitation starts to run immediately. By obtaining revival letters for all term loans (other than standard a/cs), it will be ensured that no account will become time-barred through default of instalments. 15. While obtaining the thumb impression of a borrower on security documents a separate certificate is taken signed by an independent witness that the borrower has understood the contents of the documents and that he has executed the documents on his own volition. R. This extraordinary precaution enables the Bank to prove that the borrower had understood the transaction and acted on his free will without any pressure or coercion from the Bank. If the certificate is taken on the document itself, it may attract higher stamp duty on account of attestation. 16. Registered letters sent to customers but returned to the Bank undelivered should not be opened by us, but preserved as it is carefully. R. Quite often, these have to be produced in the court as evidence of our having served due notice on the borrowers/guarantors; as also of our having followed the normal business practice. If opened, he may contend that the notice was not enclosed in the cover. 17. Title Deeds register should not be signed by the mortgagor while effecting equitable mortgage. R. If the register is signed by the mortgagor he may contend later in the court that the mortgage is a registered mortgage, that no proper stamp duty has been paid and hence the document is inadmissible in evidence. 18. Equitable mortgage can be created only at notified centres. R. Under the Transfer of Property Act, equitable mortgage can be created at Mumbai, Kolkata and Chennai and at such other centres which have been notified for this purpose under S 58(0 of the Transfer of Property Act by the State Govemments in the official gazette. Equitable mortgages created at centres which are not so notified are not valid. 19. While creating equitable mortgage, nothing in writing should be obtained from the person creating the mortgage. R. If any instrument is signed by the mortgagor while he creates an equitable mortgage, it may be contended later that the mortgage is a registered mortgage and that it is inadmissible as evidence, as no 1-20 Rationale

stamp duty has been paid on it; and also that the document has not been registered with Registrar of Assurances. Later date will show that the letter was not signed at the time of creating the mortgage. 20. In case of equitable mortgage, a confirmation letter dated subsquent to the date of the EM is obtained from the borrower. R. In this letter the borrower confirms, as on a later date, that he has created equitable mortgage in favour of the Bank. The letter will bear a date later than the date on which the equitable mortgage was created. It is an independent and extra evidence that the mortgage has been created by him without any coercion from the Bank and out of free will. 21. The title deeds deposited at a notified centre in respect of an advance sanctioned at a non- notified centre are returned back to the non-notified centre. R. This enables the sanctioning branch to have an effective control over the title deeds. Also Inspecting Officials/officials taking over the advance can verify the title deeds effectively and satisfy themselves about the security offered for the advance. (eg: present condition, makret value etc). 22. In the absence of original title deeds, EM cannot be created but English Mortgage (Registered Mortgage) can be created. R. a) Deposit of title deeds with intent to create a mortgage is an essential ingredient of Equitable mortgage. Equitable mortgage created by deposit of duplicate copy of the title deed is not without risk in the absence of conclusive proof that the original title deed has been lost. b) In an English mortgage the mortgagor transfers the property absolutely to the mortgagee. It is in writing, stamped and registered with the Registrar of Assurances which acts as notice to subsequent creditors.(Note: In exceptional cases, CA may permit EM). 23. The Bank's Guarantee Agreements contain both guarantee and indemnity clauses. R. Thereby the guarantor is made to be primarily liable for the advances along with the principal debtor (i.e., borrower). Such a clause enables the bank to file a suit against the borrower and guarantor simultaneously for the recovery of the dues. The "Guarantor" will be liable to the bank on account of the "indemnity" clause even if principal debtor escapes liability for some reason or other. 24. Most of the interest rates quoted in the bank are not expressed in absolute terms but expressed in relation to SBI Base Rate (now MCLR). R. This mode of quoting the interest rate enables the bank to automatically increase the rate when the SBI Base Rate goes up; also, the fixing of the 'minimum' ensures that the effective rate does not go down when the Advance Rate goes down. Further, if the interest rate is expressed in absolute terms, the consent of the borrower would be required every time the rate of interest is changed. 25. Eraz-ex ink is not used in correcting documents. R. Any such alteration will make it difficult for the Bank to prove any unauthorized alteration. The Registrar of Assurances may not permit registration of such documents. The court may reject the documents with alterations as evidence. To protect the Bank's interest. 26. Minimum interest clause is not incorporated in the interest clause in cash credit agreements. R. The interest rates are now fixed based on the credit rating of borrowers. There will be an automatic increase/decrease in the effective interest rate with the change in the SBI Base Rate. 27. Bank is now obtaining letters of indemnity in all cases on stamped documents only. R. Payment of stamp duty is a fiscal matter. Hence it will not be in order to waive stamp duty even for small value indemnities. Further, these are of small value and hence will not be a heavy burden on customers. Documents executed by staff should also be stamped. Ratio Analysis: 1. While sanctioning an advance to a company, the balance sheet and the various ratios are studied. R. Ratios represent the relationship between any two items in the balance sheet/profit and loss a/c. Eg: Current ratio, Equity/Debt, NP/Sales etc. These ratios will be compared with the same ratios of the •

MM Special Guide firm in the past 2/3 years as well as with the industry norm. Deviations will have to be carefully studied. These ratios are studied to find out the profitability, level of indebtedness vis a vis capital, liquidity etc of the company. 2. Liquidity ratio, mainly current ratio is considered as one of the important ratios. R. The unit's ability to meet its commitments as and when they arise depends on the liquidity of the unit. Hence a comfortable liquidity position of the unit provides a safe cushion to the Bank's working capital advances. A comfortable current ratio indicates sufficient current assets with the unit; the unit can carry on its commercial production smoothly in such a case; a reasonably high current ratio is a good safety cushion for the working capital advance. 3. A very high current ratio is not a welcome sign. R. Current Ratio is the index of the borrower's liquidity. If the ratio is very high it will put the bank on the alert as it may be due to inefficient working capital management, manipulation in the quantity/valuation of stocks, large concentration of unsold goods/unrealized book debts, etc. Also, when a business is being wound up, current ratio will be high. 4. Quick ratio is more reliable than current ratio. R. Cash and items which can immediately be converted into cash are taken into account for the purpose of arriving at the quick ratio. Hence this ratio is of relevance for assessing the capacity of the unit to meet the immediate liabilities. The reliability of the current ratio depends upon the quality of stocks and debtors and their valuation. (Usually current assets minus inventory is taken as Quick Assets). 5. Debt equity ratio is given importance and not the Current ratio for sanction of Term Loans. R. Current ratio compares the current assets with current liabilities and therefore measures the liquidity or availability of immediate funds to meet the working capital requirements. Debt Equity ratio which is a solvency ratio, compares the outside liability of the unit vis a vis its capital and indicates over-borrowings as also the unit's ability to service the proposed term loan. 6. Debt Equity Ratio is a Solvency Ratio and not a current ratio. R. Current ratio compares the current assets with current liabilities and therefore measures the liquidity or immediate funds availability to meet the working capital requirements. Debt Equity ratio compares the outside liability of the unit vis a vis its capital and hence, throws light on the solvency of the unit. 7. Depreciation is added to Net Profit to arrive at cash accruals for fixing the repayment instalment of a Term Loan. R. Depreciation is a non-cash expenditure and as such a notional expense. The cash remains in the business and hence the 'cash accruals' is arrived at by adding all non-cash expenses (eg.: depreciation, Investment Allowance etc.) to the Net profit. Repayment instalments are linked to the cash accruals. 8. Net DSCR of less than 1 is not considered good for sanction of Term loans (generally the norm is 2:1) R. Net DSCR is the ratio of annual cash accruals to the amount of term loan instalments and DPG instalments payable in the year. Cash accruals are arrived at by adding depreciation to net profit. Cash accruals should be adequate to provide for fluctuations in business, increased margin for working capital etc. If it is less than 1, the cash accruals are not sufficient to meet term loan instalments. If DSCR ratio is not adequate, repayment will be affected and the account may turn into NPA. Stressed Assets Management: 1. IRAC norms have been introduced. R. RBI has introduced IRAC norms with a view to increase the quality of balance sheet of banks in line with international standards/Basel requirements. NPAs can be identified early and action taken. Ad- equate provision can be made. Income recognition is done only on actual realization basis avoiding artificially inflated profits and tax — payment thereon. 2. Interest is not applied in case of NPA a/c. It is reckoned only on realisation basis. R. Once an account is identified as an NM, it ceases to generate income for the bank. The principal itself 1-22 Rationale

is doubtful of recovery in these cases. Hence, interest is not applied on accrual basis, as it would inflate bank's profit. This results in the Bank paying taxes on the artificial profit. Hence it is reckoned only on realization basis. As per RBI directives on IRAC norms. 3. Stressed Assets Review is an important exercise. R. NPAs have been increasing affecting profitability. Also higher risk-weight has to be assigned for stressed assets for capital adequacy. Further, provision for NPAs is also high. Hence, resolution of stressed assets has to be made without delay. 4. Importance is given to compromise proposals. R. a) Compromise proposals are based on mutual consent of parties, and hence can be settled fast. b) Court cases are time consuming, costly and cumbersome. c) Recovery of NPAs would increase profits and enable recycling of blocked funds. d) Managers can use their time productively. 5. OTS has been introduced by the Bank. R. NPAs have assumed alarming proportions in the Bank. OTS provides for settlement of dues in a quick and painless manner. It is a non-discretionary and non-discriminatory method of settlement of NPAs. The Bank's capital adequacy ratio will improve. Will enable us to cleanse the balance sheet. Can concentrate on getting good borrowal a/cs. RBI directives. 6. Compromise/OTS proposals are encouraged. R. These are hassle-free settlements in deserving cases / specially identified cases entered into on a voluntary basis to pay an agreed amount in respact of bad loans. Will help reduce the huge backlog of NPAs which in turn will improve the CAR of the Bank. RBI directions. 7. Although there is a good demand, the bank does not sanction term loans for financing OTS entered into with other banks. R. OTS accounts are bad debts. As these loans are not for productive purposes, such loans might become NPA. It will not be a wise business decision. RBI guidelines. 8. `Debt Asset Swap' can be effected in the case of NPA accounts. R. A number of borrowing units whose accounts have become NPAs have valuable landed properties lying idle. If they are not able to make cash payment under an OTS arrangement, Debt Asset Swap is agreed to. Under Debt Asset Swap, the Bank may take over the properties in lieu of settlement amount and then can either use them for own purposes or dispose of the same when market conditions improve. This will have the double advantage of reducing our NPA and disposing off the properties later at attractive prices. 9. The Bank refers cases of bad advances up to Rs 20 lakhs to Lok Adalat for recovery. R. Judgements are fast as the procedure is based on principles of natural justice; The recovery processes will be fast so that the funds can be recycled. The judgement is based on the mutual consent of the parties. Time/effort of staff can be saved; RBI instructions to Banks to refer such cases to Lok Adalat. 10. Debt Recovery Tribunals have been established. R. The legal suits are costly, time-consuming and vexatious; the procedures in the Tribunals are based on natural justice. Also, Recovery Officers are attached to the DRT: hence recovery process is fast. Appeal system also provides for quick disposal. Narasimham committee recommendations. 11. Statement of Accounts, ledger extracts and other documents used in the ordinary course of business of the Bank are to be certified properly before their production in the Court as evidence. R. In terms of S 4 of the Bankers Books Evidence Act, only a Certified Copy of such records/books will be accepted. If the copy is not properly certified, the Court will not admit it as evidence. If the Bank has to file the original documents, the smooth functioning of the bank will be affected. Also it may lead to breach of secrecy of other a/cs etc.

1-23 MM Special Guide 12. No entries other than proforma entries are passed through Advances under Collection Ac- count (AUCA): R. Now all suit filed accounts (with outstandings above Rs.50,000/- and with the realisable N. alue of security in the accounts more than 20% of the outstanding) which are written off are parked in AUCA so that these may be followed up for recovery. These are proforma accounts and hence no direct ., ..,...., debits/credits are routed through this account except proforma entries. 13. High value written off accounts against which suits have been filed are parked in AUCA. R. a) To ensure that the outstandings are not lost sight of once they are written off. b) To keep the borrowers' liability and the bank's right to recover alive. By this method the bank can initiate an effective recovery process and cleanse the balance sheet. 14. The balance in LNCA is reversed when the loan amount is written off. R. INCA balance represents the unrealised interest on account of NPAs. An account is written off only when a decision is taken that it is irrecoverable. When the principal itself is regarded as irrecoverable, the interest will also be irrecoverable. (Hence INCA balance is reversed when the account is written off) ...... 15. 'Interest Not Collected A/C' (INCA) has been opened in the General Ledger. R. RBI guidelines require that accounts in which interest has not been paid for 90 days should be treated asNPA; interest on such accounts should not be treated as income until it is actually realised. Hence, interest debited to the account is reversed by credit to Interest Not Collected account. This amount is reckoned as part of provision available for the NPA account. General: 1. Only one operating account is maintained in respect of working capital advances to SSI. R. This enables us to know at a glance the over-all liability of the unit as well as the available security/ drawing power; also, it has operational simplicity. 2. Financial statements alone are not sufficient to take credit decisions. R. The basic parameters in a credit decision are honesty and integrity; the other vital parameters are need for the advance, over all viability, reasonable stake etc. Also credit needs have to be assessed bearing in mind the future prospects for the business. 3. Sanction of credit facilities should, by and large, be based on performance prospects of the industry and not merely on the performance of the concerned unit. R. It is necessary to have an overall perspective of the industry which includes its growth prospects and challenges while examining a proposal. This will enable the bank to gain better appreciation of the inherent risk factors and take a suitable credit decision while appraising the proposals. 4. Opinion reports are compiled on borrowers. R. Integrity and honesty and means of borrowers are the basic factors on which credit decisions are taken. These are recorded in the opinion reports. Also, the total means / break-up worth of the borrowers would show their financial status. If the unit's assets are not adequate to repay the Bank's dues, the Bank has to fall back on these assets. .- 5. Opinion Report on the guarantor is also being compiled along with that on the borrower, while preparing the credit appraisal report. IR. i) This is to ascertain the total means of the guarantor, his track record and other relevant information; also to ensure that the advance would be backed by the guarantee of a third party with adequate means and good standing and no bad credit history. ii) To enable the bank to take suitable credit decisions. 6. Normally, the BUW (Break Up Worth) of assets of borrowers is estimated to be about 50% of the value (while compiling opinions or completing appraisal forms). R. In the case of a forced sale (i.e., in emergencies) the movable assets invariably vanish and the immovable property suffers steep deterioration in value. Hence, BUW is estimated conservatively. 1-24 Rationale

7. A minor's share is deducted from gross net worth of a firm, while arriving at the net worth of the firm, in the opinion report. R. While minor can be admitted to the benefits of the partnership firm, he is not liable for the debts of the firm. Hence, for arriving at the net worth of the firm, a minor's share is deducted. 8. The credit limits sanctioned to units must be renewed annually. R. The Bank can know the financial health of the unit, desirability of continuing the advance, utilisation of the limit, conduct of account etc. The limit can be reduced/enhanced depending upon the projected sales/ operations. Security available can be reviewed and the Bank's exposure protected. If the limit is not renewed within 180 days from the due date, the account will be classified as NPA. 9. In respect of group-firms enjoying credit facilities, renewal should be undertaken for the whole group and not piece-meaL R. This procedure will enable us to know the total picture of the group-firms, their activity-levels, inter- ' dealings especially investments in associate firms and the stake of the group in the business. (Note: The balance-sheets must be obtained as on a common date; only then we will know the nature / extent of inter-locking of funds). 10. Debit and credit summations in the cash credit account are reviewed while renewing the limits sanctioned to borrowers. R. This will show the extent of utilisation of the limits, whether the sale proceeds/bills have been routed through the account and whether the account has been conducted properly (eg: return of cheques, excess drawings availed, retum of bills, etc.). Adequate facilities commensurate with the current level of operations can be extended. 11. Control returns are sent by the Branch Managers to their controllers. R. i) These forms are subjected to scrutiny by the controllers to ensure that the Branch Manager has exercised his powers within the discretionary powers vested in him. ii) To ensure that the sanction of advances conform to the laid-down policies, terms and stipulations of the bank and are in order. iii) This is an administrtive tool to ensure that delegated powers are exercised properly. 12. CRA rating may now be shared informally with the borrower. R. It will add to the transparency in our dealings with the borrower. The borrower can himself assess his financials and take steps to improve them. A better Credit risk rating would get him the benefit of finer interest rate. (Note: informally shared orally). 13. Break even level of sales is an important concept in appraising term loans. R. A unit will make profit only if it operates above the break-even level; it will make loss if it operates below this level; Hence, it is necessary to ensure that projections are based on operations at a viable level above the break even point. 14. Projects with high Break Even Point are viewed with disfavour by banks. R. In such cases, if the fixed cost of the project goes up, the unit's profitability will be jeopardised; if the variable cost goes up, the contribution will be less. Hence, the repayment of the TL will be affected. The margin of safety is less. 15. Moratorium period is given to Term Loan borrowers in respect of repayment of instalments. R. A unit requires adequate time for acquisition of land, construction of factory building, erection of machinery and trial production. It will work above the BEL only when it achieves commercial production. Hence, during the construction period, no repayment should be stipulated. Otherwise, the unit's working capital a/c will become irregular. The projects require generally 12 to 24 months for achieving commercial level of operations. At this level only, it can make profit and commence repayment. 16. Stock statement has to be subjected to scrutiny before allowing drawing power in the cash credit account. R. Stock statement is scrutinised in order to ensure that it reflects the correct position in regard to

1-25 MM Special Guide quantity, valuation etc of the goods offered as security to the bank. It is also to ensure that the stocks are not inflated/over-valued and that obsolete stocks are not included. 17. Physical inspection of borrowing units is done periodically. R. To verify the adequacy, value and general condition of assets charged to the Bank as well as to acquaint ourselves with the general functioning of the unit. It enables us to maintain better rapport with the unit/owners as also understand general market conditions. 18. 'No lien' letters are obtained from owners of godowns in which stocks pledged to the Bank are kept. [Note: In SBI, no pledge advance is sanctioned to SME (manufacturing units)]. R. The owners agree that their right of lien over the goods for the unpaid rent is postponed to the Bank's claims. Thus, the Bank gets first charge over the goods for payment of its dues. 19. Bank's name-boards are exhibited in the factories/godowns in which stocks pledged to the Bank are stored. R. This serves as a notice of the Bank's charge over the goods to the outside world and of the advance made by the Bank. Thus, the Bank's first charge over the assets is protected. 20. Stock Registers kept by a borrowing unit/other records of the unit should not be signed/ initialled by officials who inspect the units. R. Otherwise, it may be contended later on by the borrowers/guarantors that the Bank was aware of or admitted the correctness of the contents of such records. The Bank's interest will be affected. 21. While issuing a Letter of Credit or Bank Guarantee, instead of marking a lien on the DP in the CC a/c we should insist on cash margin. R. It will ensure that the unit provides additional security as deposit for the contingent liability. There will not be any possibility of payment of the deposit to the customer, as the amount will be adjusted against the claim under the Letter of Credit/Guarantee. In case a lien is marked against undrawn DP there is a risk of DP coming down. 22. Banks register their charge with RTO in SRTO advances. R. This will serve as a notice to third parties that the vehicle is hypothecated to the bank. Acts as a preventive measure against illegal sale of vehicles and protects bank's interests in the event of such contingencies. (Note : Recently, The Ministry of Road Transport and Highways has launched a website Vahan.nic.in in which our hyp. charge can be viewed). 23. While granting loans against motor vehicles (including tractors/power tillers) the vehicles are insured only in the sole name of the borrower. R. If the insurance is done in the joint-names of the Bank and the borrower, third party claims may be made against the Bank as a co-owner in case of accidents. Also, the Bank's Interest clause noted in the policy is sufficient to protect the interest of the Bank. 24. Excess Drawing reports are submitted to controlling authority. R. The excess drawings in a borrowal account above the branch manager's powers have to be confirmed by the appropriate authority with the requisite powers. This is to be done as per the Administrative Orders under SBI Regulations of the Bank. The authority will examine the need for the same before confirming it. 25. The consent of the guarantor is necessary to rephase term loan instalments. R. Rephasement of term loan instalments, if it is detrimental to the interests of the guarantor, is a material change in the contract and as such requires the consent of the guarantor (S133 of Contract Act). Otherwise, the guarantor will be relieved of his liability. 26. The Bank cannot sell the goods pledged to it without serving a notice of sale on the borrower, even though the advance has been called up. R. A notice of sale giving reasonable time for payment is a statutory requirement (Under S. 176 of Indian Contract Act. It is also called a statutory notice). If it is not served, the sale would not be valid and will

1-26 Rationale

be set aside by the Court. (Note: In such cases, the bank has to serve a notice and conduct a fresh sale). 27. Goods charged to the Bank as security are preferably insured for the full market value R. If the goods are insured for a lesser amount than the full market value of the entire stock, in case of loss, 'Average clause' would operate. The borrower would get only a proportionately lesser amount. To protect bank's interest. 28. Insurance of stocks pledged/hypothecated to the Bank must be done in the joint names of the borrower and the Bank. R. This enables the Bank to make a claim on the insurance company in case of loss. Also, the insurance company will not settle the claim with the borrower ignoring our right. Further, the bank has insurable interest in the goods as it is a creditor. 29. When a claim under a fire policy is settled, the insurance company must be advised to enhance the value to the original extent. R. The value of the policy is automatically reduced when a claim is settled (Hence, it has to be raised to the original limit by paying additional insurance premium). If it is not done, it will result in under- 1, .K insurance of stocks. 30. Margins are to be maintained on the stocks/assets charged to the Bank. R. Margin is a cushion against deterioration in value and obsolescence of stocks. If no margin is maintained, the bank's advance would not be covered by market value in case of decrease in price. It also indirectly ensures owner's stake. 31. Lesser margins are stipulated for imported materials compared to local materials. R. The imported materials generally command a premium in the market on account of better quality. Also, the unit has to import in bulk due to shipping, licensing, minimum quantity purchase and such other constraints, which necessitates locking up of more funds as margin. a. 32. Margin on Raw Materials is less than that on Semi-finished goods. R. Raw Materials can easily be disposed of by the Bank, as at this stage they can be utilised for manufacturing a variety of goods. Also, the value of raw materials will not fall as steeply as that of SFGs in a forced sale for the same reason. 33. Inspection charges are recovered from assisted units. '--?i. R. In view of the decline in the profitability of the Bank, as a matter of policy, the out-of-pocket expenses/ cost of operations are recovered from the assisted units. In the long run various services/activities have to be self-sustaining in terms of revenue. 34. Banks should take more than ordinary care in the case of pledged goods. -,„ R. As a pledgee, the Bank has to exercise the standard of care of a bailee-i.e. as an ordinary prudent man taking care of his goods of a similar nature. The bank would be liable for any loss/damage to the goods arising out of its negligence. 35. Every effort is made to get the deposit slips signed by the borrowers in respect of credits into NPA accounts (or accounts in which there are no operations for say 2 years). R. Often it is difficult to get the revival letter signed by the borrower in time. In NPA accounts Signature on the deposit slip will extend the limitation period; also, a debt which is binding on the debtor will be binding on the guarantor, in terms of Supreme Court judgement. 36. Advance against bills is preferable to advance against book- debts. R. The drawee would be obliged to meet the commitment under a bill (usance bill) on the due date lest the bill should be protested for non-payment. Thus the fate of bill will be known for necessary action by the Bank. This may be difficult in case of book debts. Also, the debtor of our borrower may set off any claims by him against the debt and refuse to pay the debt. MM Special Guide 37. The list of Transport Operators recommended by IBA is furnished to the branches every month. R. Branches can grant advance against MTRs/Lony Receipts of only IBA approved Transport Opera- tors. These Receipts are issued in a special format prescribed by IBA. The transit insurance is to be effected by the consignors and the goods are carried at the carrier's risk. Advances agent goods covered by such LRs only are considered as secured loans. 38. The opinion on Borrowers/Guarantors has to be revised every year. R. This will alert the manager about any erosion of net worth of the borrower/guarantor. The manager can take additional security or other appropriate action to safeguard the Bank's interest. The Bank has lost many legal cases as it was not able to identify/furnish details of assets of borrowers/guarantors to the Court Officials for attachment, execution etc. 39. Credit risk rating of borrowers is done by the Bank. R. This enables charging of different rates of interest based on the credit risk. Advances with very high risk can be declined. Indirectly, this promotes efficiency in the borrowers to earn finer pricing.

PRODUCTS

1. SME Credit Plus has been introduced. R. This product helps SME units with excellent track record and borrowers of highest standing and integrity to meet unforeseen expenditure. The c/c a/c will be regular. It is a cost-effective arrangement, as there is no need to process frequent requests for adhoc excess drawings. 2. A General Purpose Term Loan scheme for SME (mfg) units has been introduced. R. The financial requirements of SME units have been growing; also flexibility is required for SMEs to survive in today's highly competitive environment. Hence, the loan is granted for any long term needs and is repayable out of cash generation by the unit. 3. The Bank has introduced 'SBI Shoppe' R. Financing for purchase of shops and offices in the emerging market scenario offers good business potential. Loan is also given for modemisation, renewals/repairs, face-lifting etc. Quality business can be tapped; also fully secured with immovable property, which will not undergo depletion in value generally. 4. SME Smart Score has been introduced. R. Credit Approval Process is simplified under the scheme; delay in credit approval will be reduced. The criticism that there is lack of consistency in getting information, and delay in decision process will be met. 5. The Working Capital limit under SME Smart Score is now sanctioned for 2 years with annual .• review. R. Speedier reviews are possible; backlog of renewals at branches / SMECs can be cleared. The time spent by credit officers on renewals will be reduced. 6. The Concessions / freebies under Power Gain and Power Pack a/cs for SMEs have been further liberalised. • R. Private sector banks and foreign banks have introduced innovative products to tap float funds of SME businesses. A number of our borrower-customers have opened current a/c with these banks. To wean away these customers to our Bank as well as to retain our existing customers and meet competition. 7. Bank Guarantees have to be classified properly. R. a) The Bank has to provide for capital adequacy for all types of guarantees. b) The credit conversion factor (CCF) applicable for performance guarantee is 50% & for financial guarantee is 100%.

1-28 Rationale

c) RBI has issued directives for proper classification for the purpose of having effective control over the guarantee transations. 8. SME Asset Backed Loan has been introduced. R. It is a modification of SME Easy Loan Against Property. Drop-line overdraft (combined OD & DL) facility is provided. The scheme provides loans for those who are unable to furnish detailed financial data, but are in a position to offer property as collateral. LTV ratio is 60% up to loan of Rs.10 Cr; and 50% for loans above Rs.10 Cr. Earlier the loan was meant only for trading units and now it also covers units under Manufacturing & Services sector. 9. BPR branches must submit ECS mandate in respect of auto loans to the concerned RACPC immediately on disbursement and not wait for migration of the documents. R. Corporate Centre has observed that there is a strong correlation among NPAs, frauds, non-migration of auto loan documents and timely activation of ECS mandate at BPR branches. Prompt submission of ECS mandate will enable RACPC to activate the mandate and follow up recovery.

Note: No pledge advance is sanctioned to SME (manufacturing) units in SBI. The new SME documents do not have any pledge documents. Further, action under SARFAESI can be taken only against hypothecation advances; pledge advances are excluded from the SARFAESI Act. Rationale pertaining to pledge advances are retained for general understanding. Pledge is applicable to advances against gold omaments, warehouse receipts, shares and govt securities.

1-29 MM Special Guide ADVANCES - AGRICULTURE

Agricultural Cash Credit I. Banks are focussing on agricultural lending/rural lending. R. Food security for the nation is a critical factor in the development/security of the Nation. Investment in agriculture has come down to 1.3% of GDP from 1.6%. India's population is set to rise slowly but steadily in the next 20 years. A number of farmers had committed suicide as they were not able to repay the loans taken from money lenders. Also, there is an urgent need to give an export-thrust to the agricultural economy in the context of WTO imperatives. 2. Agricultural credit is a supervised credit. R. The small and marginal farmers are indebted and are under pressure to divert the advance. The banker would know the progress of the investment /crop cultivation; and subsequent instalments need only be given if the farm had the benefit of earlier instalments. Further, a number of factors like support price, availability of power, other inputs, environmental factors affect the fortunes of agricultural activities and the banker should have an understanding of these. (Hence, it is a supervised credit). 3. A term loan borrower should be encouraged to avail crop loan from us. R. Cultivation of crops on modem scientific basis will increase the incremental income of the farmer; it will enable him to repay the term loan instalments. Agricultural credit will go up. 4. Share of agriculture in GDP is very low and has been declining over the years. Therefore the target for agriculture finance is kept on the higher side. R. Declining share of agriculture in GDP can not be accepted as a valid reason for prescibing lower target, as agriculture is an important sector in the economy, 2/3 rd of the population depends on it for its livelihood. It is also critical for ensuring food security and poverty elimination. Agriculture sector does not have recourse to other sources of finance like equity, CP etc. The Co-operative structure is weak and its role has become restricted. 5. Crop loans are disbursed in stages and not in one lump sum. R. This ensures the end-use of funds and eliminates the propensity of the farmer to divert the funds for unproductive purposes; also, the farmer needs to pay less interest; In this way it is easy to establish the link between credit and benefits eamed by the farm. 6. Crop loan is disbursed in both cash and kind components. R. Disbursal of kind component (seeds, fertilisers etc.) ensures the proper end - use of credit and application of right inputs for maximum yield; cash component (labour, water, etc.) enables the farmer to promptly carry out farming operations. Tendency/pressure for diversion of funds is avoided. Credit is made available at the appropriate time as seasonality and timeliness are important in agri, fmance. 7. Pre-sanction / Post sanction inspection of farms is essential while granting agricultural advances. R. Pre-sanction inspection will enable us to judge the bona-fides of the applicants, suitability of the farm, present conditions of the farm, water source etc. Immediate post sanction inspection will enable us to ascertain that the farmer has taken up the work as per plan and commenced farming operations. 8. Inspection should be farmer-oriented rather than farm oriented. R. We are able to establish good rapport with the farmer which is essential for good repayment culture. We will also know about the condition of his farm as well as other farms/farmers' affairs. General condition of the farms, crops etc are indicative of the situation in the entire village. The business potential of the borrower can be exploited. 9. Interest on crop loans is applied at the time of harvest while it is applied on cash credits (for business units) on monthly basis. R. The agriculturist gets his income only after harvest and sale of the produce; in an industrial advance

1-30 Rationale

the unit is able to generate cash on an on-going basis. 10. Repayment for agricultural advances is based on the cropping pattern. R. The farmer will select the cropping pattern based on soil, water conditions etc. Thus, different crops would be raised during a year at different seasons. The crop loan can be repaid by the farmer only out of sale proceeds of the crops. Also reasonable time say 2 months after harvest should be given for sale of crops at a reasonable price. The farmer does not have other periodical income. 11. Repayment period for crop loans for raising different crops differs. R. Some crops like rice, wheat, cotton etc are short duration crops and hence they can be repaid within 6-8 months; long duration crops like sugarcane, grapes, pine-apple etc require longer periods. Hence the repayment period differs for the various crops. 12. Even if the borrower is literate, photograph is taken in Agl advance a/cs. R. The farmer can be easily identified for operations at the branch during inspection; aids quick transactions. It is a uniform practice throughout the banking system. Now, a must under KYC. 13. Collateral norms have been liberalised for Agriculture loans up to Rs. 1 lac. R. Insistence on collateral security hinders the growth of agricultural advances; will enable us to compete with other banks that have relaxed the norm. To facilitate credit off take in agriculture sector. RBI directives.

Agricultural Term Loan 1. While financing farmers for agricultural equipments etc finance is given for the purchase/ acquisition of economic units/size. R. So that the activity will be viable; otherwise their earnings will be low and unremunerative; they will be obliged to sell the assets. The purpose of the advance would be defeated; also, the Bank's loan would not be repaid. 2. Gestation period is fixed for term loans granted to farmers under the various schemes of NABARD. R. After carrying out many technical studies NABARD has prescribed repayment period, gestation period, economic units for an activity etc. It is essential to conform to these. Otherwise, NABARD refinance will not be available; also, the advances will be in jeopardy. 3. Loans for cultivation of horticulture/plantation crops are given as Term Loans whereas loans for growing paddy and grains are granted as cash credit. R. Horticultural plants/plantations are long duration plants; during the years till they come to fruition, no e can incom Hencetthtn, lit/2istngivnnetnhsafter as a term loan. short duratioben cgroenesraantedd aretheseri marlankettsed. w harvest. TiHelencpea,dthdyeyanadregrfianianns carede as crop loans (cash creditfrtshoe)ym. 4. In many states priorclearance r water - be obtained before sanctioning an advance for minor irrigation. R. This ensures that the water resources in a particular area are not over- exploited. (In many States the ground-water level has gone down on account of over-exploitation of water resources by the digging of wells. Hence, State Govts. have set up Ground Water Directorate whose prior clearance (feasibility report) is essential for grant of loans for digging /deepening of wells. 5. The Government has prescribed minimum spacing between two wells. R. With a view to ensure that the water table in the area does not go down steeply making the cost of pumping uneconomic. Also, indiscriminate well-digging in an area will make all the wells dry making the agricultural activity a risky one. 6. For a 'Dairy Unit', a minimum of 2 milch animals are financed. R. To ensure continuity in milk production, income generation and repayment of loan. The scheme will be viable and NABARD Refinance will be available. 1-31 rr

6 r 4 "11 .1thk

MM Special Guide 7. Loans sanctioned to the farmers for purchase of farm equipments should be paid direct to the dealer. R. This ensures that the farmer is able to acquire the equipments of reputed make from reliable dealers as provided in the scheme. Thus misuse/diversion of funds is avoided; reasonableness of price is also assured. 8. Now, the tractor-borrower is given the option of taking either Comprehensive insurance or only third party insurance (TPI) in respect of the tractor. R. The borrower gives an undertaking that he assumes the risk of not taking Comprehensive policy in case he opts for TPI only.This will reduce the burden of insurance premium on the farmers. The chances of total damage in case of a slow-moving vehicle like tractor are very low. 9. In the case of tractor advance, insurance policy in respect of the tractor is not taken in the Bank's name or in the joint names of the Bank and the Borrower. or Insurance policy in respect of a tractor is taken in the name of the borrower and the Bank's interest is noted in the policy. R. To avoid any possible claim on the bank by a third party, in case of accident, as a co-owner of the tractor. (The bank's interest is protected by taking the policy in the single name of the borrower and noting its interest in the policy by the insurance company). 10. Signed undated blank transfer form in the prescribed format (In duplicate) has to be obtained from the borrowers in case of tractor advances. R. This will expedite transfer formalities with R.T.O. in case the borrower defaults in payment. The forms can be dated and details filled up later and the tractor transferred to the Bank's name or sold. 11. The Gobar-gas loans are preferably granted to persons having stable-bound animals. R. This will ensure that adequate quantity of animal dung is available for the production of the gas. (if the animals are sent for grazing, the dung will not be available to the farmer). 12. Financing of bio-gas plants is done by banks liberally. R. In view of the acute fuel crisis faced by the country, nonconventional sources of energy must be encouraged; In a warm country like India with highest number of animal population bio- gas/gobar gas \ plants can be set up easily. It is cheap. The residue can also be used as fertiliser; subsidy is available as also NABARD refinance. 13. Term loans for pumpsets are granted only for purchase of pumpsets with BIS markings. R. This will ensure that the agriculturist gets only quality equipments free from faults at reasonable price. Refinance is available only for loans sanctioned for purchase of such pumpsets. 14. Loans for purchase of mulch animals are disbursed in two phases-for the first animal on sanction and for the second animal after a period of 6 months-from the date of first disbursement. R. a) It will ensure continuity of supply of milk and income for the farmers. b) Repayment of instalments will be assured for the banks. c) Proper phasing will ensure that at least one animal will be yielding milk at any point of time ensuring regular earnings for the small farmer. 15. Though classified under Agricultural segment, the dairy advance will become NPA if the instalment is not paid within 90 days from the due date. R. In case of Dairy Advances the income/cash flow is regular like any other trade/manufacturing activity. It is not linked to harvest. Self Help Groups 1. Banks prefer to extend financial assistance to weaker sections through self help groups. h R. i) Advance to SHGs is treated as finance to weaker sections within the priority sector. ii) The habit of thrift and proper credit management is promoted by SHGs. iii) There is a better commitment towards utilisation and development as compared to individual loans. 1-32 ' , .. . --- - "'"' : : 4 ' "i' it" , `:1.:.).;i 0L,1 . 4 ;..', ;1,4'; V, i :, ----"-l"'"-''-'-'----'-'""--- . 1l , . ,...i ., 4' 'ft 1 .-„e:„ , 4 r .:: ,, • ' A4 . , ', . . -'. Ai Y " . , x ,14PPOk7,,: ', 1 V , .' 1 , P ';'''' • .' .'' ''' f, , P', - ; ' r'. J . 4+ 1 'P 4*,t : i , ?, :i::':1041?' ,, 4 , :. ,;; P ,2 'f, 1 '` ' ,,.„.1 ' :l V.,

MM Special Guide

6. The Bank has introduced a scheme for financing seed processors. R. These are highly secured and high value advances with lower transaction / supervision cost. To exploit the huge potential which remains untapped. The Bank can cross-sell other products. 7. The Bank has introduced SBI SHG Credit Card and SBI SHG Gold Card. 0 R. The needs and requirements of new SHGs and matured SHGs are different. This product will enable hassle free loans to SHGs for internal lending for consumption as well as economic activities; will also enable the members to take up micro enterprises to improve their earnings. 8. Cheque book is issued to a literate borrower with limit of Rs.25000/- or above under KCC Scheme. R. Will enable agriculturists to make purchases of their choice; they need not visit the branch for withdrawal. Will result in better customer service as also reduction in peaking of loan proposals during the busy season.

Miscellaneous 1. Modified National Agriculture Insurance Scheme has been introduced w.e.f. 1.11.2013. R. To provide insurance coverage and financial support in the event of prevented sowing and failure of any notified crop as a result of natural calamities; pest and diseases. To help stabilize farm income particularly in disaster years. 2. IBA has formulated a scheme for financing farmers for purchase of land for agricultural purposes. R. Small/Marginal farmers can get an opportunity to acquire agricultural land through bank finance: they can cross the BPL limit and increase their income. Waste land and fallow land can be brought under cultivation. To step up agri production and agricultural credit. 3. The Banks can avail refinance from NABARD. R. It enables the Bank to channelise investment in specific areas of economic activity/rural areas and augment its resources. Also it enables concessionary interest rate to be quoted to borrowers. Bank is not required to maintain SLR/CRR on refinance obtained. Also, the schemes have the benefit of being vetted by NABARD'S technical staff. (Of late banks have not availed refinance; reasons: cost of refinance has gone up; by and large, banks have had comfortable liquidity). 4. Back-ended subsidy is given for SGSY (now NRLM) loans or Back-ended subsidy is given for implementation of Govt-sponsored schemes. R. Under the back-ended subsidy scheme, the subsidy can be adjusted to the loan a/c by the bank only at the time of payment of last instalment of the loan. Thus, it is automatically ensured that the project is taken up by the beneficiary and completed. Also, the bank cannot adjust the subsidy amount to the loan a/c a/c till the project is completed. 5. For financing under SGSY (now NRLM) scheme, the SHG shall not consist of more than one member from the same family. Also, a person should not be a member of more than one group. R. SGSY is a holistic programme. Its objective is to help the rural poor to set up micro-enterprises for producing valuable goods/services in rural areas. This restriction is stipulated to achieve the main objective of lifting the assisted families (and not an individual member) above the poverty line and also broad-base the benefit to a large number of poor families. 6. The Bank has introduced SBI Krishak Uthaan Yojana. R. Tenant farmers, share croppers, oral lessees having no land records or written documents are financed under the scheme.They can raise crops with easy access to short term production and consumption credit. A significant thrust can be made in financial inclusion by the Bank. 1-34 Rationale 7. Service Area Approach is applicable only to Govt. Sponsored Schemes. R. Govt. Sponsored Schemes are implemented in identified villages which are compact and contiguous. This will ensure close contact with the beneficiaries / Govt officials for smooth implementation of the schemes. To avoid multiple financing. Competition for general schemes in the area will benefit farmers and improve efficiency in banks. 8. Agriculture Gold Loan Scheme has been made flexible. R. Gold Loans are one of the safest advances with low NPAs. The scheme is flexible. This portfolio eases the Bank's capital adequacy ratio as risk weight has been reduced for gold loans by RBI. To step up agriculture credit. 9. Banks / FIs should invariably furnish a copy of loan agreement along with a copy each of all enclosures of loan agreement to all the borrowers at the time of sanction / disbursement of loan. R. This is as per guidelines issued by RBI on Fair Practices Code for Lenders. A transparent and fair, practice. Not furnishing a copy is considered an unfair practice. To avoid disputes between banks and customers with regard to terms and conditions. 10. Scheme for Debt Swapping of Agriculture borrowers has been introduced. R. To mitigate acute distress of farmers due to the heavy burden of debt from non-institutional lenders. To suit crop production needs. 11. DIR facility is not sanctioned under SGSY (now NRLM). R. DIR facility is availabe only to the particular target group at concessional rate of interest at 4% p.a. It is available throughout the country.There is ceiling on loan amount; subsidy and refinance are not available. The objective of SGSY is to bring the entire family above the poverty line within 3 years with the help of Bank loan and Govemment subsidy in the rural areas only. There is no ceiling on project cost. Therefore DIR lending cannot be brought under SGSY. 12. The Bank has introduced a new product called Farmers Easy Empowered Loan (FEEL)- "Krishi Kalyan" R * The farmers will bea able to avail KCC and Produce Marketing Loan at one instance. * To reduce multiple appraisal sanction and documentation. * To ensure smooth flow of credit and increase staff productivity. 13. PMRY and NREGP have been merged and PMEGP launched. R a) to generate employment opportunities in Rural and Urban areas through setting up of new self- employment ventures/projects/micro enterprises. b) To provide employment to artisans and rural / urban unemployed youth; to help arrest migration of rural youth to urban areas. 14. The Bank has introduced a product for financing Organic Farming on a Pilot basis. R * To ensure sustained yields and improve profitability and repaying capacity of the borrower. * To prevent degradation of soil, pollution of water from chemicals / pesticides. * To reduce probability of crop failure, maintain a better ecosystem and capture export market. 15. SJSRY (Now NURM) Scheme has been comprehensively revamped some time ago. R * To provide gainful employment to the urban unemployed poor by encouraging them to set up self- employment ventures. * To support skill development through training. * To empower the community to tackle urban poverty through suitable self managed community structures. 16. The Bank has introduced a scheme for lending to producer companies. R Producer companies are providers of inputs / knowledge / technical advices and contribute to the value chain collectively, thereby achieving economies of scale in production and marketing of agricultural produce. They adopt modem technology to enhance agriculture production; also they can ensure remunerative price for the produce; and eam greater share in the retail price. To reduce operating cost, 1-35 MM Special Guide and bring about better repayment culture and better group dynamics. 17. Tractor Upgradation Scheme (Sanjeevani) has been introduced. R To assist farmers, who are regular in repayment of their loans, for maintenance, upgradation, refurbishment of tractors and also for purchase of additional implements. This will help farmers keep their tractors in very good repair and ensure steady eamings/benefits.

Recent Rationale 1. RBI has revised the Kisan Credit Card Scheme. R. • To simplify and make the scheme suitable for current requirements. • To facilitate issue of electronic kisan credit cards. • To Provide timely and adequate credit support for short term credit requirments as also invesment credit needs along with consumption requirments under a single window. • As per T.M.Bhasin Committee recommendation. 2. New Tractor Loan Scheme (NTLS) has been introduced in the Bank. R. • The market dynamics of the tractor loan business is changing. • It will help the operating functionaries to book untapped tractor business by extending relaxation in eligiblity, margin, security,interest rates, upfront fee with monthly repayments • To improve the market share. 3. RBI has prescribed priority sector lending to foreign banks also. R. After nationalisation , the task of financial inclusion was considered to be the responsibility of PSBs only. Foreign banks have been having long presence in India and know the Indian economy/culture. These banks can also play an active role in priority sector lending along with domestic banks to ensure speedy financial inclusion. Foreign banks can draw upon their global experience to develop innovative solutions and delivery models in a cost effective manner. As per MV Nair committee recommendations. 4. RBI has revised the priority sector lending norms. (April'15) R. To attain greater allocational efficiency thereby facilitating effective financial intermediation by banks including foreign banks. To ensure an effective and transparent frame-work for priority sector lending to attain sustainable excellence in banking. The distinction between direct and indirect finance has been removed and renewable energy units are now categorised under priority sector.

oa Rationale `P' SEGMENT

1. The Education Loan scheme has been comprehensively reviewed and modified some years ago. R. i) to make our scheme more broad-based and liberal. Also to specify a time schedule for prompt sanction and disbursal of loans. ft) RBI directive based on R.J.Kamath Committee recommendations. iii) It is classified as priority sector advance up to Rs.I0 lacs for studies in India and Rs.20 lacs for studies abroad. 2. Home loans have been identified as a thrust area for growth. R. i) It is profitable and highly secured. ii) Housing loans up to a maximum Rs.28 lacs in metros/Rs.20 lacs at other centrres are now classified as priority sector advances. iii) The demand for housing loans is very high on account of various tax incentives and rising income of middle class. iii) NPA is less 3. Many PB segment schemes have been made flexible. R. a) With a view to maintain/ increase our market share in this segment. b) `P' segment advances offer sizeable potential for thrust and a reasonably good spread; and also generally mostly secured. c) To make them customer-friendly. d) To meet competition. 4. The Bank has introduced 'SBI maxgain' scheme. R. This is given as overdraft facility. Hence, the borrower need draw only up to his requirements; can deposit his surplus funds in the a/c and save Interest cost. To provide value added and customer friendly features in housing loan scheme. To meet competition effectively and increase coverage under `13' segment. 5. SBI Loan to Pensioners scheme and SBI Loan to Affluent Pensioners scheme have been merged (Oct'14). R. The ceiling has been raised to Rs.14 lac so that higher quantum of loan can be sanctioned. The maximum age for eligibility has been increased to 76 years, as the average life of people has gone up and the risk has not materially increased. The revised scheme covers old Pension Scheme, Pension Scheme for Affluent Pensioners and Family Pension Scheme; it also provides for top-up loan. 6. Personal loans scheme against immovable property has been liberalised. R. This product caters to a niche group of customers who own property and wish to raise loan against the property without selling it. The Scheme is flexible, with long repayment period and surplus funds can be diverted to prepay the loan without penalty. 7. New Credit Scoring models have been introduced for Personal Loans. R. * The new scoring model will serve as a better credit decisioin making tool. * To strengthen the existing system of sanction / rejection of proposals. * Bank can deliver the loans fast. 8. A loan scheme against Demat units of open ended schemes of SBI Mutual Fund has been launched R. To give boost to 'P' segment advances. Arrangements have been made with SBI Funds Management for noting and lifting of lien on the units. Loan against units in `Demat' form is more secure and liquid than units in the physical form.

1-37 MM Special Guide 9. Overdraft against the security of life insurance policy issued by SBI Life Insurance Company Ltd can be granted. R. To provide liquidity to the policy holders. The loan product would increase the attractiveness of SBI Life policies. There will be better synergy between the Bank and the subsidiary leading to a better market share and increased profits for the SBI group as a whole. 10. The Bank has introduced 'SBI Scholar' education loan scheme. R. To provide assistance to deserving and meritorious students for pursuing full time course in premier and reputed Institutes in the country (around 90). To step up sale of education loan product in a niche market. 11. 'Credit Khazana' scheme has been introduced for home loan borrowers. R. This is a composite package of `P' segment products for the housing loan borrower whose account has been conducted satisfactorily for the past one year. The housing loan borrower is automatically entitled to one or more of six schemes viz. Car loan, Two-Wheeler loan, Education loan, Personal Loan, Tractor loan, any other loan under 'Plus' schemes. To give a big thrust to `13' segment advances. 12. A borrower has to give an undertaking that he will not use the funds for any speculative purposes, in case of `P' segment advances. R This will ensure that the General Purpose loans are not diverted to capital markets. This is a precautionary step. 13. SBI Reverse Mortgage Loan (RML) Scheme has been introduced. R. To provide a source of additional income to senior citizens of the country who own self acquired and self occupied house property in India. To provide assistance to senior citizens who are owners of houses but have inadequate income to support themselves. 14. The Bank has prescribed LTVRatio for granting home loans. R. This step will increase the safety margin for the Bank To minimise loss due to defaults and prevent slippages. 15. National Housing Bank has launched NHB RESIDEX-a housing price index. R. This will help in tracking movement of property prices for the purpose of revaluation of our IHLs (Individual Housing Loans) at the 5 metros. To implement Asset Revaluation Policy for IHLs effectively. 16. Home loan moratorium period has been revised recently. R. With the advent of integrated townships and mega residential complexes with several towers, longer time is taken for completion of projects. This will enable alignment of repayment schedule with that of building-completion. Current moratorium period is considered adequate up to 7 floors. SBI Surakshit Home Loan has been introduced. R. The regulatory guidelines require that the insurance policy should be sold only where the customer volunteers to obtain it. Hence, the offer of two products by us, one with insurance and another without it would enable the customer to exercise option. No allegation can be made that Bank has compelled the borrower to take up life cover. 18. SBI Home Loan: Pre-Approved Limit (PAL) has been introduced. R. To enable the home loan borrowers to confidently settle the property deal with the builder / seller. To reduce the TAT and prevent customers going to other banks. It will also enable borrowers to negotiate with the builders to get better price. 19. Customer Day is now observed twice a month. R This would act as an early warning system to point out the areas which require immediate attention. Serves as a learning tool for branches/offices to identify the mistakes and take remedial actions. A satisfied customer will bring in more customers. 1-38 Rationale

20. Norms for loans for more than one house has been relaxed. R Due to increase in investible income of salaried employees, a number of our existing valued and young customers are approaching us for a 2nd home loan. Providing loan within a period of less than one year of availing first loan will help such customers. 21. For new home loan accounts obtaining 48 PDCs for repayment is not necessary in most cases. R Since most of the new home loans are covered under ECS/S.I mandates, obtaining 48 PDCs is not necessary. Instead only 2 cheques need be obtained now. 22. Home Loans can be availed at a place other than the place of construction. R This will enable the branch to effectively leverage the potential to tap business emanating from existing customers who are maintaining long relationship at the branch even though his/her place of posting/ activity is presently at a different centre. With the adoption of CBS it is possible for lending branch to track the customer's SB/Salary Account maintained at any branch to ensure prompt and regular repayment. 23. Bank has introduced SBI Home Equity (Personal Loan) (now renamed as Top Up Loan) scheme. R. To tap the potential available for granting additional loan to existing Home loan borrower against the security of housing unit. Home loan borrower will be able to avail personal loan at the same branch at a competitive price. The terms/conditions are more flexible. 24. Key statement / Fact sheet should be given to all individual borrowers w.e.f 01.04.15. R. Banks should provide a clear, concise, one page key fact statement/fact sheet, as per prescribed format to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions. The same may also be included as a summary box to be displayed in the credit agreement. 26. Now, the Bank has to submit credit information to all CICs and not merely to CIBIL R. As per instructions of RBI all banks have to become members of all CICs will a view to makecredit information freely available. SBI has decided to obtain CIR from 2 CICs. 27. Aadhaar details are seeded in the borrower accounts / Education Loan accounts. i)It ensures that interest subsidy is credited directly to the eligible persons based on Aadhaar card identity as authorised by the concerned government dept. ii)This is a direct debit transfer to the eligible customers which avoids delay. This eliminates the middle- men in getting the subsidy. The corruption in making available the subsidy to the beneficiaries is also eliminated.

MM Special Guide SAFE CUSTODY, SECURITY, SAFE DEPOSIT AND SAFE DEPOSIT LOCKER

SAFE CUSTODY / SECURITY: 1. Government bonds, securities etc that are accepted for safe custodty are recorded in the Safe Custody Register, Category-wise/Issue-wise R. To ensure that all scrips of the same Series are sent for collection of interest, redemption etc. at the appropriate time in appropriate lots without omission. As a bailee the Bank has to ensure that dividends etc are collected promptly. '.; 2. No indemnity is required when a memorandum of securities is lost by the customer. R. Memorandum merely details the securities left with the Bank on a particular date. It does not contain • any undertaking from the Bank about the return of the securities which may be enforced against the Bank in a court. Also, in the case of safe Deposit Receipt, the depositor undertakes to surrender the Receipt at the time of delivery.No such undertaking is obtained for the issue of Memorandum ,.., .. of Securities. 3. The contents of the safe deposit articles must be packed tightly. R. If they are packed loosely, the contents might be damaged in normal handling. This may give rise to a claim from the depositor that the Bank has not taken proper care of the article as a Bailee. 4. Duplicates of the important keys of the branch should be lodged with the nearest branch of the Bank/Associate Bank/Nationalised Bank. R. To ensure that the duplicate keys are withdrawn and the Bank's work is carried on without any stop or difficulty in the unlikely event of the original key being mislaid, broken etc. If kept inkhe branch safe, they cannot be taken out for use in the event of loss of any original key affecting ' , .,..... customer service. 5. Safe Deposit Articles must be turned over periodically by the Accountant. R. So as to obviate the possibility of white ants attacking the articles due to dampness etc. This also provides an opportunity to verify that no articles have been mislaid and that they are in order otherwise (Seals, locks are intact etc.). . . 6. Blanket insurance does not cover safe deposit articles. R. These are kept in fire-proof strong rooms/safes. Further, the contents/value of these articles are ,, not known to the Bank. 7. Safe Deposit Articles and gold ornaments in a closed gold loan a/c are not delivered against Succession Certificate. R. Succession Certificate covers only debts and securities. A Safe Deposit Article is neither a debt nor a security. 8. A Safe Deposit packet deposited by a customer is not branded with the Bank's seal/seals I of the Bank's officials. R. The packet is the property of the depositor; further, the contents of the packet are not known to the Bank. If the Bank's seal is affixed, the depositor/legal heir may contend later that the article has been tampered with while in the Bank's custody. 9. Packets said to contain Wills must be superscribed with the words "Deliverable to Sri ...... on application". R. The onus of demanding delivery of the packet lies on the legal representatives. In the absence of such a statement, the Bank has to search for the legal representative and serve a notice on him, which may not be practicable often.

1-40 Rationale

10. The Bank continues to collect interest on Govt. securities lodged as security for advance even after the death of the borrower. R. It is a case of Agency coupled with interest (S 202 Contract Act). Recovery of interest for the loan given is the 'benefit' for the bank. Interest is credited to the loan a/c. 11. Govt Securities for sale should be accepted only from customers and well-known parties. R. The Bank's name appears in the securities as an endorsee; and hence to avoid any litigation we should deal with reputed parties only. 12. The securities standing in the name of a limited company and lodged by it in safe custody are not transferred into the Bank's name. R. In terms of Companies Act, the investments of a company should stand in its name. 13. Safe Deposit Articles are accepted from only those customers for whom KYC due diligence has been carried out. R. With a view to avoid dealings with fictitious persons, benami- holders etc. RBI directive. 14. Bank is a bailee in the case of a safe custody a/c. R. The articles/securities are entrusted to the Bank for safe- keeping; these have to be returned to the customer intact on demand. The Bank has to take care of these goods as an ordinary prudent man would take care of his own goods in similar circumstances. Bank is liable for any loss or damage arising out of his negligence; but he is not liable for loss etc.due to Act of God, natural calamity etc. 15. Right of general lien cannot be exercised on securities entrusted to the bank for safe custody. R. In terms of the Indian Contract Act, items entrusted for specific purpose are not subject to the bank's lien. Safe custody items are entrusted to the bank for the specific purpose of safe keeping and not in the capacity of a 'Creditor'. SAFE DEPOSIT LOCKERS 17. The wards of the surrendered lockers are inter-changed before the lockers are rented out again. R. This precaution is taken to ensure against any attempt by the previous locker holder to try to open/ operate the surrendered locker. 18. When a locker is operated by a Power of Attorney holder, at the time of closure, the original hirer of the locker must terminate the agreement. R. The power to operate an account cannot be construed to include the power to close the account. This will eliminate avoidable contentions and claims and will protect the customer's interests. The power of attorney does not provide for closure/transfer of the SDL a/c. 19. The I.T. Dept. has instructed the officers conducting search operations of lockers to offer themselves for search both before and after the search of the lockers. R. To avoid any allegations that incriminating evidence was planted by them or that they took away stealthily any valuable items. 20. A stamped agreement form is obtained from the customer opening a locker. R. This is the agreement of hire setting out the terms and conditions of the contract. It specifically provides that the Bank has a tight of general lien over the contents of the SDL; also that in case of default in payment of rent, the Bank has a right to deny access to the SDL. 21. One locker is always kept vacant R. This will enable inter-changing of wards before letting out a surrendered locker to another hirer. This contingency will happen in case all the lockers are hired out and one locker is surrendered. 22. All Safe Deposit Locker A/c holders should open a SB/Current a/c. R. This will enable prompt recovery of rentals from the locker holder on the due dates (SI is to be recorded). It is an avenue for profitable deposit business. 23. Locker Access Register is in use at Locker Branches. R. The official in charge should verify the signature, identify the person and allow operation only thereafterIt ... 1-41 MM Special Guide

also serves as a record of operation by the locker-holder. Lockers that are not operated beyond a specified time have to be followed up to assess the risk and take appropriate action. 24. The Locker Official should certify at the end of the day that he has verified every locker operated during the day immediately after its operation and found it properly locked. R. To ensure that the lockers have been locked properly and that no articles have been left behind by any customer after the locker operation. The immediate verification will lead to effective action in finding out true owner in case any items are left outside the locker. To protect customer's interests better/for better customer service. 25. Banks do not permit operations in safe deposit lockers before commencement of business hours/after the banking hours. R. This is to avoid any liability on the part of the bank in the event of seizure of lockers by income tax authorities as per Section 132 of the IT Act. Will avoid any allegations of collusion by the Bank authorities. 26. Deposit is accepted now while opening a locker account. R. This will ensure that the rent is recovered from the interest earned on the deposit. RBI has advised that it is in order for the banks to demand adequate deposits, interest on which will cover 3 years' locker rent and charges for forcing open the locker in an eventuality . 27. A separate letter is obtained from the locker hirer at the time of surrender of locker. (IBPS). R. This is to ensure that the locker agreement has come to an end along with his rights thereon and that he may not approach the bank again on the strength of earlier agreement. To avoid contentions / claims in future. Note: In SBI, the Locker Register has a provision to record the locker termination agreement and his signature is obtained thereon at the time of closure of the account. 28. A copy of locker agreement should be given to the locker hirer. R. This will serve as evidence that the hirer has understood the terms and conditions of locker operations and also that in the event of non-operation of locker for a specified period, the bank can break open the locker. The Bank can also sell the contents in case of arrears of rentals.It adds to the transparency in our dealings with the customer. RBI directions based on recommendations of CPPAPS. 29. The Bank can break open a locker even if rent is paid regularly, under specified circumstances. R. Risk on locker service has increased significantly of late. A few cases of fire arms were found in lockers not operated for a long time . Hence , based on the risk on accounts, different periods are prescribed for breaking open lockers in case of non-operation (RBI). 30. Banking facilities including Locker should be made available to visually challenged persons. R. * Visually Challenged persons cannot be denied the facility of cheque book, Locker and ATM on the possibility of risk in operating / using the said facility as risk is involved in the case of other customers as well. * As per orders passed by Hon'ble Court of Chief Commissioner for Persons with Disabilities and RBI directives. 31. Locker keys should be embossed with Bank's name and Branch Code number. R. This will facilitate identification of Safe Deposit Locker on the basis of Locker keys seized by Income- Tax and other investigating authorities. RBI directives. Authorities can take quick action for blocking operations, seizure of locker-contents etc. .. -...,,

fititi

1-42 Rationale

REMITTANCE, COLLECTION, NEGOTIATION, BILLS, AND SBI CARD

Remittance 1. A Demand Draft payable to bearer cannot be issued by the Bank R. S 31 of the RBI Act prohibits issue of a bearer draft. It is punishable under Sec 58(b) of the Act. A bearer draft, if issued, will become virtually a currency note. 2. Indemnity is insisted on before the issue of a duplicate draft. R. Though rare, the original and the duplicate might be negotiated to two different holders in due course and the bank might be obliged to pay both of them. In such a case, reliance has to be placed on the indemnity of the purchaser only. Also, bank can insist on an indemnity from the holder for issue of a duplicate Negotiable Instrument (S 45 A, NI Act). 3. The payment of a Bank draft /10I cannot be stopped. R. Once a draft issued by the Bank is delivered to the payee; it becomes a Trustee for the Payee for the draft amount. Further, the Bank draft carries a promise of the Bank that it would pay 'Payee' or 'order' a sum of money for value received and third parties might have got title to the draft by negotiation. The bank has already received the value for the draft. 4. A person's passport or postal identity card may be accepted as sufficient identification for payment of demand drafts up to Rs. 25,000I-(Now, demand drafts for amounts exceeding Rs. 20000/- should be crossed A/c payee). R. As a measure of good customer service the practice has been introduced; one of the recommendations of the Working Group on Customer Service. The ceiling has been fixed with a view to limit the risk of loss in case of fraudulent encashments made on the basis of forged passports or postal identity cards. 5. The duplicate draft issued in lieu of the original reported lost in transit should not be paid by cancellation without the specific written consent of the payee concerned. R. Once the draft is sent by the Purchaser to the Payee, the Bank becomes a Trustee for the payee. Purchasers or other parties do not have any right or title to receive the proceeds at this stage. (Hence, without payee's consent or without proof that the purchaser has settled the claim of the payee by other means, the draft should not be cancelled). 6. The serial number of an 10I draft form used for issuing a duplicate draft should not be scored out. R. If the number is scored out, the machine may reject the draft while processing it leading to delay in and increased cost of reconciliation. 7. Customer should not be compelled to put the instruments (drafts, cheques etc) in Drop Boxes;however, he may, be persuaded to use the Drop Box facility. R. RBI has clad fed that the customer should have the option of either depositing the instument in the drop box provided or handing them over across the counter against acknowledgement. 8. Remittance facilities to cooperative banks are not available at non-currency chest branches. R. Non-chest branches do not keep adequate cash; they do not have adequate staff to transact such work; also, security arrangements are not geared for the same. RBI guidelines. 9. Drafts are not to be issued on Associate Banks at those centres where our branches are established. R. This will avoid cross-drawings and contribute to the over-all efficiency in cash management. 10. A Draft should not be issued by a branch on itself. R. A draft is a Bill of Exchange; In a bill of exchange, three parties are involved - Drawer, Drawee and Payee. (Such drafts, if issued, will only operate as a promissory note). Hence, to simplify matters, it has been prescribed that local payments effected by the branch should be by means of a Banker's 1-43 MM Special Guide , cheque. Also, draft is a remittance instrument and not a 'payment' instrument. The signature of the payee of a draft should not be attested at the back of the draft by an I+ 11. official at the draft-issuing branch. R. In the past, the fraudsters have forged the signature of the official who has signed the draft and made forged identification of payees. Such a practice will reduce the level of care at the paying branch which might result in fraud and forgery. RBI instructions. 12. Demand Drafts should not be signed in red ink by the signing officials. R. The red ink pigment is relatively very unstable and hence will fade away in due course; further, it may be washed off quickly by water etc. 13. Validity of a Draft is now restricted to 3 months. R. The draft is a remittance mechanism and hence should be valid for a very short time in modem times with fast communication and wide banking facilities. To ensure that the instrument is not in circulation for an unreasonably long time; the risk of manipulation, alteration etc minimised. It is an established banking practice to prescribe validity period. Recently reduced by RBI under S 35A, BR Act. 14. A discharge on a revenue stamp is obtained from the purchaser of the draft while cancelling a draft. R. It is regarded as a receipt for payment and hence it is stamped as receipt under the Stamp Act. RBI has advised that a discharge over the revenue stamp should be obtained, whether the payment is made by credit to account or by cash. The proof of payment will be easy in a court, if need arises. 15. The branch telephone numbers (including STD Code number) are printed on drafts, bankers cheques, deposit receipts etc. before these are put to use at the branch. R. This will help other branches, banks and customers to seek immediate clarification without any loss of time where necessary, from the issuing branch; will help prevent frauds at the time of payment. Customers can readily contact the branch for any clarifications. 16. Hologram has to be affixed in the drafts for Rs.1 lakh and above against the payee's name as also on letters of credit and guarantees issued by the bank irrespective of the amount. R. It is an additional protective measure. These are instruments which are sent to third parties and any attempt to tamper these instruments will put the beneficiary on the alert. To prevent frauds and protect the Bank's interests. 17. I01 has been introduced (SBI). R It is a single design security form covering the three products - SBI drafts, Banker's cheques and Associate Bank drafts. It has improved security and reconciliation processes. It is a BPR initiative. 18. RBI has reduced the validity period of cheques and drafts to 3 months. R To discourage people who have been taking undue advantage of the longer period of such instruments by circulating them in the market like cash for six months before encaslunent. By reducing the validity period of such instruments, the unhealthy practice in the market will be curtailed. It is an RBI directive issued under Section 35A of BR Act. .. ,,, 19. Demand Drafts for Rs.20,000/- and above are now issued with Account Payee crossing. R RBI has advised all the banks to issue drafts for Rs.20,000/- and above duly crossed "Account Payee" to discourage unscrupulous persons from using drafts without any crossing for transferring money as an alternative to settlement through cash. Once such drafts are crossed, the payment can be made only to a banker for credit of the payee's account. Such irregular practice will be eliminated. 20. Cash should not be accepted for issue of drafts for Rs.50,000 and above R. As per KYC guidelines and to curb circulation of black money in the Economy. 21. Duplicate drafts can be issued without surety upto Rs.50,000/= for valued constituents. R. To improve customer satisfaction to valued constituents. To remove major irritant for such valued constituents in completion of formalities like arranging for sureties. A ceiling has been fixed for limiting the risk. 1-44 ...... — Rationale

22. Before a duplicate draft is issued to the purchaser, a written confirmation should be obtained from him stating that the original has not been delivered to the payee. R. On issue of draft a privity of contract is established between the Bank and the payee. Banker wil get protection only if he obtains a letter of concurrence from the payee. 23. A demand draft presented in clearing should not be dishonoured for reasons such as issuing branch's code number required, draft not signed, hologram not affixed, amount in words and figures differ, etc. R. It will amount to deficiency of service under Consumer Protection Act. In case the customer makes a complaint to the Consumer Forum, the bank will have to pay compension as well as costs, in addition to having adverse publicity. Customers should not be inconvenienced for the mistakes committed by our branch staff, and the problem should be resolved by the drawee branch contacting the issuing branch.

Collection 24. Interest is paid to customers if the collection of cheques is delayed beyond the stipulated period. R. To reimburse the customer with loss of interest on account of delay. RBI directive. To create consciousness among staff about the need for prompt collection and thereby increase efficiency and customer satisfaction.

Negotiation / Discount / Purchase of Cheques / Bills 25. Advance against collection bills is not considered as good as discount of bills. R. In respect of 'bills discounted' the banker is a holder and can sue the parties to the bill in its own right; further the liability should be met by the parties on a definite date in due course; otherwise, the bank can sue for non- acceptance/non payment. Thus, it is a self-liquidating advance.In the case of advance against bills the drawee may set off his claim against the customer; further, the debt is not assigned to the Bank. 26. Advances against clean bills form a small portion of advances against the total bill purchases. R. It is prudent to advance against documentary bills as the goods covered by the bills will be hypothecated to the bank; it will enable the bank to recover the dues in case of failure of the parties. Also, it is preferable for a bank to limit clean exposures as high provision has to be made for unsecured exposures. 1 27. In the case of a cheque (presented by us) returned in clearing the relative credit voucher is not destroyed. Instead, a separate debit voucher will be prepared for debiting the customer's account. R. The customer would have been given the relative counterfoil with the bank's acknowledgement. The credit voucher and the debit voucher together will explain the transaction, so that the customer cannot stake his claim for the credit based on the counter-foil.

Bills 28. Usance bills have to be presented to the drawee for acceptance. R. In a usance bill, the drawee is not liable until and unless he accepts the bill. Hence, the bill has to be presented to him promptly for his acceptance as per NI Act. 29. Dishonoured bills have to be protested and noted, if required by the lodgers of the bills. R. It is a proof that the bill has been dishonoured either by non- acceptance or non-payment. Proof of dishonour would be easy in a court.

1-45 $

MM Special Guide 30. Bills returned unpaid should be marked with "without recourse" endorsement before they are ei''' banded over to the lodgers. R. Such an endorsement is a notice to the lodger (and other subsequent endorsees, if the lodger endorses the bill to a third party) that the Bank will not be liable on the bill (Sec. 50 of N.I. Act). 31. RR accompanying a Bill should not be in the name of the consignee. R. This will obviate the possibility of the consignee/third parties taking delivery of the goods without the Bank's endorsement, in case the RR falls into the hands of the consignee/third parties, through oversight. Also, if it is in a negotiable form the Bank can pass on the title to the drawee against payment by endorsing the same. 32. The usance bills must be accepted by the drawee as payable at the drawee branch. R. If the place of payment is not stated, the Bank has to make a demand on the drawee at his place of business which will result in delay. It is an established practice. 33. Pro-forma control entries are passed in respect of L.B.Cs (and not in respect of LSCs). R. As an agent for collection of the usance bill, the Bank has to present the bill for acceptance, follow up payment, advise non-payment etc. Hence, contra entries are passed. LSC bills are demand bills and are payable on presentation; hence, no need for accounting control in respect of LSC bills. 34. Railway Receipts accompanying bills given to the Bank for negotiation should not be older than 7 days from the date of negotiation. R. The goods might have arrived at the destination; the risk of goods being taken delivery by the consignee by executing an indemnity is also there. Further, at a few larger centres, the Railway authorities may sell the goods if they are not cleared by the consignees within 7 days. 35. Contra-entries in respect of overdue bills should not be reversed on the due dates, if they are not paid. R. Contra-entries are passed to keep a control over the outstanding bills and hence should be reversed only when the bills are paid or returned unpaid ultimately to the originating / negotiating branch. 36. The Bank's interest in goods covered by B.L, R.R. etc. should be advised to the carrier. R. To obviate the possibility of the consignee obtaining the goods by executing indemnity. Such notice is given in respect of BBRs/DBRRs, in which cases the Bank has advanced against the bills. 37. Opinion has to be compiled on borrowers/discounters of bills. R. To ensure that the parties are honest, credit-worthy and persons of integrity. To ensure that only genuine trade bills relating to the trade or buisness of the borrowers are discounted; also to ensure that the quantum of limit corresponds to turnover, means etc. Opinion contains the Total Means and Break up Worth of the borrowers/parties. 38. The usance bill, if dishonoured, requires noting and protest, but not a cheque or a draft. R. Unlike a draft or a cheque which is payable on demand, a usance bill is a time bill and acceptance of such a bill establishes liability. Dishonour of such a bill after acceptance needs to be noted/protested which serves as a proof of dishonour if the holder requires the same. In the case of dishonour of draft or cheque it is returned to the payee which itself is a proof of dishonour. 39. Usance bill is stamped whereas Demand bill is not stamped. R. Usance bill is payable only after a fixed tenor from the date of the bill or from the date of acceptance of the bill. Once it is accepted the liability of the drawee is established. It has to be stamped as per the Stamp Act. An unstamped usance bill will not be accepted in the court as evidence in the event of litigation: (A demand bill is payable on demand or on presentation and does not require to be stamped as per Stamp Act). . 40. Why the legend "Payable at State Bank of India, -- Branch" should be noted in all the Usance Bills immediately after acceptance? R. This serves as a notice to the drawee that he should come over to that branch for retiring the bill. Otherwise as per NI Act the usance bill has to be again presented to the drawee at his place for 1-46 Rationale

payment on the due date. SBI Card 41. The Bank has formed a subsidiary company for providing credit card services. R. Credit card is an important complement of Personal segment business which is profitable; credit card has become a favourite mode of payment for purchases by high income earners. To capture this market and to meet competition, the Bank has entered the business; a separate subsidiary company will enable the bank to market the cards in a cost-effective way, build a good brand - image and also take quick and adequate safeguards for preventing frauds/loop-holes in the business. 42. SBI is promoting SBI card in a big way. R. a) Credit Card business has considerable unexploited potential. Card spending has grown considerably and is expected to grow further substantially in the corning years. b) With a huge network of retail outlets in the State Bank Group we are in an advantageous position vis-a-vis our competitors. c) The card market will provide an exciting opportunity to our bank to improve its bottomline through cross-selling of different credit card products. MM Special Guide DEPOSITS

Legal 1. Paying banker is not concerned with the account payee crossing. R. The 'Account Payee' crossing is a mandate to the collecting banker; he has to ensure that the cheque is not collected for a third party. This mandate is not addressed to the paying banker (Note: However, it is banking practice for the paying banker to return cheques if thrid party endorsements are found on them as payment may be termed as "not in due course"). Current Account 2. No interest is paid on Current Accounts. R. Current accounts are opened generally for business entities to enable them to settle their financial transactions smoothly. The entities are able to comply with legal requirements, avoid cash transactions which are risky. Other benefits are proof of payment, ready independent record of transactions etc. Also, they need not keep large amount of cash in their custody. RBI instruction.(Note: Historically banks do not pay interest on current accounts for the above reasons. It must be noted that banks incur cost in and take the risk of keeping large quantities of currency, shroffing, safe-keeping etc as well as provide a record of transactions, irrefutable proof of transactions etc)

Savings Bank Account 3. Savings Bank Accounts are not opened for Companies and Firms. R. Savings Bank Account is meant to encourage thrift and savings among individuals. Companies and firms require a bank account to carry on their day to day transactions. Hence, RBI has imposed the restriction that ordinarily no SB a/c can be opened for a trading concern. 4. Even though a contract with a minor is void, the Bank opens an SB a/c in the name of a minor. R. To enable minors develop banking habit as well as to encourage thrift in them; the ceiling on the deposits is comparatively low. The Bank has taken a calculated commercial decision. Also, withdrawal is restricted to the minor only against his receipt and hence receipt of the moneys cannot be denied by him. 5. A New a/c is opened with deposit of cash. R. It is an established banking practice to open new accounts with cash deposit after ascertaining the bonafides of the person and after carrying out due diligence for KYC. The Bank gets collecting banker's protection under NI Act. (Note: In exceptional cases, an account can be opened with a cheque deposit, after completing KYC; under Financial Inclusion drive, a/cs are opened with Nil balance.) 6. Savings Bank Account mobilisation is given importance by Banks. R. Savings Bank deposits, like Current a/cs, are low cost deposits. Also, sizeable balances in these accounts are almost permanent. In view of reducing interest rates on advances, the overall cost of deposit would come down, increasing the spread. NIM would go up. 7. Banks open Savings Bank a/cs after due diligence under KYC. R. To curb opening of benami accounts; it will enable banks to identify customers quickly and prevent impersonation. Transactions can be put through fast as photographs are obtained. The protection as a collecting banker under the NI Act is available only for collection for the account of a customer on whom KYC has been done. It is also to ensure that the Bank opens accounts only for honest and law- abiding persons. To prevent money laundering, terror financing etc. RBI guidelines. 8. The Bank has introduced Premium Savings Account. R To offer an enriched version of Savings Bank account with the benefit of various concessions and add-ons targeted at high-end customers. Add on benefits such as auto sweep, MOD, ATM Gold Rationale

debit card are available. Time Deposits 9. Term Deposit Receipt is not signed by the authorised official over a Revenue Stamp. (Cf:money receipts) R. TDR issued by banks is exempted from stamp duty under the Stamp Act even though it is a money receipt. 10. The rate of interest applicable for premature payment will be the rate applicable to the period for which the deposit has remained with the Bank or the Contracted rate whichever is less minus 1% for deposits above Rs.5 lacs. R. With the liberalisation of interest rates, interest rates may not be in the ascending order vis a vis the period. Hence, in some cases, the depositor may become eligible for higher interest for a lesser period, in the case of premature closure. Hence, the penalty is applied on the lesser of the contracted or applicable rate, whichever is less. Otherwise, the purpose of prescribing a penalty will be defeated. H. Multi-Option Deposit Scheme has been introduced. R. The product gives liquidity to the depositor; he can avail either an overdraft against the deposit or withdraw a portion of the deposit. Under MOD, automatic facility of loan or withdrawal is provided when the deposit is made.. No further formalities are involved. 12. Paying banker is protected even if an endorsement on a cheque happens to be forged. R. It is the collecting bank's responsibility to ensure that it collects for the true holder of the cheque; further, the paying bank has no means of verifying the signature of the endorsees in a cheque. 13. TDRs are not transferable by endorsement and delivery. R. Term deposits are not negotiable instruments and are not govemed by NI Act. TDR is a debt and therefore is an 'actionable claim' which can be transferred only by way of Assignment under Transfer of Property Act. 14. TDRs are accepted up to a maximum period of 10 years. R. The bank loans are granted for long periods.The bulk of bank deposits are for short periods. Therefore, there is a built-in maturity mismatch in the Asset Liability Portfolio. This relaxation has corrected the ALM mismatch to some extent. (Note: Some years ago, the maximum deposit period was less than 10 years. 15. If a senior citizen does not want to make a nomination on his deposit a/c, suitable letter has to be obtained from him. R. Nomination facility should be offered to the senior citizen, as it will ordinarily give him/her a sense of comfort (RBI). It will also be easy for the Bank to settle the deceased a/c. The letter will make it clear that the depositor had taken such a decision consciously. To ward off legal complications, in future. 16. Term Deposit Receipts are not transferred by endorsement whereas drafts are transferred by endorsement, R. TDR is a receipt and not a negotiable instrument. The interest in TDR can be transferred by assignment and notice. Drafts are negotiable instruments and as such title can be transferred by endorsement and delivery.

Payment of Cheques 17. A cheque in which crossing has been opened can be paid only to the drawer or his known agent. R. There is a possibility of forging the drawer's signature appearing on the cheque while opening the crossing which will result in the loss of statutory protection to the paying banker. Such cheques , are not paid over the counter to third parties. IBA's advice to banks.

1-49 MM Special Guide

18. Cheques payable to a firm should not be credited to the private account of a partner without the concurrence of the other partners. R. Prima-facie, the payee of the cheque is the firm and crediting the proceeds to any other account will expose the bank to the charge of 'conversion' (Note: Legally a Partnership account may be maintained in the name of a partner. The bank has to get the approval of all the partners to credit the proceeds of the cheques payable to the firm to the account of the partner. Cf: Crediting of a cheque payable to a company to the account of the Managing Director of the company; also crediting of a cheque payable to a Trust a/c to the personal account of the Trustee: these are not permissible). 19. A specially crossed cheque is paid only to that bank. R. Under 5127, NI Act, a cheque specially crossed to a Bank should be paid only to that Bank or the collecting agent of that Bank. If the payment is made to any other bank, the paying banker's protection would not be available. . 20. While effecting payment in a SB A/c against 'withdrawal slip' the Teller/SWO should brand the slip with a stamp reading 'Pass-Book Scrutinised' under his initials. R. To ensure that the Teller/SWO calls for and scrutinises the Pass book as per laid down procedure. With a view to prevent forged withdrawals without production of the Pass book. 21. A Cheque crossed Not Negotiable and endorsed to a third person is paid in clearing, if otherwise in order. R. The cheque marked 'Not Negotiable' is still transferable and hence can be paid to the endorsee. Non- Negotiable crossing affects only the negotiability of the cheque and not its transferability. The subsequent endorsee will not get a better title than the endorser. 22. Even a small value cheque has to be referred to the Accountant/Branch Manager in the Cheque Referred and Returned Register before its return. R. The retum of a cheque has to be decided keeping in mind the over-all relationship/value of the customer to the bank. Hence, very senior level branch management has to decide it. Granting of overdraft also has to be decided in the same way. Return of a small value cheque will damage the credit of the cn customer seriously. Recording in this register the reasons for the return of the cheque would enable us to provide evidence in a court etc. 23. When a cheque is returned unpaid noting and protesting is not necessary. R. a. It is not provided for in the NI Act b. The reason for the dishonour of the cheque is advised to the tenderer of the cheque in the Return memo along with the return of the dishonoured instrument which will serve the purpose. 24. Cheques returned for want of funds should be marked " insufficient funds". R. In order to enable the payee of the cheque to proceed against the drawer by filing a criminal case under section 138 of NI Act. Supreme Court Judgement also supports this view / IBA's advice. 25. Payment of a cheque is not made after banking hours. R. A cheque should be presented for payment during the business hours of the Bank as per Sec 65 of NI Act. Otherwise it may not be a payment in due course as per Sec 10 of N.I Act and the banker may not get protection under section 85 of NI Act. 26. Cheques drawn by a power of attorney holder are not paid on receipt of notice of death of the account holder. R. According to Sec 201 of Contract Act the contract of agency gets terminated on the death of the principal. Mandate given to the Banker ceases to exist. Operations are stopped and the cheques are returned with the remark "Drawer's title requires confirmation". 27. Crossed cheques are not paid over the counter but paid only when presented through a bank. R. According to Sec 126 of N.I.Act payment of crossed cheques has to be made through a bank only; otherwise the banker will be liable to the true owner of the instrument as per section 129 1-50 Rationale

of NI.Act. 28. The cheque drawn by the director of a company is paid even after his death; but a cheque drawn by a partner of a partnership firm is not paid after his death. R. A company has a legal status independent of that of the shareholders. It is an artificial person which has perpetual existence, limited liability and a common seal. So a cheque issued by the company has to be paid even after the death of the directors. Partnership is dissolved on the death of a partner. Clayton's rule will apply.

Trust Accounts 29. Trust deed has to be verified before opening a Trust a/c. R. The bank has to ensure that the funds of the Trust are utilized for the purposes of the Trust in terms of the Trust deed and that the trust funds are not utilised for purposes other than the trust purposes. Also the conduct of accounts must be as per the Trust Deed. The Bank will be liable for breach of trust arising out of negligence. 30. The Administrator/Executor of the estate of a deceased cannot delegate his powers to operate on the bank account. R. These are fiduciary capacities and hence delegation is not permissible. They have to personally ensure that the fiduciary funds are dealt with as per Will, Letters of Administration etc. 31. The trust accounts are closely monitored by the Branch Manager/Manager personally. R. This is to ensure that trust provisions are not violated in the conduct of bank account. Further, a banker has to be extra-cautious while dealing with Trust accounts, because, for any negligence the bank may be held a party to breach of trust.

General 32. Notice is served before exercising right of set-off. R. A statutory notice has to be served on the borrower requesting for repayment of the loan before exercising the right of set off. 33. Insolvency proceedings are not initiated against minors. R. A contract with a minor is void as per section I I of the Indian Contract Act. This protection is given to the minor to ensure that he will not incur any liability by way of debts. An Insolvent is a person who is incapable of entering into contracts. As a minor cannot enter into a contract for debts he cannot be declared insolvent. 34. Partnership letter (COS 37) is required to be signed by all the partners. R. This letter empowers the firm to open the account; In this form the partners declare the names of all the partners; the names of the partners who are authorised to operate on the a/c are also mentioned; they also undertake to advise the bank of any change in the constitution. Thus, the letter binds all the partners to these terms and protects the bank against any changes in the constitution etc. 35. Nomination is insisted in deposit accounts. R. (With the setting in of mass banking, the volume of deceased accounts has increased significantly). Settlement of deceased a/cs by obtention of succession certificate or through other legal processes has become time consuming, costly and vexed. To facilitate smooth transfer of assets, nomination is now available. -... 36. Nomination is obtained in favour of one individual only. R. Nomination for bank deposits has been introduced with the objective of settling deceased accounts without delay. The depositor has also the satisfaction that the monies will be paid to the person desired by him after his death. If more than one person is nominated, the settlement process will be delayed. Anyway, it is the duty of the nominee to account to the legal heirs the monies received by him. 1-51 MM Special Guide 37. RBI has asked banks to make available Basic Savings Bank Deposit A/c (formerly called No Frills A/c.) R. To make banking services accessible to more people. RBI has advised that such accounts should have "nil" balance. The prescription of high minimum balance by some banks has led to the exclusion of large number of people from the banking arena. It will act as a level playing field among foreign / private banks and public sector banks. It is focussed on common man to make him open Bank account free of cost. 38. No introduction' is necessary for opening accounts for public limited/private limited companies. R. A company acquires legal status once it obtains the Certificate of Incorporation from ROC. A scrutiny of the MA and the AA will show whether the company is authorised to open an account. The Resolution of the Board of Directors empowers the company to open the account. 39. Accounts of other Banks not established at the centre should not be opened by our branches (without approval of the CA.) R. Accounts of other banks are opened to enable settlement of mutual dealings at a centre. If an a/c is opened for a Bank not established locally, that bank will use the account for carrying on its banking business at that centre using our services. 40. When an account is not conducted properly in spite of the bank's advice, we can now close the account and send the balance as a bankers cheque to the customer. R. Irregularly conducted a/cs are a source of danger to the Bank and must not be allowed to continue. IBA, in consultation with RBI, has taken the view that such a/cs can be closed forcibly if cheque return/ECS mandate failure takes palce 4 times in a financial year. Due notice has to be given. 41. The first debit to an inoperative a/c must be referred to the branch manager for authorisation to pay. R. In an inoperative a/c there will not be any operations for 24 months and this practice provides for an additional verification of the genuineness of the signature by a very experienced and senior officer. It also provides for a general scrutiny by the manager that the circumstances of the debit are normal (eg: endorsement, date of the cheque etc.) 42. Confirmation of debit balance requires to be stamped. R. Confirmation of debit balance operates as an acknowledgement of debt which, as per Stamp Act, attracts stamp duty. 43. While opening an account for a JHF engaged in trading, a JHF letter (COS 38) signed by all the adult co-parceners must be taken. R. COS 38 presumes that the business carried on by the JHF is an ancestral business. It thus binds all the adult co-parceners including Karta to the borrowings in case the business turns out to be not an ancestral one. It also binds automatically the minor's share in the ancestral property. 44. When a minor attains majority, he is required to sign the existing JHF letter; a fresh JHF letter signed by all adult co-parceners is also taken. R. Karta's actions and borrowings bind the JHF property including the minor's share if they relate to ancestral business. The signature is obtained, as a measure of abundant caution, ratifying the previous transactions; he cannot question them thereafter even if the business turns out to be not an ancestral one. The fresh letter is a protection for future transactions. 45. Partnership letters, JHF letters etc. obtained by the bank from account-holders are not entered in the Power of Attorney Register. R. These letters are executed by the account-holders in the bank's standard forms and are kept by the Bank in original (for later reference as evidence of contract). (Note: Only such of those documents which require to be returned to the customers have to be recorded in the P.A. Register eg: Death Certificate, Power of Attorney, Probate etc. photo-copies 1-52 Rationale

of originals where considered necessary are also obtained and kept). 46. No account can be opened in the name of an undischarged insolvent. R. Insolvency is legal death. An undischarged insolvent is legally not competent to enter into a contract. The court-appointed Receiver alone has the legal capacity to represent him. 47. The Bank has issued Cash Plus. R. It is a debit card cum ATM card. Can be used for both cash withdrawal in the ATMs and at merchant establishments. It is issued under Maestro logo; hence, the card holder has wide access to merchant establishments. Surveys indicate that customers prefer debit card i.e a card that can be used to draw on the deposit balances in their bank accounts. 48. Before a Current account/Savings Bank A/c is transferred to inoperative account, the customer is advised of the bank's intention one month ahead. R. It may induce customers to re-activate their accounts; it will create a better image of the Bank in their minds and thereby strengthen our relationship with them. Some time ago, RBI has also advised banks accordingly. 49. Banks do not issue cheque book to a Public Ltd Co. before subscription of its initial issue of shares to the public is complete. R When a Bank has agreed to act as the Company's Bankers to the Capital issue, a current account can be opened for the Company. Only the share-monies received from the applicants can be credited to the account. Cheque book should not be issued to the Company. If the minimum amount is not subscribed (90% of the issue), the balance in the account has to be paid in one lump sum to the Directors of the Company. It is the responsibility of the directors to return the application-monies to the tenderers. 50. Banks are now given the discretion to quote interest rates on deposits. R. This is in tune with RBI's policy of gradual liberalisation of interest rates. Banks have now the flexibility to quote competitive rates. They will be able to manage the Asset Liability mix through the pricing mechanism. 51. When an account is opened in the name of a partnership firm, the signature of the minor partner is not obtained but his signature is obtained if a personal account is opened in his sole name. R. Minor is admitted to the benefits of the partnership; he cannot become a partner and hence he will not be liable to pay the partnership debt. Hence, his signature is not obtained while opening an account in the name of partnership. When an account is opened in his sole name, his signature is obtained as he will be-the account holder operating the account. To verify the genuineness of his signature when payment against Withdrawl slips are made. 52. The E or S contract is effective only on maturity and any mandate during the currency of the deposit should be signed by, both the depositors. R. The legal position in a typical `E or S' deposit is that the bank agrees to repay the deposit on the date of maturity to either of th,Klepositors or the survivor in case of death of one of the depositors. The E or S contract does ,not mention about the manner of dealing with the deposit prior to the maturity date. Hence, during the currency of the deposit, both the account holders should instruct the bank.(e.g.: Premature payments). Also Supreme Court decision in Anumati vs PNB. (Note: In SBI the depositors agree in the a/c opening form that the deposit can be paid to one of them before maturity). 53. Although a minor cannot enter into a contract, deposit accounts are opened in his single name. R. Only TD a/cs / SB accounts (and not current a/cs) in the names of minors are opened and that too for small sums only. It is a calculated business risk taken with a view to spread banking habit among minors. Also, to meet competition. As no cheque book is issued and payment is made by `withdrawal slip', the bank can ensure that payment is only made to him. He cannot deny receipt 1-53 MM Special Guide of the moneys. 54. Interest rates on NRI deposits are changed periodically. R. India's forex reserves have increased considerably of late. Now interest rates are kept internationally competitive so as to attract only genuine savings of NRIs and prevent arbitraging. International rates have also come down. RBI has been judiciously increasing/decreasing the max interest rate based on international market situation. 55. FCNR (B) deposit can now be a accepted up to 5 years. R. To meet the demand for foreign currency loans from corporates for longer periods up to 5 years. Banks can now manage ALM mismatches more comfortably. 56. RBI has directed banks to obtain photographs in respect of all deposit accounts with some exceptions. R. To curb opening of benami accounts; it will enable banks to identify customers quickly and prevent impersonation. Transactions can be put through fast. KYC requirement. 57. Individual nomination form is obtained for each TDR of the depositor. R. It will ensure that no delay/mix up takes place in the payment of different TDRs as and when they fall due. It will be cumbersome/laborious to make entries in the form relating to different TDRs if a single form is obtained. The depositor has the freedom to nominate different persons for different TDRs. It is a statutory requirement. 58. The Bank provides the facility of savings Account opening through its website. R. It facilitates the customer KYC requirments of the Bank. Enalbes the customer to open accounts at his convenience. Facilitates the Bank's marketing efforts. 59. No nomination is permitted on loan accounts. R. No one can make it obligatory for his legal heirs to pay for his debts, unless he leaves property to them. (Hence, no nomination on loan accounts). Hence, Nomination relates to deposits and a few other assets only under the Banking Regulation Act. (Note: A legal heir is liable to repay the debts of a person only to the extent of assets inherited by him). 60. Banks should display time-norms at branches. R. This gives assurance to the customers that the Bank would adhere to the committed timings. It serves as a reminder to the staff to provide prompt and efficient service within the time stipulations. As per Banking Codes and Standards Board of India (BCSBI) guidelines. 61. All the Banks do not offer uniform rates of interest on deposits for the same maturity periods. R. Under the de-regulated environment, banks have more flexibility in quoting interest rates. Banks decide on interest rates based on their Credit/Deposit mix as well as the cost of operations. The rates are influenced by competition also. 62. IBA has introduced Code for Banking Practice. R. It is intended to promote good banking practices by setting out the minimum standards which banks will follow; to foster customer confidence; to inculcate self-discipline amongst Banks and to promote healthy competition/ethical practices. 63. A depositor can nominate only an individual but not a Trust/ society/institution to his deposit a/c. R. According to nomination rules, only individuals can be nominated. Further it is a facility extended to individuals for smooth transfer of assets to the nominee without any need for a legal representation. In almost all cases, the nominee will be the legal heir, so that the smooth transfer of bank balances of deceased persons to them would take place smoothly. 64. Banks accept only unconditional power of attorney. R. It will be difficult for the bank to ensure that the conditions are complied with by the power of 1-54 Rationale

attorney holder. Hence, it will be risky to accept a conditional power of attorney. (eg: "A is authorised to operate while I am out of India"). 65. Payments against withdrawal slips in SB a/c will be permitted to the account-holder only against the production of pass book. R. There has been a number of frauds/attemped frauds by using withdrawal slips, which can be freely obtained at the branch. Hence payment by withdrawal slips is permitted only to the a/c holder; also, only if pass-book is produced. To protect the bank's interest and customer's interest. 66. Whenever a minor attains majority, he should be asked to sign existing partnership letter in addition to the fresh partnership letter. R. Minor is only admitted to the benefits of partnership as per section 30 of Partnership Act. His signature is obtained on the existing documents as ratification of the previous transactions. Signature on fresh documents is taken to bind him for future transactions. 67. The word `Depositor' in the SB withdrawal Form has been substituted by the word "Account Holder". R. While signing the withdrawal form, the account holder does not make any "deposit" into the a/c. The nature of the transaction is made apparent by the change. 68. DD purchase cheques are debited to savings bank/Current accounts even after information is received about the death of the account holder. R. In respect of DDs purchased the transaction is completed when the DD is purchased. Here the relevant date of debit is the date of purchase of the cheque at the other centre and not the date of making the entry in the ledger account. Anyway, the estate of the deceased is liable for the amount. Nowdays, DDP (ch) transactions are rare) 69. Low cost deposits are better than term deposits. R. If low cost deposits are attracted, the bank will have the benefit of wider spread and therefore higher profits. The interest rates on low cost deposits are not subject to wide/frequent variations. This is not so in the case of term deposits. Also, SB/CA with small balances are relatively permanent. 70. The bank has to strictly comply with instructions regarding TDS (Tax Deducted at Source) R. Otherwise, the amount will be recovered from the Bank as if it is the assessee; the amount can be recovered as a revenue recovery item.Further, the particular official will also be liable for penal action. 71. TDRs are not presented in clearing. R. Clearing House has been established to clear all negotiable instruments and settle the claims among banks each day within a tight time-frame. Any delay will upset this drill and lead to difficulties for the bank and customers. Processing of non-negotiable instruments like TDRs will result in delay and dislocation of the smooth functioning of the Clearing House.Also, interest-element, lien on the TDR etc would delay fast processing / settlement. 72. Nomination is extended to proprietorship firm also. R. In the sole-proprietary firm, the owner is a single person. In effect there is no difference between the sole proprietorship a/c and the individual a/c. Hence , RBI has advised banks to extend the facility to proprietorship firms also so that deceased a/cs can be settled smoothly and fast. 73. The signature of the nominee is obtained duly verified by the depositor in the case of deposits accepted from senior citizens. R. This is done as a measure of extra service to the senior citizen; he will have the comfort of knowing that the monies would be paid after his death to the person of his choice. As the signature is verified, identification of the nominee and settlement process would be easier and quicker. ' 74. The name of the nominee may be written on the face of the TDR or in the savings bank pass book of the customer, if requested by the depositor. R. This will give comfort to the depositor that the TDR amount would be paid to the nominee after his life time. Also, it will be easy for nominees to approach the Bank for payment after the death of depositor. 1-55 MM Special Guide It is one of the recommendations of Goiporia Committee. 75. Payment of TDR of Rs.20,000 and over is not made by cash. R. As per Section 269 of the IT Act if the amount of the term deposit is Rs.20,000 or more it must be paid by an account payee cheque or by credit to depositor's bank account. This provision has been made in IT Act to curb benami transactions which lead to tax evasion. If the said provision is violated the bank's official concerned will be liable to pay penalty. 76. Depositors of the bank are treated as unsecured creditors. R. Even though the bank/depositor relationship is that of a debtor/creditor, the depositor does not hold any security or charge on the assets/properties of the bank. Inasmuch as the deposit is unsecured he is referred to as an unsecured creditor. 77. TDS on Bank Deposits (TDR) has been Introduced. R. It is an effective method of bringing in more assessees to the tax fold. IT dept can have better control over the banks in its implementation. Interest is also an income like Rent, Service earnings etc.which are subject to TDS. 78. The Bank has introduced universal Pass Book. R To provide convenience to the customers for all Bank products. To eliminate problems while printing due to non-standardised measurements, problems of non- alignment, overlapping of printing etc. For better customer service. 79. Compliance of KYC norms is insisted not only for deposit accounts but also for loan accounts and lockers. R. KYC guidelines are based on the recommendations of Financial Action Task Force (FATF) which is an inter- govemmental body that develops and promotes national and intemational polices to combat money laundering and terrorist financing. Non-compliance of this could lead to global money-laundering, terror financing etc. It is insisted in loan accounts to ensure that banks do not lend for illegal activities, finance terrorist activities; and in the case of locker facility it is to ensure that the bank's lockers are not used for carrying out anti-social terrorist activities. 80. In case of Joint accounts with no survivorship benefit, banks continue the deposits even after the death of one person and do not close the account. (or will not advance to the Survivor) R. In such accounts the balance is payable to the surviving depositor and the legal heirs of the deceased; further the survivor is not entitled to avail any advance in the case of Joint accounts with no survivorship benefit. 81. Banks hold deposit mobilisation campaigns. R. The Bank's predominant resource base is 'deposits'. Systematic and planned efforts are necessary for building up deposits in as sustained manner. Planned efforts will help acheive cost effectiv mis of deposits. ALM can be managed better. Any slackening in the efforts will affect he resource base int eh long run 82. We pay interest to legal heirs on TDRs (during settlement of claims) even though the deposit period has expired. R. The Bank has had the benefit of the funds; This also shows the Bank's concem for giving relief to the legal heirs. RBI directives. 83. Customer Service is given importance by banks. R. An efficient customer service would enable the bank to enhance its image, expand business and widen the clientele base. Bank can effectively meet the competition. 84. In a joint a/c after the death of one of the a/c holders, no premature withdrawal or loan is permitted by Banks to the Survivor(s). (IBPS Rationale). R. The legal heir of the deceased might be a different person than the survivor. He may be able to prove his claim against the Bank. If a loan/premature payment is made to the survivor, the Bank may find it 1-56 Rationale

difficult to recover the same. (P1 see position in SBI). 85. A TDR is paid on the succeeding working day if it falls due on a holiday whereas a bill of exchange is paid on the preceding working day. R. Under S25 of NI Act, if a bill of exchange falls due on a holiday, it is deemed to be due on the immediately preceding working day. The uniform rule helps business people to discharge their liabilities on the due date and to arrange for smooth banking transactions. The Banks pay interest for the holiday if the TDR matures on a holiday in terms of RBI instructions, as the benefit of funds is enjoyed by the banks. Hence, the TDR is payable on the next working day. RBI instruction. (Note: If the term deposit is repaid the previous working day, the customer will lose one day's interest, which will affect his benefit). 86. Pay in slips, withdrawal forms have been redesigned. R. To incorporate new features viz. Home Branch, PAN No, contact No of the customer, post CBS. To bring in uniformity in pay-in-slips/withdrawals used in different circles. For better customer service and customer convenience. 87. Settlement of claims in respect of missing persons has been revised by the Bank. R. With a view to alleviate hardship to claimants in respect of missing persons. In line with RBI instructions.Settlement up to Rs. 1 lac can be made subject to conditions. 88. Balance in accounts opened with liberalised KYC should not exceed Rs. 50,000/- at any time. R. i) The restriction will prevent the account being used for money laundering purposes by unscrupulous persons; also will curb unaccounted moneys being put through the account. ii) Will enable the common man to avail banking facilities without much hassles, as their income will be low and the ceiling will be sufficient to cover their needs. iii) If customer needs to keep higher balance or to put through larger volume of transactions the a/c can be converted into a full KYC-Compliant a/c. 89. Birthday greetings are sent to minors on their attaining majority. R. A Minor, on becoming major, will be Bank's potential customer. Hence a greeting is sent as a gesture of goodwill. Also to establish a long standing relationship with him. Further, the bank can market its products like educational loans, mobile banking services etc. that would suit his future requirements. There is scope for attracting valuable business on their becoming major and getting gainful employment etc.

• 1-57 ;;" MM Special Guide FOREIGN EXCHAT

1. Only specified branches are authorised to handle forex transactions. R. (i) Forex business is concentrated at relatively fewer centres compared to the total number of branches. (ii) Consolidation of transactions / and centralised reporting to RBI will be faster as also the overall control of the business. (iii) RBI can monitor the forex business more efficiently and compile BOP data promptly. 2. Adding confirmation to the Letter of credit is not done at the branch level but the proposal needs to be referred to GMUK. R. On account of the volatile international situation, the current standing/position of many banks especially in Africa, Asia, and South America will not be known to the branch. GMUK will be able to take a decision about the risk in confirmation. (varies from bank to bank). 3. 'Direct Rate' method of quotation is followed in India. R. (i) It is easy to understand the exchange rate. (ii) Calculations are relatively simple and therefore quick. (iii) Relative rates for various currencies can be easily compared. 4. The maximum period for which a forward purchase contract can be fixed is generally 12 months from the date of shipment. R. In terms of EC Regulations the export proceeds should be realised within 12 months from the date of shipment. Hence, there is no need for forward contracts for longer periods for this purpose. Also, Indian market is not deep enough to cover beyond 12 months. (Note: It is, however, permissible to book forward contracts for longer periods). 5. Overdue interest on export bills/import bills is recovered separately. R. (i) The exchange rate computation is comparatively simple and quicker. (ii) It conforms to the practice of international banks. 6. If an import bill under LC is not retired within 10 days of its receipt by the drawee, the bill amount has to be crystallised. R. (i) Our Nostro A/c maintained abroad would have been debited when the bill under our LC was negotiated by the exporter's bank. By the procedure of crystallisation, the Bank is able to avoid the risks of adverse fluctuations of the foreign currency. (ii) Also the importer is obliged to retire the documents promptly. 7. Concessionary rates of interest are granted for export credits. R. (i) In view of the huge external debt and liberalisation of the economy exports have been given special incentives and concessions; the interest rate is also less so that valuable forex can be earned by exporters. (ii) Interest Subvention (now called Interest Equalization) is also provided for exports. 8. T.T Buying rate is applied for cancelling a draft (or a Sale Transaction is cancelled by applying TT Buying rate). R. Issue of a draft is a sale transaction and would have been covered by a purchase transaction. As the Bank has got the forex funds already at the time of cancellation, the best rate viz. TT buying, rate is applied. 9. TT selling rate is applied for cancelling a purchase transaction. R. At the time of the purchase, the transaction would have been covered by the sale of foreign exchange. Actually the buying rate would have been quoted based on the selling rate in the market

1-58 ' • • . . . ..

Rationale

adding our profit margin. Hence, the best rate viz. TT selling rate is quoted to the customer. 10. LC and other documents are to be scrutinized carefully when an export bill is received for negotiation. R. a) To ensure that the LC is in order and valid. Also to ensure that the documents are drawn strictly in conformity with the terms of the LC. Otherwise, the documents may be returned by the opening bank. b) To ensure that the bill is not dishonoured as the bank usually extends export credit against the LC bills. 11. Exchange Control Regultions have been substantially liberalised in the past 15 / 20 years. R. (i) This is an important measure in the liberalisation of the economy- removal of controls over industry in terms of investment, price, exit policy, monopoly, competition. (ii) Our forex reserves have been increasing substantially over the past many years which has resulted in the stability of Rupee. (iii) Foreign investors have to be attracted by the removal of controls on foreign investment in industry and capital market, easy/quick formalities connected with foreign investment clearances, easy repatriation etc. (iv) Forex is like any commodity and its value has to be determined by market forces of demand and supply and not artificially by RBI. 12. 'Options' have been introduced: R. (i) It is more favourable to the customer than forward contract as the customer is not obliged to buy / sell the forex if the contracted rate is unfavourable compared to the spot rate on the due date. Also he has the right to buy / sell the forex at the agreed rate if it is advantageous to him. (ii) International markets provide such a facility; hence Indian businesses should also be provided such a facility. 13. Homecoming Deposit Scheme has been introduced for returning Indians. R. (i) More attractive for NRIs - they can keep their funds in dollars and use them for their needs; (ii) Banks can quote competitive rates of interest as no SLR need be maintained. 14. R Returns have to be submitted to RBI promptly and regularly. R. (i) R-Retums are the principal source for RBI for computing the BOP data. (ii) RBI can monitor/oversee the forex transactions put through by ADs and ensure that ADs have exercised the powers delegated to them correctly. Any delay / non-submission would attract RBI's adverse action. 15. The Bank does not undertake forex transactions on Saturdays OR The Bank does not undertake forex transactions for large amounts on Saturdays. R. (i) International markets are closed on Saturdays; hence, the Bank cannot cover these transactions. The Bank's position will become vulnerable due to exchange fluctuations if these are not covered. (ii) RBI/FEDAI directions also prohibit them. ' 16. TT buying rate is quoted for foreign inward remittances where cover has already been provided for or TT rates are more favourable to customers. R. (i) As forex funds have already been credited to our Nostro A/c the Bank is not out of Funds; Hence, the best rate is quoted. (TT rates are the basic rates from which other rates are derived). (ii) Also there is no risk of non-payment as the funds have already been received. 17. Different interest rates are quoted for the various currencies under FCNR(B) scheme. ' R. (i) To make the interest rates attractive to NRIs, the rates are determined based on rates in the international market. (ii) Different interest rates prevail for different currencies in the international market. 1-59 MM Special Guide 18. Forward contracts are booked by exporters/importers. R. (i) To ensure that they are protected against fluctuations in forex rates. (ii) To ensure that their profit margins are not adversely affected. 19. Advances up to 90 days against claims of duty drawback are granted at Nil rate of interest. R. Banks are given 100% refinance by RBI at 'Nil' rate of interest against such advances. It is an incentive for export promotion. 20. Full set of bill of lading should be presented to the Bank for negotiation. R. The holder of one negotiable copy of the Bill of Lading is entitled for delivery of the goods. Hence, if the full set is not obtained by the negotiating bank, there is a risk of a thrid party getting hold of a negotiable copy and obtaining the goods. The Bank's interest will be affected. 21. RBI has increased the period of FCNR (B) deposits to 5 years from 3 years. R. It will enable banks to manage the mismatch between deposits and loans better. FCNR (B) loans to corporate customers are given up to 5 years. 22. The Bank has to exercise great caution while confirming an 'export' letter of credit than while merely 'advising' a credit. R. When a bank 'confirms' a credit, it is bound to negotiate the documents under the L.0 provided they comply with the credit terms strictly. In case of opening bank's failure to honour the bills under the credit, the 'confirming' bank's liability is absolute. Hence confirmation will be added only to irrevocable letters of credit established by first class banks. An 'advising' bank merely advises the credit; it is not bound to negotiate the bills under the credit. 23. Generally, the restrictions on the operation of NR(E) accounts are more than those on NR(0). R. (i) NR(E) A/c enjoys tax exemptions from IT, GT and WT. (ii) The balances are repatriable as the funds are remitted from abroad. Hence, funds of local sources should not be credited to the account except as permitted by RBI. (Hence there are more restrictions on NRE A/c). 24. Letter of Credit liabilities are treated as contingent liabilities. R. (i) The Bank undertakes to honour documents drawn under the credit provided they conform to the terms of the credit strictly. (ii) If the applicant (importer) does not honour them, the bank is bound to reimburse the negotiating bank etc. 25. Opening a Letter of Credit is considered a credit decision. R. The documents covering imports under the L.C. have to be paid for within a short time after their receipt. If the opener is unable to pay for them, the Bank has to honour its commitment; it will be saddled with the liability. 26. Application for establishment of LC is stamped as an agreement. R. The establishing bank is bound to honour the bills under the LC if they are drawn in conformity with the terms of the credit. As the application contains a hypothecation clause it is stamped as an. agreement.(In the Bank, it is the practice to stamp a document based on the dominant/principal effectn of the document, as provided for in the Stamp Act.). 27. The rates quoted for purchase/sale of foreign currency notes are most unfavourable to the customers. R. (i) The currency notes are to be retained in India and hence funds are locked up in them. (ii) Cost of operations (viz:scrutiny, handling and storage costs) is relatively high (iii) The risk of counterfeiting, forgery etc. is relatively high. 28. All the forex transactions are reported promptly to Treasury Department, Mumbai. R. Treasury Department, Mumbai will arrange for prompt cover operation so that the Bank does not incur any exchange loss. The forex rates are volatile and change minute to minute. Instant communication will enable immediate cover operation eliminating exchange risk. 1-60 Rationale

29. The Bank keeps as square a position as possible in respect of all currencies. R. Otherwise, any serious fluctuations in the value of the foreign currency will affect the profitability of the transactions. As the value of the transactions is very high, often the loss will be substantial. RBI regulations strictly provide for keeping the position squared over night. (Note: RBI is now permitting banks to have overbought/oversold position based on the volume of operations of each bank; limits to be fixed with the approval of RBI). 30. NRI Assistance Cell/NRI Facilitation Cell has been set up at LHO. R. It is a nodal agency in the Circle, set up to ensure that the difficulties/complaints of NRI Customers in the circle are resolved promptly. Established to tone up customer service to this sensitive customer sub-segment and boost our image. The deposit growth in NRI deposits has been substantial making this sub-segment a very important one for the Bank. 31. Foreign institutional investors (eg: pension funds, mutual funds, investment trusts etc.) have been permitted to invest in the Indian Capital Market. R. (i) India has embarked on liberalisation of trade, investment in industry and gradual removal of forex controls. (ii) Capital is scarce in the country; (iii) Such investments add to the non-debt capital of the country and helps globalisation of Indian economy. 32. Importer will have to submit the bill of entry form / postal wrapper to his banker within 3 months of imports. R. It is an evidence that the goods for which payment has been made in forex have actually been imported into India. It is an Exchange Control requirement. 33. Banks are now accepting payment for exports through International Credit Cards. R. The use of ICCs in international business and trade has increased considerably. Often, the overseas buyers visiting India make payment with ICCs to the Indian exporters. This step of RBI making payment through ICCs an approved method of payment has helped Indian exporters. 34. No encashment certificate is issued for inward remittances for credit of NRE A/c. R. The encashment certificate is given only to travellers to India from abroad. It enables the travellers to take back the unspent forex while they leave India. NRE a/c balances are repatriable and hence no separate certificate need be issued. Further, if a certificate is issued there is a risk of double repatriation of the same amount.(Note: Such a certificate is given only to foreign tourists on arrival to enable them to convert the unspent forex at the time of leaving the country). 35. GR Form (now Export Declaration Form) is one of the important export documents. (GR Form has been replaced by Export Declaration Form). R. The exporter gives an undertaking in that he would bring to India the export proceeds within 12 months from the date of shipment through authorised channel. Customs authorities satisfy themselves that the valuation is correct and that the declared quantities/numbers of the goods only have been exported. 36. No local credits are permitted in NRE account. R. NRE account balances are freely repatriable and hence only foreign remittances are credited to the account. If a local credit is accepted, the local funds may be repatriated by oversight. Hence, RBI has prohibited any local credits in NRE accounts, except permitted current income after meeting tax liabilities. 37. Cash Flow Statement is studied while opening a LC R. The bank has to ensure that the borrower has the ability to generate adequate funds to effect payment of bills drawn under the LC when they are received for payment. If he is unable to pay, it would result in devolvement of such payments on the bank.

1-61 MM Special Guide 38. FEDAI does not prescribe charges for forex transactions levied by banks. R Consequent on the liberalisation of the finanical sector, it is felt that banks should quote competitive rates to customers which will increase the operational efficiency and customer service. It is not in order for FEDAI to fix rates in this context. FEDAI Rules relate to various aspects regarding conduct of forex transactions. 39. Liability in respect of letters of credit issued by the bank is reflected in General Ledger. ' • • R. Accounting control has been introduced over the Letters of Credit transactions with a view to ensure that the contingent liability in respect of LCs is correctly recorded. Also, whenever the Bank `confirms'an export L/C, the contingent liability in respect of the transaction has also to be accounted for. 40. Claused bill of lading should not be accepted for negotiation under a letter of credit. R. In terms of ICC UCP 600 (2007) a foul (claused) bill of lading is not a good tender as it would contain notations in which the defective condition of goods/packages are expressly stated. Acceptance of such documents is risky and the negotiating bank will be put to loss as the opening bank is not bound to accept the same. 41. Exporters can now maintain foreign currency accounts with Banks. R. This will enable them to readily effect payment for imports, repay foreign currency loans, incur approved expenditure etc. out of export proceeds credited to the account. This measure is part of the liberalisation measures taken to stimulate exports. 42. Standardised pre-shipment export documents have been introduced. R. With a view to simplify/rationalise the preparation and handling of export documents. It will help scrutiny/processing of documents by connected parties-banks, shipping companies, clearing agents, Customs etc. Also, in conformity with international practice. 43. Better rates are offered for encashment of Travellers Cheques than for currency notes. R. The realisation period in respect of FC Notes is much longer than the T/Cs. (Fluctuations in exchange rates have to be provided for) FCNs are not sent abroad for realisation as and when they are purchased unlike T/Cs. Bank's rupee funds are locked up as idle balances. Transaction cost/risk is relatively high. 44. NRIs can now bring into India gold and silver up to the prescribed ceiling. R. To prevent smuggling of these precious metals; To plug revenue leakage; to satisfy the legitimate demands of people. 45. The Bank will add 'Confirmation' only to an irrevocable credit. . , , R. The confirming bank's liability is in addition to the liability of the opening bank. In case of revocable credit the opening bank can revoke the credit any time; but the confirming bank will still be liable to negotiate/pay the bills under the credit. Hence it is risky to confirm revocable credit. • . 46. Authorised Dealers can now rediscount in foreign markets the export bills discounted by them. R. It is an additional window(source) for early realisation of forex. Banks will have active exposure to intemational markets. RBI instructions. 47. Pre-Shipment credit in foreign currencies is granted to exporters. R. The rate of interest on dollar loans is relatively low compared to that on Rupee loans. It is an altemative to the Rupee loan; and the exporter has the option to avail either of the two. 1 48. The Bank should undertake forex transactions only in respect of bonafide/good customers. R. The obligations under the Exchange Control, Import Control, Export Benefit Schemes etc. are very stringent. The Bank will also be liable for any lapses on its part. The bank's responsibilities are . also high in respect of LC transactions. 49. Crystallization of export / import bills is done if they are not paid within a stipulated period. R. Import bills are crystallised as our Nostro a/c would have been debited when the bill under our LC was negotiated by the negotiating bank. Hence, there is no need to carry the liability of the importer in 1-62 Rationale foreign currency. This procedure helps avoid bank's exposure to the risks of adverse exchange rate fluctuations. The forex liability of export customer in case of negotiated bills is converted into rupee liability with the stipulation that overdue interest has to be paid by him. The bank will be able to utilize foreign funds abroad when the bill is paid. The bank will be able to protect itself against forex fluctuations. It is in line with international practice. 50. ECGC cover is not obtained for LC bills generally. R. In an LC established by a first-class bank the exporter is assured of getting his payment as soon as the goods are shipped provided the documents strictly conform to the requirements of the LC. In view of the definite undertaking of the opening bank, ECGC cover is not obtained for LC bills. (Note: ECGC provides such a cover) 51. Foreign bills are drawn in sets and despatched in 2/3 lots by separate post. R. As the bill is sent to a foreign centre, there is a chance of the bill being lost, destroyed etc. It is drawn in sets of two/three and sent to the foreign centre in two lots by separate post, so that in the event of loss of one set, the other set will be presented to the drawee for acceptance/payment. 52. Export bills are sometimes negotiated under reserve by banks. R. If the documents contain some minor or superficial discrepancies they are negotiated under reserve or against the indemnity of the exporter-beneficiary. This would enable the exporter to maintain continuity in the operations, by availing funds. The bank will be able to recover the moneys from exporter- beneficiary in case the opening bank does not honour the bill. 53. Import LC bill is crystallized on the 10th day of the receipt of the bill, if it remains unpaid. (i) Our Nostro A/c maintained abroad would have been debited when the bill under our LC was 1101111111 negotiated by the exporter's bank. By this procedure the Bank is able to avoid the risks of adverse fluctuations of the foreign currency as the liability is converted into rupee liability. (ii) Also the importer is obliged to retire the documents promptly. (iii) FEDAI instructions. MM Special Guide

ACCOUNTING SYSTEM

1. Protective arrangements at the branches have to be reviewed periodically. R. Branches have to maintain cash and other valuables safely. The nature of business is changing as also the enviroment making it necessary to review the arrangements according to the changes. Protective Arrangements are approved by the controlling Authority in advance. 2. Usance bills attract stamp duty (but not demand bills). R. In terms of the Stamp Act, usance bills have to be drawn on stamped bill forms. It is a mode of revenue for the Govt. The Stamp Act has not provided for the payment of stamp duty on demand bills. (usance/trade bills up to 3 months are exempted from stamp duty if these are routed through Banks/FIs). 3. Ordinarily third party cheques endorsed in the name of the staff should not be purchased. R. The facilities to staff like 'at par' purchase, higher rate of interest for deposits etc. are granted for their genuine personal savings and personal banking needs. To ensure that such benefits are not diverted to third parties. 4. "Triple Lock Receptacle box" has been installed by RBI at its issue offices. R. This will enable the members of general public maintaining bank accounts to exchange tom currency notes/mutilated notes by dropping them in the box. The value of mutilated notes will be credited to their bank account through ECS. To ensure hassle free exchange of mutilated notes. 5. All vouchers of the day should be cancelled at the end of the day by using an indelible pencil. R. The authorised official scrutinises the vouchers and satisfies himself that they are in order in every respect. It enables the managers to understand the nature of business/transactions passing through the branch. Also, this will ensure that the day's vouchers do not get mixed up with some other day's vouchers. Further, the risk of creating another debit/credit in our system based on the same voucher will be eliminated. 6. Bank has introduced Market Related Fund Transfer Pricing (MRFTP) w.e.f 01.04.2007. R. MRFTP is a scientific intemal funds transfer price mechanism evolved to supplement the ALM of the Bank. It will help in ascertaining the true profitability of operating units by bench-marking the product prices to the market rates. 7. Cash Balance at the branch is maintained as low as possible. It should not exceed retention limit. R. Branch cash balance is an idle and profit less asset. Branch has to pay Central Office interest on such funds which affects profitability. Also, insurance cost can be reduced. If the balance exceeds retention limit, insurance cover would not be available, unless it is covered specifically. 8. Adjusting account is opened in the General Ledger on the annual closing day. R. This enables the correct accounting of income received but not yet earned and Income earned but not yet received; also expenses accrued but not yet incurred and expenses incurred but not yet accrued. [Bank's accounting system is based on accrual concept]. 9. Confirmation of debit balance is required to be stamped; confirmation of credit balance in current account, if obtained from the account-holders, is not stamped. R. Confirmation of debit balance is an acknowledgement of debt and hence requires to be stamped, as per Stamp Act. Confirmation of Credit balance does not attract Stamp duty as per Stamp Act. Note: (I) Stamp duty is a form of tax revenue to the Government and hence has to be paid only where stipulated. (2) At times the Bank may issue a Certificate of Balance to a Company when Auditors 1-64

Rationale

require the same. This Certificate is issued over revenue stamp as it serves as an acknowledgement of debt. (3) SBI: Confirmation of credit balances is not obtained in SBI, in view of the large number of a/cs / cost involved. Also, the risk of non-obtention of such a confirmation is considered inconsequential. But, confirmation has to be obtained for Power of Attorney operated accounts. 10. No entries should be passed in Recalled Assets account during the year-end as fixed. R. The provision for Bad Debts has to be made as on 31.12. This will ensure that the same figures are taken for provision at all levels in the Bank(i,e., Branch, Administrative Units, H.O., and CAO) for Balance Sheet purposes. Also, same figures of Recalled Asset A/cs would be taken at all levels for Balance Sheet/by Statutory Auditors. 11. Concurrent auditors are appointed at large branches. R. As volume of work is heavy at large branches, mistakes, omissions etc, could be rectified then and there; it helps in accounting efficiency. Also, the educative value of the role of the concurrent auditor is important. 12. All demand drafts for Rs.20,000I- and above should be issued only by debit to Customer's account or against cheque. Also payment can be made only by credit to account and not in cash. R. To curb the misuse of banking channels for violation of fiscal laws and evasion of taxes. RBI instructions. Now included in KYC guidelines, also. 13. Income Audit is conducted by the Bank at regular periodical intervals. R. It has been observed that income leakage has been substantial on a wide front of income categories; to plug the loopholes in systems and procedures; it has created awareness among staff about the leakages and reduced their incidence. 14. Weekly Abstract has to be Compiled. R. Under section 42(2) of RBI Act, Banks have to submit the Weekly Statement of Affairs within 7 days from the reporting Friday to which these pertain. RBI has decided to impose penalty on the Bank in case of delay. Enables the Bank to maintain the correct CRR position which is the major indicator of liquidity of the Bank. 15. Outward Cheques returned in clearing by other banks must be branded with the stamp "All our stamps cancelled" before they are returned to the lodgers. R. To ensure that no liability devolves on the bank in future against any claim by 'the holder in due course', in case the cheque is negotiated afterwards. 16. Banks have adopted alternate channels for providing better customer service. R. Customers can draw cash up to a maximum of Rs. 40,000/- from ATMs established anywhere at any time of the day (SBI). This will reduce rush at the cash counters. The Drop Box can be used to put instruments for collection and credit to their accounts even after business hours. Cheques can be processed without loss of time. Internet banking also helps customers to transact with the bank from wherever they are. 17. All debits to Suspense accounts during a month are required to be reported to controllers even if these entires are reversed during the month. R. Suspense a/c is a sensitive account. Only debits which cannot be put through the appropriate accounts at the first instance are put through the Suspense a/c in exceptional cases under the authority of the Branch Manager only. The CA will scrutinise all entries to ensure that no entries are put through this account in a casual manner or the account is used for making unauthorised advance. 18. One rupee note/coin is issued by Govt. of India whereas notes of other denominations are issued by Reserve Bank of India. R. The power to issue one rupee coin is vested with the Government of India under the Coinage Act, 1-65 MM Special Guide

2011. The one rupee note issue is treated as one rupee coins issue. The issue of notes of other denominations are delegated to the Reserve Bank of India. (Note: Hence, one rupee note is referred to as Govt. note; all other notes are referred to as Banknotes). 19. Duplicates of the important keys of the branch should be lodged with the nearest branch, Ass. Bank or a Nationalised bank as approved for safe keeping. R. To ensure that the duplicate keys are withdrawn and the bank's work is carried on without any stop or difficulty in the unlikely event of the original key being mislaid, broken etc. If kept in the branch safe, they cannot be taken out for use in the event of loss of any original key. 20. Interest on Govt securities, dividends etc is collected on behalf of deceased customer a/c where securities are held by the bank for an overdraft granted to him. R. The bank is collecting the interest etc towards its dues from the estate of the deceased customer; the agency role can be continued till the bank's loan is repaid. It is agency coupled with interest. 21. Old stationery, records and wooden boxes are not kept inside the strong room. R. Strong rooms are costly and are put up to protect valuables/cash/gold ornaments etc. of the bank/ customers against risk of loss by fire, burglary etc. If it is a currency chest containing RBI's treasure, these are not to be kept in the currency chest as per RBI instructions. It will ensure that only joint custodians enter the strong room for operations and no other staff/outsiders. 22. Banks have to deal with forged notes as per RBI instructions. R. Counterfeit notes are not legal tenders. If reimbursement of the value of the forged notes is made by a bank, the Central Government and RBI cannot be held responsible. Circulation of forged notes will bring avoidable difficulties to the banking system and public. In extreme cases, the people's trust in the currency system will be lost and the economy will be dislocated. This will ensure that the practice of priniting forged notes is curbed and appropriate action is taken by impounding such notes. It will help in detecting origin of counterfeit notes.(Sec. 489 A To 489 E of IPC) 23. No entry is passed while transmitting treasure from one currency chest to another. R. When currency notes are transferred from one chest to another, it is done at the instance of RBI.Actually, the notes in one currency chest belonging to RBI are transferred to another currency chest of RBI. The bank's cash position is not affected. RBI instructions. 24. The currency note packets shall not be stapled; instead they should be secured with paper bands. R. The life of currency notes is reduced by multiple stapling leading to the tear of the notes. Also, it enables unscrupulous persons to insert half notes pasted on papers into the note packets. International practice. RBI instructions under Clean Notes policy 25. Internal Audit machinery of Banks has to be strengthened. R. Banks have entered into new areas of business; there is need to evaluate the soundness of advances etc frequently as the external environment is changing fast. Also, new technology requires careful safety measures.With liberalisation, RBI has given autonomy to banks as a result of which intemal audit 'evaluation has assumed significance. Ghosh Committee recommendations. 26. Right to information has been made a statutory right in India. R. This will enable our country to enter into an era of accountability and transparency. The citizens will be able to have access to information under the control of public authorities including banking system. 27. For currency notes of all denominations below Rs. 100 deposited by non-currency Chest branches of other banks at our currency chest branches for credit of their account, a service charge of Re 5 per section is levied under the Guarantee Bond System. R. RBI has observed that there is reluctance on the part of currency chest branches to accept the same; now, the payment of commission acts as an incentive. Currency management will be more efficient 1-66 Rationale - for the country as a whole. RBI guidelines. 28. Depreciation is charged on the Bank's Fixed Assets. R. Fixed assets undergowear and tear due to constant use and thereby their value comes down. Depreciation is eligible for tax deduction. The Bank's balance sheet will show the correct value of the assets. 29. Staff accounts should be scrutinized by the Branch Manager periodically. R. To ensure that the credits in staff amount are not disproportionate to the known source of income To prevent frauds and malpractices. It is an effective preventive vigilance step. 30. RBI changes the security features of Bank Notes periodically. R. Counterfeiting by criminal elements, both within and outside the country is a permanent threat to the safety and good health of the financial economy of the country. Also, to prevent the loop-holes exploited by these elements by changing the design, printing etc and making counterfeiting impossible. To make the notes user-friendly (eg: for visually challenged etc). 31. The Annual Policy statement of RBI is now reviewed at intervals of 2 months. R. This will enable RBI to review the economic development, growth in GDP, inflation, money supply etc., promptly / periodically on receipt of the data/statistics. This will sharpen the monetary / credit policies which will help managing the situation properly. The market players will be able to understand economic conditions better and take appropriate decisions. It will ensure transparency in monetary / credit policy. It is an international best practice. 32. Banks have to appoint a Nodal Officer for their Currency Management Operations. R. Banks maintaining currency chests have to ensure use of modem technology and security systems for stocking, processing and distribution of adequate, genuine and clean notes to the public. RBI directives as per the recommendations of High Level Group on Currency Management. 33. Banks have to make provision for unreconciled entries. R. These entires reflect lack of efforts on the part of banks and inefficiency of the system. To prevent frauds and malpractices. To keep such entries at the barest minimum. 34. The Bank has set up Currency Administration Cells. R. This will reduce the burden of branches in day to day cash management and enable them to focus on business development. This will ensure efficient management of cash at branches including securityltranspott I insurance arrangements and reporting to RBI. It is a BPR initiative. 35. Operational Risk has been given importance by the Banks. R. It is as per Basel II guidelines Due to significant growth in the banking transactions 'there is increase in operational risk eg: inadequate / failed internal processes, people, systems, external event etc. To strengthen the soundness and stability of the banking system. It is an important component of risk management system. 36. When a cheque is issued for credit of PPF account, a paper token is issued to customer. R. The credit to PPF account is given after realization of cheque. The paper token will help in identifying the depositor when the pass book is returned after entering the credit. 37. Vouchers should be scrutinized by Branch Managerlauthorised otticials R. To ensure that they are in order in every respect. To satisfy that it is passed by an authorized official within his powers and accounted for under the correct head of account.

1-67 MM Special Guide Branch Manager will know the nature of credits/debits passing through the accounts and will act on suspicious leads. 38. The armed guard should tie the gun to his waist with a chain while on duty. R. To ensure that no miscreant is able to snatch the gun from the guard. The chain is put in such a manner that the guard can use the gun freely when it is absolutely essential, to protect the Bank's property or staff or customers. .: 1 39. Staff DD purchases should be authorized by the Branch Manager. R. This will enable the Branch Manager to satisfy himself that the transaction is a genuine requirement of staff and staff benefits are not diverted to third parties. To prevent kite-flying and study the life style of employee. (Note : Generally, need for such requests will be very rare nowadays). 40. Bank has introduced revised In-branch cash handling process. R. There will be no delay in starting cash transactions at the beginning of the day. The process will reduce the time spent by CO/CIC/SWO/Asst (Cash) in handing over and receiving cash at the beginning / close of the day. Towards better customer service. It is one of the BPR initiatives. 41. SWO can retain cash over-night in a box without handing it over the to Cash Officer. R. Under BPR initiatives, a new system of in-branch cash handling process has been introduced at all branches. This has reduced the time taken for handing over / taking over of cash both at the beginning of the day and end of the day. Maximum retention limit per SWO / Asst (Cash) is Rs.1 lac. 42. The currency chest balance is not reflected in the General Ledger in the bank. R Currency chest is the property of RBI. In the General Ledger, only the balances of bank accounts are reflected. The cash belonging to the Bank will be shown as a debit balance in the Cash Balance A/c. 43. Currency chest transactions have to be reported to FSLO/Link office on the same day. R These transactions involve funds settlement with RBI. Any delay in reporting large withdrawals from the chest will result in payment of penalty. Also any delay in claiming reimbursement from RBI would result in "opportunity Loss" to the Bank. 44. Strong Room fitness certificate is obtained every year from the Bank's Engineer. R This is as per central Government Treasury Rules. To take immediate action in case of dampness, leakages or any other deficiency. RBI instructions. 45. RBI Remittance should be examined promptly. R To take immediate action in case of shortage, any other deficiency. It will reduce the overheads on account of payment of halting allowance to the potdar. 46. KYC (Know Your Customer) guidelines have been revised by RBI. R Revised guidelines are based on the recommendations of Financial Action Task Force (FATF) which is an inter — governmental body that develops and promotes national and international policies to combat money laundering and terrorist financing. Non — compliance of instructions will lead to problems in international relations. ., ,.. F • -' 47. RBI has cautioned the banks to be more cautious/vigilant in respect of inward remittance towards participation in lottery money circulation schemes. R Remittance in any form towards participation in lottery schemes is prohibited under FEMA-1991. There has been a spate of fictitious offers of cheap funds recently through letters, e-mails, mobile phones, SMS etc. To prevent the general public from getting cheated. 48. Bank has introduced Inter Branch Transfer System (IBTS). R All branches are now on CBS platform. To leverage the benefits of CBS. 1-68 Rationale It is a self-reconciliation process. 49. "CURRECY CHEST-Online" Website has been launched by the Bank. R To streamline the monitoring of compliance of irregularities pointed out by officials from RBI/LHO/ Administrative Office. To improve efficiency of operation of currency chests. To avoid levy of penalties by RBI for non-compliance. 50. Government Business should be aggressively marketed. R To retain the lead position in Government Business. To meet competition from PSBs and Private Banks. To improve profits from Agency Commission. To get allied business. 51. Government Receipt should be promptly settled with RBI. R To avoid payment of penal interest on account of delayed reporting/settlement. Government will be able to know their funds position and can plan its expenditure. 52. Currency Notes are kept in steel bins/cup broads in the strong room. R Bins are safe and clean. Notes can be kept denomination-wise separately. Easy to maintain/handle. Currency notes should not be kept in wooden racks as termites may affect these (RBI directives). 53. KYC guidelines are applicable to deposit a/cs, loan a/cs and lockers. R To ensure that these facilities are not made available to fictitious persons and in benami names. To prevent against money laundering activities by unscrupulous persons. To comply with RBI directions.

1-69 MM Special Guide HUMAN RESOURCES

1. The Staff Suggestion Scheme has been revised. R. The creativity of staff can be tapped for achieving organizational excellence. The scheme h a s been made effective and acceptable to all categories of staff. It will motivate staff to participate in the scheme.

2. A Memento is presented to an employee on retirement. R. Retirement is an important landmark in the career of our staff after 3 decades and more of service and commitment. It will strengthen the emotional bondage between the Bank and the employees. It will also beneficially impact the motivation of the serving staff.

3. A scheme for recognition and reward of alertness in staff in prevention / detection / foiling of frauds has been introduced. R. Frauds damage the Bank's image and demoralise the staff. The reward shows the importance attached by the Bank to fraud prevention and detection. The staff have a crucial role in preventing / detecting frauds and this will act as an incentive for the same.

4. The Bank provides different modes of training to staff. R. The Bank's HRD Philosophy aims at activating the potential of each employee with the objective of achieving the Bank's goals. Different modes of training (institutional, on-site, distance learning, hands on etc) are suitable for imparting different skills / knowledge and reorient the attitude.

5. Incentive schemes for staff have been launched for many schemes. R. These schemes provide both monetary and recognition awards. They aim at bringing out both the group and individual potential in our staff. Monetary incentives show to the staff dial the Bank is evolving methods to provide compensation to them as per market practices. These schemes have been successful in enthusing the staff and garnering business for the Bank.

6. Job Families concept has been introduced. R. The Bank's businesses have been classified into 10 clusters of related skills / knowledge, called job families. Option is given to officers up to MM Scale III to opt for preference for working initially in 4 job families. This system would give opportunity to officers to work in areas of their choice. It will also enable the Bank to develop talent pools with medium range perspective. It will also bring about better alignment of training and placement functions with the business / HR perspectives. Rationale

INDIAN FINANCIAL SYSTEM

1. Banks' capital market exposure is now linked to net worth of a bank. R. The risk assessment of the exposure will be more prudent now than the earlier stipulation linking it to outstanding advances. It is in line with best international supervisory practices.

2. Crisil has launched bank loan ratings some time ago. R. It could strengthen the banks' confidence in their borrowers. The ratings will provide a uniform benchmarks for credit and pricing decisions in the bank loan market. They will also serve as an independent opinion on loan specific risk to the lending bank and can be used by banks for risk pricing, capital allocation and portfolio management.

3. Investment through Participatory Notes have been prohibited in sensitive sectors like banking, telecom, petroleum etc. R. These could be misused for money laundering. Investment may be made by overseas investors who are not subject to regulatory requirements or scrutiny by an established financial regulator. These could also be used to skirt the ownership norms applicable for private banks viz. Private banks have to report to RBI if the investment in a bank is 5% or more by a single entity.

4. Many foreign banks are now seeking to set up NBFCs in India. R. Presently foreign banks can open only 20 branches in a year in the aggregate in India. NBFC route may offer very good access to expand their presence in the country. Also the regulatory requirements are less stringent. The NBFC arms of foreign banks can raise capital in India whereas foreign banks cannot. NBFCs can fund corporates to buy out promoters' stake.

5. SEBI has permitted setting up of real estate mutual funds. R. a) To encourage real estate sector with long term institutional finance b) To give opportunities to retail investors to participate in the fortunes in real estate sector. c) To help the real estate sector in getting access to funds from retail investors. MM Special Guide TECHNOLOGY IN SBI Rationale: I. Internet banking has been introduced by many banks. 2. Passwords of computer operators are changed frequently. 3. Checking of daybooks / scrutiny of vouchers is carried out even in a computerised set up. 4. Disaster Recovery plan prepared by the branch has to be approved by the controlling authorities for all branches. 5. ATMs are being installed by many banks in a big way. 6. Computer Audit is an important aspect of Inspection and Audit of the branch. 7. Corporate Internet Banking facility is provided to corporate clients. 8. Passwords have to be kept strictly confidential by the staff. 9. SBI has adopted Core Banking Solutions. 10. ATM withdrawal limit has been increased. 11. The Bank is not responsible for the transactions of the customers put through Internet Banking. 12. Pre-printed INB kit is given to customers. 13. ATM card and PIN are not dispatched together by the bank directly to the customer. 14. While using ATM any 2digit number has to be entered by the customer. 15. Mobicash facility is activated by link branch only though all other formalities are completed through CSP (Customer Service Point). 16. In RINB after adding a new third party, the amount that the customer can transfer to the new beneficiary is restricted by the Bank to a maximum of Rs 50,000/- for the first 5 days even if the limit is set at higher amount. Besides, only one new beneficiary can be added in RINB per day. 17. ATMs and POS machines are being installed by the bank in a big way. 18. The Bank has provided virtual card for INB users with Transaction Rights. 19. Bank is issuing 16 digit ATM debit cards since 2011, instead of 19 digit debit cards issued earlier. 20. "Saral" (Single User Corporate Internet) INB facility has been provided as a variant of C1NB. 21. Green Channel Banking is given importance by the Bank. 22. Merchant establishments prefer cards to cash payment. 23.

Answers to Rationale: 1. The Banking environment has now become highly competitive. Customers are getting used to electronic banking. As compared to traditional banking this is very cost effective and convenient. Speed and accuracy is ensured. 2. Security should be maintained in respect of passwords used by different functionaries at the branch and at various other levels to guard against misuse by unauthorized persons, to prevent frauds and thereby minimize the operational risk. The system also prompts to change Passwords frequently. In CBS, the user cannot continue with the same password beyond 15 days as a security measure. 3. i) To ensure against wrong, fictitious entries and double postings. ii) To ensure against interpolation and manipulation. 4. To ensure that in the event of a disaster the branch is capable of dealing with the situation and take urgent action to restore normalcy and commence service with least possible delay. As this is a very critical area, controller has to approve it. Also, we have to retain the customer confidence and safeguard the Bank's reputation. 5. i) It enables the Bank to provide anywhere anytime banking. ii) To meet competition and enhance customer satisfaction.

1-72 Rationale

iii) Results in reduction in cost of operations. iv) To reduce the rush at the SWO counters and provide 24 hrs service to customers. 6. To ensure against breach of computer security, safeguard assets, maintain data integrity and ensure xi 1 system efficiency. 7. i) To provide corporate clients on-line access to their accounts. ii) This will enable corporate clients to enquire about the details of their various accounts and also to put through transactions in electronic form remotely. 8. i) To ensure that the transactions are put through only under their authorisation and to prevent frauds/misuse. ii) It is an important preventive vigilance step. iii) To meet the requirement of computer audit. 9. The customer has become the Bank customer from Branch customer. Highly cost-effective.The customer can access his a/c from any place. Reconciliation will be automatic. Targeted marketing of customers can be effectively done. Has resulted in improved customer service and efficiency in transaction processing. 10. (a) ATMs have gained prominence as an alternate delivery channel for banking transactions. (b) To increase usage of ATMs for reaping attendant benefits. (c) To meet the increased needs for convenience of customers. 11. The Bank has responsibility to safeguard the personal data of the customer by employing highest security features. However, it is the responsibility of the user to protect the user name and any attempt of attack to hijack the banking information by unscrupulous elements. Since all internet transactions are conducted through virtual banking (without direct involvement of bank staff) the responsibility for internet transaction lies solely with the customers. Further, the user ID and Password are known only to the customer. 12. (a) The INB kit would enable the person who opens the bank account to operate his account immediately. (b) The kit consisting of temporary user-id and password is provided to the account holder and the interne banking account activated generally within 2 working days. The temporary login is used for logging into intemet banking for the first time and both the user-id and passwords are to be changed on first usage. (c) All our competitors provide this facility. 13. To operate an ATM both ATM card and PIN are required. If both are sent together, it may fall into wrong hands and can be misused for drawing funds from customer's account. To avoid this the ATM card is sent directly to the customer and we can ensure that the customers address is genuine. The PIN is sent in a sealed cover to the branch, which the customer is required to collect from the Branch to operate the ATM. As PIN is delivered to the customer after verification of his signature, the secrecy and security of the PIN is ensured. 14. A security feature is incorporated in the ATMs to safeguard the customers interest against misuse by fraudsters/hackers. When the 2 digit number is entered, the customer has to observe that the number entered is properly displayed on the screen. If the number is displayed properly then it is an indication that the keyboard of the ATM is proper and customer can continue with further operations like entering PIN etc and perform the desired transaction. If the number entered is not displayed or not displayed properly, then it is a warning that the key board is tampered with or smudged and information from the key board is being tapped by a fraudster/hacker unauthorisedly to capture the card/information like PIN, account details etc. In such a case the customer should not use the ATM. He should not also disclose PIN to any other person.

1-73 MM Special Guide 15. Mobicash facility is available to those accounts for which full KYC diligence has been done. The party has to approach the link branch for activation, after completing wallet account formalities through CSP. Since the responsibility for KYC, in terms of RBI directions, rests with the bank, the party has to approach the link branch with the originals of KYC documents (given to CSP) for verification. After verification the branch has to authorize activation of Mobicash facility and issue the MPIN. 16. This is an additional security measure provided by the Bank to RINB customers to protect their interest. The Bank also sends SMS alert for five days confirming that a new beneficiary has been added by the customer. Further, to minimize the risk, the bank permits addition of one new beneficiary in a day. 17. i) It enables the Bank to provide Anywhere Anytime banking. ii) To meet the competition and to enhance customer satisfaction. iii) To reduce the cost of operation and improve the bottom-line, as transactions through alternate delivery channels are relatively cheaper and Merchant Acquiring Business is a source for additional revenue. iv) To reduce the footfall at the branches and provide 24 hours anywhere anytime service to customers. 18. This is another secure alternative provided by the Bank for customers to protect their on-line purchases/ shopping transactions. Since customer need not disclose the underlying debit card details or personal information, use of e-card is secure and safe. It minimizes the risk as maximum exposure per e-card is Rs 50000/= and its validity is only for 48 hours. 19. With the enhanced IT awareness, the use of alternate delivery channels by customers has been increasing fast. They use them for most of their banking transactions including add-on services like utility bill payment/ticket booking etc. For online purchases the merchant sites call for the ATM card number, expiry date and CVV number to ensure genuineness/identity of users. Since the 19 digit cards had no validity period and CVV number, online purchase transactions could not be made through use of our Debit Card. Hence, the bank switched over to 16 digit debit card, with validity period of 5 years and 3 digits CVV (Card Verification Value) number on the back of the card. This conforms to Industry Practice. 20. a) It has a simplified single user interface with functional and security features similar to RINB. b) It is a single user product suitable for proprietorship; the user will have both maker and authorizer rights. c) It will enable SBI's intemet penetration into SME and micro-enterprises. d) It is also highly user-friendly. 21. Green channel banking is Paperless Banking. It is a simple and secure way of carrying out banking transactions through technology channels using ATM cum Debit card, Green remit card etc. The customers need not remember account number, carry passbook, cheque book, fill in pay in slip: withdrawal slips etc. It is an environment-friendly initiative. 22. The Bank can avoid unproductive cash handling work as also the associated risks. The merchan establishment can obtain prompt reimbursement from the bank. Cards induce spot purchases thereb: increasing sales leading to higher profits. MEs are entitled to commission from the card issuers. Rationale

RECENT RATIONALE

1. Interest subvention details for agri crop loans have to be entered in CBS through the interest subvention functionality. R To ensure that all eligible agri advances are covered under the scheme. To ensure that correct interest of 7% is charged during the subvention period. To ensure automatic restoration of normal interest rate beyond the subvention period. To ensure that the effective interest does not undergo change during the subvention period due to revision in the Base rate. To plug income leakage. 2. The stock of foreign currency notes should be kept to the fine minimum at the authorized branches. R The balance constitutes open position for the Bank and is a part of Net overnight open position. Huge balances will expose the Bank to rate fluctuations. Hence surplus notes have to be handed over to TCIL (Thomas Cook India Ltd) with whom the Bank has an arrangement. 3. The Transfer price for various busineses/schemes/products are revised periodically. R: The market conditions/cost of inputs/services undergo change periodically. To bring the various rates in alignment with the market rates. To ascertain the true profitability of operating units and to provide suitable incentives to operating staff. 4. The advance value against gold ornaments is being changed frequently now. R The price of gold has been fluctuating of late in line with the price in international markets. To ensure that the outstanding is covered by the advance value at all times. The margin on loans has also been revised to 25%. 5. RBI has issued (licences for New Banks in the private sector. R The presence of more banks will give wider choice to customers. The increased competition will enhance efficiency of operations. 6. SBI is making a focused thrust in personal segment advances. R The credit off take in the C&I segment has been very sluggish in the past 2/3 years. The demand for home loans, car loans and education loans has been very brisk. Will improve interest eamings for the bank. Some portion of the loans form part of priority sector also. 7. RBI has reiterated the imperative need for carrying out KYC diligence before opening bank accounts for customers. R RBI has observed many short-comings in banks in respect of KYC compliance; it was revealed in the RBI audit of banks following cobra post.com revelations some time ago that many branch officials were helping customers in money laundering. KYC compliance is an important exercise to ensure that banks do not help people to do money laundering, do not finance terrorism etc. 8. Many Restrictions have been imposed on financing against gold jewellery/ gold coins. R Import of gold has gone up steeply in the recent years causing huge Current Account Deficit(CAD). Restrictions are part of larger measures taken by the Govt / RBI to curb import of gold for domestic use. Continued high CAD would have made the intemational credit rating agencies reduce India's Credit Rating. (Note: In 2014-15. CAD position hs significantly improved on account of steep decline in petroleum prices and commodities). 9. SME Asset Backed Loan has been introduced. R It is a modification of SME Easy Loan Against Property ; Drop-line overdraft(combined OD & DL)

1-75

MM Special Guide facility is provided. The scheme provides loans for those who are unable to furnish detailed financial data , but are in a position to offer property as collateral. LTV is 60% up to loan of Rs. 10 Cr. and 50% for loans between Rs. 10 Cr to Rs. 20 Cr. Earlier the loan was meant only for trading units and now it also covers units under Manufacturing & Services sector. 10. A number of schemes have been withdrawn in the SME segment some time ago. R Many of the schemes have not been popular; only very low quantum of advances have been given under the scheme. Some schemes like Auto Clean have outlived their usefulness/relevance. Other types of loans would take care of the needs of the customers. It is Bank's policy to review and need not obsolete products. 11. SBI Fleet Finance Scheme has been introduced. R It is an improvement of Transport Plus scheme which was not very popular. The product has good potential in some centres. Now, medium transport operators are focussed with a higher minimum loan amount of Rs.50 lakhs and maximum of Rs. 10 Cr. A specialised credit scoring matrix has been developed and the assessment has been made simple. Tracking device can also be financed. 12. The photographs of defaulting education loan borrowers(students) should not be published in the news papers. R The publication of photographs has raised widespread resentment in public and social media. RBI instructions based on Govt of India's advices. 13. SBI Combo loan scheme has been introduced R Provides for financing car and two wheeler at the same time as young affluent car buyers go for a two wheeler also. Reduced car loan interest is applicable for the entire loan . 14. State Bank Mobi Cash Easy has been introduced. R It is a Mobile Wallet. It is a prepaid account on the mobile phone. Money can be loaded and used to pay for different services. Introduced at selected centres/states. It can be issued to non-KYC compliant customers also. 15. A cadre of 'Customer Assistants' has been created R It will help unlock the potential of younger and well-educated junior staff by empowering them more. They have passing powers also. Higher responsibilites will enable them to improve their skills. 16. External Credit rating is mandatory for units with exposures above Rs. 10 Cr. R i) It will enable the Bank to price the risks accurately and charge interest as per the risk of the account. ii) Capital provision will also come down 17. RBI had decided to withdraw currency notes issued prior to the year 2005. R Notes printed from 2005 have more security features . Notes printed in the earlier years are easy to be counterfeited and they do not carry the year of printing. The withdrawal will also reduce the menace of black money and discourage cash hoarders. 18. A modified policy on sexual harassment of women at work place has been issued by the Bank. R The Sexual Harassment on Women at Work Place Act 2013 has come in to force. The Supreme Court has made many observations regarding prevention and redressal of such offences. There is a heightened awareness of this evil in India and appropriate and effective administrative system has to be brought into force. The official in charge of an establishment will be responsible for the due observance of the various measures. 19. Mobile banking is gaining importance in the Bank. R RBI had issued guidelines regarding Mobile Banking in Oct 2008.SBI has introduced SBI FreedoM the mobile banking service of the Bank. SBI FreedoM offers convenient, simple, secure, anytime and anywhere banking. It is another important milestone for the bank in offering new technology products to young and techno-savvy customers; also, it is most cost-effective for the Bank.

1-76 Rationale

20. HRMS - photo upload of employee is introduced some time ago. R After photo uploading, it can be viewed through 'Employee Self-Service '!View / Search '! Who's Who'. This will enable branch/office, officials to verify the credential of the visiting officials when they come for audit/inspection/joining/ deputation etc. This is a fraud prevention method and a step in operational risk management. 21. Banking Ombudsman scheme has been revised some time ago. R The Reserve Bank of India has widened the scope of its Banking Ombudsman Scheme 2006, to include deficiencies arising out of credit card operations, intemet banking and complaint against the bank for its non-adherence to the provisions of the fair practices code for lenders or the Code of Bank's Commitment to Customers issued by the Banking Codes and Standards Board of India (BCSBI). Banking Ombudsman scheme is a non-legal remedy available to customers for settlement of their grievances in an amicable manner. An appellate procedure has also been introduced. The ombudsman is appointed from among the RBI officials, serving or retired. 22. In the recent days, Operational risk has gained importance. R It is as per BASEL II guidelines. Due to significant growth in banking transactions there is a great increase in operational risk. E.g: inadequate /failed internal processes, people, system etc., It is an important component of risk management system and enables banks to strengthen the soundness and stability of the system. Banks have to maintain capital for operational risk as per Basel II norms. 23. Safe Custody Receipt in respect of Branch duplicate keys is kept in the personal custody of Branch Manager and not in Strong room. R In the event of loss misplacement of original keys of strong room, the receipt cannot be taken out and sent to the other branch for taking delivery of the duplicate keys. If it is kept in personal custody of BM, he can take delivery of the duplicate keys by signing and presenting it to the other branch. 24. Garnishee order is not applicable for articles in safe custody. R Garnishee order will attach the debt due by the debtor (bank) of the judgement debtor (customer). A judgement creditor can obtain an attachment order from the court under Sec 60 of Criminal procedure code (CPC) for attaching the balance in the account. Articles under safe custody are entrusted for a specific purpose and no money is due by the bank in this case. 25. A high level committee called ALCO manages the asset and liability of the Bank. R The ALCO consists of the bank's senior management responsible for maintaining adequate liquidity and ensuring optimum utilization of resources. Product pricing for both deposits and advances, desired maturity profile of the assets and liabilities, etc. are their responsibility. 26. Banks have entered insurance sector in a big way. R The insurance sector offers immense potential for new entrants. Banking and Insurance have great deal of complementarity. The brand equity of SBI, large number of outlets, highly educated staff etc. will be an advantage to gain a reasonable market share. The Net Interest Margin is coming down. Banks to look for other avenues like cross selling. Banks entering insurance sector help them earn other income. Banks leverage their huge network and the cost of insurance business has come down. Insurance companies prefer Bancassurance as it is highly cost-effective. 27. Operations on an account should be immediately stopped on receiving information about the death of a customer. R The death of a customer terminates the banker-customer relationship. His mandate to the bank comes to an end. Any further debit will not bind the estate of the deceased customer. 28. Educational loan disbursements are invariably made through Demand drafts in the name of the institution. This is to ensure that the loan disbursements are made directly to the institution / beneficiary and not diverted for other purpose by the borrower. Besides, RBI has advised banks to issue drafts for

1-77 RIrrr°?!• MM Special Guide

Rs.20000 and above duly crossed "Account Payee". Once such drafts are so crossed, the payment can be made only to a banker for credit of the account of the customer. As per KYC guidelines, payment should 4.] be made only through Bank Draft / Bankers Cheque or through electronic banking channel for amounts of Rs.50000 and above. 29. Outward Cheques returned in clearing by other banks must be branded with the stamp "All our stamps cancelled" before they are returned to the lodgers. R To ensure that no liability devolves on the bank in future against any claim by 'the holder in due course', in case the cheque is negotiated afterwards. 30. If the amount in words and figures differs, the Bank pays the cheque whereas, if the amount in figures is blank, the Bank returns the cheque. R According to Section 18 of the NI Act, If the amount ordered to be paid in a cheque is stated differently in figures and in words, the amount stated in words shall be the amount ordered to be paid. (However in practice, such cheques are returned with the memo words and figures differ. Reading of S18 implies that the amount has to be stated both in words and figures. Hence, if the amount in figures is blank the cheque is returned as the mandate is incomplete. 31. For Pre-shipment finance, commercial rate will be applied ab-initio if terms and conditions are not complied with. R Concessionary rates of interest are granted to boost exports and earn forex. If the export does not materialise, then normal rates are charged from the first date of the advance. Also, RBI grants refinance only for 180 days. 32. Banks are not allowed to finance below base rate. R Base Rate system is aimed at enhancing transparency in lending rates of banks. It is the minimum lending rate below which a bank cannot lend as per RBI. This will enable RBI to assess transmission of its monetary policy. The categories of advances that are exempted from Base Rate have been provided by RBI. 33. Cross selling is given more importance. R Cross selling is selling more number of products to an existing customer. This enhances customer satisfaction as he can have his various banking requirements met at one place. It also increases Bank's business and profits without adding to fixed cost. Competitors cannot wean away customers who avail multiple products. 34. Bank is charging depreciation on its fixed assets. R Fixed assets are subject to wear and tear due to use and obsolescence due to efflux of time. So their value depreciates over a period. The amount of depreciation is charged to profit and loss account as a notional expense to arrive at the correct amount of profit/loss incurred by an enterprise. 35. Bank is insisting on collateral security for advances. R Collateral security is obtained by way of additional security such as Equitable mortgage of Land & Buildings, pledge/hypothecation of machinery, pledge of NSCs/TDRs/Shares etc. to fall back upon in the event of short fall in recovery from the primary security. 36. Pirated versions of software/operating system are not used. R i) It is a violation of copyright laws. ii) Pirated versions are prone to virus infection and will corrupt the various data/software used in the . . bank. • iii) Pirated versions are not authentic and might have been diluted/abridged/meddled with. Mh

1-78 Rationale

Organisation: 1. The Bank has stopped issuing circulars in hard copy. R. Issue of e-circular is fast and very cheap. More importantly, it is a step in 'Green Banking'. Ready access to all staff whenever needed. 2. CPCs are established. R. CPCs have been set up to do the processing work for the branches. The branches are front office for the various businesses; CPCs will do the back office work. Different CPCs will carry outback office work for different types of businesses/transactions/activities eg: deposit business, clearing/collection business, loan processing, cash management and cash supply to branches, Govt. business, documentation and stationery, etc. This enables the branch to focus on sales, marketing and customer service. CPCs can carry out specialized tasks equipped with appropriate technology/ systems.

Accounting System: 1. Non — home transaction entries are generated both at transaction branch and home branch. R. The transactions generated at the non-home branch will serve as evidence for the entries put through in the account by the branch. The vouchers are retained by them for verification at any time. The branch will also be in a position to confirm the transaction in case of any reference from the home branch at a later date. The transactions generated at the home branch will enable them to satisfy that the nature and volume of transactions put through in the account are normal and are in tune with the level of operations in the account. In case of any abnormal credit etc., the matter can be taken up with the non-home branch for appropriate action.

SME: 1. Working capital limits should be renewed every year. R. The Bank can know the health of the unit, desirability of continuing the advance, utilization of the limit, conduct of account etc. The limit can be reduced/enhanced depending upon the projected sales/ operations. Security available can be reviewed and the Bank's exposure protected. If the limit is not renewed within 180 days from the due date of renewal the account has to be classified as NPA. 2. Book debts are not pledged as security for an advance. R. A book debt is merely an entry made by the seller in his books regarding a credit sale. Book debt is an actionable claim which can only be assigned or hypothecated as security. It is not a 'physical thing'. As per law, only movable goods can be secured by pledge. 3. Some types of loans are excluded from the application of Base Rate/MCLR. R. Some special category of loans which are not related to cost for various reasons such as loans to staff, Loans against Bank Deposit, DIR loans have been exempted. The rate of interest applicable to subsidized loans, restructured loans and where refinance is available from GOI are uniform and fixed for all financial institutions. RBI directive to ensure viability of such loans. 4. Bank Guarantees should be classified properly. R. This is required for the following reasons: a. Bank has to provide capital for all types of guarantees. Credit Conversion Factor applicable is 50% for performance guarantees and 100% for financial guarantees. b. RBI has issued directives to banks to ensure proper classification for the purpose of having effective control over the guarantee transactions and providing adequate capital. 5. In case of change in constitution of partnership, it is advised to close the account and open fresh account. R. A change in partnership brings to an end the agreement between the partners. The old partnership ceases

1-79 MM Special Guide • to exist. It is preferable to close the account of the partnership firm and open a fresh account in the name of the new partnership firm to avoid avoidable complications due to disputes among old partners etc., (Note: This is IBPS rationale: In SBI credit a/cs are allowed to continue. Only debit a/cs are closed and opened for the reconstituted partnership). 6. CGTMSE has decided to charge differential rates of ASF/AGF to banks depending upon their NPA levels. R. Hitherto, CGTMSE was adopting non-discretionary approach in levying ASF/AGD without reference to the level of NPAs reported by the MLIs (Member Lending Institutions). It proposes to move gradually towards a risk-based premium. It has proposed to charge 5 differential rates of premium based on the level of NPA calculated as a percentage of guarantees issued.

C & I: 1. There is no limit on the number of banks in consortium lending. R. Consortium lending relates to financing of an enterprise jointly by several banks by having a charge on the assets of the enterprise on a paripassu basis. More the number of banks in the consortium, lesser will be the risk of the participating banks. Also different banks have different approaches in extending credit. As such there is no limit for the number of banks under consortium lending. However, each bank will ensure that their exposure is within the exposure ceiling prescribed by RBI. Note: 2. RBI has advised banks to fix industry specific benchmarks for large exposures (May 2015). R. Till recently uniform benchmarks have been adopted by banks for corporate advances irrespective of the size of the advance, nature of industry etc. As the desirable / acceptable benchmarks for various industries will be different depending on the industry-environment, risks etc, SBI has specific TOL/TNW and Current Ratio for 5 industries viz., hydro carbon, power, Iron and steel, textiles and electrical equipments.

Agriculture: 1. Repayment of KCC is fixed coinciding with harvesting season. R. Cash flow is generated by farmers after marketing the produce when the harvesting season is over. Since the fanners will be able to liquidate their loans availed under KCC only during this period, the repayment is linked to harvesting season. 2. Credit for cereal crops is granted as cash credit whereas for plantation/horticulture it is given . - as term loan. R. Horticultural plants/plantations are long duration crops; during the years till they come to fruition, no income will be generated from these plants. Hence, it is given as a term loan. The paddy and grains are short duration crops and they are marketed within 1/2 months after harvest. Hence, they are financed as crop loans (cash credits). 3. KGC limit is not provided for tractor purchase. R. This product is designed for farmers with good track record. It will give the flexibility and choice in regard to the amount, time of purchase, purpose including consumption needs and repayment within the prescribed outer limits. Repayment culture will be encouraged in Agriculture Banking. 4. 'No Dues Certificate' has been dispensed with for all individual borrowers (including SHGs & JLGs) in rural and semi-urban areas for all types of loans. R. To ensure hassle-free credit to all borrowers in rural and semi-urban areas. To take advantage of the technology developments. Banks can adopt altemative methods of verification like credit check with CICs, self-declaration or affidavit from the borrower, information-sharing with lenders etc. RBI instructions. 5. Priority sector lending criteria / eligibility norms are changed by RBI periodically. • 1-80 Rationale

Organisation: I. The Bank has stopped issuing circulars in hard copy. R. Issue of e-circular is fast and very cheap. More importantly, it is a step in 'Green Banking'. Ready access to all staff whenever needed. 2. CPCs are established. R. CPCs have been set up to do the processing work for the branches. The branches are front office for the various businesses; CPCs will do the back office work. Different CPCs will carry outback office work for different types of businesses/transactions/activities eg: deposit business, clearing/collection business, loan processing, cash management and cash supply to branches, Govt. business, documentation and stationery, etc. This enables the branch to focus on sales, marketing and customer service. CPCs can carry out specialized tasks equipped with appropriate technology/ systems.

R Originally, PS norms covered sectors like agriculture, small industries / business, professions, T 0 s etc which were not given financial assistance from banks till 1960s or so. As the economy deepened / enlarged, some sectors needed special push. RBI has been including many new types of advances under PS Eg: Home loans / Education Loans subject to limits, loans to weaker sections, agri . . infrastructure loans, medium enterprises engaged in services, export credit, social infrastructure subject to limit, production of renewable energy etc. • 6. Agri LOS has to be mandatorily used at all branches except V-SAT branches for opening loan •.. accounts in CBS. R. LOS has enabled standardization of credit process. It has interface with CBS, External Credit Bureau, Census India data, PAN database, RBI defaulters list etc. Ten Agri loan products have been rolled out for processing in Agri LOS. It ensures correct data entry, better risk management, validation of scoring models and develops historical data for moving to Internal Rating Based Approach for capital computation. It has been decided to block the usage of CBS for opening agri loan accounts directly.

Remittance: 1. New compensation policy came into force in 2007 and was reviewed in 2009. R. The objective is to compensate the customers for any deficiency in service or for any act of omission/ commission directly attributable to the bank. The policy is based on the principles of transparency and fairness in treatment of customers. It is in line with the instructions of RBI/based on banks undertaking with BCSBI. The policy has also taken into account the on-going efforts of the Bank in providing efficient service to customers in fulfillment of the Bank's vision and mission statements. (The Bank changes its policy periodically.)

Technology: 1. Mobile banking service under USSD has been launched. R. The Mobile Banking Service presently available can be used over (i) java enabled mobile phone where mobile banking application needs to be downloaded and (ii) Wireless Application Protocol (WAP) where user having non java mobile phone with GPRS connectivity can use the Service. It has also been decided to launch the Mobile Banking Service over Unstructured Supplementary Services Data (USSD) to facilitate the customers having non java mobile phones to avail the Service. The advantage of using this mode of Mobile Banking Service is that the customers need not download the mobile banking application. He can also avail the facilities over a SMS session. However, these modes are considered less secure than the application based/WAP mode. Hence, RBI has restricted the daily transaction limit per customer to Rs.1000/- (USSD) and Rs.5000/- (SMS). The monthly cap is Rs.5000/- and Rs.25000/- respectively. In the case of SMS, customer should use OTP for transactions over Rs.1000/.-. 2. Now, branches do not have the discretionary powers for resolution of complaints regarding unsuccessful ATM transactions. R. Now, ATM related complaints are centrally dealt with at GITC. Branches have to enter the details of complaints on the same day in the Complaints Management System (CMS) application. Hence, now no discretionary powers with BM (Feb'15). 3. RBI has advised banks to tighten Security and Risk Mitigation measures for Card Present and Electronic Payment transactions. R. RBI has been gradually strengthening security and mitigation measures in card transactions. RBI has noted that many frauds take place in magnetic stripe only cards. Now that the acceptance infrastructure at — POS is getting geared up to accept EMV Chip and Pin Cards, RBI has advised that w.e.f 01 .09

1-81 MM Special Guide .2015 all new cards — debit / credit / domestic / International — issued by banks shall be EMV Chip and Pin based cards. RBI will prescribe the timelines for issue of these cards in due course. Deposits: 1.. In case of cheque the payee cannot stop payment, but in case of draft, payee's consent is taken before the draft is cancelled at the request of the purchaser. R. In the case of cheque, the privity of contract is with the account-holder only and hence only the drawer's (account holder) instructions will be binding on the bank. The payee has no right to advise the paying banker to stop payment. Also, the cheque might have been endorsed to third party who may become holder in due course. In the case of draft, once the draft is received by the payee, he becomes entitled to payment and the bank becomes a trustee for the payee. Hence, his consent is necessary once the draft is received by him. 2. Limited liability Partnership Act has been passed. R. LLP is a body corporate and is a legal entity separate from its partners; it has perpetual succession. Partners are not personally liable for the obligations of LLP nor their property is liable for the liabilities of the LLP. Obligation of a partner is limited to the extent provided in the LLP agreement. LLP structure is expected to promote setting up of professional services firms / small enterprises as there is no personal liability of partners and as they will not have adequate resources. 3. SB interest is calculated on daily balance. R. This will encourage the S.B. customers to retain their savings in the account and earn more interest. Even though bank's profit would come down on this score, it will be able to gamer more deposits and deploy the funds profitably to offset the effect of decrease in profit. It is an RBI directive. 4. Signature of the account holder is taken when nomination is not opted by him. R. This will make the customer take a well-considered decision whether nomination has to be made or not in his account. Also, the customer will not complain at a later date that the bank did not inform him of the availability of such a facility. To educate the customers to utilize the facility for smooth settlement of claims in case of their unexpected death. It is an RBI directive. 5. Banks do not issue cheque book to a Public Ltd Co. before subscription of its initial issue of shares to the public is complete. R. When a Bank has agreed to act as the Company's Bankers to the Capital issue, a current account can be opened for the Company. Only the share-monies received from the applicants can be credited to the account. Cheque book should not be issued to the Company unless the Bank is satisfied that the required declarations have been filed by a director of the company before commencement of business. If this condition is not complied with the name of the company may be removed from the register of companies by the Registrar of Companies. It is the responsibility of the directors to retum the application-monies to the tenderers in such instances. 6. In case of default in the loan account of a Trust, the Bank cannot recover the dues from trustee's personal account. R. Only if personal guarantee of the trustee was obtained for the trust loan account, the amount can be recovered from the trustee if there is default. If no guarantee is obtained Bank cannot recover from him since the trustee acts in fiduciary capacity and is not personally liable.

P Segment: 1. Banks should provide a one page key fact statement / fact sheet to all Individual borrowers. R. Will enable borrowers to know the gist of the terms and conditions of the advance. Better transparency in banks' dealings leading to customer confidence. RBI instructions. Has come into force w.e.f 01.04.2015.

1-82 Rationale

2. Bar Code — based passbooks are now issued to SB A/c holders including Fl customers (Swayam Kiosks). R. Customers can go to the Swayam Kiosks at the branch / ATM when convenient for them and have their passbook updated on 24x7 basis. It also enables customers at those branches where Swayam facility is not provided to go to a Swayam branch and have their passbook updated. Improves efficiency and customer satisfaction. 3. Interest rates on deposits are being changed periodically. R. Interest rates on deposits and advances are based on general interest rate structure in the market, inflation, bank's ALM requirements, RBI's Repo rate, competition etc. Repo Rate changes indicate RBI's intention to move interest rates either up or down. Hence, they are changed periodically. 4. Tab banking has been introduced for home loans. R. It is for giving in Principle Approval for Home Loan based on the mobile application. - The application will enable Field Staff to source a credit proposal from a potential customer even when they are on move without the need to carry and fill in any physical document. - The application has been integrated with Lead Management System (LMS). - Allows the field staff to access and process the leads assigned to him or her by LMS. Also he can create a new lead of his own based on marketing efforts / other channels. - The application based on inputs, will also be sending email and SMS to the prospective customer informing his eligibility, rate of interest, EMI and other relevant details. 5. Now, SB a/cs are opened with non-personalised Welcome Kits. R. One of our main USPs while opening new accounts with our bank is issue of non-personalised Welcome Kits (NPWK) to our customers immediately. The issue of Welcome Kit to customers which includes INB Kit and ATM Card will also help in decongestion of branches by migrating them to alternate channels. 6. Online loan against shares to individuals / staff has been launched. R. Centralised processing of loans has been provided at the Specialized Securities Finance Branch, Worli, Mumbai. Sanction will be done on uniform appraisal basis and fast. Streamlined and effective follow up has been provided. Statutory Compliance [Statutory Compliance under (S 19 (2), BR Act)] can be ensured effectively. 7. KYC must be done even for NRI a/cs. R. KYC is applicable to all accounts / transactions including those of NRIs. In fact, NRI a/cs are classified as high risk category accounts under KYC. Money Laundering and Terrorist financing are the major risks with NRI accounts. 8. Interest subsidy claims on educational loans is not submitted physically now by branches to Canara Bank. R. A web based portal has been developed by EDWP Deptt. GITC Belapur, Mumbai in association with PL Deptt, PBBU, CC Mumbai for submission of interest subsidy claims under CSIS. Now the portal is available for submission of primary claims for 2014-15 as and when Canara Bank's portal is opened for the same. 9. SBI Home Top-up loan has been launched. R. SBI Home Equity Loan (now called Top up loan) has been modified recently. Permissible Loan amount is linked to the applicable LTV Ratio. Loans can be given for various personal requirements of the Home Loan borrowers such as education, marriage, healthcare, repairs, renovation and furnishing of the house etc. 10. Online Customer Acquisition Solution (OCAS) has been introduced. R. The objective of the application is to provide tech savvy customers with a platform where they can check their loan eligibility and apply online. The customer would need to visit the branch only for final sanction / disbursement. 1-83 MM Special Guide OCAS will enable the Bank to acquire car loan customers especially the tech savvy young customers in a big way. Processing will be fast and the TAT will be reduced. . 11. The mobile number of customer has to be mandatorily registered in all the accounts. R. It will enable easy identification of customers. It will also enable the Bank to get in touch with the customer whenever there is a need for seeking information and clarifications. Dr/Cr alerts can be provided leading to overall comfort of customers. 12. SBI Personal Liquid Gold Loan scheme has been introduced. R. It is a new type of gold loan launched initially in 3 circles. It is sanctioned by way of overdraft and the maximum amount is Rs.1 lac at all centres to exploit potential available for the business. Repayment in 36 months; repayment of principal as a bullet payment at the end of the loan term.

Human Resources: 1. De-duplication of multiple CIFs of staff has been carried out. R. RBI has issued guidelines to banks to allot a Unique Customer Identification Code for each customer to have better knowledge / information about the customer and the accounts. Accordingly,a customer must not have more than one CIF in a Bank in his name. Many staff members keep accounts at more than one branch. It is also observed that PF number is not mentioned in some a/cs. If CIFs are not updated with correct numbers, such accounts of staff will lose the staff benefits.

Advances: 1. More than ordinary care has to be exercised while accepting third party guarantors for advances. R. Several frauds have been detected in respect of title deeds mortgaged to the bank by the guarantors. KYC due diligence on guarantors has to be carried out in the same manner and rigour as on the borrower. There have been many cases where guarantees are offered by persons for monetary considerations. 2. More than ordinary care has to be exercised in financing gold and jewellery business. R. Financing gold and jewellery business is a high risk business due to volatility in gold pries, changes in regulatory guidelines on import of gold which affects availability of gold, diversion, stock verification issues, heavy cash sales etc. Accounts of such entities are classified as High Risk A/cs under KYC norms. 3. Metal Gold Loan is restricted to borrowers with high credit rating only (July'15). R. Under Metal gold Loans the bank extends loan by way of gold to jewellers / exporters. Presently the gold is in short supply. Hence, only borrowers with ECR of BBB+ and better or S B 7 and better will have to be financed. 4. CIBIL has recently introduced CIBIL (Real Time Alerts). R. This report gives an alert / information when CIBIL report of an existing SBI Home Loans, Car Loan, Education Loan, Personal Loan, Property Loan and Business Loan is accessed by competitors. Therefore, if our customers' CIBIL report is pulled for a Home Loan by competitors, we get a Real Time Alert on the same. The CIBIL alert report will also contain the details / information about our existing Home Loan customers who are trying to switch over to some other Bank / HFC from our bank. The information / alerts provided by CIBIL will not only help us to retain our existing Home Loans, but will also prevent our Car Loan, Education Loan and other borrowers going to our competitors for Home Loans.

1-84 Rationale

Foreign Exchange: 1. Form A-1 in respect of imports of goods into India has been abolished (irrespective of value of imports (Feb'15). R. RBI has abolished it with a view to further liberalize and simplify the procedure for imports. AD banks have to get the requisite details from the importers and satisfy themselves about the bonafides of the transactions. 2. The limit for remittance abroad under Liberalised Remittance Scheme has been increased to USD 2,50,000. R. Forex reserves have risen to the range of USD 350 billion and has been stable. The price of petroleum products / commodities has softened considerably in the last one year. It is in keeping with the policy of RBI to liberalize and rationalize the capital transfers gradually. 3. SBI eforex has been launched. R. A need is now felt to enable Mid Corporates and Small and Medium enterprises to book their trade transactions at rates provided directly by the Central Treasury, Mumbai. This will avoid delay in getting the first rate from the ultimate authority and book the transactions. The customer will have the satisfaction of dealing directly with the Treasury.

General: 1. RFIA / Credit Audit system parameters have been changed some time ago (May'15). R. A few rigidities were observed in the earlier format as business mix at branches have undergone changes. The resultant risks were not revealed adequately by the audit scores. A few parameters have now been changed based on the observations of the Audit Committee of the Central Board of the Bank. 2. RBI has advised banks to provide for mandatory leave for staff posted in sensitive positions / areas of operation (Apr'15). R. It is a prudent operational risk management measure. The employee will be asked to go on leave, without any prior intimation. 3. Bank forms / applications have been redesigned to include third category of persons (May'15). R. RBI has noted that transgender persons face difficulties in opening accounts as there is no provision for them in account opening / other forms. SC has decided that these persons are to be treated as `third gender'. 4. Concept of Red Flagged Account (RFA) has been introduced by RBI. R. RBI has introduced it as an important step in fraud risk control. RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals. The Bank should become alert about any weakness or wrong-doing which may ultimately tum out to be fraudulent. 5. RBI is setting up a Central Fraud Registry. R. It will be a centralised searchable database which can be accessed by banks. CBI and the Central Economic Intelligence Bureau (CEIB) have also expressed interest in sharing their own databases with the banks. The structure is being fmalised by RBI. 6. Pradhan Mantri Mudra Yojana (PMMY) has been launched by the Govt. of India. R. The objective is to "fund the unfunded" i.e extend loans to those micro enterprises which are not having access to banks. Such loans given to non-farm micro enterprises in manufacturing, trading and services sector up to Rs.10 lac will be classified as Mudra loans. 7. The accounting for sundry deposit items has been rationalized (Aug'15). R. Until recently all credits were put through the two SD a/cs without discrimination. Now, one a/c should be used only for parking disputed amounts / amounts involved in court cases. The other a/c

1-85 MM Special Guide named Sundry Deposit (others) should be used for all other miscellaneous assets. Monitoring of reconciliation of entries as well as calculation of balances for crediting DEAF A/c will be easy. 8. The Govt, of India has proposed to launch the Sovereign Gold Bond Scheme. R. The objective is to divert customers' savings from physical gold to financial assets. Aims to curb import of gold as it is an idle asset; will also have a positive impact on current account deficit. 9 The Govt has proposed to launch Gold Monetization Scheme. R. The scheme is meant to mobilize idle gold lying with households and institutions. The gold so collected can be lent to the gems and jewellery sector. Gold imports will be reduced. 10. The Bank has to be very careful when dealing with Power of Attorney operated accounts / facilities. R. There have been many frauds associated with POA operated accounts and in connection with sale deeds / mortgage deeds relating to immovable properties that were executed by PA holders. In the operation of a/cs by PA holders the donor should clearly state his requirements and limitations on the power of the PA holder. 11. RBI has advised banks that Unique Customer Identification Code (UCIC) has to be alloted to all customers. As per RBI guidelines, a customer should not have more than on CIF in a bank in his name. This would help banks to have better knowledge / information in their dealings with the customers for appropriate action. 12. Financial Benchmarks India (Pvt) Ltd has been set up. R. Presently, financial benchmarks like MIBOR is fixed by FIMMDA, association of dealers in the money / financial markets. International experience shows that there have been irregularities in fixing LIBOR. With a view to avoid conflict of interest between various bodies in the benchmark setting process, RBI has stated that a new body called Financial Benchmarks India Pvt Ltd (FBIL) be formed. FIMMDA, FEDAI and IBA have jointly set up the company. 13. Return on capital is the key indicator for investment which will enable the investor to assess the opportunity loss for the venture etc. R. It will create awareness about and focus on risk adjusted return on capital. The RAROC framework aims at highlighting the return considering the associated risk. It is a uniform measure of performance to compare profitability across different businesses with different levels of risk and capital requirements. 14. The Bank has prescribed a code of conduct for employees as regards the accounts of customers including staff of the bank. R. CBS has enabled access to accounts of customers by staff at different levels/locations more freely than was the position in the manual banking days. Hence strict instructions are in place for operation of a/cs. It is now made clear that the authorised staff can access / view the accounts of customers (including those of staff) only while performing official duty and for the purpose of the Bank's business. Otherwise it will be an infringement of privacy of the account holder and the staff will be liable for disciplinary action. They may also be prosecuted under Information Technology Act and Indian Penal Code. 15. NI Act has been amended recently. R. This relates to return of cheques by banks for want of funds. Till now the case under S 138 NI Act has to be filed at the place where the drawee branch is located. Ina large number of cases where the payees reside at other centres, the payees have been experiencing delay / avoidable expenses. Now, the case has to be filed at the place where the cheque is presented for payment and returned.

1-86 Rationale , Very Recent Rationale L Performance guarantee should be issued with due care by the bank. R Issue of Performance guarantees involves assessment of customer's experience, capacity and means to perform the obligations under the contract. We have to satisfy ourselves that the customer is not likely to commit any default leading to invocation of the guarantee by the beneficiary. 2. Vehicle financed by the Bank is insured in the name of the borrower only. 11: If the insurance is done in the joint names of the Bank and the borrower, third party claims may be made against the Bank as a co-owner in case of accidents. Also, the Bank Interest clause incorporated in the policy as hypothecatee of the vehicle is sufficient to protect the interest of the Bank. 3. TATKAL Tractor Loan (Mortgage free) scheme has been introduced by the Bank. K * Aimed at improving our market share in Tractor financing. * To ensure prompt delivery of loan to HNW Agriculturists who score 61 and above in tractor scoring model; such agriculturists purchase tractor with cash. * Special features are: mortgage free, 100% loan (TDR will be kept as margin with lien marked), lower interest rate, differentiated EMI (monthly/qly/Hy), no upfront fee, personal accident insurance cover for Rs.4.00 lac,(first year premium free), etc. 4. Penalty in the form of negative marks is awarded in the RFIA report for false compliance certificates. R: To ensure that branches rectify the irregularities pointed out in RFIA meticulously as part of risk mitigation measures. False compliance certificates reflect the inaction and negligence on the part of the branch and will erode the credibility of the branch. Negative marks will act as a deterrent against these lapses. False compliance certificates carry maximum negative marks of 50. 5. The Bank's right to exercise 'recompense' should be included in the sanction letter to a borrower of a restructured account. When a restructuring package is sanctioned to a sick / weak unit, the Bank makes sacrifice of interest through reliefs/ concessions. As per ROR (Right Of Recompense) clause the unit undertakes to repay the sacrifices once it attains viability; also this clause is activated if the unit gets extraordinary income. In case legal action is taken, this amount is also included in the Bank's claim. SBI Exclusif services have been started With increasing number of HNIs in India, many foreign/ private sector banks are offering wealth management services to HNIs. SBI has entered this area by opening an exclusive outfit at Bangalore/ Delhi initially. The brand image and outreach will enable the Bank to book more business under this category and provide stiff competition to foreign/ private sector banks. The Bank earns good income thereby increasing the profits. SBI is making focused thrust in Personal segment advances. The credit offtake in the C&I segment has been very sluggish in the past 1 year. The demand for home loans, car loans and education loans has been very brisk. Will improve interest earnings for the bank. Some portion of the loans form part of priority sector also. The five Associate Banks of SBI and Bharatiya Mahila Bank are proposed to be merged with SBI by Mar'17. Merger will result in economies of scale and lower cost of operations for the Bank. Bigger size will enable the Bank to have more resources at its command and follow better risk, asset-liability, treasury management policies etc.

1-87 MM Special Guide a) The reach of the Bank will further improve and the Bank can meet competition effectively. The balance c' sheet size of the bank will go up and the ranking of the Bank among global banks will also increase. b) Many overlaps between the Bank and Associates can be eliminated such as multiple branches in the same area eating into each other's business. Duplication of technology, infrastructure etc. will be avoided. The benefits of all synergies will accrue to the Bank. 9. Goods and Services Tax (GST) will be implemented w.e.f 01.04.2017 R: a) There will be no differentiation in goods and services in levying the tax. GST will make the products cheaper as only the final consumer will be taxed on the last stage of supply chain. b) GST will increase investments in the country as single tax across the country will ensure ease of doing business. c) Exports will get boost from better tax structures and domestically produced goods will become more competitive compared to imported goods and this will spur GOI's Make in India efforts. d) GST is expected to increase GDP by 2 Percent points and this system will be easier for the government to administer tax and plug leakage in the system. Note: Arising out of demonetization and the lock-down of Parliament in the winter session the date may be postponed. 10. SBI Privilege Home loan has been introduced. R a) It is meant for employees of central/state governments including PSBs/PSUs of Central government and other individuals with pensionable service. b) The privileges like reduced burden of servicing EMIs (lower EMI would need to be paid during post retirement term), extended repayment up to age of 75 years, full waiver of processing fee, benefit of lower interest as concession of 5bps over Home loan Card rate wherever check off facilities extended by Govt, and option for customers of other banks/FIs to switch-over are available in the SBI Privilege Home Loan making it attractive. It will enable the Bank to exploit the potential and augment its home loan Portfolio. 11. Form 15G & 15H — Income Tax: Simplification (w.e.f.1.10.15) R - A payee can submit the self-declaration either in paper form or electronically. The deductor will not deduct tax and will allot a Unique Identification Number (UIN) to all self — declarations. - The deductor should advise the particulars of self declarations along with UIN in the quarterly TDS statements. - The deductor need not submit physical copy of Form 15G / 15H to I.T. authorities; but retain the forms for 7 years. 12. Account Aggregators are being set up. R At present, persons holding financial assets, such as, savings bank deposits, fixed deposits, mutual funds, insurance policies etc, do not get a consolidated view of their financial asset holdings, especially when the entities fall under the purview of different financial sector regulators. Account Aggregators would fill this gap by collecting and providing the information of customers' financial assets in a consolidated, organized and retrievable manner to the customer or any other person as per the instructions of the customer. The investors will be able to avail the service of an Account Aggregator purely at their option. 13. SBI has launched SBI Global Ed-vantage scheme.

'1",-- 1-88 , Rationale

R: To extend financial assistance to deserving / meritorious students for pursuing full time regular courses in foreign colleges / universities. The higher ceiling will be helpful to students to pursue studies in first-class institutions. 14. The Bank has launched SBI Happy Home Loan: R: - Available to working professionals / executives. - Loan amt: up to 1.2 times more than eligibility amount under HL Schemes - Moratorium: As opted by the borrower; only interest to be paid during the moratorium period. - Longer repayment period of 25 — 30 years allowed. 15. RBI has introduced Priority Sector Lending Certificates — Scheme. R: To enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivize the surplus banks; thereby enhancing lending to the categories under priority sector. The seller will be selling fulfillment of priority sector obligation and the buyer would be buying the same. There will be no transfer of risks or loan assets. 16. The Govt. has introduced Revamped Gold Deposit Scheme (R-GDS). R It is in the nature of a fixed deposit in gold. Customers can deposit idle gold under R-GDS. Redemption on maturity in rupee or gold. The product will enable banks to mobilise idle gold in the country and use it to meet normal demand; costly imports can be avoided. 17. SBI Personal Gold Loans Scheme has been introduced. R It requires minimum paper work and has low interest rate. Principal and interest to be repaid at the end of the term as bullet repayment. 18. Simplified Cash Credit Facility (SCCF) has been launched by SBI. R To ensure realistic assessment of WC limits, a new CC product Simplified Cash Credit Facility (SCCF) has been developed for limits above Rs.5 crore and up to Rs.20 crore for manufacturing units. 19. SBI SHAURYA HOME LOAN has been launched. R It is meant for Defense Personnel belonging to Army, Navy and Air Force. The Scheme's terms are liberal. Reduced EMIs during the post-retirement term. EMIs to be serviced during the post-retirement term are capped at 50% of the current Net Monthly Income. Extended repayment up to the age of 75 years. Full waiver of Processing Fee. Benefit of lower interest rate as a concession of 5 bps over the Home Loan Card Interest Rate is available wherever check-off facility is extended by the Government under tie-up arrangement with the Bank. 20. SBI PRIVILEGE HOME LOAN: R: Employees of Central / State Governments including PSBs, PSUs of Central Government, and other individual(s) with pensionable service are eligible. EMIs to be serviced during the post-retirement term are capped at 50% of the current Net Monthly Income. Extended repayment up to the age of 75 years.

1-89 MM Special Guide Full waiver of Processing Fee. Benefit of lower interest rate at a concession of 5 bps. 21. Bank staff should get certification from appropriate bodies in specialised areas like Treasury Operations, Risk management, Credit management, selling of other products, etc. R Recommendations of GGopalakrishna Committee that banks should identify specialised areas for certification of the staff manning key responsibilities. To begin with, the banks should make acquiring of a certificate course mandatory for the following areas: Treasury operations, Risk management and Credit Management. To address the issues of mis-selling and to minimise customer complaints, the employees involved in marketing third party retail products and wealth management products must necessarily undergo an appropriate certification process. Where other financial sector regulators have prescribed any certifications, these must be complied with. 22. RTI Query Management and Tracking System has been introduced by the Bank. R a) This will enable the Bank to know the type of questions being asked under RTI Act and ensure that the questions have been properly answered and no adverse criticism is made against the Bank. Also to ensure that the information which are exempt from disclosure as per sec 8 of the Act such as information that would affect sovereignty and integrity of India, information that has been expressly forbidden by courts to be published and information affecting commercial confidence, trade secrets, intellectual property etc are not given. b) This will also avoid payment of penalty etc by the Bank for Non / Delayed submission of the information. 23. Interest should not be applied in NPA account. R Once an account is identified as an NPA, it ceases to generate income for the bank. The principal itself is doubtful of recovery in these cases. Hence, interest is not applied on accrual basis, as it would inflate bank's profit. This results in the Bank paying taxes on the artificial profit. Hence it is reckoned only on realization basis. As per RBI directives on IRAC norms. 24. Review of standard account has been introduced by the bank. R Review of standard account would enable the Bank a) To satisfy that the unit's performance is as per projections with regard to sales, net profit, level of stocks / debtors etc. made at the time of sanction of the advance. b) To satisfy that the conduct of a/c is satisfactory and there is healthy turnover in the a/c, and there are no adverse features in the conduct of account such as non routing of sale proceeds, return of cheques, invocation of BG, devolvement of L/C bills etc. c) To identify early warning signals and take appropriate timely corrective action for smooth conduct of the account. 25. Lease Rental Scheme has been introduced. R: Lease Rental: Loan against future rent receivables. Targeted at owners of residential and commercial properties in all areas except rural areas. Product will enable building of residential/ commercial buildings for which there is a growing demand. 26. Marginal Cost of Funds based Lending Rate (MCLR) has been introduced w.e.f 01.04.2016. R Till 01.04.2016 Base Rate was in vogue. RBI found that banks were not transmitting the changes in the Repo Rate fixed by the RBI. Hence, w.e.f 01.04.2016 RBI has instructed banks to fix interest rates linked to the marginal cost of funds (MCLR). This will force banks to pass on the changes in Repo to borrowers. As against Base Rate, MCLR is tenor based also and Banks have to re-adjust to the revision in Repo Rate monthly.

1-90 Rationale

27. SBI Asset backed Agri Loan (Premium Kisan Gold Card) has been launched. R: The product is aimed at financing emerging Agri business entrepreneurs engaged in high-tech farming and allied activities. Competitive interest rates are quoted to increase business. 28. Internal Ombudsman has been appointed in banks. R The post of Internal Ombudsman has been created in PSBs and a few Private sector banks and foreign banks. He/She is designated as Chief Customer Service officer. This initiative of RBI is aimed at further ! boosting the quality of customer service and to ensure that there is undivided attention to resolve customer I. complaints. 29. Demonetization of currency has been effected by the Govt. R To stop counter-feiting of the high value notes (Rs.500 and Rs.1000) which was happening in a big way. To freeze and bring out black money from the economy. To prevent funding of terrorism, drug trade and smuggling. To encourage use of electronic banking. 30. Stree Shakti Tractor Loan Scheme has been introduced R It has a shorter loan tenor/EMI; sanctioned with collateral security / without collateral security. Women should be a co-borrower. It has many competitive features and risk proofing. ,.. ,..; : - , ,- -:Ti, _.1 , ;', -"''''. ' ',,,---, 1 P'.1'": ', r.'",:Pi\10f..,-,,2 _ ' -.1.) q - - i W.: . 1 \ / 2 - -- • • - • ', ' ' .1' -',.', 5 a ' .-'' ' -' , : 1'15 7. ( . i . . —, e/4 ' • :1:‘' .'_''-.' -. 4 .:1-101"''' - • ,...;,!,) ,-1',.4 -(, ., '-. :: -. ,P,'',:i.-. `,.: "7., _. ,. _ ''' ,,, . , 4 - ,'• ' '''-", !.'/.-''' I r , - ' .',

, -

• ORGANISATION AND BUSINESS PROBLEMS

I 1. List six Complaint Prone areas in our Bank. 1 2. Write 3 points for prevention of frauds and 3 points for detection of frauds. 3. What are the major concems of the Bank? What steps you recommend to over-come those concerns? 4. What are your suggestions and strategies to imporve Savings Bank deposits in a Rural Branch?

Answers: 1. The following are major complaint prone areas: a) Complaint regarding ATM services b) Locker related complaints c) Lack of details in the statements d) Recovery of excess bank charges e) Delay in settlement of deceased claim cases 1) Delay in sanctioning of loans g) Complaints relating to INB facility h) Complaints relating to RTGS/NEFT transactions. i) Bank's failure to act on Form 15G/15H in respect of TDS

2. Prevention of frauds 1. System security measures to be followed meticulously 2. Password security system to be meticulously followed 3. Strict compliance with laid down systems and procedures. 4. KYC due diligence to be done carefully 5. Bio-metric authentication. 6. Active Directory Services 7. Maker-checker concept 8. Online V.V.R.Checking

Detection of frauds 1. Prompt reconciliation of GLIF (General Ledger Inter Face) transactions. 2. Customer complaints about shortage in cash received by them, shortage in account balance, long delay in realisation etc. 3. Spot Audit 4. Scrutiny of control returns. 5. Online VVR checking 6. Scrutiny of staff a/cs.

3. After liberalization the following major concerns have emerged: a) Stagnation in Bank's market share. b) Emergence of competition from private sector / foreign/ Nationalised banks. c) Interest spreads have been narrowing affecting profitability. d) NPAs have assumed serious proportions. In fact, it has emerged as the most worrying factor in 2013-14/2014-15/2015-16. :=4 e) Re-skilling of staff is not adequate; attrition rate is rather high.

2-1 I114 Special Guide

f) Achieving Financial Inclusion. g) The Bank is not fully perceived as a tech-savvy bank by the young customers. Following steps have been initiated/are to be intensified: • State of the Art technology has to be adopted to meet competition. Already the Bank has introduced Single Window System, State Bank Connect and Core Banking Solutions. Staff at all levels have to be re-skilled. Large scale recruitment has been effected in the last few years to augment staff strength. • Emphasis on opening bank branches, ATMs, BCs, in unbanked areas. • Transaction costs have to be reduced through technology/delivery of services through alternate channels. • Securitisation Act and other recovery methods have to be used more effectively. The NPAs will have to be transferred to Asset Reconstruction Corporation of India Ltd, which will improve the NPA position. • Faster promotion opportunities to younger and more capable staff, retraining/reskilling of staff, appropriate redeployment, adequate compensation will add to the commitment and contribution of staff. • Posts of Relationship Managers have been created in all segments for deepening the relationship with customers. • Massive recruitment of Assistants, Probationary Officers, MEs / Scale-III officers, Marketing Officers, OMR (R) has been made of late. • Contact centres established at Bangalore and Baroda to respond promptly to customer queries, greivances etc. • Launching of sbi INTOUCH in six centres; to be further widened. • Launching of Tablet Banking.

4. a) The front line staff should develop marketing approach and skills. b) Strengthening Relationship Banking by personal visits to important/relatively well educated/well off people to explain the various schemes / facilities. c) Regular Customer Call. d) Illiterates to be given assurance that the Bank staff will help them in filling up forms etc. e) SHGs to be encouraged to open SB a/cs. f) Persons having Gold Loan a/c, ACC, An to be persuaded to open SB a/cs. g) Branch staff to be actively involved h) "Savings Bank Accounts" camps will be organised during harvesting/marketing season. i) Regular visit by staff to APMY Yards/Commission agents to ascertain the position of payments to farmers. j) Opening PMJD A/cs and activating them so that the account holders will maintain larger balances. k) Wide local publicity. I) Use of BCs through Kiosk Banking Model.

2-2 Banking Problems ADVANCES - GENERAL PROBLEMS

Advances-General: 1. Mr. 'X' has a Gold Loan for Rs. 5 lakhs. He is absconding for the last 5 years. His wife wants to close the loan a/c on the condition that the release of the gold ornaments should be made to her. Discuss. 2. Mr. A had a Gold Loan A/c at your branch. Mr. C, son-in-law of Mr. A reported the death of his father in law and wanted to close GL ale and take delivery of the ornaments. How will you act? 3. A gold loan account became irregular and was not repaid. After serving due notices the ornaments were auctioned and the loan amount adjusted. A banker's cheque for Rs. 10,000 was sent to the customer, being the excess amount realised. However the customer has filed a case against the bank. contending that the bank should have filed a suit on the primary security of DPN and not sold the ornaments. 4. Mr. X has pledged gold ornaments and availed a demand loan. He agreed to keep the gold ornaments till the other loan a/c (he is having a Term loan) is repaid. He repaid the term loan and the gold loan. He is a surety to one loan a/c. He demanded the delivery of the gold ornaments. The Bank refused to give delivery. Is Bank's action justified? Discuss. 5. Mrs. 'X' has a TDR for Rs. 10 lakhs. She has availed a Demand Loan on the TDR. She requests you to include the name of her son 'M' who is a minor, in the TDR. Discuss how you will help her. 6. A has availed an advance against TDR. The interest has not been paid. On scrutiny of the advance after 3 months it was found that the advance is less than the prematurity payment. Discuss what action you will take. 7. While purchasing a documentary bill the Railway Receipt accompanying the bill should be in favour of "Self" and not in favour of the drawee. Why? If it is in the name of the drawee, what complications can arise? 8. Mr. P.K.SINGH has availed a loan which was guaranteed by M.K. SINGH. Mr M.K.Singh also availed a loan which was guaranteed by P.K.Singh. Mr P.K. Singh's account was regular but Mr. M.K. Singh's account was not regular. Mr P.K.Singh informed the bank about the irregularity of Mr. M.K.Singh's a/c and has revoked his guarantee. How will you proceed? 9. A minor avails an overdraft with the bank by misrepresenting his age. The overdraft is guaranteed by Mr. 'X'. It is irregular and barred by limitation. The minor attains majority. When contacted by the bank he undertakes in writing to repay the OD but eventually fails do so. Discuss the bank's position.

Answers to Advances General I . As per Section 108 of the Indian Evidence Act if a person is missing for more than 7 years and the persons who would have ordinarily known of his existence have not heard about him, he is presumed to be dead for civil purposes. In this case he is absconding for 5 years. Hence, the gold ornaments can be delivered only to Mr. 'X' after the closure of the gold loan.It cannot be given to his wife. However she may be allowed to close the gold loan a/c as a special case subject to her giving an undertaking that she will not claim: a) The gold ornaments pledged to the bank b) The amount credited to the gold loan amount. This is done with a view to reduce the interest burden. Also, the wife is the legal heir of the borrower. CA's prior permission has to be obtained. 2. Mr. C has to produce the death certificate. He will be allowed to close the account with a view to reduce the interest burden. He should give an undertaking to the effect that he will not claim. a) the gold ornaments pledged to the bank b) the amount credited to the gold loan amount .

2-3 •• . . ,.".

•

MM Special Guide c) He will also agree that the gold ornaments will be delivered by the Bank to the legal heirs only. He will be advised that the account is closed only for reducing the interest burden; and that the bank will deliver the omaments to the legal heirs only. 3. In Law, a gold loan would be viewed as an advance secured by a) DPN and b) pledge of gold omaments.The bank is well within its rights to sell the pledged goods and sue the customer for the balance, if any, on the strength of the DPN. In the present case, the entire advance has been recovered by the sale of omaments and the surplus has been refunded to the borrower. The bank's actions are in order. 4. The bank is well within its rights to keep the ornaments till the gold loan and the other loan is repaid. However, the action of the bank in retaining the omaments till the loan guaranteed by him is repaid is not in order. The borrower's liability is a contingent liability only. The account has not been crystallized and his liability has not matured. The bank has to deliver the ornaments. 5. She has to close the loan account inasmuch as inclusion of the Minor's name in the TDR during the tenure of the loan would amount to granting a loan on minor's deposit; also, it would amount to entering into a loan Contract with the minor, which is void ab initio. As an altemative, his name could be included as survivor by converting the TDR on Former or Survivor basis or she can be advised to nominate her minor son 'M' to the deposit. 6. The interest on the loan has to be serviced regularly. If interest is not paid, the margin on the advance will be eroded. This is because the interest on advance is to be paid monthly whereas interest on TDR is compounded quarterly leading to faster erosion of margin in case of advances against TDR. If the value of prematurity payment minus outstanding advance is less than 2%, the TDR has to be prema- turely closed and advance adjusted. A letter is to be obtained from the depositor to this effect while opening the account. 7. Usually, the consignor despatches the goods 'to self' and obtains a Railway Receipt. The consignee copy (as goods are deliverable against this copy) of the railway receipt with 'self' as consignee is endorsed in favour of the bank which purchases/discounts the bill. By this procedure, the bank becomes a holder for value. The endorsement and delivery of a receipt is sufficient to create a valid pledge of goods covered by the receipt. Customer cannot take delivery of the goods by executing indemnity if bank informs the railway authorities about its lien. If the RR is made out in the name of the drawee, the drawee will be able to clear the goods on providing indemnity to the Railways; also, in case RR falls into his hand inadvertently, he can clear the goods. 8. • There are 2 loan a/cs as under: i) A/c of P.K.Singh: The account is regular ii) A/c of M.K.Singh: The account is irregular; the guarantor P.K.Singh wants to terminate his guarantee. The following actions have to be initiated. M.K.Singh's a/c: M.K.Singh would be advised to regularise the account and offer altemative acceptable security. If the a/c is not regularised or alternative security is not available, we have to freeze the operations on the a/c so that the guarantor's liability is determined. Thereafter, steps have to be taken to recover the dues from M.K.Singh and P.K.Singh. A/c of P.K.Singh: The account is regular and the guarantee is continuing. However, once the other a/c is called up and coercive / legal action is initiated, P.K.Singh will become a defaulter to the bank, if he does not pay up the dues as guarantor. Hence, if he does not pay the dues as guarantor, he will be advised to repay the loan failing which coercive / legal steps will have to be initiated on his a/c also. 9. The original contract has been with a minor which is void ab initio. This is so even if he misrepresents his age. Thus the bank cannot proceed against the minor even on the basis of a letter of undertaking given by him as a major. There is no consideration for the undertaking given after his majority. Mr. 'X', the guarantor is also not liable, as the principal contract itself is void.

Advances-Commercial 1. From the following information, work out how many pieces must be produced so that the company

2-4 Banking Problems

starts making profit. Sale price of each piece is Rs.125; cash discount per piece: Rs. 25 Wage cost per piece: Rs.40 Raw Materials per piece: Rs.20 Office Rent: Rs.I000 pm; Other fixed costs: Rs.17,000 and Rs.10,000. 2. The Balance Sheet of XYZ Co. as on 31.03.2001 is given below: LIABILITIES ASSETS Bank Loan/Cash Credit 200 Cash in hand 10 Sundry Creditors 50 Inventory 200 Adv.recd.from customers 20 Sundry Debtors 150 Term Liability 90 Adv.Tax paid 10 Paid up Capital 100 Shop, Land & Building 150 Reserves 115 P & L A/c (Loss) 15 Preliminary Exp 40 575 575 Please work out the following ratios: 1) Current Ratio 2) TOL/TNW Ratio 3) TNW 4) Tangible Assets. 3. Examine the following balance sheets and offer your comments on: a) Current Ratio b) Quick Ratio c) Debt equity ratio d) Net working capital 2000 2001 2000 2001 Liabilities Assets Current Liabilities Sundry Creditors 40 32 Fixed Assets Advance Payments Received 25 13 Plant & Machinery 434 440 Deferred Liabilities Debentures 200 200 Networth Current Assets Capital 200 200 Cash 31 52 Reserves 135 169 Stocks 112 99 Debtors 23 23 600 614 600 614

Answers to Advances - Commercial

1. BEP = Fixed Cost X Sales Contribution Fixed Cost X Sales --= Sales-Variable Cost = 39.000 X 100x 100 x - 60 x = Rs.97,500 Note: Sale Price: Rs.125 - (less) Discount Rs. 25 Rs.100 2-5 o n MM Special Guide Total Fixed Cost: Fixed Cost Rs.12,000 ( Annual Rent) OFC ' Rs.17,000 and Rs.10,000 Rs.39,000 Total Variable Cost: Wage: Rs.40 Raw Material: Rs.20 Rs.60 per piece X is the no of units sold 2. a) Current Ratio: 370/270 = 1.37:1 b) TOL/TNW: 36'0/160 = 2.25:1 c) TNW: Rs.I60 lakh d) Tangible Assets: Rs.520 lakhs

3. 2000 2001 a) Current Assets 166 174 Current Liabilities 65 45 Current Ratio 2.55 3.87 Comments:Current ratio in 2000 is satisfactory but it is rather high in 2001. Perhaps the unit is building up cash for meeting some commitments. b) Quick Assets 54 75 Current Liabilities 65 45 Quick Ratio 0.83 1.67 Comments:Quite low in 2000 (the ideal ratio is 1:1). It has improved in 2001. c) Debt 200 200 Equity 335 369 Debt Equity Ratio 0.60 0.54 Deferred Liabilities are quite low as compared to the equity. d) Net working capital 101 129 (Current Assets-Current Liabilities) The unit has increased the Net working capital and reduced its dependence on short term borrowings.

Advances-Small Enterprises (Manufacturing): 1. Loan has been granted to a partnership firm. One of the partners takes retirement and other two partners accept the liability. What action the bank will take? 2. ABC Bank granted a Term Loan to Mr. 'X' guaranteed by Mr. 'Y'. The Bank came to know that the borrower is not in a position to pay the instalments at the stipulated periods. So it rephased the term loan instalments. This was not informed to the guarantor. After a few months Mr. 'Y' approached the Bank and informed that Mr. X's financial position is bad. The Bank recalls the Term Loan by issuing .notice to Mr. 'X' and Mr. 'Y'. Is Mr. 'Y' liable as a guarantor? 3. A cash credit account for Rs.10 lakhs has been guaranteed by Mr. 'X'. He has now revoked the guarantee with effect from 3 months from the date of the letter. The outstanding in the account is Rs.4 lakhs. Can you allow drawings up to Rs. 10 lakhs for another 3 months? 4. A unit enjoying credit limit of Rs. 2 lakhs has approached you for enhancement of the limit to Rs. 4 lakhs. The unit has offered certified copies of title deeds as collateral. Discuss. 5. A unit is having C/C Hypothecation a/c for Rs.4 lakhs and Bill limit of Rs.6 lakhs. It has approached you with a request that it should be allowed excess drawings of about Rs.1,50,000 as and when sr required by it. It also undertakes to adjust the excess drawings so allowed within 40/45 days. This is — . . x3 s 2-6 Banking Problems ..41h needed in view of severe competition from imported goods as well as sluggish demand. Discuss. 6. A partnership firm was sanctioned a cash credit limit of Rs.2 lakhs on 1.1.98. The documents were signed by partner A. The other partner B signed the documents on 1.2.98. Discuss the legal implications. 7. A has guaranteed the cash credit advance sanctioned to B. After some time to ensure that B who is the young nephew of A has been doing well, A asks the bank about the conduct of the account. Can the Bank reveal the conduct of account to him ? 8. On default of payment in a guaranteed account, a statutory notice was sent to both the borrower and the guarantor. The guarantor says that the bank has not taken necessary action at the appropriate time. He advises the bank that the borrower has sold the goods hypothecated to the bank and also furnishes the bank with the address of the purchaser of goods. Discuss. 9. XYZ Company, a partnership firm has been sanctioned a cash credit limit of Rs.10 lakhs against the equitable mortgage of a house belonging to the managing partner. The managing partner has got the house in a partition made among his brothers. The original partition deed is not available with him; he has only a certified copy of the title deed. Can this title deed be accepted for creating equitable mortgage? If so detail the procedure to be followed. 10. Describe the Advance Short Credit method of financing sales bills of Small Enterprise (Manufacturing) units. 11. A customer desires to create "Equitable Mortgage" against his immovable properties at his residence. Whether his request can be acceded to ? If so, what are the precautions to be taken in this respect? 12. A Term Loan of Rs.10.00 lakhs for purchasing a bungalow was sanctioned by obtaining equitable mortgage of the bungalow and plot. The auditor observed that the stamp duty paid for EM is deficient by Rs.500/-. The Borrower was ready to pay additional stamp duty. He obtained the title deeds from Branch manager for recording the payment of stamp duty from the Registrar's office with a promise that he will return the documents by same day afternoon. As the borrower did not return after 6.00p.m, the Branch Manager telephoned his house. The borrower told on telephone that the documents are ready but he will retum only if the condition for compounding of interest is deleted from the loan documents.What will you do if you are the Branch Manager. ? (Note: In some states, stamp duty is payable for registering memorandum of equitable mortgage). 13. An applicant approaches you for a loan for manufacture of immersion water heaters. He projects his monthly sales at Rs.4 lakhs. Assess his working capital requirement under Nayak Committee. 14. Insurance Policy is to be obtained in respect of hypothecated vehicles in borrower's name only and charge is noted in policy and R.T.O Books-Why? Answers to Advances to Small Enterprises (Manufacturing) 1. The partnership has been reconstituted. Hence, the following steps are to be taken. a) A stamped letter of continuing guarantee should be obtained signed by all partners, including the retired partner. This letter is taken before allowing operation on the accounts till the bank takes decision whether to continue the facilities or not. If partnership property is mortgaged to the bank, all the partners shall admit and declare that the benefit of the existing mortgage will be available to the advances that will be made available to the reconstituted unit. If any personal property is obtained as mortgage, the owner should admit that he agrees for the continuance of the mortgage to the reconstituted partnership. If a third party had guaranteed the account, a similar undertaking would be obtained from him. The new account would be opened within 2 months, after agreeing on the fresh terms and conditions. In respect of Term Loans, the existing documents may be continued; suitable letter agreeing to pay the instalment and interest will be obtained.

MM Special Guide It has to be ensured by scrutinizing the partnership deed that the Partnership does not get dissolved on the death of a partner. 2. Rephasement of term loan instalments is a material change in the contract; and as such requires the consent of the guarantor (S 133, Indian Contract Act). As his consent has not been obtained, Mr. 'Y is not liable. Some banks have made a provision in the guarantee documents that the surety should give 3 months notice to the bank for withdrawing the guarantee. In such cases, the revocation will be effective after the notice period. An interesting question is whether the bank can permit drawings up to Rs. 10 lakh or it should freeze it at Rs.4 lakhs. Mr. 'X' should be advised of his continuing liability under the guarantee; it should be specifically made clear that his guarantee would be effective for another 3 months and his liability may go up to the maximum amount guaranteed by him together with interest. Meantime, the matter has to be taken up with the borrower for arranging for altemative security. (In SBI, no notice period is provided for in the guarantee documents). The decision for enhancement has to be taken based on the anticipated level of operations of the unit.Generally, the bank does not accept copies of title deeds under equitable mortgage. However, they may be accepted if the parties are of undoubted standing and integrity in exceptional case. We have to satisfy ourselves about the circumstances of loss of the title deeds. The owner will be required to give an advertisement in the local daily about its loss and his intention to mortgage the property to the bank. He has also to provide an affidavit to this effect. The Controlling Authority's prior approval should be obtained. Advocate's Title Investigation Report that the mortgagor has clear, absolute and marketable title to the property should also be obtained. More than ordinary care has to be observed in the transaction. If documents are not complete, registered mortgage has to be obtained. The unit requires ad hoc finance for short periods over and above the sanctioned limits to meet unforeseen situations. The unit may be financed under SME Credit Plus subject to the following terms and conditions. a) It should have excellent track record and highest standing and integrity. b) It should be a standard a/c as at 31.3 of last 2 consecutive years. c) 20% of aggregate fund based working capital limits subject to a maximum of Rs.25 lakhs can be sanctioned. d) The limit can be utilized 12 times a year; to be adjusted within 2 months each time; Fresh loan will be sanctioned only 15 days after the complete repayment of the previous loan. e) A separate clean cash credit a/c called SME Credit Plus a/c will be opened; utilization of the limit is left to the complete discretion of borrowers. 6. It is preferable that documents are executed by all partners/ guarantors on the same day at one place. However, where it is not possible, the documents may be executed on two or more different dates. Each signatory should put the date on which he puts the signature to the documents. The document should be treated as executed on the first date and limitation would commence from that date. How- ever, personal liability will commence from the date of signature of each partner. 7. The bank should not reveal the nature of conduct of accounts to the guarantor. Any discussion of the nature of transactions would amount to breach of secrecy of customer's accounts. However, we can advise his liability at any time. 8. Inasmuch as a statutory notice has been served it is evident that the bank has decided to recall the debt. The liability of the guarantor thus becomes co-extensive with that of the borrower notwithstanding the • sale by the borrower of goods hypothecated to the bank. Also, the bank should investigate the allegation of sale of goods and initiate actions as appropriate. But this will not preclude guarantor's liability. 9, The duplicate or counterpart partition deed is the document of title with which an equitable mortgage can be validly created legally. But, such requests should not be entertained as a matter of routine. The standing

2-8 Banking Problems

and bonafides of the parties should be thoroughly examined. Also, abundant care and caution need to be taken in the creation of equitable mortgage with partitioned properties. The following safeguards have to be taken to protect the Bank's interest: a) Registered mortgage is to be created for a portion of loan amount, say Rs.5,000/- or Rs.50,000/ - to Rs.1 lakh depending on the advance amount. The registered mortgage should not be closed unless the entire dues are repaid. For the balance loan amount, equitable mortgage may be created after obtaining up to date encumbrance certificate. By adopting this procedure, the bank's charge will be reflected in the encumbrance certificate and it will be difficult for the borrower or guarantor to create further encumbrance over the property. b) A certificate of possession of the property by the mortgagor should be obtained from the Village Administrative Officer. c) The plan of the entire property showing the portion of each of the co-sharers duly signed by them before a Notary Public should be deposited along with other documents of title. d) It should be ensured that there is clear access to the mortgaged property from the public road and it is easily marketable in the event of enforcement. e) Where possible a letter should be obtained from other co-sharers that they are aware of the fact that one of the co-sharers has borrowed loan by mortgaging his portion of the property and that they do not have any objection in creation of such a mortgage in favour of the Bank. 0 It should be ascertained from the court through the bank's advocate whether any dispute is pending in the Civil Court with regard to the property offered; the advocate should certify in his report that no such dispute is pending to the best of his knowledge. g) In many states agriculture property cannot be mortgaged for non-agricultural loans. h) After creation of the equitable mortgage, it should be registered with CERSAI within 30 days to record our charge over the property. 10. An Outward Bill Limit is fixed for the unit based on its credit sales. Bills drawn by the unit on its buyers are submitted to the Bank under the limit. A margin of 10% to 20% is fixed. A suitable cover period is fixed based on the average period of credit extended by the unit. As and when bills are submitted D.P. is worked out and the unit can draw up to D.P. When the bill is paid the DP is reduced. If the bill is not paid at the end of the cover period, the DP is reduced and the bill is followed up for payment. A stamp is affixed on the bill forwarding schedule reading "it is not a mere collection. We are interested as financiers". The transport documents may be called for under the bill or mere copies of documents may be accepted as proof of sale etc. Suitable security documents creating hypothecation over the goods covered by the bills are obtained while sanctioning the limit (Note: Of late, book debt limit has become a practice; outward bill limit has become rare.) 11. Under S 58 (1) of TP Act equitable mortgage can be created at a Notified Centre. It does not restrict the place at the Centre where the equitable mortgage can be created. The equitable mortgage can be created only at the branch except in exceptional cases where the bank is satisfied about the genuineness and necessity of the borrower's request. However, the matter has to be referred to the controlling authorities and their approval has to be obtained for effecting the mortgage at his residence. The recital has to be appropriately modified and recorded. It should be ensured that all the other formalities in regard to the creation of the Equitable Mortgage are observed. The borrower has to send a confirmatory letter to the branch. 12. The branch manager ought not to have delivered the title deeds to the borrower. The risk of creation of .. , . . another mortgage using the titte deeds by the borrower favouring a third party cannot be ruled out. The Bank could have arranged to pay the additional duty directly by admitting the mistake and paying Penalty. Also, we cannot agree for waiving the 'Compounding Factor'. It is a matter of Bank Policy. We have to persuade the customer tactfully to come to the branch with the documents by deputing a senior 2-9 MM Special Guide

official and assuring him that his case will be referred to CA for favourable consideration. I I The Nayak committee method is applicable to Working Capital limits of SME units (Mfg) up to Rs. 5 cr. The following aspects have to be complied with. a) The unit's investment in P & M should not exceed Rs. 500 lakhs. Only then it is classified as a SME (Manufacturing) Unit. b) The Projected Annual Sale should be reasonable and capable of being achieved by the unit by examining its technical, economic, financial and managerial feasibilities. Annual Sales: Rs. 48 lakhs As per Nayak Committee the unit is eligible for 20% of its Projected Annual Turnover Rs. 9.6 lakhs (PAT) as Working Capital limit It has to meet 5% of PAT as margin Rs. 2.4 lakhs Hence, Working Capital Requirement is Rs. 12.0 lakhs The unit's requirement would also be assessed by the Conventional Method. The higher of the two limits will be granted to the unit. In case the unit's liquid surplus is very comfortable and the unit requires a lesser amount than that assessed under Nayak Committee method, the lesser limit will be extended. The reasons should be recorded and the consent of the borrower obtained for the same. 14. If the insurance is done in the joint names of the Bank and the borrower, third party claims may be made against the Bank as a co-owner in case of accidents. Also, the Bank Interest clause is sufficient to protect the interest of the Bank. Noting the Bank's charge in RTO's books will alert the RTO not to register any sale of the vehicle before the bank loan is closed and a `no-lien' letter is sent by the bank to the RTO.

Advances-Agri 1. An agricultural borrower has not been able to repay crop loan as the present market price is not favourable. He requests for financial assistance to meet the requirements for the ensuing season. How will you help him? 2. An agricultural borrower who was severely affected by Natural calamities has approached the bank to give him some relaxation for repaying the term loan. What are the relaxations we can give him? 3. When the selection of PMEGP beneficiaries was done, our field officer did not attend the meet. Subsequently, the DIC sent two selected applicants to your branch. On verification it was found out that one of the applicants is a defaulter at the other branch. How will you act? 4. A fanner approaches you for converting the crop loan into a term loan as his crops have failed. How can you help him?

Answers to Advances-Agri 1. The produce can be kept in a nearby warehouse or in his house with proper locking arrangements and with easy access to the bank. The borrower can be granted a Produce Marketing Loan (maximum Rs.50 lakhs) repayable in 1 year against the warehouse receipt (without collateral security) to enable him to carry out his agricultural operations. (P1 refer Produce Marketing Loan). The agriculturist can be granted a loan under FEEL (Krishi Kalyan) before the start of the next season. This will enable him to avail the PML after the harvest is over. It will be cost-effective and convenient for him. 2. RBI has advised banks to provide the following reliefs in such conditions. a) Short-term loans due in the year of occurrence of natural calamity will be converted into a term loan (including interest). b) The term loan to be repaid in 3 years (small & marginal farmers: 5 years)

2-10

.7, Banking Problems

c) Existing term loans can be rephased for a period of 3 years or more where needed. .1:44re 4 d) Any penal interest already charged, may be waived; no penal interest to be charged for the converted loans. e) Fresh crop loans to be sanctioned. f) The converted loan will carry the same interest rate charged on the original crop loan. g) In the case of repeated successive calamities maximum period of rephasement will be 9 years. , h) AB 7 document is taken 3. Attendance at selection meetings held by District Level Committee will enable us to ascertain whether the applicant is eligible prima facie for assistance under the scheme. In the instant case, the defaulter will not be financed. He will be advised accordingly. The DIC will also be advised accordingly. 4. A crop loan can be converted into a term loan when the area is affected by floods, cyclone, drought etc. The Dy.Commissioner (or any Authorised Authority) must issue a certificate showing the villages and crops affected and also the percentage of yield (Annewari Certificate). When the yield is below 50% of the normal yield, annewari certificate will be issued. The certificate will specifically state that it has been issued for converting the crop loan. The entire amount would be converted into a TL repayable in 3 years. The accrued Interest has to be recovered from the current harvest. Form No.AB 7 (unstamped) has to be obtained (document for converting crop loan to term loan). This facility of conversion can also be extended to individual cases where the default has been due to genuine difficulties. As per RBI directives in case of crop loss due to natural calamities, the Lead Bank Officer can convene DCC meeting to ascertain the extent of crop loss and after satisfying himself advise the banks to extend relief to the farmers without waiting for Annewari Certificate. Advances-`1” Segment 1. The Controlling Authority has asked the branch to increase the priority sector advances. Five of the local teachers of the Govt. school have approached you for housing loans for Rs.2 lakhs each. However, you do not have the required staff. How will you proceed? 2. A loan of Rs.10 lakhs has been granted to a doctor. The doctor has proposed his wife as a guarantor to the account. What precautions have to be observed in this regard? 3. Mr.X has availed a housing loan of Rs.12 lakhs from ABC Bank. He has heard from his friends that SBI will take over advances from other institutions with favourable terms. Please explain to him the requirements of the bank in this regard. 4. Mr. X is a Govt employee with NMI of Rs.15000/- and intends to take home finance for Rs.10 lacs for 180 months. EMI to start next month itself as the house is ready for occupation. The EMI works out to be Rs7523/- at 10% interest rate. He has adequate amount of LIC policy also. Mrs. X is Govt school teacher and has NMI of Rs.7000/- and willing to join as co-borrower. Mr. X is not in a position to offer any collateral. Advise suitable scheme. 5. Mr R.S.Dave is working with TCS. His monthly salary is 35,000/-. He approached your branch for HBL of Rs.17.50 Lakh. (i) CIBIL report of Mr. Dave reveals that there was a credit card bill outstanding in his name, Subsequently that was written off. (ii) An education loan is outstanding in Bank of Baroda in his name, wherein EMI is Rs.l 1, 750/-. Only 8 EMI is due for complete liquidation of Education Loan. Discuss. 6. Mr. X is having a current account, with temporary OD for the last 4 years. Temporary OD facility has not been documented. Bank returns a cheque of 5000/-, drawn by him without informing him. He threatens Bank for legal action. Discuss. 2-11 MM Special Guide Answers to Advances - 'P' Segment

It is presumed that the branch is at a rural or semi-urban centre. Housing loans up to Rs.20 lakhs (and the cost of the dwelling unit up to Rs.25 lakhs) are now treated as priority sector advances at these centres. This is an opportunity to increase priority sector lending. P Segment advances are also profitable. The problem of staff shortage can be tackled by one of the following altematives: a) one/two advance per week can be sanctioned spreading the work over a period. b) The assistance of a senior clerk/ cash officer can be utilized. c) Some more advances of this nature can be canvassed and the loan applications submitted to loan Processing Cell (LPC) at the RBO.An experienced person to help in documentation process. The branch need only to Complete KYC and obtain and forward the loan application documents to it. This process is much simpler and faster and may not require more staff. Wife can be accepted as a guarantor as she has independent contractual rights in India. However it should be ensured that she is a person of adequate means and that she understands the legal implications of her guarantee. Also, it should be ensured that she has independent legal advice in the matter so that it may not be alleged later that the guarantee was obtained using "undue influence" of the husband over his wife. 'Undue influence' is presumed in law when a wife's guarantee is obtained for an advance granted to the husband. The following conditions must be fulfilled for the take over of housing loans generally: i) Possession of the house / flat has been taken by the borrower. ii) Repayment of the existing loan has already commenced and iii) Instalments have been paid as per terms of sanction and the a/c is a standard assset and iv) The owner has valid documents evidencing his title to the house / flat. In case of any deviation from the above conditions, the branch has to obtain administrative clearance from the appropriate authority. Considerations like larger business interest, valuable connection, safety of the advance etc. would be examined before granting administrative clearance. The prospective borrower should address a letter to the institution from which finance has been availed asking them to deliver the title deeds and other securities, if any, direct to our Bank's Branch upon receipt of the loan amount. The following procedure will have to be adopted by the branch: • Statement of Account for the period of loan or for 1-12 months (where the loan has run for longer period) to be obtained. • The lending institution should confirm that they are holding an equitable mortgage over the property. • The customer should authorize the branch to debit his loan a/c and repay his outstanding loan to the other institution. Where considered necessary, during the period between granting of loan and creation of equitable mortgage on the house/flat being financed, some security including third party guarantee may be obtained. The security to be released after creation of a valid equitable mortgage at the earliest. The repayment of the loan should be made direct to the institution stipulating that the amount should be appropriated towards the loan only and the title deeds be handed over to authorized representative of the Bank only. On receipt of documents from the institution, the title deeds to be verified to ensure that the documents are complete and in order and that they convey clear, absolute and marketable title. . Equitable mortgage must be created by the borrower for the loan sanctioned by us. The borrower should be advised about the details of documents/securities received from the institution. This is important. These liberalizations have been effected with a view to boost housing finance. The Bank's housing

2-12 Banking Problems

loan scheme is very liberal, customer-friendly; and the interest rates are among the lowest rates of interest charged in the market. 4. 1) Mr. X is eligible for housing loan under our SBI Home Loan Scheme subject to following terms and conditions. a) The house is in the single name of X. Mrs. X can join as the guarantor. As she is a Govt. employee, the Govt. dept's clearance for standing as guarantor has to be obtained by her. b) As the loan amount is Rs.10 lacs the Loan to value ratio should not be above 90%. The borrower has to meet a margin of 10% on the cost of the house. c) Income calculation: The income of both the husband and wife can be considered to arrive at the total eligible loan amount subject to the sanctioning authority satisfying himself about the proof of the income. Depreciation can be added to the net income. Also, the expected rental income less taxes, cess etc. in case the house is proposed to be rented out may be added to the income to determine the loan amount d) EMI/NMI Ratio: The net annual income is Rs.2.64 lacs. (Rs. 7000 + 15000 x 12). The EMI as applicable to the bracket. Rs.2 to Rs.5 lacs will be applicable (50%). Therefore the EMI should not be more than 40% which works out to Rs. 8800/- against Rs. 7,523 @ 10% fixed by the bank. Hence, acceptable. e) The term loan has to be repaid before the borrower attains 70 years of age. 5. Form the data, we observe that Mr.Dave had defaulted in payment to credit card company, which is disturbing. However as the dues were written off by the credit card company, it presumed that it could be due to a disputed transaction. The Education loan appears to be regular. Therefore we may not doubt Mr. Dave's Credit worthiness. The monthly salary of Rs.35000 /- of Mr. Dave is presumed to be his net monthly salary. The proposed EMI for the housing loan of Rs.17.50 lacs sought by him would be Rs.15,552 assuming the rate of interest at 10.15% and a repayment period of 30 years. He has to also service his existing education loan with a EMI of Rs.11750/-. Hence the total EMI to be serviced by Mr. Dave for both existing education loan and the proposed housing loan would be Rs.27302/- (Rs.11750 + Rs.15552) which would yield an EMI / NMI ratio of 78% as against the required EMI / NMI ratio of 50% In the circumstance the housing loan sought by Mr. Dave a is not considered acceptable. Therefore the proposal will be declined. 6. It is not in order that the Bank had allowed the OD without formalizing the same for the last 4 years. However, Bank is within its right to return the cheques if the balance was short in his account. Hav- ing allowed overdrafts in the a/c during the past 4 years, the Bank has led the customer to presume that his cheque would be paid by the Bank even if adequate balance is not there in the account. However, Bank should not have stopped the facility abruptly. It should have put the customer on notice and avoided embarrassment to him. As a good customer service bank should have advised him in the matter. Even now bank should advise the customer about its willingness to consider sanction of the limit on merits.

2-13 MM Special Guide SAFE CUSTODY, SECURITY, SAFE DEPOSIT LOCKER ETC. Problems Safe Deposit Lockers: 1. Your bank has a branch in a semi-urban area which offers Safe Deposit Locker facility.Flash floods entered the branch premises and destroyed most of the contents in the S.D. Lockers. Discuss the bank's position in this regard. 2. Mr. X has a Safe Deposit Locker facility with the bank. The locker rentals have not been paid by him despite reminders. Mr. 'X' has a clean overdraft at another branch of the bank which is irregular and time barred. One day, he comes to the bank to operate the locker. The Bank Manager refuses to allow him to operate and says that the bank has a lien on the contents for the above dues. Discuss. 3. Mr. A & Mrs. A have S.D.Locker A/c operated on E or S basis. 'A' telephones to the bank that the key has been lost and that Mrs. A is insane. Later, Mrs. A comes to the bank with the locker key to operate the S.D.Locker. How will you handle the situation as Branch Manager? 4. A new Accountant has assumed charge at the Branch. He has observed that a number of items relating to unclaimed items in the locker room are held as safe deposit articles in the joint custody ofAccountant and Manager (Cash). Articles left by customers outside the locker are also found in these items. He suggests that the items be disposed of and reasonable charges are recovered for the 'safe keeping' of the items. How will you decide the issue? 5. Kamalakant had a locker in his sole name in our Bank. He died in an accident last week. Today, his son Jeevan comes to you with the locker keys and a Will in the handwriting of Kamalakant stating that the contents of the locker be delivered to him. Simultaneously, Sunita, daughter of Kamalakant also gives a letter to the Bank, stating that she has also a claim to the property. How will you deal with these claims? 6. The hirer of a locker operated the locker but forgot to lock it after the operation. The locker official observed the same at the end of the day. What steps are to be taken to protect the bank's interest? 7. A hirer of a locker has died. The legal heir came with a succession certificate. Branch Manager refused to accept the succession certificate. How will you advise the legal heirs in the matter ? 8. Your Bank has hired a Safe Deposit locker to Mrs.Raja & Mr.Raja on a "Either or Survivor" basis. One day Mrs.Raja, comes to the bank and informs you that she has lost her handbag which contained the locker key while she was travelling in a train. Now, she wants to access the locker for taking away the Gold ornaments kept inside for her daughter's marriage, which is to be solemnized shortly. She also informed that her husband is in London for attending a conference and he will come back one week before the marriage. How will you help her and handle the problem? Safe deposit / Safe custody : 9. X has deposited with the bank a sealed cover for safe deposit. The bank has accepted an instruction that the cover should be handed over to his minor daughter immediately on her attaining the age of majority. Discuss. 10. A number of securities in the name of Mr. 'X' who is a minor is kept by his father, a valued customer of the bank in safe custody. Mr. 'X' is now a major. He claims all the securities being the rightful owner. Discuss. 11. A left a box in safe custody with the bank "said to contain" gold ornaments. After A's death, the box was handed over to Mrs. A. The original wrapper and seals were not found on the box; instead, the bank's wrapper and seals were found. The box was also lighter in weight than when it was left with the Bank according to Mrs.A. Mrs A refused to take possession of the box. The bank refused to give open delivery of the box. Meantime, Mrs A also died. The legal representatives filed a suit claiming the delivery of the ornaments or compensation equivalent to the market value of the ornaments. The bank

2-14 Banking Problems

contested that it was not aware of the contents and hence not liable. Discuss. 12. Mrs X has kept a sealed packet in safe custody in your bank. Suddenly Mrs. X passed away. Her son comes to the bank and requests the bank to hand over the packet to him. He states that he is the only legal heir and his father had also died. Discuss. 13. Mr. Ramesh is an ardent follower of Ramakrisha Mission and has a safe deposit article of his 'Will' with the Bank. He dies and the Head of Ramakrishan Mission claims the safe deposit article stating that Ramesh has donated funds through his 'Will' and claims the savings and fixed deposit balance in his account. How to deal with the claim?

Answers to Problems: 1. The banker-customer relationship in the case of a locker is licensor-licensee (as per SBI documentation). The bank has to exercise ordinary care and caution. In the event of natural calamities like floods etc, the banker will not be held liable as the cause was external to himself and beyond his control. As such he is absolved of his liability for the loss or damage. Ordinary and prudent care by the banker cannot prevent natural calamities. 2. In the instant case the bank cannot exercise a general lien on the contents of the locker. The articles are kept for safe keeping only. However, it can exercise a particular lien on the contents of the SD Locker for any arrears in rentals. 3. In the instant case the bank should not take cognizance of the telephone call of Mr. 'A' informing that his wife has become insane. Her insanity has to be properly established. A should be requested to come to the branch; we should tell him that a suitalbe court order has to be produced under Mental Health Act. However, he has informed that the key is lost whereas Mrs. A has come to the Bank with the key to operate the locker. A possible dispute or misunderstanding between A & Mrs. A cannot be ruled out. The bank has to allow further operations against joint mandate only. It is preferable to persuade them to close the locker a/c in view of their apparent deep disagreement. 4. The branch has to take every effort to trace the true owners of the articles and return these to them. As it is, there is no precise instructions on the subject and hence the matter has to be referred to the CA in every case. Under the Indian Contract Act (S71) the bank is treated as finder of lost goods in these cases. SI69 of the Act permits sale of such goods if a) the owner cannot with reasonable diligence be found, or b) refuses upon demand to pay lawful charges of the finder, or c) the thing is in danger of perishing or of losing the greater part of its value, or d) when the lawful charges of the finder in respect of the things found amount to two thirds of its value.

Indian Penal Code : A person who finds property not in possession of any other person and takes such property for the purpose of protecting it for or of restoring it to the owner, does not take or misappropriate it dishonestly and is not guilty of an offence. However, he is guilty of criminal misappropriation of the property, if a) he misappropriates it to his own use when he knows or has the means of discovering the owner. b) he has not kept the property for a reasonable time to enable the owner to claim it. (Explanation 2; S403 IPC). What are 'reasonable means' and what is a 'reasonable time' in such a case is a question of fact. It is not necessary that the finder should know who is the owner of the property or that any particular person is the owner of it. It is sufficient, if, at the time of appropriating it, he does not believe it to be his own property, or in good faith, believes that the real owner cannot be found. However, it would be advisable to give notice of the same to the police under Section 176 of the Indian Penal Code. 2-15

411111k -1111 1.1111111.11

MM Special Guide In terms of Banking Companies (period of preservation of records) Rules 1985, RBI's permission will be required for sale / disposal of the unclaimed articles as the above mentioned Rules also include safe custody / lockers. In the light of the above legal opinion, the Corporate Centre have referred the matter to IBA with a request to take up the issue with RBI for finalising a procedure for disposal of the unclaimed safe deposit articles. Since it is a long drawn process the branches should follow the extant instructions till LHO issues specific instructions for disposal of such items. Meanwhile, if considered appropriate, individual cases may be examined by the Law Department at the LHO before taking any action. 5. As a matter of courtesy, the bank will send a letter of condolence to the family members. The death certificate has to be called for and carefully scrutinized. A Will has to be properly executed and witnessed; further, it has to be probated. A Will without probate cannot be executed; further, there should not be any counter-claim. The bank cannot deliver the contents of the locker to Jeevan in view of counter-claim from his sister. The matter has to be explained to him suitably. He will be advised to get a probate from the court. Sunita's request also cannot be accepted. As the bank knows that, prima facie, there are two legal heirs, Probated Will or Letters of Administration would be needed. It will not be advisable to deliver the contents under indemnity- cum-affidavit basis as there is obvious disagreement between the claimants. Sunita will be advised that a suitable Court order is necessary for delivering the contents of the locker to her. If any nomination has been made for the locker, the Nominee has to be advised of the claim received from son/ daughter. If the son / daughter does not produce a legal representation as above within a reasonable time, it will be in order for the bank to deliver the contents to the Nominee. The matter has to be reported to CA for instructions. 6. An inventory of the contents should be taken; it is to be witnessed by the joint custodians; it is preferable to have it witnessed by a valued customer of the bank. The contents may be kept in a sealed packet as a safe deposit item in the custody of BM/Acct. The customer has to be contacted for taking delivery. Extreme care has to be exercised in finding out the true oconer of the items. The matter should be explained to the locker holder in detail as also put on record; the contents have to be delivered against his unconditional acknowledgement of the entire contents. The customer would be requested to be cautious in operating the locker in future. The Controlling Authority should be advised of the matter. (Note: In SBI, the locker official must satisfy himself that the locker is properly locked immediately after each operation. This procedure will help detect any incident like this immediately on its happening and before any other hirer enters the locker room for operating his locker). 7. On the death of the locker hirer, the contents have to be delivered to the nominee. Hence, the bank has to verify the position in regard to nomination. In case there is no nomination the legal heirs have to be properly identified by the bank. The bank should also ensure that there is no dispute among the legal heirs. The contents can be delivered to legal heirs against indemnity and affidavit in these cases. There is no need to call for legal representation if the articles are delivered to all the legal heirs jointly. However if all the legal heirs do not join in executing the indemnity or if there is a dispute among them, the bank may call for a probate or a Letter of Administration. A succession certificate is applicable only for debts and securities as per S 370 of the Indian Succession Act and is not appropriate for the locker • contents, safe custody items, gold ornaments etc. (except in the States of UP and MP) 8. The key has been lost and the locker has to be forced open. In such circumstances, generally the request of all the locker holders is to be obtained in writing and the locker is forced open in the presence of all of them. A communication must be sent to Mr. Raja about the matter seeking his confirmation by email /fax/telephone. Also the breaking open must be arranged 2/3 days later so that there will be time for Mr. Raja to confirm the arrangement, by email /fax. In view of the urgency and ie 2-16 .. „ ••- Banking Problems ,,, ,:' 1: . after satisfying ourselves about the circumstances as stated by Mrs. Raja, the locker may be forced tift ;-,: open by the locker supplier's technical personnel in the presence of Mrs,Raja. It is preferable to obtain ,- , . f;i;iP: 'Ti ,.141;iF:1,;.• :,: an indemnity for permitting this. Also, an inventory of the contents has to be kept on record. A letter ratifying the action has to be obtained on Mr. Raja's return. We have to satisfy ourselves beyond doubt about the standing/intergrity of parties and bonafides of the request of Mrs.Raja. CA's prior permission has to be obtained. 9. The Bank will accept safe deposit items deliverable only to the depositor on demand. We will not accept items which are deliverable to third parties as it may be a onerous responsibility to trace third 1 parties. Bank will not accept articles for safe deposit with canditional delivery clauses. Only exception is acceptance of sealed covers with a notation on them "Said to contain a Will" of the depositor. Also, such an item will be deliverable to the named person on his application to the bank. Hence, it is not in order for the bank to have accepted the item with this the condition. The depositor should now be contacted and persuaded to take delivery of the article; if he refuses, due notice should be given and the deposit should not be continued after the current period. Legal opinion has to be obtained and action to be taken on these lines. 10. Although Mr 'X' is the rightful owner of securities they will not be delivered to him as the original contract has been established by the bank with the father of Mr. 'X'. Hence the securities can be delivered only to the father. Mr `X' will be adivsed accordingly. 11. In a similar case, the court has held that the condition of the box at the time of delivery was not the same in which it was entrusted to the Bank. The bank had put its own wrapper replacing that of the depositor's. The bank is a bailee and it ought to have taken due care of the goods.The Bank, therefore, has to make good the loss. The Bank may have to pay compensation for any loss of items. (Chandra Trikha V PNB-AIR 1998 Del 266). 12. In terms of the present RBI guidelines, the safe custody article can be delivered to the legal representatives on affidavit cum indemnity basis. However, we have to satisfy ourselves that the son is the only legal heir. Otherwise all legal heirs have to jointly sign the affidavit cum indemnity. The affidavit has to be made out by one respectable person known to the Bank and to the family of the deceased (but not connected to the family to the effect that the deceased left behind only the claimants as known legal heirs). Also the indemnity has to be signed by the son and another person (other than the person who signed the affidavit) good for the amount. 13. As per Bank's instructions the packet containing the 'Will' would bear the legend "Deliverable to Sri on application". It is deliverable only to individuals. It is not permissible to mention the names of Trusts, societies etc to recieve the article. The depositor would have mentioned the name of the person to whom the bank should deliver the packet on his application after the death of the depositor. The Bank has to advise the Head of the Ramakrishna Mission to approach the legal representatives of the deceased customer for any information. No information about the details of customer's accounts should be revealed to him.

•

Yf 247 MM Special Guide REMITTANCE, COLLECTION, NEGOTIATION, BILLS & SBI CARD Problems 1. What are the due dates of the following instruments? Mention the principle of calculation followed by you. a) Bill of exchange dated 27.10.02 payable 4 months after date b) Bill of exchange dated 31.12.03 payable 45 days sight accepted on 4.1.03 2. An unsigned draft purportedly issued on you by another branch has been presented for payment. What action you would take? 3. The purchaser of Demand Draft, which is lost in transit, approaches the bank for getting a duplicate draft. The payee of the draft is not willing to give a statement/indemnity bond regarding the loss of draft. How will you deal with the situation? 4. You have taken over as Manager (operations) at a large branch. During the scrutiny of the outstanding bills, an usance bill drawn on ABC has been dishonoured by non-acceptance 10 days ago. But the originating branch has not been advised that the bill has been dishonoured. You also observe that there is a notation in the bill reading " In case of dishonour, please present to XYZ," What action you will take? 5. You have received a documentary usance bill for collection from an up-country branch. The name of XYZ Traders has been given as the drawee in case of need. It is also mentioned that the bill has to be presented to XYZ Traders in case it is not accepted within 10 days from the date of first presentment. The bill is presented to the drawee on 1st Sep. The Case in Need approaches you on the third day with the notice and wants to retire the bill against cash payment. Discuss. 6. A draft for Rs.1,30,000 was purchased by a Govt. department in favour of a contractor. The same was sent by post. The draft is lost probably while in transit. The payee of the draft requests for issuance of duplicate draft and the Govt Dept is not in favour of giving an indemnity. However, the Govt. Dept has no objection in issuing the duplicate draft to payee. How will you act in the matter? 7. A bill is purchased by the bank on behalf of its customer, which is payable 60 days after sight. The bill was accepted. Before due date of the bill the drawee is declared insolvent. What are the remedies available for the bank to recover the amount? 8. A customer of your branch has received a documentary bill drawn on him from Hapur. He approaches you with a request to show the bill to him so that he can satisfy himself that the goods ordered by him have been despatched by the seller. Will you agree to his request? 9. A customer has retired a bill by making cash payment. While delivering the bill it is observed that the RR is missing. The number and date of the RR is noted in the LSC Register (Bill Register). The customer is demanding immediate release of the RR as any delay will result in payment of demurrage. Discuss. 10. A draft was issued by your branch payable at Chennai. On the same day the payee approaches you and requests you to give payment immediately as he is in urgent need of money. He is offering introduction of a person who is your valued customer. How will you deal? 11. A banker discounts DA bill payable 90 days after sight for A&Co. drawn on B&Co. The bill is duly accepted by the drawee. a) before bill matures, the drawee becomes insolvent. What are the remedies open to the banker? b) If A & Co. have a current account with your bank showing credit balance, can it exercise right of set off; if so, when? 12. A draft has been issued favouring A and B. A presents the draft for payment; the draft is endorsed by A. B has not endorsed it. B is dead and the death certificate has been produced by A. Discuss. 13. A draft for Rs.50,000/- has been presented in Clearing without any signature of the officials of the of " issuing Branch . Will you pay the draft?

2-18 Banking Problems

14. What is the "Cash Management Product" and how it is beneficial to the customers of the Bank? 15. An SB customer deposits an outstation cheque for Rs. 10, 000 issued by his friend. He demands immediate credit in his account against the cheque. How will you deal with the situation?

ANSWERS TO PROBLEMS

The bill of exchange dated 27.10.2002 is payable on 2.3.2003. The bill dated 31.12.2003 is payable 45 days after sight ie from 4.1.2003. The due date will be 21.2.2003. In both the cases grace period of 3 days is allowed. The draft has been delivered unsigned by the issuing branch through oversight. The consumer courts have held this as a serious deficiency and imposed severe penalties on banks for such omissions. Further, if the draft is returned, it will cause inconvenience to the payee. As the branches are now on CBS, the paying branch can access the system for details of the draft issued and can know prima facie genuineness of the draft.The issuing branch should be contacted and the details of issue ascertained and the draft paid. In case the issuing branch cannot be contacted, decision to pay has to be taken based on the standing of the payee, amount of the draft, the reasons for its issue as ascertained from the payee etc. However, if the amount is very large and the payee is unknown and we cannot satisfy ourselves about the circumstances of the issue of the draft, it is preferable to postpone payment till confirmation is received from the issuing branch. A draft becomes the property of the payee on 'delivery' to the payee by the purchaser. If the draft has been sent by post on the express or implied request of the payee, the post office is regarded as the Agent of the payee and the 'delivery is complete so as to constitute the payee as the true owner once the draft is posted. If the 'Post Office' is deemed as the agent of the purchaser, the delivery is complete only on actual delivery to the payee. This aspect has to be decided first by getting more details of the transaction from the purchaser. However, in the present case a duplicate draft may be issued after obtaining evidence of waiver of his title to the draft or his consent for issue of a duplicate draft to the purchaser. In the present case, the purchaser wants to purchase a duplicate draft; also the payee has not objected to the issue of the duplicate. Hence, a duplicate can be issued to the purchaser against his indemnity/ sureties. 4. Dates of Acceptance, dishonour of bills etc must be advised promptly to the originating branch. Otherwise the bank will be charged with Negligence. However, in the instant case, the bill is not considered as dishonoured; whenever, there is a 'Case in Need' the bill has to be presented first to the Drawee; in case it is dishonoured by non-acceptance, it has to be presented to the 'Case in Need'. The bill will be considered as dishonoured, only if he also dishonours the bill by non-acceptance. Hence, the bill has to be presented forthwith to the Case in Need. In case the Case in Need objects to the delay, the bank is in a weak position to defend itself. It will be responsible for any loss/damage arising out of delay. _ . 5. The Drawee in case of need comes into picture only when the original drawee dishonours the bill by non-acceptance. Only if the bill is dishonoured by the drawee does the case in need get a right to accept the bill. Hence, the bank can present the bill to the Case in Need, only 10 days after presentation to the drawee. After the dishonour of the bill, the Case in Need can accept the bill or retire the bill; if a bill is dishonoured for payment, it can be retired by payment by the Case in Need. 6. When the draft is lost in transit it amounts to constructive delivery to the payee and therefore the bank can ask the payee to execute an indemnity and with the concurrence of the Govt dept (in writing) it can issue a duplicate draft. Non-payment of the draft has to be ensured by verifying in the system. The Branch should also get the controller's permission for issue of the duplicate draft.

2-19 ,.- 0 '579.M.f

MM Special Guide 7. The bank as a holder for value has recourse against the drawee or the lodger from whom the bill was purchased. Hence when the drawee has become insolvent, the bank can have recourse to the lodger for recovery of the amount of the bill. 8. While collecting a bill the bank acts as an agent of the lodger of the bill. The bank's responsibility is to send a notice promptly to the drawee about the receipt of the documents. It will not be in order for the bank to permit the drawee to scrutinize the bill etc before payment. IBA had also advised banks accordingly. 9. It is clear that the RR has been received at the branch but misplaced. The bank will be held liable if the RR and other documents are not handed over to the customer, immediately against payment. RR should be traced immediately and handed over to the drawee. If it cannot be traced, an indemnity should be executed by the bank favouring the Railways which should be handed over to the drawee along with an authorization letter for delivery to him. Every effort should be made to trace the missing RR. 10 . An I01 draft can be paid by any branch other than the issuing branch. However, issuing branch can only cancel the draft. Therefore, we can suggest to him to approach the purchaser for settlement to him by cash by arranging cancellation of draft. KYC formalities have to be complied with; no a/c can be opened on mere introduction. 11. a) The bank as a holder for value has recourse against the drawee or the lodger from whom the bill was purchased. Hence when the drawee has become insolvent, the bank can have recourse to the lodger for recovery of the amount of the bill. b) The bank can exercise the right of set off after giving notice to the drawer of the bill, only on the maturity of the bill. It can also demand better security from drawee (S 100 NI Act). 12. The draft is payable to A & B jointly. Hence, the discharge of both is needed. As B is dead, the draft will be payable against the joint discharge of A and B's legal representative. Hence the draft will be retumed with the answer "Discharge of the Joint Payee required". 13. The draft is for a substantial amount and is not signed. Legally, it is not a mandate and therefore the branch is not obliged to pay. However, I01 draft cannot be issued unless the amount has been received. We can access the system to fmd out whether such a draft has been issued by the issuing branch. We should contact the issuing branch and satisfy ourselves that it has been issued by them. The branch has to consider an important issue viz., the consumer forums have held under the COPRA that the issue of a draft, without signature is a deficiency and therefore the bank will be penalized very heavily. Hence, the branch has to examine the following matters before taking a decision. - The issuing branch BM to be contacted over IP phone/Fax and the genuineness of the draft ascertained. - If the payee is a person of integrity and standing etc. due weightage has to be given to this.If we are satisfied on these counts, the draft can be paid. Also, the paying branch can find out the entries relating to the draft issue in the CBS. 14. Cash Management Product (CMP) has been introduced by CAG Branch for corporates. A large corporate has a wide dealer net-work spread over the country. CMP enables the corporates to improve their cash, liquidity and treasury management operations. The proceeds of cheques collected at various centres are advised by fax/e-maiUV-Sat to the branch where the main account is maintained. Thus, the corporates get the benefit of the funds within 1 to 3 days. They have the benefit of MIS also. 15. We have to satisfy that: a) it is a KYC Compliant account and is in operation for a minimum period of 6 months. b) the conduct of the account should be satisfactory. If these aspects are satisfied instant credit can be given after recovering the usual collection charges and out of pocket expenses. [Note: If the cheque is drawn on SBI, it can be debited straightaway through CBS and credit given to the depositor. If the Cheque is drawn on a Speed Clearing Centre, the cheque can be presented in local clearing to that Bank which will debit the a/c through its CBS and afford us credit. Immediate credit can be given up to Rs.30000/-]

:...- 2-20 Banking Problems DEPOSITS AND GENERAL BANKING Problems

1. What are the changes made in N.I. Act regarding return of cheques for want of funds? 2. 'A' a reputed customer alleges that the Bank has wrongfully debited his account with Rs.10000, without his mandate. On scrutiny you find that his son had cleverly forged his signature and withdrawn the money from the account. The Bank has sent the statement of account for the past 6 months in time. Discuss the Bank's position. 3. Sri and Smt. Ram maintain an E or S account. Smt. Ram wants to close the account by drawing a cheque. She informs that her husband has lost his sanity. At the same time the Branch Manager receives a phone call from Sri. Ram that he has quarrelled with his wife and hence her cheques should not be honoured. How would you proceed in the matter as a Branch Manager? 4. Mr. Murthy, a very valuable customer of your branch having sizeable deposits and business connections is very keen that your branch should provide an adverse opinion report on him when sought by the New Delhi Branch of another bank. The purpose is to avoid being a guarantor to a loan to be granted to his brother-in-law whose credibility is doubtful. Discuss. 5. Mr.'A' is granted an overdraft by the bank against an LIC policy. He commits suicide. Discuss. 6. Mr. 'X' draws a cheque in favour of Mr. 'Y' for a consideration that he should give false evidence in the Court. Mr. 'Y' endorses it to Mr. 'Z' and hands it over to Mr. 'A' from whom he purchased some goods. The cheque was countermanded by Mr. 'X' as Y refused to give false evidence. Who is liable to Mr. 'A'? 7. Mr 'X' an employee of ABC Ltd who visits the Bank frequently for deposits and payments withdrew a sum of Rs. 1 lakh on 16.5.2000. On 17.5.2000 Mr 'D', director of the Co. comes to the bank and informs that the employee Mr. 'X' was removed from service on 12.5.2000.The company denied that it had issued the cheque for Rs. I lakh that was paid on 16.5.2000. On scrutiny, a slight difference in signature of the director was noticed in the cheque. The director demanded for the refund of the money. The Bank took the stand that it was a small amount and the cheque was paid in good faith. Discuss. 8. Today morning your manager expressed condolence to Mr. 'Y' on the death of his father Mr. 'X', a valuable customer. A cheque issued by Mr. 'X' for Rs.50,000 favouring Mr. 'Y' is presented for payment. A cheque for Rs.24,000 favouring Electricity Board issued by Mr. 'X' is presented in clearing. Discuss. 9. The Bank has come to know of the death of a valued SB Customer, whose account is having sufficient balance, from the newspaper on 18th. Subsequently the branch received two cheques issued by him. Both cheques have been negotiated, one of which by our own branch and the other by another Bank. Negotiation was done on the 15th. State with reasons, how you would deal with each cheques? 10. Is the Bank entitled to set off credit balance available in a joint account against a debit balance of one of the joint account holders? 11. Mr.A an old customer of your bank had appointed Mr.B as his power of attorney holder for operating his current A/C and subsequently gone abroad. Today you come to know that Mr.B has died. You receive two cheques for Rs.1.000/- and Rs.2000/- in clearing signed by Mr.B favouring creditors of Mr.A. A Cheque of Rs.3000/- signed by Mr. A (before appointment of Mr.B as attorney) is also received for payment of dues under his American Express Credit Card. What will be your course of action? 12. How will you act when the following cheques are received for payment? A. An order cheque favouring a minor is endorsed by the minor and a third party presents the cheque for payment.

2-21 MM Special Guide B. A cheque is crossed and below the crossing the words crossing cancelled' is mentioned under drawer's full signature. It is presented for payment by the payee across the counter.

Standing Instructions 13. A Draft issued to L.I.C. towards premium under Standing Instructions is now reported lost. The customer refuses to execute indemnity bond and threatens that he will sue the bank if the policy lapses because of nonpayment of premium. L.I.C. also refuses to execute the indemnity bond. Please discuss. 14. Under Standing Instructions issued by A you have been effecting a monthly remittance of Rs. 2500 to A's land-lord on the 10th of each month. As the balance in the account was only Rs. 2000 on 10- 12- the remittance for December was not effected on that date. Immediately on the account receiving adequate funds on 23-12 the S.I. was put through and the resultant balance was Rs. 400. On the 26th inst. a cheque for Rs. 1000 was presented on the a/c. Discuss.

Current Account 15. A and B are having a joint account styled E or S. Statement of account is being sent regularly to A. One year after opening the account B advises the Bank that A is not permitting him to see the statements and requests for supply of the statements for the past period; he also requests for the supply of a statement to him also in future. How will you act? 16. A has issued a cheque on his current a/c for Rs.1000. The balance will come down to Rs.300 after payment of the cheque as against the prescribed minimum balance of Rs.500. How will you act? 17. Mr. 'A' presents a cheque for payment. But he does not turn up for getting payment. Next day, he calls on the bank and explains that he felt uneasy and had to rush for medical attention. Bank is satisfied about the reasons given by the presenter of the cheque and agrees to effect payment. Before the payment is made, the bank receives stop payment instructions followed by a Garnishee Order on the account. Mr. 'A' contends that the cheque was presented on the previous day and hence it should be paid. Discuss. 18. A current account is opened on 15-12. A cheque dated 10-12 (sunday) is received in clearing on 18-12. Will you pay the cheque ? 19. A & B hold a joint overdraft account with you. The current account debit balance is Rs.10,000/-. It is reported that B is dead. How would you proceed in the matter? 20. A joint current account is maintained by A,B and C, operable by any one of them. The account is overdrawn. A maintains an individual current a/c with a credit balance. Can the Bank set off the balance in A's a/c against the overdraft in the joint A/c ? 21. A firm had availed Cash Credit facility at the Industrial Estate Branch. The account turned bad and the outstandings were recovered eventually by the sale of hypothecated stocks. A credit balance of Its. 4000/- was left in the account. It was found that it had opened in the Town Branch a current account which had been overdrawn. In fact, it had been running block for the past 5 years. Can the Bank exercise the right of set off? 22. You have received a notice from an advocate that you should not pay any cheques in the account of A in your books. He has stated that the employer of A is his client and that the employer has filed a criminal complaint of embezzlement against A. How would you act? 23. A current a/c customer is unable to sign the cheques as he has suffered from a paralytic stroke. His wife requires funds urgently for treatment. It appears that he may be able to sign with the left hand instead of the usual right hand. Discuss. 24. A, a current a/c holder has instructed you to transfer Rs. 10000 to the account of another customer, at the branch. The transfer has been effected but the credit advice has not been sent to the transferee. , Meantime, a gamishee order has been received attaching the balance in A's a/c. Discuss. 2-22 Banking Problems

25. A cheque for Rs. 5000/- drawn on Current Account favouring the Collector of Customs was received for payment. The balance in the a/c was only Rs. 2500/-; cheques to the tune of Rs. 6000/- were being processed for presentment in clearing. Hence, the cheque was returned with the answer, "Effects not cleared. Please present again". When the cheque was re-presented by the collecting bank it was observed that some other cheques had been paid in the account meantime and the resultant balance was Rs. 3000/-. The Branch Manager proposes to return the cheque for the reason 'Refer to Drawer'. Comment. 26. Certificate to commence business is not obtained for both Public Ltd Companies and Private Ltd Companies under the Companies Act, 2013. Discuss. 27. A valued customer of yours is promoting a public limited company. On his assurance that the M.A, A.A etc would be produced to you shortly,a current a/c has been opened in the name of the compay with balance of Rs.50,000/- A cheque book has been issued. A cheque for Rs. 25,000 favouring the Govt. has been received in clearing the next day. The customer says that he would produce the M.A. etc after a few days as his auditor is out of station. He also requests that the cheque be honoured as it is given as initial payment for purchase of land for the company. 28. A drew a cheque favouring B or order and despatched it to him after adding the general crossing. One C interupted the cheque and forged B's endorsement; he delivered it to D for value who took it in good faith and without any knowledge of forgery. D got the cheque cleared through his Bank. What are the rights and liabilities of (i) the Collecting Banker (ii) the Paying Banker and (iii) D? 29. 'A' opened a current account at your branch by forging the signature of a valuable customer of the Bank in the 'Introduction' column in the account opening form. He deposited clearing cheques aggregating Rs.45,000/- and withdrew the amount. The true owner of the cheques has sent to you a legal notice alleging 'conversion'. Discuss. 30. An open cheque for Rs.900/- issued by 'A' on his account was presented by B, the payee. As the balance was only Rs.800/-, the cheque could not be paid. 'B' suggested that he would remit Rs.200/- into the account to enable the Bank to pay the cheque. Discuss. 31. An advocate - customer of yours refuses to sign at the back of a bearer cheque tendered by him for encashment. How will you deal with the case ? 32. There is a joint current account in the name of A & B on E or S basis. A cheque for Rs.3000 was presented by A at 2 pm. Thereafter he went to the BM's cabin for some discussion. The working ' hours of the Bank is only up to 2.30 pm. The bank paid the cheque at 2.45 pm. On the same day Mr. B comes to the bank with a letter to stop the payment of the said cheque which was withdrawn by Mr. A. He also says that the bank paid the cheque after the business hours and therefore he will sue for damages. The stop payment instruction was given by Mr. B at 3 pm. Discuss the bank's position. 33. A well dressed gentleman comes to your branch with a pass book having the name of a lady. He said that she is his wife and he wants to know the balance of the pass-book. What will be your course of action? 34. A, B & C are having a jointly operated account with you. C dies. The account was overdrawn by Rs.20, 000. Subsequently, a cheque of Rs.3000 purchased by Chandigarh Branch prior to the death of C was debited after his death and Rs.2, 000 deposited by cash also. Determine the liabilities of the legal heirs of C. 35. You have received an Income tax attachment order for Rs 5 lakh on a company, which is having a cash credit facility of Rs 25 lakh with your branch. How will you act in the following situations? • There is undrawn limit of Rs 1.5 lakh in the CC account. - The company is having an STDR for Rs 5 lakh which is given as collateral for the CC account. 36. Can the Bank be held responsible towards third parties for issuance of cheque book to its customers? Will the position of the Bank differ from that of laxity on the part of the Bank in opening Current 2-23 MM Special Guide Account. 37. Mr. Nadkarni presented a cheque drawn in his favour for Rs. 20,000/- at the SWO counter. The SWO observed that the amount was written in words not in figures. The cheque is otherwise in order. What shall be the course of action? 38. There is a wrong credit in the pass book of a customer. Relying on the balance in the account, the customer draws cheques. Meanwhile, the bank found the mistake. Should the bank return cheques drawn against such credits? How to deal with the situation? 39. A cheque was received in clearing. As there is sufficient balance in the customer's account the cheque was honoured. A stop payment instruction was received in respect of the cheque. It has come to your notice that the clearing time has not been elapsed for the return of the cheque. Discuss 40. Vijay & Co. having account no 2345/97 remitted Rs. 1, 50, 000/- to its account. But the bank credited the amount in Ajay & Co account no 2346/97. A cheque drawn by Ajay & Co. for Rs. 1, 30, 000/- favouring XYZ & Co. was presented in clearing and duly honoured by the bank. A cheque for Rs. 1,50,000/- representing earnest money deposit drawn by Vijay & Co. favouring a Government 1 Corporation was presented in clearing; it was duly returned by the bank with remark "Insufficient Funds". When contacted, Ajay & Co. informed that they did not want the bank to honour the cheque for Rs. 1, 30, 000/-, therefore they had not kept sufficient balance in the account. As B. M. what will you do? 41. On verification of the bank account X notes that a Cheque for Rs. 18,900/- was paid. He claims that he has not issued such a cheque but a cheque for Rs. 189/- was issued by him. On scrutiny, it is observed that the amount has been altered as Rs. 18,900/-. Discuss. 42. Mr. Prashant had given a bearer cheque for Rs.50I/- to his daughter as a gift on her 13th birthday. She presents the cheque at your branch for payment. But SWO refused to give payment as she is a minor. You are the passing officer. What action you will take?

Savings Account • 43. A SB account customer having balances of about Rs. 10,000/- but operating on his account infrequently has signed a cheque for personal withdrawal. As the signature showed some variance with the specimen signature, he suggests that he would sign a fresh specimen for our record. Discuss. 44. Mr. A has a S.B. a/c with a very large balance. As he has not been keeping good health for quite some time he writes to the Bank to pay the balance in his account to his wife after his death. What action you will take? 45. A had opened a S.B. a/c with the Bank. She had been sending moneys through her neighbour and friend for credit of her account. The friend was a messenger in the Bank. After some time it transpired that an aggregate sum of Rs. 12,000 was not remitted into her account by the messenger. He had been manipulating the pass-book by making false entries in it. The Bank declined its liablity and the customer threatened to sue it. Examine the bank's position. 46. A S.B. A/c holder had lost both his hands in an accident. He is in need of funds for treatment. How can he withdraw the amount? 47. A had opened a S B a/c on 1st Dec. with a cash deposit of Rs. 1000/-. On 3rd December a NEFT remittance for Rs. 35,000/- was received from Trivandrum branch for credit of his account. Also a cheque for Rs. 32,000/- drawn on the a/c was presented in clearing on the 3rd Dec. Will you make payment of the cheque? 48. A SB A/c is in the style of 'C, the guardian of AB Minor'. The minor dies. The guardian approaches . you for withdrawing the balance. How will you act? 49. The Commandant of the local army unit has written to you not to pay the cheques drawn by Lt. Nath on his account unless counter-signed by the Commandant. This step has to be taken as -I Lt. Nath is found to have incurred large debts. How will you proceed? 2-24

Banking Problems

Mr. Sudhakar maintains with you SB A/c with average balance of Rs.50, 000/-.He is your valued constituent. He has a TDR for Rs.1.50 lacs and STDR for Rs.2.20 lacs with your branch. He has now requested you to convert his STDR into TDR and arrange for payment of monthly interest on both the TDRs. How will your proceed? Mrs. X, an account holder at your branch operates the ATM for the purpose of withdrawing a sum of Rs.5000/-. But she did not get the cash. She got a slip, which indicated that her account has been debited with Rs.5000/-. She reports this to the Branch Manager. Discuss. A Central Govt pensioner is having a pension account with your branch. One day he comes with his wife requesting to include his wife's name in his account. How will you advise? arm Deposit An RD a/c has matured on 1.7.2001 and held in Overdue Deposits a/c. The customer approaches you on 1.7.2002 with a request to pay the deposit amount together with interest up to 1.7.2002. Will you agree? What action will you take in these situations? a) He agrees for the renewal of the deposit up to 15.7.2002. b) He agrees for the renewal of the deposit for 1 year. A is having a Term deposit for Rs.1 lakh maturing on 1.7.2020. He approaches you with a request to nominate his 3 sons to the deposit as he is not keeping good health for some time. How can you help the customer? A TDR has been issued in the name of Executive Engineer (PWD) account A, a contractor in the city. On the maturity of the TDR, A approaches the bank for its payment stating that the receipt has been lost. Discuss., A TDR is issued in the name of X, Executive Engineer, PWD. The amount represented earnest money for taking up a contract by X from the dept. On the due date, X applies for repayment of the deposit; meantime, the Executive Engineer had also sent a claim to the bank in respect of the Deposit. Discuss. A term deposit has been issued in the name of X. He has availed a loan on the deposit thereafter. Subsequently, he approaches the bank for adding the name of his son to the receipt. Discuss. . Mr. A and B is having a TDR for Rs. 10 lakh issued on F or S basis. Both of them die in an accident. The amount is claimed simultaneously by the legal heirs of 'A' as well as 'B' . Discuss. . A T.D.R. is standing in the name of XYZ. A request is received signed by all the depositors to substitute the name of Y and Z with A and B. The Bank accedes to the request. Some time later, another request is received signed by X, A & B to subsitute the name of X by C. Can the request be acceded to ? . X handed over Rs. 25,000 to the Branch Manager for issue of a Term Deposit. The Branch Manager issued the receipt under his seal but after forging on it the signature of the Accountant. He misappropriated the amount. On the due date X when approached the branch for payment, he was advised that as the receipt had been forged and as no entries had been found in the books of the Bank, the bank was not liable on it. Examine the Bank's contentions. . A & B (wife of A) maintain a T.D. of Rs. 25,000/- payable to either or survivor. A dies before the due date of the deposit. A week before the due date, C's lawyer has sent a notice instructing the Bank not to pay the deposit to 13. The lawyer has alleged that the amount belongs to C his client who is the real wife of A and that B was A's concubine. He has also stated that he will be arranging for issue of the a Court order shortly. Discuss. Why no stamp duty is payable on TDR? A TDR was issued on F or S basis. F dies. His legal heirs approach you for premature payment. Discuss. A TDR for 1 year has been issued on 1st Jan to A, B & C payable to anyone or survivor; A dies

2-25 MM Special Guide on the 4th April; B dies on the 5th May and C dies on the due date i.e. on 1st Jan next year. Examine who were entitled to the deposit on the 4th April, 5th May and on the 1st Jan. 65. A Term Deposit Receipt dt. 2.1.1999 matured on 1.1.2001. The nominee produced the Receipt on 1.8.2001 and a death certificate dt.1.12.2000 and claimed the amount .Discuss. • 66. Mr. X, son of Mr. Y brings 2 TDRs for Rs.5000/- each issued in favour of Mr.Y in the year 1965 to mature after 5 years i.e. in 1970. Mr. X advised that his father, Mr.Y had expired and that he found the original TDRs in a trunk now. He requested you to renew the TDRs for every 5 years since the original due date and pay him the proceeds after completing the formalities for deceased accounts. The subject TDRs are not outstanding as per records and the relevant TDR Register , Specimen signature etc. are not available. How will you act? 67. Mr. A had opened a fixed deposit account and a nomination was inadvertently made in favour of his two wives. Subsequently Mr. A died and both the widows put up a claim on the bank. Bank refuses payment on the ground that only one person can be nominated. What is the legal position of the Banker?. Can he refuse payment? 68. A term deposit standing in the name of X for Rs.50,000 matured on 1/7. He informed the Bank that he had lost the deposit receipt and requested that payment be made to him against issue of a Duplicate Receipt, on Indemnity basis. Meanwhile, Mr.B approached the bank with the original TDR of Mr.X duly discharged by X on the reverse of the TDR over a revenue stamp and together with a letter of authorization signed by X, authorizing the bank for payment of proceeds of the TDR to Mr.B for consideration received by him from B. Mr. B demands payment of proceeds of the TDR of Mr.X to him. How will you deal with the situation? 69. P and S had a deposit a/c in their joint names in the Bank. The said deposits were payable on maturity to "former or survivor". P died. R filed an application for grant of a succession certificate, inter alia, in respect of the above deposits on the ground, among others that she is the legal heir of the deceased. S objected on the ground that the said deposits were deposited in the Bank with instructions to pay to "former or survivor"; therefore he is entitled to receive the said payment from the Bank. The Court after considering the facts and evidence on record came to the conclusion that the objection raised by S has no merit and therefore granted succession certificate in favour of R. Aggrieved by the order, S filed an appeal inter alia on the ground that the mode of operation provided in the said deposit accounts was that the money was payable to "former or survivor" and therefore the grant of Succession Certificate in favour of R is bad in law. However R contested the appeal on the ground that she being the legal heir is entitled to succeed to the property of the deceased. Therefore, according to her the Succession Certificate has correctly been granted. Discuss. 70. A is having a Term Deposit for Rs.2 lakh maturing after 3 years. He approaches you with a request to nominate his 2 sons to the deposit, as he is not keeping good health for some time. How can you help the customer? 71. 'A' has a fixed deposit for 1 year for Rs. 5000/-. He approaches you for premature payment of the deposit after 6 months. Discuss. 72. What is the product that can be sold to customers to avoid paying capital gains tax?

,.... Partnership Firm 73. Under which section of the Companies Act, 2013 a firm cannot have more than 100 partners? 74.. A partnership consists of 5 partners, one of whom is an illiterate and another a minor. What precautions ii: . would you observe while opening an account for the firm'? 75. AB Trading Company is a partnership firm with 3 partners-A, B and C. The partnership deed has provided for profit sharing in the ratio of 50: 40: I 0 for A, B, and C respectively. The outstandings in the cash credit a/c of the firm is Rs.30,000. C has approached the bank and offers to pay Rs. 10000 as he wants to retire from the partnership. Discuss. 2-26 Banking Problems

76. A partnership consisting of partners A B & C has a current a/c. A & B are authorised to operate on the account 'singly'. C issues a letter stopping operations on the account as a result of a dispute between the partners; simultaneously a letter from D claiming to be a partner has also been received stopping operations on the account. Discuss. 77. A, B, C, D are partners of a Partnership firm having a CC limit of Rs.40 lacs. C & D have decided to retire from the partnership firm. They come to the branch and inform you of their decision. One Mr. E is willing to join as a partner of the partnership firm. a) What steps have to be taken by the bank to protect its interests? b) Can further operations be allowed in the account? 78. Partnership Letter is obtained while opening a C/A in addition to Partnership Deed-state the reasons. 79. A cheque drawn by a partnership firm is signed by 2 partners A& B. Third partner C sends a letter stopping payment of the cheque alleging that A & B are diverting the firm's funds to another firm owned by A & B. How will you deal? 80. A partnership account with partners Ram & Sham has credit a balance of Rs. 65000/- Ram died. His son came to the bank with a claim on the balance in the account stating that the amount belongs to his father. Discuss. Minor Accounts 81. A joint SB a/c is in the name of a minor and his natural guardian. The minor approaches you and requests you to allow him to operate the account as his father has become mentally unsound. Discuss. 82. A wants to open a joint account in the names of his minor sons aged 10 and 8 years and desires to operate the account as a natural guardian. Discuss. 83. A minor is having an SB a/c and a T.D.a/c for Rs.52000. The SB a/c was overdrawn through oversight. As the minor did not adjust the overdraft promptly the guarantee of his father was obtained. The branch manager proposes to file a suit against the father or alternatively, exercise the right of set off against the deposit. Discuss. 84. A minor's contract is void. But educational loans are granted for minors. Discuss the legal implications. 85. A minor has misrepresented his age and availed an OD. Can it be recovered? 86. A grandfather wants to open an SB a/c in joint names with his minor grandson on F or S basis. Discuss.

87. G guardian has opened a joint account with his minor son '13'. The Guardian dies. The minor's maternal uncle requests payment of the balance. Discuss. 88. Mr. and Mrs. Raghunath are valuable customers of our Bank and they wish to appoint their Minor son as power of attorney holder to operate their account as they are going abroad for a short trip. Will you accept? If so, what are the formalities to be complied with? Marketing 89. Your bank is located in an urban centre where hitherto only a Co-op bank and a Pvt bank existed around the same place. There is a Degree College near your branch and the salaries to the staff of the college are paid through your bank. Now HDFC has started selling housing loan products to the staff of the college. Their representative visits the college twice every week and collects loan applications from the staff. How to face the situation? Pardanashin lady 90. Mrs. Najma, a Mohamedan pardanashin lady, approaches you to open a T.D.a/c in her minor son's name for Rs.2,00,000. Her husband is in Dubai. Will you open the a/c? How will you help her? Visually Challenged Person 91. A retired Govt. pensioner has turned blind all of a sudden. He desires to open an account at your branch. Please detail the procedure to be followed and precautions to be observed for opening and conducting the account.

2-27 MM Special Guide Trusts 92. X and Y are trustees operating on the account of Sri Vidya Mandir Trust a/c. The account is operated under joint signatures. X has become insolvent. A cheque for Rs.5000 has been received in clearing signed by both X and Y. Will you pay the cheque? 93. All the trustees of a Trust approach you with a request to grant a term loan for construction of a computer Institute in the land belonging to the Trust. Discuss. 94. Sound Bank maintains the account of ABC Trust and also the personal A/c of Mr. Joshi who is the sole trustee authorized to operate the Trust A/c. Mr. Joshi has in the past deposited cheques drawn in his favour and signed by him on behalf of the Trust in his account, telling the bank that these amounts are salary and other dues payable to him. Today the Trust has written to the Sound Bank that Shri Joshi had been dismissed from the Trust for embezzlement of funds. Also it has demanded the bank to refund the amounts of the cheques deposited in his personal a/c. Is the Trust's demand for refund justified? Give reasons. 95. To whom the balance in a Trust a/c operated by a sole trustee will be paid? 96. How to open and conduct a Trust A/c? 97. Your branch is maintaining a current a/c styled Ramkumar A/c Shriram Temple Renovation Committee. A registered notice is received purporting to be signed by the Secretary and Treasurer of the Shriram Temple Renovation Committee prohibiting you from allowing operation on the account by Ramkumar. Meantime, Ramkumar claims that he has been the properly elected Secretary, and in any case, the funds in the a/c have been contributed by him and his family members and that he has the right to operate on the account. Discuss. 98. A bank has a trust account, which is operated by the sole trustee. The trustee draws cheque in his favour and informs the bank that he is drawing the amount towards salary and other dues payable to him. The Bank has been crediting such cheques in his personal a/c. After some time, the bank receives information from the Trust that the trustee has been dismissed as he was mis-utilising the trust amount The Trust claims that the amount drawn by the trustee in his favour be made good by the bank. Is the claim justified? Discuss.

Joint Hindu Family 99. Mr. 'X', 'Carta of a Joint Hindu Family, has signed all the documents including a mortgage deed mortgaging the JHF property as security for the loan granted to the family. The advance has become irregular. Mr. 'Y' one of the co-parceners, has a TDR held in his individual capacity. Can the bank exercise right of set-off against the deposit? 100. There is a dormant SB a/c in your branch in the name of Mr. "A" and Mrs. "A" in B or S style with a balance of Rs. 10, 000 since 1985. The account was opened in 1930. In May 2003, one Mr. B approaches your branch claiming to be only son of Mr and Mrs. A and informs you as under: a) He holds pass book of the account b) Mrs. A died in year 1987 c) His father has left the house in 1980 and his wherebouts are not known He requests you to make payment of the balance to him. How will you deal with the situation?

Garnishee/Court Order, Revenue Attachment Order 101. A Gamishee Order is issued in the name of Mr. `A'. He has a Current Account. Discuss how the bank will proceed in the following cases. a) He has deposited a cheque for Rs. 5000 into the account which is to be sent for collection. b) He has also deposited cash for Rs.5000 into the account. c) He has also deposited 5000 shares worth Rs.2.40 lakh for safe custody. d) He has deposited Rs.5000 to another overdraft account in the name of Mr. 'A'. There is an undrawn drawing power in the account 2-28

Banking Problems

76. A partnership consisting of partners A B & C has a current a/c. A & B are authorised to operate on the account 'singly'. C issues a letter stopping operations on the account as a result of a dispute between the partners; simultaneously a letter from D claiming to be a partner has also been received stopping operations on the account. Discuss. 77. A, B, C, D are partners of a Partnership firm having a CC limit of Rs.40 lacs. C & D have decided to retire from the partnership firm. They come to the branch and inform you of their decision. One Mr. E is willing to join as a partner of the partnership firm. 111) a) What steps have to be taken by the bank to protect its interests? b) Can further operations be allowed in the account? 78. Partnership Letter is obtained while opening a C/A in addition to Partnership Deed-state the reasons. 79. A cheque drawn by a partnership firm is signed by 2 partners A& B. Third partner C sends a letter stopping payment of the cheque alleging that A & B are diverting the firm's funds to another firm owned by A & B. How will you deal? 80. A partnership account with partners Ram & Sham has credit a balance of Rs. 65000/- Ram died. His son came to the bank with a claim on the balance in the account stating that the amount belongs to his father. Discuss. Minor Accounts 81. A joint SB a/c is in the name of a minor and his natural guardian. The minor approaches you and requests you to allow him to operate the account as his father has become mentally unsound. Discuss. a. 82. A wants to open a joint account in the names of his minor sons aged 10 and 8 years and desires to operate the account as a natural guardian. Discuss. '!!; •9j 83. A minor is having an SB a/c and a T.D.a/c for Rs.52000. The SB a/c was overdrawn through oversight. As the minor did not adjust the overdraft promptly the guarantee of his father was obtained. The branch manager proposes to file a suit against the father or alternatively, exercise the right of set off against the deposit. Discuss. : 84. A minor's contract is void. But educational loans are granted for minors. Discuss the legal implications. 85. A minor has misrepresented his age and availed an OD. Can it be recovered? 86. A grandfather wants to open an SB a/c in joint names with his minor grandson on F or S basis. Discuss. 87. G; guardian has opened a joint account with his minor son 'Ir. The Guardian dies. The minor's maternal uncle requests payment of the balance. Discuss. 88. Mr. and Mrs. Raghunath are valuable customers of our Bank and they wish to appoint their Minor son as power of attorney holder to operate their account as they are going abroad for a short trip. Will you accept? If so, what are the formalities to be complied with? • Marketing 89. Your bank is located in an urban centre where hitherto only a Co-op bank and a Pvt bank existed around the same place. There is a Degree College near your branch and the salaries to the staff of the college are paid through your bank. Now HDFC has started selling housing loan products •

to the staff of the college. Their representative visits the college twice every week and collects loan applications from the staff. How to face the situation? Pardanashin lady 90. Mrs. Najma, a Mohamedan pardanashin lady, approaches you to open a T.D.a/c in her minor son's name for Rs.2,00,000. Her husband is in Dubai. Will you open the a/c? How will you help her? '• Visually Challenged Person 91. A retired Govt. pensioner has turned blind all of a sudden. He desires to open an account at your branch. Please detail the procedure to be followed and precautions to be observed for opening and conducting the account.

2-27 Banking Problems

102. A garnishee order in the name of a customer was received. The counter clerk informed you that the customer is deceased. Susequently an Income Tax attachment order in the name of another customer was received. The counter clerk informed you that the customer is deceased. What action you would take as BM? 103. Bank received a garnishee order in a customer's account at 11.00 a.m. The balance in the account is Rs.1,00,000 at the time the garnishee order was served. How will you act in the following circumstances? a) One cheque was posted for Rs.10,000 in the account and a token was issued to the payee but payment was not made. b) A cheque for Rs. 10,000/- issued on the a/c and presented in inward clearing has been posted in the account, and entries have been recorded in the banks' books. The time of advising the clearing return is 2:00 pm. 104. A guarantee has been issued by the Bank on account of X against 50% margin in the form of a lien on his deposit account. A garnishee order is recevied attaching the moneys lying in his account. How will you proceed ? 105. You receive a garnishee order attaching the amounts due to Mr.X to an extent of Rs.5000/-. What action will you take in the following cases : a) X's overdraft account shows a debit balance of Rs.2000/- and shows a drawing power of Rs.5000 b) X's SB account shows a credit balance of Rs.1500/- c) X has a joint SB account with Y and shows a credit balance of Rs.6000/- d) X has deposited a sum of Rs.3000/- for purchase of a draft. 106. A maintains an account with the Bank. A Court attachment order for Rs. 10,000 on the account is received. Detail the action you will take in the following cases. a) A also maintains a joint a/c with B (his wife) and the credit balance in the a/c is Rs. 1000. b) A has tendered Rs. 5000 for purchase of a draft. c) A credit voucher for Rs. 3000 being S.C. realised has been released. d) A's current a/c has been overdrawn by Rs. 2500. e) A draft for Rs. 5000 presented in clearing for credit of current a/c has been paid. f) A has tendered a clearing cheque for Rs. 2000 which will be presented in clearing the next day 107. A notice under S 226(3) of the Indian Income Tax Act, 1961 read with sec. 73(5) of the Estate Duty Act has been served on your branch directing you to pay Rs. 4233 due from late X whose current a/c has been in your books with a credit balance of Rs. 3000. Discuss. 108. ABC & Co is a partnership firm with ABC as partners. An income tax attachment order is received attaching a sum of Rs.75, 000/-. The balance in the account is Rs.7500/- (credit) and the balance in the individual accounts of the partners is as given below. A- Rs..40000/- B- Rs.30000/- C-Rs.15000/-. How will you act? 109. The Income Tax Department attaches Shri Nalla Reddy's joint account with his wife for a sum of Rs.20000/-. The balance in the account when the attachment order is received is Rs.25000/-. On the same day, a cheque issued by Smt Nalla Reddy for Rs.10000/- is received in clearing. Discuss.

Miscellaneous 110. An NRI comes to the bank and informs that he will not go abroad again and he has become a resident. He has STDRs, TDRs & NRE accounts with you. The Branch Manager then changes the interest rate in all the accounts and converts the NRE into NRO account. Is BM's action correct? Discuss. 111. Mr.Rabo, a manager in a Road Transport corporation, has a current account with your bank, which is for the local or small transactions only. One day Mr. Naik came to bank with a cheque for Rs 165000/-, drawn by Mr. Rabo, endorsed and attested by the signature of Mr. Rabo. The cheque was presented across the counter to the SWO. As a single window operator what precaution you will 2-29 MM Special Guide take? 112. Mrs. Mehta has a TDR account of Rs. 5 lakhs dated 15.3.2002 for a period of 3 years. She has been availing interest at quarterly rest. She came to the bank on 16.3.2003 and requested for converting the TDR into STDR stating that she does not want to take interest quarterly. How will you advise her? Find out the rate of interest eligible, the date of conversion, date of maturity and the maturity amount.

Insolvency / Death/ Insanity 113. X is the executor of the estate of late A. A cheque signed by X is presented for payment. X is reported dead in the newspaper of the same date. Will you pay the cheque? 114. Y presented a cheque for Rs.10,000 at the SWO counter for payment. The cheque has been issued by X, an SB account holder. Before he received cash from the SWO he collapsed on the counter and died. Discuss. 115. A and B have a T.D.R for Rs.50000 in their joint names, payable to E or S. A approaches you with a request for premature payment of the deposit. Will you accept his request? What precautions you would take? What is the position if A requests for a loan? 116. What action you will take in respect of the following situations? (a) A customer has filed an insolvency petition in the Court. A cheque for Rs.8,000/- signed by him earlier to the date of the petition is presented in clearing ? (b) A customer has been adjudged insolvent by a court. (c) A guarantor to a borrowal account has been adjudged insolvent by a court . 117. A joint account (E or S) has been opened. KYC procedure not duly complied with, as at the time of opening the account, the account holders promised to give a deposit of Rs.5 lakh. After some time,remittances for large amounts have been received for the credit of the account. One of the account holders has started withdrawing funds from the account. What precautions would you take at this stage to protect the interest of the Bank? 118. E and S have a joint account on E or S basis. E is reported dead. On the death of E, S draws a cheque which has been wrongfully dishonoured by the bank. In the meantime the step-sons of E request the bank to pay the balance in the account. How will you deal? What is the position of the bank in each case? 119. Mr.X has given a Power of Attorney to his wife to operate the account. Mr.X has issued a cheque on the a/c. His wife has written a letter stopping payment of the cheque. Discuss. 120. A minor approaches you to open a SB a/c. He brings a cheque given by his father to open the account. His father has a current account with the branch. How will you deal with the situation? 121. A company has a current account at the branch. It is operated by the Manager of the company. The signature of the Manager has been forged by the company secretary in a few cheques which have been paid by oversight. The Bank has been regularly sending the statement of account to the company. The company has sent to you a letter demanding that the amounts debited in respect of forged cheques should be re-credited to the account. How will you act? 122. You come to know that your customer has filed an Insolvency petition. On the same day two cheques drawn by the customer has been presented in clearing. What action you will take? 123. Mr.Arjun Kumar had asked the bank to purchase 100 shares of Hindustan Lever Ltd. on 6.10.96 in terms of his letter of the same date. In the same week the shares were purchased through the Bank's Broker, but, before the settlement date, the bank received notice of death of Mr. Arjun Kumar. Can the Bank debit Arjun Kumar's a/c on the settlement day? Give reasons. 124. A current a/c styled "JEEVAN RAJ-ADI JAIN TEMPLE CHARITY" was opened at the branch by Jeevan Raj one of the valued customers of the branch. Today, you receive a letter purported to have been signed by one Mr.Karthik Jain, Secretary, Adi Jain Temple Charity Trust stating that the bank

2-30 Banking Problems

should not allow Mr.Jeevan Raj to operate the Adi Jain Temple Charity account. Mr.Jeevan Raj informed you that funding the account was from his personal income which was kept aside from time to time for Temple Charity and the Temple Trust is not at all concemed with the account. How will you deal with the situation? Give reasons. 125. Following cheques have been presented for cash payment at the counter. i) A Cheque for Rs.6,000 payable to Ashok or order marked "A/c Payee" without two transverse lines, i.e.crossing. ii) A cheque for Rs.5000 payable to Sunil or order bearing the words "Not Negotiable" without two parallel transverse lines across the cheque. iii) A crossed A/c payee cheque with "Not Negotiable" words, payable to Amul or Order is presented by ABC Co-op Bank across the counter for cash payment with a certificate "Payees a/c will be credited on realisation". How will you deal with the cheque? Explain your answers with reasons. 126. You have been approached by the following persons to open NRE a/cs: i) A person of Indian origin holding UK citizenship but presently doing business in Nepal. An Indian residing in Pakistan. iii) An Indian National employed with UNO in Nepal drawing salary in US$. iv) American wife of -a Non-Resident Indian residing in UK. v) An Indian who has gone for a business visit to USA and is likely to stay there for 6 months. How will you deal with the above requests as per the present guidelines in this regard? A Savings Bank a/c customer, in whose a/c the average balance is very nominal, has been giving introduction to a number of new accounts, reportedly by taking some commission for each account. The manager wants to close the account of the customer. What is the procedure to be followed? 127. A Savings Bank a/c customer, in whose a/c the average balance is very nominal, has been giving introduction to a number of new accounts, reportedly by taking some commission for each account. The manager wants to close the account of the customer. What is the procedure to be followed? Customer Service 128. Narrate any five recommendations of Goiporia Committee. 129. Match the following: (As per Bank's compensation policy) Activity Time norm a) Cash Receipt (SB/CA) 8 minutes b) Cash Payment (SB/CA) 12 minutes c) Issue of cheque book 8 minutes d) Payment of Draft 16 minutes e) Issue of Demand Draft 4 minutes f) Opening of SB a/c 8 minutes Negotiable Instruments 130. One Shri. M.P.Singh comes with a cheque for Rs.5,000/- drawn in his name on another bank, and duly endorsed by him, with a request to collect it and issue a STDR in his favour for 2 years. Will you accept his request? 131. A cheque for Rs.1909/- written in figures and in words "One Thousand Nine Hundred Ninety only" is presented for payment. What will you do? 132. How will you act when the following cheques are received for payment? A) An order cheque favouring a minor is endorsed by the minor and the third party presents the cheque for payment. B) A cheque is crossed and below the crossing the words crossing cancelled' is mentioned under drawer's full signature. It is presented for payment by the payee across the counter. 1"4-

2-31 MM Special Guide

133. Give a gist of the amendments to NI Act (Dec 2002). 134. 1 . Mr X had issued a cheque for Rs.14, 500/- when he was on tour. He sent a telegram instructing the Bank to stop payment of the said cheque. Meanwhile the cheque was presented in clearing. Discuss the Bank's position. 135. Indicate with reason whether the following documents are negotiable instruments. a) A Rs.10. 00 rupee note issued by RBI b) A bill of lading issued by a shipping company covering export of garments to USA. 136. How would you deal with cheques bearing per pro endorsements when it is received? a) through clearing b) across the counter 137. A crossed order cheque for Rs.I0, 000/- drawn on X bank is collected by P bank for latter's customer in whose favour it has been endorsed by the payee. Discuss the position of the paying banker and collecting banker if a) signature of the drawer has been forged. b) endorsement of the payee has been forged. 138. A draws a cheque in favour of B on 30.5.03. On 31.5.03, he telephoned the bank to stop payment of the cheque. Simultaneously, the cheque is presented for payment. How will you deal? 139. An undated order cheque for Rs. 10, 000 drawn on SB account of Mr. Sham Kumar is presented for encashment by the payee who does not maintain account at your branch. The counter clerk objected to pay the cheque for want of date. The payee writes the current date and demands payment. How will you deal with the situation? 140. A cheque payable to Mr. M or order drawn by X on your branch is stolen and the thief forges M's signature and presents it to you for payment. However, you made the payment during the normal course of business. M is having an SB account with your branch which has not been operated for the last 5 years. How will you deal? 141. A cheque crossed specially to ABC bank and XYZ bank is presented in clearing to your branch by ABC bank. How will you deal? 142. A cheque is drawn payable to B or order. It is stolen and B's endorsement is forged. The banker pays it in due course. Is the banker discharged from liability? 143. X, the holder of bill, transfers it to Y without consideration. Y transfers it to Z without consideration. But Z transfers to M for consideration and M to N without consideration. Can N hold M,Z,Y or X liable for payment? 144. a) A bearer cheque drawn in favour of a Minor has been presented by a third party across the counter for payment. The cheque has been endorsed by the minor. b) A crossed cheque has been presented by a third party across the counter for payment, duly cancelling the "crossing" by the drawer of the cheque. c) A cheque has been presented for payment wherein the amount is written in figures as Rs.1999 and in words as "Rupees Nine Hundred and Ninety Nine only. How will you deal with the above cheques? 145. A cheque for Rs. 12, 000/- dated 8.10.2003 issued by Mr. X on his account was paid by the bank on 14.10.2003. Mrs X came to the bank later stating that Mr X died on 10.10.2003 and hence the bank has to refund the amount to her. Discuss.

Set Off 146. A loan account is irregular having a debit balance of Rs. 36534/-. Borrower has been requested to regularize the account. In spite of repeated requests he has not taken any steps to regularize the account. The documents will be getting time barred within one month. The borrower is not willing to revive the documents. In the mean-time you have noticed that the guarantor of the above loan account has a current account in the branch, which has a credit balance of Rs. 75620/-. Can the bank set off the amount in the current account towards the loan account? 2-32 Banking Problems

Answers to Problems: 1. The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act. 1988 has made the following changes in N.J. Act. S 138 : If a cheque given in discharge of a debt or other liability is returned by the bank either for the reason 'insufficiency of funds' or 'exceeds arrangement' it is deemed a criminal offence on the part of the drawer of the cheque. When a cheque is returned, the payee must make a demand on the drawer (within 30 days of notice of return) for payment. If the drawer does not pay the amount within 15 days from the date of demand he shall be liable for imprisonment up to 2 years or fine up to twice the amount of the cheque or both. S 139 : Unless proved otherwise, it will be presumed that the cheque has been issued for the discharge of a debt/liability. S 140 : The drawer cannot plead that he had no reason to believe when he issued the cheque that it may be dishonoured on presentment. These changes have enhanced the acceptability of cheques in the settlement of debts. Courts have held that the reason 'Refer To Drawer' does not necessarily indicate insufficiency of funds. Hence, cheques retumed for want of funds should be given the objection "Insufficiency of funds".(Note: S 143 to S 147 were introduced later in NI Act in 2002). Note: Very recently S 142A has been introduced in NI Act. The new provision states that the holder of the cheque can file a criminal complaint before a magistrate where he resides and tendered the cheque. He need not go to the place where the cheque was issued or other courts. After this clarification, there is a single place to file the complaint. Litigation expenses will come down, and the drawers of cheques, including company directors will be more careful while signing such cheques. The government feels that these procedural changes will be fair to both parties. According to the newly introduced Section 142A, all cases which were pending in any court, whether filed before it or transferred to it shall go before the court having jurisdiction under the new procedure. 2. The Bank has paid a forged cheque; the Bank has no authority to pay a forged cheque even if the forgery has been done very cleverly. A forged cheque is no mandate from the customer. The Bank is obliged to refund the money to the customer. However if it can establish contributory negligence/connivance on the part of the customer which has resulted in the forgery, it can refute the claim of the customer. As per Indian law, there is no duty cast on the customer to scrutinise the statement of account; He can question a wrong debit at any time when he finds it in the account. As a practical measure, the Bank must impress on the customer that if he does not agree for the debit, the Bank would have to proceed against his son criminally. 3. In the present case, the account is maintained by Sri. and Smt. Ram on Either or Survivor basis. Smt. Ram wants to close the account whereas Sri Ram does not want the bank to pay cheques issued by Smt. Ram which clearly indicates that there is a dispute between them. Therefore the E or S option automatically stands cancelled and thereafter the account can be operated by them only jointly in future. Sri Ram must be advised to give his instructions in writing. Smt. Ram must also be advised to approach the Court for appointment of a Guardian for Sri.Ram as per Mental Health Act as he is said to have become insane. Bank must also make discreet enquiries about the soundness of mind of Sri.Ram with the introducer, friends etc. 4. Notwithstanding the valuable connections Mr. Murthy has with the bank it is to be ensured that the opinion report to the other bank depicts the true state of affairs without giving room for any distortions. The bank should not become a party to the deceit as suggested by Mr. Murthy. It is an accepted practice to provide credit information/ opinion on customers when requested by other banks as per IBA format 2-33

y l

MM Special Guide 5. While availing an Overdraft against the LIC policy, the borrower has to assign the policy in favour of the bank. which would have been registered in the books LIC. On the death of the borrower, the bank as an assignee is entitled to receive the payment directly from LIC. Suicide clause affects the original parties and not the assignee i.e., the bank. 6. Mr. 'Y' has obtained the cheque from Mr. 'X' for an unlawful consideration. Mr. 'A' the holder in due course has received the instrument in good faith and for valuable consideration. As per Section 58 of N I Act he can have recourse to any of the prior parties for recovery of the cheque amount. 7. There is no doubt that Mr. 'X' is the known agent of the company for making deposits, withdrawing money etc. However, it should be remembered that the company is the Bank's customer and the Bank can only pay as per the 'mandate' of the company. There is forgery in the signature which means that there is no mandate to pay. The bank is liable to the company. The bank would have been put on guard if the company had advised about his removal from service earlier. But, the omission does not affect the legal position. The bank's stand that the amount was small and that it was paid in good faith is not tenable. The signature is forged and the bank is liable. 8. The original mandate comes to an end on the death of the account—holder. The Bank cannot pay cheques on the account after it comes to know of the death of the account holder. The bank cannot pay both the cheques. If a E or S a/c had been opened with Son as survivor, a new a/c can be opened in the name of Y after completion of formalities and amount paid to him. It is hoped that 'Nomination' would have been obtained on the account so that settlement of the account would be smooth. 9. The death of the customer should be cross-checked with reliable sources and noted in the a/c in the system. The death of the customer revokes the authority given to the bank to pay any cheques. The cheque received from the other bank has to be returned with the answer "Drawer Deceased" The cheque negotiated by our branch will be debited to the account for the following reasons. a) The transaction is completed on the date of negotiation and the bank has parted with the funds. b) Anyway, the customer's estate will be liable to pay the money to the bank. 10. The debt owed by a bank to joint depositors (i.e. credit balance) cannot be set off against the debt owed to the bank by one/some of the joint depositors (i.e. debit balance), as both the debts are not due in the same right. Hence, the bank cannot exercise the right of set off. 11. According to 5201 of Indian Contract Act the contract of Agency gets terminated on the death of the principal or agent. However, as the agent signs in a representative capacity and the principal is alive, the cheques signed by B can be paid. Also, the cheque signed by the principal should be paid as his power to operate on the account in not affected. 12. a) According to S.26 of N.I. Act a minor can draw, endorse, negotiate and deliver negotiable instruments so as to bind all others except himself. Hence if the cheque is otherwise in order it can be paid. b) There is a risk of forgery of drawer's signature as his signature is available in the cheque itself. Hence, as a measure of abundant caution, IBA has taken the view that it is not safe to pay such a cheque to third parties. It can be paid only to the drawer or his known agent.

Standing Instructions 13. While executing S.I. the Bank acts as an agent of the customer. An agent should show reasonable competence and diligence. Hence if the draft had been issued after getting an indemnity from the drawer correctly and despatched promptly its function as an agent is completed once the draft is despatched. The Bank is not liable for the miscarriage in post, misplacement by L.I.C. etc. Legally the customer is obliged to execute the indemnity bond. L.I.C. is not aware of the draft and therefore cannot execute any indemnity for it. A letter to the effect that it has not received the draft will be sufficient. However, as a matter of practical consideration a duplicate draft may be issued and sent direct 2-34 Banking Problems

to the L.I.C. with request to forward the original if received later. It is presumed that the amount of the draft is small. This will enhance the image of the Bank without endangering double payment. 14. Under S.I. the Bank acts as an agent of the customer. It has to effect the remittance promptly on the due date, provided the funds are kept in the account by the customer. As a healthy banking practice, the bank will advise the customer if it is not able to carry out the S.I. for want of funds. If funds are not available on the due date the Bank should not effect the remittance on a subsequent date when funds are available without the concurrence of the customer. However, the Bank has done so and the balance has come down. Now, it will not be in order for the Bank to return the cheque for want of funds. The Bank has to necessarily grant an overdraft to the customer and recover it from him. We can presume a customer who has a S.I. arrangement, will be credit- worthy for this amount.

Current Account 15. In a joint a/c each of the account holders is entitled to information about the account. However, the bank cannot be compelled to supply more than one copy of the statement free of charge. In this case statement of account has been sent regularly. Duplicate statement can be sent by recovery of charges; additional statement can also be provided to B in future, if he is agreeable to pay the charges. 16. The cheque will be paid. As the balance will come down below the prescribed minimum balance, penalty will be charged on the account and credited to Commission a/c. The customer will be requested to maintain the minimum balance in the account in future. 17. When the payment is not received by Mr:A' the entries in the customer a/c in the system will be reversed. On the next day it is treated as a fresh entry and this has no relevance to the previous day's transactions. Thus the bank has to accede to the stop payment instructions received from the account holder. Also, the garnishee order will be given effect to. 18. A cheque is valid even if it is ante-dated at the time of issue. Hence the cheque can be paid if otherwise in order. There is no bar for a cheque to bear the date of a sunday or any other holiday. 19. The bank should make discreet enquiries to ascertain the death of B. If satisfied, the bank should stop operations on the account to avoid application of Clayton's rule and to retain the bank's claim over the assets of the deceased borrower B. The Bank would have obtained a joint and several liability letter (COS 57) from A and B; therefore, it can call up the advance and ask A to repay the overdraft. Alternatively the bank can claim the amount from A as well as from the legal heirs of B if they have inherited the assets of B. Alternatively, if A is considered good for the balance, a fresh a/c in his single name may be opened by closing the existing a/c and transferring the liability. 20. The bank has no right of set offketween a joint account and the personal account of a joint account holder. But if the bank had obtained a Joint and Several Letter (COS 57) at the time of allowing the overdraft, then it can'eNereisethe right of set off in respect of the overdraft against the personal account of one of joint account holders. 21. The customer has--a debit account in one branch and a credit a/c in another branch. The Bank can exercise the right of set off as both the debts are due as between the same parties and in the same right. If the bank has any surplus balance left by sale of securities/assets charged to it (after adjusting the loan amounts), it has a right of set-off against this surplus against an overdraft m another account. The account may be maintained at the same branch or at another branch and the debt may be current or time-barred. 22. The contractual banker-customer relationship is of paramount importance. Only a valid court order i w3 prohibiting payment/attaching the balance in the account will be binding on the Bank. The advocate has to be advised accordingly. Meantime, the Bank has to honour any cheques issued by the customer. 23. Obviously, the customer cannot sign in the manner in which the specimen is recorded at the branch. 2-35 MM Special Guide An officer of the Bank may be deputed to his place and his thumb impression obtained on the the cheque/withdrawal form. It should be witnessed by two indepedent witnesses known to the Bank. One of the witnesses may be the wife and the other the bank official. (RBI Instructions). In the long run, if he is able to sign with the left hand, the specimen of his left hand signature may be obtained and kept on record. He can sign cheques in his left hand as per specimen. The branch has also to examine whether he can use ATM card for future operations. The Branch should arrange immediately for issue of ATM Card which will solve the problem of the customer. 24. The customer has the right to revoke his instructions till the Bank advises the transferee of the credit; In case the credit advice is sent by post, till the Bank posts the credit advice the customer can revoke his instructions. In the instant case, the Bank has not advised the transferee. The garnishee order operates in law as a revocation. Hence the entire balance (inclusive of the amount of Rs. 10000) stands attached. 25. In view of the penal provisions contained in Section 138 of NI Act and in the light of court judgements, the cheque ought to have been returned for the reason 'insufficient funds' in the first instance. However in the present case, the expression `Please present again' does not amount to a guarantee by the Bank that the cheque would be paid in the next presentation. Hence, it is in order for the Bank to return the cheque the second time also as the balance is insufficient to meet the cheque. (IBA has advised Banks that it is not necessary to add the words 'Please present again' in such circumstances). 26. Under the 2013 Companies Act, there is no provision for issue of certificate to commence business to both Public/Pvt Ltd companies. The company can commence business after the fulfillment of some conditions. 27. It is not in order to have opened the account without calling for the M.A, A.A. and the Certificate of Incorporation. It appears that the Company has not come into existence at the time of opening the account.The Bank has also not acted carefully in issuing the cheque book. Under the Companies Act, the acts of the promoters before the formation of the company cannot be ratified by the Board of Directors later. Thus, the purchase of land by the promoters cannot bind the company. Hence the cheque has to be returned. The reason for return may be given as Refer to drawer. But this reason might affect the credit of the company in formation. Instead, a reason such as 'Insufficient Mandate' may be given. 28. The Collecting banker will get protection if he has collected a crossed cheque for a customer in good faith and without negligence. The paying banker will get protection if he has paid the cheque in due course as per Section 85 and Section 10 of NI Act even though the endorsement is a forged one as long as the endorsement appears to be in order. But D will not get a good title over the cheque and become a holder in due course since he has received the cheque with a forged endorsement. Therefore D will remain liable to the true owner of the cheque. 29. The collecting Banker's protection is available to the Bank only in respect of 'customer' of the Bank and that too in respect of crossed cheques. It is mandatory for the Bank to satisfy itself that it deals with honest individuals. Introduction of a new customer by a well-known person/existing customer serves this purpose. If the Bank fails to do this exercise or is lax/negligent in doing this, the Bank will be incurring the risk of dealing with an unscrupulous person. The bank's negligence in not verifying the Introducer's signature has led to the present situation. The bank is liable for negligence. Also, is not clear whether KYC due diligence was done or not while opening the account. 30. (a) It is not in order to accept credit into the account of a customer from unauthorised persons; it will lead to income tax problems for the account holden (b) In the instant case, if the exact amount of Rs.200/- is accepted, 'A' may allege that the position of the account was revealed to a third party, thereby violating bank's duty of secrecy. 31. The Bank cannot legally insist on a signature by the payee/endorsee of bearer cheque at the time 2-36 Banking Problems

of encashment as there is no such requirement under NI Act. A bearer cheque is payable on presentation of the cheque. But this well-established practice of getting the signature is adopted to readily find out the recipient of the cash, if a need arises, for any investigation. In case he is not convinced of this argument, the advocate may be requested to give a stamped receipt on a separate paper for the money received by him. 32. As per Section 65 of the NI Act, payment of a cheque presented for payment after the banking hours is not a payment in due course. However, in this case, Mr. A presented it within the banking hours and the cheque was paid in due course. Hence, it is a payment in due course. The Bank cannot accede to the stop instruction given by B. In the present case, the Cheque was presented within the working hours. A slight delay in payment due to processing time, waiting time etc will not make the payment 'not in due course'. 33. A customer's account details have to be kept confidential by the bank. Otherwise, the bank will be liable to the customer for breach of secrecy. The details can be revealed to the husband, only if he is known agent of his wife. It is therefore necessary to confirm with her over phone that it is in order for the bank to update the pass-book and hand it over to her husband after establishing his identity as husband of the customer. As he has come with the pass-book we can reasonably presume that he has been authorised by the customer to have the transactions done i.e to have the pass-book completed. 34. The debit of Rs.3, 000 towards cheque purchased by our Chandigarh Branch is in order as the bank had parted with funds on the date of purchase. As there has been a credit of Rs.2, 000, the liability of legal heirs of C by application of Clayton's rule will be Rs.21, 000 as furnished below: OD at the time of C's death Rs. 20,000 Cheque purchased Rs. 3,000 Rs. 23,000 Less credit Rs. 2,000 Rs. 21,000 35. a) Income tax attachment order will attach funds due and accruing due by the bank to the customer. In case of cash credit limit no money is due and payable by the Bank. Also the undrawn portion of the limit will not be attached by the Income tax order. However, any credit balance in the cash credit account will be attached. b) The Bank has paramount lien on the STDR accepted as collateral security for the cash credit \ account. The Bank can utilise the proceeds of TDR at any time for the dues of the bank and the surplus amount, if any, available from the TDR only will be attached by the Income tax attachment order. 36. Issue of cheque books to customers is governed by the rules for conduct of the bank a/c framed by the • bank. No doubt, the bank will adopt some salient safeguards. a) Only required number of cheque-leaves as needed for the operations will be issued. b) Cheque book will be sent by LCPC to the customer to his recorded address through authorized courier. c) In case a cheque book is issued through a messenger of the customer, direct confirmation would be called for. These safeguards are adopted to protect the bank's interest and the customer's interest. However, any lapses are only matters of concern between the bank and the customer. Third parties are in no way concerned with these and hence the bank is not liable to third parties for these. On the other hand, if a current a/c is opened without making KYC due diligence the bank will not get Collecting banker's protection under S131 of NI Act. 3.7. It is well-established banking practice to require the amount of a cheque to be written both in figures d and words. In London Joint Stock Bank Vs Macmillan, it was held that the banker is justified in 2-37 MM Special Guide returning a cheque when the amount is expressed in figures only. Hence, the cheque should be returned for the reason "The amount to be written in words also". 38. The bank has shown a higher balance on account of the wrong credit. Relying on this the customer had issued cheques. The bank has subsequently identified the mistake. The bank must honour the cheques if no notice has been sent to the customer. However if the customer had issued the cheques even after receiving the notice in regard to wrong entries such cheques can be dishonoured by the bank. 39. It is well settled now that payment is complete in such cases only when the retum 'clearing time' expires. Hence, the stop payment has to be noted. The cheque should not be paid. 40. The Bank has been negligent in providing a wrong credit. Unfortunately, the amount has been withdrawn by Ajay & Co. The contention of Ajay & Co that the Cheque was not to be paid is untenable. It is established law that when a cheque is issued, it is intended to be paid and there is adequate balance in the account. It would also be in order for the bank to pay the cheque by creating an overdraft, at its discretion. When the balance is insufficient, the bank may pay the cheque treating it as an implied request for overdraft. Hence, it is liable to repay the overdraft. The Bank's action in the return of the cheque issued by Vijay & Co would have damaged the credit of the firm. We will have to provide immediate credit to the account, with the approval of C.A. The BM has to call on the firm, explain the mistake and persuade the firm to arrange for presentation of the cheque. We have to offer our deep regret for the mistake and assure good and faultless service in future. However, from the practical angle, no overdraft should be granted to any customer unless there is a request from him for the same. Only then these types of disputes can be avoided. Immediate steps have to be taken to recover the amount from Ajay & Co. 41. It appears that the amount in the cheque has been altered to Rs.I8,900/-. If the customer has written the words and figures with gaps enabling it to be altered and if the alteration could not be detected with reasonable care and the payment was made in due course, the bank is not liable. However, if the alteration is apparent and could have been detected by the bank with reasonable care and diligence, the bank would be held negligent and hence liable. 42. A Minor may draw, endorse, deliver and negotiate any negotiable instruments and bind all parties except himself as per Section 26 of the NI Act. As the cheque represents a gift given to him payment can be effected provided he understands the nature of the transaction and the cheque is otherwise in order.

Savings Account 43. The identity of the customer has to be established strictly. Some of the staff members or the introducer would be able to do it. The specimen on record should not be shown to him to enable him to sign as per specimen. A few frauds have occurred in the past when the signatures were shown to the unauthorised persons. As a measure of immediate satisfaction about the genuineness of the signature, we may compare the signature with the signature on the earlier cheques paid on the account. Only after thoroughly satisfying ourselves about the identity of the customer, can we obtain a fresh specimen signature. The old signature sheet may be left undisturbed as it is on the basis of this signature that the cheques have been paid so far. 44. On the death of the account holder the balance will stand vested in his legal representatives. All instructions issued by him will lapse. Hence the Bank cannot accept such instructions. However as the depositor is anxious to see that his wife shall get the balance in his account after his death we may suggest to him to make a nomination in her favour or open a E or S / F or S a/c. In fact, we should have got the 'Nomination' instruction while opening the account. 45. To make the Bank liable it has to be proved that the employee acted in the course of his master's business and that he had acted within his actual or ostensible authority when he accepted cash from A for depositing into her account. Cash transactions are permitted only at the SWO counters 2-38

00 4127,-;

1 ir°441111141'°°42°°"" 'IOW all 0 “), 110011011 O. 44* ..,.Nta..-- , Pah .,,,,,,,,, i„ii 11.4; i I hi* 00 .-..- 1170---0.00 /100 k., •^.i -, . .41004 ... Clot ibif Wiilf:` 414., , • 0,---0- 4 $0110, - • -'' "44 , • 0 1 . tir cvarcoyrty *Oboe -, * L .. 4004144 . , ...... ,.., *ifk. 111,4., liSe.1 1: OSTOW r, 1 .err{ PIPPIPPPr ili'lle ,,t, --t I 1.4.-0, 1,41,6414,0r4 pcdloi if011.11k4 .sr-e mfr o . k., ft.b,.. „I'41Pte , -.4, : "1".. , • ../' , I, ,.' .,. **Iikil 'OF ,s, i TOP 010 1.2.2.- • t • Ai' •,,, -‘, , ,.1.1,1 ilk ,t...

arFal -e ',rat ' ,TO, ,

44 „ 44N ., , 44 appL.. i. . „ I.,4,44.' 4 1414, Ala -',. 'fi r , atavot t',,, hal/ ... ',:;.,'

,. -, , 44 )1.. - ,, . , iaral by the, Bank. . ,,,, Ia..- . , ‘, ---'%'''' . -:,;,....,:.. conversion '''''' . ,,.. ,t ,, •.. l I 1 latiztair , .. ,.. ^ .. -,;_,%. ,ir , s , 1 - t. t,,,,,nt Thetis . „...,. ' , w ht . RBI. cbtir.vvei • ,o set - ' ' d rate: .. gla 001 ' ndth',,, saN,mertt. ntlabt ay* "%tot 1.3110w_ ,t,... , %tit .401.40.304„, ... a0= -s- .ay&‘ MM Special Guide 55. The holder of the receipt is the Executive Engineer. Hence, it will not be in order to pay the amount to A. 'No objection letter' is to be obtained from the Executive Engineer (PWD) for the bank paying the proceeds to A. 56. The deposit amount is payable to the E.E. and not to X as the deposit stands in the name of X, E.E. However, .the deposit receipt should, have been issued in the style of E.E. (PWD) a/c X. The deposit amount has to be paid to the department even though the receipt has been made out in favour of X a/c E. E. 57. The son may be a major or minor. If he is a major, the major son should agree for signing the loan documents. In such a case, his name will be added to the deposit. A fresh loan will be sanctioned and the existing loan will be adjusted. If the son is a minor, his name cannot be added to the deposit receipt as it will affect the bank's interest. However, his name can be added after the liquidation of the loan by X. 58. As long as 'A' is alive he is the rightful owner. After his death the proceeds of the TDR are payable to the survivor as per contract. The survivor should account the proceeds to the legal heirs of A. If 'A' qr has died his legal heirs are entitled to get the payment from the bank. In the present case B has also died. If any court order is received for the disposal of the balance to the legal heirs of 13', it should be complied with. It is preferable to advise the claimants to get a suitable court order for the disposal of the proceeds of the TDR. 59. Any change in the name(s) of the depositors during their lifetime is allowed provided the name of at least one of the original depositors is continued till the end of the deposit period. Thus the first change is in order. The Bank cannot accede to the second request as deletion of 'X' at this stage will result in a situation wherein the name of none of the original depositors will be found in the TDR. RBI instructions. 60. Under the law goveming Master & Servant (i.e. Employer & Employee), if a fraud is committed by the employee in the course of his master's business and if the employee acts within his actual or ostensible power/authority, then the Master is liable for damages vicariously. In the instant case the Branch Manager has obviously acted within his capacity in accepting the deposit. Hence the Bank is liable for the fraudulent act of the Manager provided X is not a party to it. 61. On maturity the deposit amount is payable to either or survivor. Thus, in terms of the original contract the amount is payable to B as survivor, unless the Bank is served with a court order restraining payment to her. The lawyer has to be advised accordingly. Further, if B presents the Receipt for payment, she has to be paid the amount. [Note: The inter-se claims between 'B and C have to be settled in the court of law between themselves and the Bank is not a party to it]. 62. It is not required to be stamped under the Stamp Act. Exemption has been given with the objective of encouraging banking business. 63. In terms of the original contract, the proceeds of the TDR have to be paid to 'F' during his lifetime and thereafter to S. Hence the deposit is payable to 'S' only. The legal heirs have to be advised accordingly. However if a Court order is received prohibiting the payment, the Bank will be bound by the order. 64. The deposit became payable to B & Con the death of A; to C on the death of B. On the due date the deposit is payable to C. As he is dead, it is payable to his legal representatives. 65. The depositor has died on 1.12.2000 as per certificate i.e. before maturity of the deposit. Hence, interest would be paid till the date of maturity i.e. 01-01-2001 at the contracted rate of interest. Interest from 1.1.2001 till 31.7.2001 will be paid at the appropriate rate for 7 months without penalty.( Note: Even if the depositor died after maturity, the same principle is adopted for paying interest-RBI direction). 66. The transactions relate back to a very long period. Also, there are no entires in our books showing the outstandings. Hence, more than ordinary care is needed in scrutinising the transactions.The death certificate of the depositor has to be scrutinised. It is stated that the TDRs are not outstanding as per

2-40 Banking Problems

records. It means that there is no entry outstanding in the Deposit at Call A/c or Overdue Term Deposit A/c nor it is outstanding in the TDR a/c. We should also scrutinize the Interest Test Check Register for the period 1970 to 1972 to satisfy ourselves whether the TDR has been paid by issue of a duplicate TDR. Further, the annual return in respect of Unclaimed Deposits Accounts relating to the period 1980/1982 and thereafter would also show whether the TDR had remained unpaid. In SBI, the returns would show the outstandings. In some banks, the balance would have been transferred to H.O. We should also scrutinize the SB A/c/Current A/c for the period 1968/1972 and therafter, to see whether the depositor had an account and whether it was closed during the period. The inoperative Current A/ c/SB A/c Register may throw some light on this aspect, The letter of undertaking for issue of a duplicate, if any, would have been entered in the Branch Document Register and kept along with counter guarantees/indemnities. These also have to be scrutinised. As our efforts have not revealed that the TDR is outstanding in our books, we have to advise the claimant accordingly and explain to him that the depositor should have got a duplicate encashed. We have to necessarily depend on the negative evidence to show that the deposit is not outstanding in our books in view of the fact that more than 40 years have lapsed. These procedures have to be explained to the claimant (in a court, if neccessary) to convince that the deposits would have been repaid to the . depositor during his life time. In a similar case in UK, the court has upheld the Bank's stand. As a matter of academic interest, even if the deposit is outstanding, it cannot be renewed, as the renewal facility, is given to the depositor only. Contracted rate of interest will be paid up to the due date (1970). Thereafter, maximum interest rate for 31 years prevailing on the date of maturity in 1970 may be considered without penalty, though these facilities were not available in the 60s / 70s. 67. According to nomination rules the depositor can nominate only one person to receive the money after his death. However in the instant case the depositor had nominated his both wives which was accepted by the bank. Hence the bank cannot now take advantage of its own mistake and refuse payment. The amount has to be paid to both the claimants jointly. There is a decided case to this effect wherein the Court directed the bank to honour the claim of both the widows. 68. Obviously X has assigned' the TDR in favour of B for consideration. But the assignment is incomplete as notice has not been given to the bank about the assignment as required under S130 of Transfer of Property Act. The bank is, therefore, not bound to pay to 'B'. However, it has to be noted that the customer has made a false representation to the bank that the original TDR has been misplaced. We have to advise the customer to explain to us the correct position. We may advise the customer that the original TDR has to be submitted to us after cancelling the assignment for payment. Otherwise, the bank has to pay to the assignee. 69. Under F or S or E or S deposit the deposit is payable to the Survivor on the death of the former. The Survivor is only the "hand" that receives the deposit. He should account the moneys to the legal representatives of the deceased. Perhaps, anticipating that he may have difficulty in getting the moneys from S and putting the matter of his heir-ship to P beyond doubt, R has obtained the succession certificate from the court after producing evidence. The technical contention of S that he is the survivor and therefore as per the contract with the bank, he should be paid the moneys has no validity. However, we should advise R that a court injuction order should be issued on us preventing payment to S. Hence, it will be in order for the bank to pay the balance in the a/c to R based on the Succession Certificate. 70. Only one individual can be appointed as a nominee. Hence his request cannot be acceded to. However, . . we may suggest to him that the deposit may be split up into 2 deposits of equal amount and each son can be appointed as a nominee on one deposit. This will meet the depositor's requirement. There should not be any change in the period of deposit, amount of deposit etc. 71. Premature payment can be made. Interest at 0.5% below the contracted rate or at the applicable rate G • !,9 " for the period the deposit has remained with the bank, whichever is lower, will be applied.

2-41 s MM Special Guide 72. Capgains Plus scheme. Under the scheme the customer can either open a Savings account or a Term deposit account as per his choice. Minimum amount for SB is Rs.I 000 and for term deposit is Rs.5000/-. No cheque book facility or ATM card facility available for SB. Whenever the amount is withdrawn, it has to be utilized within 60 days from the date of the withdrawal. No loan facility is available. Nomination facility is available for individuals. TDS is applicable for term deposits. The account can be opened by individuals, firms, companies, NRIs etc.

Partnership Firm 73. S 464 of Indian Companies Act, 2013. If it exceeds 100, it is punishable up to Rs.1 lac; the concerned persons will be liable personally for all liabilities incurred in such business. . . 74. It is stated that a minor is also taken as a partner in the firm and according to Section 30 of Partnership Act, a minor can only be admitted to the benefits of partnership. Therefore the firm is an illegal association and the bank cannot open an account in the name of the firm. However an illiterate can be a partner in a firm. 75. The offer of C should not be accepted by the Bank. The liability of partners is both joint and several. Each of them is liable to repay the entire outstandings to the Bank. The percentage of profit sharing is an internal arrangement among the partners and does not affect the rights of the creditor. Further, if the partnership property is not sufficient to repay the debts, the creditors have a right to proceed against the personal assets of the partners. 76. Under the Partnership Act each partner can represent and act on behalf of the partnership. Even the partner who is not anthorised to operate the bank a/c, can also give instructions to the bank regarding stop payment etc. Hence, the Bank has to accept the instructions of C. The Bank is not aware that D is a partner and therefore his instructions will be ignored. Further, future operations on the account have to be permitted only against the signatures of all the partners jointly or under instructions from all of them. 77. In the partnership firm A, B, C and D are partners. C & D have decided to retire and one Mr. E is willing to join as a new partner. The Bank should go through the partnership deed of the reconstituted firm to ascertain the rights and responsibilities of the new partners, capital position etc. Importantly, the Bank has to be satisfied as to the viability of the new firm under various areas such as economic, technical, financial and management. The availability of security with the bank also has to be satisfied. Thereafter fresh limit can be sanctioned to the new firm. After execution of security documents the outstandings in the erstwhile firm can be transferred to the new partnership firm. The exercise should be completed within a maximum period of 2 years. The Bank, pending completion of the above exercise can permit operations in the a/c provided a continuing guarantee is executed both by the existing as well as retiring partners. Otherwise, the operations in the a/c should be stopped to avoid application of claytons rule. A new a/c may be opened to put through the current transactions till all the formalities are completed. 78. This letter empowers the firm to open the account; In this form the partners declare the names of all the partners; the names of the partners who are authorised to operate on the a/c are also mentioned; they also undertake to advise the bank of any change in the constitution. Thus, the letter binds all the partners to these terms and protects the bank against any changes in the constitution etc. (Note: A partnership account should not be opened without obtaining Partnership Letter (the Bank form); in case partnership deed is not available at the time of opening of the a/c, it should be obtained subsequently. 79. Any partner, including a partner not authorised to operate the account, can stop payment of a cheque notwithstanding the fact whether he is authorised to operate the account or not. The bank has to accede to the stop payment instructions issued by him. Presuming that the Partnership Firm is having a Current account with the bank the reasons given by C would not be of relevance to the bank as such 2-42

Banking Problems

issues have to be sorted out by the partners themselves but the instructions are binding. Further operations would be permitted against the joint signatures of all partners. 80. On the death of Ram, the firm has come to an automatic end as per Section 42 of the Partnership Act. The balance is payable to Sham and the legal representatives of Ram jointly. It cannot be paid to Ram's son alone. The position has to be explained to him.

Minor Accounts: 81. Till the minor attains the age of majority, only the Natural Guardian should operate on the account. The fact that the NG has become mentally unsound does not entitle the minor to operate on the account. [A legal guardian has to be appointed for the NG under the Mental Health Act]. The minor would be advised to approach the court for this purpose. The court may direct release of money for the maintenance of the mentally deranged N.G to a guardian appointed by it for this purpose. Usually, a close relative would be appointed on his application to the court.The court may also appoint another guardian to the minor. 82. When an account is opened for a minor, the father would operate the account in a fiduciary capacity. If a joint a/c in the names of two minors is opened, the minors' funds would get mixed up which may be disputed later. Hence, A would be advised to open two separate joint accounts, one each in the name of a minor son and himself. 83. The contract of overdraft with the minor is null and void ab initio. Hence, we can neither proceed against him legally nor exercise the right of set off. The right of set off can be exercised only against legal debts. We cannot proceed against the father as the guarantee is also void. 84. Now, the advances are granted in the joint names of the minor and the guardian. The guardian would execute the documents on his behalf and on behalf of the minor. Further, minor is liable for the necessaries' supplied to him. In this case, the loan is granted for his advancement in life and hence he is liable to pay. However, it should be noted that only the minor's property would be liable and that the minor is not personally liable to repay the debt. 85. No. Minor enjoys statutory protection and he cannot be made liable even if he misrepresents his age and avails a loan. 86. Normally only a natural guardian can open an account jointly with his minor child where the age of the child is below 10 years in SBI. But sometimes near relatives like grand father may be interested to open a joint account along with his minor grand child. Such request can be acceded to and the bank can open an account on Former or Survivor style, former being the grand-father and the minor being the survivor. If the former dies, the money is payable to the survivor. Since the survivor is a minor child, a court-appointed guardian or the natural guardian can receive the money on behalf of the minor child or else the money will be paid only after the minor attaining majority. 87. The balance in the account is payable to the minor only consequent on the death of the Guardian. The moneys are not payable to anyone else. However, the account can be operated by the natural guardian viz. mother, if alive or by the Court- appointed guardian. 88. In law, a minor can be appointed as Agent. However, we have to satisfy ourselves that the minor can understand the nature of agency, and that he has a steady and uniform signature. Both the account holders should authorise the minor to operate on the account, by signing the Bank's standard mandate letter.

Marketing 89. So far the branch has not faced competition from the co-op bank and the private bank. Now, HDFC has started selling housing loans to the college staff We should have anticipated this and taken pro-active steps to meet the competition. The following steps must now be taken immediately: a) As already staff salary is paid through us we should contact the college authorities and make sales presentation of the various schemes and products of the Bank. 2-43

MM Special Guide b) We are a Bank and HDFC is a non-bank (NBFC). We can extend various other banking services like collections, remittance, safe deposit lockers etc. c) We have a wide range of deposit and advance products, suitable to various market segments which should be marketed vigorously. i) Housing Loans. Various liberalizations such as lower interest rate, longer repayment, no prepayment penalty, reduced/no processing charges, inclusion of spouse income for arriving at loan amount etc. Further special features of various types of home loans like SBI Max Gain, SBI Top Up Loan will be focussed. PAL, YUVA home loan etc will be highlighted. ii) Other Loan products like Educational Loans, Credit Khazana. iii) Credit Cards, Mutual Funds, Life Insurance/General Insurance products. We should also avail the opportunity to explore credit needs of the College through School Plus; also installation of ATM, social banking etc. •

Pardanashin Lady 90. As a matter of rule a minor account can be opened only by the natural guardian. Mother is not a natural guardian in the case of a Mohammedan minor. Father and after his death the person named by the father in his Will will be the natural guardian. Hence, Mrs.Najma cannot open an a/c jointly with her minor child. Single a/c in the name of the minor may be opened. The conditions are that the age of the minor should be 10 (min) and the minor should have uniform and legible signature. We may also suggest that an account be opened in the name of the husband with the son as the nominee, if feasible. As only TDR a/c is to be opened, there will be no need for any operations.

Visually Challenged Person 91. According to the recent guidelines, an account in the name of a blind person be opened either with or without cheque book facility, to be operated by himself. Alternatively a joint account with another person who is not blind can also be opened. A blind person can also appoint a Power of Attorney holder to operate his account but it has to be notarized or certified by a Magistrate of a Court. Trusts 92. The insolvency of a person does not affect his capacity to act as a Trustee. He can carry on the functions of a Trustee including the operation in the Bank a/c. Hence, the cheque can be paid. However it should be ensured that there is no diversion of funds for non-trust purposes. More than ordinary care is required to ensure this. 93. A Trustee has no power to borrow unless it is provided for in the Trust deed.The Trust deed has to be perused to find out whether the activity proposed is approved in the Trust deed and loan can be raised by the trustees for this purpose by mortgaging the Trust property. The personal guarantees of all the trustees would also be obtained. 94. Any cheque drawn by the Trustee on the Trust A/c should not have been credited to his personal account by the bank as in case of any breach of trust and misappropriation of funds, the Bank is liable for conversion. However, if the Trustee has produced evidence to the satisfaction of the Banker that the amounts are paid to him by the Trust as provided in the trust deed, then the Banker can claim protection for payment of these cheques. ABC trust cannot hold the Bank liable in such a case. 95. The balance would be paid as per Trust deed. If the Trust deed is silent, it will be disposed of as per court's orders. • 96. The Trust Deed is the basic document which contains the purposes of the trust, the name of the beneficiary and the powers of the trustees. The Trust deed must be scrutinised and a copy kept in a separate file. All portions of the trust deed having a bearing on the bank account must be marked carefully for compliance. The following aspects need special mention. • .

is • 2-44 •

Ai. Banking Problems

i) All trustees must sign the cheques if the power has not been specifically granted to one or more of them. ii) A trustee cannot delegate his power to other trustees or third parties, unless the trust deed authorises him to do so. iii) Trustees cannot borrow, unless specifically authorised. Brief details regarding the purposes of the trust, signing powers etc. must be recorded in the ledger as well as Power of Attorney Register. The banker has to exercise more than ordinary care in the conduct of the bank account so that he may not be made a party to breach of trust, if any. The Branch Manager has to scrutinise the trust accounts at the time of take-over of the branch and annually thereafter to ensure against any irregularity. While no investigation need be made by the Bank to satisfy itself that the trust funds are applied properly, omission to detect any prima facie misapplication/diversion of funds will land him in difficulty ti 97. It is not clear how an account in the style Ramkumar A/c Shriram Temple Renovation Committee was opened in the first instance. The account should have been opened in the name of the Trust. If the committee is a Registered Society the bye-laws would contain the details regarding the objectives, constitution, mode of operation of the bank a/c, the method of election/appointment of Secretary and other office bearers etc. If a new Secretary has been appointed by the committee, the relevant orders have to be called for to confirm the same. The matter has to be dicussed with Ramkumar, and, if for any reason, he still disagrees, it is preferable to advise both the parties to have the matter settled in a Court of law and forward to us the order of the Court. Meantime, cheques issued on the account should be returned with the reason Drawer's authority requires confirmation. Ramkumar's contention that the funds have been contributed by him/his family, and therefore he should be allowed to operate is not valid. The Bank is aware of the fiduciary nature of the a/c and hence cannot permit him to operate on the account. 98. While opening Trust A/c, this information should have been ascertained and recorded in the bank's books. Now the Trust deed has to be scrutinised to find out whether the Trustee has the powers to draw and encash such cheques. If no authority is found in the Trust deed, the Bank would be held negligent and liable.

Joint Hindu Family 99. As per law, Karta has power to incur debt, execute documents and mortgage the Joint Hindu Family property on behalf of the family for the purpose of family business or for the legal necessity of the family. All the co-parceners become liable for the debts incurred by the Karta in the ordinary course of family business. However, their liability is limited only to the extent of their interest in the family property. They become personally liable only if the documents are executed by all the co-parceners. The loan a/c and the deposit a/c are held in different capacities. Hence, the bank cannot exercise the right of set-off against the deposit. 100. After the death of Mrs. A, the deposit will vest with A. The death certificate of Mrs. A has to be produced. If a person is absconding and not traceable for a period of 7 years or more the court has to declare him as legally dead on the basis of a certificate issued by the police authorities that he is not traceable. As per S 108 of the Evidence Act, B has to produce a court order directing the bank to effect payment.

Garnishee/Court Order, Revenue Attachment Order 101. a) Not Attached. A Garnishee Order attaches only sums due or accruing due at the time of receipt of notice. It does not attach future credits. Only the existing balance as at the time of receipt of the r order is attached. The cheque can be sent for collection and proceeds credited to the fresh 1 2-45 IMP MM Special Guide account to be opened for future transactions. 11111 b) Attached c) The Garnishee Order attaches only 'Debts' and does not attach/affect other types of transactions. We can accept the shares for safe custody. d) The Garnishee Order attaches the net dues by the bank i.e. the bank can exercise the right of set off between the overdraft account and the Current Account. Only the net credit balance, if any will • be attached.The garnishee order does not attach undrawn balance in OD a/c. 102. The garnishee order does not attach a deceased account. Hence, it would be returned to the court with the remark "customer deceased". The income tax attachment order relates to the dues to the Govt. by way of taxes and hence attaches the balance in the account. The amount attached has to be remitted to the I.T. dept. The customer has to be advised in the matter. r 103. a) The debit is valid only if cash is paid to the presenter of the cheque by the cashier. Till such payment is made, the transaction is not complete. The garnishee order attaches the balance and the entry has to be reversed in the system. b) The payment will become absolute only at 2:00 p.m. as regards the clearing bank. Till such time, the entries can be reversed in the system. The garnishee order will attach the balance. The clearing ,i!I cheque has to be returned. ...::. P.! 104. Right of set off can be exercised by the Bank only m respect of an actual, immediate recoverable debt due to the garnishee (i.e Bank) from the judgement debtor (i.e Bank's Customer) at the date of the

41,::. service of the garnishee order. In other words the debt must be one for which the Bank could sue for and recover at that moment. In the instant case, the liability of the customer is only contingent i.e. it ..,, . would arise only on the failure of the customer to fulfil his obligations under the guarantee and not either immediate or actual. Hence, the entire deposit would be attached by the garnishee order. 105. a) As no amount is owed by the bank to X, the undrawn portion of drawing power is not attached b) It is attachable c) Joint accounts are not attachable by the garnishee order d) Not attachable since the amount is deposited for a specific purpose i.e., purchase of draft 106. a) As the attachment order is in the sole name of A the joint- account is not attached. b) Only debts 'owing and accruing due' to the judgement debtor at the hands of the Bank are attached by a Garnishee order. The amount tendered for purchase of a draft is entrusted for a specific purpose, and therefore, cannot be considered a debt; hence it is not attachable. c) If at the time of the receipt of the Garnishee order, the proceeds of the collection cheque has been realised, this amount would also have to be included in the balance. d) As no amount is owed to A, the account is not attached. e) Same as (c) I) The clearing cheque will be presented in clearing only the next day, and, therefore, it is a future credit. It is not attached. 107. Under these provisions of law, the Income Tax Authorities are empowered to attach funds of defaulting assessees in the hands of third parties (including Banks). The debts due and accruing due including future credits to an a/c are attached. These orders must be issued quoting the relevant sections, signed by appropriate authorities and bearing the seal of the Department. The Bank has to debit X's Account and issue a banker's cheque in favour of the Income Tax Authority. IT order attaches the credit balances in the account of a deceased depositor also. [Note : While demanding payment they need not produce deposit receipt, pass-book etc; if the person to whom the notice is sent demanding payment fails to make payment (while in possession of the funds) he will be deemed to be an assessee in default and proceedings will be launched against him for recovery. 108. When the I.T attachment order is received, the amount of Rs.7500 available in the firm's account will be attached first.The balance amount should be recovered in equal proportions from the partners' •• personal accounts (i.e. Rs.22, 500 each). But C has only Rs.15,000 in his account. It will be attached. 2-46 Banking Problems

The shortfall of Rs. 7,500 will be recovered in equal proportions from A and B. 109. It is presumed that the account is an E or S a/c and hence 50% of the balance belongs to Shri. Reddy and the balance to Smt. Reddy. Hence, a sum of Rs. 12,500 will be remitted to I.T dept. It is preferable to transfer the balance 50% viz Rs. 12,500/- to a separate a/c for further operations. The cheque issued by Smt. Nalla Reddy should be paid by debit to the new a/c. In fact, operations can be allowed in the new a/c by either of them. Note: In case, the a/c is F or S in the name of Shri. Nalla Reddy (F) and Smt. Reddy the amount of Rs. 20,000 will be attached.

Miscellaneous 110. If a non-resident, who has been staying abroad for a continuous period of more than 1 year returns to India, he will be referred to as Returning NRI. A Returning NRI can continue his deposits at the contracted rate of interest till maturity. If he desires, his deposits can be treated as resident deposits. On maturity the depositor can opt for conversion of the deposit into a resident rupee account or RFC a/c. if eligible. A Resident Foreign Currency a/c may also be opened in US$. The forex brought by him, the balances in FCN(B) a/c as well as the balance in NRE a/c can now be converted into RFC a/c. III. Presumably, the cheque is an open cheque. It is unusual for a drawer of the cheque to attest the payee's signature on the cheque. Also, it is not a desirable practice. Further, it is stated that Mr. Rabo has been using the account for small transactions only. However, in the present case, we have to telephone to Mr. Rabo to find out whether the transaction is genuine. We have to satisfy ourselves beyond doubt about the signature of Mr. Rabo on the cheque. If the cheque is an order cheque, Naik's signature must be obtained on the cheque in a running readable hand-writing as a discharge for payment. Even if it is a 'bearer cheque', the signature of Naik has to be obtained. The address of Naik has to be recorded at the back of the cheque. There precautions will enable us to prove that the payment has been made in due course. 112. Her request can be accepted under following terms and conditions: (i) simple interest at the contracted rate is paid from the date of original deposit till the date of conversion. (ii) The conversion can be done only if the deposit is extended beyond the original due date; further, the extended date should coincide with one of the standard periods for which STDRs are issued. (iii) conversion can be done only prospectively and not retrospectively (i.e. from a back date).

Insolvency/Death/Insanity 113. X has signed the cheque in a fiduciary capacity. Hence, the cheque can be paid even after his death. 114. The "payment" has not been completed as cash has not been paid to Y. Hence, the money represented by the cheque belongs to X. The debit entry in his account has to be reversed. The circumstances of the case have to be advised to the Controlling Authority. Arrangements have to be made for handing over the body to the relatives of Y after recording the circustances of death by means of a panchanama. 115. In the original TDR application a suitable request clause for premature payment to either of the depositors would have been obtained under the signature of both the depositors. The BM can exercise his discretion and agree for premature payment. The other depositor would be advised of the transaction. 116. a) The cheques will be returned unpaid, whether they are dated prior to or subsequent to the date of the petition. . . b) When a person is adjudged insolvent, the banker-customer, relationship is terminated. His assets i will vest in the Official Receiver. Hence, no cheques should be paid. 1 c) Further cheques would not be paid; otherwise, Clayton's rule would operate. The bank has to -V 'k

2-47 ,..:,.'; • [ -Me MM Special Guide review the position of the advance and ask for alternative collateral security, if it decides to continue the advance. 117. It is not in order to have opened an account without proper KYC due diligence. The bank does not get collecting banker's protection. Hence, it is essential to once again verify the address etc and open a new account with proper KYC compliance. The transactions have to be scrutinized by BM to ensure that they are bonafide. A close and careful watch over the account should be maintained till these ' t formalities are completed. 118. a) The bank is liable for the wrongful dishonour of the cheque issued by S. b) The balance is payable to S, the survivor unless there is an order from the court prohibiting payment to S. The step-sons of E have to be informed that we have to pay the balance to S as per contract unless an order from the court prohibiting the Bank from making payment to S is served on it. 119. P.A holder can carry out all operations as the donor himself can do, subject to any restrictions mentioned in the P.A. Hence, she can stop payment of the cheque issued by the donor. 120. The account has to be opened with an initial deposit made by the minor in cash. The account can be opened for a Minor and the cheque collected for him. But we should satisfy ourselves that he has a uniform signature and is capable of understanding banking transactions. 121. If the Manager's signature on the cheque is forged, it is not a mandate of the company. As such payments made by the bank are not payments in due course. Hence, the amounts in respect of the forged cheques have to be re-credited to the account unless the bank is able to establish contributory negligence/connivance on the part of the customer. The Bank has to proceed criminally against the forger of the signature. 122. Declaration of insolvency is civil death for the person. The estate of the person vests with the Official Receiver from the date of commission of the act of insolvency and hence he has no power to operate the account. Therefore, the cheques have to be returned for the reason "Refer to Drawer". 123. Under S 202 of the Indian Contract Act, agency coupled with interest cannot be revoked; nor does it get revoked by the death or insanity of the Principal for past actions. In the present case, the bank has already purchased the shares and incurred the liability in pursuance of the instructions of the customer. Also, the transaction in the present case has materialized before the death. Hence, it is in order for the bank to debit the account of the customer. 124. It is not clear whether the Trust Deed creating the Trust for the administration of the charity and appointing Jeevan Raj- as the trustee has been received, scrutinized and kept on record at the time of opening the a/c. As a letter has been received stopping operation of the account signed in the style of secretary of the charity, we have to satisfy ourselves about the mode of appointment of the secretary before permitting further operations on the account. As the account is a Trust a/c and conflicting claims have been made by two parties it is safer for the bank to advise both parties to settle the matter in the court. Meantime operations on the account must be stopped. The CA must be advised in the matter seeking their guidance for further action. 125. i) Two transverse lines are essential to constitute a crossing. In terms of NI Act, the cheque is not a crossed cheque as two transverse lines have not been put. However, in view of the fact the words "A/c Payee" has been written, it will be safer to persuade the payee to credit it to his account. However, if the payee insists, the cheque can be paid in cash on strict identification. ii)Writing of the words "Not Negotiable without two transverse lines does not constitute a crossing; hence the cheque can be paid in cash after identification of the payee. The effect of a Not Negotiable crossing is that the endorsee(s) would not get a better title than the transferor iii)In terms of S 126 of NI ACT, payment of a crossed cheque should be made only to a bank. It can , be paid to a bank by credit to its account or across the counter. Hence, it is in order to pay cash to the 1. bank. • 2-48

Banking Problems

126. i) An NRE a/c can be opened provided remittances are received in foreign currency and not in Nepalese rupees. ii) No NRE a/c can be opened without RBI permission. iii) We can open NRE a/c as he is treated as a Non-resident. iv) She can open NRE a/c jointly with her spouse. v) The businessman has gone on a business visit for 6 months. An NRE a/c can be opened for Indian residents going abroad for indefinite period of stay/uncertain period of stay. Hence, no NRE a/c can be opened in this case. 127. Now introduction is not required for opening accounts as per RBI. KYC due diligence should be complied with. [Obviously, the customer is an undesirable customer as he has been introducing `customers on a 'commission' basis. It is desirable and usual to stop accepting further credit into the account and allow it to run off. In case, 'the customer appears intransigent, we can even close the account by issuing a "Bankers cheque'. Evidence of the malpractice must preferably be collected and kept on record].

Customer Service 128. The recommendations are: 1. Immediate credit to be given for outstation instruments for satisfactory accounts. 2. Dishonoured instruments may be retumed/dispatched to the customer within 24 hours. 3. Interest to be paid for delayed collection. 4. Notes/coins counting machines may be introduced whenever volume of work so warrants. 5. Time norms for specialised business transactions should be displayed prominently in the banking hall. 6. Staff should come 15 minutes before the branch opens for business. 129. Time Norms for various Transactions: Specific time limits (time norms) have been laid down for various customer transactions. These have to be prominently displayed at the branch. These norms are (for SBI): Activity Time Norm 1. Cash Receipt-S.B., C. A/c.(100 pieces) 3 minutes 2. Cash Payment - S.B., C.A/c. 5 minutes 3. Issue of Cheque Book 10 minutes 4. Payment of Draft 8 minutes 5. Issue of Demand Draft 10 minutes 6. Opening of S.B. A/c 10 minutes

Negotiable Instruments 130. M.P.Singh is not a customer of the Bank. Hence, the bank will not get collecting banker's protection. However, an account can be opened for him, with proper KYC and completion of other formalities. Thereafter as the cheque is in favour of Sri.M.P.Singh and endorsed by him in bank's favour it can be collected and an STDR issued after realising the proceeds. 131. S 18 of NI Act states that if the amount in figures and words in a cheque differs, the amount in words can be paid. However, it is a well established banking practice in India to retum such cheques with the answer "The amount in Words and figures differs". 132. A) According to Section 26 of NI Act, a minor can draw and endorse a cheque to others but without binding himself. Therefore the cheque can be paid if otherwise in order after proper identification of the presenter of the cheque. 1 B) Whenever a cheque where the crossing is cancelled is presented across the counter, it can be paid only to the drawer and not to third parties since there is a possibility of forgery of the drawer's signature for cancellation of the crossing. 2-49

MM Special Guide 133. Gist of the Amendments: S 143 to 147 have been added • Punishment for dishonour of cheque for insufficiency of funds increased to 2 years imprisonment and or fine up to 2 times the amount of the cheque or both. • The holder can issue notice to the drawer about dishonour up to 30 days (increased from 15 days) from the date of return. • Court can take cognizance of a case even if complaint is made after the expiry of the stipulated period of one month, if sufficient cause is shown. - Summons can be served by speed post or authorised courier service; if it is not accepted, it will be treated as duly served. • Summary trial as per Criminal Procedure Code, 1973 is applicable; offences to be tried by I Class Judicial Magistrate or Metropolitan Magistrate. • Trial to be conducted fast, but to be concluded within 6 months • Offences are compoundable • In case of conviction in a summary trial, the Magistrate can impose imprisonment up to 1 year and fine up to Rs.5000/-. • Directors nominated by Central/State Govt or Hs owned/controlled by Central/State Govt exempted from prosecution. • Cheques now include cheques issued in electronic form; the truncated cheques in its electronic image can be paid by the banks. • Cheques can be signed by digital signature and asymmetric crypto systems. 134. The telegram should be acknowledged immediately by Regd. Post with a request to confirm the same in writing. Photocopy of the telegram is taken and kept on record. Entry in the Stop Payment Register, a/c in the system etc should be made after verifying the signature. When the written instructions are received, the details have to be checked with the original message and entered in the Stop Payment Register, System etc. If a cheque is presented before receipt of the instructions in writing, the BM / DM should use his discretion to pay or return the cheque. In case the cheque is returned, the answer should be stated as "Drawer's confirmation required, persent on ...... ". It should be ensured that the credit of the customer is not impaired. 135. a) Currency note is not considered as a promissory note inasmuch as it is itself money. Also under S 4 of NI Act, the definition of Negotiable Instrument specifically excludes currency note and Bank note. b) Bill of Lading cannot be called a negotiable instrument as the transferee will not get good title if the transferor's title is defective. 136. If it is received through clearing it will be paid as the collecting banker acts as Agent for collection and he has to ensure that he collects for the rightful owner. If it is presented across the counter it should not be paid as encashment of such cheques may amount to conversion. 137. Paying Banker: There is no mandate for the bank from the customer to pay a forged cheque. The paying banker has no protection under Section 85 of the NI Act. The amount has to be made good by the bank. The paying banker is not responsible for forged endoresement as long as the endorsements appear to be in order. Collecting Banker: The collecting banker is protected under Section 131 of the NI Act, if he has collected the crossed cheque for his customer in good faith and without negligence. 138. The cheque should be returned with the reason "cheque countermanded by the drawer by telephone; confirmation awaited. Present again". The drawer of the cheque should be contacted immediately to confirm the stop payment instructions in writing. If the cheque is re-presented later before the written confirmation is received, decision to pay or return the cheque should be taken after carefully examining the circumstances. If it is returned, the reason should be given as 'Drawer's confirmation required'. 2-50 Banking Problems

139. In this case the payee of the cheque issued by Sri. Shamkumar has the authority to fill up the date. It is an inchoate instrument. As per S 20, NI Act a holder of an inchoate instrument has the authority to complete it to give effect to the intention of the maker of the instrument. Further, the payee has affixed the current date. Hence it can be paid. 140. The payment has been made by the bank under circumstances which do not afford a reasonable ground to believe that the person receiving the payment is not entitled for the same. Hence it is a payment in due course. 141. As per S 127 of NI Act, the paying banker shall refuse payment of a cheque if it is crossed to more than one bank, except when crossed to an agent for the purpose of collection. In this case, the cheque has been crossed specially to two banks but without making one of them as agent of the other bank. Hence the cheque is returned for the reason "cheque crossed to two banks". All stamps affixed on the cheque should be cancelled. 142. Protection is available to the paying banker while paying an order cheque. A paying banker is protected even if the endorsement is forged, provided it is regular. In case the endorsement is apparently irregular the paying banker loses protection. 143. Any bill drawn without consideration is void and hence cannot be enforced in law. But if any person received the bill for consideration becomes a holder in due course and is entitled to recover the amount from all the previous endorsees/holders if the bill is dishonoured. In the instant case N has received the bill from M without consideration and hence will not become a holder in due course. He loses the right to recover from Z,Y or X. 144. a) A Minor can endorse a cheque and pass on valid title to another person. Hence, the cheque can be paid to the third party across the counter, provided the cheque is in order otherwise. (S26 of NI Act). In case of dispute, the minor would not be liable but all others who derive title through the Minor will be liable. b) The drawer of the cheque has originally crossed the cheque which is a direction to the paying banker that the cheque should be paid only through a bank. The cheque has been "opened" by the drawer by canceling the crossing. IBA had examined the issue and taken the view that there may be chances of forgery in opening the crossing as the signature of the drawer is readily available on the cheque for reference. It has advised banks not to pay such cheques to third parties. Such cheques may be paid to the drawer himself treating the instruments as a mandate to pay. Hence, the cheque will be returned for the reason "Refer to Drawer". c) In terms of S18, NI Act the bank can pay the amount in words where there is a discrepancy between the amount in words and the amount in figures in a cheque. However, it is a well established banking practice in India to return such cheques for the reason "Amount in words and figures differs". Hence the cheque will be returned. 145. No doubt, the mandate of the customer comes to an end immediately on the death of the customer. But this rule is applicable from the date of notice of death to the Bank and not from the date of death of the customer. The bank has obviously paid the cheque in the normal course of business on 14.10.2003 with no knowledge of the death of the customer. Hence, the claim of Mrs. X for the refund of the cheque amount is not valid.

Set Off 146. In the present case, the loan amount has not been called up; and hence it has not fallen due / crystallised. Unless a notice is served on the borrower and guarantor calling upon them to repay the dues, the liability does not crystallize. Hence, we cannot exercise the right of set off against the credit balance in the account of the guarantor.

2-51

MM Special Guide FOREIGN EXCHANGE PROBLEMS

1. A customer wants you to encash foreign currency of US $ 10000 which was given to him by his brother who resides abroad. The amount was given to him as gift when the brother visited India. How will you deal with his request? 2. A revolving LC for Rs. 50000/- has been established. Two drafts amounting to Rs.25000/- were received and paid under the LC. When a third draft for Rs.10000/- is received under LC, importer requests the bank not to pay the draft since the goods received in the consignment is not in a good condition. Discuss. 3. Our bank has opened an LC on behalf of an importer. On scrutiny of the documents received from the negotiating bank, some discrepancies were observed. How will you proceed? 4. A customer approaches you for opening an LC on his behalf for importing certain computer components from USA. What considerations would weigh with you before you agree to open the LC? 5. A SWIFT message was received at your branch detailing establishment of an irrevocable letter of credit from a Bank in Paris. You were unable to verify the authenticity of the message. Nevertheless you advised the credit to the beneficiaries. Subsequently another bank negotiated documents under the Credit advised by you. The documents came back to the bank from Paris with remark "Non-existent addressee". What is the responsibility of our bank in the case? Explain your answer citing provisions of UCP. 6. Following is an extract from an Inspection Report of a' branch. In respect of the following LCs established by the branch discrepancies mentioned against them were observed. L/C No. Nature of discrepancies a) 96/6: The LC is for US$ .50,000 while the bill of entry indicates value as US$ 42,000. The invoice and remittance indicates value as US$ 50,000. b) 96/7: The LC is for import of 300 tonnes of chemicals valued US$ 30,000; the bill of entry indicates import of 300 tonnes valued US$ 32,000. Invoice and remittance indicates value US$ 32,000. How would you reply to these irregularities pointed out by the Inspecting Official? What action you will initiate to rectify the irregularities? 7. A shoe shop owner received $20 from a foreign tourist towards sale of shoes. Now he wants to encash (convert into Indian rupees) the dollars. He is not an a/c holder. Can it be permitted? If so, what is the procedure? 8. Bharat Bank negotiated an export bill under L/C for one of its valued exporter customers under reserve for the following discrepancy: "Certificate of inspection issued by a body other than the one specified in the Credit". They obtained reimbursement from the bank specified in the Credit by giving a guarantee. The L/C issuing bank rejected the documents after 2 months and claimed refund on the ground that the documents are not in conformity with the terms of the Credit and the negotiating bank itself has observed the discrepancy. 9. The exporter M/S.Hill Products Ltd., submitted the shipping documents to Bharat Bank Ltd., for negotiation. The Bill of lading tendered under the Credit contained "said to contain 20 items" when 20 items are to be shipped according to the Letter of Credit. The Bill of Lading is also stamped "additional loading and unloading charges paid". State whether Bharat Bank can negotiate the documents. 10. The Letter of Credit covering 100 bales of cotton prohibits partial shipments. The party presents 2 sets of bills of lading each covering 50 bales on board SS "JALAVIJAYA". The two sets of bills of lading

2-52 Banking Problems

evidencing shipment on board bear the dates 21st July and 23rd July respectively. Can the bank accept the bill of lading for negotiation? 11. M/S.Rajkamal & Co. an exporter customer of your branch has submitted export bills to you for negotiation. Goods covered by the L/C are despatched by air on 22.12.1998 from Mumbai. The airway bill and other documents are presented to you on 7.1.98. Should you consider the document stale? If it were a bill of lading would the position be different? 12. A Letter of Credit issued by Bank of Tokyo stipulated the last date for negotiation of documents, as 25.12.1998. Your exporter customer tendered the documents on 26.12.1998 since 25.12.98 was a bank hoilday and he could not present the documents before the expiry of the L/C. The documents are otherwise in order. Will you negotiate the bill under reserve treating the delay as a discrepancy. Please comment. 13. What is the importance of 'R.' Return?

Answers to Problems: 1. The Bank can encash the foreign currency up to US $ 10000 from the customer. A supplementary statement has to be obtained from the customer stating the purpose of the remittance. Should be reported to RBI in 'R' Returns. 2. According to Article 5 of the UCPDC, the Bank deals with documents and not with goods covered by • the documents. Therefore if the documents are in order the bank can debit the amount to the customer's account. The customer has to take up his claim with the exporter. 3. The negotiating Bank can purchase the bill submitted by the exporter provided they are strictly in compliance with LC terms. The opening bank is liable only if documents conform to the LC terms strictly. Therefore the LC opening bank may advise the negotiating bank about the discrepancies noticed by it immediately on receipt. The documents should be held at the risk and responsibility of the negotiating bank meantime. Also, the importer has to be advised about the discrepancies. If they are acceptable to him, he can retire the bill. If it is not acceptable to the importer, the bill has to be returned to negotiating bank, calling for refund of the amount, if it has obtained reimbursement already. 4. Procedure to be followed in opening a confirmed irrevocable LC 1. The LC Application form must be completed fully and correctly and signed by the applicants. Omnibus Indemnity for LC opening: Omnibus indemnity is obtained from borrowers who have been sanctioned a LC limit. An LC can be opened on receipt of application from them or e-request through Eximbills. In case of an e-request a hard copy of the LC application should also be obtained subsequently. There is no need to obtain LC application form every time an LC is opened. - LC can be opened only for a customer of the Bank; he should have a code number issued by the Director General of Foreign Trade (DGFT). - The total value of the goods to be imported and ability of the customer to retire the bill to be assessed. - LC can be opened on a documentary basis only; i.e., Bill of Lading etc., must be called for; no clean credit can be established. - The signatories shall have the authority to open the LC as well as sign an indemnity. - LC Application form is to be stamped as an agreement. - The signature of the applicants shall not be attested; otherwise, it will attract stamp duty as a bond. 2. Import License formalities : mport should be permitted by OGL; or a specific license should be issued by the Director General I • of Foreign Trade. The Foreign Trade Policy has reduced the licensing requirements considerably. - Exchange control copy of the import license should be submitted by the applicant. - Validity, special conditions to be complied with. ( 2-53 I • MM Special Guide - Import Licenses to be endorsed with Cost, Insurance, Freight etc. (Import Licences: OGL means Open General License. It refers to the list of items mentioned in the Foreign Trade Policy which can be imported freely. No physical license is needed. Specific License: DGFT issues specific licenses for import of certain items. These are issued in rupees and for CIF value. An import license is valid for a specified period; also it is valid till the last day of the month in which it expires; there is no grace period for shipment of goods under an import license. Goods have to be exported before the expiry date of the Import License. The goods should not be shipped before the date of issue of the import license.) 3. Liability Register: To be maintained to show the liability of the party. 4. Margins and Charges: i) Suitable margins to be fixed and margin amount credited to 'Margins on Bank LCs A/c.' Banks have the freedom to fix charges for the various forex transactions. 5. Insurance: Insurance should be as per Institute Cargo Clauses A (TPND) Institute strike and war Clauses for 110% of C.I.F. Value. (TPND means Theft, Pilferage and Nondelivery). 6. LC is made out and advised to the Advising Bank: a) Exchange Control Requirements to be complied with. b) License and Purchase order no. to be indicated in the LC where applicable. c) The legend "subject to provisions of UCP 600 of 2007 to be incorporated in the L.C. 7. The Advising bank must also be advised of the reimbursement procedure. 8. Request Foreign Correspondent of the Bank to add its confirmation to the Credit, when the applicant has made such a request. 9. An LC may be sent by swift, cable or air mail but not by e-mail. 5. Art 9 of UCP lays down the responsibility/ liability of the Advising Bank. a) A credit may be advised to the beneficiary through another Bank (Advising Bank) without any engagement on its part. b) If the bank does not want to advise the credit, it should inform the issuing bank without delay, of its intention. c) If it advises the credit, it should check the apparent authenticity of the credit In the instant case our bank is negligent in not verifying the genuineness / authenticity of the credit. We should have advised the issuing bank that we were unable to verify the authenticity of the credit and hence unable to advise the credit. Hence, the bank is liable to the negotiating bank. 6. a) LC No.96/6 : Bill of Entry is issued by customs and this form will show the quality and value of goods physically imported into India. The position reveals that goods worth $42000 have been actually received while $50,000 have been remitted abroad. We have to ascertain whether any other shipment for $8000 has been received by the customer relating to this remittance. Otherwise, we have to initiate steps to recover $8000. The matter has to be reported to RBI. b)LC 96/7 : As the actual import is more than the remittance there is no irregularity in this case. We have to verify whether any advance remittance has been sent by the importer to the exporter.We should also ascertain the reasons for the discrepancy and record them. 7. Exchange control permits any person in India to receive foreign currency from any foreigner visitinl India for services rendered and for any lawful obligation. Also, a resident can keep up to US$2000. It can also be encashed with A.D. He need not be an account holder nor he need to hold a passport. The currency notes will be encashed at C.N.Buying Rate. The tenderer's address will be recorded in the bank's books. The amount will be debited to Foreign currency Notes A/c/Link office as the case may be. 8. There are two aspects to this problem. If the negotiating bank has informed the L/C issuing bank abou the discrepancy then the issuing bank should have informed the negotiating bank within 5 working days *. whether the documents are acceptable to the openers or not. If the negtiating bank has done that then the issuing bank is liable to the negotiating bank for honouring its commitment. (Art.14(f) UCP, 600.

2-54 Banking Problems Secondly the L/C issuing bank should have informed the negotiating bank about the non-acceptance of the discrepancy within 5 working days. (Art.14.(b). In the instant case the issuing bank has rejected the documents after two months and therefore cannot claim refund. It is also not obligatory for the negotiating bank to provide any certificate while claiming reimbursement from the reimbursing bank as specified in the Credit (Art. I 3.b ii). 9. Art.26 (b) says that the negotiating bank can accept B/L with the remarks "said to contain" unless the Credit specifically prohibits it. Further, banks can accept B/L where additional charges like loading and unloading charges paid unless the credit specifically prohibits such reference. Therefore Bharat Bank can negotiate the documents if there are no such prohibitory clauses in the L/C. 10. According to Art.31(b), the B/L indicating the same destination and bearing two different dates of shipment and or different ports of loading, is considered a single shipment and not as partial shipment . Both the shipments are sent through the same voyage of the ship.Therefore the Bank can accept the documents for negotiation with two bills of lading bearing dates 21st and 23rd July. 11. Letter of Credit should stipulate an expiry date and a place for presentation of documents for payment / negotiation. (Art.29). Further the Credit should also stipulate a specified period of time after the date of shipment during which presentation must be made. If no such period is stipulated, banks will not accept documents presented after 21 days after the date of shipment, but in any case not later than the expiry date of the credit. Under the circumstances we can accept the documents if it is within the expiry date of the L/C as the document is well within 21 days of shipment. The said Article is silent about the airway bill. Therefore the bank can accept the documents as long as the airway bill is submitted within 21 days of shipment and also well within the expiry date of the Credit. 12. Art.29 provides that if the bank is closed for reasons other than reasons mentioned in Art.36 (i.e., civil commotion,riots, wars, acts of God or any other cause beyond their control), then the stipulated expiry date shall be extended to the first following working day. Therefore the bank can accept the documents submitted by the exporter customer and negotiate the same without reserve. The bank should provide a statement that the documents were presented within the time limits extended in accordance with Art.29 of UCP No.600. 13. RBI has laid down the system regarding collection of Statistics from the Authorised Dealers for the purpose of Exchange Control Administration. For this purpose `R' returns are submitted to RBI. 'It' retums show the details of sales and purchases of foreign currencies. RBI is able to take policy decisions as R Returns are the principal source of information for computing BOP data.ADs should report all transactions made by them through their NOSTRO Accounts abroad and VOSTRO Accounts maintained by them in appropriate 'A' Return i.e., It' Return (NOSTRO) and `R' Return (VOSTRO). ,-. The Bank will submit the R-Returns for the whole bank on fortnightly basis i.e., as on the 15th and last day of the month so as to reach RBI within 7 days from the date of the return. Under the present procedure, there are two types of R-Returns namely R-Returns (NOSTRO) for reporting the transactions in each currency and R-Retum (Vostro) for rupee a/cs Offices/branches maintaining rupee accounts of Non-Resident Banks (including banks from ACU countries) as also Private Exchange Houses (i.e., VOSTRO Accounts) in their books should report operations on such accounts to RBI in R-Return (VOSTRO).

2-55 MM Special Guide ACCOUNTING SYSTEM PROBLEMS

Currency Chest / Cash Dept: I. The Cash Officer finds a note bundle amounting to Rs.I0,000 in the branch at 5:00 p.m. Discuss the action to be taken by him. 2. It is brought to your notice by the cashier that five one thousand rupee notes bearing political slogans of a political party is received. These notes are otherwise in order. What shall be your advice to the cashier in respect of these notes as a branch manager? 3. During the Verification Audit, 1 piece of Rs. 100 currency note was found missing in a section kept in the strong room. 4. Two pieces of a tom Rs.5 currency note were presented for encashment. Discuss. 5. What precautions are to be observed in sending currency remittance to another branch? 6. X comes to the branch 10 minutes before the closure of the branch and wants to remit Rs.20000 (in one rupee coins) for credit of Govt. account. Being the first day of the month, the cash work is heavy and also a number of cashiers were on leave. How will you handle the situation as Manager(Cash) of the branch? 7. You are the Branch Manager at a branch. The Manager (Cash) has left the key on his table at the end of the day through oversight and is not found. The day's work has been completed. What action you will take? 8. A cheque for Rs. 5000 was encashed by a customer. He was given 5 packets of Rs.10 each. On the same day Rs.50 was found excess by the Payment Cashier. On the very next day a customer came to the branch with 5 packets of Rs. 10 notes having 99 notes in each packet. How will you deal with the situation as a Branch Manager? 9. As a Branch Manager what steps you will take when a paying cashier reports to you a shortage of Rs.15000 at the end of the day. 10. Detail the security arrangements to be made at the branch for protecting the bank's interests.

Answers to Problems 1. The following actions have to be taken: a) The matter has to be immediately reported by him to the Branch Manager. b) The entire cash transactions of the day have to be verified very carefully and tallied. As the amount found is large, extraordinary care has to be taken in the verification. Also, the chest balance/cash balance has to be verified to satisfy ourselves that the balances are correct and agree with the various system balances. c) After satisfying that the amount is surplus, the amount has to be immediately credited to Sundry Deposits A/c. d) If any claim is received subsequently from a customer, it has to be examined very carefully and decision taken. e) The matter has to be reported to C.A Iil 2. As per the provisions of Legal Tender (Inscribed notes) Act, 1964, any currency note carrying any message of political character is not a legal tender. The Cashier will be advised not to accept such notes even if they are otherwise in order. 3. Under the procedure for making note packets under Clean Note Policy, the Cashier who prepares the .., note packet is responsible for quality, quantity and value up to the denomination of Rs.100/-. -' ':qt''-ti:'''k 4. In terms of RBI directions, a two piece currency -note should be exchanged by all branches of Public , ",-- ;i;, , Sector Banks subject to the following conditions: •%-:,;'" 14:

2-56 • ' ,• • •-•2-1•.•.? • ' • ••••- ..• •

•

' • •

Banking Problems

a) The single number currency notes (Re.1, Rs.2, Rs.5 denominations) should not be in more than 2 pieces; also no essential feature of a currency note should be missing. b) The entire number should be identified in an undivided area on one of the pieces. Pasting should be done on the back side by a brown paper. This will enable us to remove the note from circulation as such notes are to be treated as soiled notes (RBI). 5. The currency remittance will be sent under RBI instructions or as per arrangements by C.A The following precautions should be strictly observed: i) The required amount will be taken out of the currency chest. ii) The denominations/bundles/sections would be verified before putting them into the currency remittance box under the unremitting supervision of joint custodians. iii) The box will be tightly secured, and locked and the locks will be covered with cloth and sealed by the Bank's brass seal; or alternatively, the box will be nailed and sealed. A content slip will be signed by the joint custodians and the cashier who put the currency in the box and put inside the box. iv) The box will be accompanied by the cashier concemed and an armed guard. v) Transit insurance would be taken by declaring the remittance in the monthly statement. 6. The bank is the agent of RBI for conducting Govt. business. The customer has come within the business time. Also, one rupee coin is unlimited legal tender. Hence, the remittance has to be accepted. Heavy work, shortage of staff etc. are internal problems of the bank and they are not sufficient reasons for refusing to accept the remittance.The following alternatives will be tried. a) A clerk-cashier from the Accounts dept may be detailed for the work. b)The Manager (Cash) himself can receive the cash. 7. The Branch Manager should initiate steps to trace the Manager (Cash) and ask him to take over the keys. Otherwise emergency charge should be given to a suitable official who will make a gross check of cash in the strong room before taking charge. The branch manager should satisfy himself beyond doubt that keys have not fallen in the hands of any third party in the intervening period. Also, it is important that the branch manager should not handle the other set of keys. The circumstances under which the Keys were left on the table by the Manager (Cash) and his inexplicable absence/unavailabil- ity must be enquired into and reported to CA. Needless to add, a very careful check of the chest balances and cash transactions of the day have to be carried out. The matter has to be advised immediately to the CA and their instructions have to be compled with. 8. It is the responsibility of the customer to verify the correctness of the notes and point out the shortage to the bank before leaving the bank's counter. Hence, the claim made by him the following day is not acceptable. A notice to this effect is exhibited in the banking hall.The fact that excess cash was found in the Rs. 10 rupee packet in 5 packets is only coincidental. This does not lead to the conclusion that the shortage was caused by this.However, the entire cash has to be verified in detail in view of the discrepancies that have surfaced. The matter has to be reported to CA. Further action will depend on the findings. We have to remember that the Bank's image is at stake whenever shortages are found in a section with note-slips in tact. 9. a) Detailed verification of the cashier's transactions should be carried out immediately. The denominational details entered in the vouchers, system should be tallied b) All paid instruments and cash receipt vouchers should be carefully scrutinized and the denomina tions recorded therein to be verified with the transactions. c) If the shortage is confirmed, the concerned cashier should be advised to make good the shortfall d) The matter should be reported to CA. In case the Cashier cannot make good the amount the Branch Manager should obtain permission from CA to debit Recalled Assets Account to close the cash on the day. The CA may permit debiting Suspense A/c, if considered unavoidable. e) It should be ensured that there is no differences between BGL and CGL entries. 10. a) Web cam is installed at various vantage points at the branch, which should be in proper working condition. Web cam has to be fixed showing the view of the public using Kiosk, lobby ATM. 2-57 r i Ma y,,

MM Special Guide b) Alarm system should work properly; to be tested daily. c) Only one entrance should be kept open during office hours. The collapsible gate should be so adjusted that only one person can enter or come out of the premises at the same time. d)All windows should be fitted with iron grills. e)Entrance to strong room should have a collapsible gate. f) Fire buckets, sand buckets and fire extinguishers are to be kept in usable condition. g) Sand bags to be arranged so that security guard can take position in an emergency. h) Armed guard should have cartridges loaded in the gun and the gun should be attached to his body while on duty. Banking Problems FINANCIAL STATEMENTS PROBLEMS / SHORT NOTES

1. Balance Sheet (Rs. in lakh) Paid up Capital 800 Fixed Assets 1600 Surplus & Reserves 240 Stocks 800 Debentures 1400 Debtors 350 Bills Payable 40 Investments in Associate Firms 150 Creditors 360 Cash 100 Other current Liability 160 3000 3000 Calculate: a) Current Ratio b) Debt Equity Ratio c) TOL/TNW Ratio 2. Examine the following Balance sheet and answer the questions: (Rs. in lakh) Liabilities Assets Capital 360 Cash 100 Reserves 40 Debtors 300 Term Loan 600 Stocks 300 Cash Credit 400 Fixed Assets 800 Sundry Creditors 200 Goodwill 100 1600 1600 Calculate: a) Networth b) TNW c) TOL/TNW d) Debt/Equity e) Current Assets f) Current Liabilities g) NWC h) WCG i) Current Ratio j) Quick Ratio 3. Study the following Balance sheet and answer the questions given below: (Rs.in lakh) Liabilities Rs. Assets Rs. Networth 150 Raw Material 150 Sundry Creditors 150 Finished goods 70 Cash Credit 200 Receivables 150 Term loans 200 Fixed Assets 300 Prepaid Exp. 30 700 700 Work out the following: a) What is the Tangible Networth of the company? b) Current Ratio c) Debt / Equity Ratio d) Net Working Capital e) Quick Assets 0 Quick Ratio

4. I. Rearrange the following statements in a suitable form for analysis and calculate the ratios which are important for analysing the financial trend of the business.

2-59 , ...... „ .._ .,. ,,-.,,, • . -,:. !;,....,-. - .. ' • , . ..,...... , -.-:,', •.• !fs-, '•: ,.--' -',.- ;Ki, ' , . .• ....— ••••••-••. ..,....,.... -....,. • ._ „., . • ' • ••• .-';'-'.• ::iia,-kY.ii MM Special Guide LIABILITIES ASSETS 2003 2004 2003 2004 Rs. Rs Rs. Rs. Creditors 40,000 32,000 Cash 30,760 52,040 Bills payable 25,500 13,000 Debtors 22,520 23,420 Reserves 1,34,500 1,69,000 Stock 1,12,320 98,920 Capital 2,00,000 2,00,000 Fixed 4,34,400 4,39,620 Assets (less dep) Debentures 2,00,000 2,00,000 6,00,000 6,14,000 6,00,000 6,14,000 Sales 3,60,000 3,90,000 5. A summarised Balance Sheet and Income Statement of PQR Ltd. are given below. Income statement for the year ended 31.3.2004: (Rs. in 000s) Sales 1600 Less cost of goods sold 1310 290 Less Selling and Administrative expenses 40 250 Less Interest 45 Earnings before Tax 205 Less Tax paid 82 Earnings After Tax 123

Balance Sheet as at 31-3-2004 (Rs. in 000s) LIABILITIES ASSETS Rs. Rs. Paid up capital (40,000 shares of Rs. 10 fully paid) 400 Net Fixed Assets 800 Retained earnings 120 Inventory 400 Debentures 700 Debtors 175 Creditors 180 Marketable Securities 75 Bills Payable 20 Cash 50 Other current liabilities 80 1500 1500 Industry average ratios are: Current ratio 2.4 Quick ratio 1.5 Sales to inventory 8 times Average collection period 36 days Debt/Assets 40% Profit margin 7% Return to Total Assets 11%

2-60 Banking Problems

a) PQR Ltd. approaches the Bank for a cash credit limit of Rs. 5 lacs against the security of stocks and debtors. Evaluate the firm's financial position by calculating ratios that you feel would be useful for the Bank's evaluation. b) What problem areas are suggested by your ratio analysis? c) Do you think the Bank should grant the loan? 6. Explain: (a) Fixed Assets (b) Current Assets (C) Miscellaneous Assets (d) Intangible Assets (e) Net working capital 7. Explain: (a) current liabilities (b) deferred liabilities (c) capital and surplus. 8. Match a) Current Assets 1) Stocks b) Fixed Assets 2) TDR with Bank (encumbered) c) Intangible Assets 3) Dividends payable d) Misc. Assets 4) Equipment e) Current liability 5) Debentures f) Deferred liability 6) Goodwill g) Capital & Surplus 7) Deposit from friends and relatives 8) Bad debts 9. What is Deferred Expenses /Deferred Revenue Expenditure ? 10. Prepare a Cash Flow statement from the following data in an analytical format and comment

Balance Sheet of ABC Ltd., as on (Rs. in lakhs) Current Liabilities Current Assets 31-12-2002 31-3-2004 31-12-2002 31-3-2004 Bank C/CAJC 75 95 Cash & Bank Balance 3 6 Deposits 20 21 Advance paid (Maturing for purchase of 3 5 within 1 year) Raw Materials Sundry Creditors 40 57 Sundry Debtors 63 70 Provision for 18 24 Inventory 54 52 taxation Advance Tax paid 15 22 Other current 7 9 Other current 3 3 Liabilities Assets Total Current Liabilities 160 206 Total current Assets 141 158 Term Liabilities Fixed Assets Term Loans 60 75 Gross 187 262 Deferred Payment facilities 15 10 Dep.(Cumulative) 52 75 Debentures (Payable after year) 3 3 78 88 135 187

Net Worth Miscellaneous Assets Share Capital 15 15 Investment in Subsidiaries 5 6

2-61 MM Special Guide

General Reserves 21 27 Investment in unquoted shares 4 1 Investment Allowance 7 10 Surplus 4 6 Total net worth 47 58 Total Misc.Assets 9 7 Total Liabilities 285 352 Total Assets 285 352 Net Profit after Tax as per P & L Account; Rs.11 lakhs.

11. What is meant by: i) cash flow/funds flow ii) Tangible Net worth iii) current Ratio iv) Quick Ratio v) DSCR vi) Debt Equity Ratio Answers: I. a) Current Ratio = CA/CL =1250/560 = 2.23 b) Debt/Equity = 1400/1040 = 1.35 c) TOL/TNW = 1960/1040 = 1.88 2. a) Networth = Capital + Reserves = 360 + 40 = 400 b) Tangible Networth = Networth - Intangibles = 400 - 100 = 300 c) TOL/TNW = 1200 / 300 = 4:1 d) Debt/ Equity = 600 / 300 = 2:1 e) Current Assets(CA) = Rs.700 f) Current liabilities(CL) = Rs.600 g) NWC = CA-CL = 700 - 600 = 100 h) WCG = CA-CL (other than bank borrowings) = 700-200 = 500 i) Current Ratio = 700 / 600 = 1.16:1 j) Quick Ratio = 400 / 600 = 0.67:1

3. a) TNW - Rs.150 lakh b) Current Ratio 1.14:1 c) D/E ratio 1.33:1 d) NWC=Rs.50 lakh e) Rs.150 lakh f) 0.43:1 4. Re-arranged statement of Assets and Liabilities LIABILITIES ASSETS (Rs. 000's omitted) 2003 2004 2003 2004 Current Liabilities: Creditors 40 32 Current Assets: Bills payable 26 13 Cash 31 52 Stock 112 99 Debtors 23 23 66 45 166 174 Deferred Liabilities: Debentures 200 200 Fixed Assets: Capital & Surplus: Block 434 440 Capital 200 200 Sundries - - Reserves 134 169 334 369 600 614 600 614 2-62 Banking Problems

1) Liquidity Ratios: 89 i) Current Ratio: C.A. 166 2.5:1 174 3.9:1 C.L. 66 45 ii) Quick Ratio or Acid Test Ratio: O,A. 54 0.8:1 75 1.7:1 C.L. 66 45 2) Capital base Ratios i) Term Liabilities (Funded Debt) Net Worth 200 0.6:1 M 0.5:1 334 369 ii) Total Liabilities 266 0.8:1 245 0.7:1 Net Worth 334 369 3) Activity Ratios: i) Sales 360 0.67:1 390 0.69:1 Capital Employed 534 569 (Capital Employed is the total of Equity and Funded Debt. The ratio shows the number of times the capital is turned over in the business). h) tock = 112 3.7 mths 99 3 mths Sales 30 32 (Monthly sales is taken in the denominator. The ratio shows the efficiency of inventory management). hi) Debtors 23 23 Less than Sales 30 3/, mths 32 3/, mths Comments: i) Liquidity: Current ratio for 2003 is satisfactory; but it is rather high for 2004. Perhaps the unit is building up cash for meeting some commitments. ii) Capital Base Ratios: The long term debt and the total outside liabilities are quite low compared to equity. Hence, the financial position of the unit is good. iii) Activity Ratios: a) The Sales/Capital Employed ratio is rather low. The reasons for the same have to be ascertained. b) Debtors management and Inventory management have marginally improved in 2004. Overall, the financial position and the liquidity position of the unit are considered satisfactory. 5. Important ratios are worked out below: Ratios PQR's Ratio Industry average see below Comment 1) Liquidity Ratios: a) Current Ratio C.A., 700 = 2.5 2.4 Satisfactory C.L. 280 b) Quick Ratio 0.A = 1.07 1.5 Low C.L. 280 2) Capital base Ratios: Funded Debt/Assets 46.7% 40% Slightly high 1500 Funded Debt/Equity 700 1.3:1 N.A. Good

520

2-63 MM Special Guide

Total Liabilities/Equity 980 1.9:1 N.A. Good 520 3) Profitability Ratios: a) Net Profit x 100 123 7% Satisfactory x 100 7.7% Sales 1600 b) Return on Assets: ie. N.P. x 100 123 11% Low x 100 82% Total assets 1500 c) N.P. x 100 121 N.A Satisfactory x 100 10.1% Capital Employed 1220 4) Activity Ratios or working capital management ratios. a) Sales to inventory 1600 4 8 Very low 400 b) Average collection period: Debtors = 175 = 36 days 40 Marginally high Avg. daily sales 4.4 (1600/365 = 4.4)

COMMENTS: Liquidity Ratios: Liquidity ratios are satisfactory. They also compare favourably with industry average except that the acid test ratio is low. Capital base Ratios: The capital base ratios are satisfactory; but funded debt/assets ratio is higher than the industry average. Profitability: Though the profitability on sales is satisfactory the eamings on assets are low compared to the industry average. Net Profit before tax can also be used for working out the ratio. As tax rates may change from year to year a more uniform basis will be provided by NPBT. Activity Ratios: The sales to inventory ratio is half of the industry average. The sluggishness in turnover of stocks has to be probed into. Collection efficiency (debtors management) is marginally higher than the industry average. Conclusion: The Company's overall liquid, financial and profitability positions are satisfactory. The precise reasons for the low turnover of stocks have to be ascertained to find out whether any marketing problems will be faced by the Company. The unit's NWC position is very comfortable; hence there may not be any need for W.C. finance. 6. Fixed Assets: are those assets which are utilised for the manufacture of goods in the unit. (Land, Buildings, Plant & machinery, equipments etc) Block: refers to the main productive machinery, equipments, Land, Buildings etc. Sundries: refers to such items as furniture and fittings, fixtures etc., which have very marginal contribution to production. Current Assets : are those assets which are transformed into cash in the normal course of business. While analysing the balance sheet, all assets which are transformed into cash within 1 year from the date of the balance sheet are classified as current assets. Miscellaneous Assets : are those assets which are neither current assets nor fixed assets. Eg: investment in associate concerns/subsidiaries, unquoted investments, long term deposits with Electricity Boards etc. Intangible Assets : are those assets which are not tangible. Eg: goodwill, accumulated losses, deferred s--- revenue expenditure, patents, copyrights, etc.

2-64 Banking Problems

Net Working Capital : The total of current assets is also referred to as gross working capital. Net working capital or liquid surplus is Current Assets minus current liabilities. The liquid surplus is expressed as a percentage of current liability. Eg: Current Assets Rs.10 lacs Current Liabilities Rs. 8 lacs Net working capital or liquid surplus Rs. 2 lacs = 2/8 x 100 = 25% of current liabilities. 7. Current Liabilities : are those liabilities which have to be paid by the unit in the normal course of business. While analysing the balance sheet, all liabilities which have to be met within one year from the date of the balance sheet must be classified as current liabilities. (Eg: Sundry creditors, Taxes to be paid, bonus payable, accrued expenses, term loan instalment to be paid within one year, debentures to be redeemed within one year) Deferred liabilities: are those liabilities which need not be paid within one year. These relate to the loans raised for aquisition of fixed assets, term loans, debentures, loans and deposits from directors/partners/ friends and relatives-all payable after one year. Capital and Surplus (also referred to as Net Worth) consist of (a) capital (b) credit balance in profit & loss A/c (c) General reserves. Tangible net worth (also referred to as Equity) = Net worth minus Intangible assets. In view of the difficulty of SSI units getting capital from the market, the loans and advances from friends and relatives are treated as "quasi equity". Such loans are added to the capital and ratios are worked out on that basis. But 'No withdrawal letter' will be obtained from the creditors or the unit in respect of such loans. Only then, these can be classified as Quasi Equity. Surplus: denotes all free reserves in the business. 3. Answer: (a) 1; (b) 4; (c) 6 (d) 2; (e) 3; (0 5; (g) 7 Note: (i) 7 is classified as equity in case of SSI units if the amount is retained in the business during the period of the bank advance. (i) Ordinarily a TDR without any encumbrance is to be classified as a current asset. (iii) Bad Debts : Usually bad debts would be deducted from the Sundry Debtors. Only the net S.D. will be shown in the balance sheet. 9. Certain expenses yield long term benefits. Eg: The benefit of advertisement may be apportioned by the Management for say 3 years. In such a case, one year's portion would be debited to the P&L A/c and the balance would be shown as an Intangible Asset in the balance sheet. 10. Cash flow statement for the year ended Mar 2004: Source of Funds: (Rs. in lakh) Net Profit after Tax 11 Depreciation (for the year) 23 Increase in Term Loans 15 Increase in Short term bank borrowings 20 Increase in deposits and unsecured borrowings Increase in other liabilities 25 Decrease in Inventories 2 Decrease in Misc. Assets (Shares) 3 100 Use of funds: Increase in fixed assets (increase in gross value to be taken) 75 Decrease in Deferred payment facilities 5 Increase in Debtors 7 Increase in investment in subsidiaries Increase in other assets 9

2-65 MM Special Guide 97 Surplus 3 Opening Cash and Bank balances: 3 Surplus in operations 3 Closing Cash and Bank balances 6 Comments: 1) The company has generated Rs.34 lakhs during the period internally. 2) It has ploughed back the entire profit of Rs. I I lakhs into the business. 3) The Company has diverted from shrot term sources a sum of Rs. 28 lakhs for long term purposes as shown below: Long Term Sources: (Rs. in lakh) NPAT 11 Dep. 23 Inc. in L.T. Loans 15 Dec. in Misc. Assets

Long Term uses: Inc. in F.A. 75 Dec in. Deferred Payment facilities 5 As a general rule, diversion of short term funds for long term purposes is not desirable. Thus, it is observed that even though the inventory has decreased by Rs. 2 lakhs and the debtors have gone up by Rs. 7 lakhs only, the company has increased its borrowing from the Bank by Rs. 20 lakhs and utilised it for purchase of fixed assets. Thus short term funds have been utilised for long term purposes. The end use of funds is not in order. The Working Capital advance has not been used for increased production. 4) The company has increased its creditors for raw materials even though the inventory level has come down. 11. i) The Funds Flow Statement is a statement depicting the movement in the relative positions of various items of assets and liabilities between two dates. The Funds Flow Statement is based on a wider interpretation of funds encompassing within itself not only 'Cash' but any 'economic source' capable of giving value or benefit. It is also called "where got and where gave" statement showing the sources of funds to ascertain the end use of funds of the entity. ii) Tangible Net worth (TNW) : The Net worth (NW) of a company is represented by Capital, Reserves and Surplus. TNW is arrived at by deducting the intangibles from the NW. It is a better indicator of the worth of the borrower. Thus TNW = NW - Intangibles Current Assets Current Ratio = iii) Current Liabilities This is an index of the unit's liquidity. If the ratio is more than 1, the presumption is that the unit is in a position to pay the current liabilities from out of the current assets. It is obvious that the higher the ratio, the better the liquidity position. Too high a current ratio also needs careful study as it may reveal inefficient working capital management. iv) Acid Test Ratio or Current Assets - Inventory Quick Ratio Current Liabilities Generally, it would be difficult for a unit to sell the inventory and realise money at a short notice. The Quick Ratio takes into account the Quick Assets and compares this with the current liability. A ratio of 1:1 is considered very good. Quick ratio denotes the ready and immediate ability of a unit to meet its expenses / liabilities. It is a better indicator of liquidity than Current Ratio. v) Debt Service coverage Ratio (DSCR):

DSCRouitnadsicuantesderthe ability of the unit with the cash accruals generated by it to repay the debt. DSCR is worked Net Cash Accruals_f Profit after tax + depreciation + non - cash expenses) . DSCR = Annual Repayment of T.L. and other Deferred Liabilities , i,n '`` The DSCR ratio indicates the safety cushion available to the term creditors for the repayment of the T.L. . • : 2-66 - Banking Problems The norm for DSCR ratio is 2: 1 vi) Debt Equity Ratio = Term liabilities Tangible Net worth i) It indicates, the proportion of owners' stake to that of the long term creditors of the company. ii) Normally, Debt/Equity ratio should not be more than 2:1

Ideal I Indicative Ratios of sound financial position: These are only indicative ratios. Recently introduced in SBI. 1. Current Ratio - 1.33 (Mfg Enterprises) , ' 1.20 (For others: Limit above Rs.5 cr; Limit up to Rs.5 cr). 1 2. Debt/Equity Ratio - /.1 3. TOUTNW - 3:1 (Mfg) to 5:1 (Others) 4. Gross DSCR - 1.75:1 5. Net DSCR - 2:1 6. Promoters' contribution - 30% in equity (mfg); for others: 20%.

2-67 MM Special Guide TECHNOLOGY PROBLEMS

1. (a) Late evening, a person comes to you and represents himself as a retired IAS officer. He is in urgent need of Rs.10,000/-; and he informs you that he had tried to withdraw through 4 ATMs and his attempts have failed; one of the ATMs is yours. He threatens to make a complaint to CGM, if he does not get money. What will you do as a Branch Manager? (b) What are the present instructions of RBI as regards cash withdrawal by customers through ATMs? 2. Sri Anand Mishra, a customer of your branch complains that: (a) A debit entry of Rs 10000/- was found in his account representing ATM debit transaction through the branch ATM, though he has not used the debit card in the ATM or has made any withdrawal. In fact he was out of station on official duty on that date. (b) On the third day after the debit to his a/c, he went to a shop and swiped the card for payment of Rs.500/- for payment of merchant bill through POS, but the transaction had failed. He paid cash for the goods purchased in the shop. He threatens to approach the consumer forum as he is put to loss of Rs.10,500/- and inconvenience. How will you tackle the issue? What will be your response to the customer? 3. Sri Jagannath a customer of your Bank transacts in a Canara Bank ATM to withdraw cash. After he performs the transaction, the cash was not disbursed by the ATM. He verified the balance again in ATM but to his surprise he finds that the account is already debited. He approaches the Manager, Canara Bank, and complains that he did not get the cash in his Branch ATM and he needs cash immediately to settle hospital bill. The Manager, Canara Bank expresses his inability to help him as he is not their customer. Is the Manager, Canara Bank, right and if so what should the customer do and what is the correct procedure to resolve the issue? 4. The branch has just opened for the day and about to commence business. You have observed that the connectivity with CDC has failed although the branch server is working. A customer approaches you and informs that he wants to draw money immediately from his a/c. What will be your response? 5. M/s Prakash Software, a partnership firm with 4 partners is having accounts at your branch. The managing partner, Sri Ranganath Mishra has maintained his personal accounts with the branch and has taken RINB facility also. For the firm they have taken CINB —Vyapaar facility. Sri Mishra approaches you and complains that he is not able to view/transact the firm's account maintained by the firm in another branch of SBI, whereas in his personal RINB facility he is able to view and transact all the . accounts opened under same CIF he maintains at our various branches. What suggestion you will provide to Mr Mishra to overcome the problem/solve the complaint?

2-68 Banking Problems

ANSWERS TO PROBLEMS:

1. (a) Under the ATM facility, a customer can draw cash from any of the ATMs or at the branch where he has an a/c. He may be given direction to an ATM of an Associate Bank (where he can draw cash without any charges) or to an ATM of any other bank as is convenient to him as SBI ATMs could have failed due to connectivity issues. Another altemative open to us in case we can satisfy ourselves about the identity and standing and integrity of the person is to pay the cheque by debiting his account through CBS. This is possible only if the cash box of Manager (cash) has not been closed). (b RBI has introduced the following changes w.e.f.01-11-2014. - Only 3 free transations (either financial or non-financial) will be allowed at other Bank ATMs in a month for S B Account customer at 6 Metro-centres Bangalore, Mumbai, Delhi, Chennai, Hyderabad and Kolkata. - At other centres 5 free transactions (either financial or non-fmancial) will be allowed at other bank ATMs in a month for Savings Account customers. If a customer chooses to withdraw cash or make balance enquiry more than 5 times in a month, his account will be debited with a fee of Rs.20/- and Rs.8/- respectively, for every operation. - A maximum withdrawal of Rs.10,000/- can only be made in an other bank ATM per transaction. - Current account holders are not entitled to any free transactions as current accounts are maintained generally for commercial purposes. - Individual banks have been given the discretion to offer their customers free-of-cost access at other bank ATMs. - RBI has permitted Banks to charge customer for transactions at our ATMs. In SBI w.e.f 1.1.2016 charges have been revised as under:

Transactions based charges (by PBBU) & ATM related transactions (by Alternate Channels Department) AVERAGE MONTHLY MONTHLY LIMIT ON MONTHLY LIMIT ON NUMBER OF FREE BALANCE Savings Bank NUMBER OF DEBIT ATM TRANSACTIONS (BOTH FINANCIAL Transactions Charge : TRANSACTIONS AND NON-FINANCIAL TRANSACTIONS) Charges based on number of Transactions Other Banks' Our ATMs ATMs @ (SBG)

BRANCH# Internet In 6 Metro Other Any /Mobile Centres $ Centres Centre# Banking # **

< Rs.1000 4 20 3 5 5 > Rs. 1000 upto Rs.25,000 4 40 3 5 5 > Rs.25,000 upto Rs.50,000 10 free 3 5 Unlimited > Rs.50,000 upto Rs.1,00,000 15 free 3 5 Unlimited > Rs.1,00,000 No limit Unlimited Unlimited Unlimited Charges for financial trxns beyond the set limit (Rs. per trxn) Rs.20/- Rs.5/- Rs.20/-* Rs.20/-* Rs.5/- *

2-69 MM Special Guide Service Tax presently @ 14.5 % Rs.3/- Rs.1/- Rs.3/- Rs.3/- Rs.1/- Applicable Revised Charges Rs.23/- Rs.6/- Rs.23/- * Rs.23/- * Rs.6/- * Charges for non-financial trxns beyond the set limit (Rs.per trxn)* - - Rs.8/- Rs.8/- Rs.5/- Service Tax presently @ 14.5 % - - Rs.1/- Rs.l/- Rs.1/- Applicable Revised Charges Rs.9/- Rs.9/- Rs.6/-

$ Namely, Mumbai, New Delhi, Chennai, Kolkata, Bangalore and Hyderabad @This charge will not be applicable to small/no frill/Basic Savings Bank Deposit Account holders. These customers will continue to get 5 free transactions, irrespective of the centre, as hitherto. *Charges applicable from 1st November, 2014. #Staff exempted from this charge. ** S.I. fed through INB/Mobile Banking are excluded from this limit. One way inter-changeability allowed between branch transaction and ATM transaction. It means a customer will be allowed 9 free transactions at our Group ATMs if he does not visit the branch at all during a month or 8 free ATM transactions if he visits the branch once and so on.

Staff may be exempted from this charge 2. (a) In the instant case the complaint needs to be handled tactfully. It may be a case of fraudulent transaction through ATM or customer's card might have been used by a person known to him and having access to the card. He is also aware of the PIN. In either case the matter has to be dealt with politely and courteously. In this case, if the EJ log confirms that the transaction for Rs 10000/- is successful, the video footage of transactions should be used as evidence. The branch, after satisfying itself, may inform the customer of the same and advise him to lodge an FIR with the police. This has to be explained to the customer. The customer should be advised to maintain secrecy of PIN, and to keep the Card in his own custody to ensure against recurrence of such instances. The Branch can produce copy of EJ log for the particular successful transaction. It should be made clear that the bank will not be responsible for transaction caused due to the negligence of the customer. (b) In the case of transaction at POS, it might be due to connectivity issues. Branch should lodge the complaint in complaint management system (CMS). We may explain to the customer about the technical issues tactfully to avoid escalation of complaint. We should arrange to settle the disputed amount of Rs.500 through CMS. 3. As per RBI directives it is the responsibility of home branch to settle all the ATM disputes. In respect of use of third party ATMs the customer has to lodge the complaint with his Bank only, which is the card issuing Bank. In this case Manager, Canara Bank, is in order in referring the customer to the customer bank. However, in our Bank since the complaint management system is centralized, the customer can lodge his complaint in any one of our branches or through interne. He can also lodge the complaint at home branch. Our Bank customer should resort to third party ATMs as a last resort to avoid such a situation. In the above case the customer should lodge the complaint immediately which will be registered

e s r-.. 2-70 Banking Problems

under CMS, The customer will also be eligible for reimbursement of penalty at Rs 100/- per day from the 8th day if the complaint is not resolved in 7 working days on receipt of complaint by the third party Bank, Canara Bank. 4. Such a situation arises occasionally due to technical/connectivity problem. To tackle such situation every branch should have the approved BCP (Business Contingency Plan). The same should be perused and acted accordingly. In the instant case as only the connectivity with CDC is not available and the branch server is functioning, the first option available is to function in off-line mode. With branch server in off line mode, limited transactions could be performed. The off-line mode restricts non-home transactions and there will be limitation on cash transactions. For any situation where the customer transaction could not be handled due to limitation in the off line mode, the same should be explained tactfully to the customer. The customer may also be advised to use ATM for withdrawal. 5. In respect of RINB all the accounts under the same CIF irrespective of the branch can be viewed/ transacted. In case of RINB it is the CIF concept, hence all accounts under same CIF irrespective of the branch, where it is opened, can be viewed/transacted. In case of CINB it is not the CIF concept but account-wise linking. In case of CINB Vyapaar, bank has to ensure that the mandate/operational instructions given to the account is not violated and hence all accounts under the same CIF cannot be automatically linked. In the instant case Vyapaar facility is for single branch accounts and accounts under same CIF in another branch cannot be linked. The branch can suggest to the firm to take Vistaar of CINB where such provision for linking other branch accounts irrespective of the CIF is available. • , . , L PART - 3 0 SITUATIONAL ANALYSIS

SECTION A GENERAL BANKING

Ql, Banker Customer relationship I . Your customer has complained that the bank has wrongly debited his account with Rs.10, 000 on 25.6.2001. On scrutiny it was found that a) Rs.10,000/- was debited on 25.6.2001 on the strength of a cheque presented in clearing by another bank B. b) The cheque leaf belongs to the cheque book which was issued by your branch to a third person on production of a letter. c) The letter produced to the bank for obtaining cheque book bears forged signature of the account holder. d) Signatures on the cheque resemble the specimen on Bank's record, but your customer refuses to have issued the cheque. e) The beneficiary of the cheque with bank B has withdrawn the full amount and closed the account. The beneficiary and its introducer both are not traceable at the given address. Discuss: A. It appears that the cheque book has been issued to a fraudster who has forged the signature of the customer and obtained it. The Bank is negligent in not verifying the signature on the letter. It appears, prima-facie, that the fraudster has forged the cheque of the customer. But, it is stated that the signature resembles the specimen, but the customer disowns it. The position in law is that if the signature is forged, however cleverly, the cheque is not a mandate of the customer. We have to satisfy ourselves whether the signature is genuine, by referring to a handwriting expert, if necessary. If we are satisfied that the signature is forged, we have to credit the amount to the customer's a/c without delay. As the fraudster has closed his account with B bank, our position is rather weak. Also, if the B bank had collected the cheque for an introduced customer in good faith and without negligence it would get collecting bank's protection. Yet, we have to file a criminal case of forgery and fraud against the fraudster.

Q2. Your customer Mr. Ramesh Kumar Jain has given a cheque for Rs.50,000 in favour of Y. He writes to the bank not to pay the cheque because he has intentionally signed as Ramesh Kumar Jain, whereas his specimen signature reads as "R.K.Jain". This letter was received by the bank after it has already paid the cheque. Shri Jain claims the amount from the bank on the plea that his signature on the cheque does not tally with the specimen on the Bank's record. Hence, the payment is wrong. Discuss: A. The general proposition that a bank need not pay the cheques signed by the customer in a different mode than the specimen provided by him is well-established. The important question to be answered first is can the bank pay a cheque signed by the account holder in a different mode than the specimen furnished by him. The answer is 'yes' as it is a valid mandate to pay. In fact, in the instant case he has advised that he had signed as Ramesh Kumar Jain and not R.K.Jain, as provided in the specimen. Hence, there is no dispute that the signature has been put on the cheque by the customer. The cheque has been paid in due course and hence it is binding on the customer. He cannot now contend that the signature varies from that on record or that he intended the cheque to be returned.

3-1 MM Special Guide However, a disturbing question has to be answered by the branch. How such a cheque was paid? The cheque ought to have been returned with the reason "Signature differs". It is a dangerous practice to pay cheques signed in a different mode than that in the specimen signature.

Q3. Your Bank has sanctioned a cash credit limit of Rs.25,000/- to Mr. A against the guarantee of Mr. B. After about an year B writes to the Bank saying that he wishes to terminate his guarantee on a date mentioned in the letter. A debit balance of Rs.24,000/- was outstanding in the cash credit account. The letter was received at your bank and acknowledged, but was misplaced and hence no action was taken. After three months from the date of guarantee termination letter, you observe that the cash credit is running irregular and overdrawn by Rs.2000/-. You send a notice to the guarantor Mr. B for repaying the advance. Mr. B calls your attention to the letter and repudiates the liability. Discuss: A. The following issues arise for discussion. a) When a guarantee is revoked as from a future date what is the limit up to which the guarantor is liable? b) For the outstandings on which date he would be liable? c) The account has been in operation for 3 months from the date of guarantee letter and the account was overdrawn by Rs.2000/-. What is the guarantor's liability for the transactions after the date mentioned by him for the revocation of the guarantee? The answers to these questions are a) When a guarantee is revoked as from a future date, the guarantee would be valid till that date. b) Also, the guarantor would be liable for the balance as on the date, subject to the ceiling of the cash credit limit of Rs.25, 000/-. Even though the outstanding balance was only Rs.24, 000/-, it can go up to Rs.25,000/- c) The guarantor is not liable for the debits in the account after the date from which his guarantee is withdrawn. Further, credits into the account after this date will offset his liability. We will have to peruse the statement of account and find out the least debit balance. He would be liable for that amount only. If the balance had become "Nil" or had a credit balance, the guarantor would not be liable for any amount (Clayton's Rule). The position described above has resulted from the gross negligence in handling the guarantor's letter.

Q4. Apex Traders had a current a/c with the bank. A cheque for Rs.10,000/- tendered for credit of a/c on 4.4.2004 was given immediate credit. The customer presented a cheque on 6.4.2004 and withdrew the amount. On 10.4.2004, the Bank informed the customer that the said clearing cheque had been returned unpaid, and therefore, his account had been debited with Rs.10,000/-. The customer disputed the stand of the bank and filed a suit for recovery of the sum from the bank with interest. The bank claimed that it was entitled to exercise the banker's right of general lien on the money balance of the customer coming to it in the ordinary course of business. Discuss. A. Lien can be exercised only against securities and properties in the bank's custody; also these should have come to the bank's possession in the normal course of business. The banker's right over the balance in a customer's account is right of set off. The right of set off is available only if there is mutuality of debts. It means that there must be mutual demands between the bank and the customer. If there is a debit balance in one a/c and a credit balance in another a/c, there is mutuality. The cheque amount was allowed to be withdrawn by the customer. The customer has been led to believe that the clearing cheque has been realized. After a delay of 4 days, the bank had debited the account of the customer with the amount, as the cheque had been returned in clearing. The Madras H C had held in Indian Bank Vs Annapooma Finance that the bank could not exercise the right of set off

3-2 Situational Analysis

as there was no existence of mutual demands nor exercise lien in such a case as there is no security or property left in the bank's possession. The delay of 4 days was also considered as negligence by the High Court.

Q5 A firm has been sanctioned a usance Bill limit of Rs.20 lakhs. Bills to the tune of Rs. 15 lakhs are outstanding in the Inland Bills A/c. A party in respect of whom bills worth Rs.5 lakhs is outstanding has become insolvent. The bills are due for payment in the next 10-15 days. The branch manager proposes to set off the credit balance in the current account of the customer against the outstanding in the bills a/c drawn on the insolvent. Discuss. A. The question involves the Right of set off. Right of set off or right to combine accounts can be exercised only between existing debts and not against contingent debts or liabilities falling due at a future time. In the present case, the bills are due at a future time. The customer may or may not become liable to pay the amount in case of dishonour of the bills and hence the bank cannot appropriate the amount of the bills from the customer's account. In case the bill is not paid, the Bank has to pursue the matter with official Receiver.

Q6. Your branch has taken over an advance account from another bank. Before the take-over, an opinion was called for from the other bank in which the other bank has stated that the borrowing account was conducted satisfactorily. The opinion has been given in the standard format with a disclaimer clause. After some time, the account was not conducted properly and further enquiry revealed that the other bank had classified the a/c as NPA in its books but had given a false report. Discuss. A. It is a well-established practice among banks to exchange opinions on parties, when requested, in a highly confidential manner. The opinions are worded with scrupulous care. Based on British judgements it is considered in India that if a "disclaimer clause" is incorporated in the opinion, the bank will not be liable. In fact, the opinion report is not signed by the banker. Only the forwarding letter is signed. If the "disclaimer clause" is not incorporated, the bank would be liable for any breach of care. In the present case, the other bank is not liable. Notwithstanding this position, a case may be filed against the bank for furnishing a false report knowingly and thereby causing loss to us. [Note: Now, credit reports can be accessed from CIBIL and other CICs).

Q7. You are the Personnel Manager of a leading Cotton Textile Mills employing 2000 staff/workers. One of the office staff who has put in 20 years of service had met with an accident some time ago. On his reporting to work, it is observed that he is suffering from amnesia; in the last 2 months, he has become irregular in attendance and also forgetful of his duties. While you are considering the discharge of the employee, his wife, a non- matriculate meets you and pleads that he should be kept in employment as the family with 4 children is exclusively dependent on his earnings. How will you decide the case? A. It is sad that an employee should suffer from this disability. The management can, as an extraordinary gesture of goodwill arrange for his medical treatment in a reputed medical institution; if he is able to recover and become fit to carry out his normal duties he should be allowed to join work. However, if the medical opinion is that he has suffered irreparable damage and hence he is not fit for work, we have to examine whether his wife can be given a suitable employment based on her general skills, health etc - as a helper in the factory, in the creche, in the hospital etc. This will enable the employee to retire from service; and he can invest his Provident Fund amount in banks, reputed companies etc so that assured and reasonable income can supplement the family income. The employee can also be looked after better by the wife and children. [Note: The system of compassionate appointment was abolished in SBI/PSBs; but revised later].

3-3

MM Special Guide 41 Q8. A company having valuable connections approaches you with a request to put up an advertisement hoarding in the Bank's compound. How will you deal with the request? A. If we accede to its request, the company may advertise any of its products. It may even diversify into financial activities in due course and advertise its products which may compete with ours. Also, the advertisements may offend public feelings and the Bank's image may be affected. Even in the ordinary course, people may attach more credibility to the advertisements as the hoarding is located in our premises. If the premises is a rented premises, the lease agreement does not usually provide for sub- letting, sub-leasing etc. Also, such advertisements are subject to the Municipal laws.It may also result in similar requests from other companies. The Bank has built up its image and reputation over the decades and we should use all the space available for enhancing our image. The request has to be declined tactfully. A suggestion may be sent to the Controlling Authority for erection of a suitable hoarding to advertise our services and schemes.

Q9. 'You are a branch manager at a remote Taluk HQs centre where two more commercial bank branches and one co-operative bank branch are established. In a span of 15 days, there were unsuccessful attempts to break open the strong room/cash safe at two of the bank branches by dacoits. The Inspector of Police has cautioned all the banks and other institutions about the same. What steps you would take to protect the Bank's interests? A. It is a small town as there are only 4 branches of banks. With the approval of the Controlling Authority a night watchman may be posted on a casual basis till normalcy reaches /the culprits are caught. All the staff should be cautioned to look out for strangers/suspicious characters during the business hours. Entry of tea boys, casual labourers, electricians etc into the branch has to be minimised; and when entry is permitted, a vigilant watch has to be kept on their work and movement. The alarm system has to be kept in working order so that the siren would go on, in case of any unauthorised entry by any person into the branch in the night. Police should be requested to arrange for the night beat police to cover our branch. The Manager (Cash) and the Branch Manager should visit the branch independently every night daily at different times. The position has to be reviewed every week. Close rapport and liaison have to be maintained with the local police.

Q10. On a working day, a newspaper item appears that the State Govt has declared the day as a holiday under NI Act; the holiday has been declared as a mark of respect for Mr. X, a senior State leader who died on the previous night. You are unable to contact the controlling authority as your branch is located in a remote area. How will you act? A. Though the news-item is fairly authentic information that the holiday has been declared under the NI Act, ideally we have to get specific confirmation from the controlling authority. It is desirable that a decision to close down the branch is taken well before the opening time of the branch. We can ascertain the information from other banks and the decision taken by them. The district HQs branch/LBO may be contacted to ascertain the correct position. If the staff are allowed to work even for a few hours, overtime has to be paid for the whole day. (Note: As cellphones/Intemet is available freely everywhere such situations may not arise nowadays).

Q11.. Your branch is about to complete 25 years of existence. How can you celebrate the Silver Jubilee occasion? A. Such occasions offer opportunities for the branch to improve its image in the area; these are also ideal occasions to improve customer relations as well as staff motivation. Deposits and other businesses

3-4 Situational Analysis

can also be attracted through sales promotion campaigns. (i) Image projection: The branch can be done up nicely; better lay-out to suit customer convenience, new customer facilities like provision of water cooler, elegant interior designing etc will add up to the attractiveness of the branch. Health camp for students may be organised. The ambience of the branch can be stepped up. (ii) Customer Relations: Customer Relations programme may be organized. All customers may be invited to the function which will serve to enhance customer relations. (iii) Staff Motivation: The occasion being a unique one, different committees may be formed consisting of staff from different sections. This will elicit co-operation and team-work from the staff. The occasion will provide opportunity to all staff to interact closely in an informal way. Friendly competition among work groups will stimulate competition for good performance. Leadership, innovation and team-building qualities in the staff will get recognition. (iv) Sales Promotion: Special effort will be made to attract deposits and sell the new schemes of the Bank like different types of deposits, advances against securities, ATM Card, Internet facilities, PB loans, Mobile banking, Mobicash etc. The agency products like Life Insurance, General Insurance, Mutual Funds and credit cards will be given special emphasis. Over all, the branch will be benefited by the increased staff motivation. The image of the Bank will also go up. (v) Conduct Essay Competition for students on the role of SBI in nation building.

Q12. You area manager of a small branch in a remote area. One day, dacoits enter the branch and threaten customers and staff that they would shoot them down in case the strong room keys are not given to them. One of the dacoits has entered your cabin and threatens you that all the staff would be shot down if any resistance is put up by any one at the branch. Discuss. A. The presence of mind of people is tested in such unprecedented situations. If you can press the emergency alarm bell without the notice of the dacoit, the people in the neighbour-hood may rush to the branch and the dacoits may take to their heels. It is very important to remain unperturbed at such moments; the natural psychology of such persons is to rattle people and behave in a very brutish fashion. If the duration of the process of the dacoit is delayed then they may lose the nerve and leave the place. It is very important to observe the age, appearance, height, looks, method of walking, the nature and colour of dress, languages spoken, the sex etc of the dacoits for giving clues to the police. Importantly, we should avoid loss of life or limb to customers/ staff. We should hand over the keys etc but delay the process hoping that they will be scared by the delay and abandon the attempt and run away.

Q13. Your branch, located in the ground floor in a premises, is trying to persuade the landlord to extend the lease of the premises, which is expiring shortly. The landlord took a stubborn stand that, unless you give a 'no objection' letter to construct a cinema hall on the first floor, with separate entrance, he will not extend the lease. As an alternative, he has demanded enhancement of the monthly rent from the present Rs.50,000/- to Rs.1,50,000, with yearly increase by 15%. What action you will take as Branch Manager? A The Bank is faced with the following situation: • The construction of a theatre in the first floor will lead to entry of all types of people into the premises endangering the security of the Bank and interest of the Bank. • As cinema shows can be conducted right through the day and night, the Bank's normal function- • ing would be affected. Customers will avoid coming to the branch for fear of coming into contact with undesirable elements.

3-5 MM Special Guide • Any occasional disturbance affecting the safety of the Bank cannot be ruled out. The landlord has to be persuaded to abandon his idea. The matter will be explained to him by me. We can also convey this to him through mutual well-wishers whose advice will carry weight with the landlord. If any staff has a good relation with him, he may be requested to convey this to him. We may also explore the possibility of help from a respectable citizen or senior govt. official. We may also indicate, if there is scope, that the Bank itself will expand its business and therefore, take up the first floor in the next 2/3 years. As he has indicated a huge increase in rent, it is possible that he is more keen on increased rent. We should assure him that the Bank would pay the market rent subject to Bank's rules when the lease comes up for renewal shortly. I will also examine afresh whether the Branch could be re-located to another building/area which will help attract better business.

HRD Ql. An All India Bank with HQs in a Southern State held a recruitment test to select 40 candidates as direct entry officers. In the fmal list of selected candidates,- the first 35 candidates were girls and the rest of them were boys. The bank has branches at smaller centres in the northern India and the Bank planned to shift the existing officers by replacing them with the new recruits after 1 year when they would be confirmed. The Management felt that the mobility of the girls in the cadre will be difficult, if girls were appointed in large numbers. As the Managing Director of the Bank how will you decide? A. In the past, reservation for males or females were considered appropriate; but such reservation has become untenable in the modern days. This aspect should have been taken care at the time of deciding on the qualifications for the job. As stated earlier, it will be unethical and violative of socially acceptable norms to bar girls from appearing in the examination for the position of officers in a Bank. The fact that girls have topped the list in large numbers is accidental; and on that count they should not be deprived of their rightful claims. It is certain that the Bank would have made it a condition that the job requires movement to many centres in the country and that the girls should be prepared for the same. In the interview, this aspect should have been evaluated by the interview-board members. Principles of natural justice require that the appointment be given to meritorious candidates as has been assessed by the process of examination/interview. Hence appointments will be given to the candidates who have come out successful.

Q2. The Inspector of Police calls on you and tells that he has to arrest Sri X, the cashier at the branch in connection with a murder. Mr. X is working on the counter which is very busy as it is a payment day. How will you act? A . This is a very rare phenomenon. The issue does not relate to the employment of Sri X in the Bank. but, no one should or can stop the process of law. Hence, as a Bank, we have no say in the matter. But, we may request the Inspector not to arrest the employee in the Bank's premises as it will spoil the Bank's image and reputation. We may request him to wait till the employee completes his work. If, however, the Inspector insists on immediate arrest of the employee we may request another employee to take charge of his work and arrange for the employee to leave the office immediately. The Inspector can arrest him outside the Bank's premises, as per law.

Q3. You are a Chief Manager in charge of a medium sized branch. You are confidentially informed by some customers that a field officer has been borrowing money from customers and has also been found drunk at a few places in the town. Discuss. • • qi.b71 3-6 Situational Analysis

A. The branch manager has to be always on the alert to ensure that the conduct of an officer or employee does not affect the good image and reputation of the Bank. Further, as a senior-most colleague, it is his responsibility to counsel any colleague who may fall into bad habits. There is another angle to the situation. A customer who is dissatisfied with a straight forward and strict officer may also spread false rumours about him, though rare. All these aspects have to be borne in mind. Regarding the consumption of alcoholic drinks, it is a matter of personal habit and as an employer the Bank has no role in it. However, if it affects his behaviour at the branch or with the customers it will amount to misconduct. Also, his drunkenness in public places will affect the image of the bank. The Bank has a right to discharge an employee after due process of enquiry, for unbecoming conduct and loss of confidence. Drunkenness while at work is a gross misconduct in the case of an award employee. In many cases, suitable counselling with the help of the employee's friends and relatives will help. Such cases have to be identified at an early stage for effective action. As regards indebtedness, if the Bank considers that an employee has incurred excessive debts it will amount to minor misconduct. Experience shows that a person with heavy debt is tempted to commit frauds or forgeries. Vigilant check has to be kept on such employees. The declaration of assets and liabilities made by the employe should be scrutinised. In the instant case, confidential but vigorous enquiries have to be made and the true position ascertained. Also, a close watch has to be maintained on the officer's work and conduct; close and careful watch over his work, change of units to other field officers, careful watch over the operations on his personal account are some of the steps needed. Q4. Mr. A (age 45) has been working as Chief Manager at a branch in a Bank. He is an M. Corn, CAIIB with 23 years of service. He has become blind overnight. As Personnel Manager you are asked by the Managing Director your suggestions for his posting. Discuss A. The officer is highly qualified and very well experienced. His rise to the Chief Manager's position shows that he has been acquitting himself well in the different positions held by him. On account of his sudden disability he will not be able to carry out normal branch work. However, if he has good communication ability he could be posted as a Trainer in the Training Centre. This will enable him to continue to do productive work without hurting his self-pride. I will recommend to the Controlling Authority that the General Manager may give him suitable counselling. It has to be explained to him that it is necessary to keep his knowledge up-to-date. It should be possible if secretarial assistance is extended to him as a special case. The officer also should be provided with proper medical assistance. If by regular treatment or surgery or by arranging with an eye bank for eye donation his vision can be restored, that should be given top priority.There are many tools/software in the market to help persons who are visually impaired.

Q5. A counter lady assistant attends office late by 10 to 15 minutes every day. A number of complaints have been received from the customers. On being questioned by you, she states that her husband has been seriously ill with cancer and that she can come to office only after administering the medicines to him in the mornings and hence the delay. She is an intelligent and pleasant employee. How will you deal with the situation? A. It is a sad situation for the employee. She deserves sympathy and understanding by all the colleagues. All the staff, especially the other staff in the counter should extend a greater degree of cooperation and help to her in attending to her work. Perhaps, we may suggest to her to have her working hours staggered. Alternatively, she may be

3-7 MM Special Guide given a desk in the back-office where direct customer contact is not required eg., despatch, establishment etc; or she may be put in a section where one or more assistants work so that no work will be delayed on account of her coming late. The employee is an intelligent employee. She will be able to come to terms with her life and the peculiar problems confronting her, provided the immediate colleagues extend to her understanding, sympathy and help. Such an approach will avoid any complaints. The best in our staff can also be brought out only in these situations.

Q6. There was heavy rush at the branch which is a captive branch for a large public sector company employing about 15000 people. It being a salary day for the company, there was a huge rush at the payment counters. One of the customers shouted at the cashier that he is not fast and that he is delaying the payment. The cashier got annoyed and stopped payment. He demanded apology from the customer. The other waiting customers lost their patience and began threatening the cashier for not doing the work and fighting unnecessarily. The other two paying cashiers also stopped the payment. How do you deal with the situation as a manager of the division? A The situation is very hot and only a few socially gifted clerks/cashiers/messengers at the branch can bring immediate peace in the situation. There will be one or two cashiers who enjoy the friendship of the company employees. They should be requested to appease them so that we can reason with our staff. The executives of the company must also be requested over phone to come and talk to their employees. One/two more cashiers may have to be deputed to take away the pressure from the existing cashiers. The office bearers of the local union should also be requested to persuade the cashiers to start payment. The entire focus is to defuse the situation and bring about normalcy. When the human emotions are frayed and people are in a mood not to compromise on matters of personal prestige or ego, it is difficult to see the right and the wrong in a situation. It is wise not to attempt to find out who is right or wrong but to go ahead with the larger and important task viz the payment to the customers whose families would be eagerly waiting for the salary and the sweets and the presents the customers would carry home on the salary day. We have to ensure that cashiers with brittle temperaments are supported by other cashiers on busy payment days; informal meetings should be held by the Manager (Cash) or P.B.Manager on these days so that the staff concerned are geared up fully for the occasion. If the customers are able to see that special and smart arrangements have been made by the branch to meet the rush, they are also co-operative on these occasions. We should convert the employees' accounts into salary a/c and extend them the benefits of salary package scheme. ATM cards, mobile banking and intemet banking should be made available to all eligible a/c holders. These measures will reduce crowd at the branch on the salary day.

NPA Management: Q I Mr.X.Y.Ramana has been posted at a semi-urban branch in RR Dt, AP. The population at the centre is about 30,000. Black gram, Green gram, Chillies, Jowar and Sugarcane are grown in the area served by the branch. About 65%/70% of the lands are rain-fed. About 20% has borewells. Seasonal rains also cater to 5%/10% of the area. The branch has been upgraded to scale II incumbency, 2 years ago. The staff strength is 15; there are two field officers. The business of the branch as on Dec 2003 is

3-8 Situational Analysis

Deposits P Segment • Rs. 4 cr Advances Agriculture Rs. 1.50 cr. SIB Rs. 1.50 cr. P Segment • Rs. 1.00 cr. 20 villages have been assigned to the branch under SAA; It has also financed a few non-target villages. Mr.Ramana went through the loan accounts and other documents and found that out of total advances of Rs. 4 cr, NPAs stood at Rs.3.75 cr. Further study showed that more than 1200 loan accounts under different Govt schemes, agricultural and SME schemes were NPA for more than 3 years accounting for about Rs. 2.00 cr. The branch has already made provision of Rs. 2 cr up to previous March. A good number of SME a/cs were not renewed for a long time amounting to an aggregate limit of Rs. 60 lacs. There has been a good monsoon recently and economic activity has picked up. Small trade/business has picked up well, as well as agricultural activity. Mr.Ramana has sought your help in drawing up an action plan to improve the GRR of the branch. Discuss. A The advances portfolio of the branch is in a bad shape. The NPA level is alarmingly high. The following action plan may be drawn to improve the position and the GRR. i) All assets classified under loss category should be written off against the provision already available to cleanse the Balance sheet of the branch. ii) All non-renewed SME accounts should be reviewed/renewed wherever the conduct of account is found satisfactory. Rest of the accounts should be transferred to Recalled Assets a/c and the course of action for recovery should be firmed up fast. iii) All-out efforts should be made for settlement of the dues under the applicable RBI OTS / Bank OTS scheme which is in vogue or through compromise. iv) The monsoon is reported to be good. Vigorous efforts must be taken to upgrade the NPAs in the books of the branch through recovery by conducting recovery camps etc. v) Fresh advances under SIB & Agricultural segments may be sanctioned as also under the bank's plus schemes. vi) Constant follow up in written off accounts should be maintained to effect maximum recovery which would go to increase the profit level of the branch. vii) Personal segment advances should be given a boost by grant of housing loans, car loans, overdrafts under SBI Saral etc.

Q2. You are a MD of a medium-sized private bank with HQs at a Southern City. The General Managers in charge of Treasury, Investment, and International Banking have submitted their resignation, as they propose to join the new Banks that are being set up recently. You have also heard of rumours of some more executives resigning from the Bank's service. What course of action would you take as the Managing Director of the Bank? A. The banking industry including the Public Sector Banks is facing this problem. The areas of Trea- sury Management, International Banking and Investment are crucial for the survival of the Bank. Conventional banking business has tumed into a marginally profitable activity. The incumbents should be individually persuaded by the Managing Director/the Board of the Bank to continue in service. The Board has to urgently work out compensation plans for top executives keeping in mind the present emoluments/perquisites offered by other newly established banks. A crash programme of training for officers at one/two levels below the General Managers has to be organised; the training should be both practical and academic-oriented.

3-9

MM Special Guide The Banking and Finance Industry has entered an era where executives change organisations fast; competitors are weaning away talent from organisations which are not able to retain their executives by offering challenging assignments, better emoluments, better working conditions etc. The Bank should also be on the look out for similar talent elsewhere. The Board of the Bank should be willing to recruit competent people directly at higher levels.

Cash Department: Ql. At the end of the day, the receiving cashier at a sub-chest branch has reported excess cash of Rs. 50,000. The denominational details in the vouchers were verified and found correct. The amount was credited to Sundry Deposits A/c. When the branch manager was about to leave, the proprietor of Gopal & Brothers, one of the Bank's valued customers came to the branch and said that excess cash of Rs. 50,000/- has been remitted by his cashier into their account, while making a cash remittance of Rs.4,50,000/-. He also stated that he can show his cash book and other details to prove that excess cash of Rs. 50,000/- has been remitted into the account. A. It is a very ticklish situation. We are not bound to refund the amount merely because the amount claimed is the difference found in our records. May be, another claim will be received by us from another party, after a few days. However, the customer is a valued customer; he has come to the branch on the same day and claims that his accounts show that excess cash has been remitted into the account by mistake. The credit voucher of the company/system should be perused to find out any clues of excess remittances. This can be verified by perusing his account books also. We may agree to pay him the amount if he provides an indemnity to the bank against any loss or damage or claim on account of this payment. We may also request that the amount be kept as a term deposit for a period of 1 year (The customer generally will not resist the idea). This will also enable us to meet the liability if any other claim is proved against us. The settlement should be effected after referring to the Controlling Authority so that sufficient time will lapse before we agree for the payment; and if any other claims are received meantime, we will be able to decide on the genuineness of the various claims. It must also be remembered that the customer can make claim against the Bank on the ground of `mistake of fact' in a Court of Law. i.e., instead of remitting 4,50,000/- he had remitted Rs.5,00,000/-.

Bills: Ql. 'X and Brothers' is a reputed and long-standing customer of the Bank. They are wholesale dealers in food-grains. LSC bills drawn on them are received at the branch regularly. The firm desires to retire a LSC bill for Rs.15,000/-; however, it has advised you that it is not able to produce the 'C Form' as required by the lodgers, since it has run out of stock of the forms and there is delay in procuring the C Form from the Commercial Tax Department. The bill is to be returned if not paid on presentation. What will you do? A. As a collecting agent, the Bank has to strictly comply with the instructions of the lodgers of a bill. Hence, in this case, it will not be irregular if the bill is retumed, if it is not paid on presentation. There is no time for referring the matter to the collecting branch, as the instructions are that the bill has to be retumed if not paid on presentation. However, it does happen that at times the traders are not supplied with the `C form for use. On the other hand, if the C form is not obtained and sent to the lodgers, they will be required to pay a higher rate of sales tax.

3-10

Situational Analysis

It is said that the firm is a well-established and reputed wholesale dealer; and hence we may rely on their statement; a suitable undertaking may be obtained from it agreeing to indemnify the Bank for any loss in delivering the bill without the C Form and also agreeing to pay the higher rate of tax, if demanded by the lodgers. The matter has to be advised to the collecting bank.

Marketing: Ql. Your Controlling Authority has asked you to energetically canvas for and mobilise deposit /small advance accounts from ladies in your town, with some innovative approach, attracting at least 100 new lady customers, over the next month. Yours is a semi-urban, conservative town. Detail the strategy you would adopt.

A: First the staff are to be involved by convening a Staff meeting and inviting suggestions. The lady staff members should be encouraged to come out with practical approaches to tap new accounts. Two lady and two male employee-volunteers constituting a team will go round with invitation cards for a seminar on "Banking-Meet", where tailor-made schemes for the ladies would be explained. The town will be divided into four segments and each segment will be invited on a different Sunday. Personal visits will be made to their houses, with invitations, in a traditional way, as for a marriage or a social function. At the end of the seminar, they would be seen off with traditional courtesies like gifting of a coconut, etc. They will be encouraged to open accounts and fill up applications for loans, on the spot. A willing lady customer will also be associated in the programme. We shall also enlist the support of Ladies Club/Mahila Societies as well as StaffAssociations in large/ medium companies/Govt. departments for getting information on prospective customers.

Clearing: Ql. Madanlal & Co deposited with their branch a cheque• forRs.4.50 Lacs issued in their favour by Ranjit &Co, a proprietary concern towards settlement of their long overdues. The cheque was drawn on the local branch of Union Bank of India, bankers to Ranjit &Co. While presenting in the clearing, the cheque was wrongly lodged on Bank of India resulting in the return of the cheque by Bank of India with the remarks "Not drawn on us". Thereafter the cheque was lodged on Union Bank of India, when it was returned by them with the remark- "Operations stopped since yesterday and the proprietor adjudged as insolvent". — - Madanlal & Co have demanded payment of the cheque amount failing which they have threatened that they will file a suit against the Bank forrecovery of the amount. Please discuss the position of the Bank. A. The cheque ought to have been lodged correctly on Union Bank of India. As the cheque was wrongly lodged on Bank of India in the first instance, there was undue delay in presentation of the cheque on Union Bank of India leading to the development. Had the cheque been lodged promptly on Union Bank of India m the first instance itself, the cheque would have been paid. As such, this is negligence on the part of the Bank due to which the firm has suffered. The Bank is liable. (After introduction of CBS and Speed Clearing such instances will be very rare).

Credit Card: Ql. Mr. A, a credit-card holder went to a shop for purchase of jewellery and presented his card for the purchase after finalizing the purchases. The card was returned as 'Pick up' by the shop even though he had sufficient credit to draw on. He reported the matter to the Bank that has issued the card. The Bank promptly sent another card in replacement of the old card, and regretted the lapse. Mr. A filed a complaint with the Consumer Forum claiming damages. Discuss.

3-11 MM Special Guide A Obviously, as per contract, Mr. A had adequate balance to draw under the credit card. Also, the fact that the Bank has regretted the lapse confirms this. The Bank has been silent about the reasons for the rejection. Mr. A has not asked for replacement of the card either by letter or over phone, and hence, the reason for the withdrawal of the card is not clear. In a similar case, the bank was held careless and negligent in honouring a credit card. The customer had suffered humiliation due to the negligence and deficiency in the service of the Bank. Compensa- tion of Rs.50,000/- was awarded to him. The court also stated that if the compensation is not paid, the customer can take proceedings for the arrest of the Bank officials under the law. As such the claim for payment of reasonable damage by A will have to be entertained by the Bank.

Deposits: Ql. Shri.A, a retired Govt. officer, has a TDR of Rs. 3,00,000/- and a SB a/c at your branch for collection of pension. The account has been conducted satisfactorily. One day, his neighbour calls at the branch and informs you that Sri A has been admitted in a nursing home as he has suffered a heart-attack and has become unconscious; further, an expense of Rs. 20,000/- has been incurred towards emergency treatment. He also states that Mrs.A has gone to Los Angeles on a visit to her only son. The neighbour requests you to release Rs.10,000/- to the nursing home immediately for further treatment. How will you act? A. We will visit the customer at the nursing home. We have to ensure that the message of his illness has reached his wife so that she can come back immediately. The neighbours would probably have already arranged for it. In the present condition of the customer, he will not be able to sign/put the thumb impression on the cheque/withdrawal form. Payment of the amount may be made to the Nursing Home against the acknowledgment by a responsible person, for the specific purpose of treatment of Mr. A . The witness of two respectable neighbours who are now helping Mr. A in the nursing home may be obtained on the debit voucher. The customer is a retired Govt. officer and has substantial Term Deposits at the branch; also, the account is being conducted satisfactorily. Hence, it is an extra-ordinary case calling for extraordinary sense of concem for the customer. The customer/his wife will appreciate the bank's action and the image of the Branch will also go up. However, in the unlikely event of the customer contesting the debit, we can successfully counter it on the principle of 'Quasi-contract', as any liability incurred by a third party in these circumstances should be reimbursed by the beneficiary to the third party. This is only a very remote contingency.

Q2. Income Tax attachment order under S 226(3)-of Income Tax Act had been received at the branch on 8.3.94 attaching the monies due or which may become due to Sri. K. Krishna. As no account was maintained in the name of K. Krishna, the I.T. officer was advised accordingly. On 20.3.94 a current account in the name of K. Krishna was opened at the branch. The account had substantial balance. On 10.8.94 an attachment order was served on the branch but on that date the balance on the account was only Rs.250/-. The Income Tax department advises you that the Bank had failed to deposit the amount when the account had sufficient balance and has initiated proceedings against the Bank for recovery of the same. Discuss. A. No account was maintained in the name of K. Krishna when the first attachment order was received by the Bank. The Bank did not owe any money to him on that date. Our action in the first case is in order. However, subsequently an account in the same name K.Krishna was opened. The account had substantial balance during most of the period. An attachment order was received on 10.8.94

3-12 •• • ~rY r, •, t Cc; • •• •

Situational Analysis

which could not be executed for want of funds. The question which has to be answered is should a bank keep track of all Revenue attachment orders and ensure that the attachment orders are given effect to as and when accounts are opened in these names? It would be impossible to keep a track of such notices and, hence, we are not required to do so. The provision of law that states that future credits are also attached in respect of a revenue attachment order means that the account has been on the books of the bank when the order is served on it. It does not apply to accounts opened subsequently. Hence, the account is not attached by the first order; only the balance of Rs.250/- is attached by the second order.

Q3. X, a senior Govt. official has requested you to transfer accounts at your branch to Guwahati Branch as he has been transferred to Guwahati. He has following a/cs at the branch. 1. S.B. a/c: Rs.25, 000/- 2. Overdraft A/C against the security of L. I. C. Policy. Rs. 75,000/- 3. T.D.R. a/c for Rs. 4,00,000/- 4. Gold Loan a/c 5. Safe Deposit Articles (a packet said to contain documents of value to him). How will you act? 1. S.B. A/c: The customer should be advised to surrender the cheque book issued by the branch. Thereafter the transferor branch has to change the home branch code in the CIF of the customer in CBS to transferee branch code number. The customer may however, continue to use the ATM and INB after authorisation/linking in CIF by the transferee branch. Suitable advice has to be sent to the LCPC concerned so that new cheque book will be issued to the customer. 2. Overdraft A/c: In respect of overdraft account, the loan documents should be forwarded to the transferee branch. The applicant's request, along with the assignment of policy etc., should be forwarded to them. 3. TDR A/c: In respect of Term Deposit Receipt, the home branch code has to be changed and request letter of the customer forwarded to the Transferee branch. Form 15G/15H obtained from the customer along with TDS if any, so far recovered should be sent to the transferee branch. 4. Gold Loan Account: The account cannot be transferred because the risk of loss, breakage etc of the ornaments while in transit is too high and the Bank does not accept the same. If the customer insists on its transfer, we may suggest to him to close the account at the branch and avail the advance at Guwahati immediately on his reaching there. 5. Safe Deposit Articles: We do not know the contents and hence we cannot take the required nature of case in handling the same while they are in transit. If we send it by post/courier, the packet may be mislaid, tom etc during transit. Hence, the customer has to close the account and take the packet with him. In view of the fact that he is a senior Govt. Official and has had substantial connection with us, the entire set of documents may be sent by speed post as a measure of good customer service.

Q4. An account was opened with proper introduction and with an initial deposit of Rs.10,001/-. Two drafts of value of Rs. 3,00,000/- and Rs. 2,50,000/- were collected and credited to the account through clearing. Subsequently you are advised by the paying Bank that the signing official's signature on the drafts has been forged and therefore the draft amount be refunded to them. Two cheques drawn on the account aggregating Rs.5,00,000/- have been received through clearing at the same time. Discuss.

3-13 MM Special Guide A It is not clear whether the proceeds are still in the account or not. Both the cases are examined here. Basically, the Bank is protected if the account has been introduced properly and the two drafts have been collected in good faith, without negligence and under circumstances which did not show that the account holder's title was anyway defective. If these conditions are satisfied the Bank can claim the collecting Bank protection under section 131 of N. 1.Act. The next question is, if the proceeds remain in the account, can the bank return the two cheques and refund the amounts to the other Bank. As another Bank has reported forgery and as the amounts involved are large we may return the cheques for the reason "Refer to Drawer". The Bank should be asked to serve on us a suitable court injunction on the same day restraining us from paying the amounts to the account-holder. It must be remembered that till such an order is received our position is not safe. The next question is what is our position if the amounts have already been withdrawn. Certainly, we cannot do anything in the matter. The other Bank has to pursue its remedies against the account- holder. Q5. P and S had a deposit a/c in their joint names in the Bank. The said deposits were payable on maturity to "former or survivor". P died. R filed an application for grant of a succession certificate, inter alia, in respect of the above deposits on the ground, among others that she is the legal heir of the deceased. S objected on the ground that the said deposits were deposited in the Bank with instructions to pay to "former or survivor"; therefore he is entitled to receive the said payment from the Bank. The Court after considering the facts and evidence on record came to the conclusion that the objection raised by S has no merit and therefore granted succession certificate in favour of R. Aggrieved by the order, S filed an appeal inter alia on the ground that the mode of operation provided in the said deposit accounts was that the money was payable to "former or survivor" and therefore the grant of Succession Certificate in favour of R is bad in law. However R contested the appeal on the ground that she being the legal heir is entitled to succeed to the property of the deceased. Therefore, according to her the Succession Certificate has correctly been granted. Discuss. A Under F or S or E or S deposit the deposit is payable to the Survivor on the death of the former. The Survivor is only the "hand" that receives the deposit. He should account the moneys to the legal representatives of the deceased. Perhaps, anticipating that he may have difficulty in getting the moneys from S and putting the matter of his heir-ship to P beyond doubt, R has obtained the succession certificate from the court after producing evidence. The technical contention of S that he is the survivor and therefore as per the contract with the bank, he should be paid the moneys has no validity. Hence, it will be in order for the bank to pay the balance in the a/c to R based on the Succession Certificate. Q6. Income Tax attachment order under S 226(3)-of Income Tax Act had been received at the branch on 8.3.94 attaching the monies due or which may become due to Sri. K. Krishna. As no account was

maintained in the name of K. Krishna, the I.T. officer was advised accordingly. On 20.3.94 a current r account in the name of K. Krishna was opened at the branch. The account had substantial balance. On 10.8.94 an attachment order was served on the branch but on that date the balance on the account -P was only Rs.250/-. The Income Tax department advises you that the Bank had failed to deposit the amount when the account had sufficient balance and has initiated proceedings against the Bank for recovery of the same. Discuss. A No account was maintained in the name of K. Krishna when the first attachment order was received by the Bank. Our action in the first case is in order. However, subsequently an account in the same name was opened. The account had substantial balance during most of the period. An attachment order was received on 10.8.94 which could not be executed for want of funds. The question which

3-14 .2

Situational Analysis

has to be answered is should a bank keep track of all Revenue attachment orders and ensure that the attachment orders are given effect to as and when accounts are opened in these names? It would be impossible to keep a track of such notices and, hence, we are not required to do so. The provision of law that states that future credits are also attached in respect of a revenue attachment order means that the account has been on the books of the bank when the order is served on it. It does not apply to accounts opened subsequently.

Safe Deposit Locker Ql. Mr. PS maintains a SB a/c and a Locker account, in his name. He requested the Bank by letter to convert them to Joint accounts, with his wife as the joint a/c holder. The Branch sent a SB form to the customer and got it filled up and signed by both, as necessary. On receipt, the Bank opened a Joint SB account, under advice to him, completely overlooking the Locker account aspect. subsequently, on the death of Mr. PS, his wife refuses to accept the fact that Locker account is only in the sole name of Mr. PS, contending that when the Bank got the letter they should have converted both the accounts into a joint a/c. Discuss the Bank's position and options open to it. A: It is clear from the correspondence that the single S B A/c has been converted into a joint a/c and the single Locker A/c had not been converted into a joint account. Mr. PS has lived for some time after the joint S B A/c has been opened. He or Mrs. PS has not raised the issue of conversion of the locker account. Presumably, Mr. PS had decided that the status quo should continue. If he had wanted conversion, he could have asked for the forms and arranged to open the joint account. Even if the Bank had not acted on the letter through oversight, it has been ratified by Mr. PS with whom we had the privity of contract, by his continuing the account in the single name till his death. The contention of Mrs. PS is not tenable. The Bank should hand over the contents to all the legal heirs against their joint acknowledgement. The position has to be explained to her. However, the oversight on the part of the bank has led to this situation. Customer requests have to be complied with promptly.

Q2. Ram Singh approaches you with a request to have a view of the contents of his father's locker as his father had died 10 days ago. The nominee on the locker a/c is the daughter of the customer, who used to accompany the father to the bank whenever he operated his locker a/c or deposit a/cs; at times, he would be accompanied by his wife. How will you deal with the request? A. The following steps have to be taken by the Bank a) Suitable letter of condolence has to be sent to the wife. b) The death certificate has to be scrutinized and copy retained. A letter of request to be obtained from all legal heirs. c) An inventory has to be taken of the contents signed by all the witnesses. The locker can be permitted to be preferably opened in the presence of all legal representatives of the locker holder and in the presence of two witnesses. d) A proper record of the matter has to be kept. (Please see Banking Guide) Advances: Ql. S took an agricultural loan of Rs.3,000 from C Bank by pledging some gold omaments. In the year 1989, she repaid half of the said loan and the balance including interest as on 2.10.1989 was only Rs.2,765/-. On 8.9.1990, S was given credit for a sum of Rs.2,765/- under the Central Agricultural Debt Relief Scheme. Thus the said loan stood practically discharged. Meanwhile on 4.1.1986 S contracted another loan of Rs.21,000/- from the said C Bank under Gramodaya scheme. She made

3-15 MM Special Guide some part payment towards this loan and balance due as on 2.10.1989 was Rs.10, 800/-. S paid a further sum of Rs.500/- towards Gramodaya loan on 3.9.1993. On 11.10.1993 S issued a notice to C Bank to return the jewels pledged by her for raising the first loan i.e. the agricultural loan since the same has been fully discharged. The C Bank however sent a reply that the Gramodaya loan is not fully discharged and hence the Bank has exercised lien on the ornaments. Questioning the said action of the Bank in refusing to return the gold jewels even after the discharge of the agricultural loans S filed a writ petition to direct the said Bank to release the gold ornaments. Discuss. A. From the information given in the case, the following facts emerge i. The first loan secured by gold ornaments was repaid on 8.9.1990. ii. In the second loan dt 4.1.86 there was no credit from 2.10.89 till 3.9.93, when a sum of Rs. 500/- was credited. Thus, the account has become time barred; the credit after 3 years does not revive the debt. The jewellery pledged for the first a/c has continued to be in the possession of the bank since 8.9.90 till date. i.e. from the date the first loan was repaid. We have to examine whether the Bank can exercise general lien on the ornaments for the balance due in the second loan or whether the lien is available for the first loan only which has since been repaid. It is well-settled law that securities including assets which come into possession of the bank in normal course of business are subject to the general lien of the bank (S171 ICA). The Bank can exercise lien even for a time-barred debt. The bank's stand is correct.

Q2. XYZ Ltd engaged in the manufacture of steel billets, rolled products etc are the Bank's constituent for the past 15 years. They are banking with one of our branches in Chennai and enjoy credit limits aggregating Rs. 5.00 crore. The turnover of the company has almost doubled in the last year, in view of which the company approached the branch for enhancement in credit limits from the existing level of Rs. 5.00 crore to Rs. 8.00 crore. The branch has submitted a month ago, its recommendations to the controllers and is yet to hear from them in the matter. Meanwhile, drawings in excess of the sanctioned limits are being permitted in a limited manner for meeting genuine working capital needs. The Branch Manager has been recently transferred and a new incumbent has taken over charge of the branch. A cheque for Rs. 2.00 crore was issued by the company in favour of the raw materials supplier. The cheque presented in clearing was however returned by the branch with the remarks "Exceeds arrangements". Aggrieved by the action of the branch, the MD of the company sent a letter to the branch that he is arranging to switch over the account to the local branch of Canara Bank which it appears has been canvassing for the account. As Branch Manager, what action you would take? A Not only the branch has submitted its recommendations for enhancement in the limit but has also been permitting drawings in excess of the limit. The unit has been dealing with us for a long period and the turnover of the unit has increased very fast last year. This shows that the branch is convinced of the viability of operations of the unit and the need to support the same. As such, the branch should have discussed with the borrower its stand in granting further excess drawings before re- sorting to the extreme step of returning a cheque. The branch has been honouring cheques in the past even beyond drawing power/limit pending sanction of enhancement in limit. As such, the branch should have given prior intimation before return of the cheque. The exact reasons for the sudden change in the approach of the branch by returning the cheques are not stated. Any such decision should have been taken after due deliberation and communication to the unit. It is now imperative

3-16 Situational Analysis

that the senior level executives of the company are met and convinced of the action of the branch in the matter. Early sanction of enhanced limits would dissuade the company from switching over its a/ c to other bank .

Q3. Ramesh & Co is engaged in the manufacture of railway bogies. The orders obtained by them from Railways are executed through their sister concern, M/s. Sundar Brothers. The limits enjoyed by the two firms were not renewed for long after original sanction. However excess drawings were liberally permitted for execution of railway orders. As the outstandings in the accounts of the units reached disproportionate levels compared to the limits sanctioned, a stock-cum-receivables audit was conducted as a prelude to consider suitable restructuring/enhancement in limits which revealed huge clean drawings in the accounts. The audit also revealed that double financing has also been availed by the units. Further, it came to light that one of the units had opened account with another Bank and was transacting with that Bank. Besides calling for explanations from the concerned officials for the lack of requisite supervision and follow up of the accounts, operations in the account were stopped pending decision of the future course of action. Meanwhile Ramesh & Co bagged a sizable order for Rs. 15.00 crores from Railways for supply of bogies within 6 months. The proprietor of the firm has approached us with a request to sanction an ad hoc limit of Rs. 1.00 crore for a period of 6 months purely for execution of the railway orders. He promises that besides servicing interest on the existing loan accounts, he would fully repay the adhoc limit within 6 months on execution of the order. How will you deal with the situation as Branch Manager? A The accounts of both the units have huge clean drawings. The endeavour of the Bank should be to bring back the units to rails provided the honesty and integrity of the borrower is not in doubt and the units' operations, in the present conditions, would be commercially viable. The position will have to be examined through a techno-economic viability study whereafter the future course of action would need to be finned up by the Branch. As this may take some time, the feasibility of granting ad hoc assistance for execution of the orders on hand, in the meanwhile, may be considered after examining the following: i. Whether the existing orders can be executed within the time schedule and it would not result in further increase in the clean drawings. ii. The borrower should arrange to bring in his margin for the ad hoc limit of Rs. 1.00 cr sought by him. iii. Besides extending the existing securities, additional collateral securities may be insisted from the borrowers to secure the ad hoc limit. iv. Account should be monitored closely, preferably by means of a cash budget to ensure against any possible escalation in the outstandings / clean drawings in the accounts. v. It should also be ensured that the payment from Railways for the supplies is directly received for credit to the account of the units by execution of a power of attomey by the borrower in favour of the Bank which should be registered with the Railways. vi. The borrower should forthwith close the account with other bank and undertake to route all transactions in the account with the Bank. vii. As the proposed arrangement is essentially a holding-on-operations, the final course of action viz considering a Rehabilitation / nursing programme or calling up of the advance for early recovery of the dues should be considered fast. viii. The exercise relating to examination of staff accountability should also be completed quickly. MM Special Guide Q4. Mr. X was sanctioned an auto loan of Rs. 5,00,000 for purchase of a car. The repayments were regular for 6 months. No repayment was made for the 7th and 8th month. In spite of many notices and promises made by X, there was default for the 9th and the 10th month also. The Bank officials intercepted the vehicle in the road while X was going to office and seized it from him asserting that the Bank had a right to seize it in terms of the documents. Mr. X filed a writ petition in the High Court seeking a direction to be issued to the police to register a criminal case against the bank for illegally snatching the car, and other criminal offences like criminal intimidation, assault etc The Bank has a right of re-possession of the vehicle in terms of the contract entered into by the borrower with the Bank, in case of default. But courts have held that lenders should give due notice to borrowers before re-possessing the vehicles. The Delhi HC has prescribed the following procedure in a judgement. i. When a cheque issued by a borrower towards repayment of installment is retumed unpaid, notice is to be sent to the borrower by registered post. ii. The borrower should be given 7 days time for payment of the amount of the dishonoured cheque. iii. In case of second dishonour of the cheque, another notice has to be served giving 7 days time for payment from the date of service of the notice. The notice should also point out that the lender can recall the entire loan as per the agreement. iv. If the amount is not paid, the lender may exercise its power under the finance agreement to recall the loan. Accordingly, another notice calling up the loan has to be sent by regd post demanding payment within 7 days. v. If the payment is not effected even thereafter, the lender can repossess the vehicle; but it would not entitle the lender to seize the vehicle while plying on the road. vi. If the borrower refuses to sign the papers when the car is re-possessed, police must be advised immediately after repossession intimating the time and place when the vehicle was repossessed. The above procedure must be compulsorily followed by all lenders operating within the jurisdiction of Delhi HC The Supreme Court has also observed in a case of re-possession of a vehicle by a financier that undue restrictions on the financier would affect his rights adversely. In view of the stringent conditions to be followed, we have to start the process quite early, so that no time is lost in recovering the instalments.

Q5. A Proprietorship trading firm has a current a/c at the branch for the past 5 years and the account has been conducted satisfactorily. Recently the firm has been converted into a Private Ltd Company. The Company has approached you for an advance of Rs 20 lakhs as working capital. Detail the precautions you will take for entertaining the proposal? A We have to exercise caution before acceding to the company's request for loan. When a company is formed which takes over the assets of the proprietorship firm, legally it is the sale of his assets to the company. The company is a distinct and separate legal entity independent of the trader. The creditors of the trader cannot proceed against the company for the recovery of the debts of the trader. In case the trader is heavily indebted at the time of transfer, the transfer may be held by the Court as a fraudulent one, made with the intention of defeating the creditor's rights. In fact, such a transfer itself may be held as an act of insolvency. Further, if the trader is adjudged an insolvent, the transactions including sale of the assets may be held fraudulent and the bank will lose its security. j I r -;! Q6. A c/c limit of Rs. 500,000 has been sanctioned to AB & Brothers, a partnership firm against hypothecation of readymade garments. The a/c has been guaranteed by C. The goods were destroyed in a

3-18 Situational Analysis

fire and the bank has received the insurance claim. The Manager has proposed to adjust the amount against the overdraft granted to one of the partners as the guarantor has substantial means and the moneys lent to the firm can be recovered from him. Discuss. A The insurance amount has been received by the unit as compensation for the loss of stocks. The same stocks have been charged to the Bank as security for the advance. The insurance has been effected in the joint names of the firm and the Bank and hence the amount has to be credited to the c/c a/c. The firm also can sue us for misappropriation of funds. If the amount is not credited to the cash credit a/c, the guarantor's interest would be adversely affected. Hence, it it not in order for the Bank to adjust the overdraft granted to one the partners. Q7. A Term Loan was granted against the third party guarantee. The term loan was to be repaid in 6 years. After 1 year, the repayment period has been reduced to 4 years at the request of the borrower. The guarantor was not advised of the change? Is the Guarantor exonerated from his liability? A A guarantor will be discharged of his liability if the terms of the contract is altered materially or changed substantially putting the surety in a disadvantageous position. In the present case, the term of the loan is reduced and there has been no other change. In fact, the guarantor's contingent liability has been reduced to 4 years from 6 years. This is to the advantage of the guarantor. The guarantor will not be discharged of his liability, even though his consent has not been obtained for the same. But, it should be noted that as a rule, each and every change should be made only with the consent of the guarantor.

Q8. A Term Loan has been granted to X for purchase of a Taxi. The loan has been guaranteed by Y. X has given a public notice that he is unable to repay his debts. The Bank sent a letter to Y calling up the advance. Y replied that he is not liable as X has committed an act of insolvency. He also stated that the Bank ought to sell the taxi first and recover its dues and that he is liable only for the balance if any. Discuss. A As per security documents executed by X, the entire amount will fall due on the commission of any act of insolvency by him. Hence the loan amount has become due and it is in order to call up the advance from the guarantor. The Bank also should make its claim on the official receiver as soon as one is appointed. Y's contention that he is not liable because X has committed an act of insolvency is untenable. Our security documents provide that if the borrower defaults in payment, the bank has a right to recover the dues from the borrower or guarantor or by selling the assets charged to the Bank. Our guarantee documents contain both indemnity and guarantee clauses and, it is now well accepted that the guarantor has to pay the bank's dues as per agreement. His contention that taxi must be sold first is untenable. The 'taxi' will be made over to him on payment.

Q9. A has been sanctioned a Term Loan. The account became irregular. However, a working capital loan was sanctioned to A against the guarantee of X. After a year, this account also became irregular. Hence, both the accounts were called up. The guarantor has put up a defence that Banker sup- pressed vital information about the irregularity in the Term Loan a/c and hence he is not liable. Discuss. A The question to be considered in this case is whether banker is obliged to inform the guarantor that the Term Loan was irregular, when the guarantee was obtained for the working capital loan. It appears that the guarantee has been obtained only for the working capital loan. The Banker is bound by the duty of secrecy. Also, the guarantee is not given for the Term Loan. Hence guarantor's contention is not tenable. It may be stated that the banker is not liable to volunteer any information on the past conduct of account to the guarantor. But, if any questions are asked by the guarantor and

3-19 MM Special Guide the replies of the banker can be construed as misrepresentation, then the banker may be liable for suppression of facts, misrepresentation etc. Also the banker should not discuss the operations of an account with the guarantor; he can only disclose guarantor's liability on the account at any given time.

Q10. The Bank's Standard guarantee forms contain both guarantee and indemnity clauses. Why? A A guarantee can be invoked only when the principal debtor commits a default. Guarantor's liability is a contingent liability which can be enforced only if the principal debtor has failed to pay or perform an obligation undertaken by him. Indemnity clauses make him liable independently of the default of the principal debtor. The Bank can proceed against the guarantor even if it is not able to proceed against the principal debtor for some reason or the other.

Q11. A suit has been filed in DRT for recovery of Rs 60 lakhs together with interest from a cash credit borrower. He takes the stand that the bank had earlier charged a very high interest rate of 16% to 18% and therefore he has to be given relief for the same. Discuss. A The present law/court rulings in respect of interest charged by the bank are given below. S21A of BR Act: The court is not entitled to reopen the question of interest charged on an account on the ground that excessive interest has been charged. From the date of filing of the suit till the date of the decree and from the date of the decree till realization, the court as a rule shall grant interest at the agreed rate on the principal sum adjudged or found due;(i.e. principal and interest claimed in the suit) but in special circumstances the court may grant interest at commercial rate or at its discretion a reduced rate. Also, the court shall not split up interest and principal in the amount claimed in the suit as per agreement with the borrower. RBI is empowered to give direction to banks regarding interest rates under S21 and S35A of BR Act in public interest. Any bank which violates these directives is liable to be penalized by RBI. The SC has held that the court can, under S 34 of CPC, grant pendente lite or future interest under its discretion. Also, the court can decide the rate of interest for this period.

Q12. M/s Rainbo Chemicals (p) Ltd, manufacturing dyes and chemicals, approach you for establishing an import LC for import of computer parts and peripherals. The account has been conducted satisfactorily and the company is willing to offer collateral security and maintain stipulated margins. Dis- cuss. The company is manufacturing dyes and chemicals. It is not clear why they want to import goods which do not relate to their requirements. Unless we satisfy ourselves about the need for import and the viability of operations of the new activity we should not agree for the same. Further, the borrower being a company, the Memorandum of Association and Articles of Association have to be scrutinised to ensure that they permit the proposed line of activity.

Q13. Mr. Ram Chander is a valuable customer of the branch for the past 10 years. His son has secured admission in Singapore University for higher studies in IT. He requests you to sanction his son an Educational Loan of Rs15 lakhs as also issue an in-principle sanction letter immediately. Discuss. A Generally, we have to be careful in issuing 'in principle' sanction letter to customers pending detailed appraisal. The reason is the principle of Estoppel may be invoked against the Bank. However, the branch may selectively agree for giving 'in principle' sanction letter subject to the following conditions and with prior approval of Controlling Authority a) It is to be extended only to customers of undoubted integrity and standing and substantial means/income.

3-20 Situational Analysis

b) Scrutiny of all relevant papers must be done to satisfy that the applicant is eligible for the loan `prima facie' and securities offered are clear and marketable. c) The following condition will be added to the letter. " The bank is not bound to sanction the loan unless the security to be offered is acceptable and adequate and other usual terms and conditions are complied with". As Mr. Ram Chander is a valuable customer with satisfactory dealings with the Bank for a long time we may give him 'in principle' sanction letter.

Q14. A c/c limit of Rs.200 lakhs was sanctioned to ABC Ltd, a subsidiary of a well known and reputed public limited company. During the negotiations with the holding company, it expressed its inability to provide its guarantee for the advance. Instead, it offered to give a Letter of Comfort. A decision was taken to accept the same and sanction the advance. After a year, the advance was called up and the Letter of Comfort was invoked by the Bank. Discuss. A. A Letter of Comfort does not amount to a guarantee; it is not a well defined form of contractual security. It does not create any legal obligation. It is a moral commitment which should be accepted only from companies of very high standing / financials. The decision has been made on business considerations and we have to seek our remedies against ABC Ltd and the assets charged to the Bank. We cannot have any legal remedy against the holding company.

Q15. A limit of Rs100 lakhs is sanctioned at Kolkata IFB for a company having its registered office at Chennai. Immovable property located at Bangalore is offered as mortgage for the advance. How can the documentation be completed? A Advances can be sanctioned to companies at branches located at centres where the Registered office of the company is not located. However, signatures to the documents have to be identified with more than ordinary care. The branch has to satisfy itself about the powers of the officers of the company to execute documents/create mortgage by perusing MA, AA, Resolution. In this case, the security documents have to be stamped as per Stamp Act of West Bengal. The charge has to be registered with ROC, Chennai through e-filing, under whose jurisdiction the company's Registered Office is situated. Equitable mortgage can be created at Kolkata as per TP Act, provided the property offered is not situated in any army cantonment area. If registered mortgage is taken, the mortgage has to be registered with Registrar of Assurances/ Dy Registrar under whose jurisdiction the property is situated in addition to registration of charges with ROC Chennai. Also, the EM should be registered with CERSAI within 30 days of its creation. [Note: It is preferable, to have the borrowal accounts finalized by a branch at the centre where the Registered Office of the company is located. This will enable us to have an effective follow up over the years. In case of companies with multi location activities and offices/ factories, this is difficult. In such cases, more than ordinary care must be taken in identifying the persons signing the documents. Also, proper record as to the date and time of execution, officials present, witnesses' name and address where required have to be kept at the branch where documents are executed and a copy of such narrations is sent to the branch on whose behalf the documents are obtained. These are essential for taking legal action, if needed.] - • Q16. The branch inspector was scrutinizing the security documents in respect of advances. He found that the registered mortgage deed obtained by the branch has not been witnessed. The Manager (Divi- sion) felt that as the deed had been duly stamped and also registered with the Registrar there will not

3-21 MM Special Guide

be any problem in the Court to prove the mortgage. Also, the signature on the deed is that of the customer who has availed the advance and who has created the mortgage on his property. Discuss. A S 59 of Transfer of Property Act lays down that when the mortgage money exceeds Rs. 100/-, a registered instrument signed and attested must be effected or by delivery of the property to constitute a valid registered mortgage. S 3 of the Act has defined "Attested" as attested by two or more witnesses each of whom must have seen the executants sign the instrument or should have received from him a personal acknowledgement of his signature and signed the instrument in the presence of the executant. Thus, attestation (i.e. witnessing by a minimum of 2 witnesses) by way of signature on the mortgage deed is indispensable. Without attestation the document will not be admitted as evidence in a court case. The Bank's interest has been jeopardized by this serious flaw.

Q17. X & Co is enjoying hypothecation limit of Rs. 20 lakhs against stocks and bill limit of Rs. 30 lakhs. The firm has decided to shift its factory from a rented building to its own building • situated 10 kms away from the present building. What safeguards you would adopt to protect the Bank's interests? A The stocks pledged to the bank will not have insurance cover when they are in transit. Hence, suitable insurance cover has to be taken to cover the transit risk; also, it should be ensured that the stocks are covered as soon as they reach the new factory. Another risk is probable diversion and sale of goods. Hence, a suitable Trust letter has to be obtained from the unit confirming our charge and the fact that the stocks are being permitted to be taken out of the factory only for the purpose of shifting them to the new factory and at its risk. It should also agree to compentate the loss, costs etc to the Bank, if any. Immediate inspection of the unit has to be done after it shifts to the new factory, stocks to be verified and fresh DP to be worked out.

Q18. What are the various ways in which limitation for a debt can be extended? A i. In a cash credit account, the limitation is extended by credits into the account. Suit can be filed within 3 years from the date of last credit. ii Any acknowledgement of debt made before expiry of 3 years from the date when money was payable; (S18, Limitation Act). Balance-confirmation, mentioning the dues in the Balance sheet of the borrower, post-dated cheque given for payment are all regarded as acknowledgements. In the case of post-dated cheque, the limitation period will be extended from the date of the cheque and not from the date of delivery of the cheque. iii. Part-payment of interest or principal made before the limitation period, by the borrower or his authorized agent. Such payment must be in the handwriting or in the writing signed by the person making the payment. iv. "Account stated" which term will include Balance Confirmation or acknowledgement of debts and securities signed by the borrower will extend the period of limitation from the date of such document.

Q19. A term loan has been sanctioned for purchase of a Taxi on 8-10- 94. The first instalment of the term loan fell due for payment on 8-11-94. The borrower has drawn a cheque dated 10-11-94 for the same and it was presented in clearing on 12-11-94 and finally paid on 15-11-94. The final instalment will fall due on 8-11-97. There has been no subsequent payment into the account. From what date the limitation would commence in this case? A. a) If standard revival letter is obtained every year, the limitation period would get extended from the date of the last revival letter.

3-22 Situational Analysis

b) Also, if regular repayment of instalments is made, the limitation would commence from the date of payment of last instalment or interest. c) If there is default of any instalment, the entire loan will become due as per term loan document (SBI). In this case the entire term loan will become due immediately since there has been no payment after the above payment and the limitation will start accruing from that date. Assum- ing monthly repayment in this case, the instalment due on 08-12-94 has not been paid. Hence, the limitation of 3 years starts from this date.

Q20. A cash credit hypothecation limit of Rs. 5,00,000/- has been sanctioned to a Private Limited Com- pany at a district HQs branch. Copies of cash credit document were given to the Secretary of the Company along with Form SHG-I executed by the company for registration of the charge with the Registrar of Companies at the State Capital. After 40 days, it is learnt from the company that the charge has not been registered with the Registrar of Companies and the Secretary of the Company has left its services. How will you proceed to safeguard the Bank's interests? A . In the matter of advances to limited companies it is imperative to ensure that the charges on its assets are duly registered with the Registrar of Companies under S 125 of the Companies Act, 1956. The hypothecation charge ought to have been registered within 30 days from the date of the creation of the charge. The Bank ought to have followed up with the company the matter of registration as it is vital to protect its interests. The charge has to be registered through e-filing under digital authentication by the authorized official of the Bank and the company. The Bank has not taken steps to protect its interests as a creditor. Now the Bank has to file the charge without any loss of time; the Registrar may allow registration within 300 days on application by the company if it is not registered within 30 days (2013 Act). But, he has to be satisfied that the delay has been genuine. If the charge is not registered by the compnay for any reason, the Bank can also arrange to get the charge registered with ROC after approval of ROC. e-search has to be made at the site of ROC to ensure that no charge has been created since the initial search was done by the Bank before the sanction of the advance.

A term loan for Rs.5,00,000/- has been granted to a SSI unit against the primary security of machin- Q21. ery and collateral security of mortgage of the residential property of the proprietor. Instalments have not been paid regularly and the account has been irregular. You are told confidentially that the mortgaged house is to be auctioned by the court the next day in a decree obtained by a personal creditor of the proprietor. How will you safeguard the Bank's interests? A The legal position is as under. Any purchaser of a property which is mortgaged to a third party, purchases the property subject to mortgage. To make our mortgage evident, we have to arrange for `torn torn' (drum beating announcement) that the property is subject to mortgage . This has to be - done before the auction and at the auction site. Even in a court auction, the purchaser can get title only subject to the mortgage.

Q22. The field officer at the branch reports to you that he has gathered from the market that the proprietor of a printing press has planned to sell the machinery charged to the Bank and leave for Middle East . . for employment in 1/2 days. A term loan of Rs.25 lakhs and a working capital limit of Rs.5 lakh have , :§ been sanctioned to the unit; the accounts of the unit have been running irregular for a long time and have been classified as Doubtful Assets as on 31-3-94. What action you will take, as Branch .. =:.....:' Manager, to protect the Bank's interest? A. It appears that no suit has yet been filed against the borrower for the recovery of the outstandings.

3-23 MM Special Guide Hence, no attachment before judgement of the properties of the borrower can be obtained from the court for the payment of the dues. The local Advocate has to be consulted and perhaps an injunction from the Court preventing the borrower from leaving the country can be obtained. Impounding of the pass-port may also be prayed for in the court as he is trying to cheat us by leaving the country. The Bank's watchman should be posted at the unit round- the-clock; security documents have to be scrutinized to ensure that they are current and in order in every respect. The Controlling Authority have to be contacted over telephone/e-mail and their directions have to be obtained. A suit for the recovery of the dues has to be filed without any loss of time, after calling up the advance.

Guarantee: Q 1 . A cash credit limit of Rs. 50,000 was sanctioned to Universal Traders in 1991 and the limit was enhanced 3 times since then up to 1996 when a limit of Rs.5,00,000 was sanctioned on 8.10.1996. A guarantee was obtained on 1.4.1997 for the limit from X. The Bank's usual Letter of Guarantee was signed by the guarantor. The advance went bad subsequently and a suit was filed against the borrower and the guarantor for recovery. The Guarantor put up a plea that there was no consideration for the guarantee given by him and as such he is not liable. Discuss. A: S 127 of the Contract Act provides that anything done or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. However, this proposition is valid when the loan is granted to the principal debtor at the request of the guarantor. It is a well established fact that when a guarantee is obtained much later after the loan is sanctioned the consideration is 'Past' consideration. Hence this fact has to be specifically mentioned in the guarantee document. In a recent case, a High court has held that the guarantee is not valid, as the past consideration was not mentioned in the guarantee document. Amendments to the standard document must be made and they should clearly show that the guarantor acknowledges the past consideration passed on to the borrower.

Q2. A letter of guarantee for a bank loan of Rs.25000/- to B was agreed to be given to the bank by A. The guarantee form was given to B who got it signed by A for Rs 25000/-. However B altered the amount to Rs. 20,000/-. Later, as there was default, the guarantee was invoked by the Bank. The guarantor took the stand that he is not liable as there was alteration in the amount. Discuss. A S133 of Indian Contract Act provides that the guarantor would be discharged of his liability in case of any material change in the contract of guarantee without his consent. However, in the present case, the alteration does not affect the rights or obligations of the guarantor. In fact, his liability stands reduced by the alteration. Hence his contention is not valid. It is settled law that in substantial alterations or alterations which benefit the surety do not discharge the surety.

Q3. Guarantee of A and B was obtained for a cash credit advance. A was a school teacher with small pension and is very aged. B was of substantial means. As the advance failed, the bank called up the advance. Bank agreed to release A of his liability but proceeded against B. B contended that he is discharged of his liability as A has been released by the bank. Examine his contention. A. S 138 of Indian Contract Act provides that the release of one co-surety does not discharge the other. In this case, the bank has taken a business decision to release A. B's contention is untenable in law. However, A would be liable to B for his contribution, when B makes payment to the bank under the guarantee.

3-24 Situational Analysis

Q4. A has guaranteed the term loan a/c of B. The account became irregular and was called up. The outstanding in the account was Rs.7 lakhs. The bank had agreed to a payment of a lump sum of Rs. 5 lakhs under OTS, but the borrower had gone back on his word whereas the guarantor approached you for the settlement. How would you proceed? A. The guarantor's liability would be co-extensive with that of the principal debtor. As such Bank may enter into an agreement with the guarantor for a reduced sum. The amount may be accepted from the guarantor. Guarantor would stand in the Bank' shoes for recovery from the borrower. It is a matter to be settled between them and the bank has no interest in the matter.

Q5. While taking over as Branch Manager, you observe that the security documents for an advance of Rs.8 lakhs will become time-barred in 3 days' time. However, you learn from the Bank's advocate that the courts have been closed for summer vacation and will re-open after 15 days. What is the remedy? A. Every effort should be made to get revival letters signed by borrower/guarantor.If the court is closed on any day, the suit can be filed on the first day of opening of the court. The day(s) on which courts are closed will not be reckoned for calculating the limitation period. Similarly, if a document gets time-barred on a Sunday, suit can be filed on the immediately following working day. [Note: This provision is not applicable when court works on a day but the Banks have a holiday.]

Q6. ABC Ltd., a small enterprise (mfg), has been banking with the branch for the past 15 years. The present limits are M.T.L: Rs 10 lakhs; outstanding Rs. 6 lakhs C/C (Hyp.) Rs.6 lakhs; outstanding Rs.5.5 lakhs The accounts are regular. The company has entered into a contract with a newly established multinational giant for regular supply of structurals as a sub-contractor. The multinational company has called for a Bank guarantee to be issued in respect of raw materials supplied by them to ABC Ltd. The guarantee contains a clause reading "we are agreeable to renew the guarantee from time to time on mutually agreed terms". Will you agree to issue the guarantee? A. We have to ensure that ordinarily only a 'financial guarantee' is issued and that no 'performance guarantee' is issued. The Bank does not give performance guarantee, generally as it is difficult to assess the technical capability of the customer to execute contracts. Also, guarantees are to be issued only for periods up to 18 months except with the approval of • Controllers. The Bank does not issue guarantees for longer periods as the liability will be difficult to gauge. However in the case of valued customers with good reputation a guarantee as worded in the question can be issued with the prior approval of the Controlling Authority. The guarantee provides for extension of the guarantee only on mutually agreed terms. As and when the Bank feels that it cannot extend the commitment, it need not renew the guarantee.

1). Letter of Credit: — , Q I , A & Co entered into a contract with B & Co for purchase of 1000 steel bars and structural steel of certain specifications. A & Co established an LC for Rs 2 cr in favour B & Co. Bill of Exchange, Invoice and delivery challans signed by buyer's officers acknowledging the receipt of goods are the documents called for under the credit. B & Co's bank got these documents from B & Co and sent to

the opening bank requesting it to confirm the genuineness of the documents. A&Co's bank con- [ firmed accordingly. Thereafter, the bill was negotiated by seller's bank. But the buyer approached the court for issue of a temporary injunction, against the opening bank from honouring the Letter of l Credit on the ground of fraud by the seller. Discuss. i 3-25 1 MM Special Guide A. Generally courts do not interfere with the operation of Letter of Credit or Guarantee issued by banks. These are regarded as crucial instruments used by the business community and any interference might lead to the dilution of their effectiveness affecting smooth trade and commerce. However, temporary injunction may be granted by a court if a prima facie case of fraud or irretrievable damage is proved. LC or LG is a separate and distinct contract independent of the main contract of sale and purchase between the contracting parties. A bank is liable to honour the bills drawn under its LC if the documents strictly comply with the terms and conditions of the LC. Also, it has to exercise reasonable care to see that the documents are in order. This position is also clear from UCP (ICC). Breach of contract, disputes about quality, disputes about terms of contract etc are not sufficient reasons for a bank to refuse payment under LC. Courts will not grant injunction prohibiting payment in such cases. In the present case, as the documents were confirmed by the opening bank to be in order and no fraud has been alleged against the negotiating bank and the negotiating bank is in the position of a holder in due course, the opening bank is liable. The court will not grant any injunction in the present case.

Q2. An exporter customer shipped goods to Italy under LC established by a bank in Italy. As there were discrepancies, the branch sent it as a collection item outside the LC. By the time the documents reached the opening bank, the opening bank went into liquidation. The bill was not paid. The cost of re-import is very prohibitive and will be almost equal to the value of shipment. Discuss. A. The following risks are seen in the arrangements made by the exporter. - The LC is not confirmed by an Indian Bank or other intemational bank. If the LC had been confirmed he could have received payment from the confirming bank. - The documents did not conform to the LC; and hence were sent as a collection item. He ought to have ensured that the documents were strictly in order. - Often, as in this case, freight charges will be very heavy/prohibitive for re-importing into India. This risk/ cost has to be built into the pricing over a number of exports. It is presumed that the Italian bank is a well-established bank and the Indian bank which advised the credit would have entered into a correspondent relationship after due diligence. The exporter has to file his claim in Italy with the official liquidator of the bank as per procedure in this regard.

Devolvement of L/C bills: Ql. Rakesh & Co were enjoying, among other credit facilities, Bills Discounted limit of Rs. 5.00 crore and Inland L/C limit of Rs. 8.00 crore. They were engaged in manufacture of seamless iron pipes. The Company's track record in honouring the bills drawn under L/C was not good. They were facing cash-flow problems due to none too satisfactory performance and diversion of funds. Most of the LCs were on usance basis and favouring the suppliers of raw materials. The company sold their goods to a few buyers/distributors purported to be located in some major cities. Usance bills, ranging from 90 days to 120 days drawn on these firms and accepted by them were discounted by the branch. The company suddenly faced problems in meeting L/C commitments. They could not realize payments for the bills discounted by the Bank leading to huge irregularities in the account. • Since many of the bills drawn under L/C established by the banks had been discounted by the beneficiaries, pressure was exerted by the discounting banks threatening dire consequences if the bills are not paid on due dates. The bills were subsequently paid by creating irregularity in the account. On follow up of non-payment of bills it came to light that many of the parties on whom bills

3-26 Situational Analysis

were drawn were not existent. Now, the Bank is saddled with huge liability on account of these developments. Please list out the lapses in the follow up and conduct of account which led to the present situation. A. 1. It appears that the L/C limit sanctioned to the company is much higher and disproportionate to the fund-based limits enjoyed by the company making it difficult to meet the commitments under L/C within the cash credit arrangement. 2. Cash budgets do not appear to have been obtained by the branch at the time of opening of L/Cs and scrutinised to satisfy that the L/C bills when received would be met within the C / C limit. 3. Opinion reports ought to have been obtained from the bankers/CIBIL on the drawees / accep- tors to satisfy their worth and ability to meet the bills on due date. 4. When large / high value L / C transactions are involved and the conduct of the account has not been good, as stated, the account should have been monitored more closely on a bill to bill basis for safeguarding the Bank's position.

Cheques / NI Act : Ql. Mr. X having a large balance in his SB a/c has tendered a clearing cheque for Rs. 2,00,000/- for credit of his a/c. The cheque was presented in clearing but was returned with the reason "Insufficient funds" on 10.3.2004. The cheque along with the Return Memo was sent by courier to X. After 15 days X made a phone- call to the branch enquiring about the credit and he was told of the return. He stated that the Bank had neither credited the proceeds to his account nor returned the unpaid cheque. Duplicate return memo dated 28.3.2004 was obtained from the clearing bank and given to X. On 15.4.2004, X called at the branch and said that he could not take action against the drawer of the cheque as the instrument was not available. He also claimed that the Bank was responsible for the loss and that if his account is not credited with the proceeds immediately he would approach Ombudsman or Consumer Court and claim damages from the Bank. Discuss. A It is presumed that the 'returned cheque' was sent through an authorized courier. Probably, the courier did not deliver the letter to the customer; the courier should have been contacted immediately on 25.3.2004 to find out whether the cover was delivered to the addressee or not. The undelivered letter has also not been returned by the courier to the branch. As far as bank is concerned it has sent the cheque through courier as per the established practice and as such no fault can be attributed to the bank for the non-delivery of the letter. The following further aspects of the case need examination. i. Is the production of a dishonoured cheque essential to prove dishonour under S 138 of NI Act? ii. Is it the duty of the customer to mitigate the damage in a situation, even if a loss is caused by another party. The customer has to send a notice to the drawer of the cheque within 30 days from the date of return of the cheque demanding payment. If payment is not received, the cause of action would accrue from the date of expiry. He should file a case under Section 138 of NI Act within 30 days from date of the cause of action. As per 2002 NI Amendment Act, the Chief Metropolitan magistrate can take cognisance of the case even beyond this period if sufficient cause is shown for the delay. Hence, we shall advise the customer to seek legal help from an advocate to protect his interest. S 138 does not state that the dishonoured instrument must be produced as a proof for dishonour for want of funds. The Return Memo contains the details of the cheque and reason for its return. Strong circumstantial evidence must be produced to prove the dishonour in case the returned cheque is not available for any valid reason. These matters have now to be explained to the customer and every effort must be made to make it clear that the bank had not handled his matters in a casual/negligent

3-27 MM Special Guide i manner. It is important to ensure that no letter is given to the customer admitting mistake/negligence etc by the branch as it will be construed against the Bank. It is the duty of the customer to take steps to reduce the damage even in cases where bank's actions have resulted in a loss to him. Q2. Two Post-dated cheques were issued on 10.7.1992 by A favouring X for Rs.40, 000 each, the amounts representing refund of amounts due to X. The cheques were dated 10.12.1994 andl 0.4.1995. On 12.2.1993 A wrote to X that the two cheques were issued out of mistaken belief of liability and that as no amounts were due by him, the cheques must be treated as invalid. He also wrote to the Bank on 15.3.1993 to stop payment of the two post dated cheques issued by him. Both the cheques were presented for payment, and returned unpaid on 12.5.1995 with the endorsement " Present again". On 24.5.1995 X issued notice to A under S 138B of NI Act demanding payment of the amount of Rs 80000/-, being the cheque amounts. As no payment was made, X filed a complaint with the Metropolitan Magistrate on 7.7.95. Examine whether criminal liability under S 138 of NI Act is attracted or not. A. The question to be examined is whether stop payment of the cheque will take the case outside the ambit of S 138. All the conditions required under S138 have been fulfilled. These are a) The cheque should be issued for payment of a debt or discharge of a liability. b) The cheque must be returned for want of funds c) Notice demanding payment has been sent within 15 days (as stipulated before the 2002 NI Act amendments) to the drawer of the cheque. d) On non-payment, complaint under S138 must be filed within 1 month from the date of cause of action (this is also complied with). In a case with same facts, the Supreme Court has held that when a cheque is issued, it has to be presumed that it is issued in discharge of any debt or liability. This presumption is rebuttable by the drawer of the cheque. The object of the Act is to promote the efficacy of banking operations and to ensure credit-worthiness in business transactions through banks. Hence, a party should not be allowed to escape penal liability by countermanding a post dated cheque. Also, it would provide a handle to debtors to avoid payment which they undertake voluntarily. Hence, A is liable.

Agriculture: Qi. A farmer who owns 4 acres of garden land has raised paddy in three acres and sugarcane in one acre (scale of finance for paddy is Rs.10000/- per acre and for sugarcane Rs.20000/- per acre.)Sugar cane after harvest will be sent to a sugar mill which is 15 KM away from the farm. He also intends to purchase a power sprayer at a cost of Rs.9000/- in third year which he is capable of repaying within one year. He also maintains a 4 year old power tiller which is going out of order frequently because of wear and tear. He is also maintaining a broiler farm from his own funds with out availing any bank loan. However, he finds it difficult to meet the expenses on account of repairs to farm • machinery and cost of feed and veterinary care for the birds every now and then. He approaches • you for financial assistance from the bank. How will you help? A The farmer will be advised to avail a Kisan Credit Card (Revised)which will meet all his requirements as follows: The limit is valid for five years subject to annual review. i. Crop Loan Rs. 3x 10000 for paddy = 30000 lx 20000 for sugarcane = 20000

3-28 Situational Analysis

Total = 50000 (A) ii Post harvest expenses/consumption Loan { 10% of (A)} = 5000 (B)

Broiler farm maintainance and power tiller repairs etc =10000 —(C) {20% of (A)}

Total (A)+(B)+(C) i.e = 65000 (D) 1" year Max Drawing limit

{For every successive years (2'th, 3th, 41h and 5th year) the MDL (D) will be stepped up by 10% and the Cost of power sprayer will be added to the computed MDL for 3th year. (78700+9000)}

Hence, maximum drawing limit for the five years will be Rs65000/ Rs.71500/ Rs.87700/ Rs.86600/ Rs.95300. (rounded to nearest hundreds)

Max: Permissible limit will be 95300+9000 = 104300/- i.e. 5th year MDL + cost of sprayer) The limit is valid for 5 years subject to annual review. Q2. Mr.Govind, a marginal farmer (60 years old) having 1.5 acres of garden land is growing paddy, tapioca and cholam. In addition, he is maintaining a small dairy farm with 2 milch animals for the past three years. His village is well connected to a nearby semi-urban centre where there is an artificial insemination centre and a milk collection booth. He is regularly supplying milk to a private milk society. Encouraged by regular flow of income from dairy unit, Mr.Govind wants to expand and improve his Dairy business by availing financial help from your bank for purchase of quality milch animals, milking machine, chaff cutter and construction of a cattle shed. Discuss how you will proceed to help him. A Mr. Govind can be ideally financed under Dairy Plus Scheme which has the provisions to finance farmers (members of milk societies) for purchase of cross breed milch animals, construction of dairy shed and purchase of milking machine and chaff cutter.The features of the product are: Eligibility: Age not over 65 years; member of Amul Type or private milk society to which he is supplying milk. Max loan: Rs5.00 lac (ATL) Land holding: minimum 0.25 acre for every 5 mulch animals and for dairy units of

Collateral for loans upto Rs.1.00 lac — nil. Working capital Rs.2500/- year for feed/ veterinary expenses etc.. Repayable in 5 years. DSCR min 1.75 Q3. Mr. John has cultivated 4 acres of banana. About two months before harvest, the crop was badly hit by cyclone.Other farmers in the area also suffered heavy loss of crop due to this natural calamity. The yield was less than 30% of the average yield for the crop in this area.. The farmers in the area could not repay the crop loan availed for the season nor they could raise money for meeting cultivation expenses for the next crop. There was inordinate delay on the part of govemment in declaring ANNEWARI. Mr.John has also availed a power tiller loanranclgie_he could not repay tlisinstalrnents and interest which have fallen due. He approaches your bank for help. Discuss your course of action. . A In terms of extant instructions, borrowers need not wait for declaration of Annewari by Govem- ment for getting the reliefs from commercial bank in the event of crops affected by natural

3-29 MM Special Guide calamity.RBI has advised as under: Immediately on the occurrence of natural calamity, the Dist Collector will advise the LBO to convene a meeting of DCC in the district. The concerned departments will submit a report before DCC covering the full details/damage caused by natural calamity. If the DCC is satisfied that the crop loss is more than 50% of the average yield, it will issue a notification in the gazette/newspaper. Based on the notification, commercial banks can provide the following reliefs. i) conversion of crop loan into TL (repayment period ranges from 3 years to /5/ 7 /9 years as the case may be. ) is) sanction of fresh crop loan. iii) Restructuring of Term Loan. In the case of Mr.John, since he does not come under SF/MF category and the natural calamity has occurred in the first year, conversion will be for 3 years and the rate of interest will be same as for crop loan. Q4. After taking over as branch manager of a rural branch Mr. A visited the villages in the area of operation. In one such village, he convened an informal meeting of farmers wherein he observed that a group of 10 to 15 farmers residing in the village for the past two years with the voter ID cards and ration cards in their possession were cultivating paddy and ground nut on tenancy and share cropping basis. Since they do not have any land records in their name they did not approach the bank for any loan for meeting cultivation expenses or for any other purpose. To meet their urgent needs, they used to borrow money from affluent farmers at high rate of interest which was repayable immediately after harvest of crops. Periodical family contingent expenditure also proved to be an additional burden for them. In order to repay the loans immediately after harvest, they sold the crop at the prevailing market rate which normally would be low during the harvest season. Due to distress sale of crop, after payment of rent or share of crop due to the land lord and temporary loan with high rate of interest the farmers were left with very little surplus and faced financial crisis always. They sought the advice and help from the branch manager. How can he help them? A SBI Krishak Uthaan Yojana is an ideal solution for, the features of the product suit the requirements of these tenant farmers, share croppers and oral lessees. On the basis of the norms applicable for the product namely, proper address proof, affidavit from cultivator indicating the details of cultivation and terms of tenancy - verified with the land owner, crop loan computed on the basis of cropped area and scale of finance, consumption loan up to 20% of crop loan and another 20% to tide over adverse market conditions (to avoid distress sale) subject to a maximum limit of Rs.1.00 lac as Agri cash credit limit- valid for three years subject to annual review- the loans can be sanctioned. The fanners will be educated suitably in village meetings to make use of the benefits of the product to tide over their crisis. Q5. Mr.Gopinath, a progressive farmer raised turmeric in 2.00 acres and vegetables in 3.00 acres in his 5.00 acre wet/garden land farm. He also maintains an apiculture unit with 50 hives. A branch of SBI with a Development banking division with a high agriculture portfolio is located at a distance of 8 km, from where the borrower has availed a KCC limit of Rs.1.20 lac valid for 5 years subject to annual review. He was able to harvest 200 quintals of turmeric, a normal yield - thanks to good monsoon and normal climate. The cost of turmeric at the time of harvest was around Rs.5000/— a quintal and it gradually went up to Rs.9000/= over a period of 9 to 10 months. Even though he is able to get a good yield from turmeric crop, because of heavy inflow of turmeric into the market during the harvest season, the price crashed and the borrower in order to repay the KCC loan, sold the turmeric within two months of harvest at the rate of Rs.6000/— a quintal, notwithstanding the fact that government warehouses/cold storage facilities were available for storage of the produce.

3-30

Situational Analysis

In the past, the borrower used to avail Produce Marketing Loan in a couple of occasions. But frequent visits to the bank for completion of formalities such as review/renewal of crop loan, submission of application for PML, enhancement of security, extension of mortgage, fresh documentation for PML for every season etc. proved to be time consuming, cumbersome and inconve- nient. Therefore, the farmer has stopped availing PML and continued to sell the produce at a much lesser price. The fanner approaches you seeking your advice to address the recurrent problem. How will you help him? A Mr.Gopinath will be advised to avail financial assistance under Krishi Kalyan Yojana (FEEL) which will meet his needs. KKY is a combo product of Kisan Credit Card and Produce Marketing Loan. Both KCC and PML can be sanctioned in a single document and thus it obviates the need for frequent visits to the branch for completion of formalities associated with availment of KCC and PML and facilitates prompt delivery of credit. The KCC component of KKY in addition to crop loan contains a provision of 10% and 20% of production credit (crop loan) for post-harvest expenses (storage) and farm (apiculture) maintenance respectively which can be made use of in this case. For PML, value of the produce = market value or value at the time of harvest, whichever is lower. Loan for Produce Marketing= Value as computed above minus margin (30%),It varies with repayment period and place of storage. Maximum repayment period of 6 to 12 months can be allowed. Crop loan (KCC) can be repaid from PML proceeds on due dates and PML will be repaid from sale of turmeric stocks stored when the price becomes remunerative on or before due date. , , 1,k • qf,g-irifq Communication

PART - 4 COMMUNICATION

Business Communication

In modern organisations, communication plays a crucial role in conveying information to all the people in the organisation as well as in communicating with customers. Communication is vital for enabling the employees to understand the objective and aims of the organization as well as motivating them to evolve as a well- knit and cohesive team.

We spend a significant portion of our time in oral communication - with customers, colleagues, superiors and others. We talk to people face-to-face, over the telephone, etc. In oral communication our ideas are effectively conveyed by appropriate intonation, gestures, facial expressions etc. Also we can observe whether our message is being received by the other person as intended, and correct, amplify, or illustrate our mes- sages and ideas with examples.

One of the important areas of communication is 'Business Correspondence'. In the modem age, there has been a virtual revolution in communications - the telephone network, the intemet, email, satellite-based telecommunications, etc., that has virtually conquered time and distance. However, letters and other written communications in businesses continue to play a significant role in today's commercial affairs.

Business letters serve important functions. Some of these are: a) A permanent and tangible record is kept of the communications. b) Written correspondence serve as legal evidence in courts of law. c) In large organisations with different decision making levels, there is a need to record the context in which the decisions were taken, the facts on which the decisions were made, etc. The written documents may have to be kept as permanent record for audit and other control purposes.

As bankers, we would be writing letters to: - Customers; - Controlling Authority; - Other Officials in the Bank like AGM, DGM etc. - Other Banks / Institutions; - Government Departments.

The following aspects have to be borne in mind while writing letters:

1. Clarity: Letters should be written in simple and lucid language. The meaning should be direct and clear. Sentences should be generally short. It is preferable to avoid poly-syllabic words. Clarity is the soul of business letters. Remember that we are not present with the addressee of the letter to explain the meaning of the letter to him. 2. Speed: In modem days, time has become a very crucial and very scarce in business. Timely intimation of matters to the persons concerned will save avoidable correspondence. Further, decisions can be

4-1 MM Special Guide taken quickly at all levels. Reminders can also be avoided. These aspects are also true in respect of replies to letters received.

3. Secrecy: Needless to mention, bankers have to maintain utmost secrecy of the customer's affairs. Hence, proper care has to be taken to see that the letters are sent to the correct addresses so that they do not fall into wrong hands.

4. Courtesy: An official letter represents the institution. It is also an extension of the personality of the writer. Hence meticulous care is necessary to ensure that uniform and utmost courtesy is evident in our letters. Customers are offended by abrupt language, insufficient or inadequate information, lack of proper courtesy in the style adopted etc. In fact, on many occasions, an angry or dissatisfied customer can be won over by a proper and courteous reply.

5. Economy: Writing, printing out and sending a letter involves costs. Hence, most of the bank's letters are printed on standardized stationery. The printed forms have to be filled in correctly, neatly and legibly. The form should be fresh and neat. A soiled form or one with folds and creases has its own tale to tell about the bank's concern for efficient work, let alone the concern for the customer. A letter needs to be written only when it is necessary or desirable. The letter has to be comprehensive and at the same time concise.

Letters to the Controlling Authority: In addition to the above points, the following norms have also to be observed: a) All information / facts should be furnished at the first instance. Otherwise, it leads to costly and avoidable correspondence leading to delay and, on many occasions, dissatisfaction. b) The purpose of the letter should also be clear, i.e. whether it is to seek guidance on a particular matter or reporting for information/seeking confirmation or reporting for obtaining a decision. c) The letter should invariably contain reasoned recommendations so that the Controlling Authority is able to have a full understanding of the situation and issue his instructions/decisions.

.1'

Vf."' Communication

Q.1 Write a letter to your Controlling Authority about an attempt made at your branch by a miscreant to snatch currency notes from a customer and how it was foiled by the alert staff.

(Address in Regional Language) (Address in Hindi) State Bank of India Purasawakam Branch Chennai

The Regional Manager, State Bank of India, RBO-1 Chennai BR- 42 04.01.2015

Dear Sir,

UNSUCCESSFUL ATTEMPTAT SNATCHING CURRENCY NOTES FROM A CUSTOMER AT THE BRANCH BANKING HALL.

Further to the telecon the undersigned had with you yesterday in connection with the unsuccessful attempt made by a sneak-thief at the branch to snatch away currency notes from one of our customers, I have to advise as under: At 12 Noon yesterday, the branch was very busy handling cash and other transactions as the 1st and 2nd of the month were Bank holidays. The proprietor M/s. X and Co., one of our SME Units, encashed a cheque for Rs. 25,000/- for making salary payments to his employees. He collected small denomination notes from the paying cashier and started arranging the currency notes in his brief-case near the cash counter. Sud- denly, a stranger diverted his attention and snatched two sections of the currency notes, one each in the Rs. 50 and Rs. 10 denomination, and tried to run away. The alarm raised by the customer alerted the security guard on duty who tried to over-power the miscreant. In the melee that ensued, the miscreant threw away both the sections of the notes on the face of the security guard and made good his escape. Thereafter the customer counted his cash once again and confirmed to us that there was no loss/shortage in the cash. I have advised the security guard and other staff members to be more alert and keep an eye on any suspicious persons entering the banking hall. The police have also been informed about the incident and they are arranging to tighten security in the area where a number of banks are located. I recommend that Mr. Ramchand, the security guard, who grappled with the miscreant and saved the loss for the customer, be issued with a letter of commendation, which would go a long way in bolstering the morale of the staff at the branch.

Yours faithfully

Branch Manager (Name)

4-3 MM Special Guide Q. 2 Write a letter to the Controlling authority about a forged withdrawal in the account of a staff at your branch.

(Address in Regional Language) (Address in Hindi) State Bank of India Parishram Bhavan Branch Hyderabad

The Regional Manager, State Bank of India, R130-1 Hyderabad

Private & Confidential

BR-38 05.01.2015

Dear Sir,

FRAUD-SAVINGS BANK ACCOUNTS

I regret to advise that a fraud has been committed at the branch in the account of Sri. M.S.R.Anjaneyalu, Officer, JMG at the branch on 04.01.2013.

A forged withdrawal slip for Rs. 1000/- has been paid in the SB Account of Sri Deshpande. The payment was effected at the SWO counter when a senior clerk was working as a 'SW Operator'. Being the first working day of the month, there were very heavy withdrawals from the SWO counter. The number of withdrawals for the day was 500. The acting `SW Operator' who made the payment is not able to recollect the transaction. He is also not sure whether any passbook was presented at the time of encashment. I may add here that the passbook is with Sri Deshpande and the relative entry has not been entered in the pass- book.

A scrutiny of the withdrawal slip reveals that it is a crude attempt at forging the signature which should have aroused the suspicion of the SW Operator.

I have cautioned all the members of the staff to be on guard against such attempts in future. In the meantime I am making enquiries with the staff to find out the circumstances under which the fraud has taken place. I shall submit my detailed report to you shortly after thoroughly examining all issues which enabled this fraud to take place.

Yours faithfully,

Branch Manager. (Name)

Confused Mind will produce confused writing. Clear mind will produce clear writing.

4-4 Communication

Q.3 You are the Manager of a Divisionalised branch. The Manager (Branch Administration) reports the loss of the right hand drawer key of his hand-safe. Please report the matter to the Controlling Authority.

(Address in Regional Language) (Address in Hindi) State Bank of India Calangute Branch Goa

The Regional Manager State Bank of India, Regional Business office-11, Panaji.

BR —45 12.01.2015 Dear Sir,

STAFF: SUPERVISING

Sri Lancy Lobo, Manager (Branch Administration) has been given a Godrej hand-safe in which he keeps the strong-room door keys. The important documents/valuables at the branch such as branch documents, safe deposit articles etc. are kept in his sole custody in the strong-room. Also, blank forms of IOIs, letters of credit etc. are kept in the strong-room in the joint-custody of the Manager (Branch Administration) and the Manager (Cash).

The Manager (Branch Administration) has been keeping some miscellaneous documents in the right hand side drawer of his safe. The drawer has been infrequently opened by him as the items kept in the drawer are not required to be taken out daily. He has operated the drawer some 10 days ago. He has misplaced the key thereafter and could not trace it. He has made a complete and thorough search of the strong-room, hand-safe etc. but could not find the key anywhere. I forward a copy of the letter submitted by him in this connection.

As no routine work is held up on account of the loss of the key I have instructed him to make further search and locate the key. Further, I do not anticipate any misuse of the key as the receptacle is in his hand-safe.

It is regrettable that a manager of his cadre and seniority should have misplaced the key. He should know that under no circumstances he should lose any keys of the branch, more so an important key of the hand-safe receptacle. I have advised him to be more careful in future.

I shall write to you the developments promptly.

Yours faithfully,

Branch Manager. (Name) Encl:

4-5 MM Special Guide

Q.4 A cash shortage of Rs. 25,000/- was reported by a SWO at the end of the day. Plese report the matter to the Controlling Authority.

(Address in Regional Language) (Address in Hindi) State Bank of India Munirabad Camp Branch Munirabad

The Regional Manager State Bank of India, Regional Business office, Bellary.

BR —28 10.01.2015 Dear Sir,

CASH SHORTAGE OF Rs. 25,000/- I have to advise that Sri Gurusiddiah Matad, SWO, has reported a cash shortage of Rs. 25,000/- at the end of the day today.

Sri Gurusiddiah Matad has been working as as SWO for the past 6 years. There has been very heavy withdrawals during the day on account of the ensuing festival holidays and the disruption of work during the last week on account of the staff strike/agitation. A thorough search of the cash department counters and desks was made immediately to find out whether any cash has been inadvertently left out, but in vain. The denominational details as written at the back of the cheques were also verified and found correct. All cash receipts were verified to detect any instance of short receipt of cash. The cash in the strong-room was also checked by the joint custodians and found to tally with the balance shown in the vault register. All the entries in the Head Cashier's jotting book and the Kutcha books maintained by cashiers for recording mutual exchange of notes were also checked. No discrepancy was noticed.

As instructed by you yesterday over telephone when I reported the matter, the difference has been debited to Suspense A/c provisionally. I have called upon Sri Gurusiddiah Mated to make good the amount. He is greatly grieved over the loss and has requested me 3/4 days' time to make good the loss.

Sri Gurusiddiah Mead is a conscientious and careful employee. There has been no case of excess/ shortage of cash reported by him so far in his service of six years.

I shall advise you as soon as the amount is made good by him. I have advised Sri Gurusiddiah Matad to exercise utmost care in discharge of his duties in future.

Yours faithfully,

Branch Manager. (Name)

4-6 Communicationunication

PQ.5 You find that your branch is highly congested and hence the business growthComm has become 06 stagnant. Write a letter to your Controlling Authority about the difficulties faced by you as also your recommendations in this regard.

(Address in Regional Language) (Address in Hindi) State Bank of India Nippani Branch Nippani MIL The Regional Manager State Bank of India, Regional Business office, Belgaum.

BR-49 03.0L2015

Dear Sir,

MISCELLANEOUS-BRANCH PREMISES

The Branch was opened in 1980. In the last 33 years there has been a steady growth of business under the various segments. The Agricultural division was established at the branch in 1995 and the SIB division was established in 1997. The branch has also been able to achieve the budget in the last 3 years. The number of staff have also increased to 31 from 11 when the branch was opened.

While the premises was adequate at the time of opening of the branch, it has become highly congested now. A number of customers have to stand outside the premises till customers who are inside the banking hall complete the transactions and come out. This is a very embarrassing situation. Due to the acute congestion, additional cupboards could not be procured to keep the bank's books, registers etc. This has resulted in keeping these at the top of the existing cupboards, filing cabinets etc. In this situation, customer service has been affected. I have to add that the branch inspector (2014 Inspection) has also mentioned the acute space problem in page 88 of the Inspection Report. I have been on the look-out for a suitable premises very near the present premises so that our existing customers are not inconvenienced.

I have been able to locate one such building, which is only 200 metres away from the present building and is ideally located. It has a hall measuring 4000 sq. ft. The landlord is also agreeable to construct a strong room to our specification. A plan of the building is enclosed. The rent demanded, at Rs.33/- per sq. ft. is in tune with the market rate. The lease agreement in respect of the existing building expires in June 2016, and the new building will be ready for occupation by that time. I request you to depute the bank's engineer to inspect the premises. I shall advise you further in the matter soon after the visit of the Bank's engineer.

Yours faithfully,

Branch Manager. (Name)

4-7 MM Special Guide Q.6. Your customer has complained of high charges that are being levied by your branch. He has forwarded a copy of his complaint to the Head Office and also to the District Collector. Write a suitable reply to your customer.

(Address in Regional Language) (Address in Hindi) State Bank of India Dewas Branch Dewas

Sri Digvijay Singh No-12, West Street Dewas.

Misc.- 22 03.01.2015

Dear Sir,

COMPLAINTS - BANK CHARGES.

We are in receipt of your letter dated 1st January 2015. We thank you for your feed-back on the revised Bank Charges. As you may be aware, the Bank Charges were last revised a few years ago. Since the last revision the cost of stationery, communication, postal charges etc. have gone up from time to time. Also, due to various reasons the staff costs have also gone up. In the circumstances, the banks have been compelled to hike the charges. Please be assured that we are not over-charging our Customers. In this connection, we wish to add that our rates are very competitive compared to the rates of many other banks. We value your relationship with our bank and would request for your continued patronage.

Yours faithfully,

Branch Manager. (S.P.Chouhan) CC: The Regional Manager State Bank of India, Regional Business office, Indore : for information

NOTE: Generally, we do not send copies of letters addressed to customers to Government Departments and other public bodies unless there is a legal provision requiring us to do so. It is preferable to obtain the approval of the Controlling Authority also before sending reply to Govt Depts.

4-8 Communication

Q.7. A Term Deposit Receipt favouring A for Rs. 30,000/- is due for payment next month. A has nominated his adopted son B to receive the deposit in case of his death. You have received a notice from the advocate of one X claiming to be the brother of A. The notice advises you not to pay the amount to B as the deposit belongs to the joint Hindu Family of A. Please write a suitable letter to the advocate.

(Address in Regional Language) (Address in Hindi) State Bank of India Ballygunj Branch Kolkata

Sri, Janardhan Bandhyopadhyay Advocate Rasbihari Avenue, Lake Market Kolkata

Misc. — 60 10.01.2015

Dear Sir,

TERM DEPOPSIT FOR RS.30, 000/- STANDING IN THE NAME OF MR.A With reference to your letter dt. 8th January 2015 we have to advise as under.

We have been advised by Mr.B, the nominee of the captioned deposit that the depositor Mr.A has since died; Mr.B has claimed payment of the deposit on the due date.

As you know, under Section 45ZA of the Banking Regulation Act, the Bank has to make payment of the deposit to the nominee. The fixed deposit stands in the individual name of the depositor who had made a valid nomination under this Section. The claim made by your client that the deposit belongs to the joint family and not to the deceased in his individual capacity is a matter to be settled between him and the nominee. The Bank is not concerned with the said dispute. The bank is under an obligation to pay the amount to the nominee. Therefore, unless an order issued by a competent court restraining payment to Mr.B is served on us, we will pay the amount to Mr.B on the due date without any further reference to you.

Yours faithfully,

Chief Manager. (Shipra Haider)

4-9 MM Special Guide

Q.B. A valuable customer has written to you complaining that he has not been receiving reminders about the maturity date of the TDRs. Please write a suitable letter to him.

(Address in Regional Language) (Address in Hindi) State Bank of India Miramar Branch Panaji

Sri, M.A.D'Souza No.1, Ist Main Road Miramar Panaji.

Misc. — 38 25.02.2015

Dear Sir,

TERM DEPOSIT RECEIPTS.

We acknowledge receipt of your letter dated the 21st February 2015, and regret that we have not sent to you the reminders in respect of the maturity date of the TDRs.

In this connection, we would like to advise that as per our present practice, all deposits are renewed automatically on the date of maturity (in the absence of any instruction to the contrary) for the same period as the maturing deposit. Please let us know your instructions, if any, on the deposits so renewed.

We suggest that you may keep the TDRs in safe custody with us so that the receipts will be automatically renewed by us on the due dates. No service charge is to be paid by you for this service. We enclose a schedule of the current interest rates for your information. We have also pleasure in forwarding a brochure regarding a new deposit scheme called "Unfixed Deposit Scheme" launched by us very recently. Under the scheme partial withdrawal will be allowed without penalty.

Assuring you of our best services at all times and thanking you for your patronage

Yours faithfully,

Branch Manager. (Lobo Prabhu)

4-10 Communication

Q.9. You have taken over as Branch Manager of the branch at a Taluq H.Qs. Branch. Please write a letter to the Controlling Authority seeking permission for becoming a member of the local Lions Club.

(Address in Regional Language) (Address in Hindi) State Bank of India Namakkal Branch Namkkal.

The Regional Manager State Bank of India Regional Business Office Coimbatore.

AGM- 45 21.02.2015

Dear Sir,

MISCELLANEOUS - CLUB MEMBERSHIP.

I am happy to advise you that the branch has been surpassing the budgeted business regularly by a good margin in the last two years. The miscellaneous business has also shown a significant positive variance as the town has emerged as an important commercial and SME centre.

The town has a number of active service organisations, of which the Lions Club is very active. A number of businessmen, small industrialists, professionals and a few public sector executives are members of the Lions Club. Last year we conducted a free eye-check camp for school children in association with the club. It was a success and the Bank's image received a boost in the eyes of the local people. Many of our customers are active members of the club and they have been suggesting to me that as the Manager of the foremost Bank in the town I should become a member of the club.

The membership of the club will be helpful for establishing contacts with influential people in the town. It will be particularly helpful in getting additional business. Also, we can easily spot out opportunities to extend our services under 'Community Services Banking' in association with the club.

The one time admission fee is Rs. 15000/- and the annual membership fee is Rs. 3000/- I consider that the benefits of the membership of the club will be significant to the branch. Hence, I request you to kindly accord your permission to become a member of the club.

Yours faithfully,

Branch Manager. (Name: xx)

4-11

4-,.-- MM Special Guide

Q10. Report to the controlling authority about the stock shortage observed by you while inspecting a small (Manufacturing) enterprise financed by the branch.

(Address in Regional Language) (Address in Hindi) State Bank of India Thiruvattiyur Branch Chennai

The Regional Manager State Bank of India Regional Business Office -III South Beach Road Chennai - 600001

Br/Advances — 49 18.02.2015 Dear Sir,

ADVANCES TO SME SEGMENT-M/S.MURUGAN INDUSTRIES.

The above small (manufacturing) enterprise has been financed by us since 2001 under the liberalized scheme of finance to small scale industries. The position of the accounts of the enterprise as on date based on the stock statement dated 31.01.2015 is given below.

Nature of Limit Advance Drawing Outstandings facility value Power Rs. Rs. Rs. Rs.

M.T.L A/c. 3,50,000 3,40,000 3,40,000 3,40,000 Cash credit A/c : 4,00,000 3,00,000 3,00,000 * 3,00,000

* As per stock statement Rs3, 00, 000. As on inspection date (15.02.2015) Rs.1, 60,000. The unit's operating account has been irregular since Nov 2014. I have been reporting the irregularities from time to time. On 15th Feb, when I inspected the unit a detailed verification of the stock was carried out by me with the assistance of the field officer. The value of the stock is around Rs. 2,00,000/- only and with 20% margin the drawing power works out to Rs. 1,60,000/-. Thus, clean irregularity in the account has gone up to Rs.1, 40,000/-. The unit is not able to explain the sudden depletion of the stocks. The unit has been inspected by the field officers and the SIB Manager periodically as laid down. The stocks were found to be in order during the inspection in the month of Jan 2015 and earlier. I have called for a detailed explanation from the unit regarding the depletion of the stock and I shall write to you in detail shortly. I am also exploring the feasibility of obtaining additional collateral securities to strengthen the advance. I shall keep you advised of developments.

Yours faithfully,

Branch Manager. (Name)

4-12 Communication

Q.11. Write a letter to the controlling authority regarding the misbehaviour of a member of the 401 staff with a customer. IIIt. (Address in Regional Language) (Address in Hindi) State Bank of India IDCO Towers Branch Bhubaneshwar ,Orissa.

The Regional Manager State Bank of India Regional Business Office 1111 Bhubaneshwar.

(Private & Confidential)

Br — 48 08.02.2015

Dear Sir,

STAFF:AWARD

I have to advise that Sri Kalicharan Mahapatra, SWO at this branch, has been misbehaving with other staff and customers in the recent past. Repeated advice to him to behave properly at the branch have not borne the desired result. This morning when a customer approached Sri Kalicharan Mahapatra with a request to help him to write out a draft application form, Sri Kalicharan Mahapatra not only refused to do so but also shouted at the customer not to disturb him while he was working. He also shouted why illiterates should trouble him. The customer got angry and complained to me about the misbehaviour of the SWO. I enclose a copy of the complaint submitted by the cusomer in this regard. In view of the intemperate behaviour of the employee in spite of previous warnings and advice, I recommend that disciplinary action be taken against the employee.

Yours faithfully,

Branch Manager (Name)

4-13 MM Special Guide

Q.12. A new industry is coming up in your locality. Write a letter to the Chief Executive of the company narrating various Banking activities/packages your branch can offer in the light of the present day high-tech banking and the prevailing keen competition.

(Address in Regional Language) (Address in Hindi) State Bank of India Peenya Industrial Esate Branch Bangalore

The Managing Director Disha Polytech, Peenya Industrial Esatate, Peenya.

Misc.No.105 10th Feb-2015

Dear Sir,

BANKING FACILITIES.

It is a pleasure meeting you and learning that you are setting up the project for the manufacture of high-precision components which will be supplied to the MNCs operating in India. We also gather that you would be exporting about 30% of your production in 2-3 years' time. In continuation of our personal discussions, we would like to offer your company the various services available with us. a) SBI Capital Markets: SBI Caps, our subsidiary will be able to provide you the complete range of Capital Market Services — new issue management, syndication of loans, obtention of clearances for the new issues and services for accessing international capital markets, corporate advisory services, assistance for technical or financial collaboration and joint ventures, etc. b) Being the biggest bank in India with international presence and commanding about 25% of the resources of the banking system, we would provide you the entire fund based needs of your company and also non-fund based requirements. This includes issue of Deferred Payment Guarantees. Our approach is customer friendly and situation specific. We would be happy to examine your requirements and offer you the appropriate • credit facilities that would take care of your inland and export business. c) Our collection/remittance services are very fast. We have introduced Electronic Funds Transfer in the metropolitan centres. Our SBI FAST, an instant funds transfer facility which transfers high volumes at very low cost has proved to be extremely popular with our clientele. This service is available through a network of more than 1600 authorised branches across the length and breadth of the country by means of technology driven platform. It also provides instant MIS to companies. d) We have a Project Uptech cell at our Local Head Office which can organize Technical Consultancy Services for your unit. We can also offer suitable packages for extending financial support for purchase of machinery, equipment, etc.

-. • 444 ."'7-101r

Communication

' e) We have the largest network in the country with about more than 16000 branches. We would be able to extend electronic remittances facility to any of these branches spread all over the country. 0 Our Bank has Core Banking Solution which will enable to operate your account with all oP: . s.4<, our branches with its facility you will be able to manage your cash flow better. Aa g) We have 191 offices across 36 countries and have a network of 346 correspondent banks abroad. Lately, with a view to providing an efficient system for realizing the proceeds of clean and documentary collections drawn on overseas centres, our bank's International Division has begun a specialized service, viz the Global Link Services. As you know, SBI is the leading bank in forex transactions and international trade in the country. h) We have SBI Global Factors Ltd (SBI GFL), which has the largest share of factoring services in the country, whose services may be availed by you. This would reduce the burden of receivables management and enable the corporates to focus on the other core areas. i) We also offer a wide range of products suited for your employees such as housing loans, car loans, personal loans etc., besides a number of deposit products. We also have a scheme of corporate salary package accounts and if you opt for a payroll arrangement for all your employees, we may explore the feasibility of installing an ATM at your office/facility. We shall be glad to meet you this week for personal discussions with your executives for opening a current account with us and providing the various facilities required by you. Looking forward to meeting you once again and having your company as one of our Corporate Clients.

Yours faithfully,

Branch Manager. kit I (Name: xx) MM Special Guide

Q.13. Write a DO letter to your Controller about the proposed visit of the CGM to nearby branches and request him to include your branch also in his programme.

(Address in Regional Language) (Address in Hindi) M.K.Pujar, Branch Manager, State Bank of India, Badami Branch, Bagalkot Dist.

DO Letter No — 15 25.02.2013

Dear Sri. Vishwanath

CHIEF GENERAL MANAGER'S VISIT.

During my visit to Bagalkot Branch, I gathered that the Chief General Manager of our Circle would be visiting them on the 23rd March 2013. 2. Our branch has been rated as efficiently run in the recently conducted inspection. This has to be basically attributed to the commitment coupled with high level of efficiency exhibited by the Branch Staff. The housekeeping is up to date and the profit has increased two-fold. It would be relevant to indicate that recovery of loans in all segments has been above 90%. 3. We are organizing a blood donation camp and a spot-painting contest for the local school children as part of the bank's community services activities. We also propose to conduct a customer relation programme during the month. I would deem it a great privilege if we could have the august presence of the head of our circle to inaugurate and participate in all the above schemes and programmes as it would offer lot of encouragement and motivation to our staff members. I request that the CGM's visit to the branch particularly at this juncture would act as a recognition of the commitment and team-spirit of the staff as well as serve as a morale— booster for further achievements. A few of our top customers are also eager to meet our CGM. 4. As you know our branch is situated 30 kms from the above branch. Also, this is a place of tourist importance where the famous Badami Caves and Banashankari Temple are located. Pattadakal and Aihole the famous temple complex is around 20 km from this branch. 5. I request you to kindly arrange for the inclusion of our branch in the itinerary of the CGM. I confirm the telephonic talk I had with you in this regard.

With regards, Yours sincerely,

M.K.Pujar

Sri.C.Vishwanath Regional Manager-V State Bank of India Regional Business Office Zonal Office, Hubli.

446 Communication

Q.14. A customer is in the habit of issuing cheques without maintaining sufficient balance in the account. Write a letter to him to desist from this practice.

(Address in Regional language) (Address in Hindi) State Bank of India MIDC Industrial Area Branch Andheri, Mumbai,

Shri. R.D.Patil 22, Sakinaka Road, Andheri (East), Mumbai.

Misc/145 2nd January 2013 Dear Sir,

Your Current A/C No. 10427725437.

We refer to our letters Misc./112 dated 2nd Nov 2012 and Misc./129 dated 5th December 2012 wherein we have pointed out that cheques have been issued without sufficient funds in your account. We regret to observe that cheques on the accounts are still being issued without sufficient balance in the account. We have today returned a cheque No. 231865 dated 1st January 2013 for Rs. 8200 favouring Shri. Kumar Kerkar with the remark "Insufficient Funds". Balance in your account is Rs. 820 as on date.

2. A charge of Rs. 75/ will be debited to your account for every cheque returned unpaid. You may also please note that issuing cheques without sufficient balance is an offence under Sec. 138 of the Negotiable Instruments Act.

3. Kindly ensure that sufficient balance is always maintained in the account while issuing cheques, failing which we shall be constrained to close your account. If the unsatisfactory conduct of the account persists, the cheque book facility will be withdrawn and we may also stop accepting deposits in your account.

4. Please ensure satisfactory conduct of the account.

5. Assuring you of our best of services at all times.

Yours faithfully

Branch Manager. (S.D.Deshmukh)

417 MM Special Guide

Q.15. A customer had complained regarding fraudulent withdrawals from his account through ATM and on enquiry it is found out that the driver of his car has misused the ATM card. Write a letter to the controller in this regard.

(Address in Regional Language) (Address in Hindi) State Bank of India Banaswadi Branch Bangalore

The Regional Manager, State Bank of India, Region III, Regional Business Office, Bull Temple Road, Basavanagudi, Bangalore - 560 004

Br/ 32 22.11.2012 Dear Sir,

ATM Operations: Fraudulent Withdrawal in ATM.

I have received a complaint yesterday from a valued customer Mr. Anil Madhay. Mr.Anil went abroad on 10th November 2012 and returned from Singapore only on 16th November 2012. He attempted to draw Rs.15, 000 at our New Town branch ATM on 17th November and obtained a mini statement. He found 5 transactions of Rs.40, 000/- each during the period between 10th November and 16th November and his account bearing number 30251539189 has debited with Rs.2 lakhs. Since he was not in India and the ATM card and PIN are required for transacting in ATM, he demanded that the Bank make good the amount. As the withdrawals were made in our ATM and we have the video footage, with the help of our ATM Channel Manager, we displayed the image of the person who was drawing the money on 5 different occasions through this card. Mr. Anil accepted that he used to leave the card in the car dashboard and used to give the PIN to the driver for making withdrawals on earlier occasions. The driver utilized the opportunity to withdraw from their account when Anil was away. He also said that the driver has left the job two days back and his whereabouts are not known. I suggested to him to file a police complaint. I have impressed upon him that the ATM card should be kept secure at all times and that the PIN is the numeric password for use at the ATM and that the PIN number should not be written on the card, or informed to any one, as, in such cases the card can be misused if card is lost/ stolen.

I shall keep you advised of developments

Yours faithfully,

Branch Manager. (Name)

4-18 Communication

Q.16. A customer who has withdrawn cash through bank's ATM has come to the Branch Manager and informed him that he has received excess cash in the ATM. On investigation it was found that the cash was loaded wrongly in the bins. Please advise the controller.

(Address in Regional Language) (Address in Hindi) State Bank of India Chinnakada, Kollam-Dist, Kerala.

The Regional Manager, State Bank of India, Regional Business Office, Kollam

Br/ATM Complaints/43 01.12.2012

Dear Sir,

ATM Operations: Wrong loading in ATM BINs.

The Assistant Director of Agriculture (Administration), Kollam, Mr. Shankaran, has a joint Savings account (No: 11418369790) with his wife Mrs.Mala Shankaran at the Branch.

On 21st November 2012, he called on us and informed that he withdrew only Rs.2000/- but to his surprise our branch ATM has disbursed Rs.2, 800/-. He refunded Rs.800/- and we acknowledged receipt of the amount. Immediately I called ATM joint custodians and advised them to verify the ATM cash balance and submit a detailed report on the incident. The Joint custodians informed me that they have replenished cash and verified the cash balance. I accompanied them to the ATM to ascertain the details personally.

During my investigation I observed that the ATM joint custodians have deposited Rs.500 in the bin meant for Rs.100 and similarly Rs.100 in the bin meant for Rs.500. In the instant case instead of disbursing Rs. 100 x 5 pieces and Rs.500 x 3 pieces, due to the interchange, ATM disbursed Rs.500 x 5 pieces and Rs.100 x 3 pieces resulting in excess payment.

We have taken out details of all the transactions during the period (i.e. from the time of replenishment till verification by the undersigned). We have since contacted the persons and recovered the full amount. Excess payments aggregating Rs.41, 300/- have occurred during this one hour period. I have advised the joint custodians to be very careful in future.

Submitted for information, please

Yours faithfully,

Branch Manager. (Name)

4-19 MM Special Guide Q.17. There had been an attempted dacoity at the bank which was thwarted by the presence of mind of two staff members. Please report the matter to the Controlling Authority.

(Address in Regional Language) (Address in Hindi) State Bank Of India Mookandapalli I.E. Hosur.

The Regional Manager State Bank of India, Regional Business Office, Dharmapuri. Br-43 23rd January 2013 Dear Sir, Attempted dacoity at the branch. With further reference to the telephone conversation I had with you today, I have to advise that a dacoity was attempted at the Branch today. The details are given below: 2. At about 11.30 am today, a young man of fair complexion covering his head and forehead with a monkey cap entered the banking hall and went to the Single Window and demanded thaCall the money be put in the bag brought by him. The Single Window was managed by the Senior Asst. Ms. Malarkodi Thangavel. Though alarmed by the demand, Ms. Malarkodi Thangavel displayed an exemplary presence of mind. While dropping only the small denomination notes and coins into the bag she pressed the foot switch of the safety alarm. Once the hooter was on, the Bank's security guard Shri. Pannerselvan closed the entrance. With the alarm hooter making sound, the culprit panicked and tried to run away with the bag. Shri Pannerselvan overpowered and caught the culprit. The entire amount was immediately recovered. There was no monetary loss to the Bank. In the process the dacoit had attacked Shri Pannerselvan with a dagger. However, Shri. Pannerselvan had received only minor injuries and was treated as an out-patient at the local Government Hospital. The local police arrived immediately and the culprit was handed over to the police. We have lodged a police complaint in this regard. The police have taken up the case for investigation. The police have taken possession of the relevant CCTV clippings for their investigation. Later in the evening the Supt. of Police from Krishnagiri also visited the branch and assured to provide armed police to the branch for a few days. A staff meeting was convened in the evening, wherein Ms. Malarkodi Thangavel and Shri. Pannerselvan were felicitated for their presence of mind. I also advised all the staff members to exercise due care and be vigilant about the movement of people during banking hours. Though the staff were initially shocked, they are now confident and have overcome their fear. The presence of mind, alertness, and sense of duty of Ms. Malarkodi Thangavel and Shri. Pannerselvan prevented a major incident and saved monetary loss to the Bank. It also enabled us to catch the culprit and hand him over to the police. I request you to issue an appreciation letter and alertness award to both of them.

Yours faithfully,

Branch Manager (Name)

4-20 Communication

Q. 18.A customer is in the habit of issuing cheques without maintaining sufficient balance in the account. The Bank had earlier written to the customer regarding this and warned him to desist from this practice. In spite of this the customer has once again issued a cheque without balance and this is the 4th such incident in the year. Write a letter to him to close the account.

(Address in Regional language) (Address in Hindi) State Bank of India MIDC Industrial Area Branch Andheri, Mumbai,

Shri. R.D.Patil 22, Sakinaka Road, Andheri (East), Mumbai.

Misc. 156 20th January 2013 Dear Sir,

Your Current A/C No. 10427725437.

We refer to our letters Misc. /112 dated 2nd Nov 2012, Misc./129 dated 5th December2012 and Misc./145 dated 2nd Jan 2013, wherein we have pointed out that cheques have been issued without sufficient funds in your account. We regret to observe that still cheques are being issued without sufficient balance in the account. We have today returned a cheque No. 231867 dated 18th January 2013 for Rs. 9500 favouring Shri. Shirish Mane with the remark "Insufficient Funds". The balance in your account is Rs. 540 as on date. 2. A charge of Rs. 75/ will be debited to your account for every cheque returned unpaid. You may also please note that issuing cheques without sufficient balance is an offence under Sec.138 of Negotiable Instruments Act. 3. We had requested you vide our letter no Misc. /145 dated 2nd Jan 2013 to ensure that sufficient balance is always maintained in the account while issuing cheques. We have also advised that we shall be constrained to close your account if the unsatisfactory conduct of the account persists and that we may stop accepting deposits in your account. Unfortunately, this appears to have had no impact on the conduct of the account and for the fourth time during this financial year a cheque has been returned unpaid in your account. 4. Accordingly, we request you to close your above account with us within the next 30 days, failing which we shall be constrained to close your account. 5. Assuring you of our best of services at all times.

Yours faithfully,

Branch Manager. (S.D. Deshmukh.)

4-21 MM Special Guide

Q.19. You are the Chief Manager at a branch in a city. Wtite a letter to controller requesting for installation of a cash deposit machine at the branch.

(Address in Regional Language) (Address in Hindi) State Bank of India, Koti Branch, Hyderabad.

The Regional Manager, State Bank of India, Regional Business Office, Region I, Hyderabad,

Br/125 10th Jan 2013

Dear Sir,

Request for installation of a Cash Deposit Machine (CDM) at the Branch.

The branch is situated at the heart of the commercial hub of the city with a large cluster of SME clientele. It also has a substantial P Segment clientele. The business of the branch has been steadily increasing and as on 31st December 2012 the business base of the branch (in Rs. Cr) is as under:

Segment Deposits Advances P Segment 125.45 165.36 SME segment 35.46 114.54 Others 45.32 5.64

2. The total staff strength is 28 of which 7 are of supervisory cadre, including the Chief Manager and one RM (PB). There are 14 clerical staff comprising One Senior Special Assistant, two Special Assistants, Five Senior Assistants and Six Assistants. Of the remaining staff, two are security guards, one is a record keeper and four are subordinate staff 3. The number of cash transactions has been steadily increasing. SME customers are depositing in their accounts cash deposits in small denomination notes. This has resulted in overcrowding of the branch, which is inconveniencing High Net-worth Individuals (HNIs). If we are able to reduce the footfall at the branch for the deposit of small amounts, sizeable office space can be released for attracting high value business. We will be able to attract more HNI/Affluent customers. 4. If a CDM is installed at the branch, it will take care of small deposits by SME customers. The speedy disposal will attract more SME customers 5. I recommend for installation of a CDM at the branch for which we have identified a suitable space in the branch. As the overcrowding at the branch is mainly on account of SME clientele and the average deposit by them is less than Rs. 50,000 per day, it will ease the burden on the branch and we will be able to attract HNI customers. 6. I shall be glad to have your early approval for the same.

Yours faithfully,

Chief Manager. (Name)

4-22 Communication

I. There had been an attempt at the branch to encash a forged cheque. Write a letter to the controller regarding this.

ddress in Regional language) (Address in Hindi) State Bank of India ADB Bagli, Dewas.

Regional Manager Bank of India, ional Business Office, Region I, ore. Br-49 23rd January 2015

r Sir,

:napt to encash a forged cheque. ye to advise that an attempt was made at the Branch today to encash a forged cheque.

At about 11.30 am today, a bearer of a cheque for Rs.30, 000/- drawn on S.B Account Number 10116562195 of Shri. Kapil Dev tendered at the Single Window Counter No-1 which was being manned by Shri. Ajit Singh. During the usual scrutiny Shri. Ajit Singh noticed that there was some slight difference in the drawer's signature. The person who tendered the cheque was not a known face at the Branch and was showing signs of anxiety. He was in a hurry and wanted cash to be paid to him immediately. Putting him at ease, Shri. Ajit Singh contacted me. Shri. Kapil Dev was immediately contacted who informed that he had not issued the cheque and that two cheque leaves from his cheque book were missing. Further scrutiny of the cheque clearly indicated that the signature was forged. Meantime, the person who tendered the cheque had left the branch. We have lodged a police complaint in this regard. The police have taken up the case for investigation and taken possession of the cheque. A photo copy of the cheque is kept in my custody. The police have also taken over the relevant CCTV images. A staff meeting was convened in the evening, when Shri. Ajit Singh was felicitated for his presence of mind. I also advised all the staff members to exercise due care while putting through transactions.

The account holder, Shri. Kapil Dev, has been advised to take sufficient care of the cheque book to avoid misuse by unscrupulous persons.

I recommend that a letter of appreciation be sent to Shri. Ajit Singh whose diligence and alertness prevented the encashment of the forged cheque.

Yours faithfully,

Branch Manager. (Name)

4-23 MM Special Guide Q.21. A customer has failed to pay locker rental and there is no response in spite of several reminders. The SB account does not have adequate balance. Write a letter to controller seeking his permission to break open the locker.

(Address in Regional Language) (Address in Hindi) State Bank of India PB No. 1, Beach Road, Alappuzha - 688012

The Regional Manager State Bank of India, Regional Business Office, Alappuzha. Br/32 23rd Oct 2015

Dear Sir

Misc. Business: Shri. Kunihi Raman Nair. Request for Permission to Break Open the Locker.

Shri. Kunihi Raman Nair was allotted a large Safe Deposit Locker in 2004. The Annual locker rent was being paid/recovered on due date up to 2nd April 2013. However, it was observed that on the 2nd April 2014, there was insufficient balance in the Savings Bank Account of Shri. Kunihi Raman Nair and hence we could not recover the rental for the Year 2014-15. Therefore, the branch sent a reminder on the 2nd April 2015 to him for payment of locker rent. As there was no response to this reminder, following communications have been sent to Shri. Kunihi Raman Nair: i) A reminder on the 3rd July 2015; ii) Notice on COS 405 on 4th October 2015.

2. Subject to your approval, it is proposed to break open the locker after giving due notice to Shri. Nair as there is still no response from him. In this regard we propose to constitute a 5 member committee to be present during the breaking open of the locker as per standard procedure. 3. I shall set in motion necessary arrangements for breaking open the locker after receiving your ap- prOval. 4. Please approve.

Yours faithfully,

Branch Manager. (Name)

4-24 Communication

Q.22. A customer has complained regarding non-dispensation of cash in the ATM. On enquiry the branch has found that there was excess cash in the ATM. The branch has paid the money to the ATM card holder. Write a letter to the controller regarding this.

(Address in Regional Language) (Address in Hindi) State Bank of India RT Nagar Branch, Bangalore

The Regional Manager, State Bank of India, Region III, Regional Business Office, Bull Temple Road, Basavanagudi, Bangalore 560 004. Br/48 22.10.2015 Dear Sir,

Customer Complaint: Mr. Pradeep Kumar. Non-dispensation of Cash in ATM.

Mr. Pradeep Kumar (of R.T.Nagar, pursuing MBA) has a joint account with his father Mr. K. Murthy at our branch. Mr.Kumar and his father Mr.Murthy called at our branch on 21st Oct 2015, for taking a draft and informed us of the foloowing incident. 2. On 16th Oct at 5.00 p.m. Mr.Kumar went to our ATM situated in Dinnur Road. It appears there was no electric power and the ATM was running on backup power. He attempted to draw Rs.15, 000 but while the transaction was in process, the ATM screen shut down suddenly. On the next day he went to our Sultanpalya branch to give a complaint but the staff told him that the ATM is maintained by New Town branch. He went to our New Town branch and they directed him to complain at our Currency Admin- istration Cell (CAC), Hebbal, which controls off-site ATMs. Sri Kumar has made a complaint with them and is awaiting reply from the CAC. 3. I have informed the customer that the dispute has to be settled by the branch that has issued the ATM card. I requested him to produce the ATM slip for verification. I found the ATM slip was showing error code 72. As per instructions contained in SF 19 of 2006, I have obtained a letter of undertaking from him and disbursed the amount of Rs.15, 000/- by debit to Branch Suspense Account. I have also confirmed with our Chief Manager CAC Hebbal and found that they have an outstanding credit in their Sundry Deposits A/c on 16.10.2015 on account of excess cash found in Dinnur Road ATM. The "nonpayment of cash but account debited" has also been confirmed through our intranet SBITimes ABOSS, ATM Log and Branch Log. 4. The customer is delighted with the prompt service of the branch and regretted that he has failed to approach us earlier. Mr. Kumar's father, Shri. Murthy promised a deposit, from the sale proceeds of his flat in RT Nagar, Bangalore as a token of appreciation of our good customer service. We will be following up the same.

Submitted for information.

Yours faithfully, Branch Manager. (Name)

4-25 MM Special Guide

Q.23. Write a letter to a customer whose account has been transferred from a branch in New Delhi to your branch. The transfer has been delayed and the customer has written to you complaining about this earlier.

(Address in Regional Language) (Address in Hindi) State Bank of India Banashankari II Stage Branch, Bangalore

Shri. K.Kumaraswamy 28, Ist Main Road, Banashankari II stage, Bangalore.

Mis /49 10th January 2015

Dear Sir,

Transfer of Your SB Account No. 11900924620.

We refer to your letter dated 31st December 2014 and as advised by us over the phone, we have today opened the above account in our books. We regret the delay in the opening of the account. We have now changed the home branch code but your account number will continue to be the same.

2. Kindly call on us with a copy of your latest address proof (any of the following) with the same address as your present address: Telephone Bill, Rental Lease Deed, Voter ID, Aadhaar card, Passport or Driving license) so as to enable us to complete the formalities.

3. We enclose the pass-book. Please acknowledge receipt of the same.

4. Assuring you of our best services at all times.

Yours faithfully, Communication

Q.24. Write a letter to the controller regarding the steps taken by the bank for popularising the alternate channels at the branch.

(Address in Regional Language) (Address in Hindi) State Bank of India, Udyam Nagar Industrial Estate, Kolhapur.

The Regional Manager State Bank of India, Regional Business Office, Kolhapur Br. /21 23rd January 2015

Dear Sir,

STEPS TAKEN TO ACHIEVE GREATER USAGE OF ALTERNATE DELIVERY CHANNELS BY THE CUSTOMERS OF THE BRANCH.

I am in receipt of your letter No.Br-14 dt. 15-01-2015 and noted the contents. As per your suggestion, I have initiated the following steps to achieve greater usage of alternate delivery channels by the Branch customers: a) A Staff meeting was called wherein a faculty member from the local learning centre briefed the staff members in detail about the various alternate channels of delivery, the benefits to the customers using them, and also on the frequently asked questions by the customers, with a view to enable the staff to answer any customer query in this regard. b) Three small groups of two members of the staff each was formed to increase the customer awareness about our Alternate Banking channels. One group will focus on customers who are using Bank's alternate channels, but intermittently. The members of this group will call on such customers and encourage them to use ATM Cards, Debit Cards, ECS, Payment of Utility Bills, Internet Banking, Mobile Banking etc. This group will focus on making customers use all the channels relevant to them. For instance, they will motivate customers who are using Internet Banking to use Mobile Banking. This strategy has started- ielding good results. The other two groups will focus on customers not yet using any of the alternate channels and encourage them to migrate to alternate channels. c) The benefits of alternate channels and the method of using them are explained in detail to the new customers at the time of opening accounts. d) The Grahak Mitra is helping the customers in familiarizing themselves with alternate channels of delivery. The response, so far, has been encouraging. All the staff at the branch are striving hard to achieve further progress.

Yours faithfully,

Branch Manager. (Name)

4-27 MM Special Guide

Q.25. Write a letter to the controller seeking approval for refurbishing of the banking hall

(Address in Regional Language) (Address in Hindi) State Bank of India, Tonk Road, Jaipur. The Regional Manager, State Bank of India, Regional Business Office, Region I Jaipur

Br /88 10th Jan 2015 Dear Sir,

Branch Ambience: Refurbishing of Banking Hail.

I invite your kind reference to the recent RFIA report dated 25th November 2015. I am happy that the branch has been able to retain its "A" rating. However the Inspecting official has adversely commented on the premises. The Inspecting official's observation is not totally out of place as our branch is rated Silver under Branch Ambience Policy.

2. The branch premises was last done up in 2005 when we introduced Single Window concept. As our branch was a pilot branch and Single window was to be launched in a time bound manner, the premises was done up urgently at that time without making any major changes. The branch is situated at the heart of the commercial hub of the city with a large cluster of SME & P Segment customers. The business of the branch is steadily increasing and as on 31" December 2014 the business base of the branch is as under: (In Rs. Cr) Segment Deposits Advances P Segment 125.45 165.36 SME segment 35.46 114.54 Others 45.32 5.64

3. With the increase in business and customer base and large concentration of HNIs in the area, the branch ambience needs improvement. I, therefore, request you to kindly accord "in principle" approval for the refurbishing of the Branch Banking Hall with Centralised A/C. The Bank's Engineer may kindly be deputed to make the estimate so as to enable us to put up the proposal for sanction. 4. I shall be glad to have your early advices in the matter.

Yours faithfully,

Chief Manager. (Name)

4-28 Communication

IMPORTANT

Uniform stationery letter heads have been introduced at all branches/offices to enhance the Brand Equity of the Bank. Letter Heads are now trilingual; in Hindi speaking areas: bilingual (Feb'07)

A model letter will have the undemoted format:

Branch Branch State Bank of India Address in Regional Address in Hindi Address in English Language

The Assistant General Manager Region I State Bank of India Bangalore

BR/34 11.03.2015

Dear Sir,

ADVANCES TO SMEs MIS V. K. TIMBER WORKS

I shall be glad to have your approval for calling up the advance.

Yours faithfully,

Branch Manager. (Name)

4-29 MM Special Guide 26. Given below is the gist of the meeting held in respect of an NPA account M/s. Precision Engineering Ltd with its MD by the DGM (B&O), the Regional Manager and the Chief Man- ager of the branch. You are working as Manger (CREDIT & NPA). Please prepare the minutes of the meeting for Bank's record and to be sent to the MD of the company. "The meeting was conducted by a committee of DGM (B & 0), Regional Manager, and CM of the branch. The MD of the company argued that his company was not performing because of the economic slowdown prevailing in the market and he added that the debtors of the company were not repaying the dues and therefore the company was facing financial crunch. Further the MD requested not to take any action against the company and requested for 6 months' time to regularize the account, by recovering the dues from its debtors. But it was pointed out to the MD that the inspection of the unit conducted by the RM and CM of the branch revealed that the irregularity in the account was due to diversion of funds and not on account of the market conditions as stated by the MD. Hence DGM and RM insisted on regularizing the loan account. Since the discussion did not end fruitfully and in spite of giving enough time to regularize the account it continued to be irregular, DGM decided to recall the advance and instructed the CM of the branch to do groundwork for filing suit in DRT if the unit did not regularize the account within 15 days.

Answers: Minutes of the meeting held at the office of the DGM(B&O) on the 10th August 2015 Stressed Assets Management : Industrial Estate Branch, Belgaum : M/s Precision Engineering Ltd. A meeting was held with the MD of the NPA unit M/S Precision Engineering Ltd on 10th August 2015 to review the conduct of the account. The meeting was attended by the following persons. Representing the Unit : * Shri. Rajiv Khond, Managing Director, M/s Precision Engineering, Ltd., Udyam Bhag Industrial Estate, Belgaum Representing the Bank: * Shri. Vaijanath, DGM(B&O), Zonal Office, Hubli * Smt. Geeta Pillai Regional Manager, RBO, Belgaum * Shri.Vinayak Katkar, Chief Manager, IE Branch, Belgaum * Shri. R.S. Haliyal, Manager, (Credit & NPA,) RBO. Belgaum Smt. Geeta Pillai, Regional Manager, welcomed the participants to the meeting and requested Shri. Vinayak Katkar C.M of the branch, to brief the meeting regarding the developments and the status of the account. Shri. Katkar made a brief presentation and submitted that the unit was not conducting the accounts in a proper manner. The account was running irregular for a long time and in spite of several requests from the branch the unit was not taking steps to regularize the account. Responding to the observations of the Chief Manager of the branch, Shri Khond, Managing Director of the unit argued that his company was not performing because of the economic slowdown prevailing in the market and added that the debtors of the company were delaying payment of the dues and therefore the company was facing financial crunch. Further the MD also requested not to take any action against the company and requested for 6 months' time to enable the unit to regularize the dues, by recovering its dues from the debtors.

4-30 Communication Strongly contending the observations of Shri. Khond, the Regional Manager Smt. Geeta Pillai observed that, contrary to the statement of Khond, the performance of the unit was not good on account of diversion of funds as observed during inspections which was conveyed to the unit through various communications for immediate regularisation. It was also advised to the branch to consider recalling the advance and transfer the account to SAMG for resolution. The DGM Shri. Vaijanath, concurred with the observations of the RM and told Shri Khond, that in spite of several communications and requests the unit has failed to set right the position and things have come to an impasse. He advised the unit to make immediate arrangements for regularization of the account failing which the Bank would be constrained to call up the advance. DGM suggested that the branch should not waste further time and if the account is not regularised, say within 15 days, proposal for calling up the advance and transfer of the account to SAMG should be submitted, to the ZOCC for approval. The Meeting ended with a vote of thanks by Shri. R.S. Haliyal, Manager (Credit & NPA). MM Special Guide 27. Write a letter to your regional manager demanding one more award staff for your branch.

Address in Address in Hindi State Bank of India Reginal Language Chikkalagundi Mudhol Taluk Karnataka Tel: 13456 Fax: 12345

The Regional Manager State Bank of India, Regional Business Office, Region V, Zonal Office, Hubli BM/228 9th March 2015

Dear Sir

Staff AWARD Posting of a Customer Assistant

Please refer to the discussions the undersigned had with you at the recently held review meeting at your office on the 16d' Feb in the captioned subject. As desired by you I am providing the business particulars of the branch as under. Recently the branch has added 2500 accounts under PMJDY scheme. The branch has an NPA level is Rs. 1,14 Cr. While all-out efforts are being made to bring down the NPAs , we are handicapped by shortage of staff at the branch . Apart from the Branch Manager, the staff component at the branch is as under: a) Manager (Branch Operations) : 1 b) Field officers : 2 c) Senior Special Asst (CO) : 1 d) Senior Assts : 2 e) Sub Staff : 1 With this staff strength we are fmding it increasingly difficult to improve our customer service further. There is lot of scope for giving gold loans, opening accounts under Pehle Udaan and Pehle Kadam, but we are fmding it estreemly difficult to go out and market the business and exploit the potential due to shortage of man power. Therefore I request you to kindly make arrangements to post at least one senior Asst to tide over the situation and improve the business and customer service at the branch.

Thanking You

Yours faithfully

(Sd) xx Branch Manager Name: xxx

4-32 Communication

Q.28. As a Regional Manager, write a letter to a branch about the rising corporate concern regarding rising NPAs and suggest measures to improve recovery at the branch.

Address in R L Address in Hindi SBI RBO Salem

The Branch Manager State Bank of India SME Branch Salem

RMI / Adv / 151 20.02.2015

Dear Sir,

Alarming position of NPAs.

We observe, with deep concern, in the P report of your branch for the month of January 2015 at the NPA level at the branch has alarmingly increased from Rs.5.25 cr to 12.50 cr.

As you are aware, the Bank's gross NPAs stood at 4.25% as at the end of 31st March 2015. This has a telling effect on the quality of assets of the Bank besides pulling down the profitability of the Bank. The top Manage- ment is committed to take all out efforts on a top priority to bring down the level. It has directed all LHOs and Administrative units to initiate prompt and suitable action to bring down the NPAs.

It is important that you should analyse all the NPAs at your branch and firm up suitable course of action based on the status of each and every account for early resolution. You must gear up all the staff at the branch to this important task.

Recovery in NPAs is effort-elastic; so effective follow up by making phone calls, personal visits and sending letters should be ensured on an ongoing basis. Action such as Rephasement / restructuring of limits, wherever warranted, should be undertaken after ensuring due diligence. You must also aim recovery through compromise settlements or Lok Adalats wherever borrowers are willing to settle the dues amicably. Where borrowers are found to be recalcitrant, action through SARFAESI Act, sale of NPAs to ARCs and filing suits against borrowers and guarantors in court / DRT must be expedited. Needless to add that if full provision is available and the recovery is likely to be time-consuming, you must put up proposals recommending write- off of these accounts.

You must also consider entrusting more cases of recovery of NPAs to those Recovery Agencies who are doing well in recovery. Staff should also be made aware of the incentive system available for recovery of NPAs for motivating them to get involved effectively in the recovery process.

4-33

• MM Special Guide

Besides yourself personally monitoring certain high value NPAs you must arrange regular structured meetings to review the performance of each field officer / other officers in the recovery of NPA accounts entrusted to them and take necessary action. Please submit a detailed "Action Plan" chalked out by you in this regard. Also send your weekly report of the recovery position. I will be keenly watching the branch progress in the matter.

Awaiting your immediate action and reply.

Yours faithfully,

Regional Manager

(R. Raman) Communication

Q.28. As a Regional Manager, write a letter to a branch about the rising corporate concern regarding rising NPAs and suggest measures to improve recovery at the branch.

Address in R L Address in Hindi SB1 RBO Salem ' 4

The Branch Manager State Bank of India SME Branch Salem

RMI/Adv / 151 20.02.2015

Dear Sir,

Alarming position of NPAs.

We observe, with deep concern, in the P report of your branch for the month of January 2015 at the NPA level at the branch has alarmingly increased from Rs.5.25 cr to 12.50 cr.

4-33 11111.1111111111111111111

Communication

29. You have just joined as Branch Manager in a scale II Branch. Branch has undergone RFIA. The Auditor has pointed out a fraud of Rs 75 Lac in a SME account and also appreciated the efforts of branch & controlling office for handling and follow up of the account. The Auditor has also advised that there are more irregularities in SME and Personal Segment which should be addressed immediately. Your Branch has one officer, 2 award staff and one messenger only. Write a letter to your controller by apprising him of the development.

Address in Regional Address in Hindi SBI Madurai City Br Language Madurai

The Regional Manager, Region III State Bank of India, RBO, Madurai. Br 42 23.7.2015 Dear sir, Branch Inspection and Audit Report dated 06.05.2015. Rectification of irregularities ij I am happy to advise that our branch was able to maintain the previous Inspection rating of "Well controlled" in the recent Inspection & Audit of the branch. In this connection the AGM (Inspection) has complimented the Branch and the Controllers for the effective steps taken to detect a fraud relating to an SME account and the strategies followed in dealing with the fraud case. He has brought out a number of irregularities relating to Agriculture and SME accounts such as i. non follow up of irregular accounts ii. regular inspection not carried out in respect many SME accounts iii. Non-renewal of SME advances iv. Non-renewal of insurance policies in time v. Non-obtention and non-scrutiny of stock statements vi. Non-follow-up of suit filed accounts with Bank Advocates. vii. Non-transfer of chronically irregular accounts to Recalled Assets accounts viii. Non-write off of very old accounts where full provision is available.

I had a formal meeting with my staff and I have chalked out an action plan for immediate rectification of the various irregularities. The staff are energetic and enthusiastic and appreciate the need to tone up matters. I have only one support official other than the cash officer at the branch at present. While we are making vigorous efforts in this regard, I would request you to kindly arrange for deputation of one senior official, at least for a period of 15 days so that we could rectify all the irregularities expeditiously and submit our compliance remarks to you for early closure of the report. I shall be thankful for your favourable action in this regard.

Yours faithfully, (sd) Branch Manager (Name: V Govindan)

4-35 MM Special Guide 30. You are the Branch Manager of a Rural / Semi Urban Branch located in a market area. Write a letter to your controlling authority recommending shifting of the branch premises to other location.

Address in Regional Language Address in Hindi State Bank of India Attayampatty Edappady Taluk Salem Tamil Nadu

The Regional Manager Region III State Bank of India Regional Business Office Salem

No.BR - 04 27.10.2015

Dear Sir,

Shifting of the branch to a more spacious and convenient location.

Attayampatty branch located in the market area at this rural centre has completed 12 years of existence. The branch has grown in size in terms of number of staff, deposits and advances business, customer base etc. over the period. The customers feel congestion and difficulty in transacting business and lot of problem is faced by staff and customers in parking the vehicles because of constraints of space etc. The premises is also very, small and inadequate for installing ATM / CDM / Passbook Printing machines etc. Also we find it difficult to exhibit notice boards / posters of our schemes etc. for the information of customers. With a view to take advantage of growing business, I have been scouting for a suitable premises for the past 6/8 months. I am now happy to advise that one of our rich farmers who is owning a good and spacious house built in 2014 is willing to let it out for rent for the bank and has also undertaken to effect the required structural changes as per Bank's requirement.

Its location is fine, easily approachable by staff / customers. The quality of construction is good. It has adequate space to put e-lobby and for parking staff and customers vechicles. The total area works out to around 4000 sqft which is quite adequate to take care of our present requirements as also future expansion. The market rent at this centre is around Rs.30 per sqft. and the landlord is agreeable for this rate with usual advance of 6 months rent.

I consider it a good opportunity for us in all respects and we can move to the building after making necessary minor structural changes. I request you to kindly arrange for the visit of the Bank's Premises Officer and the Engineer to inspect the building and clear it to proceed further in the matter.

Your faithfully,

(Sd) xxx Branch Manager (R.S. Ram) 4-36 Communication

31. Your branch is located in a semi-urban centre. The volume of business of your branch is increas ing day by day. Write a letter to your controller recommending installation of an ATM for the use of the customers.

Address in Regional Address in Hindi State Bank of India Language Vilathikulam Tuticorin Dt Tamil Nadu e-mail: xxx fax: xxx Phone:

Br. 48 25.05.2015

Dear Sir,

APPROVAL FOR INSTALLATION OF AN ATM AT THE BRANCH. I am happy to advise that the branch located in a semi-urban centre and Taluk head quarters in Tuticorin Dist has grown by leaps & bounds within a period of 8 years since its opening in 2007. The business levels at the branch as at 25.5.15 are as under: No. of accounts. Amount Rs. Deposits 1,25,500 26.50 cr Advances 12,000 15.00 cr We are now opening around 50 BSB deposit accounts under PMJDY every day. We are providing welcome kit to the new account holders with ATM Cum Debit Card. Due to the increase in the volume of business, the foot-fall at the branch is sizeable. Though we are able to render good service to the customers, we have not been able to go out for marketing and tap business-like home loans, car loans, SME advances etc. for which excellent potential exists at the centre. There are two Nationalised banks and one private sector bank at the centre. It would be immensely helpful to further improve our business and continue our excellent customer service if an ATM is installed at the branch. Also the transactions cost for the bank will come down sizeably. There is adequate space available in the branch premises for installing the ATM. I am sanguine that the utilization of ATM service by the customers would be to the full extent. I expect substantial reduction in footfall at the branch releasing valuable staff time to build business. I recommend for installation of an ATM machine at the branch at the earliest.

Yours faithfully (sd) xx Branch Manager

Name: xxxxx

4-37 MM Special Guide

32. Write a letter to your Regional Manager requesting posting of one additional award staff for your branch.

The Regional Manager State Bank of India, Regional Business Office, Region V, Zonal Office, Hubli Br/28 9th May 2015

Dear Sir

Staff AWARD Posting of a Customer Assistant Please refer to the discussions the undersigned had with you at the recently held review meeting at your office on the 16th Feb in the captioned subject. As desired by you I am providing the business particulars of the branch as under:

2. Recently the branch has added 2500 accounts under PMJDY scheme. The branch has anNPA level of Rs. 1.14 Cr. While all-out efforts are being made to bring down the NPAs , we are handicapped by shortage of staff at the branch . Apart from the Branch Manager, the staff component at the branch is as under: a) Manager (Branch Operations) • 1 b) Field officers • 2 c) Senior Special Asst (CO) • 1 d) Senior Assts 2 e) Sub Staff • 1 3. With this staff strength we are finding it increasingly difficult to improve our customer service further. There is lot of scope for giving gold loans, opening accounts under Pehle Udaan and Pehle Kadam, but we are finding it estreemly difficult to go out and market the business and exploit the potential due to shortage of man power. 4. Therefore I request you to kindly make arrangements to post at least one senior Asst to tide over the situation and improve the business and customer service at the branch.

Thanking You

Yours faithfully

(Sd) xx Branch Manager Name: x,cx

4-38 4 011 Ag;

PART - 5 COMPREHENSION • Tips for Test of Comprehension

In our daily life, more particularly in our work life, we read many written/printed matters. The primary objective of reading is comprehension. In work situations, comprehension refers to the ability to understand, analyse and interpret. Comprehension is one of the essential skills which managers and executives should possess. This skill is tested in a test of comprehension.

The first level in comprehension is literal comprehension. This involves finding information and ideas that are explicitly stated in the text.

The second level in comprehension is called interpretation or referential comprehension. This involves reading critically and analyzing carefully what is being read. The reader should be able to see relationship among the ideas stated and also see the implied meaning, if any. The reader should be able to think and draw conclusions.

The third level in comprehension is critical reading. The reader evaluates the ideas and information contained in what he is reading. As he reads, he should be able to differentiate between facts and opinions besides recognizing persuasive statements.

In a test of comprehension, what is being tested is the ability to

a) Understand; b) Analyse; and c) Interpret.

This calls for intelligent reading and critical understanding of the written matter. The answers to the questions should establish your understanding of the matter and ability to analyse and interpret.

To save time and to avoid mistakes in communication, you can repeat the appropriate sentences from the matter. However, the ideal approach would be to communicate in your own words. Please avoid giving your opinions, unless you are specifically asked to give it or unless it is very important in the context of the answers being given by you. The answers should convey to the examiner that you have fully and correctly understood the matter and, where necessary, are able to analyse and interpret.

Comprehension is an essential and useful skill. Like other skills, one can acquire and perfect this skill by practice.

5-1 MM Special Guide

PART -A

EXERCISE - 1 There has recently been much talk about derivatives. Most has been favourable, but there has been some concern about threats which the increased use of derivatives might pose to the stability of the banking system. Outside financial markets, derivatives remain little-known tools. Derivatives may be defined concisely as "synthetic versions of established instruments, designed to give more flexibility than buying or selling the underlying product." Fortunately, the concept is somewhat simpler. A basic example of the use of a derivative involves a farmer intending to sell, say, one tonne of his wheat the following September. He does not, of course know what the prevailing price will be then, and he is keen to fix the terms now, as he fears a collapse in prices. Naturally he may try to find an interested party to buy now at a fixed price, but it could be costly and time- consuming to find a buyer. Further, he may not be certain that the price he is offered is a fair reflection of the market price. An alternative would be to fix his price via the futures market. A future is an agreement to buy or sell a standard quantity of a specified asset at some fixed future date at a price agreed today. By buying a future (in jargon going long), a participant agrees to buy the underlying commodity by selling (going short), he agrees to sell. In the farmer's case, he may sell one contract of the September wheat future on the London Futures and Options Exchange (FOX), thereby locking-in his selling price. Note that, going back to the earlier definition, the futures contract is the synthetic instrument, wheat the underlying commodity and the seller (or buyer) gains flexibility through being able to trade the derivative through an established market. By using the futures market, the farmer is able to eliminate his financial exposure to a fall in prices. Financial derivatives and hedging Commodity futures are good examples of early derivative products. In London these have been traded on a formal basis since late last century. However, it is derivatives in financial instruments that have grown rapidly over the past 10 years or so. All major financial markets have associated derivative products, including foreign exchange, interest rates, bonds and equities. Derivative instruments include futures, options and swaps; by-products include forward rate agreements, caps, floors, collars and swapions. Even more complex hybrid derivatives exist. In the UK the principal exchange where fmancial futures are traded is LIFFE (the London International Financial Futures and Options Exchange). LIFFE offers a market place for interest rate (in various currencies), bond and equity index futures and also options on these futures and individual equity stocks.Interest rate futures can be used in risk management in ways similar to the use of commodities futures. Short selling is an example of a contract-actively traded contract on LIFFE-with which corporate or bank treasuries can hedge exposure to fluctuations in UK short-term rates of interest. Specially, the underlying product is three month sterling LIBOR rates, and 12 contracts are available to hedge rates on specific date in each March, June, September, and December over the next three years.

5-2 x

• Comprehension

There is a market-determined price for each contract (each unit or 'lot' represents a nominal sum of $500,000) equivalent to the market's view of what three-month LIBOR will be at these times. i This is expressed as 100 minus the implied interest rate. For example, a market view that interest rates will be 5.2 per cent in September this year will be reflected in the price of the September 1994 short sterling • contract equalling 94.8.The value of the contract will vary inversely with the level of rates implied by the market The following gives a basic example of how short sterling can be used in managing interest rate risk. A treasurer has borrowed $50 m for one year and his interest payments are based on the prevailing level of three month sterling, LIBOR rolled over every three months, commencing in March. By selling 200 'lots' in each of the March, June, September and December contracts, the treasurer effectively fixes his net outlay. Although his interest rate payments would be greater if rates rose, this would be offset by a fall in the corresponding value of his futures of which he is short. Of course, a stream of income receipts could be hedged by buying instead of selling the futures. In practice, futures will rarely be perfect hedges for interest rate risk since the dates of the interest payments will usually not coincide precisely with the dates to which the futures contracts relate.

COMPREHENSION PASSAGE-1

Directions (Q.1-10): Read the passage carefully and answer the questions given below: 1. What is the likely threat the banking system may face by increased use of derivatives? a) The system does not face any kind of threat b) It poses a threat to the stability of the banking system c) The threat is real only outside fmancial markets d) The threat is not likely to surface in the immediate future 2. According to the author the main reason for the emergence of derivatives is: a) It is a popular financial tool b) It solves the problem of finding interested parties to buy commodities c) It affords more flexibility in buying and selling a derivative than the underlying product d) The seller can make accurate prediction as far as rates are concerned 3. The above passage suggests that "going long" means: a) Going long lengths to ensure a fair price for a commodity b) It means that by buying a future a participant agrees to buy the underlying commodity, on a fixed future date and at a fixed price c) It is the opposite of going short d) It means to plan in advance 6. 4. What is the benefit of a derivative? a) The risk of fall in prices is eliminated b) The participant gets an insurance cover for any price fluctuation • c) In future it will be the only way of trading • d) It guarantees an easy way of finding buyers or sellers 5. What is FOX? • a) It is the banking system's equivalent of a BULL or a BEAR. -•=4.- • 5-3 MM Special Guide b) Futures and Options Exchange c) It is the acronym for the London Futures and Options Exchange d) Foreign and Overseas Exchange 6. The facilities afforded by LIFFE are: a) It offers a market place for interest rate b) Offers facility of bond and equity index futures c) Offers options on these futures and individual equity stocks d) All of the above . . 7. What is hedging? a) Shirking one's responsibility of carrying out an assigned task b) A process by which one can predict interest rate changes • c) A process by which interest futures can be used in risk management d) It is a process by which loss arising out of interest rate changes is eliminated 8. Which of the following is not an informal meaning of the word hedge: a) Beat around the bush b) to protect c) Be evasive d) Follow relentlessly 9. Which word is not a synonym of the word 'hybrid?' a) Amalgam b) Composite c) Mixture d) Pure-bred 10. Which word is not an antonym of "synthetic?" a) Regular b) genuine c) natural d) artificial

Directions (Q.11-15): Choose the word which has the same meaning as the word given in the passage: 11. Synthetic (synthetic versions) a) Spurious b) Fake c) Concocted d) Manufactured 12. Reflection a) Sign h) Image c) Thought d) Source of shame 13. Jargon a) Dialect b) Techno speak c) Slang d) Unfathomable language 14. Lock in a) Store in a locker b) Keep under lock and keys c) Store in a air tight box d) Decide on after a period 15. Off-set a) Counteract b) Make amends for c) Compensated d) None of these

Directions (Q.16-18): Choose the word which has the opposite meaning to the word given in the passage 16. Formal a) Informal b) Casual c) Irregular d) Incorrect 17. Complex a) Apparent b) Understandable c) Simple d) Plain 18. Prevail a) Triumph b) Succeed c) Past d) Pile on

Directions (Q.19-20) Choose the correct words or a phrase that means the same 5-4

Y. Comprehension

19. Grown rapidly a) By leaps and bounds b) Irregularly c) Gained a lot of weight d) Grew taller 20. Suggest a title for the passage a) Derivatives - valuable financial tool b) The futures market c) Risk management d) Hedging through the banking system

ANSWERS 1. b 2. c 3. c 4. a 5. b 6. d 7. d 8. d 9. d 10. d 11. d 12. b 13. c 14. d 15. c 16. a 17. c 18. a 19. a 20. a

EXERCISE - 2

Looking at India, one could conclude that corruption in the Indian environment has been due to the existence of excessive controls and unfulfilled demands for goods and services. We have come to accept that things get done on the basis of one's connections and contacts rather than merit, and that contacts or premiums provide access to goods and services in short supply.

In this scenario, it would really take some self-restraint to remain within one's self-imposed set of parameters. Yet, it is possible. As liberalisation in our economy takes place, open competition will lead to more goods and services and decisions would be made on product competitiveness and quality of service. The need for contacts and the payment of premiums will diminish. As an example, many potential foreign investors in the past looked for Indian partners who had the ability to obtain an expeditious clearance in Delhi for a project. It appeared secondary whether that partner was the right one for a long-term business relationship. Today, there has been a noticeable change. Potential foreign investors are now seeking Indian companies which have some specific attribute or strength to bring to a long -term business relationship.

This last year in India has been an interesting one, we have seen enormous fortunes being made in the stock market. There has been the scam, which displayed how the "system could be beaten". We have seen a violent, almost knee-jerk reaction to the scam and have witnessed, with some surprise, names of well- known personalities as also a number of organisations being associated directly or indirectly with these "grey" events. All of this has, resulted in a revival of effort to conduct business on a higher ethical plane and to be more conscious of maintaining respectable values.

There is now an ever-increasing concem for a business Organisation to be seen as a good corporate citizen and the trend is towards publicising the contribution of the organization in its entirety, i.e. its contribution to the community, quality of life, the environment, rural upliftment, etc, rather than merely being concerned

5-5 MM Special Guide about profitability. Several international companies are introspecting on how they have been conducting their businesses and some have created codes of conduct to which they expect their employees to conform, Some of our corporations could do a similar exercise of introspection and endeavour to set out a code of conduct for the Organisation. Finally, the level of business ethics or the values which are shared, reflect the examples set by the people at the top. Clearly, it is the chairman or the chief executive of the Organisation who becomes the role model for the Organisation in terms of his ethics and values. There is often hypocrisy and a difference between stated and practiced ethics, but, as in so many other cases, public evaluation is always based on practiced action rather than the stated. To be a global player calls for a much higher level of interaction between Indian corporations and their counterparts abroad in conducting business overseas. It is important that Indian industry as a whole is seen to conduct its business to ethical standards which are accepted the world over. There are some countries in the developing world which have a reputation for a very low level of business ethics, where commitments and assurances mean little. Clearly, such countries will remain as backward Third World countries, held at arm's length by the global community. India should always endeavour to be above such nations.

COMPREHENSION PASSAGE-2

Directions (Q.I-7): Read the passage carefully and answer the questions given below: I. What according to the author are the reasons for corruption in India? a) Increasing population b) Increasing gap between the haves and have-nots c) Excessive controls in the economy and acute shortage of goods and services d) It is an accepted way in the Indian environment 2. What is the criterion that potential foreign investors are now looking at, while seeking Indian companies? Companiesethaeatthheard, welhieentthwasithhetheee thpoeweeprspre- ethehatebfehiensinDeslhsi,e wrgeanretzafatvieourens adfter the b) The company should augur long-term business relationship c) The company's contacts and connection d) The companies should have some specific attribute of strengths to bring to a long term business relationship 3. Accordingtoa th revelation of the "scam"? a) Organization are more discreet, if involved with`grey'events b) Business organization now conduct business on a higher ethical plane c) They are conscious of maintaining respectable values d) (b) and (c) 4. What is the role of the Chief Executive of the organization in the context mentioned in the passage? a) He strives to increase profitability of the company b) Making certain that the company does not get involved in scams c) Becoming the role model for the organization in the areas of his ethics and values d) The author does not specify in the passage 5. What is the need for observance of high standards of ethics in business? a) The value of company stocks in the market escalates - 4 b) They will be able to avail of large amounts of financial aid c) They earn a "corruption-free" tag

5-6 Comprehension

d) Business organizations can then become global players 6. What are the qualities that contribute towards organization becoming good corporate citizen? a) Responsible contribution to the community b) Efforts to improve the quality of life and environment c) Significant contribution to rural upliftment d) To absolve themselves of the accusation of being solely profit making organizations e) All of the above 7. What is the word of caution that the author extends to the Indian industry as a whole? a) To make sure India would try to be above nations who held commitments and assurances as meaning little b) To stay away from scams c) To exercise caution while interacting with their counterparts abroad d) That India is deemed to be a Third World country. Directions (Q.8-20): Choose the word which has the same meaning as the word given in the passage:

8. Scenario a) Storyline b) Summary c) Scheme of things d) Design 9. Diminish a) Depreciate b) Dim c) Dull d)Abbreviate 10. Potential d) Quality a) Imminent b) Prospective c) Threatening 11. Introspect d) Circumspect a) Check out b) Check for clues c) Look into 12. Hypocrisy a) Hyperactive behaviour b) The act of taking an oath d) Circumspect c) Deceit 13. Expeditious a) Tedious b) On the sly d) None of these c) Done with speed and efficiency 14. Revive c) Faint d) To restore to life a) Stiffen b) Slacken 15. Ethics Morality c) Indiscipline d) Indecent a) Immortality h) Stated 16. c) Unspoken d) Undone a) Proclaimed b) Reinstated 17. To conform b) To look sharp a) To turn the cover rpa d) To toe the h c) To pull strings To endeavour b) To do one's utmost a) To hit the nail on the head d) To leave no stone natured c) To leave no avenue unexplored 19. Knee-jerk reaction b) Automatic reaction a) Painful reaction c) Reminiscent of the doctor . An action of involuntarily jerking the knees when provoked d) 20. Held at arm's length 5-7 MM Special Guide a) To be wary b) Separated by an outstretched arm's distance c) To keep off an undesirable person d) To ignore

ANSWERS

1. c 2. d 3. d 4. c 5. d 6. e 7. a 8. c 9. a 10. b 11. c 12. c 13. c 14. d 15. b 16. a 17. d 18. b 19. b 20. a

EXERCISE - 3

Creativity is not ability at all, but a whole cluster of abilities. Let me describe the most important ones.

The first is called fluency. It measures a person's ability to come up with a number of solutions to a given problem. For example, if I ask a group of persons to list the number of uses of bricks, some might come up with 5 uses, others with 15 to 20. Those that come up with a large number of uses would be called ideationally fluent persons. ldeationally fluent persons tend to come up with a greater variety of solutions as well as with a larger number of unusual solutions than persons that are ideationally not fluent.

The ability to provide a large variety of solutions, to respond to a problem from a variety of viewpoints, and to use a variety of approaches in problem solving is another important ability. It is called flexibility. In the brick example, one person may list several uses of bricks, but all these uses may be connected with its use as a construction material - built houses, built bridges, built wells, built walls, etc Another person may list a large variety of uses such as bricks as weapons, as stepping stones in mud, as doorsteps, as engraving material as supporters for shelves etc.

The third creative ability is originality, or the ability to come up with unusual but appropriate responses. For bricks, their use as hiding places for jewellery, or their use as dumbbells, or their use as substitutes for pillows by placing them under the mattress may be considered unusual, and therefore, original responses. A related ability is the ability to come with novel relationships between ideas or two frames of reference. This is the sense in which Koestler understands creativity. It is the faculty that helps an Edison leap to the realisation that what you need to turn electricity into light is not a good conductor of electricity as his contemporaries thought, but a bad conductor -a new relationship between current, impedance and incandescence. And finally, it is the faculty that helps a poet to see neckties as the tethers of civilizations, or rivers as arteries of God, or a dewdrop as the abode of Vishnu.

A fourth ability is to notice the unexplained, the unsatisfactory, or the incongruent - in other words, the ability to sense problems. Scientists often dismiss data inconsistent with their pet theories as "noise". It is the inquisitive scientist, curious about "noise" that sometimes makes remarkable discoveries. Alexander Fleming, the discoverer of penicillin is a case in point. Many scientists had observed that fungus forming in a biochemical culture inhibits the growth of bacteria. But they failed to grasp the significance of this "noise" 5-8 Comprehension in their experiments. It was Fleming who wondered about this and ultimately saw the significance of this for treating infections.

A fifth ability is the ability to go to the roots of a phenomenon by unravelling its causes, and equally, to visualise its consequences. This, of course, is a vital ingredient of scientific creativity. But I suspect it may be equally important in artistic creativity, where the ability to discern the mental associations of an object, and its potential as a metaphor in a work of art may be vital - to see, for example, modem life as a spiritual waste land, as in Eliot's The Waste Land. Since death reminds us of tears, and tears of dewdrops, to use dew to convey pain at the death of a dewy child as in the following lovely words: Dew evaporates and all our world is dew- so dear, so fresh, so fleeting.

The ability to elaborate on a theme has also been recognised as a significant creative ability. It is the difference between a legend and Shakespeare's dramatic version of it, or an insight that capitalist economies get stuck with recessions and the full-fledged Keynesian general theory of economic equilibrium, or the idea that man has considerable creative potential and full- fledged training programme for increasing creativity, or the difference between the notes of a raga and its alaap. The ability to elaborate is indispensable in putting a creative idea to work.

An ability of considerable importance is the ability to go behind the surface features of a- problem, and see what the "real" problem is. A group of psychologists called gestalt psychologists have held it be mainly responsible for producing original insights. Consider the problem faced by an ambulance, blocked on a long narrow bridge by a flock of sheep. So long as one defines the problem as how to get the ambulance to overtake the sheep, there would be no really effective solution. It is only when one defines the problem as one of getting the ambulance ahead of the sheep that a solution at once dawns - the flock can be turned around and driven past the stationary ambulance.

COMPREHENSION PASSAGE-3

Directions (Q.I-9): Read the passage carefully and answer the questions given below: 1. How many aspects of creativity have been mentioned by the author? a) 4 b) 3 c) 5 d) 7 2. "Books" could be used for reading and nothing else"-this idea could mean that one is a) Unoriginal in thinking b) Straightforward c) a book worm d) Very creative 3. In the above passage the word "noise" refers to: - a) Static during transmissions b) Doubts raised by non-believers about scientific theories c) Data inconsistent with pet theories d) None of the above 4. To what ability is the discovery of penicillin by Alexander Fleming attributed by the author? a) The ability of having well defined goals b) The ability to sense problems, and to notice incongruent features c) Sheer grit and perseverance d) He had strong intuitions or gut feelings

5-9 MM Special Guide 5. Does the author restrict the ability of going to the roots of a phenomenon and visualizing its consequences, to only scientific creativity? If not, specify which other fields can benefit from this ability. a) The author is specific that it applies to scientific creativity only b) He has not clearly indicated any other field c) He extends the ability and potential in artistic creativity as well d) Metaphysics can benefit from this ability 6. According to the gestalt psychologists what ability is needed for producing original insights? a) The ability to go beyond the surface features of a problem and see what the "real" problem is b) The ability to delegate assignments to original thinkers c) The ability of considering a problem as a "non-problem" d) None of the above • 7. What is the importance of the ability to elaborate on a theme? a) It is essential to develop qualities of a good essay writer b) It has been recognised as a significant creative ability and is indispensable for putting a creative idea to work c) It is distinguishing hallmark of successful novelists d) It helps in honing of oratory skills 8. Which ability does the author describe as superior among the creative abilities? a) All of them b) None of them c) Does not specify d) Depends on the circumstances 9. Select a suitable title for the passage a) Creativity and Mankind b) Creativity-the need of the modem world c) The component abilities of creativity d) Creativity-we are all bom with it!

Directions (Q.10-14): Choose the word which has the same meaning as the word given in the passage: 10. Ideational (ideationally fluent persons) a) Abstract b) Bright c) Hurdle d) Full of ideas 11. Impedance (Impedance and incandescence) a) Total resistance b) Obstruction c) Hurdle d) Defect 12. Contemporary (As his contemporaries thought) a) Trendy colleagues b) People in the same period c) Leader d) Room mates 13. Unravel (By unraveling its causes) a) Mystify b) Liberate c) Disengage d) Find out 14. Wasteland (as a spiritual wasteland) a) Garbage dump b) Swamp c) Barren and desolate d) Desert

Directions (Q.15-18): Choose the word which is the opposite meaning to the word given in the passage 15. Fluent (The first is called fluency) a) Glib b) Hesitant c) Inarticulate d) Inexpressive 16. Incongruent (to notice the incongruent)

5-10 Comprehension

a) Relevant b) Unclear c) Incompatible d) Inconsistent 17. Fleeting (so fresh, so fleeting) I a) Momentary b) Ephemeral c) Eternal d) Transient 1 18. What is a Haiku? a) Lyrical verse b) Sonnet c) Ode d) Elegy

1 Directions (Q.19-20): Choose the correct words or a phrase that means the same I 19. To go to the roots of: a) Start from the basics b) Make a careful study c) Getting down to brass tacks d) To get an overview of 20. To go behind the surface a) Accept at face value b) Make no presumptions c) Read between the lines d) Concentrate on physical aspects Answers 1. d 2. a 3. c 4. b 5. c 6. a 7. b 8. b 9. c 10. a 11. a 12. b 13. d 14. c 15. c 16. a 17. c 18. a 19. a 20. c

EXERCISE - 4 ASSET AND LIABILITY MANAGEMENT In the context of the changes taking place in the financial markets, risk management is emerging as an important area which needs a great deal of attention. Banks have traditionally concentrated on asset management, treating themselves purely as deposit takers. Funds supply was regarded as a factor beyond their control. Asset management was governed by the principle that liquidity and profitability are opposing considerations. Risks and returns were treated as two inversely related variables influencing the composition of assets. The main objective under such a framework was to distribute the assets in such a way that for a given level of liquidity, the return was maximum. This approach is being substituted in a number of banks by a, more comprehensive approach of asset-liability management which is a continuous prncess of plan- . ning, organising and controlling asset and liability volumes, maturities, rates and yields. The objective is to avoid the mismatch of asset liability characteristics and liability is no longer treated as given. The liability structure can also be modified in tune with the asset structure that .is desired. As the kinds of risks and the frequency of occurrence of such risks have increased dramatically, both liabilities and assets are subjected to interest rate risks. The asset quality of loans can be influenced by factors which go beyond the control of the lenders. It is in this context that provisioning for loan losses and need for adequate capital become important. In terms of asset-liability management, portfolio managers look at the variable and fixed components both under assets and liabilities. The most important element in the process of asset-liability management is to build into the analysis of possible future behaviour of variables such as interest rates. Thus, the asset-liability management is a process and it must be practised in an on-going manner. Management must regularly forecast assumptions and develop contingencies to accommodate changes expected. . - 5-11

• PM!, •

MM Special Guide Pricing of risk is an important area requiring prime attention. Banks have to move away from the relatively unscientific practices of pricing risks based on perception of customers to more scientific practice based on technical assessment of the risks involved while ensuring transparency. Embracing scientific risk management practices will not only improve banks' credit management processes and increase profits, but also enablethem to nurture and develop mutually beneficial relationships with customers. In recent years, financing infrastructure has become a challenge to banks. In view of the fact that financing of infrastructure involves large funds to be committed for long periods of time, banks could face asset- liability mismatches. In order to meet the financing requirements of infrastructure and other large investment projects, banks need to develop the necessary expertise.

COMPREHENSION PASSAGE- 4 Directions (Q.1-8): Read the passage carefully and answer the questions given below. 1. What feature is emerging as an important area of concem in the face of the changing financial market? a) Asset management b) Customer satisfaction c) Risk management d) Liability management 2. Risks and returns are two directly related variables influencing the composition of assets a) True b) False c) not specified d) Subject to individual cases 3. What is meant by asset and liability management? a) It involves governing principles of liquidity and profitability for successful management b) Successful distribution of assets for a given level of liquidity c) It is a continuous process of planning, organizing and controlling asset and liability volumes, etc d) It involves careful protection of assets and liabilities from interest rate risk. 4. What does he author say regarding assumptions? a) These are static b) Assumptions have to be forecast regularly and contingencies must be developed to cope with them. c) Assumptions play a negligible role in asset liability management exercise. d) None of these 5. What does the author claim to be the most important element in the process of asset liability management? a) Adopting relevant contingencies to accommodate changes b) Recognize it as an on-going process and adapt accordingly c) Having an eye on the variable and fixed components d) To build into the analysis of possible future behaviour of variables, such as interest rates 6. What benefits does the author cite with regard to embracing scientific risk management? a) It will improve bank's credit management processes b) It will increase profits c) It will enable them to nurture and develop mutually beneficial relationships with customers d) All of the above 7. Does the author spell out the components of technical assessment in the passage?

5-12 Comprehension

a) Yes b) No c) Vaguely d) Can't say 8. Why does the author say that financing infrastructure is a challenge to banks? a) It curtails the growth of the bank b) It shifts the focus from previously set goals c) Asset-Liability mismatches d) None of the above

Directions (Q.9-12): Choose the word which has the same meaning as the word given in the passage: 9. Portfolio a) Asset b) Briefcase c) Collection of an artist's work d) Holdings 10. Contingency a) Prediction b) Emergency c) Preparedness d) Future event 11. Prime a) Pinnacle b) of chief importance c) Highest quality d) Immediate 12. Infrastructure a) Foundation b) Groundwork c) Support d) Structure needed for operation

Directions (Q.13-18): Choose the word which has the opposite meaning to the word given in the passage: 13. Comprehensive a) all embracing b) Selective c) Compendious d) Complete 14. Nurture a) Tend b) Nourish c) Neglect d) Care for 15. Frequently a) Recurring b) Irregular c) Haunt d) Reiterate 16. Transparency a) Make all facts available b) Maintain secrecy c) To hide nothing d) be clear in one's dealings 17. Expertise a) Adroitness b) Possess know - how c) Dexterity d) Amateur 18. Mismatch a) Incompatible b) Unlike c) Suitable d) Different

Directions (Q.19-20) Choose the correct words or a phrase that means the same 19. Beyond one's control a) Victim of circumstances b) Out of hand c) Going with a flow d) Helplessness 20. In tune with a) In perfect congruence b) In perfect harmony c) In sync d) Rhythmic

, ANSWERS

5-13 MM Special Guide

1. c 2. b 3. c 4. b 5. d 6. d 7. b 8. c 9. a 10. b 11. b 12. d 13. b 14. c 15. b 16. b 17. d 18. c 19. b 20. a

EXERCISE - 5 Challenges for the future and possible Policy Directions

What is the future of science and technology in India? Against the above background, let me now turn to some of the challenges and burning questions of the future. From rather long menu of issues, I shall largely deal with two issues in particular.

Effective Patent Laws and Intellectual Property Rights I have already pointed out that innovative activities often turn out to be risky from the stand-point of the financier, existence of an effective and speedy patent-legal framework goes a long way to solve the incentive problem associated with any innovative venture. Though the Indian Patent Act, 1970 was indeed a breakthrough from the earlier archaic Indian Patent and Design Act of 1911, still much needs to be done. The following example may illustrate the point. During 1994, whereas in India 4,000 patents were filed, China in the same year had 70,000 patents. After all, a slow process of patenting not only hurts the interest of the innovator but also discourages the potential ones. Existence of loose patent laws or its violation, like those prevalent in software piracy, thus, makes me extremely anxious.

Nevertheless, as a far-reaching extension to above argument, the global regime represented by trade related intellectual property rights (TRIPS) tilted the balance of benefits of innovation in favour of the private innovator. As a signatory to the 1994 Uruguay Round of Multilateral trade negotiation of the then General Agreement of Tariff and Trade (GATT), India is-bound by the regulatory framework of the recently created World Trade Organisation (WTO). This may have consequences on the adopted modes of industrial research in India like imitative research or reverse engineering. We need only to stress more innovative research but also to develop the intermediaries like patent agents and patent attorneys, who will bridge the gap between the market and the scientists. This apart, as the Draft Ninth Plan pointed out, we need to take new initiative to "secure a more favourable deal at the impending review of the TRIPs agreement in the WTO". This is going to be a serious challenge of the future.

The Role of the State in Technological Development. What is the role of Government in advancement of science and technology upgradation in a liberalised market-friendly atmosphere? At this point of time, the issue may apparently seem to be old-fashioned. Often in popular parlance, liberalisation is equated to a withdrawal of state from the economic domain. However, science and technology is a field where' such popular notion may turn out to be fallacious. It is widely argued that there are three sources of market failure, viz., indivisibility, uncertainty and externalities. Knowledge generating activities like R & D suffer from all three types of market failure. Moreover, when there is a wedge between private and social profitability, like that existent in pure research, private finance

5-14

• Comprehension may not be forthcoming. Thus, even in a deregulated regime the state will have three specific and selective roles in fostering science and technology, viz., financier of fundamental research, provider of infrastructure, and regulator of property rights. The Approach Paper to the Ninth Five Year Plan (1997- 2002) rightly pointed out,

"Experience of many developing and industrialised countries suggests that a rapid acceleration of industrial technology development calls for a deliberate 'strategy', in the sense that it requires the Government to coordinate and guide an essentially market driven process. Free markets suffer from various kinds of 'market failures'. They may not throw up the appropriate amounts of infrastructure, skill, information and institutional support, and mere exposure to market forces, while getting rid of inefficient policies, may not suffice to create the technological dynamism that continued industrial growth needs".

COMPREHENSION PASSAGE- 5

Directions (Q.1-7): Read the passage carefully and answer the questions given below:

1. What does the author recommend to solve the incentive problem? a) Heavy cash awards b) An effective and speedy patent legal framework c) Government subsidies on inventions d) Approved financiers to facilitate innovative activities 2. What reason do you attribute to the fact that China filed 70000 patents to India's 4000 in a given year? a) The Chinese are a more creative lot b) Chinese govt is eager to file more patents as compared to other countries c) India suffers from a slow process of patenting d) Indian Govt discourages potential inventors 3. What are the consequences of the regulatory frameworks on the adopted modes of industrial research in India? a) It reflects directly on innovative research b) Consequences are likely to affect imitative research or reverse engineering c) Exerts an unfavorable effect on private innovators d) None of the above 4. What according to the author is going to be a serious challenge, with respect to the Draft Ninth Plan? a) To secure grants for finding research b) To make India a prominent player at trade related meets c) To secure a favourable deal at the impending review of the TRIPS agreement in the WTO d) International frameworks to favour Indian patent laws and Intellectual property Rights 5. Who are the important entities that play a significant role in the evolution of patents? a) Patent agents, patent attorneys and scientists b) Government agencies and financiers c) Scientific advisors working in co-ordination with private innovators d) The passage does not specify

5-15 MM Special Guide

6. What stand does the author take with regard to knowledge generating activities like R & D? a) That not much is done by the state to promote R & D b) It is difficult to find financiers - private or state owned c) It augurs well for the country's knowledge management if there is non-interference by the government d) He maintains that they are bound to suffer from the three sources of market failure, namely indivisibility, uncertainty and externalities. 7. According to the Approach Paper to the Ninth Five Year Plan, what kind of a role is suggested for the state as far as fostering science and technology is concerned? a) Fostering foreign collaborations b) Not to adopt any specific strategy c) Three specific roles, namely financier of fundamental research, provider of infrastructure and regulator of property rights d) All of the above

Directions (Q.8-12): Choose the word which has the same meaning as the word given in the passage: 8. Innovate a) Modernize b) invention c) venture d) Innumerable 9. Stand point a) a point that stands apart b) points out c) a point of view d) stand still. 10. Archaic a) Primitive b) very cold c) Place where historical documents are stored d) Modem 11. Strategy a) Layer of rock b) long-term plan c) stray struggle 12. Domain a) Field of thought b) dominate c) domicile d) dominant

Directions (Q.13-14): Choose the word which has the opposite meaning to the word given in the passage:

13. Liberalized a) Generous b) liberty c) enslaved d) tightened 14. Dynamism a) Static b) dynamite c) dynamic d) dormant

Directions (Q.15-20) Choose the correct words or a Phrase that means the same 15. 'Burning Question of the future' means a) a question that burns in the future b) an important Question that burns c) that which needs prime attention d) a current problem of the present 16. 'to bridge the gap' refers to a) build a bridge to cover the gap b) to bring two entities closer to each other c) make efforts to overcome short-comings d) to widen the gap 17. 'rapid acceleration' means a) Accelerate rapidly b) Show great change c) Accelerate towards progress d) Tremendous speed 18. 'to get rid of means

5-16 Comprehension

a) to destroy something permanently b) to do away with something c) make do with something else d) feel totally helpless 19. ' R & D' refers to a) Research & Development b) Research & Dynamism c) Research & Dominancy d) Research & developing 20. Another suitable title of the passage could be a) TRIPS b) Intellectual property Rights c) Liberalized market environment d) Future of science and technology ANSWERS 1. b 2. c 3. b 4. c 5. a 6. d 7. c 8. a 9. c 10. a 11. b 12. a 13. d 14. a 15. c 16. b 17. b 18. b 19. a 20. d

EXERCISE-6 Re-engineering in Indian Banking

The spectacular growth witnessed in recent times in the banking industry has led to global competition, rapid and radical technical innovation and major shifts in attitudes about work, employees and leadership. With the opening up of the economy and policy of liberalisation, new private sector banks have come into existence with advanced or sophisticated technological set-up. This has further intensified competition. The changes witnessed have no historical precedent. Change is one of the foremost issues today-the other two being competition and customer. On the one hand, change represents growth, opportunity and innovation and on the other hand, it represents threat, disorientation and upheaval.

We are truly in turbulent times. Organisations will have to adapt to crisis by maximising their strengths as change occurs. Change has become both pervasive and persistent. With globalisation of economy, corporations face a greater number of competitors, each one with product / service innovations. Rapidity of technological change / product life-cycle have profound influence on the existence of corporations. Execu- tives think that their corporations are equipped with effective change-sensing radars but really not. Change is seldom easy. Further, change can neither be rushed nor dragged out. The various phases of the re-engineering process- preparing, planning, designing and evaluating are outlined in this paper.

Organisations are influenced by internal and external factors. Internal factors include the range of products/ services centralisation or decentralisation of operations etc. and external factors include competition, government regulations or changing economic conditions. Internal factors of organisational change have a paradoxical character. The need for change is generated at all levels of the Organisation, but the responsibility for initiating change rests primarily with the management. To deal with internal factors of change, managers must learn special skills at scanning the environment for the elements of change that significantly affect the Organisation.

5-17 IPMF MM Special Guide Coming to the external factors, competition is an important factor to be reckoned with. Government pressures usually create less anxiety than customer pressures. Customer constitutes the second most important external influence on organisations. Irrespective of the internal/external factors at work, the responsibility for identifying and leading the organisational change rests with the management - particularly the top management. It must also be ready to lead the organisations through change. Change is slow and at times, a painful process. Many changes can be traced to global communication, the microprocessor, new inventions, new technologies, etc. We need to understand the two basic kinds of changes - structural and cyclical. Structural change is radical and it is also irreversible. It requires dismantling of old institutions, relationships, procedures and replacement of these by new ones. But cyclical change involves a temporary change ,••J from a given level or state. Cyclical change does not cause any irreversible alterations in the structure of the it institutions or activities in which they are occurring.

COMPREHENSION PASSAGE- 6

Directions (Q-1-10): Read the passage carefully and answer the questions given below: 1. To what factor is the recent global competition, rapid and radical technical innovation attributed to, in the above passage? a) Sweeping reforms in policies of economic reforms b) To the spectacular growth witnessed in recent times in the banking industry c) Mushrooming private sector bank d) Sophisticated technological set-up 2. According to the author, what is the dual-faced nature of change? a) Growth and upheaval b) Opportunity and disorientation c) Threat and innovation d) All of the above 3. "The changes witnessed have no historical precedent". This statement implies that a) There are no witnesses to the change in history b) Never before in history have there been such changes .:. , • c) The changes witnessed have great historical importance d) None of the above 4. What is the strategy suggested by the author for organizations to adapt to change? a) By maximizing their strengths as change occurs b) By being passive about the whole process c) Adopt changes only if it is customer friendly d) Adopt the most suitable change, according to the company's history 5. Change is seldom easy. Choose a word from the following to convey the opposite meaning: a) Oftenb) rarely . c) always d) never 6. Does the author feel that corporations are equipped with change-sensing radars? d) Depends on corporation a) Yes b) No c) Depends on the type of change Comprehension

7. By what factors is organization influenced in re-engineering process? a) Global competition & technical innovation b) Internal and external factors that govern the organization c) Research and Development d) Challenge posed by competitors 8. With regard to external pressure that an organization faces, which creates more anxiety? a) Government pressures b) Financial constraint c) Customer pressures d) Changing economic condition 9. What type of change is irreversible? a) Structural b) Cyclic c) Procedural change d) Relationship change 10. Does the author take a pessimistic or an optimistic stand about the ability of the banking industry to cope with change? a) Optimistic b) Pessimistic c) Neutral d) not specified in the passage

Directions (Q.11-15): Choose the word which has the same meaning as the word given in the passage: 11. Spectacular a) Dramatic b) Striking c) Eye catching d) Impressive 12. Upheaval a) Disruption b) Transfer c) Mismanagement d) Violence 13. Pervasive a) Omnipresent b) Penetrating c) Distorting d) Abnormal 14. Persistent a) Unshakeable b) Enduring c) Victimizing d) Intimidating 15. Profound a) Thoughtful b) Demanding c) Great d) Bottomless

Directions (Q.16-19): Choose the word which has the opposite meaning to the word given in the passage: 16. Radical a) Conservative b) Non-conformist c) Iconoclastic d) Departing from tradition 17. Turbulent a) Agitated b) Calm c) Boisterous d) Hectic 18. Paradoxical a) Ambiguous b) Literal c) Anomalous d) Contradictory 19. Dismantle • a) Rip apart b) Demolish c) Extinguish d) Build

5-19 MM Special Guide

Directions (Q.20) Choose the correct words or a phrase that means the same 20. Dragged out a) Elongated b) Pulled out c) Lengthy process d) Extricated

ANSWERS

I. b 2. d 3. b 4. a 5. c 6. b 7. b 8. c 9. a 10. c 11. d 12. a 13. b 14. b 15. c 16. a 17. b 18. b 19. d 20. c EXERCISE- 7 ECONOMIC CRIMES IN THE CONTEXT OF THE EVOLVING ECONOMIC POLICIES

The basic objective of economic reform measures is to promote productive efficiency through competition and in the process, to unleash the market signals and market forces and optimize the level of State intervention. While reforms in the real sector in particular industry and foreign trade have been undertaken, the major emphasis of reforms has so far been confined to the financial sector. The strategic aspects of the latter area of reforms relate to fiscal policy, monetary policy, banking and other financial institutions and arrangements and exchange rates and trade and the industrial policy.

In the areas of banking and capital market, prudential norms and regulatory practices are being put in place. A Board for Financial Supervision has been set up, along with the introduction of prudential norms for banks, financial institutions and non-banking financial companies. The Securities and Exchange Board of India (SEBI) has been vested with requisite powers to regulate the Capital Market and to take steps towards setting-up of Central Depositories for Capital Market instruments to smoothen the delivery and settlement mechanisms. National Stock Exchange has brought about an automated screen based trading system in securities.

Reforms in regard to the exchange sector include progressive reduction of tariffs, liberalization of import licensing, removal of exchange restrictions on trade and services, introduction of convertibility of the Ru- pees in external current account and a series of measures to promote foreign, direct as well as portfolio investments.

Concomitant with liberalization and competition in the domestic market and globalization of markets, there have been rapid strides in information technology, affording quicker communications. The latter aspect has changed the whole financial market environment turning it into round-the —clock market with cross-border flows of funds.

A fall out of economic reforms and info-tech revolution is the increase in risks at both the macro level and micro level, leading to a variety of hedging products in commodities as well as securities. The nature of

5-20 Comprehension

contracts and the evidence in courts of law have undergone a sea change. Investor protection in an uncertain and volatile financial environment has assumed a lot of significance. As the economy opens up, it is becoming increasingly clear that the spectrum of issues arising from reform require to be addressed by new and amended set of statutes. Adjustments and reforms in the legal system would be imperative. Many of the existing statutes, in the context of reforms, have become anachronistic and conversely there are now many areas for which legislation is simply non-existing or to use the legal term `honest'. Some commercial and economic laws are ambiguous and inconsistent as they suffer from bad drafting or the existence of overlapping pieces of legislation. Procedures and regulations are exasperatingly often pushing up the costs of compliance with law. Non-compliance is not made costly. It has as a result become enticingly lucrative to those who believe that law could be circumvented. The conspicuous absence of a market friendly law calls for not only new set of procedures and regulations but also a new set of investigation and adjudication machinery to deal with hitech economic offences efficiently and effectively. What is also needed is an altogether new legislative, administrative and judicial rethinking or, to put it simply, a new criminal jurisprudence.

Economic crimes often referred to as white-collar crimes were defined by Sutherland as crimes committed by a person of respectability and high social status in the course of his occupation. Such crimes are primarily limited to such acts as promulgating false or misleading advertising, illegal exploitation of employees, wrong labelling of goods, violation of weights and measures statutes, conspiring to fix prices, selling adul- terated foodstuff and evading corporate taxes. Subsequently, they also include bribery and corruption, black marketing, profiteering and hoarding, smuggling, violations of foreign exchange regulations and such other violations by men in professions. Now with the economic reforms measures and the opening up of the economy, the economic offences are no longer limited in nature and scope. Different types of frauds are committed by different groups and perpetrated on different target groups like investors, banks and other financial institutions, pension and provident funds, creditors of companies. Manipulation of financial markets and frauds involving Central and State Governments are also commonly seen. Frauds in the financial sector have also assumed unrecognisable proportion, in view of the growing computerised environment and the absence of legal provisions to take their cognizance and properly punish such fraudulent acts appropriately.

COMPREHENSION PASSAGE- 7

Directions (Q 1-11): Read the passage carefully and answer the questions given below: 1. What are the basic objectives of economic reform measures? a) To promote productive efficiency b) To unleash market signal c) To optimize the level of state intervention d) All of the above 2. In what areas are regulatory practices and prudential norms being put in place? a) In areas of banking and capital market b) In areas of industry and foreign trade c) Securities and exchanges d) Import and Export 3. Progressive reduction of tariffs is part of measures to promote foreign, direct as well as portfolio investments. This statement is a) False b) True c) Partly5Trfe d) Conditional Clause MM Special Guide 4. Which of the areas are in the need of change in the author's opinion? a) Statutes b) Stock Exchanges c) Criminal jurisprudence d) (a) and (c) Only 5. Which significant development has affected the liberalization and globalization movement? a) Rapid progress in IT has facilitated quicker communication b) Widespread communication c) Cross border flow of funds d) Removal of exchange restrictions on trade 6. According to the author, what has led to an increase in hedging products in the micro and macro level? a) Competition in domestic market b) Satisfactory and favourable economic reforms c) A fall-out of economic reforms d) none of the above 7. "Many of the existing statutes in the context of reforms are found to be inadequate" a) False b) True c) Depends d) Can't say 8. Why is the author exasperated with "compliance with the law"? a) It is a costly affair b) Non-compliance is easy on the budget c) It has made people realize that law could be circumvented d)All of the above 9. A white-collar crime refers to: - a) A crime that deals with converting black money to white b) A crime committed with a lot of ease c) Crimes committed by respectable people in the course of their occupation d) A crime that is never solved and thus does not stain the reputation of the offender 10. The nature of economic crimes in the present day context is directly proportionate to the opening up of the economy. Comment a) True b) False c) Cannot be generalized d) the law will never permit such a situation 11. To which era does the scenario depicted in the passage relate to India? a) Pre-liberalization era b) Post-liberalization era c) It is fictitious d) cannot say, the passage is vague

Directions (Q.12 —14): Choose the correct words or a phrase that means the same: 12. To unleash a) To be out of control b) To release or let loose c) To exert restraint d) To gallop at a reckless pace 13. Fall out a) adverse effects of an action b) Not beneficial c) One-sided d) Unable to come to an agreement 14. Sea change a) Connected to naval reforms b) Not applicable to the civil cases c) A change that is temporary d) To undergo a significant and voluminous change

Directions (Q.15-17): Choose the word which has the same meaning as the word given in the passage: 15. Concomitant

5-22 a,;14 Comprehension

a) Hand in hand b) Working at cross purposes c) Committed to the cause d) Non-committal 16. Conspicuous a) Convivial b) Comprehensive survey c) Clearly visible to the eye d) Sedition 17. Volatile (Volatile financial environment) a) Capable of flight b) Highly transient c) Changeable and flighty d) Very lively

Directions (Q.18-20): Choose the word which has the opposite meaning to the word given in the passage: 18. Anachronistic a) Pertinent and relevant b) Error in computing time c) Incongruous to the period which applied d) Lack of discipline 19. Requisite a) Needed b) Appropriate c) Vital d) Unnecessary or irrelevant 20. Exasperate a) Irritating b) Making worse c) Soothing or calming d) Provocative

ANSWERS

1. d 2. a 3. b 4. d 5. a 6. c 7. b 8. d 9. c 10. a 11. b 12. b 13. a 14. d 15. a 16. c 17. c 18. a 19. d 20. c

EXERCISE- 8 Development of the Corporate Debt Market

A necessary condition for the process of asset securitisation is the evolution of a deep and liquid corporate debt market. As I have already mentioned, the corporate debt market has not fully developed in the Indian context, though there is some activity in recent years, especially in the private placement segment. Several pre-conditions for the evolution of a successful corporate debt market are now in place. These include a well-functioning market for government securities, well developed infrastructure for retail debt, a liquid money market, an efficient clearing and settlement system, a credible credit rating system and a formal regulatory framework. At the same time, the lack of good quality issuers, institutional investors and supporting infrastructure continue to constrain market development. There is also the need to enhance public disclosure, standardize products, put in place effective bankruptcy laws and use technology to reduce transaction costs further.

Market Based Financing:

5-23 MM Special Guide A final set of possibilities hinge around a shift in emphasis towards a market-based approach. Could the capital markets provide the long-term funds to industry by directly tapping the long-term savings potential in the economy? Indian households are typically risk averse and there has been a massive flight to the safety of bank deposits and contractual saving instruments. At the same time, the continuing increase in the saving rate of households suggests that there is not supply constraint in terms of financial resources available.

The challenge is really to harness these savings into risk capital. In a country like India, where a large number of retail investors enter the equity markets directly, there is great potential to develop institutional intermediaries to tap these funds. In contrast, the investor profile in most developed countries is relatively more institutional, with mutual funds and pension funds often accounting for a large proportion of the trade. This effectively means that investors in India bear far more risks than their counter parts in developed economies, who are able to spread their risk profile by say, buying units of a large mutual fund, with the necessary technical expertise of investment management. The emerging pool of institutional investors in the equity markets, therefore, needs to tap the savings potential much more effectively. The Unit Trust of India was able to successfully perform this assignment of transforming household saving into equity financing till excessive returns eroded its very sustainability. The expansion of the mutual fund industry thus becomes a target candidate for higher resource mobilisation from the capital markets. The size of the mutual fund industry in the Indian economy is still very small as compared with that of developed countries. Besides, mutual funds have been exiting the equity markets mainly because of better opportunities in the debt markets. Further, insurance companies and pension funds could be tapped, with appropriate risk management. Investment funds-a category of non-banking financial companies in the Indian context-also provide an avenue for channeling funds into the stock markets although the very logic of investment management carries an inherent bias for operations in the secondary market rather than the primary market. Venture capital funds with specialization in certain regions and certain sectors provide another possibility, although in the Indian case thus far, their portfolio is still not very large and often carries a preference for later-stage projects with a smaller gestation lag rather than projects at the absolute initial stages.

COMPREHENSION PASSAGE- 8

Directions (Q 1-6): Read the passage carefully and answer the questions given below: 1. What according to the author are the constraints in the development of a debt market in India? a) Lack of good quality issues b) Institutional investors and reduction in transaction costs. c)" Supporting infrastructure and standardization of products d) Need to enhance public disclosure and effective bankruptcy laws. e) (a), (b),(c)and (d) 2. What is the attitude of Indian households in making investments in capital market? a) They are hugely wary b) They are not interested c) They are averse to risks d) All of the above

5-24 fi-!M': Comprehension

3. How do they channelize their savings? a) They channelize their savings by way of deposits in banks b) They channelise by investing in contractual saving instruments c) (a) and (b) d) None of these 4. How do institutional investors get better returns for the people who invest in them? a) By tapping the small savings of the investors b) By investing in various capital market instruments and minimizing the risks involved c) By swindling the Government d) (a) and (b) 5. What does the author mean when be says "UTI lost its sustainability"? a) The top management did not have sound judgment b) They became overconfident c) It was unable to pay the committed high returns when its earnings declined on account of changes in the capital market d) A combination of a, b, c Directions (Q.7-12): Choose the word which has the same meaning as the word given in the passage: 6. Context a) Meaning b) Framework c) Background d) Substance 7. Pre-condition a) Precursor b) Precedent c) Precipitation d) Precaution 8. Constrain a) Restrain b) Necessitate c) Pressure d) Stifle 9. Contractual a) Binding b) To put a price on c) Shortening d) Developing 10. Harness a) Control b) Tame c) Mobilize d) Fasten 11. Erode a) Eat into b) Corrode c) Oxidize d) Wear away

Directions (Q.13-18): choose the word which has the opposite meaning to the word given in the passage: 12. Liquid a) Unsalable b) Pure c) Destructible d) Saleable 13. Credible a) Trustworthy b) Incredible c) Unreliable d) Insincere 14. Regulatory a) Conciliatory b) To make topsy-turvy c) Unsystematic d) To turn upside down 15. Enhance a) Heighten b) Magnify c) Submerge d) Decrease 16. Excessive a) Insincere b) Moderate c) Exorbitant d) Silent 17. Inherent a) Superficial b) Unnatural c) Extrinsic d) Inessential

5-25 MM Special Guide

Directions (Q.19-20): Choose the correct words or a phrase that means the same: 18. Now in place a) Appropriate and functioning b) A place of its own c) Substantial d) Adequate 19. Risk averse a) Daredevil attitude b) Gambler c) Cautious d) Analyses facts

Answers

1. e 2. c 3. c 4. d 5. 6. b 7. a 8. b 9. a 10. 11. a 12. a 13. b 14. c 15. 16. b 17. c 18. a 19. c

EXERCISE- 9 Transparency Practices in Commercial Banks

Transparency of banking operations plays an important role in ensuring effective market discipline, a potentially crucial mechanism for keeping banks prudent. This particularly helps investors and depositors to ascertain the true health of financial entities and assist policy makers to initiate timely and adequate remedial action when required. Transparency, in the context of the banking operations, may be defined as public disclosure of reliable and timely information that enables the users of that information to make an accurate assessment of bank's financial condition and performance, business activities, risk profile and risk management practices.

In a liberalized economic framework, market discipline constitutes a critical pillar of supervision of commercial banks, together with minimum capital requirements and supervisory review of capital adequacy. Under certain circumstances, market mechanisms complement supervisory efforts by rewarding banks that adopt prudent business strategies and penalising those that do not. Public disclosure encourages safe and sound banking practices and acts as a deterrent to imprudent risk taking while providing incentive for effective risk management. Market discipline, however, can be effective only if market participants have access to timely and reliable information which enables them to assess correctly a bank's activities and the risks inherent in those activities.

Systematic transparency in the working of the banking sector enhances the stability of a financial system. A regular flow of information keeps market agents aware of the situation and prevents sudden unpredictable reactions. Public disclosure also helps limit the contagion of a run on a bank by allowing the market to distinguish between banks that are genuinely vulnerable from those that are not. If disclosure norms are universally implemented, whereby banks provide comprehensive, accurate, and timely information on their financial conditions, performance, risk exposure, etc., a sound and well managed bank stands to benefit, e.g. in accessing the capital market and in developing immunity to contagion. However, while piecemeal implementation does not ward off the threat of the 'contagion effect', systemic stability would be impaired

5-26 if adverse information about weak banks becomes public knowledge all of a sudden. Hence, complete transparency would need to be gradually put in place. Further, operational risks associated with certain activities cannot be unambiguously quantified, so that disclosures in this respect may not always give a clear picture to the market. Riskiness of a bank's portfolio must also he viewed in the context of its risk appetite and its risk management skills. These again tend to be somewhat subjective in nature so that an exact quantification is not possible. In such cases disclosure alone would not lead to transparency.

The Transparency Sub-group of the Basle Committee of Banking Supervision (BCBs) identified six qualitative characteristics of the information disclosed by banks that are critical for ensuring that such disclosure leads to transparency regarding the operation of banks. These characteristics include comprehensiveness, relevance, timeliness, reliability, comparability and materiality. Comprehensiveness of information relates to the scope or span of activities covered by such information. The supervisor should seek information about the different activities undertaken by banks by themselves or through subsidiaries and the risks associated with these activities. Relevance is the characteristic that distinguishes facts, qualitative or quantitative, from information and in order to be relevant, information disclosed must be comparable on two fronts. First, it must be comparable for the reporting entities, to enable the market mechanism to distinguish between `good' and 'bad' banks. Second, it must be comparable across time for the supervision to be able to gauge trends in the performance of banks. The onus for ensuring comparability, therefore, rests to a large extent with the supervisor. Finally, information is material if its omission or misstatement could change the assessment or decision of a user relying on that information.

The goal of achieving transparency has become more challenging in recent years as banks' activities have come to include many new areas of financial operations and become more complex and dynamic. The Narasimhan Committee II, recognizing the importance of adequate disclosure norms for the Indian banking sector, noted that there is a need for disclosure, in a phased manner, of the maturity pattern of assets and liabilities, foreign currency assets and Liabilities, movements in provision account and NPAs. The Reserve Bank accordingly, instructed banks to provide information regarding these items, except movements in provisions, in their 'Notes on Accounts' to their balance sheets with effect from March 2000. The Commit- tee also suggested that full lending, lending to sensitive sectors and loans given to related companies in the banks' balance sheets. Banks would be required to publish half-yearly disclosure, providing a summary of performance over a period of time, say 3 years, including the overall performance, capital adequacy, information on the bank's risk management systems, the credit rating and any action by the regulator/supervisor. The disclosure statement should be subject to full external audit and any falsification should invite criminal procedure. The Reserve Bank agreed with these recommendations in principle and referred them to the Audit Committee of the Board of Financial Supervision with a view to discouraging false/inaccurate disclosures by banks, the Reserve Bank can impose a penalty, as recommended by the Committee. The banks had earlier been advised to disclose CRAR, the level of break-up of the provisions made towards NPAs and depreciation on investments. Consequent to the implementation of the recommendations of the Narasimham Committee II, the standards of disclosure of Indian commercial banks have moved closer to the international best practices including the standards set by the BCBs. The process of expansion of the ambit of statutory disclosure continues.

5-27 MM Special Guide

COMPREHENSION PASSAGE- 9

Directions (Q 1-6): Read the passage carefully and answer the questions given below: 1. What is meant by transparency? a) Friendly bank employees b) Clarity in the investors transactions c) Public disclosure of timely and reliable information d) Both (b) and (c) 2. What are the advantages of transparency? a) It helps to make accurate assessment of the bank's financial condition and performance. b) It clearly describes the business activities. c) It points out risk profiles and risk management practices. d) It helps in the bank's relationship with the public. e) (a),(b) and (c) only. 3. In the liberalized set up, what are the mechanisms available to gauge the market discipline? a) Minimum capital requirements. b) Supervisory review of capital adequacy. c) Mechanism for rewarding the banks that adopt prudent business strategies and penalizing those who don't d) A combination of (a),(b) and (c) e) (a) and (c) only 4. Under what circumstances would disclosure alone not lead to transparency? a) Operational risks in certain activities cannot be quantified. b) Risk appetite & Risk management skills are subjective in nature. c) Mere disclosure in the aforesaid may not give a clean picture to the market. d) All of the above 5. What is the information required for adequate disclosure for achieving transparency, as per the Narasimham Committee 11? a) The maturity pattem of assets and liabilities b) Movements in provision held and NPAs c) Foreign currency assets and liabilities d) (a) and (b) only e) (a), (b) , (c) 6. Which recommendation of the Narasimham Committee II as regards disclosure has not been implemented by RBI? a) Reliability and comparability b) Disclosure in a phased manner c) Movements in provisions d) All of the above

Directions (Q.7-12): Choose the word which has the same meaning as the word given in the passage:

7. Prudent a) Provident b) Divine c) Far sighted d) strong 8. Remedial a) In aid of b) Curative c) Corrective d) Medicinal 9. Penalize a) Scold b) Chasten c) Berate d) Punish

5-28 Comprehension

10. Vulnerable a) Exposed b) Weak c) At risk d) Defenseless 11. Norms a) Criteria b) Standards c) Types d) Models 12. Piecemeal a) Gradual b) Inconsistent c) In small measure d) Quick

Directions (Q.13-18): Choose the word which has the opposite meaning to the word given in the passage: 13. Crucial a) Cross b) Indecisive c) Unimportant d) Excellent 14. Unambiguously a) Aspiringly b) Vaguely c) Assertively d) Energetically 15. Subjective a) Personal b) Idiosyncratic c) Objective d) Non objective 16. Omission a) Repetition b) Emission c) Dismissal d) Mention 17. Depreciate a) Increase b) Appreciate c) Approve d) Pull up

Directions (Q.19-20): Choose the correct words or phrase that means the same

18. Deterrent a) Cleansing agent b) Preventive c) Hindrance d) Turn-off 19. To ward off a threat a) To cast an evil eye b) To avert impending disaster c) To welcome with open arms d) To get rid off 20. Across time a) To span different time zones b) Be congruent for unspecified time span c) To span different generations d) Limit to a specific time span

ANSWERS

1. c 2. e 3. d 4. d 5. e I 6. c 7. c 8. c 9. d 10. c 11. a 12. a 13. c 14. b 15. c 16. d 17. b 18. b 19. b 20. b

EXERCISE- 10 Corporate Governance in the Banking Sector

Under corporate governance, banks articulate corporate values, codes of conduct and standards of appropriate behaviour etc., and have systems and controls to ensure compliance with them. The Board sets the

5-29 MM Special Guide

strategic objectives and corporate values of banks and specify transparent lines of responsibility and accountability, which are communicated throughout the organization. The Board and the top management meet at specified intervals for timely exchange of information on the bank's official condition and management practices.

It is therefore, possible to identify different sets of players in the corporate governance system. There is a dynamic balance among them that determines the prevailing corporate governance system depending on the stage of institutional development and the historical development. Two aspects of financial systems in other countries emerge as particularly important in determining the operation of corporate governance, viz., ownership of the corporate sector and the structure of corporate Boards. In UK, more than 60 percent of issued equity is held by financial and non-financial corporations. In US, on the other hand, shareholdings have until recently been held mainly by individuals. In Japan, the groupings can be classified into former Zaibatsus new bank-centred groups and manufacture-centred groups. In Germany, most groupings are industry- based but there are also bank and insurance-based groupings. In Sweden, groupings are predominantly family-controlled. With regard to structure of corporate Boards, several authors have observed that carefully designed Board structures prevent hostile takeovers from taking place.

Since banks are important players in financial system in India, special focus on the corporate governance in the banking sector becomes critical. Secondly, the Reserve Bank, as regulator, has responsibility on the nature of corporate governance in the banking sector. Thirdly, to the extent that banks have systemic implications, corporate governance in the banks is of critical importance. Fourth, given the dominance of public ownership in the banking system in India, corporate practices in the banking sector would also set standards for corporate govemance in private sector. Finally, with a view to reducing the possible fiscal burden of recapitalising the PSBs, attention towards corporate governance in the banking sector assumes added importance since PSBs must be in a position to assure the market that they can be trusted with shareholders' money.

It is important in this context to examine the regulatory issues under Government ownership that interact with the corporate governance practices in India. The first issue is that of enhancing corporate governance in banks. However, the usefulness of the common supervisory mechanism would require strengthening internal controls and facilitate monitoring by focusing on a few identifiable parameters.

Secondly, the approach of the Reserve Bank to regulation has some features that would enhance the need for and usefulness of good corporate governance in the banking sector. The transparency aspect has been emphasized by expanding the coverage of information, timeliness of such information and the analytical content in various publications. Further, interaction with market participants has been intensified both at informal level and formal level.

Thirdly, there is an issue of institutional structure the regulation. The basis of the institutional approach is to cover institutions, irrespective of business, which is convenient from the prudential angle. This contrasts with the functional approach to regulations which seeks to control business activity, irrespective of institutions. In reality, there is an overlap and over time, such overlap between institutions and business are bound

5-30 Comprehension to become increasingly complex. In view of the above, it is deemed essential to review and identify a model that is suitable in the Indian conditions and is consistent with future needs.

COMPREHENSION PASSAGE- 10

Directions (Q 1-6): Read the passage carefully and answer the questions given below: I. What do you understand by corporate governance? a) It is articulating corporate values, codes of conduct and standards of appropriate behaviour b) It is trying to get banks to function on an MNC level c) Strict and rigid policies d) All of the above

2. How is corporate governance sought to be achieved in an organization? a) Ensuring compliance of the same through systems and controls b) Close-circuit cameras c) Weekly audit d) None of the above 3. Ownership of the corporate sector and the structure of corporate Boards in the financial system are important determinants of corporate governance. This implies that: a) With regard to corporate boards, it is observed carefully designed Board Structure prevents hostile takeovers b) U.S.A needs to adopt the European strategy of family run corporations c) India is far more advanced than the other countries as far as the corporate sector goes d) A mixture of (a) and (b) 4. What factors contribute to the importance of corporate governance in banks? a) Banks are important players in the finance sector b) Banks have systemic implications c) PSBs must be in a position to assure that they can be trusted by shareholders d) (a) and (b) only e) (a), (b) and (c) 5. What are the mechanisms required for enhancing usefulness of corporate governance? a) Supervisory mechanism to be strengthened for internal controls b) Monitoring must be focussed on a few identifiable parameters c) Expanding coverage of information, timely information and analytical content in publications. d) Intensification of interaction with market participants both at informal and formal levels. e) All of the above 6. What are the present inhibiting factors in identifying a model suitable for Indian conditions for corporate governance? a) There is an overlap between institutions and business b) Institutional approach is convenient from the prudential angle c) Business approach is functional d) A combination of (a),(b) and (c)

Directions (Q.7-12): Choose the word which has the same meaning as the word given in the passage: 7 To govern a) To direct b) To bridle c) To reign d) To conduct affairs

5-31 MM Special Guide 8. Emerge a) Leak out b) Come to notice c) Celebrate d) transpire 9. Predominantly a) Probably b) Celebrate c) Primarily d) Anticipated 10. Take over a) Overtake b) Remove c) Assume control d) Become interested in 11. Overlap a) Race against time b) Partly cover c) Partly coincide d) Cover up 12. Coverage a) Treatment b) To rush up c) Extent d) Barrier

Direction (Q.13-18): Choose the word which has the opposite meaning to the word given in the passage: 13. Comply a) Disobey b) Abet c) Confuse d) Subservient 14. Specific a) Fortuitous b) Deliberate c) Casual d) Indistinctive 15. Hostile a) Hateful b) Unfriendly c) friendly d) Passive 16. Strengthen a) Buttress b) Tear down c) Restore d) Wane 17. Intensify a) Diminish b) Extensive c) Escalate d) Smoothen 18. Convenient a) Disturbing b) Disadvantageous c) Unacceptable d) Uncomfortable

ANSWERS

1. a 2. a 3. a 4. e 5. e 6. d 7. d 8. b 9. c 10. c 11. c 12. c 13. a 14. d 15. d 16. d 17. a 18. b

EXERCISE-11 Infrastructure

Infrastructure can deliver major benefits in economic growth, poverty alleviation, and environmental sustainability but only when it provides services that respond to effective demand and does so efficiently. Service is the goal and the measure of development in infrastructure. Major investments have been made in infrastructure stocks, but in too many developing countries these assets are not generating the quantity or quality of service demanded. The costs of this waste—in foregone economic growth and lost opportunities for poverty reduction and environmental improvement—are high and unacceptable. The causes of the past poor performance, and the source of improved performance, lie in the incentives facing providers. To

5-32 Comprehension

ensure efficient, responsive delivery of infrastructure services, incentives need to be changed through the application of three instruments commercial management, competition and stakeholder involvement. The roles of government and the private sector must be transformed as well. Technological innovations and : experiments with alternative ways of providing infrastructure indicate the following principles for reform: ' Manage infrastructure like business, not as bureaucracy. The provision of infrastructure needs to be con- .... ,. ceived and run as a service industry that responds to customer demand. Poor performers typically have a confusion of objectives, little financial autonomy or financial discipline, and no "bottom line" measured by the customer satisfaction. The high willingness to pay for most infrastructure services, even by the poor, ' provides greater opportunity for user charges. Private sector involvement in management, financing or ownership will in most cases be needed to ensure a commercial orientation in infrastructure. Introduce competition-directly if feasible, indirectly if not. Competition gives consumers choices for better meeting their demands and puts pressure on suppliers to be efficient and accountable to users. Competition can be introduced directly, by liberalizing entry into activities that have no technological barriers, and indirectly, through competitive bidding for the right to provide exclusive service where natural monopoly conditions ,., exist and by liberalizing the supply of service substitutes. Give users and other stakeholders a strong voice

'''':1 and real responsibility where infrastructure activities involve important external effects, for good or bad or where market discipline is insufficient to ensure accountability to users and other affected groups, governments need to address their concerns through other means. Users and other stakeholders should be repre- ' r sented in the planning and regulation of infrastructure service. In some cases, they should take major initiatives in design, operations and financing. Public- private partnerships in financing hold promise. Private sector involvement in the financing of new capacity is growing. The lessons of this experience are that the governments should start with simpler projects and gain experience, investors' returns should be linked to project performance, and any government guarantees needed should be carefully scrutinized. Governments will have a continuing, if changed, role in infrastructure. In addition to taking steps to improve the performance of infrastructure provision under their direct control, governments are responsible for creating policy and regulatory frameworks that safeguard the interests of the poor, improve environmental conditions, and coordinate cross-sectoral interactions—whether services are provided by public or private players. Govern- ments are also responsible for developing legal and regulatory frameworks to support private involvement in the provisions of infrastructure services.

COMPREHENSION PASSAGE-11

Directions (Q 1-6): Read the passage carefully and answer the questions given below: 1. What are the measures of development in infrastructure? I - a) The Quantum of investment b) Investment in infrastructure stocks c) The level of service delivered by infrastructure d) Proper utilisation of existing infrastructure e) All of the above 2. What according to the passage is the primary cause for poor performance of infrastructure services in India? a) Confusion of objectives b) Little financial autonomy c) No "bottom line" measurement of customer satisfaction d) A combination of (a),(b) and (c) MM Special Guide 3. What are the characteristics of poor management of infrastructure in India? a) Lack of commercial management b) Lack of competition c) Lack of stakeholders involvement d) All three e) None 4. What does the author suggest to be done for better management of infrastructure? a) Manage infrastructure as business, not as a bureaucracy b) Run a service industry that responds to customer demand c) Private sector involvement in management, financing or ownership d) Introduction of direct and indirect competition e) All of the above 5. What are the imperatives highlighted by the author for successful infrastructure? a) Users and other stakeholders should be represented in the planning and regulation of infrastructure. b) Public-private partnerships show promise c) Govt, should start with simple projects, investors' return should be linked to project performance and government guarantees needed to be carefully scrutinized. d) Govt, should be responsible for creating policies and regulatory frame work that safeguard the interests of the poor, improve environmental conditions and co-ordinate cross-sectoral interactions whether services are provided by public or private providers e) All of the above 6. Pick the most appropriate title for this passage a) Infrastructure and its benefits b) Infrastructure-A necessary tool c) Infrastructure-The backbone of the finance sector d) Infrastructure

Directions (Q.7-12): Choose the word which has the same meaning as the word given in the passage: 7. Goal a) End b) Finishing line c) Purpose d) Object 8. Measure a) Sum b) Average c) Rhythm d) Standard 9. Foregone a)Abandoned b) Quit c) Waived d) Forgotten 10. Incentive a) Expletive b) Angry c) Provocation d) Motivational benefits 11. Autonomy a) Anarchy b) Machine controlled c) Independence d) Restriction 12. Monopoly a) Board game b) Game plan c) Faith d) Own exclusively

Directions (Q.13-18): Choose the word which has the opposite meaning to the word given in the passage: 13. Asset a) Misinclination b) Irresponsibility c) Obligation d) Liability 14. Unacceptable

5-34 Comprehension

a) Pleasant b) Delightful c) Approved d) Satisfactory 15. Transformed a) Molded b) Reassigned c) Unaltered d) Fixed 16. Responsive a) Quick b) At the nth hour c) Insensitive d) Need based 17. Typical a) Average b) Exceptional c) Uncommon d) Irregular 1 8 . Feasible a) Impractical b) Fit c) Improbable d) Unattainable

ANSWERS 1. e 2. d 3. d 4. e 5. e 6. d 7. c 8. d 9. a 10. d 11. c 12. d 13. d 14. d 15. c 16. c 17. c 18. a EXERCISE-12 NUCLEAR TEST

Few would have dreamt in their wildest dreams before the fateful May 11 and May13, 1998 that the trun- dling elephant that India has all along been compared to in the western media would and could metamor- phose overnight into a ferocious lion that could not only roar but charge and kill anyone daring to cast an evil eye. Few could have foretold that the five underground nuclear tests at the Pokhran range in Rajasthan in May1998, catapulting this nation of 950 million people overnight into a super power on its own, send shock waves across Beijing, Islamabad, Washington, the European capital and even Tokyo.

The Buddha smiled once way back in 1974 and he smiled five times on May 11, 1998 on the Buddha Poomima day and May 13 when India's Prime Minister proudly announced to the nation and the rest of the world about India venturing into the exclusive club of nuclear weapon states as part of the national security shield even as he congratulated the top scientists of India over their great achievement.

India is a country wedded to peace and non-violence and her great sons like Lord Buddha, Ashoka and Gandhiji had been living examples to prove this gospel. But India as a self-respecting nation would not propagate the peace of the graveyard or the non-violence of the weak. It is a pity that our non-violence has been mistaken by many as our weakness and many assume that India is a nation of weak willed people. Time and again, our leaders have reminded the world community that India has an inalienable right to defend its freedom, sovereignty and its ancient heritage and that it would take appropriate measures at the appropriate time to make its defensive preparedness as strong as it could. No nation need be apologetic, if it tries its best to defend its freedom. And a nation like India that has suffered centuries of foreign subjection has every right-more than any other nation to strengthen its defense. Moreover, India cannot take any chances when it lives in a hostile nuclear environment, with Pakistan receiving all sorts of smuggled nuclear and missile

5-35 •

MM Special Guide

material from North Korea, China and other sources, and China itself having conducted several nuclear tests and armed herself to teeth.

In times of crises, India has to fall back upon its resources to defend itself, its hard-won freedom, its economic gains and its own ancient cultural legacy. It has had three wars with Pakistan and another disastrous war with China and both the countries are still in illegal occupation of Indian territory. India hopes that the smiling Buddha on May 11, 1998 would have conveyed the right message to the right quarters that evil designs on this country would not be tolerated. It was this logic, too, that prevented India from signing both NPT and CTBT-treaties that are discriminatory in nature. When the present government came to power, they had announced that India would go nuclear. The decision of the government to go nuclear does not emanate from any kind of jingoism or saber-rattling mentality. It arises from the supreme concern to preserve the integrity of a nation described by many of its detractors as 'functioning anarchy'. Far from it, India has conveyed to the rest of the world that it has the best brains that can excel the best in the world.

COMPREHENSION PASSAGE- 12 Directions (Q 1-8): Read the passage carefully and answer the questions given below: 1. The passage speaks about a) May 11, 1978 on Buddha Poomima day b) The three wars with Pakistan c) Importance of NPT and CTBT treaties d) India's nuclear tests conducted in Pokhran in May 1998 2. India's stand on nuclear policies was totally misunderstood because a) India had a history of being a peace loving nation b) Great leaders preached non-violence c) Pakistan under-estimated India's inner strength d) India was not well equipped 3. The govt. decided to go nuclear because a) To protect itself from foreign aggression b) To be on the safe side of the super powers c) To show its supremacy d) To become one with the enemy 4. What is the message India wants to convey through the nuclear test: a) India can also be ready in this game b) India has the best brains c) Evil designs on the country cannot be tolerated d) All of the above 5. How has India transformed itself to a ferocious lion? a) by casting an evil eye b) By showing her prowess if threatened c) By showing her superpower d) If challenged to prove her nuclear strength 6. How many underground nuclear tests did India undertake? ''t a) 4 b) 5 c) 3 d)2 ' 7. India has battled with outside powers . , a) True but only with Pakistan b) False c) Only with China d) Pakistan and China 8. The passage drives home the point a) India has the best brains that can excel the best in the world

5-36 Comprehension

b) India is a peace loving nation c) India has suffered from foreign rule d) India's wildest dreams came true through nuclear test.

Directions (Q9-11): Choose the word which has the same meaning as the word given in the passage: 9. Foretold a) Previously warned b) Told before c) Told to be forward d) Told with fortitude 10. Hostile: a) Friendly b) Enmity c) Hostage d) Hosts 11. Legacy a) Legal rights b) Property c) Cultural d) Will

Directions (Q12-18): Choose the word which has the opposite meaning to the word given in the passage: 12. Defend a) Attack b) Harmless c) Action d) Offend 13. Ferocious a) Fierce b) Humble c) Meek d) Fearful

Directions (Q14 to 18) : Choose the word which the opposite meaning to the word given in the passage. 14. In the passage 'to cast an evil eye' refers to a) to look down upon b) to have a evil eye c) to have an eye towards India's legacyd) to have evil design on India 15. 'to send shock waves' a) to pass through electric shock waves b) Shell shock the people with disbelief c) Produce waves that shock people d) Transmit shock signals 16. The Prime Minister announced two things a) India's power and legacy of non-violence b) India's launch of nuclear activities and the achievement of scientists c) The hostile nations and India's strength d) India's contradicting nature-as a peaceful and hostile one 17. What does the author mean by 'jingoism'

5-37 , . .. , , .., .. kg..gaiiiirit,

. .,-.. ,...... , . . . , .. . MM Special Guide a) Thoughtful behaviour b) Be followers of Jainism c) Boastful and aggressive patriotism d) Patriotism through non-violence 18. The word 'catapulting' means a) Move at great speed b) Contradicting c) Convincing d) Catching the people's attention

ANSWERS

1. d 2. a 3. a 4. d 5. b 6. b 7. d 8. a 9. b 10. b 11. b 12. a 13. c 14. d 15. b 16. b 17. c 18. a

PART - B EXERCISE —1 SOME CONCERNS RELATED TO FINANCIAL STABILITY

While the opportunities to grow further are on increase, banks do have to contend with new challenges as they move forward. The recent deregulation of savings bank deposit interest rates announced may initially lead to some competition, as banks with low share of savings deposits may like to garner a larger share of such deposits. However, this process may not be disruptive. The provisioning in lieu of pension liabilities and slippages in incrementally high growth loan portfolios in sensitive sectors such as retail and real estate sectors may impact profitability. A specific area of concem that has come to the fore is the concentrated and high pace of lending to the infrastructure sector by the public sector banks (PSBs), raising the apprehensions of increasing delinquencies in the future. As mentioned earlier, banks also face challenges in respect of demanding needs of supporting growth through financial inclusion and efficient credit intermediation through technology and product innovation.

It is important to recognise that with further globalisation, consolidation, deregulation and diversification of the financial system, the banking business is set to become more complex and riskier. Issues like complex risk management, appropriate liquidity management and enhancing skill development are some challenges already visible in the Indian context. The interface between banks and financial markets has undergone a fundamental shift in the recent times. The banks have become intricately linked to financial markets and hence more vulnerable to financial markets stress.

While technological advancements in IT have led to discernible improvement in the efficiency of banking services, banks have not gained in terms of efficiency partly because of lack of business process re- engineering. The challenge is to leverage technology optimally to balance growth, efficiency and risk management objectives. f Medium term outlook

538 ,1' . . . , WM:Tir'1.!;fi 1!!YV. . •

Comprehension

To take full advantage of the opportunities while addressing the new challenges, the process of institutional strengthening assumes critical importance. Banks need to build on four principles, viz., efficiency, stability, transparency and inclusion. The three balancing acts that the banking sector development strategy needs to perform are: between the drivers of banking sector growth and the requirements of the larger growth and development agenda; between the benefits and risks of greater global integration; and between the advantages of scale and the compulsions of diversity. As articulated earlier, expected economic performance, robust savings, policy thrust to expand infrastructure and further strengthening of financial inclusion are expected to ensure robust growth of the banking sector in medium term.

In the long term, however, the most significant task of the Indian banking sector is to ensure that banking products and services are made available to every individual in the country efficiently to achieve total financial inclusion. Going forward, filling the void called Tmancial exclusion' is the critical responsibility of banks. Despite all the challenges and issues to be addressed, the banking sector in India can look forward to enormous opportunities in their quest for long term growth. The banking sector needs to focus on growth through inclusion, innovation and diversification while complying with domestic regulations and internalising international best practices.

Questions: 1. What will be the effect of deregulation of savings bank deposit? 2. What has impacted the profitability of Banks? 3. What challenges are already visible in India? 4. Why BPR is required to improve efficiency? 5. What is the task before Indian Banking System in the long run? ANSWERS:

1. The recent deregulation of savings bank deposit interest rates announced may initially lead to some coin petition, as banks with low share of savings deposits may like to garner a larger share of such deposits. However, this process may not be disruptive.

2. Provisioning in lieu of pension liabilities and slippages in incrementally high growth loan portfolios in sensitive sectors such as retail and real estate sectors may impact profitability. 3. With further globalisation, consolidation, deregulation and diversification of the financial system, the banking business is set to become more complex and riskier. Issues like complex risk management, appropriate liquidity management and enhancing skill development are some challenges already visible in the Indian context. 4. Technological advancements in IT have led to discernible improvement in the efficiency of banking services. However, banks have not gained in terms of efficiency partly because of lack of business process re-engineering. The challenge is to leverage technology optimally to balance growth, efficiency and risk management objectives. 5. The most significant task of the Indian banking sector is to ensure that banking products and services are made available to every individual in the country efficiently to achieve total financial inclusion. Going forward, filling the void called 'financial exclusion' is the critical responsibility of banks. Despite all the challenges and issues to be addressed, the banking sector in India can look forward to enormous opportunities in their quest for long term growth

5-39 MM Special Guide

EXERCISE - 2 HAS INCREASING GLOBALISATION LIMITED THE EFFECTIVENESS OF NATIONAL POLICIES IN INDIA?

In the wake of the global financial crisis, financial globalisation has come under scrutiny once again. Cri- tiques of globalisation have re-emphasized that globalisation does not bring any additional gains than what can already come from free trade. In the context of increasing capital flows, it has been time and again pointed out by the critiques that gains from trade in goods (widgets) are of first order, while gains from trade in capital (dollars) are of second order, a la Jagdish Bhagwati. Another observation has been that countries that have benefited most from free-market globalisation are not those that have embraced it wholeheartedly, but those that have adopted parts of it selectively. Open markets succeed only when embedded within social, legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared (Rodrik, 2011).

Contrarian arguments have been equally strong. Kose, et al.(2009) review a large body of literature to highlight gains from financial globalisation and the various economic policies that could help developing economies effectively manage the process of financial globalisation. They find that policies promoting sound macro economy, financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of financial integration. However, a more recent concern has been: if globalisation is leading to a loss of national policy effectiveness?

The answer is not easy to find. Subbarao (2011) suggests that there is a need to find ways to maximise the benefits of globalisation while minimising its costs. While spillovers occur, we need to deal with them. A typical case has been QE2, which has both positive and negative extemalities. Its announcement caused a double whammy on the EMEs through a surge in capital inflows and a rise in commodity prices, both requiring them to tackle inflationary pressures. They put EMEs in a policy bind as higher interest rates to fight inflation could potentially intensify capital inflows further. QE2, however, also helped shore up US recovery, bringing back confidence in financial markets and ultimately helping EMEs through improved trade and capital account flows. Effectiveness of national economic policies goes down in such cases, especially if they are uncoordinated.

The impact of globalisation on national economic policy effectiveness is ultimately an empirical question. Our theoretical understanding of the channels through which national economies are linked is also inadequate. Yet, it would not be correct to say that domestic monetary, fiscal or exchange rate policy becomes redundant with increased openness. Trilemma in policy choice is a well-known problem and needs to be managed by adopting less than comer solutions. In fact, under globalisation national policies can be more carefully calibrated and fine-tuned to serve national interests.

For instance, monetary policy takes on new importance under globalisation due to need to contain spillovers and their impact on nominal asset retums. The case for price stability as an optimal monetary rule becomes stronger. Even without nominal price rigidities, price stability is important because it enhances the risk sharing properties of nominal bonds (Devereux and Sutherlands, 2008). It is important to recognise that globalisation represents a shock to relative, not absolute prices. What happens to the general price level depends on what monetary policy makers then decide to do. It has been argued that de facto openness has risen sharply in India and has implied a loss of monetary policy autonomy when exchange rate pegging was attempted (Shah and Patnaik, 2011). It is true that the exchange rate regime has evolved towards greater 5-40 Comprehension flexibility as a conscious policy choice, but this has been calibrated to the changing structure and dynamics of the economy without loss of monetary policy independence. Policies had supported this move over a period of time, inter alia, by capacity building to withstand volatility and shocks. It has increasingly allowed exchange rate to serve as a buffer, depreciating to help the economy when it was weak and appreciating to reduce excess demand when it was strong. In the past two years, there has been no significant foreign exchange market intervention. The small increase in the Reserve Bank's foreign exchange reserves mainly reflects various accruals, interest earnings and valuation changes. Increased exchange rate flexibility has also minimised the danger that foreign inflows would be attracted by "one-way bets" on appreciation, or that domestic firms would borrow excessively from abroad without hedging their exposure.

Globalisation is a phenomenon that has now acquired a force of its own. Policy interventions can best aim at a right policy mix to reap gains from it while minimising the risks. These gains dynamically can be significant. It may appear that growing global interdependence has increased the Indian economy's vulnerability to external demand and exchange rate shocks. However, misaligned exchange rates amidst balance of payment shocks had a much larger adverse impact on the Indian economy in the earlier crisis episodes. After the Indian economy has become integrated globally, a large shock in the form of a swing of US$100 billion in total net capital inflows in a single year of peak of global crisis had been managed without too much impact on exchange rate, interest rates, external and internal balances. Questions:

1. Why gains from trade in capital (dollars) are considered as of second order. ? 2. Who have been largely benefitted from free market & why? 3. What helps developing countries derive the benefits of financial integration? 4. What is the most recent concern? 5. Why the perception that global interdependence has increased the Indian economy's vulnerability to external demand and exchange rate shocks, may not be correct?

ANSWERS:

1. Critiques of globalisation have re-emphasized that globalisation does not bring any additional gains than what can already come from free trade. In the context of increasing capital flows, it has been time and again pointed out by the critiques that gains from trade in goods (widgets) are of first order, while gains from trade in capital (dollars) are of second order, a la Jagdish Bhagwati. 2. Countries that have benefited most from free-market globalisation are not those that have embraced it wholeheartedly, but those that have adopted parts of it selectively. Open markets succeed only when embedded within social, legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared 3. Policies promoting sound macro economy, financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of financial integration. 4. A more recent concern has been: if globalisation is leading to a loss of national policy effectiveness? 5. Globalisation is a phenomenon that has now acquired a force of its own. Policy interventions can best aim at a right policy mix to reap gains from it while minimising the risks. These gains dynamically can be significant. It may appear that growing global interdependence has increased the Indian economy's vulnerability to external demand and exchange rate shocks. However, misaligned exchange rates amidst balance of payment shocks had a much larger adverse impact on the Indian economy in the

5-41 MM Special Guide

earlier crisis episodes. After the Indian economy has become integrated globally, a large shock in the form of a swing of US$100 billion in total net capital inflows in a single year of peak of global crisis had been managed without too much impact on exchange rate, interest rates, external and internal balances.

EXERCISE-3 IT Governance and IT Strategy: Board's Eye View

(From the valedictory address delivered by Shri Harun R. Khan, Deputy Governor, Reserve Bank of India, at the seminar on IT Governance for Directors of Banks at the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad on July 28, 2015.)

In the recent times, almost all the business activities in the banking industry have undergone rapid changes due to various factors with IT being the most significant. The banking products, services, processes, delivery channels, etc, have largely moved from physical to electronic. So we have come to a stage in banking, where IT is an enabler, one of the most important business drivers and also a crucial component of the business process itself. In a way a large part of the 'Internal Transformation' of banking organisations could be attributed to IT adoption. Further, as all the stake holders for banks, including the regulators, are adopting more and more technology platforms, banking sector has got an ideal IT ecosystem to flourish, so to say. Resultantly, now we are in a situation when not only the digital assets constitute a significant portion of a bank's assets in comparison to the physical assets, its share is also growing day by day.

In one way IT governance can be defined as the decision rights and accountability framework for encouraging desirable behavior in the use of IT. The IT governance provides a framework for ensuring that the information technology decisions take into consideration the business goals and objectives of an organisation. As is the case with corporate governance which aids an organisation to ensure that major decisions are in alignment with the organisational vision, mission and strategy, IT governance ensures that IT-related key decisions match the organisationwide objectives over a long term horizon.

The IT governance exists within corporations to guide IT initiatives and ensure that the performance of IT meets the corporate objectives. A well placed IT policy and structured IT governance set-up along with corporate managers combine to ensure that IT is synchronised with the business and delivers value to the firm. In the IT governance framework, issues and strategic importance of IT need to be clearly understood so that the organisation can implement its strategies effectively to face the growing market competition on a sustained basis. A bank's vision for IT governance must incorporate ideas and information about the way it executes its business strategy. It is about how one operationalises the strategy and subsequently capitalises on market opportunity. It is only at the lower levels of framework that the IT governance is about decision rights, compliance with regulations, setting standards, etc. And while I do not intend to minimise the importance of these operational elements in the IT governance, I do feel that if a bank's IT governance is primarily about being compliant and secondarily about business execution, then banks' business is not likely to benefit strategically from the IT. One would then miss out on the larger opportunity that IT governance offers.

As the regulator and supervisor of banks, let me focus a bit on our perspectives on the IT infrastructure and governance. As key areas of focus, I would like to list a few of the unfinished agenda items which banks need to pursue more vigorously:

5-42 1:.

Comprehension a. Quality of returns generated by the Core Banking Solution (CBS) of the banks is not up to the mark in many cases and it is not able to provide the data in customised formats as required by the regulator/ supervisor. Banks have to examine the need for making their CBS systems capable of meeting, inter alia, not only all their internal MIS requirements but also of generating regulatory/supervisory returns on a real time basis. b. System driven identification of NPAs has not been found robust enough in certain banks. Though banks are taking remedial actions in such cases, it does not alleviate the supervisory discomfort with this kind of situation. c. Automated Data Flow (ADF) application is yet to get fully implemented in all the banks. In absence of full ADF implementation, MIS reports are open for manual intervention and operational errors apart from delay in submission. The system also needs to address the integration issues of the legacy data in the centralised data server for a robust MIS...... d. Recently released guidelines of Basel Committee on Banking Supervision (BCBS) on corporate governance principles for banks highlights the board members having knowledge, inter alia , relating to role of information technology in risk governance. The guidelines also prescribe that the degree of sophistication of a bank's risk management infrastructure — including, in particular, a sufficiently robust data infrastructure, data architecture and information technology infrastructure — should keep pace with developments such as balance sheet and revenue growth. Realising that banks' information technology and data architectures were inadequate to support the broad management of financial risks during the global financial crisis that began in 2007, BCBS released the "Principles for effective risk data aggregation and risk reporting" in 2013. The Principles, inter alia, highlight that improving banks' risk data aggregation capabilities would lead to improvements in terms of strengthening the capability and the status of the risk function to make judgments and in turn to gain in efficiency, reduced probability of losses and enhanced strategic decision-making, and ultimately increased profitability. Banks in India, therefore, have to strengthen the IT systems for creating a robust compliance infrastructure to meet the international and national regulatory best practices. Boards of banks, especially of the Public Sector Banks, will have a critical role to play in this regard.

Questions: 1) How could the quality of the returns generated by the Core Banking Solution be improved, according to the speaker? 2) What causes discomfort in the minds of the regulator as regards NPA identification? 3) Why does the speaker recommend the full implementation of Automated Data Flow? 4) What important infrastructural aspects of information technology are highlighted in the guidelines of the Basel Committee on Banking Supervision? 5) What is the essence of the passage?

Answers: 1) CBS systems should be capable of meeting not only all the internal MIS requirements of a bank but also be capable of generating regulatory/supervisory returns on a real time basis. 2) The fact that system driven identification of NPAs is not robust enough causes supervisory discomfort. 3) Without the full implementation of the Automated Data Flow process, MIS reports lend themselves to manual interventions and operational errors. err 4) A sufficiently robust data infrastructure, data architecture and information technology infrastructure. 5) Banks have to ensure a strong IT system that creates a robust compliance infrastructure to meet the international and national best practices and that the Boards of banks have a critical role in the issue.

543 .•

-r. :.. .,.., 41., f-,4-',,:?...... ';:. MM Special Guide EXERCISE - 4 IT AND INDIAN BANKING

It would be difficult to imagine a bank of any significance which does not have some or most of the key processes being run on IT based applications. Most of the customer related functions in banks, be it account opening, transaction processing or account and data maintenance, are all run on IT enabled systems. It is the reach and capacity of information technology that has facilitated banks to transcend the limitations of, geographical spread, burgeoning transaction volumes and, to an extent, human resources. Banks are expanding their size and services to cater to fast increasing customer needs through technology enabled payment systems, intemet based access and innovative service delivery modes.

Other important business activities of banks such as participation in securities, currency and money markets, besides compliance functions like reserve maintenance, regulatory reporting etc. are all having processes heavily dependent on information technology. Even in case of internal work processes having large component of manual processing, dependence on computers and IT based communication mechanism is increasingly felt.

Overall, banks are dependent on IT based systems for almost all of their activities, although the level of sophistication and refinement in such systems may vary from bank to bank or across activities or banking Industry segments (commercial banks, cooperative banks etc.). Reasons for this are not far to seek. Technology has become essential component for customer related and market related activities and participant banks cannot meet the requirements imposed by timelines or volumes without leveraging on technology. Even for backend and internal work processes, cost and time constraints are pushing banks to lean upon technology. It may not be possible to store and retrieve huge amounts of customer data, transaction data and business information, but for the power of technology based systems. More so, the globalization, competition and compliance requirements make it imperative for banks to increasingly use IT based platforms and applications for most of their activities. It has become necessary for banks to use modern marketing as well as customer service tools to survive in a competitive environment; which involve large scale data collection, analysis and efficient communication which are not possible without the help of IT.

4. IT has a great role to play in furthering the financial inclusion drive, involving expansion of banking access to remote locations in a cost effective way. Reaching banking to the excluded segments has been the focus of regulatory agenda and many initiatives have been taken in this regard.

While the increased deployment of IT certainly has its own benefits in terms of enabling banks to meet the business requirements and enhance their service delivery capacity, such IT usage and dependence, however, bring in some new challenges and concems. These challenges keep on getting more complex and qualitatively different, as technology keeps on evolving rapidly. For instance, technologies like cloud computing bring in advantages and efficiencies along with new risks which have to be managed. Any delay in adoption of new technologies would only let the competition pass by the laggard institutions.

6. Cloud computing is an innovative concept which enables participants to leverage on collaborative sharing of resources, which not only brings down costs but also facilitates the participants to con-

5-44 : Comprehension

centrate more on their core activities, leaving the management of IT resources to the service providers. This facility, by making the sophisticated applications affordable, has the potential to enable even the marginal players to make use of the technology and develop their businesses. However, this being a new technology data integrity and confidentiality seem to be a major concern at this stage. Further, if too many participants rely on a single service provider, it may lead to a risk of over-concentration inasmuch as the failure of the service provider will be catastrophic. Banks will have to assess the pros and cons of new technologies and put in place adequate safe guards while adopting them.

Questions: I. Which of the customer related functions of the Banks are done on IT platform? 2. What has enabled the Banks to transcend the limitations of geographical spread & volume of business? 3. What has been the focus of Regulatory agenda? And what role IT can play in it? 4. What enables leveraging sharing of resources? 5. What are the pitfalls in new technology? And what needs to be done to overcome the same?

ANSWERS: 1. Most of the customer related functions in banks, be it account opening, transaction processing or account and data maintenance, are all run on IT enabled systems. 2. It is the reach and capacity of information technology that has facilitated banks to transcend the limitations of, geographical spread, burgeoning transaction volumes and, to an extent, human resources. 3. Reaching banking to the excluded segments has been the focus of regulatory agenda and many initiatives have been taken in this regard. IT has a great role to play in furthering the financial inclusion drive, involving expansion of banking access to remote locations in a cost effective way. 4. Cloud computing is an innovative concept which enables participants to leverage on collaborative sharing of resources, which not only brings down costs but also facilitates the participants to concentrate more on their core activities, leaving the management of IT resources to the service providers. 5. Cloud computing being a new technology data integrity and confidentiality seem to be a major concern at this stage. Further, if too many participants rely on a single service provider, it may lead to a risk of over-concentration inasmuch as the failure of the service provider will be catastrophic. Banks will have to assess the pros and cons of new technologies and put in place adequate safe guards while adopting them.

EXERCISE - 5 Sustainable Growth in the Financial Sector

(Speech delivered by Dr. Raghuram G Rajan, Governor Reserve Bank of India on September 18, 2015, at the 4th C.K. Prahalad Memorial Lecture.)

Resolution of Distress

5-45

• . . ' . . • •

• MM Special Guide 1

Failure is inevitable in a free enterprise system. An effective resolution system is needed to preserve residual enterprise value after financial failure. Two critical elements are the speed of resolution and the predictability of how losses are shared amongst contracts. For instance, few outsiders will want to lend if they believe they will be subordinated to promoter interests in bad times. So we need a speedy bankruptcy code to resolve distress while maintaining the priority structure of claims, and I am glad the Finance Ministry intends to bring one in soon. The bankruptcy code will give creditors more ability to resolve distress, and help strengthen the corporate bond market, which is so essential to infrastructure financing. In the meantime, we have to find ways to deal with the distress in the banking system. Regulatory forbearance, where the RBI softens its rules on classifying bad loans, only makes it easy for banks to 'extend and pretend'. It is not a "' • solution. Since no other stake-holder— such as the promoter, tariff authorities, tax authorities, etc. — contributes to resolution, the real project limps along, becoming increasingly unviable. Meanwhile, analysts grow increasingly suspicious of bank balance sheets and the growing volume of 'restructured' assets. Also, some large promoters take advantage of banker fears about assets turning nonperforming to extract unwarranted concessions, without any sacrifice in the value of their stake. Regulatory forbearance therefore ensures that problems grow until the size of the provisioning required to deal with the problem properly becomes alarmingly large — which then prompts calls for yet more forbearance. Forbearance is also a disservice to the bank's owners (which may include the Government) who, instead of being faced with a small problem early and being given the opportunity to apply corrective action, are faced with large problems suddenly when they • cannot be pushed into the future any more. The RBI ended the forbearance accorded to restructured loans. Henceforth, restructured loans will be classified as non-performing loans. However, the RBI has made it •. easier to recognise and deal with distressed projects. In other words, while ending forbearance, we have introduced flexibility for those who recognise and deal with stressed assets early— the early warning database of large loans, the Joint Lenders' Forum, the Strategic Debt Restructuring process, the 5/25 mechanism, and so on should all be seen as the RBI's way of giving banks the flexibility to deal with the stressed asset problem in the absence of a functioning bankruptcy code, even while bringing more urgency and discipline to dealing with the problem. Naturally, some criticise our easing the way for restructuring. One gentleman accosted me the other day and asked why, when he was paying his debt regularly, his competitor who had siphoned money out of the firm through over-invoicing was getting his debt written down because it was unpayable. The reality is that firms have got into trouble for a variety of reasons, only one of which is over- . invoicing. Wherever possible, of course, promoters should share fully in the costs of restructuring. But the 1 restructuring process is not meant to deal with criminality. Siphoning money out of a business is a crime against lenders and investors, and should be dealt with as such by the investigative authorities. However, the original sin of over-invoicing should not be a reason to keep idle a spanking new plant and to let its workers go.

Questions: 1) According to the speaker, why is there a need for an effective distress resolution mechanism? 2) The speaker presses for a speedy bankruptcy code to resolve distress. Why? 3) How does the speaker describe "Regulatory Forbearance" and what are the pitfalls of regulatory forbearance according to him? 4) In the absence of bankruptcy code, how has the RBI helped the banks in identifying and dealing with stressed assets? 5) What are the speaker's thoughts on over-invoicing (of imports)?

5-46 Comprehension

Answers: 1) To preserve the residual enterprise in the event of a financial failure of a firm. 2) If lenders believe that their interests are not protected adequately in bad times and are subordinated to the promoter interests, they will not want to lend. The code will empower the creditors in case of 1 distress. The corporate bond market will also be strengthened. 3) When the Central Bank permits softening of the rules relating to classification of bad loans, it displays regulatory forbearance. This soft stand by the regulator leads to the problem getting bigger resulting in higher and higher provisioning which calls for more forbearance. The bank's owners are left to face the large problems suddenly which could have been dealt better when the problems were not exacerbated following regulatory forbearance. 4) Database of large loans with early warning signs, Joint Lenders' Forum, Strategic Debt Restructuring process, the 5/25 mechanism, etc. are the tools designed to help the banks to recognize and deal with the issue with the required urgency and discipline. 5) By over-invoicing, money has been siphoned off from the firm and should be dealt with as a crime by the investigative authorities. But the firm's assets should continue to be put to productive use.

EXERCISE - 6 CASH DEPOSIT MACHINE (CDM)

As a part of enhancing customer convenience and providing a 24 X7 channel of customer service, Cash Deposit Machines (CDM) have been introduced by State Bank of India. Apart from enhancing customer comfort, this has also reduced deployment of branch resources on low value cash deposit transactions and has enabled the Bank in utilising the resources for up-selling and cross-selling of other products.

What is a CDM?

Cash Deposit Machine is a `cash-in' kiosk that allows a customer to deposit loose bank notes. Bank's customers who own any variant of ATM-cum-Debit Card and SME Insta Deposit Cards are allowed to deposit the cash to their mapped account(s). The deposit of Cash is through a bunch of loose notes up to a maximum of 200 pieces at any one instance (50 pieces in case of certain CDMs). The machine scans for quality (genuineness) and quantity (counts Notes piece by piece) of notes deposited. Customer is allowed to deposit up to a maximum of Rs.49900/- per transaction. The machine accepts cash in denominations of Rs.1000/-, Rs.500/- and Rs.100/- notes only. The Cash deposited through this machine is credited to the customer's account immediately. The customer will get an immediate response indicating the credit to the linked account if the account to which the transaction is made is enabled with SMS facility.

How CDMs function CDMs work on the sensor technology. Notes deposited are counted, authenticated and the quantity and value are displayed to the customers. Once the customer confirms that the quantity and value are correct, the cash is sent to the vault /cash box, but if the customer cancels the transaction, the cash is returned to him. The escrow facility provided allows the customer to cross check his transaction before the notes reach . 1 5-47 MM Special Guide the vault / cash box. Suspect notes are detected by the CDM and are not deposited. These are held in the machine in a separate box. The branches will handle such notes as per extant instructions of the Bank in this regard. Apart from depositing cash, the customers can also carry out other functions like Balance Enquiry, Mini Statement and PIN Change. The benefits of this initiative are being used as an USP for marketing Bank's liability products.

Cash Handling by the Branch

The joint custodians of the branch will be provided with a password to operate the safe of CDMs. The collected notes in the cassettes will be tallied with the number of notes for their quantity and value as printed on the supervisory slip. As the customers' accounts have been already credited on a real time basis, the value of such cash will be debited to branch cash balance account as in a normal manner. It is the responsibility of the joint custodians to take out the cash at regular intervals during the day to avoid overflowing of the cassettes resulting in the stoppage of CDMs. In addition to ensuring that all such notes are accounted for before EOD at the branch, the joint custodians should reconcile the physical cash with supervisory slip and BGL account balance before accounting. If any difference is observed, the same should be dealt with immediately

If CDM detects any suspect note, the joint custodians will verify the genuineness of the same. If in the process, any counterfeit note is found, branches are advised to follow meticulously the instructions issued by RBI on detection and impounding of counterfeit notes from time to time. The recent one of such instructions is available in RBI/2012- 13/104 DCM (FNVD) No. G- /16.01.05/ 2012-13 dated July 2, 2012. In addition, branches also maintain the records of such suspect transaction in the register with the following information: Date of transaction, Transaction reference number, Nature of suspect / remarks / action taken, Particulars of renderer (Name, a/c number with contact details), Denomination / pieces / serial number. The Joint custodians will enter the above details under their signature and the BM will initial.

Security Measures With a view to ensuring adequate security & safety the following measures needs to be taken: (a) Two built-in cameras are installed in the CDM that record all the transactions and the identity of the person doing the transaction. One is to record the customers and their movements and the other to record the events in the cash box. This video can be used for resolving any disputes at a future date. (b) The customer can be identified by his / her card number, time of deposit, record of rejection (denomination) in the transaction log, electronic Journal (eJ) report and the sequence in which such notes are placed in the reject bin. The reject bin will contain only suspect notes .Customer identification can be done with the help of face image and hand movement which can be viewed in CDM. (c) All the CDMs are adequately insured for the value of the asset and also their contents. (d) Cash verification is done every quarter and CDM Cash verification certificate is made as part of the quarterly / half yearly / yearly closing exercises. Questions What are the objectives of introducing CDMs in the Bank? Who can deposit Cash in a CDM?

5-48 Comprehension

3. What are the limitations for depositing Cash? 4. What is the process of depositing notes in a CDM? 5. How the Cash deposited in a CDM is handled at the Branch? 6. What Security measures have been incorporated for the safety & security of the cash?

ANSWERS: 1. The Objectives of introducing CDMs are: a) Enhancing customer convenience and providing a 24 X7 channel of customer service; b) Reducing deployment of branch resources on low value cash deposit transactions; c) Utilising the resources for up-selling and cross-selling of other products.

2. Bank's customers who own any variant of ATM-cum-Debit Card and SME Insta Deposit Cards can deposit the cash to their mapped account(s).

3. The deposit of Cash is through a bunch of loose notes up to a maximum of 200 pieces at any one instance (50 pieces in case of certain CDMs). The machine scans for quality (genuineness) and quantity (counts Notes piece by piece) of notes deposited. The machine accepts deposit up to a maximum of Rs.49900/- per transaction. The machine accepts cash in denominations of Rs.1000/-, Rs.500/- and Rs.100/- notes only

4. CDMs work on the sensor technology. Notes deposited are counted, authenticated and the quantity and value are displayed to the customers once the customer confirms that the quantity and value are correct, the cash is sent to the vault /cash box, but if the customer cancels the transaction, the cash is returned to him. The escrow facility provided allows the customer to cross check the transaction before the notes reach the vault / cash box. Suspect notes are detected by the CDM and are not deposited. These are held in the machine in a separate box. The branches will handle such notes as per extant instructions of the Bank in this regard.

5. The joint custodians of the branch will be provided with a password to operate the safe of CDMs. The collected notes in the cassettes will be tallied with the number of notes for their quantity and value as printed on the supervisory slip. As the customer's account has been already credited on a real time basis, the value of such cash will be credited to branch Cash Balance Account. It is the responsibility of the joint custodians to take out the cash at regular intervals during the day to avoid overflowing of the cassettes resulting in the stoppage of CDMs. The joint custodians have to be ensure the following: (i) The deposits in the CDM are accounted before EOD; (ii) Physical cash has to be reconciled with supervisory slip and BGL a/c balance before accounting (iii) Any difference should be reconciled immediately.

5-49 MM Special Guide

(iv) In addition to ensuring that all such notes are accounted for before EOD at the branch, the joint custodians should reconcile the physical cash with supervisory slip and BGL account balance before accounting. If any difference is observed, the same should be dealt with immediately. If CDM detects any suspect note, the joint custodians will verify the genuineness of the same. If in the process, any counterfeit note is found, RBI counterfeit notes have to be followed.

With a view to ensuring adequate security and safety two built-in cameras are installed in the CDM that record all the transactions and the identity of the person doing the transaction. One to record the image of the customers and their movements and the other to record the events in the cash box. The customer can be identified by his / her card number, time of deposit, record of rejection (denomination) in the transaction log, eJ report and the sequence in which such notes are placed in the reject bin. Customer identification can be done with the help of face image and hand movement which can be viewed in CDM. CDMs are adequately insured for the value of the asset and also their contents. Cash verification is done every quarter and CDM Cash verification certificate is made as part of the quarterly / half yearly / yearly closing exercises.

EXERCISE - 7 CHEQUE TRUNCATION SYSTEM

In the Clearing House cheques drawn on a paying bank will be physically presented by the collecting bank and settlement made. Physical presentation of cheques for realization involves delay. Using technology, an electronic image of a cheque is sent by the collecting bank to the paying bank for payment. The physical cheque is retained by the collecting bank itself. This system is called CHEQUE TRUNCATION SYSTEM (CTS). Electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation eliminates the physical movement of instruments. This effectively saves the cost associated with the physical movement of the cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing. Thus, Cheque Truncation System expedites clearing process, resulting in better service to customers, reduces the scope for clearing-related frauds or loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation-related and logistics-related problems. RBI has directed that banks should issue only the CTS 2010 (Cheque Truncation System 2010) - compliant cheques to customers w.e.f from April 1 2012. This would enable replacing physical clearing system with electronic clearing system. The CTS process is given in detail below.

Instead of sending the physical instrument for collection to the drawee branch, the presenting bank trans- mits an image of the cheque directly to the branch by capturing the image of the cheque. Images of cheques are taken using scanners. Scanners also function like photo-copiers by reflecting the light passed through a narrow passage on to the document. Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called a pixel. Images are classified as black and white, gray- scale or colour based on how the pixels are converted into digital values. The images are captured with digital signatures of the presenting bank and thereafter transmitted to the Clearing House and then to the paying banks. Further, the paying banks, if not satisfied with the image quality or for any other reason, can . .. Nil ask for the physical instrument to facilitate payment processing.

5-50 Comprehension

The image along with the data is transmitted by the banks to the Clearing House using a software called as Clearing House Interface (CHI) provided by RBI. Other information like the Magnetic Ink Character Recog- nition (MICR), date of presentation and presenting bank are also sent. The Public Key Infrastructure (PKI) ensures the safety and security of the cheques and non —repudiation of data/images. The data processing takes place at the clearing house and thereafter, the Clearing House sends the same to the drawee bank for processing.

The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing. The drawee banks through their CHI receive the images and data from the Clearing House for payment processing. The drawee CHI also generates the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed. The entire essence of CTS technology lies in the use of images of cheques (instead of the physical cheques) for payment processing.

There is no change in the clearing process for customers. Customers continue to use cheques as at present, except to ensure the use of image-friendly-coloured-inks while writing the cheques. No changes / corrections can be carried out on the cheques (other than for date validation purposes, if required). RBI has advised that no cheques with alterations (even with authentication) should be issued under CTS. Hence, a fresh cheque has to be issued if any alterations are required on any cheque. This would help banks in identifying and controlling fraudulent alterations. Cheques with alterations in material fields are not allowed to be processed under the CTS environment.

Under CTS the physical cheques are retained at the presenting bank level and these do not move to the paying banks. In case a customer desires, banks can provide images of cheques duly authenticated. Cus- tomers, who have arrangement with banks for receiving the paid instruments (like government departments) would receive the cheque images. In case, however, a customer desires to see / get the physical cheque, it would need to be sourced from the presenting bank, for which a request should be made to his/ her bank. An element of cost / charge may also be involved for the purpose. To meet legal requirements, the presenting banks which truncate the cheques need to preserve the physical instruments for a period of 10 years.

The new approach envisioned as part of the national roll-out is the grid-based approach. Under this approach the entire cheque volume which was earlier cleared through 66 MICR Cheque Processing locations is consolidated into the three grids. Each grid provides processing and clearing services to all the banks under its respective jurisdiction. Banks, branches and customers based at small / remote locations falling under the jurisdiction of a grid would be benefitted, irrespective of whether there exists at present a formal arrangement for cheque clearing or otherwise. The illustrative jurisdiction of the three grids are:

New Delhi Grid: National Captial Region of New Delhi, Haryana, Punjab, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand and the Union Territory of Chandigarh.

Mumbai Grid: Maharashtra, Goa, Gujarat, Madhya Pradesh and Chattisgarh. Chennai Grid: Andhra Pradesh, Telangana, Karnataka, Kerala, Tamilnadu, Odisha, West Bengal, Assam and the Union Territory of Puducherry. MM Special Guide

Questions: 1. What is Cheque Truncation System (CTS)? 2. What is the function of scanner under CTS? 3. How is the clearing cycle is completed under CTS? 4. What changes are brought out in making of a cheque under CTS? 5. What are the changed instructions regarding physical instruments under CTS? 6. What are the advantages of CTS system? ANSWERS: 1. In the Clearing House cheques drawn on a paying bank will be physically presented by the collecting bank and settlement made. Physical presentation of cheques for realization involves delay. Using technology, an electronic image of a cheque is sent by the collecting bank to the paying bank for payment. The physical cheque is retained by the collecting bank itself. This system is called CHEQUE TRUNCATION SYSTEM (CTS).

2. Images of cheques are taken using scanners. Scanners also function like photo-copiers by reflecting the light passed through a narrow passage on to the document. Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called a pixel.

3. The image along with the data is transmitted by the banks to the Clearing House using a software called as Clearing House Interface (CHI) provided by RBI. Other information like the Magnetic Ink Character Recognition (MICR), date of presentation and presenting bank are also sent. The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing. The drawee banks through their CHI receive the images and data from the Clearing House for payment processing. The drawee CHI also generates the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed.

4. No changes / corrections can be carried out on the cheques (other than for date validation purposes, if required). RBI has advised that no cheques with alterations (even with authentication) should be issued under CTS. Hence, a fresh cheque has to be issued if any alterations are required on any cheque. This would help banks in identifying and controlling fraudulent alterations. Cheques with alterations in material fields are not allowed to be processed under the CTS environment.

Under CTS the physical cheques are retained at the presenting bank level and these do not move to the paying banks. In case a customer desires, banks can provide images of cheques duly authenticated. Customers, who have arrangement with banks for receiving the paid instruments (like government departments) would receive the cheque images. In case, however, a customer desires to see / get the physical cheque, it would need to be sourced from the presenting bank, for which a request should be made to his/her bank. An element of cost / charge may also be involved for the purpose. To meet legal requirements, the presenting banks which truncate the cheques need to preserve the physical instruments for a period of 10 years.

5-52 Comprehension

6. The benefits from CTS could be summarised as follows — a. Cost reduction; b. Shorter clearing cycle; c. Superior verification and reconciliation process; d. No geographical restrictions as to Clearing House jurisdiction; e. Operational efficiency for banks and customers alike; f. Reduction in operational risk and risks associated with paper clearing.

.• EXERCISE - 8 SUPERVISORY COLLEGE FOR SBI AND ICICI BANK

Introduction: With a view to deal with supervisory issues revolving and establish a cooperation mechanism for cross- border supervision Reserve Bank of India (RBI) have set up two supervisory bodies for State Bank of India and ICICI Bank. This is expected to ensure compliance of global prudential norms and reduce supervisory overlap.

What are Supervisory colleges? Initially enunciated in the Basel Committee for Banking Supervision (BCBS) October 2010 Document, "Good Practice Principles on Supervisory Colleges". The concept is an attempt to reduce supervisory overlap and filling in supervisory gaps for better supervisory co-operation enunciated in Basel II Framework. World over Supervisory colleges have evolved as an important component of effective supervisory oversight of an international banking group.

Though India does not have any Systemically Important Banks (SIBS), Reserve Bank as the banking regulator has decided to establish a supervisory college each for SBI and ICICI Bank Ltd., as both banks have vast expanse of overseas operations spreading across many supervisory jurisdictions and to enable benchmarking India with the best practices across the globe.

The College is driven by two specific categories of supervisors, each with different but mutually reinforcing responsibilities, important for understanding the relationships: home supervisors and host supervisors. Whereas home supervisors are responsible for the supervisory oversight of a banking group on a consolidated basis , host supervisors have different interests in relation to the supervision of the group as a whole depending on whether the group has material risk exposures in the host jurisdiction and whether any systemic risk to the host jurisdiction is suspected etc. Members of a college should include host supervisors who have a relevant subsidiary or a significant branch in their jurisdictions and who, therefore, have a shared interest in the effective supervisory oversight of the banking group.

Supervisory college in india: The College comprises representatives from foreign countries named as host country supervisors. While for State Bank of India (SBI) there are nine host country supervisors namely Bangladesh Bank, Central Bank of Bahrain, National Bank of Belgium, Dubai Financial Services Authority, Financial Services Authority (London), Federal Financial Services Authority (BaFin), Bank of Mauritius, Nepal Rastra Bank and Monetary Authority of Singapore, in the case of ICICI Bank Ltd. there are seven host country supervisors, viz. Central Bank of Bahrain, National Bank of Belgium, Dubai Financial

5-53 MM Special Guide Services Authority, Financial Services Authority (London), Federal Financial Services Authority (BaFin), Bank of Russia and Monetary Authority of Singapore.

What the College will do: The Supervisory College, being a process and not a one-time forum, will become a key tool of consolidated supervision particularly considering the ever expanding footprint of Indian banks abroad. It plays an important role in sharing information and coordinating supervisory activities especially for large internationally active banking groups. The information exchange and cooperation between supervisors will strengthen the supervision of the individual components of a banking group. The College will assist its members in developing a better understanding of the risk profile of the banking group. Supervisory colleges are, effectively, working groups of supervisors of an international banking group, which will be part of the supervisory framework and over the time, will become integrated with supervisory cooperation and coordination.

How the College functions: It is the responsibility of the home supervisor to design the arrangements for the college to ensure that it truly reflects the nature, scale and complexity of the banking group and the needs of relevant supervisors associated with the group. Towards this end, the home supervisor should design the college structures based on the discussions with host supervisors and the banking group and also banking group's intemational operations. Home supervisors should also strive for consistency of practice between different college- structures for an international banking group and effective communication between them. The college's design will be periodically reviewed so as to ensure that the structures remain appropriate to the banking group as it evolves over time.

Questions : 1. What is Supervisory College Concept? 2. What are the different kind of Supervisors under the concept and what are the roles of the supervisors? 3. Which banks will have Supervisory Colleges in India? 4. Who are the Host country Supervisors for SBI? 5. What role does Supervisory College play?

ANSWERS I. Initially enunciated in the Basel Committee for Banking Supervision (BCBS) October 2010 Document, t`Good Practice Principles on Supervisory Colleges". The concept is an attempt to reduce supervisory overlap and filling in supervisory gaps for better supervisory co-operation enunciated in Basel II Framework. World over Supervisory colleges have evolved as an important component of effective supervisory oversight of an international banking group. 2. The College is driven by two specific.categories of supervisors, each with different but mutually reinforcing responsibilities, important for understanding the relationships: home supervisors and host supervisors. Home supervisors are responsible for the supervisory oversight of a banking group on a consolidated basis, host supervisors have different interests in relation to the supervision of the group as a whole depending on whether the group has material risk exposures in the host jurisdiction and whether any systemic risk to the host jurisdiction is suspected etc. Members of a college should include host supervisors who have a relevant subsidiary or a significant branch in their jurisdictions

5-54 Comprehension

and who, therefore, have a shared interest in the effective supervisory oversight of the banking group. 3. With a view to deal with supervisory issues revolving and establish a cooperation mechanism for cross-border supervision Reserve Bank of India (RBI) have set up two supervisory bodies for State Bank of India and ICICI Bank . This is expected to ensure compliance of global prudential norms and reduce supervisory overlap. 4. For State Bank of India (SBI) there are nine host country supervisors namely Bangladesh Bank, Central Bank of Bahrain, National Bank of Belgium, Dubai Financial Services Authority, Financial Services Authority (London), Federal Financial Services Authority (BaFin), Bank of Mauritius, Nepal Rastra Bank and Monetary Authority of Singapore. 5. The Supervisory college, being a process and not a one-time forum, it will become a key tool of consolidated supervision particularly considering the ever expanding footprint of Indian banks abroad. It plays an important role in sharing information and coordinating supervisory activities especially for large internationally active banking groups. The information exchange and cooperation between supervisors will strengthen the supervision of the individual components of a banking group. The College will assist its members in developing a better understanding of the risk profile of the banking group. Supervisory colleges are, effectively, working groups of supervisors of an intemational banking group, which will be part of the supervisory framework and over the time, will become integrated with supervisory cooperation and coordination.

EXERCISE - 9 TECHNOLOGY ENABLED TRANSFORMATION IN THE FINANCIAL SECTOR

1. Introduction: With the onset of economic liberalisation in the country in 1990s, the banking sector has seen a greater emphasis on technology and innovation. While technology, was initially adopted in the banks to reduce the drudgery of internal housekeeping relating to book keeping, balancing and reconciliation processes, over the years IT has become all pervasive and commercial banks in India both in private & public sector, have adopted technology to provide fast and better quality of services. The concept of anywhere and anytime banking is made a reality by the introduction of ATMs, Internet Banking and Mobile Banking services making time and distance, irrelevant. Payment systems is an area where technology has brought in revolutionary changes. Today's customer has the benefit of choosing from a slew of products- card payments, POS terminals, NEFT transfer, RTGS transfer, ECS/NECS payments, mobile payments, intemet transfers, etc as against the earlier options of Cash, Cheque, Drafts TTs/MTs. Customer also gets an immediate confirmation through an SMS over his mobile phone, which is reported to be unique to our country. Technology has been able to bring down the cost of financial services by using economies of scale. Even though IT has become an invaluable and powerful tool in driving development, supporting growth, promoting innovation, and enhancing competitiveness in the banking , still there are several potential areas where technology can deliver better, which are discussed below.

Financial inclusion: It is an area where technology can play a major role.. Hand held devices, used by bank agents is drawing people living in remote areas into the banking fold to people hitherto deprived of banking services. The need of the hour is to move the mobile financial services sector beyond payments space and create products that reach every level of society. For this to happen

5-55 Guide industry requires product development based on customer desires, usage patterns, and needs. While developing such products, standardisation and interoperability is important, "one-size-fits-all "approach will not work. This will succeed only with the active participation and support of all the stakeholders involved. Therefore collaborative innovation is very important.

3. Automated Data Flow: The policy and decision-making processes are increasingly becoming information intensive. Quality of data and its timely submission assumes importance as data quality will have an impact on the reputation of banks besides posing other risks. A major step in this direction is an automated process for submission of returns to the bank's management & the regulator. Towards this, the Reserve Bank has initiated the Automated Data Flow Project. The deadline for banks to automate all their returns is March 2013.

4. IT-Business Alignment :However, Technology is a double edged weapon while on the one hand it enables the banks to address the issue of volumes it also raises the issue of security. Banks need to retain the trust of their customers —a trust which relies not only on their capacity to deliver good value services, but also on their ability to protect people, assets, premises and the highly sensitive data they hold. There is a need to ensure that the best of controls and security measures are in place. Timely and appropriate application of IT in harmony with business objectives, strategies and requirements is very important. A two way relationship, of give and take between IT and business will ensure perfect IT-business alignment. Improving the bottom line is the aim of such an alignment, by reducing costs & standardising processes. IT is therefore now becoming an implementation tool to shaping business strategy by developing business oriented IT strategies.

5. Outsourcing: While banks look to external IT service providers for assisting them to innovate and optimize, they must assess how to utilize the right engagement models and align with the appropriate service providers meeting the business needs and strategic objectives. The challenges of outsourcing range from selection of ideal outsourcing partner to dynamic issues of knowledge transfer, security risks, legal concerns, vendor dependency, etc. Diligence in vendor selection is a must. There is a need to document and putting in place a well-defined and enforceable Service Level Agreements (SLAB) with the vendor detailing performance standard and service quality expected under the agreement, accepted procedure which governs service expectations and obligations including change management.

6. Cyber Security: In a networked environment service delivery is generally available to everyone else on the network, many a times this could be the gateway for entry to the bank's main systems as well. There are Government initiatives aimed at enhancing cyber security, however, such security cannot be adequately assured by market forces or regulation. Cyber security issues now top the list of risks to watch. Banks, as prime targets of financial fraud and crime, need to be extra vigilant as far as cyber security is concerned and this needs to be ingrained in each and every offering made available using IT. Banks need to put in effective security for accessing, sharing and controlling important documents across the extended and mobile enterprise on any device.

5-56 Comprehension

7. IT Governance: Implementing IT Governance in banks can be very challenging. For addressing the structural inadequacies in the areas of IT governance, there is an imperative need to have synergy among Information, Data & Information security. Adoption of a structured IT Governance framework would enable banks to manage their businesses in a manner that would bring about benefits to their customers as also facilitate the growth of banks.

8. Man Power: Though Banking industry has undergone a sea change in the past few years, one characteristic that has remained unchanged is people. Any Bank's success depends on the quality of their workforce at every level be it front lines, middle management or executive leadership. Workforce is the primary engine for sustained, competitive advantage. Creating a workforce in which people at every level are capable of contributing with high levels of performance leveraging on technology is therefore very important. It's about creating an IT culture of excellence. It is the HR teams that will give banks the competitive advantage in the years to come. Banks in India have now reached a stage to move over to a fully automated transaction processing environment.

9. Data mining & Predictive Analytics: While banks have resorted to data mining, they are yet to leverage predictive analytics to acquire and retain customers, manage campaigns and improve cross sales. This will provide an opportunity to refine customer understanding to a different level, which would improve customer centricity. This can be achieved by collecting and analysing transactional data, which will give them more insight into their customer's preferences which will help to create new products & services, increase efficiency and ensure regulatory compliance. Banks need better methods of gathering and reporting data from all their verticals. There is a need for new and improved business process management tools in the times ahead and hence a great deal of collaboration among all. There is a need to effectively bridging gaps between the IT and business teams.

10. Cloud Computing: Banks need to keep abreast with the changing technology and adopt it fast. Cloud computing is transforming the way financial institutions think about how they consume their IT resources. While the Cloud is here to stay, Banks are worried as to whether or not to acknowledge it. This is because about the security and data integrity in the Cloud. Cloud computing, which in the most basic of terms, offers unlimited computing resource as a service on a pay-per-use basis, is proven to directly translate to less upfront capital expense and reduced IT overheads, offering a cost- effective, simple alternative to accessing enterprise-level IT without the associated costs. But world over, financial sector is treading with caution in adopting this technology. Banks in India needs to be conscious of this reality, at least until such time, the industry evolves Indian standards for cloud computing.

11. Mobile Banking: While mobile banking is likely to change the way banks do business. While banks are embracing the mobile channel and continuing to support the old standby of online banking still they are not integrating the technologies to build e-banking solutions. With more and more people conducting their banking on mobile devices, they 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 banking area viz. fraud prevention and marketing to customers. In fact, world over mobile banking already is

5-57 MM Special Guide playing a prominent role in reducing fraud in a variety of ways, ranging from simple transaction and •-. ' security alerts to mobile authentication for bank transfers.

12. Conclusion:_ IT is going to further revolutionize the payment process . The days are not too far for the elimination of POS terminals and checkout lines that require an associate in a store to scan and . :Iliigi .'i, * • bag purchases item by item. Wireless sensor networks will automatically identify the buyer, scan the items to be purchased, and process payments without human intervention. Biometric factoring is not . . that far away. Therefore coming years is going to pose substantial challenges for the banking industry. Dramatic changes in the levels of competition in the retail banking space is predicted. Banks, will have to look at opportunities by harnessing product, service and process innovation to serve customers better, and to create a niche in an increasingly crowded marketplace, as customers will be more discerning in their relationships with banks. In what is going to be aping of the corporates, the customers will in future compare offerings across the market; evaluating the service levels of different banks and also demand transactions increasingly on their own terms.

Increasing customer centric products and intensifying competition are going to drive the Banks in future. Banks will therefore be forced to focus more on managing human capital, regulations and technologies which are the answers to intensifying competition and results in customer empowerment. To take the IT usage to next level Banks now need to look at the following: • Technology based KYC which is easy to implement yet ensures secure and sure information which cannot be repudiated. • Free themselves from dependence on some IT systems • Inter-operability across IT systems and more importantly inter-operability across banks? • Technology expenditure should be seen more as an investment to support growth and new business development.

Questions: 1. What had been the role of Technology in Banks? 2. What options of Remittance are available to the present day customer? 3. What is of critical importance while developing banking Products? 4. What are the Challenges of outsourcing? 5. What banks are required to do to take IT to next level?

ANSWERS: 1. Since 1990s, the banking sector has seen a greater emphasis on technology and innovation. While technology, was initially adopted in the banks to reduce the drudgery of internal housekeeping relating to book keeping, balancing and reconciliation processes, over the years IT has become all pervasive and commercial banks in India both in private & public sector, have adopted technology to provide fast and better quality of services. 2. Today's customer has the benefit of choosing from a slew of products- card payments, POS terminals, NEFT transfer, RTGS transfer, ECS/NECS payments, mobile payments, intemet transfers, etc

5-58 Comprehension

as against the earlier options of Cash, Cheque, Drafts TTs/MTs. Customer also gets an immediate confirmation through an SMS over his mobile phone, which is reported to be unique to our country. Product development has to be based on customer desires, usage patterns, and needs. While developing such products, standardisation and interoperability is important, "one-size-fits-all" approach will not work. This will succeed only with the active participation and support of all the stakeholders involved. Therefore collaborative innovation is very important. While banks look to external IT service providers for assisting them to innovate and optimize, they must assess how to utilize the right engagement models and align with the appropriate service providers meeting the business needs and strategic objectives. The challenges of outsourcing range from selection of ideal outsourcing partner to dynamic issues of knowledge transfer, security risks, legal concerns, vendor dependency, etc. Diligence in vendor selection is a must. There is a need to document and putting in place a well defined and enforceable Service Level Agreements (SLAs) with the vendor detailing performance standard and service quality expected under the agreement, accepted procedure which governs service expectations and obligations including change management. To take the IT usage to next level Banks now need to look at the following: a) Technology based KYC which is easy to implement yet ensures secure and sure information which cannot be repudiated. b) Free themselves from dependence on some IT systems c) Inter-operability across IT systems and more importantly inter-operability across banks? d) Technology expenditure should be seen more as an investment to support growth and new business development.

EXERCISE -10 The Five Pillars of RBI's Financial Sector Policies

I want to focus on what we at the Reserve Bank are doing to improve the financial system. We plan to build the Reserve Bank's developmental measures over the next few quarters on five pillars. These are: 1. Clarifying and strengthening the monetary policy framework. 2. Strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms. 3. Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help allocate and absorb the risks entailed in financing India's growth. 4. Expanding access to finance to small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through technology, new business practices, and new organisational structures; that is, we need financial inclusion. 5. Improving the system's ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery. Let me elaborate on each of these measures a little. First, we are among the large countries with the highest consumer price inflation in the world, even though growth is weaker than we would like it to be. Much of the inflation is concentrated in food and services. Our households are turning to gold because they find financial investments unattractive. At the same time, many industrial corporations are complaining about high interest rates because they cannot pass through their higher costs into higher prices for their products.

5-59 MM Special Guide

We can spend a long time debating the sources of this inflation. But ultimately, inflation comes from demand exceeding supply, and it can be curtailed only by bringing both in balance. We need to reduce demand somewhat without having serious adverse effects on investment and supply. This is a balancing act, which requires the Reserve Bank to act firmly so that the economy is disinflating, even while allowing the weak economy more time than one would normally allow for it to reach a comfortable level of inflation. The weak state of the economy, as well as the good Kharif and Rabi harvest, will generate disinflationary forces that will help, and we await data to see how these forces are playing out. No single data point or number will determine our next move. I think the market understands what we are trying to do. But we do need a more carefully spelled out monetary policy framework than we have currently. Action on the framework will follow the submission of the Dr. Urjit Patel Committee report, which is expected to submit its report by end December 2013. Second, we have already announced measures to free bank branching, and to incentivise foreign banks to incorporate domestically. Going forward, we have to give our public sector banks, which are a national asset, the means to improve their competitiveness. Many of them have made enormous strides in the last decade — for instance, the extent to which they have digitised their operations is extremely praiseworthy — but because competition in the banking sector is likely to increase in the next few years, they cannot rest on their laurels. In the coming months, we will discuss with stakeholders in public sector banks about what needs to be done to further improve their stability, efficiency and productivity. Third, we need to enlist markets in the aid of banking. Liquid markets will help banks offload risks they should not bear, such as interest rate or exchange risk. They will also allow banks to sell assets that they have no comparative advantage in holding, such as long term loans to completed infrastructure projects, which are better held by infrastructure funds, pension funds, and insurance companies. Liquid markets will help promoters raise equity which is sorely needed in the Indian economy to absorb the risks that banks otherwise end up absorbing. Rather than seeing markets as being inimical to the development of the banking sector, we have to see them as complimentary — of course, this requires you bankers to build on your risk management capabilities so that you can use markets effectively.

In the coming weeks, we will roll out more recommendations of the Gandhi Committee report to improve the liquidity and depth of the G-Sec market. We will then turn to money markets and corporate debt markets. We will introduce new variants of interest rate futures and products like inflation indexed certificates, and work to improve liquidity in derivative markets. Fourth, we have to reach everyone, however remote or small, with financial services. Financial inclusion does not just mean credit for productive purposes, it means credit for healthcare emergencies or to pay lumpy school or college fees. It means a safe means of remunerated savings, and an easy way to make payments and remittances. It. means insurance and pensions. It means financial literacy and consumer protection.

We have made great strides in inclusion, but we are still some distance from our goal. We have adopted a branch based strategy for inclusion, but it is not enough. Too many poor people in so-called "overbanked" urban areas still do not have access to banking services. We have many experiments under way to use technology, mobile phones, new products such as mobile wallets, and new entities as business correspondents to link people up to the formal financial system. Much as with cell phones where we created a frugal Indian model, we need a frugal, trustworthy, and effective Indian model for financial inclusion. The Dr. Nachiket Mor Committee is helping us think through possible models, and I am hopeful that when we outline measures based on its recommendations, our fi ne banks, NBFCs, IT companies and mobile players

5-60 Comprehension will rise to the occasion. At a more detailed level, we have set up committees like the Sambamurthy Commit- tee to advise us on how to expand mobile banking in India through encrypted SMS based funds transfer in any type of handset. I should emphasise the need for banks like the ones represented in this room to move beyond simply opening bank accounts to ensuring that poor customers are confi dent and comfortable enough to use them. Innovation in reaching out to the underserved customer, rather than simply posting higher numbers in branches or bank accounts opened, has to be part of our efforts.

And last but not least, we have to deal better with distress: The natural, and worst, way for a bank management with limited tenure to deal with distress is to "extend and pretend" to evergreen the loan, hope it recovers by miracle, or that one's successor has to deal with it. The natural incentive for a promoter to deal with distress is to hold on to equity and control despite having no real equity left, and to stand in the way of all efforts to resolve the underlying project while hoping for an 'Act of God' to bail him out. Not all bankers and promoters succumb to these natural incentives but too many do. We have to ensure that the system recognises financial distress early, takes steps to resolve it, and ensures fair recovery for lenders and investors. We could wish for a more effective judicial process or a better bankruptcy system, but while we await that, we have to improve the functioning of what we have. In the next few weeks, we will announce measures to incentivise early recognition, better resolution, and fair recovery of distressed loans. We will focus on putting real assets back to work in their best use. Here again, you bankers have a critical role to play by fighting the natural incentives that are built in to the system. You have to help those with genuine difficulty while being firm with those who are trying to milk the system. The RBI will help you with every means at our disposal. MM Special Guide QUESTIONS: 1. What is the balancing act that the speaker refers to regarding monetary policy? 2. What, according to the speaker, needs to be done by public sector banks to meet the increasing competition? 3. How can liquid markets help banks? 4. The speaker compares the financial inclusion model with the Indian version of the cell phone. What attributes is he alluding to? 5. What are the aspects emphasised by the speaker on debt recovery?

ANSWERS: 1. As inflation comes from demand exceeding supply, reducing demand without serious adverse effect on investment and supply is a balancing act. 2. Public sector banks need to improve their stability, efficiency and productivity. 3. Liquid markets will help banks offload risks they should not bear, such as interest rate or exchange risks. 4. The financial inclusion model needs to be frugal, trustworthy and effective. 5. Ensuring that the system recognises financial distress early, takes steps to resolve it and ensures fair recovery for lenders.

EXERCISE -11

The Global Financial Crisis and the Indian Financial Sector How have we, in India, Responded.

Historically, the Reserve Bank has played an important role in preserving financial stability — drawing from its wide mandate as the regulator of the banking system and of the payment and settlement systems, regulator of the money, forex, government securities and credit markets, as banker to banks, as also the lender- of-the last resort. This unique combination of responsibilities for monetary policy combined with macro prudential regulation and micro prudential supervision with an implicit mandate for systemic oversight has allowed the Reserve Bank to exploit the synergies across various dimensions. The micro-level information coming from supervision of individual institutions has been a valuable input for shaping the macro perspective. On the other hand, the broad understanding from macro prudential regulation has been effective in instituting prudential safeguards at the micro institution level. Recognising the importance of an institutional mechanism for coordination among regulators and the Gov- ernment, in December 2010, the Government established the Financial Stability and Development Council (FSDC) to be chaired by the Finance Minister. The FSDC is to be assisted by a sub-committee to be chaired by the Governor of the Reserve Bank. This sub-committee has replaced the erstwhile High Level Coordina- tion Committee on Financial Markets (HLCCFM). The Government has held out a clear assurance that the working of the FSDC will not in any way erode the autonomy of the regulators.

5-62 Comprehension

The way forward from here in India is still uncertain. The FSDC has been meeting regularly, about 3 or 4 times a year, and has been focused so far on stock taking and discussing policy issues. The agenda has been set more by immediate concerns, and there has been no explicit attempt to define what constitutes a 'financial stability' issue that falls within the domain of the FSDC. Meanwhile, the Financial Sector Legislative Reforms Commission (FSLRC) submitted its report to the Government in March this year. In its submission to the Commission during the consultative stage, the Reserve Bank argued that the financial stability mandate that the Reserve Bank has been carrying out historically by virtue of its broad mandate should be clearly defined and formalised. Nevertheless, the FSLRC has envisaged a different arrangement for safeguarding financial stability. Under this arrangement, the FSDC is accorded statutory status. The responsibility for safeguarding systemic risk is entrusted to the FSDC Board chaired by the Finance Minister and comprising all the regulators and agencies of the financial sector 'which allows it to combine the expertise of the multiple agencies involved in regulation, consumer protection and resolution'. The FSLRC recommendation that the executive responsibility for safeguarding systemic risk should vest with the FSDC Board runs counter to the post crisis trend around the world of giving the collegial bodies responsibility only for coordination and for making recommendations. The Reserve Bank has always held that financial stability cannot be its exclusive mandate, and that all regulators and the Government have to share the responsibility for fmancial stability, that coordination is important and that the Government has a more active role to play in a crisis time than in normal times. The Reserve Bank is also of the view that in a bank dominated financial sector like that of India, the synergy between the central bank's monetary policy and its role as a lender of last resort on the one hand and policies for financial stability on the other is much greater. In his speech at an ICSS Seminar on the Indian Financial Code last month, the Finance Minister alluded to the difficulties of getting legislation passed in India, especially a path breaking legislation of the type of the Indian Financial Code suggested by the FSLRC. He suggested that in the meanwhile, we should pursue the implementation of FSLRC suggestions within the framework of existing laws. Within the task defined by the Finance Minister, on the issue of safeguarding systemic risk, we need to think through whether the responsibility of FSDC Board should be extended from being a coordination body to one having authority for executive decisions? What will that imply for the speed of decision making? Can we clearly define the boundaries between fmancial stability issues falling within the purview of the FSDC and regulatory issues falling exclusively within the domain of the regulators? Will this arrangement not mean compromising the synergy between monetary policy and policies for financial stability? And what will it mean for the autonomy of regulators?

5-63 MM Special Guide QUESTIONS: 1. How do the various responsibilities of the Reserve Bank of India result in synergy? • - 2. The Financial Stability and Development Council (FSDC) has been formed as a mechanism to coordinate the actions of the various regulatory bodies and of the Government. What are the concerns expressed on the role of the FSDC?

3. What is the suggestion made by the Finance Minister to overcome the difficulties of getting Indian Finance Code-type legislation passed?

4. What types of institutions dominate the Indian financial sector? What does that imply for the RBI?

ANSWERS: • 1. The micro-level information from the various institutions under its supervision helps in shaping the macro-perspective; an understanding of the macro-level regulation makes the instituting of prudential safeguards at the micro-level.

2. Whether FSDC will also have authority to make executive decisions apart from its regulatory role; overlapping of domains with the existing regulatory bodies; reducing the impact of the synergy that was possible; autonomy of the regulators.

3. Pursue the implementation of FSLRC within the framework of existing laws.

4. Banks dominate the financial sector in India. For the RBI, this means greater synergy between its monetary policy and financial stability roles.

• Comprehension

EXERCISE -12 Financial Sector Reforms

The job agenda requires a disciplined focus on 4 issues: 1. We need to improve the quality of our infrastructure, especially the logistical support and power that industry and services need. Grand plans are on the anvil, such as the Delhi-Mumbai Industrial Corridor. We need to complete such projects on time, and within budget. The success of the New Delhi Metro suggests that timeliness and cost control are not foreign to the Indian psyche. 2. Our youth need education and training for the jobs that will be created. Some of this will be higher degrees, not just computer science but also design or civil engineering. Some of it will be appropriate vocational education that teaches them to be good plumbers and electricians rather than unemployable low-skilled engineers. In fact, teaching our citizens can be a stepping stone to teaching the world. India can be at the forefront of providing mass technology-enabled education with our professors providing appropriate human inputs to achieve the best mix of automation and customisation for learning. We need better business regulation. This does not always mean less regulation but it means regulation that is appropriate to the objective and, that is enforced. Entrepreneurs tell me about boiler inspectors showing up at software outfits, asking for the location of the boiler. The lack of change may be sheer inertia, but it may be more sinister rent-seeking. All too often, we have too much regulation on the books and too little regulation in practice, with the worst of the regulated finding unscrupulous ways around the regulation while the honest are stymied. Even opening a business legitimately requires an enormous number of clearances and paperwork. In the same way as we have Saral form for ft ling income tax, could we have a Saral one page disclosure for opening a small business, with a single authority giving all necessary permissions? And fatally, we need a better financial system, which will finance the needed infrastructure and the expansion of every producer ranging from the kirana shop owner to the industrialist. But finance is not only about credit. Equally important is for households to be able to save safely with positive real returns, insure themselves against health emergencies or old age costs, and borrow at low cost to finance consumption. They should be able to make remittances cheaply and pay at low cost. Importantly, the fmancial system should not require constant subsidies to bail it out.

QUESTIONS: What, according to the speaker, are the issues that need focus? What are the aspects about the Delhi Metro Project that are highlighted? What will appropriate vocational education achieve? What does the speaker refer to as "better business regulation"? What does the speaker say about finance apart from only providing credit?

ANSWERS: Quality of our infrastructure, education and training for the jobs that will be created, better business regulations, and a better financial system. Timeliness and Cost-control. It will help avoid the creation of unemployable low-skilled engineers. Regulations that are appropriate to the objective and are enforced.

5-65 MM Special Guide 5. Ensuring positive retums for household savings, enabling low cost credit for consumption, and making remittances cheaper. EXERCISE -13 Compliance Function in Banks

Let me now elaborate upon what compliance function really entails. In the present day context, compliance function encompasses several dimensions. I will discuss some of these in detail: i) Prudential and regulatory compliance Prudential and regulatory compliance includes compliance with directives and guidance of the regulator. For banks, this includes regulations emanating from the various departments of RBI, for example, regulations relating to income recognition, asset classification, provisioning, restructuring, capital adequacy, liquidity, disclosures, priority sector lending, exposure norms, etc. For banks whose activities transcend the other segments of the financial sector(whether carried out departmentally or through subsidiaries) compliance with applicable regulations of other dothestic regulators, viz. Securities and Exchange Board of India (SEBI), Insurance Regulation and Development Authority (IRDA), Pension Fund Regulation and Development Authority (PFRDA) also form part of prudential and regulatory compliance. For banks that have overseas operations in the form of branches, subsidiaries or joint ventures, compliance with prudential and regulatory norms of host country regulators is also important. ii) Integrity and market conduct In order to ensure the integrity of the financial system and to guard against its misuse for illegal purposes, compliance with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) rules has assumed great significance globally. The AML/CFT rules are based upon the Financial Action Task Force (FATF) recommendations. It is incumbent upon banks to diligently ensure compliance with these rules. AML/CFT compliance in banks is assiduously assessed by regulators/supervisors to ensure that the safety and soundness of the institution and whole of the financial sector is not being compromised on account of non-compliance with these rules. Market conduct guidelines are also issued by various self-regulatory organizations within the financial sector. In India, we have the Banking Codes and Standards Board of India (BCSBI), Indian Banks Association (IBA), Foreign Exchange Dealers Association of India (FEDAI), Fixed Income Money Markets and Derivatives Association of India (FIMMDA), etc. that provide guidelines/guidance on various aspects relevant to the structuring of banking products . Such guidance, being based on good market conduct, also needs to be complied with. I must also sound a note of caution here. The inability of the financial market players to ensure fair treatment to consumers and their indulgence in unfair market practices has forced some of the jurisdictions to create a separate market conduct regulator. This has happened in UK, France, Australia and South Africa and there is no reason why it could not be replicated in India, if we did not mend our ways quickly. A separate regulator would mean additional regulatory and compliance burden for the banks. This should give you an added incentive to comply with the current regulations. iii) Legal compliance Compliance with various applicable laws and rules relating to the setting up of banks, tax laws and other legal enactments form an important part of compliance. In India, for example, compliance with the applicable provisions of the Banking Regulation Act 1949, Reserve Bank of India Act 1934, Foreign Exchange Management Act 1999, etc. is mandatory. iv) Internal compliance The prudential and regulatory compliance requirements, market conduct and integrity standards, and legal compliance requirement coupled with bank specific issues all culminate in various intemal rules and policies. In recent times, there has been a growing trend towards encouraging banks to create their own internal

5-66 Comprehension control framework through a network of policies and procedures that would be best suited to meet the specific needs of the organization. It is crucial for banks to ensure that internal compliance is adhered to with the same commitment as required for ensuring prudential, regulatory as well as legal compliance. No doubt, the primary position relating to internal compliances rests with the business area/unit within the bank. However, a pro-active role by the compliance function will provide strong impetus to intemal compliance as well. RBI guidelines on compliance function in banks In 2007, RBI issued guidelines to banks on the compliance function based on the Basel Committee guidance. The guidelines articulated the minimum requirements for putting in place an effective compliance function in banks. The guidelines also intended to guide bank-led 'Financial Conglomerates' in managing their "Group wide compliance risk". Acknowledging the significant differences among banks with regard to their scale of operations, their risk profiles and organizational structures, the guidelines exhorted banks to organize their compliance functions and set priorities to manage their compliance risks. The guidelines stipulate that the compliance function has to necessarily be an integral part of governance framework along with the intemal control and risk management process. Further, for the function to be effective, it is necessary that compliance is not merely viewed as a responsibility of an individual or a department, but is supported by a healthy compliance culture within the organization. The guidelines clarify that the compliance function should have the right of direct access to the Board of Directors or to the Audit Committee/other Committee of the Board. Further, the Board or the Audit Committee or the special Committee of the Board could meet with the head of compliance at suitable intervals to assess the extent to which the bank is managing its compliance risk effectively. Thus, there is equal emphasis on ensuring independence of the compliance function and ensuring that it pervades all activities of the enterprise. The guidelines provide for having in place a Board approved compliance policy, a clear structure for the compliance department/unit, quality, tenure and location of compliance staff and the responsibility of the Board and senior management in ensuring an effective compliance culture in the bank. Banks need to nominate Chief Compliance Officers to function as the nodal point of contact between the bank and the regulator. It is heartening to note that all banks in India now have in place dedicated compliance personnel, a compliance unit or a full-fledged compliance department depending upon their size and business. In many banks, the compliance unit/department is a separate unit with interaction/cooperation mechanisms for interaction with the risk management department and direct reporting lines to the Board/Committee. I only urge proactive action from the compliance department personnel and support from bank managements in nurturing a thriving compliance culture within their respective organizations.

QUESTIONS: What are the dimensions of compliance function the speaker has elaborated upon? What are the key regulations of RBI that need to be complied with by banks? For banks with overseas operations, what additional guidelines need to be complied with? Which rules of the Financial Action Task Force are of global significance? What is the essence of RBI guidelines on compliance function in banks?

ANSWERS: Prudential and regulatory compliance, Integrity and market conduct, legal compliance, and internal compliance. Regulations relating to income recognition, asset classification, provisioning, restructuring, capital adequacy, liquidity, disclosures, priority sector lending, exposure norms, etc. For banks with branches, subsidiaries or joint ventures overseas, compliance with prudential and regulatory norms of host country regulators is also important.

5-67 MM Special Guide 4. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) rules, based upon the Financial Action Task Force (FATF) recommendations, has assumed great significance globally. 5. The guidelines stipulate that the compliance function has to necessarily be an integral part of governance framework along with the internal control and risk management process EXERCISE -14 Debt Management Strategy

Policy Objectives The main objective of debt management is to ensure that the government's financing needs and its payment obligations are met at low cost over the medium to long run consistent with a prudent degree of risk. Prudent degree of risk ensures that no problems exist in rollover of debt. Further, the debt structure must be sustainable to ensure financial stability across time periods. Another important objective is to promote deep and liquid financial markets to minimize long term borrowing cost. The debt management policy must also be consistent with other macro-economic policies including monetary policy. Debt Management Strategy (DMS) comprising objectives, various benchmarks & portfolio indicators and yearly issuance plan (external and domestic funding, instruments, maturity structure, etc.) provides requisite direction to the debt management operations. Its articulation imparts information and transparency, certainty and enables market participants (investors) to chalk out their investment strategy in the G-Sec market. Our DMS revolves around three broad pillars viz., cost minimization, risk mitigation and market development. Cost Minimisation Cost minimization is sought to be achieved over medium to long run by formulating appropriate issuance strategy and developing financial markets. The borrowing needs are estimated and amounts are borrowed in timely fashion thereby minimising the opportunity cost. Proper demand estimation, planned issuance and offer of appropriate instruments would aid in lowering costs. In India, the issuance calendar for market borrowings is announced in advance for each half year with details of the quantum to be borrowed each week, maturity buckets, etc. A week prior to the auction, individual securities along with their issuance size is notified to public. This strategy of sharing information about debt management has enhanced transparency of debt management operations. The borrowings are planned keeping in view the investment preferences/ horizons of various investors. As commercial banks are large investors in G-Sec and are interested in short/ medium tenor bonds, substantial issuance is in this tenor. Longer tenor bonds are issued keeping in view demand from insurance companies and provident funds. It may be noted that cost minimisation objective refers to the planning horizon of debt management as minimizing costs at any point in time is different from minimizing costs over a longer time horizon. What might seem cost-efficient today may prove rather costly " over a number of years. It is exactly the acknowledgment of this distinction that would help mitigate the alleged "dilemma" of minimizing costs while containing risks. The cost minimization attempted over short- term by the debt managers may create sub-optimal debt structures, which may create stress for issuer by enhancing refinancing risks as was seen during the recent European sovereign debt crisis. Recognising the need for appropriate debt portfolio structure, we have desisted from issuance in short tenors as debt maturing in ten years constitutes nearly 60 per cent of total debt.

Risk Mitigation The sovereign debt portfolio is exposed to rollover risk, currency/exchange rate risks, sudden-stop risks and interest rate risks which need to be managed. Rollover / Refinancing Risk Elongation of maturity of the portfolio is preferred strategy to limit rollover risk. DMS in India has stressed on elongation of maturity whenever possible and, in turn, cost minimization over the medium term. This is achieved by limiting issuances in short tenor bonds and increasing issuance of medium/long tenor bonds

5-68

- --

. .

-;" Comprehension

taking into account the investor preferences and shape of the yield curve. Though we have issued short , term bonds to meet the needs of market borrowings for fiscal stimulus in wake of global financial crisis, we have adopted a conscious strategy of elongating maturity to lessen rollover risk. This is achieved by non- issuance in maturity of 1-5 years, moderating issuance in 5-9 years and increasing issuance in 10-14 year tenor which sees robust demand from banks and other market participants. We have also increased issuance of bonds in tenors more than 15 years to cater to needs of insurance companies and provident funds. Presently, weighted average maturity of India's debt portfolio at 10 years is one of the longest in the world. . With an objective to smoothen redemptions, switching of short-tenor bonds maturing at proximate years with long-tenor bonds is also being attempted and is expected to reduce rollover risks. ' Exchange Rate Risks I Achieving appropriate and stable mix of domestic and foreign currency debt in portfolio is essential. Raising debt in foreign currency could be cost effective and provide a wide and varied investor base. A country with large foreign currency denominated liabilities is, however, exposed to "currency/exchange rate risks" which could impact macro-economic stability. Further, dependence on foreign currency bonds could mean sharp volatility in interest rate and market volumes linked to the uncertainty of external sovereign ratings. Hence, no sovereign foreign currency bonds have been issued so far by India. Sizeable domestic currency bond issuances are necessary to ensure supply of bonds in the domestic bond market which is a very critical ingredient for development of the domestic bonds market. As a conscious strategy, issuance of external debt (denominated in foreign currency) is kept very low in India and external debt as percentage of Central Government's public debt has come down from 6.4 per cent in 2005-06 to 5.2 per cent during 2011-12. The ih external debt in Indian context is entirely bilateral and multilateral loans. NI Sudden Stop Risk: Stable Investor Base Almost entire internal debt (i.e., more than 90 per cent) of the Central Government and all the market loans (which form more than 90 per cent of internal debt have been raised from the domestic bond markets. An important feature of investor profile of the G-Sec market is the dominance of domestic investors and limited 11104 foreign investor participation. The ability of domestic markets to finance government operations is a source - . of strength of the debt portfolio which is insulated from the currency risk. This is a consciously adopted policy framework. Investment limits for the Foreign Portfolio Investors (FPls) have been enhanced in a phased manner to US$ 30 billion in G-Sec. The limits are apportioned to different categories of investors with preference towards long term stable investors and investments in longer maturities keeping in view the sensitivity of foreign investors to global macro-economic factors and possible sudden reversals which could potentially impact the systemic stability. Participation of foreign investor in the domestic bond markets also needs to be examined in the light of our policy stance relating to calibrated approach to capital account convertibility and the possibility of interest rate and exchange rate volatility due to large scale reversal of capital flows. The domestic investor base is dominated by banks in short to medium tenor securities and by insurance companies and provident funds at the long end. With the entry of co-operative banks, regional rural banks, pension funds, mutual funds and non-banking finance companies, the institutional investor base has been reasonably diversified. There is very little retail participation in the G-Sec market as the G-Sec market has traditionally been an institutional market. For diversifying the investor base, especially in context of calibrated reduction in mandated investments in form of Statutory Liquidity Ratio (SLR), there is need to focus on new investors, such as, pension funds and retail investors. Reserve Bank has taken several steps to promote retail participation, such as, enabling non-competitive bidding in primary auctions to enable non-institutional investors to participate in auction, introduction of odd lot trading, permitting trading of G-Sec on stock exchanges; mandating retail/ mid- segment targets for primary dealers, web based trading access to gilt account holders, etc. The process of developing the retail and mid-segment investor base will be continued.

5-69 MM Special Guide Interest Rate Risk DMS involves issuance of variety of instruments of varying maturities to cater to the preferences of different investors. For example, some investors (banks and financial institutions) like to invest in floating rate bonds (FRBs) for their duration management. Similarly, institutional investors, such as, insurance companies, provident funds, pension funds, etc. would prefer to buy long term bonds, zero coupon bonds and inflation indexed bonds (IlBs) for their liability management. Floating rate instruments carry interest rate risks on re- fixing. In India, although we have been raising funds by issuing variety of instruments, such as, fixed rate conventional bonds, FRBs, Zero Coupon Bonds, CIBs, the contribution of linkers (FRBs, IlBs, etc.) has remained small, thereby limiting interest rate risk in the debt portfolio. There is, however, a need to increase the share of variable rate bonds to further improve the breadth and width of the G-Sec market and enable market participants to diversify their portfolio. Towards this end, IlBs have been issued linked to the Wholesale Price Index (WPI). A new series is being planned which is linked to Consumer Price Index (CPI).

QUESTIONS: 1. What is the main objective of debt management of a country? 2. What are the three pillars of Debt Management Strategy? 3. What tenor of G-Sec is of interest to commercial banks and what tenor is of interest to insurance companies and provident funds? 4. To what risks a country with large foreign currency denominated liability is exposed? 5. What key reason is cited for the RBI's steps to promote diversification of the investor base and retail participation in the bond market?

ANSWERS: 1. To ensure that the government's financing needs and its payment obligations are met at low cost over the medium to long run with a prudent degree of risk. 2. The three broad pillars are cost minimization, risk mitigation and market development. 3. Commercial banks are interested in short/medium tenor bonds; insurance companies and provident funds are interested in longer tenor bonds. 4. Such a country is exposed to currency/exchange rate risks. 5. The calibrated reduction in mandated SLR is the key reason for the various steps of the RBI to promote new investors. Comprehension

EXERCISE -15 Financial Inclusion

Five Ps of Financial Inclusion Financial inclusion in my view is about getting five things right: Product, Place, Price, Protection, and Profit.

If we are to draw in the poor, we need products that address their needs; a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance, and an avenue to engage in saving for old age. Simplicity and reliability are key— what one thinks one is paying for is what one should get, without hidden clauses or opt-outs to trip one up. The RBI is going to nudge banks to offer a basic suite of Products to address financial needs.

Two other attributes of products are very important. They should be easy to access at low transactions cost. In the past, this meant that the Place of delivery, that is the bank branch, had to be close to the customer. So a key element of the inclusion program was to expand bank branching in unbanked areas. Today, with various other means of reaching the customer such as the mobile phone or the business correspondent, we can be more agnostic about the means by which the customer is reached. In other words, 'Place' today need not mean physical proximity, it can mean electronic proximity, or proximity via correspondents. Towards this end, we have liberalized the regulations on bank business correspondents, encouraged banks and mobile companies to form alliances, and started the process of licensing payment banks.

The transactions costs of obtaining the product, including the Price and the intermediary charges, should be low. Since every unbanked individual likely consumes low volume of financial services to begin with, the provider should automate transactions as far as possible to reduce costs, and use employees that are local and are commensurately paid. Furthermore, any regulatory burden should be minimal. With these objectives in mind, the RBI has started the process of licensing small local banks, and is re-examining KYC norms with III , a view to simplifying them. Last month, we removed a major hurdle in the way of migrant workers and people living in makeshift structures obtaining a bank account, that of providing proof of current address. New and inexperienced customers will require Protection. The RBI is beefing up the Consumer Protection Code, emphasizing the need for suitable products that are simple and easy to understand. We are also working with the government on expanding financial literacy. Teaching the poor the intricacies of finance has to move beyond literacy camps and into schools. Banks that lend to the entrepreneurial poor should find ways to advise them on business management too, or find ways to engage NGOs and organizations like NABARD in the process. We are also strengthening the customer grievance redressal mechanism, while looking to expand supervision, market intelligence, and coordination with law and order to reduce the proliferation of fly-by-night operators.

Finally, while mandated targets are useful in indicating ambition (and allowing banks to anticipate a large enough scale so as to make investments), financial inclusion cannot be achieved without it being Profitable. So the last 'P' is that there should be profits at the bottom of the pyramid. For instance, the government should be willing to pay reasonable commissions punctually for benefits transfers, and bankers should be able to charge reasonable and transparent fees or interest rates for offering services to the poor.

5-71 MM Special Guide Questions: 1. What are the key elements of a product for financial inclusion, according to the author? 2. What additional attributes are important as regards the financial inclusion product? 3. The author suggests engaging agencies to spread financial literacy to new and inexperienced customers. What are they? 4. What, according to the author will help achieve targets for financial inclusion?

Answers: 1. The key elements are simplicity and reliability. 2. Products should be easy to access and have low transaction cost. 3. NGOs and organizations like NABARD. 4. Profitability for the banks engaging in the financial inclusion activities, such as reasonable commissions Comprehension

EXERCISE -16 Banks in India: Challenges & Opportunities - Challenges from the regulatory perspective

Re-orientation of the Indian Banking Structure As the economy expands, a greater quantum of resources will be needed for supporting the growth process. The Indian banking sector also needs to catch up the likely acceleration in the credit to GDP ratio as the economy expands. To support the economic growth as envisaged in the 12th Five Year Plan, the banking business needs to expand significantly to an estimated Rs. 288 trillion by 2020 from about Rs. 115 trillion in 2012.4 Given this, there is a need for reorienting the banking structure to make it more dynamic and flexible, while ensuring safety and systemic stability. There is enormous scope for increasing the size and capacity of the banking structure. Accordingly, the Reserve Bank came out with a set of guidelines for licensing of new banks in the private sector in February 2013. The process of licensing culminated with the granting of "in- principle" approval to two applicants who would set up new banks in the private sector within a period of 18 months.

While announcing the decision to grant "in-principle" approval to the two applicants, the Reserve Bank indicated that going forward, it would use the learning experience from this licensing exercise to revise the guidelines appropriately and move to grant licences more regularly on "tap" basis. Further, Reserve Bank would work on a policy of having various categories of "differentiated" bank licences which will allow a wider pool of entrants into banking leading to greater banking penetration and more competitive environment. Reserve Bank has, accordingly, been working on the relevant guidelines for licensing payment banks and small banks.

Eventually, over the years, as visualized in the Discussion Paper, the reoriented the banking structure may comprise four tiers. The first tier may consist of three or four large universal Indian banks with domestic and international presence along with branches of foreign banks in India. The second tier is likely to comprise several mid-sized banking institutions including niche banks like Payment Banks with economy-wide presence. The third tier may encompass old private sector banks, Regional Rural Banks, and multi state Urban Cooperative Banks. The fourth tier may embrace many small privately owned local banks and cooperative banks.

Competition W. Chan Kim & A. Renee Mauborgne in their 'Blue Ocean Strategy' have shown that companies can succeed not by battling competitors, but rather by creating Blue Oceans of uncontested market space. These strategic moves create value for the company, its buyers and its employees, while unlocking new demand and making the competition irrelevant. Unlike the Red Ocean Strategy, the conventional approach to business of beating competition, the "Blue Ocean Strategy" tries to align innovation with utility, price and cost propositions. Similarly, financial sector reforms have brought about significant structural changes and created several blue oceans. A manifestation of this development is reflected in the increase in bank competitiveness. The share of public sector banks (PSBs) in total banking assets, which was 90 per cent on the eve of reforms in 1991 has since declined to around 72 per cent, a decline of roughly 1 percentage a year. In a move that is further expected to increase competition in the domestic banking industry, the Reserve Bank released the framework for setting up of Wholly Owned Subsidiaries (WOS) by foreign banks to India in November 2013, besides the framework for new universal banks and differentiated banks, such as, small banks and payment banks, which is in the offing. As I mentioned above, new banks are set to enter baking sector. Further, banks are facing increasing competition from non-banks including NBFCs, MFIs and tech companies. Going ahead, there may be increase in the non-bank related financing activities

5-73 MM Special Guide through innovations like Peer-to-Peer (P2P) lendings, direct consumer lendings and social investing. With increasing competition, banks will need to tap into untapped business opportunities. This would also call for harnessing resources at the bottom of the pyramid. Small customers are as important to their business growth as big business opportunities. The challenge before banks would be to make the best use of technology and innovation to bring down intermediation costs while protecting their bottom lines.

Basel HI implementation The implementation of Basel III framework will throw various challenges for banks. In particular, the , ' adoption of Basel III capital requirements by Indian banks would push down their return on equity (RoE) to g an extent. Investors have a wider choice and the stocks of the manufacturing sector may be preferred to 0, banking sector stocks and, as such, it may perhaps be difficult to convince the investor community to invest in Indian banks in the short-term. It is, however, expected that by looking at the benefits of implementation is of Basel III capital requirements by way of increasing resilience of the banking system, investors will get adjusted to the new reality. This issue also needs to be seen in a historical perspective to understand the fact , that Indian banks have successfully transited in the past from the regime of no regulatory requirement for capital to progressively tighter capital requirements and it would be logical to expect that Indian banks would be able to navigate the current phase as well. Nevertheless, it needs to be recognized that while moderation of growth in RoE is inevitable, the key to cushion this impact is to optimise capital and augment efficiency. On June 9, 2014, the Reserve Bank issued guidelines for the implementation of the Liquidity Converge Ratio (LCR), which is a part of the Basel III framework on Liquidity Standards. In India, the LCR will be introduced in a phased manner starting with a minimum requirement of 60 per cent from January 1, 2015 and reaching minimum 100 per cent on January 1, 2019. Further, Government securities in excess of minimum SLR requirements and the Government securities within the mandated SLR requirement to the extent allowed by the Reserve Bank under Marginal Standing Facility (MSF) are permitted to be treated as Level 1 assets for the computation of LCR. Adoption of liquidity standards under Basel III may induce changes in funding preferences of the Indian banks reflecting the fact that availability of and access to quality liquid assets may be a challenge going forward when the LCR requirement increases incrementally.

QUESTIONS: 1. What policy of bank licensing is suggested so as to have greater banking penetration and more competitive banking environment? 2. What is meant by Blue Ocean Strategy? 3. What, according to the author, will be the effect of adoption of Basel III norms of capital requirement and what is the suggested remedy? 4. What could be a challenge when Liquidity Convergence Ratio is progressively implemented?

ANSWERS: 1. A policy of various categories of "differentiated" bank licences. 2. Companies creating business in uncontested market space thereby unlocking new demand and making competition irrelevant. 3. The adoption of Basel III capital requirement would push down the return on equity to an extent. However, by optimising capital and augmenting efficiency, this effect can be cushioned. 4. The availability of quality liquid assets may be a challenge.

-, 1 5-74 ;•3 ' • Comprehension

EXERCISE -17 Payment Banks

E:; W,;,. ' ,I (From the Valedictory Speech delivered by Shri R. Gandhi, Deputy Governor, Reserve Bank of India at '' i FIBAC 2015, Mumbai on August 25, 2015.)

Payment system has been proving to be the arena where new ideas, products and services have been successfully introduced. Starting from the Real Time Gross Settlement System (RTGS), the National Electronic Funds Transfer (NEFT) system, the Pre and Post Paid Instruments, the card present and absent transactions, :.- the different types of e-wallets and to the mobile banking products, we have been experiencing a payment revolution in our country.

The next biggest contributor to this is going to be the payment banks. Just the other day, we, the Reserve Bank, have granted in principle approval to eleven entities to form payment banks. Payment Banks are a part of the disruptively innovative regulatory initiatives of the Reserve Bank for fmancial inclusion, which will lead to inclusive growth. These banks have been structured with the specific mandate to further financial inclusion. As we said clearly in the Guidelines for Licensing of Payment Banks, the objective of setting up of payments banks will be to further financial inclusion; the strategies will be by providing i. small savings accounts and ii. payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

The scope of the activities permitted for the Payment Banks included: a. Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs.100,000 per individual customer b. Issuance of ATM/debit cards c. Payments and remittance services through various channels d. BC of another bank and e. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

As you can see, the scope has been carefully crafted to sub-serve the primary objective of furthering financial inclusion. We have also insisted that the Payment Bank should be a fully networked and technology driven institution. You will appreciate the relevance of this, if you will recall that when we had announced the policy guidelines for licensing new banks way back in 1993, one of the requirements was that they should be ab-initio technologically driven banks and the resultant new era of information technology based banking that the country could enjoy in these twenty odd years. In the same way, we are confident that the Payment Banks will further revolutionise the payment arena.

Questions: 1) What disruptively innovative products and services have led to a payment revolution in the country? 2) What disruptively innovative regulatory initiative is the speaker referring to and what is the aim of the initiative? 3) What is the requirement that the payment banks have to meet ab initio?

5-75 MM Special Guide 4) Apart from accepting demand deposits and enabling payments and remittance services, what other activities are proposed for the payment banks? Answers: I) Real Time Gross Settlement System (RTGS), the National Electronic Funds Transfer (NEFT) system, the Pre and Post Paid Instruments, the card present and absent transactions, the different types of e- wallets and to the mobile banking products. 2) The granting of in-principle approval for the setting up of payment banks is being referred to as a disruptively innovative initiative towards financial inclusion. 3) The payment banks should be technology-driven banks ab initio and should be fully networked. 4) The payment banks could act as BCs for other banks and also distribute non-risk sharing simple financial products such as mutual fund units and insurance products.

5-76 Comprehension

EXERCISE -18 The Three KY Principles

(From the speech delivered by Shri R. Gandhi, Deputy Governor at "2nd National Conference on Financial Frauds Risks & Prevention" organised by ASSOCHAM on June 26, 2015 at New Delhi)

When banks are faced with frauds, their financials are expected to bear the immediate impact. Because of this implication, and if uncontrolled it can cause systemic risk, the regulators usually have an extra oversight on banks about frauds. More often than not, the frauds lead to tighter regulations. These aim towards bringing in both corrective and preventive measures. As I said earlier, if a bank has to prevent fraud, it must follow the three KY Principles. It must know its customer; it must know its employee and it must know its partner i.e., Know Your Customer, Know Your Employee and Know Your Partner, the Three KYs.

The First KY — Know Your Customer (KYC)

When one thinks of KYC norms frequently the emphasis is on the different type of documents to be obtained from an account holder which will establish that KYC norms have been followed. In a scenario where many frauds are committed by submitting forged and fabricated documents, such an emphasis is too narrow and will result in us missing the wood for the trees.

A bank, apart from obtaining the relevant documents, should make an effort to 'know the customer' in the real sense — his background, his stated activities/profession, what his signature style of operation is or digital foot print is, in case of online transactions, etc. A robust KYC system envisages such an understanding. This observation of his pattem of transactions will let the bank draw up a customer profile. Once this is established any exception to the norms can raise a red fiag and tracked or confirmed with the customer. Banks should become adept in pattern recognition and do discreet investigations on the suppliers/buyers to check if they are in the same line of business or are bogus entities. Such timely checks help identify frauds at an early stage.

Banks need to invest in data analytics and also intelligence gathering to make fraud detection as near to real time as possible. Data analytics solutions can crunch huge data and give us the patterns, that too in a visual, easily understandable format.

Another strong trend in the future would be the profiling of the customer across different channels or medium — online, offline, corporate loans, personal loans, etc. At least in respect of customers perceived to be of high risk, very large advance accounts, we need to use Big data for analysing information from disparate sources e.g., data available with the banks, the social network activities, identifying relationships that are usually invisible. This way we may be able to analyse transactions and be able to predict the likelihood. f a fraud happening.

On a bank level, each bank should segment its customers based on their risk profile and transaction patterns — and develop appropriate response systems for exceptional patterns noticed and fortify systemic level controls. 11 17. But one word of caution though. I don't think banks can sit back after investing in a software or establishing a fraud risk management system. The business landscape is generally dynamic and with ingenious fraudsters we are dealing with people who always change their strategies to be one step ahead of bankers and regulators and the police. As such, when it comes to fraud risk management, a bank has to be like a

5-77 . , .

MM Special Guide referee in a football game, always moving with the players and be alive to changes in the game and take action.

The Second KY — Know Your Employee 18. Several frauds are insider jobs; or at least with the abetment of insiders. Bankers are generally people of integrity. The selection process is highly sensitised in this respect. Still, some bad apples do escape or become rotten. Banks have to take extra care to have continuous vigil on their staff. Background checking for antecedents, checks and balances, periodic rotations, vigilance assessments, internal audits, etc. techniques will have to be employed to know the employees better and as preventive measures.

The Third KY — Know Your Partner 19. Modem day banking necessitates that a bank join hands with partners, agents, vendors. Outsourcing peripheral and several operational activities involves deploying and trusting somebody else's employees. Varied activities as diverse as cash logistics to IT and data management are being entrusted to third parties. Banking correspondents and banking facilitators are emerging as another set of persons closely associated with a bank. If frauds are to be prevented effectively, banks have to know their partners.

Questions: 1) The speaker refers to three "Know Your" (KY) norms to guard banks against frauds. What are they? 2) Why does the speaker feel that the emphasis on documents alone is too narrow? 3) What are the additional efforts suggested by the speaker that a bank should make to fulfil KYC requirements in the real sense? 4) Study of the pattem of transactions of a customer leading to a drawing up of a customer profile is recommended by the speaker. Why? 5) What precautions are suggested by the speaker to prevent employee-related frauds? 6) Why has "Know Your Partner" assumed importance in the current banking scenario?

Answers: 1) To prevent fraud, a bank must follow these three KYs - Know Your Customer, Know Your Employee, and Know Your Partner. 2) Because many frauds are committed by submitting forged and fabricated documents to satisfy KYC norms. 3) The bank should make efforts to know the account holder's background, his activities/profession, his particular method of conducting his operations, his digital footprint in online transactions, etc., as these will make the KYC system more robust. 4) Once the profile of a customer based on the pattern of his transactions is drawn up, any deviation from the normal transaction can raise a red flag for the bank to follow up to see if the transaction is genuine. 5) Background checking of the employees' antecedents, rotation of seats periodically, vigilance assessments, and internal audits are the measures suggested by the speaker in respect of employees. 6) Modern day banking involves outsourcing of many operational activities such as cash movement, IT, data management, etc. Also, BCs are becoming closely associated with the activities of the bank. For effective prevention of frauds involving any such individuals or agencies, banks have to know its partners. • - • •

°0

5-78 , PART-6 DATA INTERPRETATION

INTRODUCTION: Data is nothing but given facts , which is represented in many forms. For any meaningful analysis and decision making extraction of information from the data provided is very important. The art of extracting information from Data is known as Data Interpretation. Data is represented in various forms like : Data Tables Line Graphs Bar Charts PIE Charts Venn Diagrams A combination of Two or more of the above. Data Tables: In Data Tables data is represented by rows and columns . In this type of data presentation a particular column represents the different entities and corresponding cells in the other column represents data which is variable . For example the following Simple three column Table represents the performance of State Bank Group during the Years 2010-11 & 2011-12

Amounts in Rs. Cr

DETAILS 31.3.2012 31.3.2011 31.3.2010 31.3.2009 INCOME 1,77,032.82 1,47,843.92 1,33,851.83 1,13,093.09 EXPENDITURE 1,61,059.51 1,36,663.98 1,09,052.90 88,827.61 ADVANCES 11,63,670.20 10,06,401.55 8.75.302.22 7.65.432.24 DEPOSITS 14,14,689.40 12,55,562.48 11,21,433.56 10,12,588.89

In the above table the details column represents various parameters like Income, Expenditure, Advances & Deposits. The figures in the columns under 31.3.2012 , 31.3.2011,31.3.2010, 31.3.2009 represent the performance of the group under these parameters during the respective years, this is known as data. From this data we can infer meaningful conclusion as to the growth in various parameters between 2009 & 2012, which parameter shows relatively better performance etc.,. This method of representing a set of numerical information in a tabular form is known as Data Table. Representation of data in this form provides data in an easy and simple way to undertake a comparative study, data interpretation and analysis and can easily be represented in graphic & chart forms. In data table there are a. Simple Table , in which only one attribute of the entity is presented b. Complex Tables, in which two are more inter-related characteristics are presented. Some questions that can be asked on this data are

6-1 yt MM Special Guide a) The highest growth YOY in income is in which year ? b) Lowest Growth in expenditure is in which year ? c) What is the percentage growth in Advances from 31.3.2009 to 31.3.2012 ? d) What is the Annualised growth in deposits in the Bank between 2009 & 2012 ? Line Graph : A Line graph summarises the relationship between various information , how they are related and how they vary with one another. A line graph has a vertical axis and a horizontal axis. The numbers along a side of the line graph are called the scale. Each variable is plotted along an axis. For example, the representation of the above data as a line graph will be as shown below :

1600000 -

1400000 -

1200000 -

1000000 - > _ar

800000 -

600000 -1

400000

200000 1

0 31-Mar-2009 31-Mar-2010 31-Mar-2011 31-Mar-2012

The type of questions that can be asked on this are a) What is the gross profit in 2012 ? b) What is the CD ratio in 2011 ?

Bar Charts

When data is represented using either horizontal or vertical bars to show comparisons among categories it is known as a bar chart. In a bar chart one of the axis represents a discrete value , while the other axis of the chart shows the specific categories being compared. When bar graphs present bars clustered in groups of more than one they are known as grouped bar graphs, and when the bars are divided into sub parts to show cumulative effect known as stacked bar graphs. It is one of the most popular methods of representing data and indicates trends & patterns of activity and enable comparisons between variables. It provides clarity on how one variable impacts another. It helps to determine the value of a given variable relative to others. • Data Interpretation

1, The above data is represented by a bar chart as under:

16on000 _r 1

Pie Charts : In a pie chart data is represented by a circle divided into sectors representing a specific type of information in terms of percentages. These charts show parts of a whole, so if each percentage is added together, it must equal 100 percent. A business can use a pie chart to show what percentage of their resources is going into each project in development

U Engineering

• Chemical & Dyes

Ulnfrastructure • NBFCs &Trading

MOthers

Venn diagrams are illustrations used in the branch of mathematics known as set theory. They are used to show the mathematical or logical relationship between different groups of things (sets). A Venn diagram ;,,,-. • .. ,,' shows all the logical relations between the sets or groups of objects that share something in common. Usually, Venn diagrams are used to depict set intersections (denoted by an upside-down letter U)and is used , :,-;, : . in scientific and engineering presentations, in theoretical mathematics, in computer applications, and in j,?, :,. . statistics. ...„.u,,_::::.,, 4- ,g__Ty'; .:. 6-3 4 '41i:.C. MM Special Guide

For example : Set A = (2,4,7,9) and B Set as shown below : each one is represented by venn diagram

2, 4, 7, 9

3, 5, 7, 9

Set-A (2, 4, 7, 9) Set-B (3, 5, 7, 9)

Set-A & B (7, 9)

,...... ,\N,

lo, , . 7, 9 - 2, 4 t 7, 9

Set-A or B (2, 4, 7, 9, 3, 5) Set- not A, not B (Shaded Part)

The data within the circle A represents the data in respect of set A. Similarly the numbers within the circle B represents data of B. The area outside the circle A is known as "not A" and similarly the area outside circle B is known as "not B". In the picture representing intersection of two circles the common area is known as A and B; similarly the total area of the two circles is known as A or B. This type of representing data is known as venn diagrams.

64 Data Interpretation

Examples : 1. Industry type distribution of exposures of State Bank Group as on 31.3.2012 is given below: Amount in Rs. Crs

S1.No INDUSTRY TYPE STANDARD NPA TOTAL ASSETS 1 Engineering 32513.98 1301.66 33815.64 2 Chemical & Dyes 34239.42 1792.62 36032.04 3 Infrastructure 104948.87 1387.06 106335.93 4 NBFCs & Trading 86061.30 4999.98 91061.28 5 Others 892522.67 40167.38 932690.05 Total 11,50,286.24 49648.70 11,99,934.94

Questions : 1. How is the performance of Infrastructure advances in the Bank ? a)Worse than the group b) Same c) better than the Group d) None of these 2. What percentage of Chemical & Dyes units are NPAs ? a)1.5% b) 5.23% c)6% d)4% 3. What is the share of Engineering Industries out of the total advances of the group ? a)5% b)6% c)4% d)2.83% 4. What is the share of others out of total NPAs of the group? a) 50% b)70% c)80.90% d) None of 5. What is the NPA of the group ? a) 4.31% b)5% c) 2% d) None of these

2. Performance of State Bank Group during the Years 2008- 2009 and 2011-12 is depicted in bar chart as under : MM Special Guide Questions : 1. What is the growth in deposits in the group between March 2009 and March 2012 ? a) Rs. 2,50,000Cr b) 2,02,000 CR c) Rs 300000 Cr d) none of these

2. Maximum growth in deposits has taken place between the years b) 31.3.2010 to 31.3 .201 ti r t a) 31.3.2009 to 31.3 .2010 c) 31.3.2011 to 31.3 .2012 d) none of these

3. The ratio between income & expenditure is highest in the year ? a) 31.3.2009 to 31.3 .20110 b) 31.3.2010 to 31.3 .201 c) 31.3.2011 to 31.3 .2012 d) none of these

Questions : 4. CD ratio of the group is highest as on what date ?Ans : a) 31.3.2009 b) 31 3 2010 c) 31.3.2010 d) 31.3 .2012

5. Maximum growth in Advances has taken place between the years a) 31 3 2009 to 31.3 .20110 b) 31.3.2010 to 31.3 .201 c) 31.3.2011 to 31.3 .2012 d) none of these

1. The following Line graph depicts State Bank Groups performance from 1.4.2008 to 31.3.2012.

1600000 MEI INCOME

1400000 - .EXPENDITURE ADVANCES 1200000 - x...... 0.....„...... :,, DEPOSITS 1020303 -

802000

60300

400000

200000 / ii= i,....._...... 6

0 i 31-141.14.2009 314424.2010 31-Mar-2011 314ar-2012

Questions : 1. What is gross growth in business (Deposits plus Advances) of the group from 1.4.2009 to 31.3.2012? a) Rs. 2,50,0000Cr b) Rs 1400000 Cr c) Rs. 800000 Cr d) none of these

2. Annualised growth in Advances from 1.4.2009 to 31.3.2012 is ? a) 17% b) 15% c) 20% d) none of these

6-6 Data Interpretation

3. Lowest % growth in deposits has taken place between the years a) 31.3.2009 to 31.3 .20110 b) 31.3.2010 to 31.3 .201 c) 31.3.2011 to 31.3 .2012 d) none of these

4. Assuming same growth pattern expected level of deposits as on 31.3.2013 will be how much? a) 15,00,000 Cr b) 15,54,000 Cr c) 15,94,000 Cr d) none of these

5. Assuming that growth during 2012-13 will be same as that in 2011-12 , expected profit for the Group during 2012-13 will be a) 15,600 Cr b) 18,700 Cr c) 19,750 Cr d) 20,750 Cr

4. Break up of Banks Advances to various sectors as on 31.03.2012 is depicted below :

Industry wise Break-up of Advances

■ Engineering ■ Chemical & Dyes ■ Infrastructure ■ NB FCs & Trading ■ Others

3% 3%

Standard Asset

U Engineering

• Chemical & Dyes

id Infrastructure

E N8 FCs & Trading

it Others

6.7 MM Special Guide

NPA I I NPA Share

• Engineering • Chemical & Dyes • Infrastructure • NBFCs & Trading Er Others I I • NPA • TOTAL

3% 3% I 4%

Questions (Assuming that as on 31.3.2012 Advances level of the group as Rs 12,00,000 Cr) 1. How much is the total NPA of the Group ? a) Rs. 49000 Cr b) Rs. 60000 Cr c) Rs. 30000 Cr d) None of these

2. Standard Assets in Infrastructure segment of the Group as on 31.3.2012 is a) Rs. 149000 Cr b) Rs. 60000 Cr c) Rs. 104,000Cr d) None of these 4111. 10 3. NPAs under other category is how many times of NPAs in NBFCs and Trading segment a) 9 times b) 8 times c) 5 times d) None of these

4. Total NPAs in NBFC & Trading segment is a) 4000 Cr b) 3500 Cr c) 6000 Cr d) Rs. 4900 Cr

5. Standard Asset in Others segment is a) Rs. 800000Cr b) Rs. 850000 Cr c) 8,93000 Cr d) Rs.950000 Cr

6-8 PART - 7 FOR AND AGAINST STATEMENTS

1. Business Budget is essential for Bank's growth. F: Budgeting system provides a focus for operations of a Bank in terms of business levels and profits; it motivates managers at various levels to launch result-oriented strategies and action plans. We can plan for an integrated growth of the Bank in terms of profit, business, manpower, and resources. A Many times there is a tendency to impose impractical targets from the higher level; or avoid challenging budgets at lower levels; also, window dressing has become common on account of the pressures to achieve the budgeted business levels. Further, economic / financial environment has become very volatile. 2. Net profit per employee arrived at by dividing Net profit by total number of employees is used to measure the productivity of employees. F: It is a ready measure to compare productivity / profitability of employees in the various banks. Easy to work out. A Net Profit depends on technology used, NPA legacy and the historical overload of rural / semi-urban branches of banks Also, a big bank like SBI has been engaged in a large number of activities which cannot be directly linked to profitability. Eg: currency chest maintenance, clearing work, Govt business, handling Govt securities issue, Lead Bank matters etc Hence such a comparison does not truly reflect the profitability per employee. 3. Loss making RRBs are to be closed. F: A few RRBs have made huge losses and are saddled with huge overdues. Their staff do not appear to be better motivated than the staff of the commercial banks. Also, the recent court judgements have made the remuneration of the staff on par with commercial banks. The overall impact has been that the viability of RRBs are being jeopardised and that they have become burden-some in the light of pressure on the profits and operations of nationalised banks. A RRBs have limited area of operation and are the appropriate agencies for rural development. They are relatively low cost outfits with the staff recruited from the area of operation; also, their focus is on weaker sections. Of late, many of the RRBs have been merged and they are making profits. Hence RRBs have to be supported and strengthened by sponsoring banks. 4. SBI has entered Insurance business. F: The insurance sector offers immense potential for new entrants. Banking and insurance have great deal of complementarity. The brand equity of SBI, large number of outlets, highly educated staff etc. will be an advantage to gain a reasonable market share. The savings need as well as the risk protection need of customer can be met. A The Bank does not have superior expertise to handle this highly specialised activity where keen competition has set in on account of privatisation. Bank may lose its focus on its core activity. This may result in the loss of existing business coupled with customer dissatisfaction. 5. Banks have to hive (sell off) the loss making subsidiaries. F: It will enable them to concentrate on their core business viz banking. NPAs can receive better attention. The balance sheet would improve as also profitability. A It is becoming difficult for a bank to be profitable unless it diversifies and engages in universal banking. Customers will not prefer banks with limited range of services / activities. Suitable strategies need to be drawn up for making the subsidiaries profitable.

7-1 MM Special Guide ADVANCES-GENERAL 1. Banks should not grant advances against their Fixed Deposits. F: When continued for long it results in artificially inflating the deposit and advance. A Genuine savers should not be denied the freedom of borrowing against their deposits; more so, when they are able to liquidate the advance from their earnings. 2. Banks should not grant advances against NSCs. F: Investment in NSCs carries tax benefits and is expected to be done out of the genuine savings during a year. Availing advance has become a routine for investors/employees for purchase of NSCs thereby defeating the very purpose of investment through savings. A Any ban would make the NSCs illiquid; therefore it will lose its attraction. States will be affected as they get substantial portion of NSCs sold as their resources.

ADVANCES-COMMERCIAL 1. Leasing is preferable to term loans from the angle of the borrower. F: The entire lease rental can be shown as an expense; no margin to be met; the transaction is put through relatively fast; As the accounts do not show the borrowing, the balance sheet looks better, prima facie. A Lease rentals are relatively costly compared to the interest charged on the term loan; penalty clauses are strict. As the borrower is not the owner, the lessor can always assume possession on default etc thereby affecting production. 2. 'Commercial paper' mechanism is a threat to Bank's business/profits. F: Over a period, first class companies will raise their WC requirements from the market; profitable industrial lending avenues will decline in the intermediate term. A All corporates cannot raise borrowing through Commercial Paper. The conditions laid down by RBI have to be complied with. Also, banks have to develop other markets like retail segment, export business, remittance business etc. 3. Banks have been permitted to finance feature films. F: It has been declared as an Industry. Production costs will come down as presently the interest rates are high in the informal market. The industry caters to the needs of the poor especially in the rural/ remote areas where there is no other medium of entertainment. The films have great potential for education and as a change-agent for various ills of the country such as illiteracy, superstition, uncontrolled population growth etc. Kansan Committee has recommended the same. A It is impossible to predict the success of a film, till it is released. The losses will be substantial in case of failure of films. It is difficult to get appropriate/adequate security for the advance.

ADVANCES-SME 1. SME Units (Mfg) should maintain their borrowing accounts with one Bank only. F: This will enable the financing bank to know the financial position of the industry as well as its dealings, so that any signs of incipient sickness can be detected early and appropriate corrective action taken. A If there is dislocation in the functioning of a Bank the unit would find it difficult to carry on its banking transactions. Further, in many cases it will be operationally convenient to have one more account with nearby branch for small transactions. •, r sr

7-2 • 17 ymplpilVIINYVINN, .. • .: , I .,

ter For and Against Statements

2. Priority Sector lendings are eroding commercial banks' profitability and hence they should be rP discontinued. F: Substantial portion of the banks' funds are locked up as bad and doubtful debts in the advances to Priority Sectors. Further, these are cost-intensive and consume staff-time considerably. A In a capital-scarce/labour-abundant developing economy like ours small enterprises like small industries, small service units, small businesses, small agriculturists dominate the economic scene. National economic development means naturally the development of these groups. 3. There should be no rigid prescription of 40% norm for priority sector lending by banks. F: There has been a change in the mix of economic activities consequent on liberalization/globalisation. Banks should finance all activities which are viable and which add to the well being/economic good of the society. The size of the activity should be immaterial. It is the viability that is important. Artificial standards of smallness and forced lending to such activities will make banks finance unviable activities. Also target lending has always affected quality of lending. A Activities which are relatively small involve more risk and cost of operations. Hence, banks may shy away from financing these and instead concentrate on large advances, trade, imports/exports, investment, etc. This will affect employment and small sized secondary / tertiary activities in the economy. Govt./RBI is in a position to direct bank credit to emerging areas of importance in the economy eg: housing, education, food processing industries, medium enterprises etc. 4. The Bank should study the debit and credit summations in the cash credit a/c instead of verifying stocks, as part of follow-up. F: The objective of Bank finance is to maintain/increase production; A good control system should ensure this. Scrutiny of the debit and credit summations will reveal the level of activity, sales, nature of purchases etc; it will also show whether the unit has routed its entire sales through the account. A The proper functioning of a unit can be quickly gauged by physical inspection of the unit, which includes verification of stocks and bills. It is our experience that both financial and physical follow up of units is necessary. 5. SME units require timely and adequate credit rather than subsidised credit or other concessions like price-reduction, reservation of items etc. F: Recent research has confirmed this. SME units have the advantage of very low overheads, speedy execution of work, production of customized products etc. A In all the countries, Special concessions/special assistance are extended to SMEs as the small size itself carries a disadvantage as regards operations.

ADVANCES-AGRI 1. Agriculture should be given the status of Industry. F: a) It can enjoy reliefs, concessions etc as enjoyed by industry. Workers' working conditions can improve. The present conditions in the industry cannot afford a higher wage structure etc. A Agriculture depends on monsoon; hence it may not be able to maintain uniform pay structure etc. 2. Frequent writing off of dues from Agriculturists will affect the stability of the Banking system. F: The outstanding loans from small agriculturists, share croppers etc., are very large and the profits of the Bank are very small comparatively. There will be similar demands from other small borrowers also. The 'credit' discipline in the country will be destroyed. A In the absence of any Funds/adequate insurance to meet losses arising out of natural calamities, the agriculturists are loaded with loans which they cannot repay.

7-3 MM Special Guide 3. One specialised branch of a bank may be set up in each state to finance agricultural activities which involve higher level of technology (RBI's suggestion to Banks) F: The country's approach to agricultural development has changed with a focus on export. Technologi- cal improvements and risk- taking investments will call for new financial techniques. Such branches can be pioneers for financing of high-tech agriculture. A The need of the hour is extensive fmancing at a large number of centres/financing the small/marginal farmers throughout the country who dominate the agricultural scene. 4. Banks can take over loans of farmers availed from money-lenders F: Interest rates of moneylenders are very high and exploitative; on account of this a number of farmers have committed suicide when they were unable to repay the debt. A Extra-ordinary care has to be exercised in such take-overs as these are non-productive loans and many of them would have become over-due. Also, extraordinary care has to be exercised to ensure that these are genuine loans and not fictitious loans created with a view to avail bank loan.

GOVT. SPONSORED SCHEME 1. DRI scheme should be abolished. F: Being a scheme with no subsidy content, the scheme is not very popular now among beneficiaries. The rate of interest being very low, the banks will make loss in such advances; also there is a built-in disincentive for banks to lend under the scheme on account of very low interest rate. A Poorest people in rural areas carrying on economically viable activities will be denied this facility with low interest rate. Also, for the bank, only a negligible percentage of credit is involved viz 1% of net bank credit. 2. Target-oriented approach in the Government sponsored schemes is the main cause for low recovery. F: Without studying the viability/infrastructure availability, loans are bunched especially at the financial year-end to achieve targets; hence misutilisation, loss in operations, poor monitoring etc., occur ultimately resulting in low recovery. A If no time limits or targets are stipulated, the Government agencies and Banks might not implement the programmes effectively thus retarding the progress of poverty-alleviation/self- employment generation programmes of the Government.

P-SEGMENT 1. Financing purchase of consumer durables in a large way will lead to inflation. F: There will be diversion of scarce resources in the economy to manufacture luxury items to meet the needs of middle and upper classes; this will affect production of wage goods and essential consumption articles by urban and rural poor thereby leading to inflation in these sectors. A In the modem urban life today, consumer durables have become a necessity; if banks do not finance this need, other institutions would do it. The Banks will lose an important segment of business.

SAFE DEPOSIT LOCKERS 1. Lockers should be given preferably against deposits and to known people. F: RBI has already permitted banks to accept adequate deposits, interest on which would be sufficient to cover the arrears of rentals. This will enable us to ensure that the locker service is given to persons having adequate deposits with the Bank.

7-4 ' 1 It" '

For and Against Statements 1 A Banks have to work for the general good and convenience of the public. Hence, any preference to known customers or big depositors will spoil the image of the Banks in the long run.

GOVERNMENT BUSINESS 1. Our Bank should not conduct Government business. F: Our branches have become over-crowded with the public transacting govemment business so much so high value PB customers do not prefer to deal with us. A The Bank earns commission (also, it enables us to have easy and ready access to Government hierarchy at all levels; it also provides opportunity to have access to business clientele.); The Bank has been given currency chests which enable us to keep the cash balance to the minimum. The Bank is able to have some float funds on account of Government business.

DEPOSITS 1. Interest rates payable on deposits should be linked to the cost of living index. F: Cost of living index reflects the rate of inflation. Bank will be paying positive rate of interest by which it will be able to attract more deposits. Can compete with others like PO, NBFC etc. A Rate of inflation varies from week to week; adjusting the interest rate will be impractical; it will be difficult to forecast the rate of inflation for the ensuing period as it will be influenced by Govt. Policy. 2. Interest on Bank deposits should be made tax-free without any ceiling. F: Banking system contributes a very high percentage of resources to national development in terms of investment in Govt. securities and direct/indirect advances to agriculture, small industries etc. Hence, the bank depositors should be given the same benefit as investors in select Govt. securities like NSC etc. Moreover, more than 50% of the deposits in the banking system is held by individuals/agriculturists. A Already, there is an acute shortage of revenues for the Govt. Any reduction in revenue, however small, will affect the developmental expenditure. Other sections of the society would demand similar concessions. 3. DICGC Deposit insurance should not be extended to all banks on a uniform basis. F: The risk of the deposit corporation varies from bank to bank. In the present system, the better banks (in terms of capital adequacy, profitability, NPA etc) are required to subsidise the weaker banks, as the guarantee commission is uniform. Differential pricing will act as an incentive for weaker banks to improve their performance/financial position. Jagdish Capoor Committee recommendations. A In the present system, weak banks are also PSBs and hence enjoy the overall umbrella protection of the Centre. Higher guarantee fee may act as a signal that the bank is not safe which will affect their functioning. Depositors would switch over to other banks. 4. Public Sector Banks should be exempted from the Deposit Insurance of DICGC. F: Public Sector Banks are owned wholly or substantially by the Govt. of India. Therefore, these banks have the implied support of the Govt. and hence will not fail. Depositor's moneys are therefore safe. The guarantee of another Govt organisation is superfluous. A With privatisation coming in, though slowly, these banks will go out of the Govt fold. Further, the Govt's budgetary support will not be available for such purposes. The small depositor will be ruined in the case of bank failures. 5. NRI deposits need not be actively canvassed. F: These deposits are comparatively costly; the servicing cost for small deposits is also high; In view of the hardening of the rupee and 'interest arbitrage opportunities' speculative flow cannot be contained;

7-5 MM Special Guide forex reserves have been built up to a very comfortable position and the liquidity is very high. A We must have a long term and stable policy as we have substantial NRI deposits/business. Economic growth must be given a great push so that the forex flows and reserves can be utilized profitably. NRI deposits must be used as part of a strategy to attract NRIs to make investments in India as well as NRI talent in various. spheres. NRI deposits will also act as a cushion in case of volatility in HI / FDI investments. Also, when the domestic deposit market becomes tight, we will be able to tap this market. 6. SB Interest has been de-regulated. F: RBI has been gradually de-regulating the interest rates.Now, each bank can fix an appropriate rate for the SB a/c aligning it with the interest rates for other deposits. It would facilitate better asset-liability management for the banks and competitive pricing benefitting SB a/c holders. The Banks will have the flexibility to vary the same depending upon market conditions. A It may result in unhealthy competition among banks. 7. Interest rate changes as and when effected should be made applicable to existing deposits also. F: This will enable the bank to extend the benefit of higher interest to the existing depositors and thus retain their deposits. Goiporia Committee recommendations. A In case of reduction of interest, the customers would resent the same. Further, the bank would have invested/advanced with lesser yield the funds obtained at a lesser rate of interest. Profitability of the operations will be affected. (Note: RBI has not accepted this recommendation.)

FOREIGN EXCHANGE 1. Indian companies should be permitted to borrow freely in foreign markets directly. F: This will enable the industry to attract foreign investment. This will tone up the competitiveness and efficiency of industry in the long run. Direct foreign investment in industry will go up. A Entry of foreign capital may make the economy a command economy for developed countries. In the medium term, it might affect the political independence of the country, as the economy is not strong. 2. Full convertibility of the Rupee should not be introduced now. F: (Full convertibility implies that there will be no restriction for foreign investment or for repatriation of the investment as and when the foreign investor desires). Indian economy has not yet achieved macro economic stability viz consistently low inflation over the years, budget deficit within a small range etc. This position has been further worsened by the knock-on effect of sub prime crisis of the US. The experience of Mexico and East Asian nations show that the international investors will withdraw the investments when the economy faces difficulties, making the position further worse. A To stabilise the rupee value and BOP position, India is in need of forex resources. Further exports, have not been picking up. Hence full convertibility will attract more forex inflow. Also, as the Indian investors have the option to move the capital to foreign countries, the efficiency of Indian industries will go up in a competitive move. 3. Export credit should not be subsidised. F: This will force exporters to improve quality and achieve higher realisations per unit. In principle, there should be no discrimination between the cost of domestic credit and the cost of export credit. A Export is a thrust area as the country's forex reserves can be kept at a high level by subsidised credit. Foreign debt cannot be serviced comfortably.

7-6 For and Against Statements

ACCOUNTING SYSTEM 1. Increasing frauds in banks are due to indifference of staff and not due to inadequacy of control systems. F: Analysis of frauds has invariably shown that the failure to follow the laid down procedures and laxity in supervision and control have resulted in most of the frauds. A Banks are entering into new areas of business; also the technology environment of the banks is changing; further, fraudsters are forging the security documents and adopting the procedures followed by the banks while committing frauds. hence, there is need to frequently review and recast the systems and procedures as also forms and formats used. 2. Internal audit of branches should be carried out by Chartered Accountants (External Audi- tors) and not by the bank's inspecting staff. F: This will lead to improvement in systems and procedures as suggested by Chartered Accountants and an objective evaluation of the advances at the branches. A The bank's experienced officers in the areas of management and credit administration will be able to assess the performance of the branch/evaluate the advances more meaningfully. The educative role of the audit is an important aspect. 3. The Banks should not be permitted to create secret reserves (or The Banks must make full disclosure in their balance sheet). (or There should be more transparency in Banks' Balance sheet). F: Under the present system, we are unable to know the real financial position of the Banks. It is believed that a number of Public Sector Banks have actually made losses even though they have reported profits in the Balance Sheet. Moreover, there is a move for full disclosure in all/open economies. A In the initial development phase of the economy in which public financial institutions play a significant role, there will be a higher percentage of losses; full disclosure/scrapping of secret reserves might create undue panic among the public/bank customers. Now, banks' balance sheets contain wealth of data as per Basel guidelines. 4. Market Related Funds Transfer Price Mechanism adopted in the bank should be discontinued. F: The Transfer Price mechanism does not throw out the real profitability of a branch because the rates are based on the concept of positive and negative incentives. A All branches do not have the same type of business/operations. Hence, different weightage has to be given for the various activities; differential rates are given to provide incentive to attract different types of business. Transfer Price Mechanism is a common technique adopted in multiproduct, multi-location companies. 5. The post of concurrent auditors at branches should be abolished. F: There are regular and frequent audits/inspection which should help running of the branch on efficient lines. Mechanisation has improved balancing position/correctness of calculations. A At larger branches routine mistakes/deficiencies are bound to happen which can be rectified on an on- going basis. Has educative value for staff. Ghosh committee recommendations. 6. Banks should be audited on a quarterly basis. F: This will ensure that the market price of the shares of the bank will reflect the correct position of the bank. Tendency to violate RBI directives and make risky loans will be curbed. A It will be a costly and time-consuming exercise; productive time of executives will be lost. Already, there are several heavy audit drills in the banks.

7-7 MM Special Guide HUMAN RESOURCES 1. Award staff in banks should be transferred freely. F: Redeployment of staff, re-training would be needed to rationalise the use of staff with the spread of technology. It is essential that staff pick up the ability to work in different environments/markets; will prevent vested interest being developed by staff. Staff in rural areas will get opportunity to work in big towns/cities. This has become crucial after VRS has been implemented. A: Will affect family responsibility severely especially for women in the Indian context. It is perceived by staff as a management ruse to force them to opt for voluntary retirement. It is very costly. 2. Subordinates should also write confidential reports on their bosses. F: An executive's ability to manage the subordinates will be ascertained from the this angle also. This will ensure that there is no arbitrariness in the treatment of subordinates. A Managers will be afraid of taking objective decisions lest it should displease subordinates. Subordi- nates may not know the corporate compulsions under which managers have to act. 3. Salaries and allowances of employees should be based on productivity / profitability of the Bank. F: Uniform salaries and allowances among banks have affected the desired level of productivity. There will be an in built-incentive among the employees to improve productivity. A Productivity will be varying almost continuously depending upon the technology used, training imparted, lateral recruitment of employees with skills in specialised areas, motivational levels of employees etc. Hence salaries and wages have to be changed frequently. The principle of equal work, equal pay will be affected. 4. Awards are given for branches providing excellent customer service. F: This will promote achievement of business goals, excellence in Customer service etc. Will bring in friendly competition among branches. Team spirit would go up. A Giving of awards is a minor aspect of the issue. Appropriate technology induction, proper orientation, revamping of the image of the Bank as a tech-savvy bank etc are urgently needed. 5. The Bank staff must be freely transferred among all Banks. F: This will bring about uniformity in approach to developmental issues and problems. Skills/experience of one bank is thus made available to another bank by this process. A A huge monolithic banking organisation would immobilise the banking system itself in a large country like India. Staff will become insensitive to customer needs. The Staff will not develop any identity with a particular Bank which is a strong motivator for performance. 6. Trade unions should be banned. F: The world has become highly competitive and the markets volatile. Labour laws/labour markets have become very rigid to suit the needs of the present situation of an emerging free market. Unions have been obstructive of developments/changes in these areas. A Union is a tremendous constructive force through the 19th/20th century contributing to the welfare of the workers and containing arbitrariness/inhumanness of capitalistic employers. Abolition would lead to oppression of another kind. Social partnership of Labour-Capitalist should be evolved for the smooth functioning of the society. 7. HRD concepts have limited application in Banks. F: Banks appear to have reached a saturation phase presently; the staff appear to be demotivated as they fear that their career growth will not be as quick or as much as that of their predecessors. A HRD concepts have rich potential to be used in Banks to stimulate the latent feelings of loyalty, self- worth, commitment, achievement etc., in the staff . _

For and Against Statements

B. Messenger recruitment in the Bank should be stopped forthwith. F: About a third of the staff strength accounts for subordinate staff, majority of whom are unable to progress further. Further the establishment cost is also very heavy, compared to output. A Movement of vouchers, books, registers etc., is an important activity for the smooth and efficient functioning of the branch. Entrusting this work to a higher category of employees as a routine measure would be costlier. 9. The Bank should concentrate on 'on the job' training instead of on institutional training. F: On the job training will ensure that appropriate training is imparted to the staff depending upon their immediate and near future requirements; also, the cost of training will be less. A In the fast changing world of banking, institutional training provides training by specialists in different fields of banking and management; also, persons with various background in a training situation contribute new ideas and experiences which are valuable. 10. Promotion to higher cadres must be based on performance only and the promotional examina- tions must be scrapped. F: This will lead to better performance by each employee in the position in which he is presently placed; there will definitely be a great improvement in customer service and business. A Banking is a knowledge-based industry and a banker should have the requisite academic knowledge of banking and allied subjects. This could be tested only in an examination. Mere satisfactory performance in a few tasks/roles might not give an employee an over all view and knowledge of banking. 11. Management should be given free hand to punish/retrench indisciplined workers. F: Those who enjoy their rights and ignore their duties will be disciplined /weeded out of the organisation. This would pave way for a disciplined environment and ensure productivity. The need of the hour is disciplined and dedicated work and customer service A This may result in abuse of power vested with the management. A likely downtrend in the morale of the staff cannot be ruled out. It will bring in industrial conflict. Large sums have to be paid as compensation. The economic, political, social situation is undergoing fast changes and hence tactful and persuasive efforts will have to be used. 12. Labour laws should be changed in order to allow the banks to appoint freely officers by direct/ campus recruitment. F: The environment in the banking world is highly competitive and volatile. There is need to induct better quality candidates at the management level. Banks should be given full autonomy to recruit the right candidates by attracting the best talents with the right mix of educational qualifications, functional exposure and skills to ensure efficiency and to face the challenges in the industry. Will lead to generation of new perspectives / new skills. A The banking business demands a large number of mangers with ordinary skill and extraordinary scruples and carefulness. The possibility of the recruitment process being put to abuse cannot be ruled out. This will lead to nepotism, bad image etc. Regional bias and favouritism may creep into the system. The already existing skills have to be tapped fully. i 13. Only Agricultural graduates should be recruited to manage rural branches. F: Agricultural graduates have the necessary knowledge and skills in the fields of agriculture and other activities related to rural development. Hence, they can be profitably utilized to make a deeper thrust into the rural areas. A Agricultural and rural development depends not merely on the knowledge of technical aspects of Yr Agriculture. Willingness, commitment and managerial skills are needed. Also, persons with different academic background are desirable for a balanced growth of institutions.

7-9 MM Special Guide 14. Inefficient staff should be compulsorily retired/retrenched. F: It will improve the efficiency and profitability of the Bank as also the customer service. Efficient and enthusiastic staff at lower levels can be promoted to higher positions. It will affect the morale of the staff; it will bring in industrial conflict. Large sums have to be paid as compensation. 15. A retired employee's family member should be given a job in the Bank. F: This will increase the loyalty of the staff. In these hard days of unemployment, the employee/his family would be benefited greatly. A number of staff members who are not happy/whose contribution is not much may opt to retire. A: As it is, employment opportunities have shrunk; hence, general public would be affected by this reservation. 16. Individual banks should settle the wage negotiations separately with their staff. F: Each bank can settle the wage payments based on its ability to pay as well as the quality of staff, work entrusted to their personnel etc. Work dislocation/staff dissatisfaction in one bank will not affect the entire banking system. A The principle of 'same work-same pay' may not be achieved. 17. Efficient employees should be rewarded and inefficient employees should be punished. F: This will act as an incentive to improved efficiency, which is a must now to improve profitability and morale of the employees. A An overall Human Resources Management policy has to be evolved to retain and build up high talent. Ad hoc policies may not have lasting effect as inefficiency has multiple causes.

LEGAL ASPECTS OF BANKING 1. Banking ombudsman is not required as we have Consumers' Protection Act. F: Consumer Protection Act is the statutory protection for consumers of goods and services. An Indi- vidual consumer is weak, compared to the providers of goods / services. When usual methods fail to get justice he can utilize his legal right to seek legal remedy. A: Banking ombudsman has been set up for amicable settlement of customer grievances. The settlement will be fast .The Bank can also avoid bad publicity. 2. Banks should be exempted from the operation of the Limitation Act. F: It will eliminate the need for obtaining revival letters which has proved to be a vexatious and time- consuming task. Banks' claims against defaulting borrowers can be enforced any time. A: Limitation concept is a whole-some legal precept that legal claims should be asserted within a reasonable time and cannot be kept alive forever. Bank staff may become complacent and may not contact the customer for recovery. 3. Limitation Law must be abolished F: Will help Banks/FIs as in many cases they are not able to get Revival letter, balance confirmation etc from borrowers/guarantors, in spite of best efforts. Borrowers cannot take technical protection of limitation in such cases. A: Limitation law is based on the wholesome principle that courts shall assist only those who are vigilant about their rights. If Limitation law is abolished, there will be end-less and fruitless litigation.

INDIAN FINANCIAL SYSTEM 1. SLR and CRR are useful tools to curb inflation. F: Bank credit is a known source of inflation and RBI has to contain inflation by regulating Bank credit 7-10 For and Against Statements

through variations in SLR and CRR. A The unorganised sector and black money in the economy are outside the control of RBI. Further, budget deficit and unrestricted borrowings by the Government which cause inflation are outside the purview of CRR/SLR. 2. CRR should be abolished. F: This will release additional funds to Banks which can be profitably utilised. A CRR is a well-tested measure of prudence which enables banks to meet depositor's demand for cash. RBI will lose an effective tool to regulate money supply, control inflation etc.

CAPITAL ADEQUACY, MANAGEMENT OFNPAs 1. The Bank can appoint outside recovery agents for recovery of NPA. F: Many banks have successfully used the Recovery Agents. They have more flexibility to pursue the defaulters and recover the NPAs. The Bank can concentrate on credit delivery/follow up standard assets. A Often, Recovery Agents have adopted questionable methods leading to the bad image of banks, court strictures etc. Banks are exposed to reputaion risk. 2. The risk weight attached to priority sector lending for capital adequacy purposes must be reduced to 50% from the present level of 100%. F: This will enable banks to increase priority sector advances as in the case of Home loans. The cost of capital will come down. Further, many PSBs are not able to raise capital immediately. A Capital adequacy norms are being aligned with best international practices and as per the guidelines of BIS. The concept of risk-weight is based on the "risk" of the advance and the risk of default of priority sector advances is not less than any other advances, if not more. 3. Assets Reconstruction Corporation has to be set up for all banks. F: The Corporation can take over the bad debts of the commercial Banks with a view to recover them. They will take over the bad debts at their current realisable value. This will improve the balance sheets of the Banks which can then start with a clean slate (Recommendation of Narasimham Committee) A Unless ARC is equipped to recover the bad debts quickly we are only transferring a sticky problem to another Institution. The wilful defaulters may escape any stem action. Further, unless the Banking system is made autonomous and de-politicised, there is no guarantee that this state of affairs may not recur. 4. The name of bank defaulters should be publicised. F: This will ensure that the Banks/FIs do not lend to the defaulters/their associates etc. This will act as a deterrent to the wilful defaulters. A Defaults take place due to genuine reasons like competition, change in Govt. policy etc also. Sick units which can be rehabilitated will be affected as their credit would be damaged by any such adverse publicity. The banking secrecy laws have to be amended. 5. Loan defaulters to Banks/FIs should be prosecuted criminally. F: NPAs have assumed alarming proportions; will inculcate healthy fear in borrowers. A Bank loans are contractual in nature. Unless a person can be accused of criminal acts like cheating, impersonation, falsification of documents etc, the law would not permit such recourse. Already, IPC contains enough provisions to take care of these. • 6. Bank defaulters should be barred from seeking election to public offices. :;;; F: The NPA problem has assumed alarming proportions in the banks. Will be a strong deterrent for wilful

7-11

MM Special Guide default; will induce better credit discipline. A This is only a fringe of the problem. Bank defaulters are not only from politics but are from a cross- section of the society. Genuine defaulters will be affected.

MISCELLANEOUS TOPICS 1. Corporates should not be allowed to float banks. F: i) This may not be the right approach in the context of the lack luster performance put forth' some of the new banks floated by institutions. Historically, combination of business interests and banking interests has affected the stability of banks. A i) The floatation of new generation banks will instill competition as well as quality of service in the banking sector. New customer friendly products will be introduced by Banks. The existing players will not develop complacency in regard to their operations. 2. Fiscal Responsibility Act has been enacted. F: It will be a strong institutional mechanism for the management of the fiscal deficit. There will be more transparency in the budgeting process. Will help contain the Govt. borrowings; will lead to predictable and consistent tax rates. A The fiscal deficit has to be taken for the whole country; if the States are not covered, the purpose is not served. If the Central Act tries to cover States also, the States' autonomy will be affected in preparing their budgets. If Centre/State Govts enact laws limiting their borrowings, deficit would be reduced. 3. Banking transactions should be carried out in local language. F: The customers would be able to understand better the implications of the agreements and transactions; they will have a better understanding of the systems and procedures. A The Customer's foremost requirement is a fast, error- free and courteous service; language is of minor importance in this context. 4. Restricted holidays should be made applicable to banks also. F: Banking industry has emerged as an important utility service for the community. Trade and Commerce will be benefited if banking facilities are available all the time. A It will be difficult to impose reforms and changes on only one section of the industry. Better alignment of holidays between the trade and industry sector and financial sector has to be brought about by mutual discussions. 5. Foreign investment should be permitted freely. F: There is an acute shortage of investment capital in the country; hence, foreign investment will be helpful; also, import of technology/modernisation of industries will be easier. Intemational commercial borrowings have become very difficult/costly. A Out-go of foreign exchange in the form of dividends etc., will affect the BOP position: Further, local R & D may not flourish. Many Indian companies will go out of business due to competition. Foreign interests may dominate/take control of Indian industry. 6. Branch Activity Analysis is the only method of estimating the staff requirements. F: Weightage has been given to the various activities in a Branch and staff requirements are related to the nature and number of transactions. BAA method provides a common standard for all branches. A In the changing mix of business/activity staff requirements as estimated through the BAA are found to . . be at variance with the felt needs of the branch.

7-12 For and Against Statements

7. Employment generation and better distribution of National Income are important and not more growth rate in the economy. F: Unemployment and poverty are the two scourges afflicting Indian society; therefore, any developmental plan should alleviate these by having specific targets. A Without registering adequate growth we would only be distributing poverty; Growth is the first requisite. 8. Subsidies in the economy should be immediately abolished. F: Every section of the society should pay the actual cost of goods/services enjoyed by it from the society. It is not correct to tax one group/section of the society to provide benefits to another section. Also, Govt., finances have been in bad shape; budget deficits have worsened the inflation. A The purchasing power of the poor is very low and hence subsidy for essential consumer items has to be provided to them. Subsidy in the agricultural sector has boosted production in the past. Sudden withdrawal will result in social unrest. 9. Unemployment allowance should be given to all jobless persons. F: This will reduce misery and frustration faced by the jobless; This will enable them to meet their basic needs. This will also put indirect pressure on Govt/society to provide employment. A The Government finance would not permit this as already the budget deficit is very high in the country; further, any allowance without work might act as a disincentive to seek work which will ultimately affect the work ethos of the Nation. 10. Specialised services should be provided by branches. F: Focussed marketing of services can be done to the targeted customer groups to meet their unique needs. This will help staff to acquire expertise in specific areas; also special resources and technology can be mobilised for rendering specialised services. A Customer needs have multiplied and all the needs of a customer may not be met by one branch; further, the over-all skill development of staff would not take place. 11. Revenue Recovery powers must be vested in all branch managers. F: This will create fear in borrowers and make them repay loans promptly; it will also speed up recovery of bank loans through Revenue Recovery processes. A Branch Managers might be tempted to over-use this process without matching benefit instead of closely monitoring/persuading the borrowers to repay the advances. (Close rapport and continuous monitoring are essential for the timely recovery of advances). 12. The money lender cannot be totally removed from the rural scene. F: He lives among the people, is sensitive to the needs of the people and extends help to them on all crucial occasions. The procedures are simple, if any, and, the people are bound by the moral duty to repay the debt. A Quite often he exploits the poor and ignorant people and charges usurious rates of interest. More pragmatic and sympathetic approach by banks would eliminate him in due course. 13. Deposit Guarantee cover should be provided for NBFC deposits also. F: There are a large number of small depositors, pensioners, house-wives, small traders etc. who have deposited with NBFCs; NBFCs play a significant role in financing priority sector activities such as SRTOs etc. A NBFCs are not subject to the rigorous discipline (CRR, SLR, CAMELS rating etc. as banks) a large number of them are not financially as strong as banks. It would be risky to extend deposit coverage. It would amount to subsidising weaker units. We will also give a wrong signal to depositors that there are no risks investing in NBFCs.

7-13 MM Special Guide 14. 'Right to work' must be made a fundamental right. F: Unemployment among people lead to frustration and poverty. Young people might be tempted to take to anti-social activities. It is the duty of any Government to ensure that employment is available to its citizens. A The Government will not be able to enforce the right due to lack of resources. 15. The nationalised banks should be privatised. F: Customer service has deteriorated steeply after nationalisation. The banking sector is believed to be not doing well on account of the loans to sick industries. Under Private Sector, a better accountability to shareholders would be established. The use of resources would also be optimized. Management Con- trol would also be better. A The banking sector might not put in strenuous efforts to fmance priority sectors and weaker sections in the economy. 16. Swapping of bank branches among banks should be allowed freely. F: This will enable a Bank to swap its loss making/marginally profit making branches m one area with other similar branches of another Bank. It will benefit both the Banks and lead to a rationalised branch system and better efficiency and profitability. A Over a period, the branches in remote and interior areas may be closed. The rural area/rural people will not have adequate banking facilities. 17. Rural banking should be entrusted to the private sector. F: Efficient, low-cost banking structure in the private sector can come into existence. Such banks will have a very limited area of operation and functions and their staff can be recruited locally. A It may be difficult for RBI to supervise the large network of such banks. As the clientele of such banks are heavily risk-prone (eg: small agriculturists, small traders etc) the banks may not actively assist them thereby defeating the main purpose of such a bank. 18. The number of banks should be reduced to 6 or 7. F: It would lead to a rational branch network in remote areas and Urban/metropolitan areas. There will be a sizeable reduction in overheads with the improvement in profitability. RBI can have better supervision over the banking system. Capital base of Banks would go up. A As long as viable banks can be started and run on efficient lines there is no need to merge them. If a large bank fails the impact will be disastrous to the economy. Also, if the number of banks are few, a cartel may develop among them which is against customers' interests. 19. Bank Investment Company to be set up. F: The body can insulate the Bs k. from the direct pressures of the bureaucracy and the political system. As the body is set up solely for this purpose, management and control will become systematic and efficient. Dr.P J Nayak Committee recommendation. A The functioning of Banks affects the money supply/inflation in the country. Hence, RBI should monitor the Banks on these aspects. There may be conflict with RBI in many areas. Procedural and staff matters may dominate the functioning of such a body. Any strike/lock-out in such a set-up will paralyse the country. 20. Foreign Banks should be allowed to open branches freely in India. F: This will force Indian banks to improve their products, efficiency and customer-service. This will also enable them to help the Indian industry to enter the global markets by learning modem techniques of financing as well as acquiring modern technology. Foreign Banks will be a conduit for foreign investment, Joint Venture etc. Requirement under WTO agreement.

7-14 For and Against Statements

A Indian Banks are beset with problems like capital inadequacy, social obligations like priority sector ]endings, out-moded systems and procedures, very high labour intensity, low international banking experience and stature. Hence, they will not be able to face the competition form foreign banks. Also, the 2008 global aftermath of sub-prime crisis has revealed that the approach and practices of foreign banks have been undesirable. 21. Stamp duty must be abolished. F: Thousands of crores of revenue have been lost on account of inefficient administration. There are now a wide number of commercial activities from which Govt can raise tax. A The collections go to state govts and they cannot afford to leave out any major revenue source as their financial health is not sound. Stamp duty is a sizeable source of revenue for State Govts. It is the administration of stamp duty system that has to be made pilfer-proof, citizen friendly, fraud —free and hassle-free. 22. SBI should do 'Correspondent Banking' for other banks in the country. F: Many new private/foreign banks are being established in the country and they do not have adequate branch net-work. This is a fee-based activity and therefore would be profitable. A Our Bank has a very vast network; we will be encouraging the spread of the brand - image of competitors using our infrastructure and capabilities. 23. P S U shares should be listed in stock exchanges abroad. F: Many of the PSUs have hidden assets and substantial potential. The PSUs can reap the advantage of securing forex as well as substantial investment. They will be better known in the international capital markets so that future issues would be easy. A Not all PSUs can attract investors from abroad. There is a danger of core/strategic industries falling into the hands of foreigners who may disregard national interests. 24. Service sector companies like Insurance companies, banking companies etc should obtain ISO accreditation. F: Products of these institutions will have better acceptability. This will enable these institutions to get international recognition. The process of obtaining the ISO accreditation will improve the systems and procedures as well as the quality standards in these organisations. A Immediate obtention of ISO accreditation will be difficult in view of very low standards obtaining in these industries presently. 25. A Super-Regulator has to be set up for the financial sector. F: Many banks/FIs have diversified/are diversifying into various financial areas e.g.: Mutual Funds, In- vestment Banking, Insurance, Security Services etc. and will be subject to function-specific regulations. Multiple regulators will not be effective. Also, they may work at cross-purposes. The image of the super-regulator with ample powers will be superior. This will also enable the separation of functions of monetary authority and the Central Banking (Regulatory) Authority. The UK whose financial system/fiscal system, is a model to the country has already established a similar body. A It will take some time before such a body becomes very effective. The control may suffer in the near term and conflicts are bound to arise. India is too vast a country and a single super regulator may not be effective. The existing regulators have to be strengthened and their functioning integrated. Even the experience of Financial Services Authority of UK as a unified regulator does not show unqualified success. 26. Unwieldy branches should be split up and small specialised branches set up. F: a) Staff in smaller branches can work as a cohesive and well-knit team. b) Administrative / organisational problems will be less;

7-15 MM Special Guide c) Specialised branches can be manned with staff with expertise in a specific field; special facilities like telecommunications facilities, computers systems with unique software and computer professionals can be provided. A a) Administrative Establishment costs will go up. .. , b) Banking being of a generalised profession the managers have to be exposed to different facets of the bank's business, so that they could develop proficiency/general management ability in different areas when they attain senior levels. 27. Planning should be 'indicative and not prescriptive'. F: Indian economy has grown in size and complexity in the recent years; detailed planning by Govern- ment/Niti Aayog will be difficult to translate into performance. It will be inefficient and political pressures will dilute economic efficiency. iii:'!.- A Social objectives, national priorities, interest of the weaker sections may be sidelined. 28. The implementation of the liberalisation policies have to be speeded up. F: The World environment is changing fast; the investment tempo may recede; The slowness/systems at the field-level requires to be removed/stream lined. A The Liberalisation experience of other developing nations has not been very encouraging. The Govt. has to be at its guard; suitable regulatory measures to be taken/agencies set up to take corrective actions in respect of aberrations to protect the weaker/ unorganized sectors. 29. Income Tax must be abolished. F: i) Industry and Individuals will have better incentive and motivation to work and earn and save. ii) The problems of tax evasion/black money will be solved. A The Govt. will lose a substantial source of income; the principle of contribution of the Individual to the State for the safety and well-being of the Nation will be eroded...... -:j 30. India should not import agricultural products. F: Agriculture is the backbone of India's economy. Foodgrains production has been growing steadily over a period of time and our country is by and large self-sufficient. A Many times, due to the delayed onset of monsoon and other unfavourable weather conditions agricultural production would decline substantially. Also, import of foodgrains is necessary to ensure against hoarding and for making them available at reasonable prices to the poorer sections. Competition posed by cheaper/better quality products would increase the quality of our production. Our agriculturists will be affected if free imports are allowed. Over a period, food security of the country will be threatened if we depend on imports. 31. Proper pricing of different services is essential in Banking. F: There is a significant resistance from industrial customers. In the market based economy correct costing and proper pricing will be essential to survive in the market. A With a commitment to disadvantaged sections of society, banks cannot help subsidising credit to 32. Futures trading in commodity has been introduced. F: It will be beneficial to farmers, producers and exporters; the future prices would be influenced based on estimated availability/demand. Abra committee recomendations. lip A Speculation and other associated development cannot be avoided. Strong regulatory/overseeing bodies have not yet been set up in the country. 33. Trade and social clause should not be linked by advanced nations in WTO negotiations. F: Only then the developing countries will be able to increase their share of world trade; this will develop their economy also. Social issues like child labour etc. are camouflage for trade discrimination.

7-16 For and Against Statements

A Will be a strong incentive to abolish undesirable social/economic practices in less developed countries tl like India. 34. Companies have been allowed to 'buy back' their shares. F: Will help them to keep at bay any take-over attempts. A Will likely to result in price-rigging and manipulation. Capital market in India has not yet become mature for this. 35. Slum Development banks should be established on the lines of RRBs. F: The big cities in the country have a large number of slums. The credit/other banking/non-banking needs can be met so as to improve their savings potential and living conditions. A It may be difficult to run the branch on profitable lines. 36. Credit cards should be issued to all account holders. F: Bank operations would become easy for customers. Bank advance to PB segment will go up. It is an easy and hassle-free credit mechanism for a short period. A a) It will have an inflationary impact. b) Indiscriminate advance will increase the NPA c) It results in debt-trap for the large number of customers. 37. Banks should finance schemes which have social benefit rather than individual benefit. F: Banks are custodians of public funds. Its schemes should benefit a wider cross-section of the people. A Society can grow economically only if entrepreneurship prospers. Bank's funds should help industries develop and grow as well as other economic activities. 38. A leading commercial bank like SBI should be given the task of managing forex. F: The leading banks like SBI have developled expertise in forex dealings and the feel for the market and its various players. The dealers are in constant touch with the market and hence can deal in the currencies confidently and competently. A Commercial banks will take decisions based on their interest only; hence it cannot be vouchsafed that RBI's interest/Govt's. interest would be foremost m their operations. 39. Loan Waivers by Govts. should be treated as electoral malpractice. F: In the past such actions have affected the credit-worthiness of the poorer sections in the country as well as the concept of bank credit. A The govt. has to make timely provision for the needs of the poorer sections of the society. Any delay will result in difficulty to the people and social unrest. 40. Strong patent protection law is necessary in India. F: It is a must to comply with our commitments to WTO. Intellectual property is seen as a potent source of income for universities, research laboratories etc. There will be a free flow of foreign investment. A In the present stage of development, India's development efforts would become costly; prices of drugs are expected to go up sharply. 41. Apprentice scheme has to be introduced in Banks. F: Will enable people to join the banks while young and learn the work. Mismatch between educational degrees and nature of jobs will be minimised. A Under the present system of bank recruitment, persons with varying educational backgrounds can join the banks; hence different skills, aptitudes etc are brought into use. This benefit will be lost to some • extent. 42. The Govt. should not declare continuous holidays in the country under NI Act. F: Continuous holidays will affect trade and business; delays in payment arrangements, bank transactions

7-17 .,,,!.1 ,. • . .,

...

MM Special Guide etc. will be costly and appear as a symbol of backwardness of the country to international banks/ investors. Respect for departed leaders should be shown by measures other than declaration of holidays. A: It will be difficult to impose reforms and changes on only one section of the society. Better alignment of holidays between the trade & Industry sector and the financial sector has to be brought about by mutual discussions. 43. Consumer goods sector must be opened up for imports or consumer goods sector should be opened up. F: It will increase trade and give an impetus to growth. The high level of industrial growth will be able to sustain the imports. Indian companies will be spurred to improve the quality of goods to meet the competition which will benefit the consumers. A: Sudden removal of restrictions will release the pent-up demand; valuable forex will be frittered away; Indian Industry needs time to improve its efficiency. SME units will be affected. 44. Expenditure Tax should replace Income Tax. F: Income tax is levied on earnings of a person. Therefore it acts as a disincentive for earnings and thereby savings. People adopt different subterfuges to reduce their income and pay less tax. A: Expenditure tax will inhibit consumption of goods and services. This will in turn affect economic activity and employment. 45. Tax on Forex inflows may be levied. F: Will enable the Govt. to reduce the budget deficit; management of surplus forex will be easier to the extent the flow is inhibited. A: It will send wrong signals to foreign investors, thereby affecting the flow of foreign investment. 46. World Bank and IMF may be merged into a single institution. F: The role of these institutions has become overlapping gradually; overheads will come down. A: The identity and the objective of each is very clear and distinct. World Bank extends financial assistance for developmental projects; IMF extends facilities to countries to tide over fundamental forex problems. 47. Personal responsibility has to be attached to bank officials for compensation paid under the orders of consumer forum. F: Officials will exercise great care and caution. Efficiency and customer service will improve. Banks are not penalised for the lapses of individual officials. A The staff act in good faith to promote the business of the Bank. Hence, it will be an injustice to recover the loss arising out of bona-fide actions. Staff will be demoralised in case the mistake has occurred due to heavy pressure of work. Also, the staff concerned may not be able to meet the loss, if it is high. 48. All the co-operative banks have to be converted into scheduled banks or wound up. F: There are large number of co-operative banks. They are subject to multiple regulatory bodies-RBI, NABARD, State Govt. Their managements are weak and they are unable to withstand present open market competition. RBI's resources are too thin for their effective control. A Co-operatives are well-established form of business enterprise including Banking. Co-operatives ensure participation by field level members. A well established form of business should not be sacrificed because of errant units at one point of time. Regulatory measures/management set up to be tightened. 49. Tax incentives provided to small savings schemes should not be withdrawn. F: It has proved a well-tested recipe to induce middle class to save. The Govt should work out Measures to prevent leakages and increase the efficiency of the investments rather than withdraw the

7-18 . .1, • • •,,'•• • ' , . L u? 1.41, fl

'14011,1 A1110011., ta

• •

For and Against Statements

incentives. There is a very high risk of savings to GDP ratio coming down sizeably if the incentives are withdrawn. A Govt is gradually vacating the economic activities. Hence, its need for garnering the resources will gradually come down. Further public debt is going up steadily. The middle class can decide on investments based on market conditions rather than merely deciding on tax advantage. 50. All bank employees should declare to the employers the details of their accounts with other branches/banks. F: There will be better transparency in the financial dealings of staff. Will act as a built-in discipline against any financial manipulations through bank accounts. Ghosh Committee recommendations. A The privacy of employees will be affected. 51.. PS Bank branches may be sold to Foreign Banks. F: A number of PS bank branches have been making losses / are marginally profitable. Will help these banks to right-size branch network and increase their efficiency and profitability. Can help foreign banks to expand and meet their priority sector obligations. A It may be psychologically hurting to PS Banks. Technically Foreign banks in India are operating as `branches' and not as full fledged banks. Hence, they cannot take over PS bank branches. Presently, Foreign banks are allowed to open branches on the principle of reciprocity and as per our commitment to WTO. This approach may be diluted affecting the interest of PSUs at this juncture when business growth has been sluggish and the NPAs of Banks are very heavy due to historical reasons and recent down turn in the economy. 52. Branch Managers should have discretion to quote different interest rates to different types of customers. F: The interest rates can be linked to the demand/supply of deposits as well as the quantum of deposits; can attract large value deposits if higher rates of interest can be quoted; can meet competition effectively. A Will produce dissatisfaction among different types of customers as rates will vary from customer to customer. Also control by CA will be difficult; will also be operationally difficult. 53. Companies should be given loans by banks against pledge of their own shares. F: The promoters can retain control over the companies and prevent adverse take over. A May lead to cornering of shares by vested interests. In the case of down-tum of business, the share value will go down steeply and security value will become very less for the Bank resulting in the advances becoming unsecured. 54. Banks should stop publishing the quarterly results. F: The trend as revealed in quarterly results would be often reversed at the end of the year. Further !: massive exercise is needed on the part of the banks for declaring quarterly results. A Publishing the results on an annual basis would not give the correct picture for the whole of the year. The shareholders would be in dark as to the performance of the Bank. It may be too late to suggest and rectify any adverse trend/working result revealed at the end of the year. 55. 'Customer is always right'- This concept is not understood by some of the employees. • F: Banking industry has emerged as an important utility service for the customers. Customers' foremost requirement is fast and courteous service. Employees should have the right orientation to meet the needs of the customer in the light of the competition prevailing in the banking industry today. A Obsolete systems, lack of appropriate technology fear of CBI etc. have affected the positive attitude of many staff to customers. Further it should be ensured that the morale of the staff is of a high order apart from their loyalty to the organisation.

7-19 MM Special Guide 56. Mergers and acquisition of banks should be encouraged. F: With the onset of liberalisation and globalisation, the competition has increased among banks in India. The small banks will find it difficult to manage the risks; also they cannot achieve Economy of Scale in their operations. Following the International trend, some banks like Times Bank Ltd, Bank of Rajasthan, etc. have merged with other banks. A The major banks are in the Public sector. Mere merger will not solve problems like NPAs, unproductive branches, excess staff, rigid labour norms etc. 57. Smaller banks have to be merged to form few big banks. F: Modem banking has become very risky in view of the competition, globalisation, volatility and the rapid integration of various financial markets. Only banks with a large capital base and varied financial businesses can manage these risks profitably. A Integration of the various entities would be a great challenge, particularly personnel and technology. Immediate benefit of downsizing/rationalization of branches may not be possible. The process should be left to the market forces. 58. India should not follow policies that are imported from western countries; instead sound internal economic policy has to be framed for the development of the country considering the resources and needs of the country. F: A sound economic policy that affords protection to indigenous industries, takes care of alleviation of unemployment, poverty etc and ensures proper utilization of country's vast natural resources has to be evolved. Dependence on IMF and World Bank whose strings are in the hands of developed countries has to reduced. A Having joined W.T.O, our country has to open the doors for entry of multinationals and evolve policies in tune with globalisation of economy. This will enable Indian industries to develop enough strength to compete with them on equal footing. 59. CEOs of the banks should be appointed at least for 5 years before their retirement and not for 2 years as at present. F: A tenure of five years is considered reasonable to realise the CEO's vision and develop the Bank accordingly. Introduction of new products and implementation of various action plans of the bank could be accomplished during the long tenure. A This will lead to supercession of other top executives some of whom will be capable and committed. It will produce heart-bum in them. Longer tenures would be self-defeating if no positive contribution is forth-coming from the CEO. 60. Banks should be prohibited from investing in the stock markets F: The Markets are very volatile. Banks do not have credible experience in this field. SEBI has not been able to prevent the scams affecting the stability of the market. A The banks have to emerge as a knowledgeable player providing stability to the market. Banks' have an additional source for improving their profitability. Regulatory prescriptions restrict the direct investment in stock market to 20% of networth. 61. All Indians should be insured. E Insurance will enable the person to have regular income in old age; also, it will compensate the family in case of the death of the bread-winner. Enables savings in small amounts over a period of time. A Insurance coverage can be given only to those who are capable of paying the premium and are of relatively good health. The principle of insurance is contribution of all to compensate the loss of a few. r - Without this principle, insurance will fail. It is not commercially feasible. .,i-.r

720 4 ,. , For and Against Statements

62. Employees have the fundamental right to strike. F: The individual employee is weak and powerless in free societies against the Employer. Hence, strike viz withdrawal from work, has emerged as a collective weapon of Labour to protect its interests against exploitation by Capital. A The weapon of strike evolved when Govts were passive or pro-capitalistie. Society has become dependent on services provided by Labour. Any strike will affect the smooth functioning of society, especially in areas like health, sanitation, medical emergency services, transport, lighting etc. If right to strike is made a fundamental right society's larger interests and benefits would be affected. 63. The utility bills of the public should be collected by Banks on behalf of State Govt. F: RBI /banking system has devised faster and cheaper methods of payment and settlement eg: EFT, ECS, etc. Hence, it can now handle large volumes. The transaction cost/transaction time will be reduced leading to over-all social benefits. A In the changed electronic environment, the costs will be relatively more and the State Govts may be reluctant to compensate the banks adequately. 64. If foreign exchange reserves go on increasing, it is good for the economy. F: India will have substantial forex resources which could he deployed for development of country's infrastructure, meeting conformably the import commitments, prepayment of desired level of foreign debt etc. A It might dampen exports of the country due to Rupee appreciation unless other corrective measures are taken to boost exports; any economic down tum might lead to flight of these reserves with attendant adverse consequences. Recent Rationale 65. Public Sector Banks must be exempted from the jurisdiction of CBI / CVC. F It has been an accepted fact that decision making especially in credit area has been greatly affected by the threat of CBI / CVC. It will remove the fear in decision making. Will bring about a level playing field between PS banks and private sector banks. Bank executives have to take reasonable risks for business growth and development. A Making an exception for only one set of PSUs like PSBs may not be feasible. Corruption is prevalent in society and PSBs must evolve strong machinery to take swift action; otherwise the image / morale of PSBs will be seriously affected. 66. Telemarketing of financial products should be banned. F Privacy of the customer is invaded; it creates often a strong negative image. A Telemarketing has enabled companies to meet the needs of large number of customers through Direct Selling Agents. About 40 to 50% of cards and up to 25% of retail loans are sold through telemarketing, which shows the popularity and need of this channel to reach customers / prospects. Consumer awareness would increase. A self-regulatory approach as evolved by IBA may be sufficient-model code of conduct for DSAs, fair practice code for banks, effective consumer redressal mechanism etc. A common registry of "Do Not Call" telephone numbers is being maintained for those consumers who are not willing for this type of solicitation. 67. VAT has been introduced F It will replace State Sales Tax which varies from State to State. Tax on tax will be avoided; only tax on value addition need be paid at every stage. A The Compliance costs are high as also procedures are onerous, especially for small traders. Trade is worried that the pinpricks from tax authorities might increase. A number of States have not adopted VAT and hence there is no uniformity presently among all States.

7-21

,-. . MM Special Guide 68. Factories Act has been amended enabling women to work in the night shift. F Women are getting involved in more and more industries; women are equal to men in their work and contribution to the economy and hence all bars / restrictions on them should be removed. The ILO Protocol 1990, which was ratified by the Govt, now permits this with proper safeguard for safety and health of women. It will empower women. A There is a danger of exploiting women by making them work in night shifts in industries like consumer electronics, garments manufacturing etc. Provision of creches, maternity benefits, safety / security inside the factory / outside in the streets / public places, affordable transport are all to be ensured first before permitting women to work in night shifts. Absence of these will make women vulnerable. 69. Credit Cards are undermining the credit culture in the country. F Credit cards are being virtually dumped by the issuers on customers; Due diligence of eligibility is not being made or necessity established due to intense competition. Easy availability of credit coupled with the emerging consumption style of living and FMCG marketing thrust has made a large number of young people avail large credit leading to debt trap. Default rate will go up. A It is an easy, hassle free mode of credit dispensation. It is highly cost-effective compared to conventional loan products. It is well-established mode of credit delivery in developed nations. 70. Bank shall not charge pre-closure penalty when loans are repaid before the due date. F: RBI has replied to a query under the Right to Information Act that it disapproves of the practice. However, it has left the discretion to the banks. A: This would result in mismatch in asset-liability to be managed efficiently. The profitability of the bank would also be affected. 71. Too many delivery channels reduce contact with customers. F: The need for visiting branches by the customers will come down since alternative channels are mainly meant for providing convenient, any time, any where, any mode Banking to customers. A: The Bank has many ways of getting in touch with the customers for business development. These include Customer Service Committee Meetings, Customer Relations Programme, Relationship Banking, Customer call etc. 72. There is an urgent need for a common international currency other than dollar. F: The US has accumulated more than a $ 3 trillion deficit. The dollar has been weakening on account of the deteriorating American economy with the ultimate result of loss of value of dollar reserves to all nations (Other than USA) A: Dollar continues to dominate global currency reserves — 64% of global reserves are kept in dollars. Oil producing countries in the gulf like Saudi Arabia prefer to use dollar for Oil pricing. Many of the World's Currencies are pegged to the $. 73. Housing Loans may be excluded from priority sector lending. F: The housing loan market has been showing signs of over-heating. Any downside in the market value will affect the security value of the banks. Originally it was classified as priority sector advance when there was difficulty in getting bank credit. Now there is no difficulty. An RBI internal committee has also recommended the exclusion. A Still there is a shortage of about 20 million households. Personal loans for purchase of flat / house subject to reasonable limit will give boost to industries like construction, cement, steel, paint etc., as also provide valuable employment to unskilled / semi-skilled labour. 74. S B pass book system must be abolished and statement of a/c must be given for S B a/c. F: In the computerized system, the operation is cumbersome and has been found to be imperfect. State- ment of a/c is easy to prepare and deliver to the customer.

7-22 A*Irf-rr' For and Against Statements

A Operations are infrequent and the transactions are for small amounts generally. Cost will go up considerably if statements are sent. The present protective feature in the operation of the account viz production of passbook for withdrawal through withdrawal slip which serves to identify the a/c holder will not be feasible. Hence, operational risk will go up as the number of S B a/c holders is very large. 75. Associate Banks must be merged with SBI. F: This will enable the Bank to reap the benefits of scale by cutting down avoidable competition, cost, and improving profitability. Virtual merger of SBI with Associate Banks has already taken place by having a common platform for technology, products, training etc. Merger will invest in increased capital of the Bank. A: It may take some time for cultural integration between the banks. Regional identity of some of the banks may be lost. 76. Maximum limit has to be prescribed for an individual to avail credit card facility from different banks / FIs. F: This would ensure against availability of disproportionate credit compared to the means of the card holder from the banks / card issuers. It would also help the card holder to meet the commitments with out difficulty avoiding dishonour of payment and creation of bad debts in the books of the banks / FIs. A Banks may not feel comfortable in sharing with other entities the limits fixed by them. Also the criteria in fixing the limit vary from bank to bank based on their business policy and credit risk judgement. The number of card holders in the country is very large and exchange / follow up of information will be costly, time-consuming and cannot be fool-proof for the present. [Such a policy is not in vogue in any country. Any case of over-indebtedness of a person must be followed through overseeing prompt payment, recovery steps etc and the credit risk arising from this angle must be factored into the pricing.] 77. Banks are aggressively marketing housing loans. F: i)It is profitable and highly secured. ii) Housing loans up to Rs. 28 lacs in metropolitan centres with population of Rs.10 lacs and above and Rs.20 lacs at other centres are treated as priority sector advances (subject to conditions). iii) NPA is negligible. A Interest rates have become very low due to unhealthy competition. As the volumes have increased, in case the economy enters a bad phase, the salary earners may not be able to service the loans. Selling of houses mortgaged to the Bank may be difficult. Already RBI has cautioned the banks some time ago. 78. Alternate delivery channels (ATM, Drop boxes etc.,) are followed by banks. F: Customers can draw cash up to a maximum of Rs. 40,000 from ATMs established anywhere at any point of time in a day. This will reduce the rush at branches and reduce operational cost. The facility of drop box has been introduced as a part of BPR initiatives of the bank. The customer can put in the drop box the instruments to be credited to his account even after business hours and cheques will be processed without any loss of time. CDMs enable quicker processing of cash deposits. . A Changes m the delivery system may come in the way of maintaining personal rapport with customers for the purpose of business development. Ceiling imposed on drawal of cash from ATMs may cause -4 .i1 ,•%: inconvenience to customers. Drop boxes may not provide a sense of security to the customers particularly in cases where large amounts are deposited. They would prefer to deliver such instruments directly at the branch against acknowledgement.

7-23 • MM Special Guide 79. Some restrictions have been imposed on withdrawal of cash by customers from ATMs of Banks other than the Customer's Bank. F: In the "free withdrawals" regime the number of cash withdrawals increased many fold increasing the cost of ATM service very significantly. To control the cost as well as to bring in a measure of discipline among customers for not drawing very small amounts. If the ATM usage is free every bank would like to avoid investment in new ATMs and wait for other banks to open ATMs. This will defeat the purpose of the ATM i.e. providing any time cash/other service. A: Free third party facility (i.e. free use of ATMs by non-customers) has increased the use of ATM. The bank customer is benefited if he can use the nearest ATM to him instead of going to the ATM of his own bank. In the long run, banking system should work for free ATM usage as it is a very cost- effective substitute for the branch set-up. 80. Incentives should be given for the employees who are involved in recoveries of NPAs. F: This will give a boost to recovery of NPAs; also will serve as an incentive to staff involved in the • process. It will eliminate the need for engaging outside agencies which is not cost effective. A The focus on other vital activities like marketing of services will not get the desired attention. Other avenues like recovery through DRTs, sale of NPAs to ARCs, enforcement under SARFAESI Act etc are available to bank. 81. Banks should be liberal in rehabilitating sick units. F: This will help in the utilisation of the resources locked up in the sick units as well as ensure the continued employment of labour. A Units become sick because they have become unviable; their products would have become unacceptable or their cost of operations would have made them unviable. Banks should not lend further to such units throwing good money after bad money. 82. Banks have introduced performance oriented pay for its workforce. F: This will lead to better performance by each employee in the position in which he is presently placed; there will definitely be a great improvement in customer service and business. Uniform salaries and allowances among banks have affected the desired level of productivity. There will be an in built- incentive among the employees to improve productivity. A Productivity will be varying almost continuously depending upon the technology used, training imparted, lateral recruitment of employees with skills in specialised areas, motivational levels of employees etc. Hence salaries and wages have to be changed frequently. The principle of equal work, equal pay will be affected. 83. Agriculture income should be taxed. F: Govt will be able to tap substantial revenue from the wealthier sections of the farming community and ensure against black economy. Revenue mobilized can be deployed in developing infrastructure for irrigation, electrification etc. A Tax imposition may be a disincentive for agricultural production. The activity is susceptible periodically to natural calamities. Imposition of agricultural tax may offset the benefit of subsidy extended for price support to crops. 84. Loss making branches should be closed. F: Such branches are a drain on the bank's resources position. Their continuance will further erode, the profitability of banks. Optimum utilisation of man power can be established by shifting them to profit making branches. A This will affect the morale of the depositors. With the advent of technology and universal banking new strategies should be evolved to make these branches productive and profit making. Financial Inclusion may be dampened. 7-24 1 • For and Against Statements

85. Compulsory leave for officers has been introduced. F: It is a preventive vigilance measure. Officers get rejuvenated and return to work with energy after availment of the leave. Bank is able to save encashment of leave salary paid to them. A: It may affect customer service in the branch. Further, officers will be deprived of accumulating leave which can be enchased. Sincere officials who used to work loyally with out taking leave may feel uncomfortable as their loyalty is not viewed positively. 86. Penalty for return of cheques has to be made severe. F: It will ensure against customers issuing cheques indiscriminately without-funds and ensure better discipline in the issue of cheques. A: It may cause undue hardship to customers in case the cheque is returned if the funds are not available for genuine reasons. 87. A funds transfer system through mobile phones outside the banking system may be implemented in the country. F: It will be cost-effective, convenient and efficient. We have the technology and expertise for it. The number of mobile phone subscribers has touched 100 cr and about 40% of them do not have a bank account. It would help in bringing greater financial inclusion. A: Monitoring /control of such payments would be difficult for RBI and it has expressed its concerns. It would be difficult to ensure KYC compliances. The Home Ministry has expressed concerns about national security. 88. Furniture and Fixtures are provided to all officers now starting from probation period as per eligibility criteria F: The comfort level has gone up for officers. Image of the Bank as a caring organisation has gone up in the minds of officers. A: The officer on probation has the freedom to leave the job before confirmation; he may also be looking out for an alternative job during this period. Generally, perquisites are to be given in a graduated manner and linked to the service of the employee. This would lead to better incentivisation of career progression. If increased remuneration / perquisites are not provided by the organisation with increased service / cadre promotion the employee's motivation will be flat. 89. Cross selling of non-banking services affects banking business F: The branch staff right up to the branch head are striving to build up the banking business (deposits, advances, miscellaneous business etc) which are reflected in the BS / P & L account of the branch. Hence cross-selling of agency products will divert their attention affecting the business of the branch. A: The branch's ultimate goal should be to optimize its resources and earnings. The branch business should be viewed from the angle of the customer and his needs and wants-savings products offered by the Bank, protection products offered by the Insurance subsidiaries of the Bank, Investment products offered by the Mutual Fund, Services like Custodial Services, Merchant Banking Services etc. From this perspective, the branch staff have to develop the outlook that SBI is a financial supermarket and that they are the conduits to satisfy the needs and expectations of the customers. 90. RBI has indicated to banks that they should focus on lending for the short and medium term rather than on long term loans. F: RBI is concerned over the fact that banks are running huge asset-liability mismatches by extending very long-term project loans, while the bulk of their deposits are short-term deposits. As the deposits are 1-2 years tenure, it will be better if banks concentrate on loans of 1-3 years tenure. Banks should finance long term loans / projects for initial period of 2/3 years and the term lending institutions can

7-25 MM Special Guide take over these loans after this period. This will enable banks to lend working capital loans for which they have developed appropriate capabilities over time. A: Banks are permitted by RBI to issue tax-free long term bonds with minimum maturity of 7 years which will help them raise resources for long term lending. There is a core element in the CASA deposits of banks which remain in the bank for ever. This core element must also be reckoned while computing asset / liability position of banks. 91. Mandatory credit-rating of financial instruments by credit-rating agencies must be dispensed with. F: The credit rating agencies have assigned high ratings to toxic instruments. The 2008 sub prime crisis of USA had revealed a number of vital deficiencies in the rating process by these agencies. Further, their processes are found to be opaque and not transparent. There is a built-in conflict interest in the ratings business (Rating is sought by and paid for by the company floating the financial instruments). A: Rating is an exercise by an independent specialist agency. Appropriate strengthening of the regulatory measures coupled with the introduction of transparency in the rating process would help instead of abolishing the rating process itself. In the context of huge corporate frauds the independent assessment of the debt issues would be essential. It is always prudent to build on existing strengths. 92. RBI has asked banks to increase coverage ratio for NPAs to 70%. F: It will result in healthy balance sheet growth for banks. This ratio has not been uniform for all banks and many banks have provided relatively less coverage. A: This may put a severe strain on the banks to cope with the requirement as the banks are in the process of augmenting their net worth to meet Basel-III norms. 93. Bank unions should not oppose bank mergers. F: The capital base of many PSBs is small. Merger will result in bigger banks with larger capital. Bigger banks are believed to have better strength to face the market upheavals. Mergers will lead to rationalization of branch network, increase in productivity, absorption of technology etc. which will. ultimately lead to better compensation to employees. A: It is the responsibility of bank unions to protect the interests of employees. Hence, anxiety of retrenchment and reduction in the network of banks are the crucial concems of the unions. Many westem banks though huge in size and operations have failed in the 2008 global melt-down. Recently RBI Deputy Govemor has stated that time for consolidation has not come; financial inclusion is more important than consolidation. 94. The executive pay in banks should be controlled by RBI/ Govt. F: The 2008 global melt-down is attributed to mainly greed and selfishness of American top executives whose pay and perks were astronomical and goaded bankers to take unacceptable risks and formulate unsustainable financial products. Uncontrolled pay will lead to systemic risk in the banking sector. A: In the private sector environment and with globalisation executive perks are an important incentive for performance. Further, banks may lose out excellent talent to industries / other services sectors. 95. Interest should be paid on CRR: F: Under Sec 42 of RBI Act, Banks are required to maintain a certain minimum cash balance in current - account with RBI. By providing interest on this which bank calls as dead capital, the Banks may be able to reduce interest on loans to industries thereby stimulate economic growth. s t i. A Banks have to maintain liquid cash to maintain the cash needs of its customers. As per the monetary policy of RBI, CRR is used as a tool to squeeze liquidity from the system or vice versa. The monetary 4.in mechanism will lose its effectiveness and hence RBI is against payment of interest. The RBI Act is , • silent on payment of interest on CRR. • 7-26 For and Against Statements

96. The main objective of KYC is to prevent money laundering: F: Banks are increasingly being used, by criminal elements for money laundering. For prevention of money laundering KYC and AML are introduced and Banks violating RBI guidelines are fined. KYC is a key defence for Banks against money laundering A: Criminals obtain identity and address proof through fraud / manipulations whereas stringent KYC norms exclude large section of population who are honest, access to Banking. 97. RBI has issued guidelines on Financial Literacy Material for achieving Financial Inclusion through two essentials: "Literacy" and "easy access". F: The financial literacy has emerged as a focus area for policy makers. Financial Literacy is to provide Banking facility and easy access to the unbanked population in adjoining villages. The intention is to highlight the importance of Banking to the unbanked population of the country. Without financial literacy, Banks cannot expect to make major headway in financial inclusion. A: As huge section of the population is unbanked, the immediate need is financial inclusion. The finan- I.. :I cial education / literacy by explaining about the Banks' various details about Banking including about the recovery methods against defaulters may result in a few poor illiterate borrowers not availing Banks finance. 98. A holistic programme for addressing financial exclusion is suggested by Government and Banks have a definite role to play. F: Opening of Basic Savings Bank Deposit account with nil or very low minimum balance, providing small over-drafts in such accounts, Relaxation on know-your-customer (KYC) norms, Engaging business correspondents, and Use of technology will go a long way in providing financial inclusion to vast population. A: Considering the vast population of the country and that around 50% have been excluded from banking facilities it would be a stupendous task for the Banks to achieve financial inclusion in a short span of time. 99. RBI has introduced Base Rate. F: RBI has been gradually deregulating loan interest rates. Now each bank can fix an appropriate rate for their loans aligning it with their various products. It would facilitate better asset liability management for the banks and competitive pricing benefiting the borrowers. The Banks will have the flexibility to vary the same depending upon the market conditions. A: Since base rate is the basic rate below which the Banks cannot lend to their borrowers, Banks will not have flexibility to lend below the base rate whenever the credit absorption is very low and competition • is high. The banks will be constrained to keep the funds idle leading to loss of revenue. 100. 5 days working in a week should be introduced in banks. F: The financial markets are closed on Saturdays; hence there is virtually no demand from business sector on Saturdays. With the availability of ATM, Intemet Banking, Mobile Banking and Credit Cards the customer can avail their financial requiremetns easily. Longer hours on working days will help in meeting the banking needs. The quality of personal time for bankers will improve. A: The customers are accustomed for six days service and may not be able to adjust to five days week • '1. of banks. A few customers having Saturday holiday prefer banks working six days a week for using their holiday for banking purpose. 101. Banks should reduce dependence on bulk deposits. F: Bulk deposits are negotiated with corporates who ask for higher rate of interest. Also, they are withdrawn as desired / needed by corporates, affecting the funds management of banks.

7-27 MM Special Guide A: Bulk deposits act as a cushion for banks to manage their credit portolio. Banks' lending activity can be increased. 102. Mobile Banking facility is being popularized. F: Mobile Banking is a cost effective, convenient and efficient alternate channel of delivery available to customers. Number of mobile phones in use has increased many folds and it whould help in greater financial inclusion. A: Customers who are not alert to keep their ID/Password secret may run into difficulties. Lot of educative effort has to be put in for users especially in rural areas. 103. Business Correspondents are being recruited by the Bank. F: While Bank can concentrate on the high value and the core banking business, Business Correspon- dents can supplement the Bank's efforts in small value accounts / transactions thereby assisting in financial inclusion. It is a cost-effective supplement to spread banking in rural/remote areas. A: As Bank is faced with reputation risk strict vigilance is required in their area of operations. Monitoring costs and use of staff time will be substantial.

Very Recent F & A Statements 1. From 01.07.2015 all PSBs will be closed on the second and the fourth Saturdays of every month. F: This is as per agreement between the managements and employees. Thanks to interne, mobile banking and ATMs and plastic cards, the individual customes may not face any difficulty for their ordinary banking needs. The bank staff can enjoy quality time on these days. A It will take some time for business customers to adjust to this. Also, individual customers will not be able to call at the bank for locker and other facilities on these days. 2. The Govt. must transfer its stake in PSBs to a separate Bank Investment Company. F: The body can insulate the Banks from the direct pressures of the bureaucracy and the political system. As the body is set up solely for this purpose, management and control will become systematic and efficient. A The functioning of Banks affects the money supply/inflation in the country. Hence, RBI should monitor the Banks on these aspects. There may be conflict with RBI in many areas. Procedural and staff matters may dominate the functioning of such a body. Any strike/lock-out in such a set-up will paralyse the country. 4. SLR should be phased out over a period. F: It will enable the banks to increase their loan portfolio and improve profitability. A SLR is an effective monetary tool in the hands of RBI to regulate money supply and thereby control inflation. This mechanism will be last to RBI. In a day, it is a reserve power which can be used by the Govt to force banks to invest in Govt securities through RBI in emergencies. 5. RBI has stated that banks may offer unbreakable FDs to customers (i.e FDs without a call option). F: No premature payment can be claimed under such FDs. The bank does not face liquidity risk in such cases. Hence, the bank can offer a higher interest rate than for normal FDs under which premature payment will not be available. The bank can manage ALM better. Also, customers who do not plan to claim premature payment will be benefitted with higher interest rate. A The individual customer may not be able to anticipate his cash needs. If premature payment is not made in a genuine case, the customer would become disgruntled and the bank's image may suffer. 7-28 For and Against Statements

6. Small banks and Payment banks are being set up. F: It will further improve financial inclusion. Small people can have easy banking access and these banks can provide credit to small businesses, small and marginal farmers and micro and small enterprises. Competition in the banking system will go up increasing efficiency and customer service. A It may lead to unhealthy competition amongst banks in the short run. There is no relaxation in maintenance of CRR and SLR for these banks which may make it challenging for these banks to run on profitable lines. 7. RBI has to advised banks to work out the base rate based on marginal cost of funds. F: The incidence of reduction in base rate whenever RBI reduces repo rate will be marginal and the profitability of banks can be maintained. A Will involve fmer calculation for arriving at the rate. May involve more time and work on the part of banks. 8. RBI has introduced the concept of non-cooperative borrowers. F: This is a fmer classification of likely wilful defaulters who are not adhering to terms and conditions of the Bank. Bank will be able to recognize very early the warning signals to take appropriate corrective action. A The line of difference between non-cooperative borrowers and wilful defaulters is very thin and it is quite likely that even very genuine default or delay in complying with the terms and conditions may result in these entities being branded as non cooperative borrowers 9. Leverage ratio has been introduced by RBI w.e.f 01.04.15. F: This is a simple non-credit based backstop measure which will serve as a supplement to the risk based capital requirements of the banks. This will avoid destabilizing the deleveraging processes which can damage the broad financial system and the economy. A Banks are required to maintain a leverage ratio 4.5% w.e.f 01.04.2015. The leverage ratio is also applicable to Pillar-3 on disclosure. Banks have to disclose on quarterly basis the information on Tier-I capital, Exposure measure and leverage ratio and this may put pressure on banks in maintaining them at the required level. 10. Dress code should be introduced in the Banks. F: Will create a feeling of belongingness to the organization to all. The staff of the banks will develop a distinctive identity (eg. Mcdonald's/ Maruti). A It may be construed as an interference in the personal liberty of an employee in the matter of wearing dress and as such may not be welcomed by all. 11. All PSB should be merged to form 3/4 big banks. F: Will enable the merged Bank to avail the benefit of economy of scale. Will augment the resources of the bank to increase business, follow better Risk Management, Technology Management & Credit Management policies. The capital adequacy ratio will also improve. A Many banks have been able to make a mark in their performance in the area of their operations. They have created niche products, markets and customers and are able to effectively compete with other banks. 12. Foreign Banks should be given national treatment. F: This will enable the foreign banks to actively involve themselves in all banking activities which will boost economic growth of the country. There will be better level-playing field for Indian and Foreign banks. A Foreign banks with their cultural background and ideology may find it difficult to adapt themselves to certain policies which may not be in tune with their objective. They may not be able to meet the

7-29 , . •

MM Special Guide targets / sub-targets of priority sector lending as their branch strength will be very less. 13. Only Agriculture graduates should be posted at rural branches. F: Agriculture graduates have the necessary knowledge and skills in the field of agriculture and other activities related to rural development. They can make deeper thrust in agricultural lending in rural areas. A: Agricultural and rural development depends not merely on the knowledge of technical aspects of agriculture. Willingness, commitment and managerial skills are needed for successful running of rural and other branches. Persons with varied backgrounds are desirable for balanced growth of the Organisation. 14. Takeover of loans between Banks' should not be allowed. F: It will avoid unhealthy competition by dilution of standards for take over of advances from other " ' — banks. A This will give an opportunity to the customer the choice to choose the Bank of his liking. Also, the capabilities of banks differ. 15. All Banks can decide independently regarding payment of wages to their employees. F: This will serve as an incentive for the employees to work better and improve profits; they can bargain for better wages/perquisites with the employers. A: Will create disparity among bank staff in payment of wages and the attrition rate in banks may go up.

16. Demonetization of currency has been effected by the Govt. F: To stop counterfeiting of the high value notes (Rs.500 and Rs.1000) which was happening in a big way. To freeze and bring out black money from the economy. To prevent funding of terrorism, drug trade and smuggling. To encourage use of electronic banking. A: The cost of remonetisation is very high; the current banking infrastructure is insufficient for the exercise; the average citizen is forced to spend time in exchange of demonetised currency; causes disruption in citizens' lives; the economic activity of the country is paused. Concept Briefs PART - 8 CONCEPT BRIEFS

1. Bank Frauds (RBI) 2. The Srikrishna Commission Report on the Financial Sector 3. Inflation Indexed Bonds (llBs) 4. Non Banking Financial Companies (NBFCs) 5. Railway Budget 2016-17 6. RuPay Card 7. Virtual Currency 8. Report on Comprehensive Financial Services for Small Business and Low Income Households (Nachiket Mor Committee) (Jan'14) 9. BASEL III- Capital Regulations 10. Disruption will change Banking significantly 11. P J Nayak Committee Report on Corporate Governance in Boards of Banks 12. Real Estate Investment Trusts and Infrastructure Investment Trusts - Draft Guidelines by SEBI. 13. Restructuring of Swarna Jayanti Shahari Rozgar Yojana (SJSRY) as National Urban Livelihoods Mission (Aug'14) 14. The Companies Act, 2013 15. Wilful Defaulters 16. Know Your Customer Guidelines - FAQs 17. India's Foreign Trade Policy - 2015-2020 18. India's New GDP Methodology 19. Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks (Mar'15) 20. Guidelines for Relief Measures by Banks in areas affected by Natutal Calamities 21. Priority Sector Advances (Changes-April 2015) 22. Financial Literacy - FAQ 23. Gopalakrishna Working Group on IT & Electronic Banking - FAQ 24. Economic Survey 2015-16 25. Union Budget 2016-17 26. Digital India 27. Smart Cities 28. Sovereign Gold Bond Scheme 29. Gold Monetization Scheme 29A. Revamped Gold Deposit Scheme (R- GDS) of SBI 30. RBI's Guidelines for Small Banks and Payment Banks

8-1 MM Special Guide

31. RBI's Charter of Customer Rights 32. Cheque Related Frauds - Preventive Measures (RBI) 33. Draft Indian Bankruptcy Law 34. FATCA 35. Crop Insurance Scheme: National Crop Insurance Programme (NCIP) Rashtriya Fasal Bima Karyakram (RFBK) 35A. National Crop Insurance Programme (Part-II) Weather based Crop Insurance Scheme (NBCIS) Component-II of NCIP 36. Strategic Debt Restructuring (SDR) Scheme (RBI) 37. Framework for Revitalizing distressed assets 38. Scheme for Sustainable Structuring of Stressed Assets (S4A) 39. Unified Payment Interface 40. On-tap Licensing of banks 41. Some Important aspects of loan policy (SBI) 42. Brexit 43. Marginal Cost of Funds based Lending Rate (MCLR) 44. Gist of Policy Guidelines 45. SBI - Important Statistics 46. Restructuring of Bank NPAs 47. Restructuring of Banks 48. Cyber Security Framework in Banks (RBI) 49. Gist of Mobile Banking guidelines 50. Goods and Services Tax (GST) Act 51. Real Estate Regulator • Concept Briefs 1. Bank Frauds (RBI)

The policy on Frauds risk management has been revised and updated based on RBI guidelines and approved by Banks Central Board on 19.06.2014. i) Classification of Frauds: Based mainly on the provisions of Indian Penal Code. Misappropriation and criminal breach of trust, Fraudulent encashment of forged instruments and manipulation of books/accounts, Unauthorised credit facilities, Negligence and cash shortage, Cheating and forgery, Irregularities in Forex and other types of fraud not listed here. ii) Following cases where fraudulent intention is not suspected /proved at the time of detection will be treated as fraud and reported. Cases of Cash shortage more than Rs.10000/= (including at ATMs) and cases of cash shortage more than Rs.5000/=if detected by management/auditor and not reported on the day of occurrence by the person handling cash.

Reporting of Frauds to RBI: FMR 1: Banks need not furnish FMR 1 return to RBI for fraud cases below Rs.1.00 lac. Only data entry through FRMS package which will be captured automatically in FMR 2 consolidated data base. Frauds involving Rs.1.00 lac and above: FMR 1 return on actual or suspected frauds (soft copy) to CFMC Bengaluru within three weeks of detection. For Rs.1.00 lac and above to Rs.50.00 lac: FMR 1 return (hard copy) within three weeks of detection to Regional Office of RBI Dept. of Banking supervision (DBS) under whose jurisdiction the bank branch is located and to the RO, DBS/SBMD under whose jurisdiction the head office of the bank where the fraud has taken place is located or to the SSM of the bank. For Fraud cases of Rs.Rs.50.00 lac and above: in FMR I (hard copy) within three weeks of detection to CFMC Bengaluru and RO of RBI (DBS)/SBMD or the SSM of the Bank. For cases of Rs.1.00 crore and above: A Flash report in addition to FMR I ( hard copy) through a DO letter to PCGM/CGMDBS, RBI, Central Office, Mumbai, within a week of fraud coming to notice of HO of the bank. Copy to RO of RBI under whose jurisdiction the bank branch is functioning and RO, RBI (DBS)/ SBMD or SSM of Bank. Under Risk based supervision of RBI (for the cycle 2015-16 ), there are 33 banks including State Bank of India listed under the supervisory purview of Senior Supervisory Managers (SSM) and 31 banks supervised by Small Bank Monitoring Division (SBMD). FMR 2: Quarterly Report on Frauds outstanding (Soft copy) to CFMC Bengaluru within 15 days of the end of the quarter to which it relates. FMR 3: (ace wise quarterly progress report (for frauds Rs.1.00 lac and above) (soft copy) to CFMC Bengaluru. Within 15 days of the end of the quarter to which it relates. Nil report to be sent in there is no fraud. Special Committee of the Board: While Audit Committee of the Board monitors all cases of fraud in general, a Special Committee of the Board (SCBF) is to be constituted to monitor cases of frauds involving Rs.1.00 crore and above exclusively. Banks need not report cases of attempted frauds of Rs. 1.00 crore and above to RBI but such cases have to be placed with details such as modus operandi, how the attempt was foiled, measures taken to revamp the system etc., before the Audit committee of Board, with full details such as modus operandi, how the attempt was foiled, measures taken to revamp the system etc. Banks have to place the copy of the circular on modus-operandi of fraud issued to their branches before the audit committee of board in its periodical meetings.

8-3 MM Special Guide Quarterly review of Frauds: Information relating to Frauds for the quarter ending June, September and December will be placed before ACB during the month following the quarter to which it pertains to discuss the punitive and preventive aspects of the frauds. In view of Annual review of fraud for the year ending March, no separate review for the quarter ending March. Guidelines for reporting Frauds to Police/CBI Private Sector Banks / Foreign Banks: Cases involving Rs. 10,000/- and above: frauds committed by staff— to State Police Rs.1.00 lac and above: Fraud committed by outsiders, on their own or in connivance with bank's staff- to State police. Rs. 1.00 cr and above: In addition to State Police, to be reported to Serious Fraud Investigation Office (SFIO), Ministry of Corporate Affairs, GOI, in FMR-I format. Public Sector Banks: Fraud above Rs.10000/= but below Rs 1.00 lac to local police station. Rs1.00 lac and above (if Staff and outsiders are involved) -To state CID/Economic Offences wing of state concerned. Case to be lodged by Regional Head of bank. Frauds involving Rs.3.00 crore and above and up to Rs 25.00 crore - to CBI. (If staff involvement is prima facie evident-to be lodged with Anti-corruption wing; if staff involvement is not prima facie evident- to be lodged with Economic Offences wing of CBI) Cases of more than Rs.25.00 crore and up to Rs.50.00 crore.-To CBI, Banking Security and Frauds cell (BSFC) irrespective of involvement of Public/staff. Frauds involving more than Rs.50.00 crore - to CBI lodged with Joint Director (Policy.) CBI, HQ, New Delhi. All fraud cases of value below Rs.10000/=involving bank officials should be referred to Regional head of the Bank who would decide as to whether the case has to be referred to police or not. CVO of the Bank, in consultation with CMD, may refer any case which cannot be classified on monetary limits or which is of serious nature and or has national / international ramification or any to RBI. Cases of Theft. Burglary, Dacoit and Bank Robberies: To be reported immediately in FMR-4 to specified authorities in RBI and Dept. of Financial Services, Ministry of Finance, GOI. [FRMS=Fraud Monitoring System. FMR=Fraud Monitoring Return. DBS=Department of Banking Supervision. CFMC= Central Fraud monitoring Cell, Bengaluru. SSM=Senior Supervisory Managers. SBMD= Small Bank Monitoring Division.] Cheque related fraud cases - preventive measures: As the number of cheque related fraud cases has been increasing and causing serious concern, RBI has advised some of the preventive measures banks may follow in this regard. RBI has advised banks to strengthen the controls in the cheque presenting / passing and account monitoring processes. These are: . Ensuring the use of 100% CTS - 2010 compliant cheques. . Strengthening the infrastructure at the cheque handling Service Branches and bestowing special attention on the quality of equipment and personnel posted for CTS based clearing, so that it is not merely a mechanical process. . Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/her as long as he/she remains a customer of the bank. . Examination under UV lamp for all cheques beyond a threshold of say, Rs.2 lakh. . Checking at multiple levels, of cheques above a threshold of say, Rs. 5 lakh. . Close monitoring of credits and debits in newly opened transaction accounts based on risk categorization. . Sending an SMS alert to payer/drawer when cheques are received in clearing. The threshold limits mentioned above Can be reduced or increased at a later stage with the approval of the Board depending on the volume of cheques handled by the bank or its risk appetite. In addition to the above, banks may consider the following preventive measures for dealing with suspicious or

8-4 , Concept Briefs

large value cheques (in relation to an account's normal level of operations): a) Alerting the customer by a phone call and getting the confirmation from the payer/drawer. b) Contacting base branch in case of non-home cheques. The above may be resorted to selectively if not • found feasible to be implemented systematically. It has been reported tha tin some cases even though the original cheques were in the custody of the customer, cheques with the same series had been presented and encashed by fraudsters. In this connection, banks are advised to take appropriate precautionary measures to ensure that the confidential information viz., customer name / account number / signature, cheque serial numbers and other related information are neither compromised nor misused either from the bank or from the vendors' (printers, couriers etc.) side. Due care and secure handling is also to be exercised in the movement of cheques from the time they are t endered over the counters or dropped in the collection boxes by customers.

Central Fraud Registry: The Reserve Bank is in the process of designing a Central Fraud Registry, a centralised searchable database, which can be accessed by banks. The CBI and the Central Economic Intelligence Bureau (CEIB) have also expressed interest in sharing their own databases with the banks. More information In this regard would follow once the structure is finalised.

Loan frauds in banks. RBI has expressed disquiet about the rising number of frauds in banks as well as reporting delays in respect of frauds. It has issued a framework for fraud risk management (7.5.2015). Highlights: (i) The concept of a Red Flagged Account has been introduced as an important step in fraud risk control. Early Warning Signals (EWS) and Red Flagged Accounts (RFA) The concept of a Red Flagged Account (RFA) is being introduced in the current framework as an important step in fraud risk control. A RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately him out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into a RFA. The threshold for EWS and RFA is an exposure of Rs.500 million or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). All accounts beyond Rs.500 million classified as RFA or 'Frauds' must also be reported on the CRILC data platform together with the dates on which the accounts were classified as such. Early Detection and Reporting At present the detection of frauds takes an unusually long time. Banks tend to report an account as fraud only when they exhaust the chances of further recovery. Filing Complaints with Law Enforcement Agencies Banks are required to lodge the complaint with the law enforcement agencies immediately on detection of fraud. Penal measures for fraudulent borrowers In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrower including the promoter director(s) and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concemed, etc. Provisioning pertaining to Fraud Accounts Now RBI has prescribed a uniform provisioning norm in respect of all cases of fraud, as under: (a) The entire amount due to the bank (irrespective of the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period not exceeding four quarters commencing with the quarter m which the fraud has been detected; • 8-5 MM Special Guide (b) However, where there has been delay, beyond the prescribed period, in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once. In addition, Reserve Bank of India may also initiate appropriate supervisory action where there has been a delay by the bank in reporting a fraud, or provisioning thereagainst.

2. The Srikrishna Commission Report on the Financial Sector

Justice B N Srikrishna, a retired Supreme Court judge and Chairman of the 11-member Financial Sector Legis- lative Reforms Commission (FSLRC), has submitted his final report on the financial sector in India; it is in line with its initial approach paper released in October 2012.

Objectives of the Report: It seeks to enhance customer protection, contain systemic risk, encourage financial stability and manage sick firms. It also aims to reduce the number of instruments — guidelines, circulars, letters, and press releases and so on that are used to .operate and execute laws.

The gist of recommendations of the final report: I. Financial Sector Laws: The report recommends that several major financial sector laws including the Secu- rities and Exchange Board of India Act (SEBI Act) and the Reserve Bank of India Act (RBI Act) be recast— it proposes to repeal 20 laws and amend several others; it suggests that no specific laws should exist for State Bank of India (SBI) and Life Insurance Corporation of India (LIC). It has proposed drawing up an Indian Financial Code (IFC) to ensure flexibility and durability of the law so that it can handle the size of the Indian economy in the decades to come. IL Agencies: There will be 7 agencies managing the Indian financial sector with different tasks: A. Regulatory Authority: RBI will continue to be the monetary and banking authority in charge of payments, settlements, distribution and supervision of banking operations but its role will be principally restricted to formulating the monetary policy, payment and supervision of banking operations. 3 distinct boards must take care of these functions to avoid conflicts of interest in the management. Also, rules for outbound capital flows are to be formulated by the RBI while those for inbound capital flows are to be set by the Finance Ministry. B. Unified Financial Agency: A new agency called the Unified Financial Agency will look after everything else in the financial sector— other than banking and payments. The Securities and Exchange Board of India (SEBI), Forward Markets Commission (FMC), Insurance Regulatory and Develop- ment Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) are to be merged into this new agency. This new agency will take care of organised financial trading that includes trading in equity, bonds, currency derivatives, corporate bonds and commodity futures. C. Resolution Corporation: It has suggested that a Resolution Corporation be created to deal with closure of distressed firms. The Deposit Insurance and Credit Guarantee Corporation of India (DICGC) is to become part of the Resolution Corporation. D. Financial Redressal Agency: This new agency is to be set up to protect customers — it will enable customers to register their complaints through a single-window against financial intermediaries and institutions. The new financial regulatory structure will be govemed under the Financial Regula- tory Architecture Act. A uniform legal process will empower financial regulators and that will translate into better customer protection. E. Public Debt Management: Anew Public Debt Management agency will look after Govemment debt management. Currently, the RBI manages Government securities and the foreign exchange markets.

8-6 Concept Briefs

To enable the objective of price stability and to avoid conflict of interest, the report suggests that a separate agency be set up to manage public debt. F. Financial Sector Appellate Tribunal (FSAT): This will enable customers to voice their grievances against financial regulators including the RBI. The Securities Appellate Tribunal (SAT) is to be merged into the FSAT. G. Financial Stability and Development Council (FSDC): It was set up in 2010 to strengthen the mechanism for financial stability, financial sector development and inter-regulatory co-ordination. The existing Financial Stability and Development Council (FSDC) will continue with some amendments in its functions to enable it to contain systemic risk.

Challenges: There are some dissenting members within the Commission who disagree with different provisions of the report. The recommendations will have to be studied by the Government which will have to move Parlia- ment to pass appropriate amendments to key laws. The RBI has not favoured this report on the ground that this model has not worked in other foreign countries; it is against the dilution of its powers in public debt management and forex market management as they are mediums through which the monetary policy is carried out — an integral Central Bank function.

3.Inflation Indexed Bonds (IIBs) Introduction: With a view to eventually wean millions of Indians off gold, their favoured hedge against rising prices, RBI has launched Inflation-Linked Bonds. It is not the first time such an exercise is attempted. Way back in 1997, Infla- tion Indexed Bonds (I1Bs) were issued in the name of Capital Indexed Bonds (CIBs). However, CIBs issued in 1997 provided inflation protection only to principal and not to interest payment. The new product of IlBs will provide inflation protection to both principal and interest payments.

Protection against Inflation WPI will be considered for protection against inflation. Inflation component on the principal amount in HBs is arrived at by multiplying the principal amount with an Index Ratio an On redemption, the adjusted principal or the face value, whichever is higher, is paid. The inflation component is not paid along with the periodic interest. The inflation adjustment for the interest is achieved by paying a fixed coupon rate on the principal adjusted for inflation.

Methodology Capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption. If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected. Final monthly WPI will be used as reference WPI for 1st day of the calendar month. The reference WPI for intermittent days, i.e. dates between 1st days of the two consecutive months will be computed through interpolation. For interpolation, two months final WPI should be available throughout the month. As final WPI is available with a lag of about two and half months (e.g. final WPI February 2013 will be released in mid-May 2013), two months final WPI could be available only with a lag of four months. In view of above, the four months lag has been chosen for final WPI to be considered as reference WPI for 1st day of the calendar month. For example, December 2012 final WPI will be taken as reference WPI for 1st of May 2013 and January 2013 final WPI will be taken as reference WPI for 1st of June 2013. For calculating the index ratio for a specific date, daily reference WPI values would be linearly interpolated using 'Ref WPI' for the first day of the calendar month and the first day of the following calendar month. WPI series is being revised after every 10 or more years (e.g. base year revision in WPI series took place in 1981-82, 1993-94 and 2004-05). Any revision in the base year would be tackled by splicing the base years so

8-7 MM Special Guide that a consistent WPI series with the same base year is available for indexation purpose since the issue date of the bond.

Government securities (G-Sec): IIBs would be Government securities (G-Sec) and issued as part of the approved Government market borrowing programme. Therefore, different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs. FTIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs. As IIBs are G-Sec, they can be tradable in the secondary market like other G-Secs. Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges. Being G-Sec IIBs would automatically get SLR status and would be eligible for short-sale and repo transactions .Settlement cycle of IIBs will be T+1, like fixed rate conventional bonds. Like other G-Secs, the day count for IIBs would be 30/360. Issuance of IIBs would be within the Govt market borrowing programme.

Participation in Bidding: A non-competitive scheme has been devised for participation of such investors in the auction. Under this scheme, investors are required to indicate the amount of their bids and not the price at which they want to subscribe. Allocation to such investors is made at the weighted average price emerged in the competitive bidding. Presently in auction, up to 5 per cent of the notified amount is reserved for non-competitive bidding, while up to 20 per cent of the notified amount will be earmarked for such bidding in case of IlBs to encourage retail participation. The retail investors will be able to participate in non-competitive bidding through'primary dealers (PD) and banks. They can open a gilt account with PDs and banks or demat account for such participation.

Maturity & Frequency of coupon payment on IIBs: To begin with, IIBs will be issued for 10 years and more maturity points will be explored subsequently. Like other G-Secs, coupon on IIBs would be paid on half yearly basis. Fixed coupon rate would be paid on the adjusted principal.

Auction & Underwriting of IIBs: As is the case with fixed rate conventional bonds, IIBs would be issued through yield based auction and subsequent reissues will be through price based auction. Investors would be required to bid for real yield in case of IIBs as against nominal yield in case of fixed rate G-Sec. Like fixed rate G-Secs, IIBs would be underwritten by the primary dealers. Tax treatment: There will be no special tax treatment for these bonds. Extant tax provisions will be applicable on interest payment and capital gains on IIBs.

4. Non Banking Financial Companies (NBFCs)

Introduction: Non Banking Financial Company (NBFC) is a financial Institution that is into Lending or Investment or Collecting monies under any scheme or arrangement but does not include any institutions which carry on its principal business as agriculture activity, industrial activity, trading and purchase or sale of immovable properties. A company that carries on the business of accepting deposits as its principal business is also a 3 NBFC.

8-8 • , . = Concept Briefs

What is a Non-Banking Financial Company? A Non-Banking Financial Company (NBFC) is a company a) Registered under the Companies Act, 1956, b) Its principal business is lending, investments in various types of shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business, and c) Its principal business is receiving deposits under any scheme or arrangement in one lump sum or in installments. A Non-Banking Financial Company does not include any institution whose principal business is agricultural activity, industrial activity, trading activity or sale/purchase/construction of immovable property u/s Section 45 I (c) of the RBI Act, 1934. However, the financial activity of loans/advances as stated in 45 I (c), should be for activity other than its own. NBFCs whose asset size is of Rs.100 cr or more as per last audited balance sheet are considered as systemically important NBFCs and their activities will have a bearing on our country's financial stability.

Regulation of NBFCs Various regulators established by law regulate and supervise Specific Financial companies, for example, IRDA for insurance companies, Securities Exchange Board of India (SEBI) for Merchant Banking Companies, Venture Capital Companies, Stock Broking companies and mutual funds, National Housing Bank (NHB) for housing fmance companies, Department of Companies Affairs (DCA) for Nidhi companies and State Governments for Chit Fund Companies. The Reserve Bank also regulates companies whose principal business is to accept deposits. (Section 451 (c) of the RBI Act, 1934). RBI regulates only such NBFCs which are into the business of (i) Lending (ii) Acquisition of shares, stocks, bonds, etc., or (iii) Financial leasing or hire purchase.

However, Reserve Bank regulates and supervises companies which are engaged in financial activities as their principal business. Financial activity as principal business is when a company's financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 percent of the gross income. A company which fulfills both these criteria will be registered as NBFC by RBI. While the term 'principal business' is not defined by the Reserve Bank of India Act, RBI has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it and other trading, manufacturing or industrial companies are not brought under its regulatory jurisdiction. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some fmancial business in a small way, they will not be regulated by the Reserve Bank. Companies which do financial business but are regulated by other regulators, are given specific exemption by the Reserve Bank from its regulatory requirements, such as, registration, maintenance of liquid assets, statutory reserves, etc. NBFCs which are exempted from the provisions of the RBI Act or its directions cannot hold/ accept deposits from the public as not holding or accepting deposits is one of the conditions for granting them such exemption. HFCs can however accept deposits to the extent allowed by NHB.

Residuary Non-Banking Companies (RNBCs): Non-Banking Companies whose 'principal business' is to receive deposits, under any scheme or arrangement or in any other manner but are not into investment, asset financing or lending are known as Residuary Non-Banking Companies. Functioning of these companies is different from that of NBFCs in terms of method of mobi- lization of deposits and requirement of deployment of depositors' funds. There is no ceiling on raising of depos-

8-9 MM Special Guide its by RNBCs. However, every RNBC has to ensure that the amounts deposited with it are fully invested in approved investments. In other words, in order to secure the interests of depositor, such companies are required to invest 100 per cent of their deposit liability into highly liquid and secure instruments, namely, Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/ FIs, units of Mutual Funds, etc. Residuary Non-Banking Company cannot forfeit any amount deposited by the depositor, or any interest, premium, bonus or other advantage accrued thereon.

Acceptance of Deposits: Non-bank finance companies, which have been issued Certificate of Registration by RBI with a specific license to accept deposits, are entitled to accept public deposit. In other words, not all NBFCs registered with the Reserve Bank are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registra- tion can accept deposits. They can, however, accept deposits, only to the extent permissible. Housing Finance Companies, which are again specifically authorized to collect deposits and companies authorized by Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central Government under the Companies Act can also accept deposits also up to a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public. The Reserve Bank regulates the deposit acceptance only of banks, cooperative banks and NBFCs. It is not legally permissible for other entities to accept public deposits. Unincorporated bodies like individuals, partnership firms, and other association of individuals are prohibited from carrying on the business of acceptance of deposits as their principal business. Such unincorporated bodies are prohibited from even accepting deposits if they are carrying on financial business. The Re- serve Bank publishes the list of NBFCs that hold a valid Certificate of Registration for accepting deposits on its website: www.rbi.org.in (/Sitemap/NBFC List/List of NBFCs Permitted to Accept Deposits). At times, some companies are temporarily prohibited from accepting public deposits. The Reserve Bank publishes the list of NBFCs temporarily prohibited also on its website. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs. The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount. The maximum interest rate that an NBFC can pay to a depositor should not exceed the limit fixed by RBI (present limit-12.5%). The Reserve Bank keeps altering the interest rates depending on the macro-economic environment. However, RBI has deregulated interest rates to be charged to borrowers by financial institutions (other than Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.

RBI Supervision: The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition. RBI has issued detailed regulations on deposit acceptance, including the quantum of deposits that can be collected, mandatory credit rating, mandatory maintenance of liquid assets for repayment to depositors, manner of maintenance of its deposit books, prudential regulations including maintenance of adequate capital, limitations on exposures, and inspection of the NBFCs, besides others, to ensure that the NBFCs function on sound lines. If RBI observes through its inspection or audit of any NBFC or through complaints or

8-10 1 • I Concept Briefs through market intelligence, that a certain NBFC is not complying with RBI directions, it may prohibit the NBFC from accepting further deposits and prohibit it from selling its assets. In addition, if the depositor has complained to the Company Law Board (CLB) which has ordered repayment and the NBFC has not complied with the CLB order, RBI can initiate prosecution of the NBFC, including criminal action and winding up of the company. More importantly, RBI initiates prompt action, including imposing penalties and taking legal action against companies which are found to be violating RBI's instructions/norms on basis of Market Intelligence reports, complaints, exception reports from statutory auditors of the companies, information received through SLCC meetings, etc. The Reserve Bank immediately shares such information with all the financial sector regulators and enforcement agencies in the State Level Coordination Committee Meetings. RBI's initiatives in this regard include issue of cautionary notices in print media and distribution of informative and educative brochures/pamphlets and close interaction with the public during awareness/outreach programs, Town hall events, participation in State Government sponsored trade fairs and exhibitions. At times, it even requests newspapers with large circulation (English and vernacular) to desist from accepting advertisements from unincorporated entities seeking deposits.

Grievance redressal mechanism: If complaints or grievances against the NBFCs are submitted to the nearest office of the Reserve Bank of India, the same are taken up with the NBFC concerned to facilitate resolution of the grievance/complaint. If an NBFC fails to return deposit money, the depositor can complain against the NBFC to the nearest Regional Office of the Reserve Bank. Depositors can also approach the Company Law Board constituted under the Companies Act 1956 or a civil court or Consumer Disputes Redressal Forums for recovery of their money. Affected persons can complain to the State Police authorities/Economic Offences Wing of the State Police as well. Some States have passed the Protection of Interest of Depositors (in Financial Establishments) Act,which empowers the States to attach the assets of such entities and distribute the proceeds thereof to the depositors.

Chit Funds: Under the RBI Act 1934, Deposits are defined as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscriptions to chits. All other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount. The subscriptions are specifically excluded from the definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting deposits with effect from August 2009. The chit funds are governed by Chit Funds Act, 1982 which is a Central Act administered by state governments. Those chit funds which are registered under this Act can legally carry on chit fund business. However, RBI has prohibited chit fund companies from accepting deposits from the public in 2009. In case any Chit Fund is accepting public deposits, RBI can prosecute such chit funds.

Surveillance on unauthorized acceptance of deposits Section 45S of the RBI Act 1934 specifically prohibits Unincorporated Bodies(UlBs) like individuals, firms and unincorporated association of individuals from accepting deposits from the public if they are carrying on financial activity or are accepting deposits as their principal business. The Act makes acceptance of deposits by such UIBs punishable with imprisonment or fine or both. Section 45T of the Act, gives concurrent powers to the RBI and the State Government to obtain a search warrant from the Court to investigate the acceptance of deposits. An authorised Officer of the Reserve Bank or the State Government can file a complaint in a court of law against the unincorporated bodies and the individuals concerned for the offence. Since the State Government machinery is widespread and the State Government is also empowered to take action under the provisions of RBI Act,

8-11 YRy

•

MM Special Guide 1934, any such information should immediately be passed on to the State Police or the Economic Offences Wing of the concerned State who can take prompt and appropriate action. Many of the State Governments have enacted the State Protection of Interests of Depositors Act in Financial Establishments, which empowers the State Government to take appropriate and timely action. But it is essential that before investing, public must ensure that the entity they are investing in is a regulated entity with one of the financial sector regulators. (Source: RBI Website)

5. National Food Security Act, 2013 Railway Minister Suresh Prabhu presented his second consecutive Railway Budget for 2016-17. The theme of the budget was "Reorganise, Restructure, Rejuvenate Indian Railways." The strategy is based on 3 pillars: .NavArjan — New Revenues . Nav Manak — New Norms .Nav Sanrachna — New Structures By 2020, the Minister hopes to: . make available on-demand reservation of accommodation . improve safety standards . get rid of all unmanned crossings . improve speed and punctuality; freight trains to run on timetables . do away with direct discharge of human waste Achievements of 2015-16 and Plans for 2016-17: Railway Lines: . 2,500 km of broad gauge (BG) commissioned; 2,800 km to be commissioned in FY17; commissioning @ 7 km/day (expected to increase over the years) as opposed to 4.3 km in the last 6 years . 1,600 km of lines electrified — highest-ever; Rs.2,000 km to be electrified in FY17; outlay for this increased by 50% . 9 crore man days employment to be generated in 2017-18 and 14 crore man days in 2018-19 Freight Corridor: o All civil engineering contracts to be awarded by March end 2016 • o North-South, East-West and East coast corridors to be undertaken with Public Private Partnership (PPP) • Ports: . Tuna port was commissioned. . Rail connectivity to Jaigarh, Dighi, Rewas and Paradip is in the works . Connectivity to Nargol and Hazira in 2016-17 North-East: . Barak Valley in Assam connected with rest of the country, Agartala brought to BG network . Plan on to bring Mizoram and Manipur also on to BG network J&K: . 2 bridges to be commissioned by March 2016; 2 others to be completed by 2016-17 . Decongestion ofJalandhar-Jammu line going on . 35 km of tunnelling out of 95 km completed in the Udhampur-Srinagar-Baramulla Rail Link Project

• Make In India: , • . 2 locomotive factories on the anvil . Current procurement of train sets to go up by 30% A:12;14 '"

Concept Briefs ,,,,,. . 2500 water vending machines installed ill . 7,200 e-tickets dispensed per minute from 2,000 earlier; e- ticketing facility on foreign debit and credit cards and sale of tickets through hand held terminals to be launched and e-booking tickets available on concessional passes for joumalists . 1,780 automatic ticket vending machines, mobile apps and Golndia smart cards introduced; bar—coded tickets and scanners planned . Online booking of wheelchairs now possible . Braille-enabled new coaches introduced for the Divyang (people with extra-ordinary capabilities) . One-time registration for availing concessions . 100 stations to be Wi-Fi enabled this year; 400 more next year . CCTVs at 311 stations and helplines to be made available for added security . 350 manned level crossings closed and 1,000 unmanned level crossings eliminated to promote safety; 20% fewer accidents this year than the last . 820 Rail Over-bridges and Rail Under-Bridges completed in 2014-15; 1,350 more in the works . 30,000 bio-toilets to be provided by end of this fiscal; one Divyang-friendly toilet at Al stations during FY17; portable bio-toilets to be provided for senior citizens on platforms of select stations . 'Clean my Coach' toilet-cleaning services available on request through SMS . Cancellation facility to be available through 139 helpline . Tatkaal services to be improved . All new and re-developed stations to be Divyang-friendly . IRCTC to manage catering . Increasing facility of battery-operated cars and porter (to be called Sahayak) services . Operational stoppages to become commercial halts . Optional travel insurance while booking . Mahamana Express with modern coaches introduced . SMART (Specially Modified Aesthetic Refreshing Travel) Coaches to offer bio-vacuumed toilets, entertainment screens, FM radio stations, automatic doors, accessible dustbins, vending machines, improved aesthetics and so on . 2 Mobile Apps to integrate ticketing and complaint addressing services . High-tech centralised network of 20,000 screens across 2,000 stations to enable real-time flow of information to passengers underway . Aastha train to connect important pilgrimage centres; stations at these centres to be beautified . GPS-based digital display in coaches to inform passengers of upcoming stations Energy: Savings in energy of Rs.3,000 crore per annum to be achieved by 2016-17 — one year early because of direct procurement of power Digitalisation: Application of Track Management System (TMS) launched leading to savings through inventory-reduction and scrap identification Fair Pricing: Rail Development Authority to ensure fair pricing to be set up Proposed Facilities for Unreserved Passengers: o Antyodaya Express (full-unreserved superfast train) and o Deen Dayalu coaches with potable water and more mobile-charging points for long-distance trains Proposed Facilities for Reserved Passengers: o Humsafar (all coaches with AC on train and with meals-option), o Tejas (to operate at a speed of 130 lanph with WiFi, on-board entertainment and local cuisine though one 1 service provider) o UDAY — Utkrisht Double-decker Air-conditioned Yatri Express — ovemight double-decker trains in busiest business routes The Minister plans to bring in transparency in recruitment and procurement with the

8-13 MM Special Guide help of social media and e-platforms. Special teams will audit and inspect operations to detect inefficiencies and incidences of wastage. MoUs are underway with various state Governments to take up works. Governance has

able seonp i ml a pnsr ofvoer dwbayt reducinge l pn gro pjel ac tn stsa nact ts io e nle tm e andp e r or mRa a clw e -arye slat e d Ma olsUo sohaevr e2b- 6eein n so es d. nere are stations. The will ff internship training to about 100 engineering and MBA students. Financials of 2015-16: o Annual plan size in Revised Estimates (RE) has been maintained at Budgeted Estimate (BE) levels in 2015-16 at Rs.1,00,000 crore. o Gross Traffic Receipts has been revised downwards by Rs.15,744 as compared to Rs.1,83,578 • crore in BE 2015-16 because of the negative growth trend since 2013-14. o Freight earnings target also revised downwards to Rs.1,11,853 crore. o Ordinary working expenses expected to be Rs.1,10,690 crore - lower than Rs.1,19,410 crore in BE 2015- 16. The Railways has made a savings of Rs.8,720 crore in 2015-16. o Appropriation to Pension Fund at Rs.34,900 crore has been revised marginally to Rs.34,500 crore. o Appropriation to DRF at Rs.5,500 crore from Rs.7,900 crore o Excess of receipts over expenditure at Rs.11,402.2 crore o Expected operating ratio of 90%.

Budgeted Estimates 2016-17: o Annual plan size of Rs.1.21 lakh crore. o Gross Traffic Receipts maintained at Rs.1,84,820 crore o 12.4% passenger earnings with target of Rs.51,012 crore o Goods earning target of Rs.1,17,933 crore o Other earnings budgeted at Fts.6,185 crore and sundry expenses at Rs.9,590.3 crore. o Pension outgo of Rs.45,500 crore o Appropriation to DRF estimated at Rs.3,500 crore from revenue and at Rs.200 crore from production units o Targeted operating ratio of 92% o Excess of receipts over expenditure estimated at Rs.8,479 crore o Average capital expenditure between 2009 and 2014 was Rs.48,100 crore with 8% average growth per annum; in 2016-17 capital expenditure expected to be Rs.1.21 lakh crore; states and private players to play a Part o Operating working expenses of Rs.1,69,260 crore has factored in the 7th Pay Commission. o Advertising revenue target fixed at 4 times the current fiscal's o LIC to invest Rs.1.5 lakh crore over 5 years on favourable terms o Re.1 investment in Railways leads to Rs.5 economy-wide increase in output.

Model Questions and Answers: 1) What is operating ratio? 2) The targeted operating ratio for 2015-16 and 2016-1 3) The annual plan size for 2016-17 is Rs. . 4) Antyodaya, Humsafar and Tejas are trains.

Answers: 1) Operating Expenses as a percentage of Revenue. 3) 1.21 lakh crore

, 8-1

Concept Briefs '"

T Crore 2014-15 2015-16 2015-15 2016-17 Gross Traffic Receipts 1,56,711 1,83,578 1.67,834 1.84,820 Total Working Expenses 1,42,996 1,62,210 1,50.690 1,69,260

Net Railway Revenue 16,838 25,076 19,898 18,211

Dividend Payable to General Revenues 9,174 10,811 8,495 9,737

Operating Ratio 91.3% 88.5% 90.0% 92.0% Excess 7.665 14,266 11,402 8,479

Source: Railway Budget 2076-77 documents KBKInfographics

,...-.--) _ ftgpt ,.. Railway Budget at a Glance .6- - --- ,, - ./..-;, T--- ir-- ' Excess 2' C /.. 1 4.266 z / 4.. 17.402 -4-.,-. 7.665 1 8.479 ...--- faj ' ... 11 , . •14_15 •, ,. .15-76 1116-/7 .:__; • - I a e . . 00 , Actual Budget Revised Buoget BM - , Operating Ratio In per cent, , 90.0 92.0 411. --,-;.-7 a ii 91-3 85.5

111

Railway Earnings t• cram( Working Results z crore' err Passenger me Gross Traffic Roco.pls am Goods Re Total Working Expenses • .'. ,_: 1,,, ...._ .4 - - a . '14-15 '15-16 15-113 1 6-17 14.75 15.70 7 5,6 .7 6,7 I Actual Budget RevisedBudge! j Actual t3tAtoet flovesAd UutatIAI Source.. Ral/way Budget 2076-17 documents KBK integraphics

. . ..P! -• . :- 8-15 ..

. , MM Special Guide 6. "RuPay" Card

"RuPay" is Indian domestic card scheme conceived and launched by National Payments Corporation of India (NPCI). It has been conceptualized to fulfill Reserve Bank of India's vision of having a domestic, open loop and multilateral system of payments in India. "RuPay" card was conceptualized with a view to enable Indian banks and financial institutions to effect electronic payment and had provided an opportunity to Indian banks of various segments to operate in the card payments domain. RuPay's logo symbolises coming together of `Rupee' and 'Payment' to indicate the launch of a new world-class retail payment system in India. The new system is simple to use, affordable, state-of-the —art and easily accessible even in the remotest comer of India round-the- clock. India has been one of the fastest growing countries for payment cards in the Asia-Pacific region. It is estimated that, annually banks pay about Rs.300 Crores to Visa and MasterCard for processing all debit and credit card payments. With Rupay Card, NPCI aims at reducing these costs which is also a drain on the nation's Forex reserve. The need for such a system arose from two major considerations: a) The absence of a domestic price setter has caused the Indian banks to bear the high cost for affiliation with international card associations, and • b) The connection with intemational card associations resulted in the need for routing even domestic transactions, which account for more than 90% of the total, through a switch located outside the country. Therefore, in 2009, the RBI had asked the Indian Banks Association to launch a not-for-profit company and design a rival card, then tentatively called India Card (now called Rupay Card), that meets the requirements of the domestic banks. National Payments Corporation has finalised the proposed unique India Rupay Card which would be a domestic alternative to the global real-time payment processing firms like Visa and MasterCard. "RuPay" card scheme was launched on 26th March, 2012 by National Payments Corporation of India

NPCI has been incorporated as a company under Sec 25 of the Companies Act to consolidate and integrate varying payment systems in India. NPCI is promoted by RBI having ten core promoter banks (State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC).

All card payments which are presently routed through Visa or MasterCard, which are being processed outside the country, is being targeted by Rupay Card. Payment information being very sensitive needs a repository of payment information with some institution. NPCI is such an institution. In this regard, NPCI has entered into strategic partnership with Discover Financial Services (DFS) for RuPay Card, it will enable acceptance of RuPay Global Cards on Discover's global payment network outside of India. The following benefits for member banks and customers are expected from RuPay card scheme: Competition from Rupay card to Visa & MasterCards will result in the reduction in overall transaction cost for the banks in India. • Boost to Financial inclusion process through the development of appropriate products for the country. Bring in many banks under the ambit of Card payment service, which were hitherto not eligible foil card issuance under the eligibility criteria of international card companies. Migrating transactions from cash to electronic payments in an expanding economy with a huge population of 1.2 billion.

8-16 Concept Briefs

It is expected that RuPay will eventually deliver these benefits to various stake holders. In order to become a prominent player in the Indian card payments industry, Rupay has charted out the following RuPay roadmap: 1. Acceptance at ATMs and Micro-ATMs. 2. Debit card, prepaid card, Acceptance at PoS. 3. E-Commerce acceptance and Virtual Card. 4. EMV and contactless. 5. Credit card. The RuPay Visual Identity connotes that it is deeply rooted in India and is also a modem and dynamic unit. The orange and green arrows represent a nation on the move and a service that matches its pace. The color blue stands for tranquility and peace which the brand `RuPay' expects to offer.

For high security transactions, NPCI has also rolled out its chip card with global standard for debit and credit cards using EMV (EuroPay, MasterCard and Visa) chip technology. RuPay chip cards are considered to be secure due to the presence of embedded micro-processor circuit containing the information of the card holder and transactions are PIN-based and not signature-based.

Already, RuPay cards are acceptable at all ATMs across India under National Financial Switch (NFS), who are managing the country's ATM network. It is also hoping for a foreign foray with its agreement with DFS, which has enabled its customers for international usage. RuPay was enabled for online transactions using RuPay debit on Jun 21, 2013. E-commerce or online transactions through RuPay is growing steadily. However, Since RuPay is based in India and is to be used in India only, it is not accepted on international websites. Even in India, it is not accepted by many online shopping sites.

7. Virtual Currency

Reserve Bank of India seeks to define Virtual currency as `a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community'. Virtual currencies include bitcoins, litecoins, bbqcoins and dogecoins. Their value is determined by the users based on its acceptability and applicability in the payment system.

Features of Virtual Currencies: 4. They are not approved by any central bank or public authority of the world. 4, There is no underlying asset to back this currency and hence it is difficult to rationalise the value of the currency. 4. It generates 'float' revenue for its owner. 4 Ownership of the currency is recorded only in electronic form. 4 Cost of transacting in virtual currencies is low since unlike fiat money there is no physical handling and hence maintenance. 4. It offers the benefit of interoperability.

Risks Involved: 4. Since these virtual currencies operate in various jurisdictions there is no clear legal framework that can address issues that are likely to come up. 4, There is also no customer grievance cell for traders to take their complaints to.

8-17 MM Special Guide 4. The US has already accused a virtual currency service company Liberty Reserve of money laundering. It is difficult to identify just how many virtual currency service companies bypass laws of the land in their day-to-day operations. 4. Their value is purely speculative and as a result traders run a great financial risk— this can be seen in the way prices crashed 50% because China banned bitcoins.

RBI Caveat: RBI has issued a warning notice on usage of virtual currencies on the following grounds: Since no monetary authority has sanctioned or approved the usage of these currencies and payments are made on a peer-to-peer basis there is no proper/formal structure for handling customer grievances. • All transactions are electronic and hence there is the risk that the electronic wallets, where the bitcoins are stored, may be hacked into and data compromised. • Without an asset backing the currency, users are prone to huge financial risk because of inherent volatility. • It is not clear what legal framework these transactions fall under so there is no proper recourse in case of disputes. • There is not much information on counterparties to payments and so traders must be careful not to violate anti-money laundering rules and beware of terror-financing.

A Note on Bitcoin: Bitcoin (BTC) was the first crypto-currency (currency based on cryptography) and the most successful one in terms of its widespread nature. Bitcoin is rapidly gaining popularity as a payment system. No central authority or middleman is involved in this peer-to-peer payment network. A personal bitcoin wallet allows a user to send and receive bitcoins. As such, to get or buy bitcoin, you must have a bitcoin address. Bitcoin is unique in that only 21 million units will ever be created. However, this will never be a limitation because bitcoins can be divided up to 8 decimal places or even smaller units. Bitcoin started operations in 2009. A Japanese developer called Satoshi Nakamoto (pseudonym) is believed to be the first trader of a bitcoin on Jan 3 2009.

Bitcoin Mining: No Central authority makes bitcoins. It is mined by miners. Mining is the process of adding new bitcoin transactions to past transactions. Every bitcoin transaction is stored in a public ledger called block chain to help authenticate new transactions. Miners work in groups to solve algorithms to get a block of bitcoins assigned to them from the pool. Very expensive hardware infrastructure is specifically installed to run algorithms 24 hours a day to enable mining. The process is laborious and it is so named because the long process is similar to the great exertion that is involved in extracting metals such as gold. Mining used to be done on home computers before the increasing value of the currency caught the fancy of industrialists. Iceland, Hong Kong and US have bitcoin mining stations. Miners usually charge a fee when they create a `block' in the block chain.

Value/Exchange Rate: The value of a bitcoin was US$ 13 in January 2013. In November 2013 it was US$ 1,124. In December 2013, this was halved because China banned its financial institutions from transacting in bitcoins. The price of bitcoins in India is now Rs.42, 737 down from Rs.74, 628 in November 2013. Bank of America Merill Lynch has valued the market capitalisation of bitcoins at US$ 15 bn.

Acceptability of Bitcoins: Currently, there are not too many vendors who accept payment in bitcoins — some 4:',' ,,, . sites let users buy domain names while others accept donations to run their sites for free. British entrepreneur t- . , Richard Branson's company Virgin Atlantic, has stated that it will accept bitcoins for trips to space. 0 ?.. ., - 4-

,.,,, 8-18

Concept Briefs

Various Countries' Stance on Bitcoins: Most countries have cautioned against the risks of using a currency without the backing of monetary authorities. US has identified and accused a company of money laundering, China has banned its main virtual currency exchange from accepting yuan deposits. India's central bank has also issued a warning notice. None of the countries have banned the currency as such but are unable to give their unreserved consent. European Central Banking Authority has also warned about the risks of using unregulated digital money that is susceptible to hackers. The Government of Norway has stated that virtual money does not qualify as real money.

Conclusion: Those who support bitcoin mining believe that this digital medium of exchange will transform the way payments are made all over the world in terms of speed and costs. But monetary authorities around the world are approaching the currency with a touch of caution since there are no regulatory boundaries to govern its mining and operation.

8. Report on Comprehensive Financial Services for Small Business and Low Income Households (Nachiket Mor Committee) (Jan'14) In 2013, RBI had set up a Committee on the Comprehensive Financial Services for Small Business and Low Income Households under the Chaimianship of Dr. Nachiket Mor, Member on the Reserve Bank's Central Board of Directors; the Committee was to present a vision for India's objective of Financial Inclusion and the means to deepen it. RBI has now released the Report:

Current State of Affairs: 4* 90% of small households do not have access to formal financial institutions. • 60% of the rural and urban population do not have bank accounts. -7.- Savings to GDP Ratio has decreased from 36.8% in 2007-08 to 30.8% in 2011-12. • Out of 870 mn mobile phone subscribers, 350 mn are in rural areas; there are only 30 mn fixed line subscribers.

Highlights of the recommendations are: '• * Bank Account for All: All Indians over 18 years of age must be provided with a full-service, electronic .... j.' bank account by January 1, 2016. Aadhaar cards may be used for account opening. Banks should form their own risk perceptions of customers based on their transaction-history. Currently RBI does not .,..- i''.=: require documentary proof of the identities and addresses of customers if the amount involved is less Aict! than Rs.50,000 but beyond that it is essential. <* Accessibility: Everyone must have access to deposit and withdrawal facility at a distance of 15 minutes' walk from his/her residence. • Suitability and Consent: Before marketing a product to rural customers, a due diligence of the customer must be performed. Companies must have a process in place to test the appropriateness of the product and its utility to the customer. The customer must fully understand the terms and conditions of the product in question. This shifts the onus onto the financial services provider. •1'• Payments and Settlement: There should be a Vertically Differentiated Banking System; this will include creating * Payments Banks for taking deposits and making payments to small businesses and low income households. They will not be allowed to provide any credit. These could include mobile phone

8-19

•

DWI

I-4 • ..

7 .1

3 3..

MM Special Guide companies, Business Correspondents (BCs), Post Office system and consumer goods companies; existing Scheduled Commercial Banks (SCBs) may also open them as subsidiaries. * Wholesale Banks — they are meant to primarily provide credit to the low income households and small businesses — these are not meant to accept retail deposits; they can only accept deposits over Rs.5 crore. They may also act as Business Correspondents (BCs) for other full-service banks. These banks can be opened with a minimum capital of Rs.50 crore. Normally, Rs.500 crore is the initial capital required for full-service banks. (RBI has prescribed a minimum capital of Rs.100 cr). • Insurance: Customers must have access to risk management and insurance schemes at a reasonable cost to protect them from crop damage, death of livestock, commodity price movements and so on. :• Unified Customer Grievance Redressal System: The Report recommends that the Finance Ministry create a customer grievance redressal system that is accessible to customers in all districts. The turnaround time for redressal must not exceed 30 days from the date of registration. • Farm Loans: Banks should not be asked to lend to farmers at rates lower than their base rate. It has proposed abolishing loan waivers and interest subventions as it creates a trend of non-repayment and discourages credit discipline. If the Government wants to subsidise loans to farmers, it should transfer the benefits directly to the farmers. :• PSL Target: The Priority Sector Lending (PSL) target should be increased to 50% from the current 40%; this should include weightage for different sectors and regions based on the level of difficulty in lending to them. It has suggested that banks be allowed to invest in equity in complementary infrastructure under PSL guidelines such as warehouses and godowns within its equity investment limits. It also suggests that banks focus on developing certain regions or sectors under PSL rather than getting involved in all of them. .• SLR: The Statutory Liquidity Ratio (SLR) must be done away with over time as it has outlived its usefulness. • Provisioning for Different Asset Classes: There should be differential provisioning norms for various asset classes. Therefore, if banks choose to meet their PSL targets by focusing on different asset classes, the overall Non Performing Asset Coverage ratio would still be based on the asset portfolio mix of the bank. This is so that different risk levels are considered during asset classification guidelines as well as standard asset provisioning levels. :• NBFCs and Banks: There should be similarity in treatment of banks and Non Banking Finance Compa- nies (NBFCs) based on regulatory convergence on definition and classification of Non Performing Assets, provisioning for standard assets and eligibility under the Securitisation and Reconstruction of - Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The Report envisions NBFCs becoming an integral part of the whole banking system rather than just being an outside sup- porter of the banking system. • NBFC Definition: There should only be 2 types of Non Banking Finance Companies (NBFCs). — Core Investment Companies (CICs) and otherNBFCs. This is to do away with regulatory arbitrage that sepa- rates rather than unifies NBFCs. Different asset classes can still have different provisioning norms. Maintaining its current position on NBFCs not being subjected to PSL requirements the Report has suggested that this should be continued going forward also because of their limited size and reach. Non- deposit-taking NBFCs may be allowed to function as Business Correspondents (BCs). :• Consolidation of State-level Regulators: A State Finance Regulatory Commission (SFRC) should be created that merges all the existing State Government-level regulators; functions like the regulation of

8-20 ..i: t. ., Concept Briefs hay t Non-Government Organisations-Micro Finance Institutions and local Money Services Business could also be included within its purview.

Comments: The Mor Committee Report seeks to protect rural customers from being compelled to depend on dubious money-lenders and shadow financial institutions. It seeks to create an altemative model to achieve India's main aim of Financial Inclusion. While some experts believe that some of its recommendations are too ideal and impractical to be effective, others feel the timeline mentioned is too ambitious. In particular, its dependence on Aadhaar with its incomplete penetration is a major obstacle to achieve its set goals. However, the Committee has focussed on stability, transparency, neutrality and responsibility to help fmancial institutions achieve Financial Inclusion which are sound bases for its proposals.

9. BASEL III — Capital Regulations Introduction: The main objective of the Basel III framework issued by the Basel Committee on Banking Supervision (BCBS) in Dec. 2010 is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, thus reducing the risk of spillover from financial sector to real economy. The reform package will amend certain provisions existing under Basel II framework New Capital Adequacy Framework (NCAF) and introduce some new concepts and requirements.

These new standards mainly seek to raise the quality and level of capital to ensure that Banks are better able to absorb losses on both a going concem and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measured, raise the standards for the supervisory review process and public disclosures etc. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. the capital conservation buffer and the countercyclical buffer are intended to protect the banking sector from periods of excess credit growth.

A. Guidelines on Minimum Capital Requirement The Basel DI capital regulations continue to be based on three-mutually reinforcing Pillars, viz. minimum capital requirements (Pillar 1), supervisory review of capital adequacy (Pillar 2), and market discipline (Pillar 3) of the Basel II capital adequacy framework. Under Pillar 1, the Basel III framework will continue to offer the three distinct options for computing capital requirement for credit risk and three other options for computing capital requirement for operational risk. The options available for computing capital for credit risk are:- a) Standardised Approach, b) Foundation Internal Rating Based Approach; and c) Advanced Internal Rating Based Approach. The options available for computing capital for operational risk are:- a) Basic IndicatorApproach (31A), b) The StandardisedApproach (TSA); and c) Advanced MeasurementApproach (AMA). Keeping in view the Reserve Bank's goal to have consistency and harmony with international standards, as also capital efficiency likely to accrue to the banks by adoption of the advanced approaches, a time schedule was laid down in 2009 by RBI that all commercial banks in India (excluding Local Area Banks and Regional Rural Banks) may switch over to Internal Rating Based Approach (Both Foundation as well as Advanced Internal Rating Based Approach) for credit risk and Advanced Measurement Approach for operational risk by 31.03.2014. Each bank

8-21 pi MM Special Guide has to undertake an internal assessment of its preparedness for migration to advanced approaches and take a decision with the approval of their Boards/RBI. The provisions of Basel III include:- a) The Basel III capital regulation has been implemented from April 1, 2013 in India in phases and would be fully implemented as on March 31, 2019. b) Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer.) c) The capital ratios computed under Basel III capital adequacy framework are to be disclosed from the quarter ending 30.06.2013. d) The RBI may consider prescribing a higher level of minimum capital ratio for each bank under Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. e) Banks are required to comply with the capital adequacy ratio at two levels viz. consolidated (Group) and standalone (Solo) level. Under the Basel II framework, the total regulatory capital comprises of Tier I (core capital) and Tier 2 capital (supplementary capital). In order to improve the quality and quantity of regulatory capital, capital will predominantly consist of Common Equity under Basel M. Non-equity Tier 1 and Tier 2 capital would continue to form part of regulatory capital subject to eligibility criteria as laid down in Basel III. Banks have to comply with the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing basis. To ensure smooth transition to Basel III, appropriate transitional arrangements have been provided for meeting the minimum Basel III capital ratios, full regulatory adjustments to the components of capital etc. Consequently, Basel III capital regulations would be fully implemented as on March 31, 2019.

Composition of Regulatory Capital Under Basel III, Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer). The RBI will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the capital held by a bank is commensurate with the bank's overall risk profile. This would include, among others, the effectiveness of the bank's risk management systems in identifying, assessing / measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Accordingly, RBI will consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Further, in terms of the Pillar 2 requirements, banks are expected to operate at a level well above the minimum requirement.

The total regulatory capital fund will consist of the sum of the following categories:- (i) Tier 1 Capital (going-concern capital*): comprises of:- (a) Common Equity Tier 1 capital (b) Additional Tier 1 capital (ii) Tier 2 Capital (gone-concern capital*) (*From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concem capital is the capital which will absorb losses only in a situation of liquidation of the bank). Banks are required to compute the Basel III capital ratios in the following manner:-

8-22 Concept Briefs

Common Equity Tier 1 Common Equity Tier 1 Capita 1 Capital Ratio Credit Risk RWA* + Market Risk RWA + Operational Risk RWA Tier 1 Capital Ratio Eligible Tier 1 Capita I Credit Risk RWA* + Market Risk RWA + Operational Risk RWA Total Capital (CRAR#) Eligible Total Capita 1 Credit Risk RWA + Market Risk RWA + Operational Risk RWA

* RWA= Risk weighted Assets; # Capital to Risk Weighted Asset Ratio

With the full implementation of capital ratios (For smooth migration to these capital ratios, transitional arrangements have been provided) and CCB the capital requirements would be as follows:-

Regulatory Capital As % to RWAs 1. Minimum Common Equity Tier 1 Ratio 5.50 2. Capital Conservation Buffer (comprised of Common Equity) 2.50 3. MCE Tier 1 Ratio + CCB 8.00 4. Additional Tier 1 Capital 1.50 5. Minimum Tier 1 Capital Ratio (1 + 4) 7.00 6. Tier 2 Capital 2.00 7. Minimum Total Capital Ratio (MTC) (5 + 6 } 9.00 8. MTC + CCB (7 + 2) 11.50

a) For prudential exposure limits linked to capital funds, the 'capital funds' will exclude the applicable capital conservation buffer and countercyclical capital buffer as and when activated, but include Addi- tional Tier 1 capital and Tier 2 capital which are supported by proportionate amount of Common Equity Tier 1 capital. Accordingly, capital funds will be defined as the sum total of Common Equity Tier 1 capital, Additional Tier I capital, and Tier 2 capital eligible for computing and reporting CRAR of the bank. It may be noted that the term 'Common Equity Tier 1 capital' does not include capital conservation buffer and countercyclical capital buffer. b) For the purpose of reporting Tier 1 capital and CRAR, any excess Additional Tier 1 (AT I) capital and Tier 2 (T2) capital will be recognised in the same proportion as that applicable towards minimum capital requirements. In other words, to admit any excess AT1 and T2 capital, the bank should have excess CET 1 over and above 8% (5.5%+2.5%). c) In cases where the a bank does not have minimum Common Equity Tier 1 + capital conservation buffer of 2.5% of RWAs as required but, has excess Additional Tier 1 and / or Tier 2 capital, no such excess capital can be reckoned towards computation and reporting of Tier 1 capital and Total Capital. d) A countercyclical capital buffer of 0.205% of RWAs in the form of Common Equity or other fully loss absorbing capital is to be created to mitigate/protect the banking sector from periods of excess aggregate credit growth and resultant system-wide risk being an extension of CCB.

8-23 ° MM Special Guide Transitional Arrangements As per Basel III terms, in order to ensure smooth migration without any near stress, appropriate transitional arrangements for capital ratios have been made which commenced as on 01.04.2013. Capital ratios and deductions from Common Equity will be fully phased-in and implemented as on 31.03.2018 and accordingly the phase-in arrangements for SCBs operating in India are drawn as under:-

Transitional Arrangements (Excl. LABs and RRBs) Minimum Capital 01.04.13 31.03.14 31.03.15 31.03.16 31.03.17 31.03.18 31.03.19 ratios CET 1 4.50 5.00 5.50 5.50 5.50 5.50 5.5 CCB - - - 0.625 1.25 1.875 2.5 Minimum CET I 4.50 5.00 5.50 6.125 6.75 7.375 8 + CCB Minimum Tier 1 6.00 6.50 7.00 7.00 7.00 7.00 7 capital Minimum Total 9.00 9.00 9.00 9.00 9.00 9.00 9 capital Minimum Total 9.00 9.00 9.00 9.625 10.25 10.875 11.5 capital + CCB Phase-in of all deductions from CET 1 (in%) 20 40 60 80 100 100 100

1. Capital charge for Credit Risk RBI has identified external credit rating agencies that meet the eligibility criteria specified under the revised Framework. Banks are required to choose the external rating agencies identified by RBI for assigning risk weights for capital adequacy purposes as per the mapping furnished in the Basel III guidelines.

Claims on Domestic Sovereigns (standard Assets) a Both fund based and non fund based claims on the Central Government including Central Govt. guaranteed claims cany zero risk weight. b. Direct Loans/credit/overdraft exposure, if any, of banks to State Govt. and investment in State Govt. securities carry zero risk weight. State Government guaranteed claims will attract 20 per cent risk weight'. c. Risk weight applicable to Central Govt. exposure would also apply to claims on RBI, CGTMSE, and Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH). The claims on ECGC will attract a risk weight of 20%. d. 'Amount Receivable from GOI' under Agricultural Debt Waiver Scheme 2008 is to be treated as claim on GOI and attract zero risk weight whereas the amount outstanding in the accounts covered by the Debt Relief Scheme shall be treated as a claim on the borrower and risk weighted as per the extant norms.

Claims on Foreign Sovereigns Claims on Foreign Sovereigns in foreign currency would be as per the rating assigned as detailed in the RBI circular. In case of claims dominated in domestic currency of Foreign Sovereign met out of the resources in the same currency, the zero risk weight would be applicable.

8-24 Concept Briefs

Claims on Public Sector Entities (PSE) Claims on domestic PSEs and Primary Dealers (PD) would be risk weighted in the same manner that of corporate and foreign PSEs as per the rating assigned by foreign rating agencies.

Other claims

- Claims on IMF, Bank for International Settlements (BIS), and eligible Multilateral Development Banks (MDBs) evaluated by the BCBS will be treated similar to claims on scheduled banks at a uniform 20% risk • weight. Similarly, claims on the International Finance Facility for Immunization (IFFIm) will also attract a twenty per cent risk weight

- Claims on Banks incorporated in India and Foreign Banks' branches in India, the applicable risk weight is detailed in the RBI Master Circular.

- Banks' investment in capital instruments of other banks such investments would not be deducted, but would attract appropriate risk as detailed in the RBI M. Circular. - Claims on corporate Asset Finance Companies (AFCs) and Non-Banking Finance Companies-Infrastruc- ture Finance Companies (NBFC-IFC), shall be risk weighted as per the ratings assigned by the rating agencies registered with the SEBI and accredited by the RBI.

The claims on non-resident corporate will be risk weighted as per the ratings assigned by international rating agencies.

Regulatory Retail claims (both fund and non-fund based) which meet the Qualifying criteria, viz.

a) Orientation Criterion: Exposure to individual person/s or to a small business (Average annual turnover less than Rs. 50 crore for last 3 years in case of existing or projected turnover in case of new units); b) Product Criterion: Exposure (both fund-based and non fund-based) in form of revolving credits and lines of credit (incl. overdrafts), term loans & leases (e.g. instalment loans and leases, student and educational loans) and small business facilities and commitments c) Granularity Criterion— Sufficient diversification to reduce the risk portfolio; and d) Low value of individual exposures - The maximum aggregated retail exposure to one counterpart should not exceed the absolute threshold limit of Rs. 5 crore. Regulatory Retail claims meeting the above criteria would attract risk weight of 75% except NPAs. As part of the supervisory review process, the RBI would also consider whether the credit quality of regulatory retail claims held by individual banks should warrant a standard risk weight higher than 75%.

The RWA on claims secured by mortgage of residential properties would be as under:-

Category of Loan LTV Ratio (%) Risk Weight (%)

(a) Individual Housing Loans (i) Up to Rs. 20 lakh 90/50 (ii) Above Rs. 20 lakh and up to Rs. 75 lakh 80/50 •

8-25 MM Special Guide (iii) Above Rs.75 lakh 75/75 b) Commercial Real Estate - Residential Housing (CRE-RH) N/A 75 (c) Commercial Real Estate (CRE) N/A 100. (Source: IIBF.) D-SIBs: RBI has named SBI and ICICI Banks as Domestic — Systemically Important Banks (D-SIBs) in 2016. Since April 1, 2016, the additional Common Equity Tier 1 (CET1) requirement (to be maintained over and above the capital conservation buffer) for these banks has been put in place. It will become fully effective from April 1, 2019. The list of D-SIBs with their additional Common Equity Tier 1 requirement for 2016 is as , follows: Bucket Banks Additional Common Equity Tier 1 requirement as a percentage of Risk Weighted Assets (RWAs) 5 1.0% 4 0.8% 3 State Bank of India 0.6% 2 0.4% 1 ICICI Bank 0.2%

10. Disruption will change banking significantly: Nandan Nilekani

It is just a matter of time that the lending exercise explodes in the country With the emergence of technologies such as automated teller machines, Internet and mobile transactions, banking in India catapulted to a different orbit in the last decade. But the future will bring even more change. Banking as we know it will stand on its head in the next 10 years, going by Nandan Nilekani's prediction, as "disruption is waiting to happen". Nilekani, co-founder of Infosys and former chairman of the Unique Identification Authority of India (UIDAI), believes niche banks and fmancial technology providers mean banking is going to be much more personalised and structured. The huge untapped banking potential in the country will be harvested and usurious interest rates charged in the informal sector, which can reach as high as 5,000 per cent annually, would be brought at par with the rate structure in the formal sector. While the Prime Minister's Jan-Dhan Yojana has ensured all households have a bank account, most still cannot borrow easily. True banking services remain elusive to 49 per cent of India's population, with 67 per cent of the bottom 40 per cent finding it tough to access banking. In the rural areas, 53 per cent have no true access to banking. That, however, would change in the coming decade, according to a presentation by Nilekani titled 'Indian Banking' — in a time of change. Much of the change would be led by financial technology-led lenders, and at the heart of their services will be unique identification numbers such as Aadhaar, developed by UIDAI. The force multiplier will be smartphones, the ubiquitous instrument that has managed to penetrate every nook of the country and will continue to do so due to slashed prices and cheaper and faster data plans. It is only a matter of time that the lending exercise explodes in the country.

. • 1 1 8-26 Concept Briefs

While lending has grown at an impressive 15 per cent compounded annual rate in the past seven years, it could grow "5x in the next 10 years". By 2015, India already had 32 fmtech lenders, from only three in 2013. These are heavily reliant on technology and smartphones, which are registering sales of about 25 million per quarter. This would ensure lenders would be present with their offering in every household, a few touches away on mobile phones. Smartphones will not only make brick-and-mortar banking redundant. All the ancillary technologies needed for banking will also go out of fashion. The unified payments infrastructure, floated by the National Payments Corp of India, for which Nilekani is an adviser, is heavily customised around smartphones. That would ensure cards and point of sales machines (PoS) themselves would not be needed anymore. Account information would become virtual, eliminating the need for disclosure of accounts, and transactions through mobile phones in a secured and real-time manner would become the norm. On the savings side, banks will not be able to rely on current and savings accounts for cheap capital, as competition will increase churn. Alternative low-risk savings products will emerge, providing higher interest rates and liquidity. India is set to become a data-rich nation in five years and this would mean a different set of business plans. The bank will, thus, be a platform offering services such as customer profile, ledger, personal finance management and advisory services through own and partners' products. "Fintech companies will go to free, using the data generated to add value to their operations," said Nilekani. These developments would be a mortal blow to traditional banks. "All banking products will be disrupted," Nilekani said in his presentation. Barring cash management and insurance distribution, the new mode of banking will take care of bill payments, remittances, fixed deposits, PoS terminals, mutual funds, savings accounts, current accounts, and credit cards. And, it's not existing banks can rest on established credentials. With the Reserve Bank of India making banking licence on-tap, instead of once in a decade, existing banks can hardly be complacent. • The rapid stride in granting bank licensing is, perhaps, an indication of things to come. Only 14 new licences were awarded between 1993 and 2014 but in 2015 itself, 21 new banks were introduced. If that was not enough, whoever now thinks it fit to float a bank can apply for a licence. Nimble-footed private banks are better suited to withstand the onslaught and public sector banks would surely see a rapid slide in their market share. In many ways, the loss of market shares by government banks is a continuation of how public sector units (PSUs) such as telecom and Air India lost pre-eminence in the past decade. After mobile phones and smartphones were introduced, telecom PSUs lost 70 per cent of market share in 12 years. Government banks are already losing market share but the changing landscape could accelerate the decline. In 2000, PSBs commanded a market share of 80.2 per cent, which came down to 73 per cent in 2013. Nilekani expects the share to fall to 63 per cent by 2025. The market capitalisation of government banks, too, has already started reflecting what lies ahead. "Shrinking public sector market share is de facto privatisation. The government is losing an opportunity to make billions of dollars of market capitalisation," said Nilekani. State Bank of India, the country's largest lender, has a market cap of Rs 1.7 lakh crore and all other PSBs have a combined market cap of Rs 1.8 lakh crore. However, the top four private-sector banks — HDFC Bank, Axis, ICICI Bank and Kotak Mahindra Bank — have a total market cap of Rs 7 lakh crore, eclipsing 25 PSBs (including the listed SBI associates). Nilekani also highlighted that non-banking financial company Bajaj Finance had more market

8-27 MM Special Guide capitalisation than all PSU banks except SBI. Banking per se will continue to grow. From roughly $170 billion worth of market capitalisation in FY16, the banking and related financial services market could grow to as much as $600 billion by FY26, Nilekani said.

12 TRENDS THAT WILL SHAPE THE FUTURE OF BANKING 1. Transactions: An average transaction varies between Rs 75,000 for cheque clearance to Rs 30 for mobile recharge Electronic clearing surpasses paper clearing, while IMPS volumes higher than debit cards. 2. Credentials: The phone will replace the card and PIN as authentication factor 3. Switching costs are going down 4. Lending: Rates will factor in individual pricing of risk based on digital footprints 5. Business: Fintech firms to go to free, using data generated to add value to ops unlike traditional banks which rely on fee income 6. PSU banks - Shrinking market share 7. Merchant models: Ready for disruption smartphones to replace both PoS (point of sale) and card 8. Cashless changes everything 9. Interest rates will converge 10. Jan Dhan - Aadhaar - Mobile (JAM) The Pathasr system can authEnticate 100 nn transacticrs per c3ay, in real tine 11. The emergence of the India Stack, based on JAM, will cut costs, and align market goals and social goals 12. India will be data rich (Business Standard - 16.8.16)

11. PJ Nayak Committee Report on Corporate Governance in Boards of Banks

RBI had constituted an Expert Committee to Review the Governance of Boards of Banks in India in January 2014 led by Dr. P J Nayak, former Chairman and Chief Executive Officer (CEO) ofAxis Bank. The committee has now released its report and its recommendations are as follows: 44, Stake in PSBs: The Government must transfer its stake in PSBs to a separate Bank Investment Company (BIC); it must also transfer its governance powers to the BIC. The Government has to reduce its stake in PSBs to less than 50%. This will not only help in keeping the Board independent and professional but also help in the Government's fiscal consolidation efforts. Repeal of Acts: The Report recommends that all banks should be brought under the Companies Act. It suggests that the Bank Nationalisation Acts of 1970 and 1980, the SBI Act and the SBI (Subsidiary Banks) Act be repealed. This is to empower the Board of banks and make Public Sector Banks (PSBs) competitive vis-à-vis private banks. 4, Appointment of Board of Banks: It must be professionally managed —the power must devolve from the BIC to the Board of the bank over 2-3 years. Before the BIC is constituted, a Bank Boards Bureau (BBB), comprising former senior bankers, must decide appointments. This is to ensure that the process is logical and professional leading to superior governance. 4. Constitution of Board: The Report recommends that the top management include a younger demo- graphic as this will enable a more stable Board with members having longer tenure; it will also pave the way for efficient and timely succession planning.

8-28 Concept Briefs 4„ Age Limit: The maximum age of the CEO must be 65 years. For private sector banks, the age limit as set by the Companies' Act will be applicable. The new Companies Act 2013 stipulates a minimum age of 21 years and maximum age of 70 years for directors of companies. But for Wholetime Directors, the maximum age must be 65 years. 4. Regulation: RBI must be the sole regulator and authority of banks. The Govemment must restrict its role to being majority shareholder and not interfere in governance. This will enable quicker decision- making processes and avoid dual regulation.

ry Private Holding in Banks: RBI must form a category of Authorised Bank Investors that is 'fit and proper'. These investors like pension funds, provident funds, long-only mutual funds, long-short hedge funds, exchange-traded funds and private equity funds should be allowed to hold * 20% equity in a bank without regulatory approval * 15% equity in a bank with a seat on the Board Other financial investors may hold up to 10% equity. The objective is to increase active and effective governance as investors with larger stakes take more interest in the efficient functioning of Boards. 4. Promoters 'Stake: RBI had previously suggested that after the introduction of initial capital by promoters, they must reduce their holdings to 15%. The Report has enhanced this stake to 25%. In the case of sick or distressed banks, private equity funds and sovereign wealth funds may hold up to 40%. 4. Penalties for Evergreening Bad Loans: This is to ensure that the Board of banks is held accountable for the bank's profitability and do not benefit when the bank is not performing well. The officers in charge as well as the Wholetime Directors and the Chairman must be penalised if the RBI detects significant evergreening. Their bonuses and unvested Employee Stock Option Plans (ESOPs) must be cancelled. The Chairman of the audit committee must also step down in such a case. 4. Inspections: Since RBI has suggested that banks move to Risk Based Supervision in reporting asset quality, it must conduct random but detailed checks on asset qualities in banks especially those with large ESOPs to reduce the incidence of loans turning into Non Performing Assets. 4. Third Party Products: Boards must define the correct process for selling third party products to match their products with customers' risk profile. This is to avoid possible future customer grievances. 4. Diversification of Board: In the case of old private sector banks, if the CEO is also the principal shareholder of the bank, RBI must be satisfied that the Board of the bank is adequately diversified and that the directors have independence. Otherwise, it may ask the CEO to step down. Board oversight and executive autonomy must be separated. Reactions: Public Sector Bank (PSB) unions called for a strike to protest the proposals of this report; in particular, they were opposed to the recommendation to reduce Government holding in the state-run banks to below 50%. 4 The various recommendations need approval from RBI/Govt.

12. Real Estate Investment Trusts and Infrastructure Investment Trusts - Draft Guidelines by SEBI.

REITs have been a key instrument in the world markets in the development of the real estate sector giving a platform for retail and institutional investors to invest in real estate properties offering the benefits of a regulated structure and risk diversification. SEBI has now approved the draft REIT Regulations. They are yet come into force and shall take effect on publication in the official gazette. REITs and InvITs: Real Estate Investment Trusts (REITs) offer investors an opportunity to invest in real estate with relatively lesser capital and associated risks. Investors may buy units of the trust like a mutual fund; these MM Special Guide units are invested in assets that are generally owned by the REIT. The profits come in the form of dividend income from the rental income of the property and capital appreciation from sale of the asset. An Infrastruc- ture Investment Trust (InvIT) is like an REIT except that it invests primarily in infrastructure. Requirement: The realty and infrastructure sectors have been in urgent need of funds with the steady economic growth in the country over the years. It has been estimated that in the 12th 5 year Plan, Rs.65 lakh crore or US$ 1 trillion will be required for building infrastructure in the country. Norms: In recognition of this sizeable need, Securities and Exchange Board of India (SEBI) has come up with norms for the regulation and registration of REITs and InvITs in India. Guidelines for setting up an REIT: • Trust: REITs must be set up as trusts registered with SEBI with managers, sponsors and trustees. • Offer Size: The initial offer size will be Rs.250 crore. • Asset Size: The minimum asset size requirement is R&500 crore down from the recommended Rs 1,000 crore. • Borrowings: Additional borrowings must not exceed 49% of the value of the trust's assets. Any- thing in excess of 25% of the value must be approved by the investors. Also, a credit rating will be required. . 1 . • • SPVs: REITs can invest in commercial property directly or indirectly — through Special Purpose Ve- hicles (SPVs); if they do so through SPVs, then they must hold a controlling interest of at least 50% in • it. At least 80% of the SP V's assets must be held in properties directly. Further, they are not allowed to invest in other SPVs. • Sponsors: There can be a maximum of 3 sponsors who jointly hold at least 25% stake in the trust for the first 3 years from the date of listing; each sponsor must own at least 5% stake in REIT units. After 3 years, the sponsors must hold at least 15% stake for the life of the REIT. • Minimum Investment: The minimum investment by the investor will be Rs.2 lakh. The initial offer made to the public must be at least 25% of the number of units of the post-issue REIT. • Listing: REITs must be listed and units may be traded on stock exchanges once they are listed in lots of Rs.1 lakh. The REIT must make regular and significant disclosures as per terms of the listing agreement • Investment of Funds: At least 80% of the REIT funds must be invested in completed projects that generate revenues. The remaining may be invested in developmental properties, mortgaged-backed securities, shares of realty sector companies, money market instruments and G-Securities among others. Investment in developmental properties is capped at 10% of the value of the REIT assets. • Projects: The REIT must invest in at least 2 projects; a maximum of 60% of the value of the REIT's assets may be invested in 1 project. • Distributable Income: The REIT must distribute 90% or more of its distributable cash flows to its investors. • Investors: Both foreign and domestic investors individuals and institutions, may invest in InvITs. • Taxation: Investors will have to pay tax on income earned on investments in REITs. The trust will not be liable. This will take care of the problem of double taxation. • Independence: Trustees must be independent of the sponsor or manager. Guidelines for Setting up Infrastructure Investment Trusts (InvITs): • Trust: The InvIT must be set up as a trust and registered with SEBI with managers, sponsors and trustees. The trustee must not be an associate of the sponsor. • SPVs: The InvIT may invest in infrastructure directly or though SPVs; the InvIT must hold at least 50% stake in the SPV. • Sponsors: They must hold at least 25% of the post-issue units of the InvIT for 3 years from the date of listing.

8-30 Concept Briefs

• Asset Size: The minimum asset size of the InvIT must be Rs.500 crore. • Offer Size: The minimum offer size will be Rs.250 crore. • Borrowings: Aggregate borrowing of SPV and the InvIT put together must not exceed 49% of the value of the InvIT's assets. Anything over 25% requires unit holders' approval and a credit rating. • Investment of Funds: An InvIT that invests 80% of its funds in revenue-generating infrastructure assets must: * Have at least 20 investors * Have 25% public float * Have minimum subscription of Rs.10 lakh for investors * Trade in lots of Rs.5 lakh * Distribute at least 90% of its cash flows to its investors The remaining 20% of funds may be invested in infrastructure projects that are in progress though this is capped at 10% of the value of the InvIT's assets. • Over 10% Investment in Under Construction Projects: The InvIT may invest over 10% of its assets in those infrastructure projects that are under construction only if it: * Raises money through Qualified Institutional Buyers (QIBs) and Body Corporates * has at least 5 investors each holding a maximum of 25% of the units * has a minimum investment of Rs.1 crore and also trades in lots of Rs.1 crore * distributes at least 90% of its cash flows to its investors • Under Construction Projects: InvITs may invest in under construction projects that are Public Pri- vate Partnership (PPP) projects, if, at least 50% of the construction has been completed and over 50% of the capital has been spent. In the case of non-PPP projects, all necessary approvals and certifications must have been received. • Listing: InvITs must be listed and units may be traded on stock exchanges; they must also make continuous disclosures as per terms of the listing agreement. • Taxation: Retums from investment in InvIT are taxable in the hands of the investor and not the trust. Impact: With these new norms, a framework will be in place that is expected to attract inflows of investment to the tune of US$ 15-20 billion into these sectors. High Networth Individuals and foreign investors are expected to pool their funds into these sectors reducing the dependence on bank loans. It is a big boost in liquidity for these cash-starved sectors.

13. Restructuring of Swarna Jayanti Shahari Rozgar Yojana (SJSRY) as National Urban Livelihoods Mission (Aug'14)

The Government of India, Ministry of Housing and Urban PovertyAlleviation (MoHUPA), has restructured the existing Swama Jayanti Shahan Rozgar Yojana (SJSRY) and launched the National Urban Livelihoods Mission (NULM). The Self Employment Programme (SEP) component of NULM will focus on providing financial assistance through a provision of interest subsidy on loans to support establishment of Individual & Group Enter- prises and Self-Help Groups ((SHGs) of urban poor. The Ministry has advised that the NULM is under implementation in all district head quarters (irrespective of population) and all the cities with a population of 1 lakh or more w.e.f 24.9.13. (SJSRY was operational till 31.3.14) The existing provision of capital subsidy for USEP (Urban Self Employment Programme) and UWSP (Urban Women Self-Help Programme) components of SJSRY has been replaced by interest subsidy for loans to Indi- vidual enterprise (SEP- I), Group enterprise (SEP- G) and Self Help Groups (SHGs)

8-31 MM Special Guide The underemployed and unemployed urban poor will be encouraged to set up small enterprises relating to manufacturing, servicing and petty business for which there is considerable local demand. Local skills and local crafts should be particularly encouraged. Each Urban Local Body (ULB) should develop a compendium of such activities/projects keeping in view skills available, marketability of products, costs, economic viability etc. The percentage of women beneficiaries under SEP shall not be less than 30 percent. SCs and STs must be benefited at least to the extent of the proportion of their strength in the city/town population of poor. A special provision of 3 percent reservation should be made for the differently-abled under this programme. In view of the Prime Minister's 15-Point Programme for the Welfare of Minorities, at least 15 percent of the physical and fmancial targets under this component shall be earmarked for the minority communities. ..,,, Selection of Beneficiary:The Community Organisers (COs) and professionals from Urban Local Body (ULB) will identify the proSpective beneficiaries from among the urban poor. The community structures formed under Social Mobilisation & Institutional Development (SM&ID) component of NULM viz: Self Help Groups (SHGs) and Area Level Federations (ALFs) may also refer prospective individual and group entrepreneurs for purpose of financial assistance under SEP to ULB. The beneficiaries may directly approach ULB or its representatives for assistance. Banks may also identify prospective beneficiaries at their end and send such cases directly to ULB. Educational Qualifications and Training Requirement: No minimum educational qualification is required for prospective beneficiaries under this component. However where the identified activity for micro-enterprise development requires some special skills appropriate training must be provided to the beneficiaries before extending financial support by linking for training under Component 3: Employment through Skills Training and Placement (EST&P). Financial assistance should be extended only after the prospective beneficiary has acquired required skills for running the proposed micro-enterprise. Entrepreneurship Development Programme (EDP): In addition to skill training of the beneficiaries, the ULB will also arrange to conduct Entrepreneurship Development Programme for 3-7 days for individual and group entrepreneurs. Pattern of Financial Assistance: The fmancial assistance available to urban poor in setting up individual and group enterprises will be in the form of Interest subsidy on the bank loans. Interest subsidy, over and above 7% rate of interest will be available on a bank loan for setting up of individual or group enterprises. The difference between 7% p.a. and the prevailing rate of interest will be provided to banks under NULM. Suitable certification from banks will be obtained in this regard. Procedure for interest subsidy: All scheduled commercial banks (SCEs), Regional Rural BanIcs(RRBs) and cooperative banks, which are on the Core Banking Solution (CBS) platform would be eligible for getting interest subvention under the scheme After disbursement of loan to the beneficiaries, the concerned branch of the bank will send details of disbursed loan cases to ULB along with details of interest subsidy amount. The settlement of claims made by banks would be done on quarterly basis by the ULBs; however the submission of claims should be monthly. The ULB will check the data at their end and will release the interest subsidy amount (difference between 7% p.a. and prevailing rate of interest) to the banks. Sub-Component 1- Individual Enterprises (SEP-I) - Loan & Subsidy An urban poor individual beneficiary desirous of setting up an individual micro-enterprise for self-employment can avail benefit of subsidised loan under this component from any bank. The norms/specifications for individual micro-enterprise loans are as follows. Age: The prospective beneficiary should have attained the age of 18 Years at the time of applying for loan. Project Cost (PC): The Maximum unit Project Cost for individual micro-enterprises cases is Rs.200,000 (Rs Two Lakhs) Collateral on Bank Loan: No collateral required. As per RBI Circular RPCD.SME & NFS. BC. No. 79 / 06.02.31/2009-10 dated May 6, 2010 banks are mandated not to accept collateral security in the case of loans

8-32

. %. Concept Briefs up to Rs.10 lakhs extended to units in the MSE sector. Therefore only the assets created would be hypothecated/ mortgaged/ pledged to banks for advancing loans. The banks may approach Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by Small Industries Development Bank (SIDBI) and Government of India for the purpose of availing guarantee cover for SEP loans as per the eligibility of the activity for guarantee cover. Repayment: Repayment schedule ranges from 5 to 7 Years after initial moratorium of 6-18 months as per norms of the banks. Sub-Component 2-Group Enterprises (SEP-G) - Loan & Subsidy A Self Help Group (SHG) or members of an SHG constituted under SJSRY/NULM or a group of urban poor desirous of setting up a group enterprise for self-employment can avail benefit of subsidised loans under this component from any bank. The norms/ specifications for group micro-enterprise loans are as follows. Eligibility:The group enterprise should have minimum 5 members with a minimum of 70% members from urban poor families. The application/ intent to set up a group enterprise by beneficiaries/ group members should preferably be referred by the community structures viz: SHG/ALF formed under SJSRY/NULM. Age: All members of the group enterprise should have attained an age of 18 years at the time of applying for bank

Project Cost (PC): The Maximum unit Project Cost for a group enterprise is Rs 10,00,000(Rs Ten Lakhs) Loan: Project Cost less the beneficiary contribution (as specified by bank) would be made available as loan amount to the group enterprise by the bank. Collateral Guarantee on Bank Loan: No collateral guarantee required. Only the assets created would be hypothecated/mortgaged /pledged to banks for advancing loans. The banks may approach Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). • Repayment: Repayment schedule ranges from 5 to7 Years after initial moratorium of 6 —18 months as decided by banks. Procedure for Sponsoring of Applications: The application for individual and group enterprise loans will be sponsored by the Urban Local Body (ULB) which will be the sponsoring agency for the individual and group enterprise. The ULB will create awareness regarding SEP to the prospective beneficiaries through mass media campaigns, IEC activities, advertisements in local newspapers, City Livelihoods Centres (CLCs) etc. The ULB may also disseminate information regarding this component through active involvement of Resource Organisations and its field staff. The beneficiaries desirous of seeking financial assistance for setting up an enterprise can submit an application of intent to the concerned ULB officials on a plain paper with basic details viz: Name, Age, Contact details, Address, Aadhaar details (if any), amount of loan required, bank account number (if available), type of enterprise/ activity, category etc. The intent could also be sent by mail /post to the ULB office. The ULB shall accept such intents throughout the year. The community structures formed under Social Mobilisation & Institutional Development (SM&ID) component of NULM viz: Self Help Groups (SHGs)/ Area Level Federations (ALFs) may also refer prospective individual and group entrepreneurs for purpose of financial assistance under SEP to ULB. On submission/receipt of the intent from the beneficiary the respective ULB will enter the details in a register/ or MIS if available and hence will generate a waiting list of beneficiaries. The ULB will issue an acknowledgement to the beneficiary with a unique registration number, which may be used as a reference number for tracking the status of application. Banks may also identify beneficiaries as per the eligibility criterion and receive the intent letter. The applications received directly by the banks will be referred to the ULB. The applications in this case will also form a part of the waiting list.

8-33 MM Special Guide ULB will call the beneficiaries in order of the waiting list to complete requisite documentation including filling of Loan Application Form (LAF), activity details, identity proof, address proof, bank account details etc. The SULM may develop a Loan Application Form (LAF) in suitable format in consultation with State Level Bankers Committee (SLBC) convenor bank. The same LAF may be utilised across the State. The completed applications will be sent to the TASK force constituted at ULB level for scrutiny, which will call the prospective beneficiaries for an interview before recommending or rejecting the application or call for additional information from the applicant if required. The case duly recommended by the task force will be forwarded by the ULB to the concerned banks for further processing. Such cases recommended by task force have to be processed by concerned banks within a time frame of 15 days. As these cases are already recommended by the task force, such cases should be rejected by banks only in exceptional circumstances. The banks will send a periodic report to the ULB on the status of the applications received. In case of MIS being used, the banks may be allowed to update the status of application online in addition to manual report. Linkage with Credit Guarantee Scheme (CGS) of Ministry of Micro Small & Medium Enterprises (MSME) The banks may approach Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) set up by Small Industries Development Bank (SIDBI) and Government of India for the purpose of availing guarantee cover for SEP loans as per the eligibility of the activity for guarantee cover. Sub-Component 3- Interest Subsidy on SHG Loans (SHG-Bank Linkage) As per Master Circular on SHG-Bank Linkage Programme by Reserve Bank of India (RPCD.FID. BC .No. 10/ 12.01.033/ 2013-14 dated 01 July 2013), RBI has instructed the banks for SHG bank Linkage. SHG Bank Link- age includes Opening of Savings Bank Account of Self Help Groups (whether registered or unregistered), which are engaged in promoting habit of savings among their members as a starting point. Thereafter the SHGs may be sanctioned Savings Linked Loans (varying from a saving to loan ratio of 1:1 to 1:4) after due assessment or grading by banks. However, in case of matured SHGs, loans may be given beyond the limit of four times the savings as per the discretion of the bank. The RBI has also instructed that the advances to SHGs, irrespective of the purposes for which the members of SHGs, should be included by the banks as part of their lending to the weaker sections. With a view to provide access to credit at affordable rate of interest to the urban poor, NULM will provide interest subsidy for SHGs accessing bank loan. The interest subsidy will be the difference between the prevailing rate of interest charged by the bank and 7% per annum, on all loans to SHGs of urban poor. This difference in interest amount on SHG loan (between the prevailing rate of interest and 7% per annum) will be reimbursed to banks. of An additional 3 percent interest subvention will be provided to all Women SHGs (WSHGs), who repay their loan in time. The Interest subsidy will be subject to timely repayment of the loan (as per the loan repayment schedule) and suitable certification obtained from banks by the ULB. The additional 3% interest subvention amount will be reimbursed to the eligible WSHGs. The banks should credit the amount of 3% interest subvention to the eligible WHSGs accounts and thereafter seek the reimbursement.

Sub-Component 4 - Credit Card for Enterprise Development The financial assistance to the individual entrepreneurs through subsidised loan for setting up of enterprises under NULM could be viewed as initial impetus to facilitate livelihood support to the urban poor. However the individual entrepreneurs require further financial support in terms of working capital to make the enterprise economically sustainable. This may include immediate and short term monthly requirement of cash for meeting expenses for purchase of goods, raw materials and other miscellaneous expenditures etc. The micro-entrepreneur does not have a regular fixed monthly cash inflow/income to meet expenses arising out of entrepreneurial activities. Also to approach a financial institution for such immediate credit requirement, re-

8-34 . , , • • ..!

Concept Briefs

quires procedural documentation and consumes a lot of time. This need for working capital credit is generally met from informal sources of credit (including money lenders) which is typically available at high rate of interest. In order to support the micro-entrepreneurs to meet their working capital and miscellaneous credit needs, NULM will facilitate access to Credit Cards through banks.

Sub-Component 5 - Technology, Marketing and Other Support Micro entrepreneurs often need support in order to grow and sustain their businesses. Support needed may be for establishment, technology, marketing, and other services. Micro entrepreneurs who run very small businesses may need to gain a better understanding of what the market needs, demand of the products produced by them, prices, where to sell, etc. Support services under this component are envisaged with a view to provide an encouraging environment for development of micro enterprises.

Funding Pattern Funding under this component will be shared between the Centre and the States in the ratio of 75:25. In case of special category States (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu & Kashmir, Himachal Pradesh and Uttarakhand), this ratio will be 90:10 between the Centre and States. 14. The Companies Act, 2013 (Gist of Sections relevant to Banking)

The companies Act, 2013 has been passed by the Parliament and assent of the president has been given to it. It contains 470 sections and 7 schedules. 98 Sections have come into force w.e.f.30.08.203, lsection on 12.09.2013. 183 sections on 1.4.2014. The other sections will come into effect on their notification in the Gazette.. The Sections that are of relevance to bankers are dealt with below. One Person Companies (OPC): Sec. 2(62): One Person Company means a company which has only one person as a member. It is a private company. It appears only a natural person may form an OPC. Only an Indian citizen resident in India can form OPC. A person can form only one OPC/become a nominee in one OPC only. It is meant for very small businesses. In the case of OPC the Memorandum ofAssociation should state the name of the person, who, in the event of the death of the subscriber shall become the member of the company. The words One Person Company shall be mentioned in brackets below the name of the company, wherever its name is printed, affixed or engraved. OPC can be converted into a multi-member company after complying with the laid-down procedures. Small Company: "small company" means a company, other than a public company,—paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees. Dormant Company: Where a company is formed and registered under the Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. Associate company: In relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

8-35

" • - • ._...... , ... .. '.'''',..,..:'," ,.'.'1.-..:::2. ',"„ ":!..`", 1-•'. ,, - ..... f ..." .".•;.,"" ...... "." .

'-"., . ••• ••: " " , ...... , ." , , .....: .:, ._ .: . _ ."'',' MM Special Guide Section 8 Company. + Section 8 Company is a company formed by a person or an association of persons to be registered • as a limited company which has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and intends to apply its profits or any other income in promoting its objects and intends to prohibit payment of any dividend to its members. Section 8 Company can be incorporated without addition of the words 'limited' or 'private limited'. + A firm may be a member of the company registered under this Section. + Section 8 company cannot alter provisions of MOA or AOA except with the previous approval of the Central Government Registration of Charges (Sec. 77 to Sec. 87): • A "charge" means an interest or lien created on the assets of the company or any of its undertakings or both as security and includes a mortgage. • If the particulars of charge or for modification or satisfaction of charge are not filed within 300 days the company or any person interested in registration of charge can file an application to the Central Govt. for condonation of delay and extension of time for filing particulars of charges. Central Govt. can impose conditions for extension of time. • Pledge is not expressly excluded by Section 77 but excluded in the Form CHG. Lit is advisable to register charge of pledge also under the head "others" in the Form I . Even if omitted to be registered the Bank can take umbrage under exclusion provided in the Forml. • By virtue of Section 79 of the Act, provisions of Section 77 relating to registration of charge also apply

(a) A company acquiring property subject to a charge; (b) Any modification or extent or operation of the registered charge. In other words modification of charges is also to be registered.

Duty to register charges: It is the duty of the company to register any charge created on its property or assets, situated in or outside India, with the registrar of companies within 30 days of its creation (S 77). The Registrar may permit on application by the company registration within 300 days of the creation of the charge, after satisfying himself about the delay. If the registration is not made even then, the company or any person interested in registration of the charge has to approach the central Govt. If the Govt. is satisfied about the reasons for the omission/delay, it may permit the registration of the charge. However, the order shall not prejudice any rights acquired in respect of the property concerned before the charge is actually registered (S 87). The ROC will issue a certificate of registration of such a charge to the person in whose favour the charge is created. Liquidator or any other creditor cannot "take into account" any charge created by a company unless it is duly registered and a certificate of registration of such a charge is given by the ROC. However, the non-registration shall not prejudice any contract or obligation for the repayment of the money secured by a charge (S 77). Charge— holder Creditor can approach ROC: If the company fails to register the charge within 30 days, the person in whose favour the charge is created may apply to the ROC for registration along with a copy of the instrument created for the charge; the registrar may, within 14 days, allow such registration. ROC will advise the company and satisfies himself that the charge can be registered (S 78). However, this will be subject to intervening rights of third parties. Date of notice of charge: Any person who acquires any property or assets of a company on which a charge has been registered under S 77 shall be deemed to have notice of the charge from the date of such registration ( S 80). Modification of Charge (S 79): Any modification in the terms and conditions or the extent or operation of a charge shall be registered as the charge registered in S 77. Register of Charges (S 81): ROC keeps a register of charges; it can be inspected by any person. 8-36 Concept Briefs

Satisfaction of charge (S 82): The Company shall intimate the ROC of the payment or satisfaction in full of any charge within 30 days from the date of such payment or satisfaction. Before registering the satisfaction the ROC will send a notice to the holder of the charge asking him to show cause within 14 days, as to why the satisfaction should not be recorded. If no objection is raised by him a memorandum of satisfaction shall be entered in the register of charges under intimation to the company. Registrar has power to register satisfaction even if the company does not advise (S 83): If the Registrar is given evidence to his satisfaction that the charge has been satisfied, he has the power to register the satisfaction and advice to the affected parties within 30 days of making the entry in the register of charges. Register of charges to be kept by the company (S 85): It should contain all charges and floating charges affecting any property or assets of the company. A copy of the instrument creating the charge shall also be kept. Any member of the company or a creditor can inspect the register without any payment of fees. Any other person can also inspect it on payment of fees. Punishment for contravention (S 86): The Company will be punished for any contravention of any provisions in the chapter VI with a fine ranging between Rs.1 Iakh and Rs. 10 lakh; also, every officer of the company who is in default shall be punishable with imprisonment up to 6 months or with fine ranging between Rs. 25000 and Rs. I lakh, or with both. Charges [S 2(16)1: Charges means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage ( In the 1956 Act, pledge has been excluded from the definition of charge). In the 2013 Act no such exclusion has been made. Hence pledge charge also has to be registered with ROC. Non-registration of a charge: S 77 (3) says that if a charge is not registered, it shall not be "taken into account". If a charge is not to be taken into account, it is as if the charge is non-existent, i.e. it becomes void. In the case of pledge charge, this interpretation would mean that the Pawnee (creditor) in possession of the pledged asset would have to give up the possession as the charge is not to be taken into account. Further, this will lead to an anomalous situation of pledge being a valid charge when the pawnor is a non-company, it will become void in the case of a company when the pledge charge is not registered. In S 77 (1) it is stated that if a charge is not registered within the prescribed timeline, and in the meantime, another charge is created on the asset, the second charge will take priority over the first charge. The creditor (charge-holder) can approach the ROC only after the stipulated period of 30 days. This situation is very onerous to lenders.

Borrowing Powers of the Board (S 179): The Board of Directors have the power to borrow on behalf of the company by means of resolution passed at meeting of the Board. Other powers of the Board include investment, granting of loan, giving guarantee, etc. The Board can delegate the following powers to a committee of direction, the managing director, the manager, any other principal officer, the principal officer of a branch. a) To borrow monies. b) To invest the funds of the company c) To grant loans or give guarantee or provide security in respect of loans.

Consent of the Company by a special resolution is required for the Board to exercise the following powers, among others (S 180) a) To borrow money when the borrowing will exceed aggregate of its paid up capital and free reserves. The borrowing includes the existing borrowing. The temporary loans obtained from the company's bankers in the ordinary course of business is exempted. Temporary loans means loans repayable on demand or within six months from the date of the loan such as short-term loans, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

8-37 MM Special Guide b) To sell, lease, or otherwise dispose off the whole or substantially the whole of the undertaking of the company. Every special resolution passed by the company for borrowing shall specify the total amount up to which monies may be borrowed by the Board of Directors.

Revival and Rehabilitation of Sick Companies S 253 to S 269 deal with Sick companies. S 253: Any secured creditor can file an application to the National Company Law Tribunal (NCLT) to determine that the company be declared a sick company. The following conditions have to be satisfied. a) The secured creditors must constitute 50% or more of the outstanding debt of the company. b) They should have made a demand on the company for payment of the debt and the company has failed to pay the debt within 30 days of the service of the notice of demand. c) The Company has not secured or compounded the debt to the reasonable satisfaction of the creditors. The Tribunal shall give notice of the application to the company and 30 days' time for reply. If the Tribunal is satisfied that the company has become sick, it should decide whether it is practicable for the company to repay the debts within a reasonable time. If it decides so it shall pass an order in writing giving such time to the company for repayment of the debts. S 254: On the determination of a company as a sick company under S 253, any secured creditor/company may make an application to the tribunal to determine the measures to be taken for the revival and rehabilitation of the company. Any reference to the Tribunal shall abate if the secured creditors representing three fourths in value of the outstanding against financial assistance disbursed to the borrower have taken measures to recover their secured debt under S 13(4) of SARFAESI Act. Also, if any steps have already been taken under S 13(4) by three fourths of the secured creditors no reference shall be made to the Tribunal under S 254. Further, if the financial assets of the sick company had been acquired by any securitization or reconstruction company under S 5 of SARFAESI Act, the consent of the securitization or reconstruction company is required for the reference to the Tribunal. Formerly, only industrial companies were covered by the definition of a Sick Unit. Now all companies are covered under the present Act. Formerly, definition of sickness was based on loss of net worth; the criterion of erosion of 50% of net worth has been dispensed with. Now, it is linked to failure to pay debt on demand / cash flows. Application for revival may be made by the company, secured creditors, government or bank. The tribunal will decide whether the company is sick or not. • Once the relative sections are notified, all pending reference before the BIFR or appellate authority under the SICA shall abate. The concerned company may make a reference to the National Company Law Tribunal (NCLT) within 180 days of the commencement of the Act. NCLT and National Company Law Appellate Tribunal enjoy wide powers under the Act. Most of the matters that were earlier reserved for High Courts have now to be referred to NCLT. Company Law Board will be replaced by NCLT. m

General: Memorandum ofAssociation While obtaining guarantee of security from any company, it will be advisable that the objects of the company authorise the company to provide guarantee or security for any other person or another company which may be its group company, associate company or a subsidiary company. As of date, only a holding company can give a guarantee or provide security in respect of borrowings made by its subsidiaries subject to compliance with Section 185 and Rule 10 of the Board Meeting Rules.

8-38 Concept Briefs

Registered Office All companies to have registered office within 15 days of its incorporation and to furnish verification of its registered office within a period of 30 days of its incorporation as prescribed by Rule 25 of the Companies (Incorporation) Rules, 2014. Change of registered office of an existing company outside the local limits of any city, town or village can be made only with special resolution.

Board meeting requirements: • Quorum for Board meetings shall be one-third of its total strength or two directors whichever is higher. • Participation of Directors by video conferencing or other audio visual means will be counted for the purposes of quorum. • In case the number of Directors falls below the quorum, the continuing Director(s) can act for the purpose of increasing the number of Directors necessary for quorum or for summoning a general meeting and for no other purpose. As per Section 179 of the Act the Board of Directors to exercise all such powers as the company is authorised to exercise and do. The following powers can be exercised only through resolutions passed at the meetings of the Board: (a) to borrow monies; (b) to invest the funds of the company; (c) to grant loans or give guarantee or provide security in respect of loans;

Execution of Documents The Act does not change the mode and manner in which documents can be executed , Uder the Act only Key Managerial persons or any officer of the company can be authorised under a Board resolution or a Power of Attorney. A company may by writing under its common seal authorise any person generally or in respect of any specified matters as its Attorney to execute other deeds on behalf of the company at any place either in or outside India. Deeds signed by such Attorney shall bind the company as if those were executed under its common seal.

Ordinary & Special Resolution ORDINARY RESOLUTION (S 114) A resolution shall be ordinary resolution if the votes cast in favour of the resolution exceed the votes, if any, cast against the resolution. SPECIAL RESOLUTION (S 114) A resolution shall be special when it is duly specified in the notice, calling the general meeting and votes cast in favour are three times the votes cast, if any, against the resolution. For both Ordinary as well as special resolution votes are to be cast by the members present and can be by show of hand or electronically or on poll and would include casting vote , if any available to the Chairman. Key Managerial Persons in a company (i) The Chief Executive Officer or the managing director or the manager; (ii) The company secretary; (iii) The whole-time director; (iv) The Chief Financial Officer; and (v) Such other officer as may be prescribed.

8-39 MM Special Guide Maximum no. of Directors The maximum no of directors has been increased from 12 to 15. However, Directors more than 15 directors ed after passing a special resolution. Minimum No. of Directors Public company to have minimum 3 Directors, Private company to have minimum 2 Directors and for One Person Company minimum 1 Director Woman Director At least one woman Director mandatory for (a) every listed company and (b) every other public company having paid up share capital of Rs.100 crore or more or turnover of Rs.300 crore or more. Resident Director Every company must have at least one Director who has stayed in India for a total period of not less than 180 days in the previous calendar year.

Independent Director § Every listed company to have at least 1/3rd of the total number of Directors as Independent Directors. § Public companies having paid up share capital of Rs.10 crores or more, Or turnover of Rs.100 crores or more, Or whose aggregate liability for outstanding loans, debentures and deposits exceeds Rs.50 crores should have at least two Independent Directors. Small Shareholders' Director § A listed company may have a Small shareholders' director voluntarily(Section 151). § However, the listed company to appoint such director if minimum 1000 shareholders or 1/10 th of the total shareholders give a notice for appointment of small shareholders' director. (Rule 7 of Appoint- ment & qualification of Directors Rules.) Miscellaneous:

Corporate Social Responsibility • Every Company having (a) Net worth of 500 crores or more or (b) Turnover of 1000 crores or more or (c) Net profit of 5 crores of more during any fmancial year to constitute a Corporate Social Responsibility Committee (CSRC) of the Board consisting of three or more directors with one independent director. • The Board of every company liable for CSR to spend atleast 2% of the average net profits of the company during the three immediately preceding financial years in pursuance of which CSRP. • Company to give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities.

National Financial Reporting Authority (NFRA) The Central Govt. to constitute NFRA under Section 132 for the purpose of matters relating to accounting and auditing standards under the Act. NFRA shall have the powers to investigate either suo moto or on a reference made to it by Central Govt. such class of body corporate or persons regarding matters of professional or other misconduct committed by any member or firm of the Chartered Accountants. NFRA to have same powers as are vested in the civil court.

8-40 Concept Briefs

In case of proved professional or other misconduct, NFRA can impose penalty and also debar such member or body for a minimum period of six months and maximum ten years from practising as a Chartered Accountant No other body can initiate or continue any proceeding in matters where NFRA has initiated investigation under this Section. Establishment of Serious Fraud Investigation Office (SEIM Central Govt. to establish SFIO. Till SFIO is established, SFIO set up by Central Govt. in terms of Govt. resolution dated 02.07.2003 to be deemed to be SFIO under the Act. SFIO to be headed by Director and shall comprise of various experts to be appointed by Central Govt. (Sec.211). Central Govt. can order investigation into the affairs of the company by SFIO on the grounds on which Central Govt. can order investigation u/s.210 and also on request from any department of Central/ State Govt. Winding Up of the Companies -Key Changes Inability to pay debts covers the following. • Creditor by assignment or otherwise to whom the company owes amount more than Rs.1 lac makes a demand and the company fails in 21 days to repay, compound, provide adequate security or restructure to the reasonable satisfaction of the creditor. • Execution of decree/order passed by any Court or Tribunal in favour of a creditor remains unsatisfied in whole or in part. • If proved to the satisfaction of the Court that the company is unable to pay its debts Who can file a winding up petition-k .y changes § Tribunal to appoint Official Liquidator or a Panel Liquidator as the company liquidator. A new concept of winding up committee introduced. Company liquidator within three weeks of the passing of the order to apply to the Tribunal for constitution of winding up committee, including a nominee of secured creditors. Arrears of winding up process also specifically laid down. This can hasten the process. § Tribunal to dispose off application for leave to file or continue suit or other proceeding within 60 days (Section 279) of the receipt of the petition. § Company Liquidator to submit report within 60 days from the date of winding up order to the Tribunal. Time limit reduced from 6 months to 60 days (Section 281) § Tribunal to fix time limit for completion of winding up process and dissolution of the company (Sec- tion 282, new provision). priority of Workmen's Dues: Under the 1956 Act, the dues of the secured creditors and workmen's dues ranked pan passu. Aproviso has been incorporated in Section 326 of the 2013 Act (corresponding to Sec.529A of the 1956 Act) which gives top most priority to workmen's dues to the extent of sums towards wages or salary which are payable for a period of two years preceding the winding up order or such other prescribed period. The amounts dues under the proviso are required to be paid within a period of 30 days from the date of sale of assets. Only after this amount is paid, the remaining amount will be available to the secured creditors and workmen on pan passu basis for the remaining portion of the workmen's dues.

Forms for registration of creation of charges, modification etc.

SI.No. Form Number Purpose of Form 1 CHG 1 For filing registration and modification of charge (for other than Debentures) 2 CHG 2 Certificate of Registration of charge issued by the Registrar 3 CHG 3 Certificate of Modification of charge issued by the Registrar 4 CHG 4 For filing Satisfaction of charge 5 CHG 5 Certificate of registration of Satisfaction of charge issued by the Registrar 6 CHG 6 For Intimation of appointment of Receiver or Manager

8-41 MM Special Guide 7 CHG 7 Company's register of charges 8 CHG 8 The application for Condonation of delay to be filed with Central Government if the date of creation of charge exceeds 300 days. 9 CHG 9 For filing registration and modification of charge (for debentures including rectification) 10 CHG 10 Condonation of delay to be filed before registrar if the date of creation of charge exceeds 30 days. 11 INC.28 The order for condonation of delay passed by the Central Government shall be required to be filed with the Registrar in Form No.INC.28

The Companies Act, 2013 (Frequently asked questions)

Can one person form a company? A: Yes. The company is called One Person Company. It is a private limited company. Only a natural person who is an Indian citizen and resident can set up the company or become a nominee for the sole member of OPC. A person can incorporate one OPC only or become a nominee in one such company only.

Who are the key managerial personnel of a company to be appointed as per Sec 203 of the Act? A: They are: i) The Chief Executive Officer or the Managing Director or the Manager. h) The Company Secretary iii) The whole time director iv) The Chief Financial Officer; and v) Such other officer as many be prescribed. Appointment / Removal of key managerial personnel requires approval by a Board resolution.

What is a Private Limited Company? i) Minimum paid up capital: Rs. 1 Lakh ii) The Articles restrict the right to transfer its shares. iii) Minimum No. 2; Maximum No:200 (except in one person company) The maximum number is exclusive of employees of the company and former employees of the company who are members of the company. iv) The Articles prohibit invitation to public to subscribe to any securities of the company (i.e., shares/debentures cannot be issued to the public)

What are the minimum number of persons who can form private company, public company and one person company? A: Public Company : 7, Private Company : 2; One Person Company: 1 In the case of one man company, the memorandum shall indicate the name of another person, who shall in the event of the subscriber's death or incapacity, become the member. The another person's consent should be obtained which should be filed with the Registrar along with Memorandum and Articles.

What is a small company? It is a company other than a public company with paid up share capital of Rs.50 lakhs or such higher amount which shall not be more than Rs.5 cr or with turnover of Rs.2 cr as per its last profit and loss account; the limit on turn-over may be increased to Rs. 20 cr by the appropriate authority.

8-42 Concept Briefs

6. What is meant by entrenchment in respect of Articles of Association? A: Entrenchment means' strengthening. Section 5(3) of the Act provides that the articles may contain a provision that specified provisions of the articles may be amended only if conditions or provisions which are more restrictive, than those applicable in the case of a special resolution, are met or complied with. Entrenchment provisions can be incorporated only at the time of formation of the company or by amendment with consent of all members in case of private company and by a special resolution in the case of a public company.

What is the procedure for obtaining the certificate of incorporation from ROC? A: The following documents are required to be submitted to the Registrar of Companies within whose jurisdiction the registered office of the company is to be located for obtaining the certificate of incorporation from the ROC. The Memorandum ofAssociation and Articles of Association of the company duly signed by all the subscribers to the memorandum. IL A declaration in the prescribed form by an advocate, a chartered accountant, cost Accountant or Company Secretary in practice and by a person named in the articles as a Director, Manager or Secretary of the company that all requirements of the Companies Act 2013 and the rules made there under in respect of registration have been complied with. M. An affidavit from each of the subscribers to the memorandum and from persons named as the first Directors, if any, in the Articles of Association that he is not convicted of any offence in connection with the promotion, formation or management of any company or that he has not been found guilty of any fraud or misfeasance or if any breach of duty to any company under this Companies Act or any previous company law during the preceding 5 years and that all the documents filed with ROC for registration of the company contain information that is correct and complete and true. IV The address for correspondence till its registered office is established. V. The particulars of name including surname or family name, residential address, nationality etc of every subscriber to the memorandum along with proof of identity. VI The particulars of the persons mentioned in the articles as the first Directors of the Company, their names, the Director Identification Number, residential address, nationality and other particulars including proof of identity. VII. The particulars of the interest of the persons mentioned in the Articles of Association as the first Directors of the company in other firms or bodies corporates along with their consent to act as Directors of the Company.

What is Section 8 Company? A: A Company may be set up with the objective o f promotion of Commerce, Art, Science, Sports, Social welfare, Religion, Charity etc. If such a company intends to apply its profits in promoting its objects and prohibits payment of dividend to its members, it can be registered as a company, under S8 of the Act. (In 1956 Act, it is called S25 Company). The Central Government will permit the Registrar under S8 as a limited company, without the addition, to its name, the word limited or Private Limited, as the case may be. After the approval by the Government, the ROC may register it as a company under S8.

When can a company commence business? After raising the share capital, the company has to comply with the following. (a) A declaration is filed by a director under Rule 24 of the company rules; and (b) Has filed a verification of its registered office with the ROC.

8-43 MM Special Guide 1 0 . Who is responsible for filing the charge created on a company's property or assets? A: The company is responsible. The particulars of the charge should be signed by the company and the charge-holder together with the copy of the instruments creating such charge. The charge has to be registered with ROC within 30 days of its creation (S77). The Registrar may allow the registration of charge to be made within 300 days on application by the company if it is not registered within 30 days. If the registration is not made within 300 days, the company has to apply to the ROC as provided in S87. It is important to note that any subsequent registration of a charge shall not prejudice any right of third parties in respect of any property or assets created before the charge is actually registered. ROC will issue a certificate of registration to the company. No charge created by the company shall be taken into account by the liquidator or any other creditor unless it is duly registered and certificate of registration is given by the ROC. However, the contract or obligation for repayment of the money secured by a charge is not affected even if the charge is not registered.

11. What action can be taken by the lender bank when the company does not register a charge within 30 days? A: The lender bank can apply to the Registrar for registration of the charge along with a copy of the instrument created for the charge. The ROC may, within 14 days, after giving notice to the company allow such registration on payment of prescribed fees (S78). It is to be noted that if any other charge is registered meantime, that charge will rank in priority.

12. What is ordinary resolution? A: ANotice has to be given to members of the company regarding the resolution. The ordinary resolution has to be passed by the voters either on a show of hands, electronically or on a poll. The votes cast in favour of the resolution shall exceed the votes cast against it. This is called ordinary resolution.

13. What is a special resolution? A: While the formalities to be followed are the same as for ordinary resolution, the votes, cast should be not less than 3 times the number of votes cast against it.

14. What is the minimum number of directors that a Public Company a Private Company and One Person Company shall have? A:Public Company:3, Private Company:2 One Person Company: 1

15. What is the maximum number of directors that a company can have? A: The maximum number is 15 for both Public and Private Company. It can be more for a public company if a special resolution is passed by the company. The One Person Company shall have only one Director.

16. What are the various stipulations regarding appointment of directors? i) A: At least one director of the company should have stayed in India for not less than 182 days in the previous calendar year ii) A listed company should have at least 1/3rd of the total number of directors as independent directors. iii) At least one woman director is mandatory for every listed company and every other public company having paid up share capital of Rs.100 crore or more or tumover of rs.300 crore or more iv) Independent directors can be appointed for two consecutive terms of 5 years each i.e., Maximum — 10 years

17. What are the various prescriptions for appointment of a director? Concept Briefs i) A director should be appointed by the company in general meeting. ii) A person can be appointed as director only if he has DIN (Director Identification Number); he should furnish a declaration that he is not disqualified to become a director under the Act. iii) The person should give his consent to be a director which should be filed with ROC with in 30 days of his appointment.

18. In how many companies a person can be a director at the same time? A: Maximum 20 companies. However, he cannot be a director in more than 10 public companies. 19. When a director ceases to be a director of the company? i) If he is declared by a court that he is of unsound mind. ii) If he becomes undercharged insolvent. iii) If he is convicted for any offence and sentenced to imprisonment. iv) If he has not paid any calls in arrears. v) If he absents himself from all the board meetings held during a period of 12 months with or without seeking leave of absence of the Board. vi) Appointment/Acting as Director without getting DIN

20. How a meeting of the Board be conducted? A: It can be in person or through video conferencing or other audio visual means. Quorum for the Board Meetings shall be 1 /3rd of its total strength or two directors whichever is higher.

21. What is National Financial Reporting Authority? A: The Central Government may set up NFRA (S132 of Companies Act,2013) The functions of NFRA will include a. Recommending to the Central Government accounting and auditing policies and standards for adoption by companies/auditors. b. Monitoring and enforcing compliance with accounting standards and auditing standards. c. Overseeing the quality of the service of the professionals associated with ensuring compliance with such standards. The Authority will be headed by a chair person appointed by the government. It will have the power to investigate any misconduct committed by any chartered accountant and impose penalty on him.

22. What are the various aspects covered under Corporate Social Responsibility in the Act? A: All companies fulfilling the following criteria should set up a CSR Committee: (S135) i) Net worth of Rs.500 Cr or more; or ii) Turnover of Rs.1000 Cr or more; or iii) A net profit of Rs.5 Cr or more during a financial year. The committee should consist of 3 or more directors, of which one should be an independent director. The company should spend in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years on CSR activities. These may relate to eradicat- ing extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, ensuring environmental sustainability etc.

23. What are the powers of the Board of Directors as per S179 of the Act? A: The powers of the Board include

8-45 MM Special Guide a To issue securities, including debentures, whether in or outside India b. To borrow monies. c. To invest the funds of the company d. To grant loans or give guarantees or provide security in respect of loans. These powers are to be exercised by means of resolutions passed at meetings of the Board. The powers of the Board are subject to the provisions of the Act and the Memorandum/Articles of the company. It is advisable for the banker to ensure that one of the objects to be pursued by the company authorises the company to provide guarantee or security for any person or another company which may be its group company, associate company or a subsidiary company.

24. What are the restrictions on the powers of the Board? A: Under S180, the following powers can be exercised by special resolutions only with the consent of the company. i) A company can sell, lease etc. the undertaking of the company. ii) To borrow money, where the borrowings, the existing and the proposed, will exceed the aggregate of its paid up capital and free reserves. Temporary loans, from company's bankers, taken in the ordinary course of business is not reckoned. Every resolution passed by the company in a general meeting relating to borrowings, under (ii) above, shall specify the total amount up to which monies may be borrowed by the Board of Directors.

Miscellaneous: 1. How many sections are there in the Companies Act, 2013? A: There are 470 sections and 7 schedules. There are 29 chapters.

What is the limit on number of members in an association or partnerships as per the 2013 Act? A: 100 (There is no difference between banking and non-banking companies — (Sec-464))

What is the role of Serious Fraud Investigation Office (SFIO) being established under the Companies Act 2013? A: It will be set up by Central Government and will be headed by a director. SFR) will comprise experts from various fields such as banking, corporate affairs, taxation, forensic audit, capital market, I.T. law etc., appointed by the Central Government. Central Government can order investigation into the affairs of the company by SF10. The Central Government on receipt of a report of the Registrar or Inspector under Sec.208 or in the public interest or on request from department of Central or State Government or on intimation of a special resolution passed by the company that the affairs are required to be investigated can order for investigation.

When a creditor of a company may file a petition for winding up of the company to the National Company Law Tnbunal (NCLT)? A: A creditor to whom the company is indebted for an amount exceeding Rs.1.00 lakh that was due has served on the registered office of the company a registered notice to pay the amount and the company has failed to pay the same within 21 days after receipt of the notice or provide adequate security or restructure or compound the debt to the reasonable satisfaction of the creditor.

What will be the effect when National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) come into force? 8-46 Concept Briefs

i) A: All matters, proceedings or cases pending before company law board shall stand transferred to NCLT and NCLT to dispose off such matters. ii) All proceedings under the Companies Act 1956 including relating to arbitration, compromise, arrangements, reconstruction and winding up of companies pending before District Court or High Court shall stand transferred to NCLT which shall deal with these matters. iii) Any reference made or enquiry pending before BIFR or any appeal or proceeding pending before AAIFR shall stand abated on such dates as noted by the Central Government. iv) Any company in respect of which such reference, inquiry, appeal or any proceedings stands abated can make a reference to NCLT within 180 days from such date on which the matters stand abated. No fees is payable for making such reference.

15. Wilful Defaulters RBI had released a master circular on wilful defaulters on July I, 2014 applicable to all Scheduled Commercial Banks (SCBs). This was to protect banks by warning them not to disburse loans to borrowers that have defaulted with no intention to repay loans they have taken. History: There was an earlier circular that covered all loans that were in default from April I, 1999, wherein banks had to send a quarterly report to the RBI on all non-performing loans of over Rs.25 lakh, an amount set by the Central Vigilance Commission (CVC). Banks were also advised to file criminal cases against borrowers, who had taken loans of over Rs.1 crore, where it suspects cheating or fraud on the part of the borrowers. Definition: According to its latest circular, RBI has stated that wilful defaulters are those people or institutions that: • do not repay loans despite having the capability to do so • have disposed or removed securities that were pledged to the bank for the loan without the bank's knowledge and taken another loan with it • have not used proceeds of the loan amount for the stated purpose • have utilised loan proceeds for purposes other than for which the loan was taken and where there are no assets to explain the expenditure

Other Salient Points: • If the borrower uses funds to invest in operations that are unrelated to his business and that are not in the interests of the company, the act may be considered siphoning of funds. • The track record of the borrower is important — a single incident must not be sufficient to decide whether he is a wilful defaulter or not. • The act of default must be "calculated, deliberate and intentional."

Plan of Action for Lenders: To ensure that loans that are sanctioned are used for the purpose stated in the loan document, RBI has suggested some measures that lenders may undertake: • Adequate scrutiny of books of accounts, quarterly reports, statements and balance sheets • Periodical inspection of assets pledged as security • Inspection of assisted units • Conduct of Stock audit • Periodical audit of lenders' credit system • Regular supervision of end-use of loan with certificates from borrowers Penal Measures against Defaulters: No banking facility may be provided to wilful defaulters. Any company that has misrepresented or defrauded banks must be barred from institutional finance. Banks may pursue legal action.

8-47 MM Special Guide • Banks must insist on a change of management in the defaulting borrowing unit. • No wilful defaulter may be on the board of companies where the bank has a substantial stake. This may be incorporated in the loan agreement. If such a person is found to be on the Board, the bank must take steps to remove him. Actions against Others: • If guarantees issued by group companies in favour of the borrowing company are not honoured the bank may consider the group companies wilful defaulters as well. • The bank must examine the role of the auditor. If he is found to be negligent or lacking in any way, banks may complain to the Institute of Chartered Accountants of India (ICAI). Banks must carefully document all the decisions that led them to declare the person or entity a wilful defaulter. The borrower must be given reasonable time to respond to the charge and present his side. Banks may even take criminal action against the wilful defaulter if he has presented falsified certificates.

RBI Clarification: RBI has recently clarified some points with regard to its circular on Wilful Defaulters: • If guarantors of defaulted loans refuse to pay, when they have the means to, they may also be declared as wilful defaulters. If wilful defaulters serve on the board of companies, those companies are also ineligible to avail of bank loans. However, this will not apply retrospectively. Individuals and business enterprises, whether incorporated or not, are liable to be declared wilful defaulters.

Publishing of photographs of Wilful defaulters RBI has advised lending institutions as under: It has been observed that some lending institutions have been publishing the photographs of defaulters/ guarantors in newspapers. In view of the sensitivity involved and need to prevent the publishing of photographs of defaulting borrower/ guarantor in an indiscriminate manner, it has been decided as under: (i)A lending institution can consider publication of the photographs of only those borrowers, including proprietors/ partners /directors / guarantors of borrower firms/ companies, who have been declared as wilful defaulters following the mechanism set out in the RBI instructions referred to above. This shall not apply to the non-whole time directors who are exempted from being considered as wilful defaulters unless the special conditions, in accordance with these instructions, are satisfied. (ii) The lending institutions shall formulate a policy with the approval of their Board of Directors which clearly sets out the criteria based on which the decision to publish the photographs of a person covered in paragraph (i) above will be taken by them so that the approach is neither discriminatory nor inconsistent. The lending institutions shall not publish photographs of any other defaulting borrowers.

16. Know Your Customer Guidelines - FAQs (updated up to December 22, 2014) (This is a summarised and simplified version of the Reserve Bank of India's Know Your Customer guidelines.For further details, please refer to the links which are provided below)

Q 1. What is KYC? Why is it required? Response: KYC means "Know Your Customer". It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks' services are not mis- 111 . used. The KYC procedure is to be completed by the banks while opening accounts and also periodically update the same.

8-48 Concept Briefs

Q 2. What are the KYC requirements for opening a bank account? Response: To open a bank account, one needs to submit a 'proof of identity and proof of address' together with a recent photograph.

Q3. What are the documents to be given as 'proof of identity' and 'proof of address'? Response: The Government of India has notified six documents as 'Officially Valid Documents (OVDs) for the purpose of producing proof of identity. These six documents are Passport, Driving Licence, Voters' Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Card. You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then it would be accepted as as 'proof of address'. If the document submitted by you for proof of identity does not contain address details, then you will have to submit another officially valid document which contains address details. (http://rbidocs.rbi.org.in/rdocs/content/pdfs/PMLAME170714_A.pdf) (1fttp://rbidocs.rbi.org.in/rdocs/notification/PDFs/CA090614FCN.pdf)

Q 4. If I do not have any of the documents listed above to show my 'proof of identity', can I still open a bank account? Response: Yes. You can still open a bank account known as 'Small Account' by submitting your recent photograph and putting your signature or thumb impression in the presence of the bank official.

Q 5. Is there any difference between such `small accounts' and other accounts Response: Yes. The 'Small Accounts' have certain limitations such as: • balance in such accounts at any point of time should not exceed Rs.50,000 • total credits in one year should not exceed Rs.1,00,000 • total withdrawal and transfers should not exceed Rs.10,000 in a month. • Foreign remittances cannot be credited to such accounts. Such accounts remain operational initially for a period of twelve months and thereafter, for a further period of twelve months, if the holder of such an account provides evidence to the bank of having applied for any of the officially valid documents within twelve months of the opening of such account. The bank will review such account after twenty four months to see if it requires such relaxation. (http://rbidocssbi.org.in/rdocs/notification/F'DFs/COSA270111.pdf)

Q 6. Would it be possible, if I do not have any of the officially valid documents, to have a bank account, which is not subjected to any limitations as in the case of 'small accounts'? Response: A normal account can be opened by submitting a copy of any one of the following documents: i) Identity card with person's photograph issued by Central/State Government Departments, Statutory/Regu- lator), Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Insti- tutions; or ii) letter issued by a gazetted officer, with a duly attested photograph of the person. iii) This, however, is not a general rule and it is left to the judgement of the banks to decide whether this simplified procedure can be adopted in respect of any customer. (http•Hrbidocs.rbi.org. n/rdocs/content/pd fs/PMLA ME 170714_A.pdf)

Q 7. Are banks required to categorise their customers based on risk assessment? Response: Yes, banks are required to classify the customers into `low', 'medium' and high' categories depending on their AML risk assessment.

8-49 MM Special Guide

Q 8. Do banks inform customers about this risk categorisation? Response: No Q 9. If I refuse to provide requested documents for KYC to my bank for opening an account, what may be the result? Response: If you do not provide the required documents for KYC, the bank may not be able to open your account. (http://www.rbi.org.in/scripts/BS ViewMasCirculardetails.aspx?id=9031)

Q 10.Can I open a bank account with only an Aadhaar card? Response: Yes, Aadhaar card is now accepted as a proof of both, identity and address. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/KYC101212CFS.pdf)

Q 11. What is e-KYC? How does e-KYC work? Response: e-KYC refers to electronic KYC. e-KYC is possible only for those who have Aadhaar numbers. While using e-KYC service, you have to authorise the Unique Identification Authority of India (UIDAI), by explicit consent, to release your identity/address through biometric authentication to the bank branches/business correspondent (BC). The UIDAI then transfers your data comprising name, age, gender, and photograph of the individual, electronically to the bank/BC. Information thus provided through e-KYC process is permitted to be treated as an 'Officially Valid Document' under PML Rules and is a valid process for KYC verification. (http://rbidocs.rbi.org.in/rdocs/noti fication/PDFs/CKUI0209013E.pdf) Q 12. Is introduction necessary while opening a bank account? Response: No, introduction is not required. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/KYC101212CFS.pdf) Q 13. HI am staying in Chennai but if my address proof shows my address of New Delhi, can I still open an account in Chennai? Response: Yes. You can open a bank account in Chennai even if your permanent address is inNew Delhi and you do not have a proof of address for your Chennai. In that case, you can submit an officially valid document (proof of address document) of your New Delhi address together with a declaration about your Chennai address, for communication purposes. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CA090614FCN.pdf) Q 14. Can I transfer my existing bank account from one place to another? Do I need to undergo full KYC again? Response: Yes, it is possible to transfer an account from one branch to another branch of the same bank. There is no need for KYC exercise again to transfer a bank account from one branch to another branch of the same bank. However, if there is a change of address, then you would have to submit a declaration about the current address. If the address in the 'officially valid documents'/ 'proof of address' is neither permanent nor current address, a new proof of address would be required within six months. In case of opening an account in another bank, however, you would have to undergo KYC exercise afresh. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/KYCAML290113_F.pdf and http://rbidocssbi.org,in/rdocs/notification/PDFs/CA090614FCN.pdf) Q 15. Do I have to furnish KYC documents for each account I open in a bank even though I have furnished the documents of proof of identity and address? Response: No, if you have opened an account with a bank, which is KYC compliant, then for opening another account with the same bank, furnishing of documents is not necessary. Q 16. For which banking transactions do I need to quote my PAN number? Response: PAN number needs to be quoted for transactions, such as, account opening, transactions above

8-50 Concept Briefs

Rs.50,000 (whether in cash or non-cash), etc. A full list of transaction where PAN number needs to be quoted can be accessed from website of Income Tax Department at the following URL:

h.V://lawincometaxinclia.g ov.in IT/File o ener.a a e=1TR &sch =rul csId= 1 3 008-bbb4- 4f86-b609-9296e8b5223e&rNo=114B&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws Q 17. Whether KYC is applicable for Credit/Debit/Smart/Gift cards? Response: Yes. Full KYC exercise is necessary for Credit/Debit/Smart/for purchaser of Gift Cards and also in respect of add-on/ supplementary cards. (http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9031) Q 18. I do not have a bank account. But I need to make a remittance. Is KYC applicable to me? Response: Yes. KYC exercise needs to be done for all those who want to make domestic remittances of Rs. 50,000 and above and all foreign remittances. (http://rbidocsrbi.org,in/rdocs/notification/PDFs/KYC12072013F.pdf) Q 19. Can I purchase a Demand Draft/Payment Order/Travellers Cheque against cash without KYC? Response: Demand Draft/Payment Order/Travellers Cheques for Rs.50,000/- and above can be issued only by way of debiting the customer's account or against cheques. (http://rbidocs.rbi,org.in/rdocs/notification/PDFs/KYC12072013F.pdf)

Q 20. Do I need to submit KYC documents to the bank while purchasing third party products (like insurance or mutual fund products) from banks? Response: Yes, all customers who do not have accounts with the banks (known as walk-in customers) have to produce proof of identity and address while purchasing third party products from banks if the transaction is for Rs.50,000 and above. KYC exercise may not be necessary for bank's own customers for purchasing third party products. However, instructions to make payment by debit to customers' accounts or against cheques for remittance of funds/issue of travellers' cheques, sale of gold/silver/platinum and the requirement of quoting PAN number for transactions of Rs.50,000 and above would be applicable to purchase of third party products from banks by bank's customers as also to walk-in customers. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/KYCI2072013F.pdf)

Q 21. My KYC was completed when I opened the account. Why does my bank insist on doing KYC again? Response: Banks are required to periodically update KYC records. This is a part of their ongoing due diligence on bank accounts. The periodicity of such updation would vary from account to account or categories of accounts depending on the bank's perception of risk. Periodical updation of records also helps prevent frauds in customer accounts. Oittp://rbidocs.rbi.org.in/rdocs/notification/PDFs/CPU230713FD.pdf)

Q 22. What are the rules regarding periodical updation of KYC? Response: Different periodicities have been prescribed for updation of KYC records depending on the risk perception of the bank. KYC is required to be done at least every two years for high risk customers, at • least every eight years for medium risk customers and ten years for low risk customers. This exercise would involve all formalities normally taken at the time of opening the account. If there is no change in status with respect to the identity (change in name, etc.) and/or address, such customers who are categorised as 'low risk' by the banks may now submit a self-certification to that effect at the time of periodic updation. • In case of change of address of such `low risk' customers, they could merely forward a certified copy of the document (proof of address) by mail/post, etc. Physical presence of such low risk customer is not required at the time of periodic updation. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT269FKYCI014.pdf)

8-51 MM Special Guide Customers who are minors have to submit fresh photograph on becoming major. (b_t_tp://rbidocs.rbi.org.in/rdocs/notification/PDFs/CPU230713FD.og )

Q 23. What if I do not provide the KYC documents at the time of periodic updation? Response: If you do not provide your KYC documents at the time of periodic updation bank has the option to close your account. Before closing the account, the bank may, however, impose 'partial freezing' (i.e. initially allowing all credits and disallowing all debits while giving an option to you to close the account and take your money back). Later even all credits also would not be allowed. The 'partial , freezing' however, would be exercised by the bank after giving you due notice. (http://rbi.org.in/scripts/NotificationUser.aspx?Id=9289&Mode=0)

How is partial freezing imposed? . ; Q 24. Response: Partial freezing is imposed in the following ways: • While imposing 'partial freezing', banks have to give due notice of three months initially to the customers before exercising the option of 'partial freezing'. • After that a reminder for further period of three months would be issued. • Thereafter, banks may impose 'partial freezing' by allowing all credits and disallowing all debits with the freedom to close the accounts. • If the accounts are still KYC non-compliant after six months of imposing initial 'partial freezing' banks may disallow all debits and credits from/to the accounts, rendering them inoperative. • Thus, one year after the account is due for updation, if you do not provide the necessary documents/information, your account would become fully inoperative i.e, neither credits nor debits would be allowed in the account. • Meanwhile, the account holders can revive accounts by submitting the KYC documents. (littp://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT269FKYC1014.pdf) Source: RBI Website

17. India's Foreign Trade Policy — 2015-2020

The Indian Government has unveiled its Foreign Trade Policy for 2015-2020. The policy seeks to encourage exports through systemic measures rather than with subsidies and incentives to conform to World Trade Organisation (WTO) rules. It also seeks to promote employment and value addition under the Make in India vision. Nirmala Sitharaman, the Minister of State (independent charge) for Commerce and Industry has stated that India must improve the quality of its exports making it intemationally-competitive. The Policy seeks to increase India's share of exports from 2% to 3.5% of world exports.

The highlights of the FTP are: 1) It has set a target of US$ 900 billion for exports (both merchandise and services) by 2020. It was US$ 465.9 billion in 2013-14. 2) All previous Export Incentive Schemes have been grouped under Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS). MEIS: 1) MEIS has replaced Focus Products Scheme, Market-linked Focus Products Scheme, Focus Market Scheme, Agriculture Infrastructure Incentive Scrips and Vishesh Krishi Grameen Udyog Yojana (VKGUY). 2) MEIS is meant for export of specified goods to specified markets. 3) The rates of reward under the MEIS for exporting notified goods like confectionery, pharmaceutical

8-52 * Concept Briefs

goods, dairy products and vegetables to specified countries are 2%-5% of the FOB of value of exports or FOB value realised whichever is lesser. The benefits are also extended to export through courier or foreign post office using e-commerce up to FOB value of Rs.25,000. SEIS: 1) SEIS has replaced the Served from India Scheme (SFIS). 2) SEIS is for export of notified services. 3) Service providers who have a minimum foreign exchange earnings of US$15,000 in the previous financial year will be eligible under this scheme. 4) Service providers will be given SETS scrips of 3% or 5% of net foreign exchange earned depending on the • " category of service they are in. Common Features of MEIS and SEIS: 1) MEIS and SETS will be available to units located inside Special Economic Zone (SEZs) to boost exports from SEZs. 2) Duty credit scrips issued under MEIS and SEIS will be freely transferable; this means that they can be used to make payments such as customs and excise duty and service tax. 3) Additional customs duty, excise duty and service tax that are paid via cash or debit to duty credit scrip will be available as CENVAT credit or duty drawback. Basic customs duty paid in cash or debit to duty credit scrip will also be available for duty drawback. 4) Exports up to March 31 2015 and scrips that are related to these exports will fall under the earlier relevant schemes. EPCG: If goods are imported under the Export Promotion Capital Goods (EPCG) scheme, the export obligation will be 6 times the amount of duty saved. • For goods procured locally, the specific export obligation has been reduced to 75% of the normal obligation to encourage procurement of capital goods from domestic manufacturers. • Within 6 months of imports being completed, an installation certificate must be fumished to the excise authorities. This time limit may be extended by another 12 months by the licensing authority. EOU/EH7P/STP/BTP: - Units that produce solely for the purpose of export and earning foreign exchange may set up under one of these schemes. - Only projects that invest Rs.1 crore in plant and machinery will be eligible to be set up as EOUs. - The FTP provides for promotional measures for manufacturing and exports under 100% Export-Oriented Units (E0U)/Electronic Hardware Technology Park(EHTP)/Software Technology Parks of India (STP1)/ Bio Tech Park (BTP) by , • extending by one year the time within which netforeign exchange earnings must be achieved • providing fast-track clearing facilities of procuriment for IOUs having a physical export turnover of Rs.10 crore or more allowing units to set up warehouses near ports, • permitting sharing of infrastructure facilities and so on. Miscellaneous: Export obligation period of defence, aerospace and military store has been extended to 24 months (from 18 months earlier). There will be a higher level of support for defence, pharmaceutical products, farm produce and eco- friendly products. Processed agricultural produce will be bettqr btanded and there will be quality control checks on it. • Entrepreneurial training progranunes will be co-ordinated to boost trade. This will be in keeping with the vision of Skills India.

8-53 MM Special Guide The interest subvention scheme at 3% will be given to sectors that the Government has not yet identified. Rs.1,625 crore has been allocated in the Budget for this purpose. The Government has reduced the number of mandatory documents required for import and exports to 3. It has also simplified and clarified forms that need to be submitted making provisions for electronic uploading of forms. • State Government have been asked to prepare their own trade policy under the framework of the FTP. The FTP will be reviewed once in 2.5 years. It used to be annually earlier. Comments: The Government has sought to simplify the number of schemes and forms to make trade more hassle-free. Doing away with multiple form submission and tedious procedures is a positive step. In addition, encouraging online application filing and online consultations between ministries will expedite decision-making and hasten time taken for processing. Since exports have been sagging in recent months, these measures are expected to boost India's trade paving the way for India to become a more powerful presence in the global trade scene. 18. India's New GDP Methodology

In early February 2015, India changed the way it calculates its Gross Domestic Product (GDP). India has shifted to the System of National Accounts (SNA) 2008 — the latest version of internationally-accepted statistical standard for national accounts that helps in compiling measures of economic activity. The new methodology adopted made India the world's fastest- growing economy. The Central Statistics Organisation (CSO) has stated that the new methodology takes into account more activities and companies and attempts to give a more accurate picture of the health of the economy. Revised Rates: The CSO revised India's GDP rate in 2012-13 from 4.5% to 5.1%. In 2013-14, it was revised from 4.7% to 6.9% and in 2014-15 it was estimated that the economy will grow by 7.4% as compared to 6.9% earlier. Market leader China grew by 7.4% in calendar year 2014. Since the difference between the old rates and the revised rates is stark and has catapulted India into the world's leader in terms of growth in GDP, there is much scepticism and criticism regarding the revised numbers. The disbelief is because other fundamentals such as industrial and agricultural output, trade data, tax collection and bank credit have not shown corresponding growth. Between April 2014 and February 2015, industrial output grew by only 2.6%. Comparison of Data from Old and New Series: ♦ There has been a change in the growth rate of the manufacturing sector from a contraction of 0.7% as per the old data to a growth of 5.3% according to the new data in 2013-14. In 2014-15, it is expected to grow by 6.8%. ♦ There has been a change in the weightage allocated to various sectors in 2013-14: manufacturing has been revised from 15% to 18% real estate, hotels, financial and business services has been revised down wards from 60% to 51% agriculture has been revised from 14% to 17%

Change in Quarterly Growth Rates: According to the new data, in the July-September 2014 quarter, India grew by 8.2%. In the October-December 2014 quarter, it is estimated to have grown by 7.5%; in comparison, China grew by only 7.3%. So, in the third quarter of 2014-15, as per this new data, India's growth was the highest in the world. Change in Methodology: The fundamental change in the methodology is that now the country calculates the value of consumption rather than the value of production. The main changes are: O The base year has been changed from 2004-05 (adopted in January 2010) to 2011-12. O It also replaces the factor cost method with the market price system which is the globally-accepted system — this takes into account both the gross value addition in goods and services and indirect taxes and

8-54 Concept Briefs

excludes subsidies on products and services Further, the new methodology incorporates: • newer surveys on spending by households and informal businesses - corporate manufacturing data that is enterprise-based data rather than establishment-based data — this has led to a more universal coverage of enterprises than before as opposed to calculation of production on a plant-by-plant basis - more data on value-added for part of the Government sector and the corporate sector — these 2 sectors were not properly covered in the old series corporate results that are sourced from the Ministry of Corporate Affairs' e-governance initiative, MCA21 rather than completely from the Index of Industrial Production (IIP) — the MCA21 database covers 5.2 lakh companies as well as data from the annual survey of industries. In the old series, only 2,500 companies were considered • output of retail and wholesale trade taken from Value Added Tax (VAT) or sales tax rather than from growth of the Trade Index - a more effective labour input method — the output of informal sectors that employ paid labour, owners and unpaid workers is calculated by assigning different weights to workers based on their productivity data from the fmancial sector based on RBI's surveys that now includes the small, informal and non- bank fmancial sector like moneylenders' contribution to fmance • data on local bodies that are now collected on a complete account basis rather than on a sample basis Defence of Methodology: Chief Statistician TCAAnant has stated that the actual meaning of the higher figures will be clearer once the back-series' computation i.e. data for previous years based on the new methodology is made available. This is expected later in the year. The back series data will partially be based on assumptions as the database that the new National Accounts series requires is not available for past years. Since older data is still not calculated with the new methodology, it is not practical to compare the data under the new series with that under the old series. The statistics department has claimed that the new series reflects overall economic activity more accurately and is in conformance with internationally-accepted practices. This enables a better comparison with GDP numbers of other countries. Review Committee: The National Statistical Commission (NSC) has set up a commission to review the methodology of the new series. NSC's Chairman Pronab Sen has stated that the review will help understand which aspect of the method of calculation has led to the spike in GDP. Reaction: There has been widespread doubt expressed by various banks, rating agencies, corporates and politi- cians regarding the steep increase in the growth figures. Manufacturing and financial sector data as per the new series were much better than the industrial activity figures and bank credit data. US bank Morgan Stanley has stated that more broad-based indicators of growth must be reviewed instead of solely relying on the new GDP numbers to assess India's standing in the world and its economic progress. RBI and the Asian Development Bank (ADB) have also demanded the back-series GDP data. RBI has taken policy decisions based on GDP data from the old series and hence its rate reduction would also be questioned if growth was as strong as is indicated by these new figures. Earlier, industrialists were clamouring for rate reduction based on low growth and declining inflation numbers. Recent Developments: The International Monetary Fund (IMF) has sent a team of experts to understand the substantial change in the growth data. While IMF has termed the change 'puzzling, it has also projected India's growth rate at 7.5% in 2015 and 2016 based on this new data. The CSO has also held conferences to explain the changes to economists and analysts. Chief Statistician TCAAnant has stated that India has still not been able to completely implement the United Nations' guidebook to calculating GDP for lack of data. The new methodology is a step towards worldwide standardisation of calculation of GDP.

8-55 MM Special Guide 19. Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks (Mar'15) The scheme Eligibility criteria Indian banks (public sector and the private sector) authorised to deal in foreign exchange will be eligible to set up IBUs. Only one IBU can be set up by a bank in each IFSC. (Only one IBU has been set up so far in Gujarat's Gift City.

Licensing Prior permission of the Reserve Bank for opening an IBU has to be obtained under Section 23 (1)(a) of the Banking Regulation Act, 1949 (BR Act). For most regulatory purposes, an IBU will be treated on par with a foreign branch of an Indian bank.

Capital The parent bank has to provide a minimum capital of US$ 20 million or equivalent in any foreign currency to its IBU. The IBU should maintain the minimum prescribed regulatory capital on an on-going basis.

Reserve requirements The liabilities of the IBU are exempt from both CRR and SLR requirements.

Resources and deployment The sources for raising funds, including borrowing in foreign currency, will be persons not resident in India and overseas branches of Indian banks; the deployment of the funds can be with both persons resident in India as well as persons not resident in India. However, the deployment of funds with persons resident in India shall be subject to the provisions of FEMA, 1999.

Permissible activities of IBUs The IBUs will be permitted to engage in the form of business mentioned in Section 6(1) of the BRAct as given below, subject to the conditions, if any, of the licence issued to them. i. IBUs can undertake transactions with resident (for deployment of funds) and non-resident (for both raising of resources and deployment of funds) entities other than individual / retail customers / HNIs. ii. All transactions of IBUs shall be in currency other than INR. iii. IBUs can deal with the Wholly Owned Subsidiaries /Joint Ventures of Indian companies registered abroad. iv. IBUs are allowed to have liabilities including borrowing in foreign currency only with original maturity period greater than one year. They can however raise short term liabilities from banks subject to limits as may be prescribed by the Reserve Bank. v. ECUs are not allowed to open any current or savings accounts. They cannot issue bearer instruments or cheques. All payment transactions must be undertaken via bank transfers. vi. IBUs are permitted to undertake factoring / forfaiting of export receivables. vii. IBUs are permitted to undertake transactions in derivatives including structured products that the banks operating in India have been allowed to undertake by RBI, with the prior approval of their Board of Directors. IBUs dealing with such products should have adequate knowledge, understanding, and risk management capability for handling such products. viii. a) IBUs are allowed to open foreign currency escrow account of Indian resident entities to temporally hold subscriptions to the GDR/ADR issues until issuance of the Receipts. After GDRs/ADRs are issued, the funds should immediately be transferred to the client's account outside the IBU and cannot be retained by the bank in any form including in long term deposits.

8-56 ,:;?,rW • Concept Briefs

b) IBUs are allowed to act as underwriter/arranger of India Rupee (INR) denominated overseas bonds issued by Indian entities in overseas market in terms of extant RBI instructions contained in FED CO AP Dir Circular No 17 dated September 29, 2015. However, in cases where part of the issuance underwritten by an IBU devolves on it, efforts must be made to sell the underwritten holdings and after 6 months of the issue date these holdings must not exceed 5% of the issue size. Prudential regulations All prudential norms applicable to overseas branches of Indian banks would apply to IBUs. Specifically, these units would be required to follow the 90 days' payment delinquency norm for income recognition, asset classification and provisioning as applicable to Indian banks. The bank's board may set out appropriate credit risk management policy and exposure limits for their IBUs consistent with the regulatory prescriptions of the RBI. The IBUs would be required to adopt liquidity and interest rate risk management policies prescribed by the Reserve Bank in respect of overseas branches of Indian banks and function within the overall risk management and ALM framework of the bank subject to monitoring by the board at prescribed intervals. The bank's board would be required to set comprehensive overnight limits for each currency for these Units, which would be separate from the open position limit of the parent bank.

Anti-Money Laundering measures The IBUs will be required to scrupulously follow "Know Your Customer (KYC)", Combating of Financing of Terrorism (CFT) and other anti-money laundering instructions issued by the Reserve Bank from time to time. IBUs are prohibited from undertaking cash transactions.

Regulation and Supervision The IBUs will be regulated and supervised by the Reserve Bank of India.

Reporting requirements The IBUs will be required to furnish information relating to their operations as prescribed by the Reserve Bank from time to time. These may take the form of offsite reporting, audited financial statements for IBUs, etc.

Ring fencing the activities of IFSC Banking Units The IBUs would operate and maintain balance sheet only in foreign currency and will not be allowed to deal in Indian Rupees except for having a Special Rupee account out of convertible fund to defray their administrative and statutory expenses. Such operations/transactions of these units in INR would be through the Authorised Dealers (distinct from IBU) which would be subject to the extant Foreign Exchange regulations. IBUs are not allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and domestic payment systems. The IBUs will be required to maintain separate nostro accounts with correspondent banks which would be distinct from nostro accounts maintained by other branches of the same bank

Priority sector lending The loans and advances of IBUs would not be reckoned as part of the Net Bank Credit of the parent bank computing priority sector lending obligations.

Deposit insurance Deposits of IBUs will not be covered by deposit insurance.

Lender of Last Resort (LOLR) No liquidity support or LOLR support will be available to IBUs from the Reserve Bank of India.

8-57 MM Special Guide 20. GUIDELINES FOR RELIEF MEASURES BY BANKS IN AREAS AFFECTED BYNATURAL CALAMITIES

In terms of National Disaster Management Framework, there are two funds constituted viz. National Disas- ter Response Fund and State Disaster Response

Fund for providing relief in the affected areas. This framework currently recognizes 12 types of natural calamities viz. cyclone, drought, earthquake, fire, flood, tsunami, hailstorm, landslide, avalanche, cloud burst, pest attack and cold wave/frost (added in August 2012). Of these 12 calamities, for 4 calamities i.e. drought, hailstorms, pest attack and cold wave/frost, the Ministry of Agriculture is the nodal ministry while for remaining 8 calamities Ministry of Home Affairs is required to make appropriate arrangements. A slew of measures for relief are undertaken by the Sovereign (Central/State Government) to provide relief to the affected persons which include, inter alia, provision for the input subsidies and financial assistance to marginal, small and other farmers.

These guidelines cover four aspects viz. Institutional Framework, Restructuring of Existing Loans, Provid- ing Fresh Loans and Other Ancillary Relief Measures.

INSTITUTIONAL FRAMEWORK Establishing Policy/Procedures for dealing with Natural Calamities: Since the area and time of occurrence and intensity of natural calamities cannot be anticipated, it is imperative that the banks have a blueprint of action in such eventualities duly approved by the Board of Directors so that the required relief and assistance is provided with utmost speed and without any loss of time. All the branches of commercial banks and their Regional and Zonal Offices will have a set of standing instructions spelling out the action that the branches will have to initiate in the calamity affected areas immediately after the requisite declaration by the district/ state authorities. It is necessary that these instructions should also be available with the State Government authorities and all the District Collectors so that all concerned are clear about the action that would be taken by the banks' branches in the affected areas.

Discretionary Powers to Divisional / Zonal Manager of banks:

Divisional/ Zonal Managers of commercial banks should be vested with certain discretionary powers so that they do not have to seek fresh approvals from their Central Offices to the line of action agreed to by the District/ State Level Bankers' Committees.

Meetings of State Level Bankers' Committee/District Consultative Committee: In the event of the calamity covering entire State/ larger part of a State, the convener of the State Level Bankers' Committee will convene a meeting immediately after the occurrence of natural calamity to evolve a coordinated action plan for implementation of the relief programme in collaboration with the State Government authorities. However, in case the calamity has affected only a small part of the State/few districts, the conveners of the District Consultative Committees of the affected districts should convene a meeting immediately. In these special SLBC/DCC meetings, the position in the affected areas should be assessed to ensure speedy formulation and implementation of suitable relief measures by banks.

Declaration of Natural Calamity: It is recognised that declaration of natural calamities is in the domain of the Sovereign (Central/State Gov- ernments). State Govts issue declarations / certificates which are callOed by different names such as Annewari,

8-58 Concept Briefs

Paisewari, Girdawari, etc. in different States. Nevertheless, the common thread to extend relief measures is that the crop loss assessed should be 50% or more. For assessing this loss, while some States are conducting crop cutting experiments to determine the loss in crop yield, some others are relying on the eye estimates/visual impressions.

Distinction between Drought and Other Calamities So far as Drought is concerned, a couple of States are following the advanced methodology based on the data of rainfall, crop area sown, vegetation index, moisture adequacy index along with other parameters as suggested in the 'Manual for Drought Management' released by the Ministry ofAgriculture. In the circumstances, it is considered appropriate to make distinction between (i) Drought (which is generally a slowly evolving calamity and can aggravate or reverse as per the rainfall during the period; and (ii) Other Calamities .• • . which are physiologically different from Drought and are of a sudden nature;

Drought: As the 'Manual for Drought Management' commends certain guidelines for the State Governments (while making it clear that these guidelines are not mandatory) on the adoption of scientific technology and various parameters/indexes, as mentioned above, to assess the situation, the State Governments may either: i) adopt the procedures indicated in the Manual for Drought Management and based on the various parameters/ indexes indicated therein, decide on the declaration of drought. Such declarations should elaborately indicate the data/procedures which have been relied upon/followed by the State government and the extent of assessed crop loss.

ii) conduct Crop Cutting Experiments as prescribed in the National Agriculture Insurance Programme, which is one of the pre-conditions for declaring the crops eligible for insurance, and declare the 'Anneware (by whatever name called) indicating the crop-wise percentage loss in the certificates issued. In any case, • State Governments need to submit detailed taluka/block/district wise crop loss data to Central Government if they seek any funds for relief work.

Other Calamities: The loss should be assessed through crop cutting experiments clearly indicating that the crop loss in the particular area/taluka/mandal/block (as the case may be) has been 50% or more to trigger reschedulement of loans from banks. In case of extreme situations such as wide-spread floods, etc. when it is largely clear that most of the standing crops have been damaged and/or land and other assets have suffered a wide-spread damage, the matter be deliberated by State Government/District Authorities in the especially convened SLBC/DCC meetings where the concerned Government functionary/District Collector may explain the reasons for not estimating `Annewari' (percentage of crop loss — by whatever name called) through crop cutting experiments and that the decision to provide relief for the affected populace needs to be taken based on the eye • estimate/visual impressions.

In both the cases, however, DCCs/SLBC have to satisfy themselves fully that the crop loss has been 50% or more before acting on these pronouncements.

Restructuring/Rescheduling of Existing Loans: As the repaying capacity of the people affected by natural calamities gets severely impaired due to the damage to the economic pursuits and loss of economic assets, relief in repayment of loans becomes necessary in areas affected by natural calamity and hence, restructuring of the existing loans will be required.

griculture Loans: hort-term Production Credit (Crop Loans):

8-59 MM Special Guide • • • All short-term loans, except those which are overdue at the time of occurrence of natural calamity, should be eligible for restructuring. The principal amount of the short-term loan as well as interest due for repayment in the year of occurrence of natural calamity may be converted into term loan.

The repayment period of restructured loans may vary depending on the severity of calamity and its recurrence, the extent of loss of economic assets and distress caused. Generally, the restructured period for repayment may be 3 to 5 years. However, where the damage arising out of the calamity is very severe, - banks may, at their discretion, exte,nd the,Period of repayment ranging up to 7 years and in extreme cases of hardship, the repayment period ma.); be prolonged up to a maximum period of 10 years in consultation with the Task Force/ SLBC. • . .

In all cases of restructuring, moratoriumPeriod of at least one year should be considered. Further, the banks should not insist for additional collateral security for such restructured loans.

Agriculture Loans - Long term (Investment) Credit: The existing term loan installments will have to be rescheduled keeping in view the repaying capacity of the borrowers and the nature of natural calamity viz, a) Natural Calamities where only crop for that year is damaged and productive assets are not damaged. b) Natural Calamities where the productive assets are partially or totally damaged and borrowers are in need of a new loan.

In regard to natural calamity under category (a) above, the banks may reschdeule the payment of installment during the year of natural calamity and extend the loan period by one year. Under this arrangement the installments defaulted wilfully in earlier years will not be eligible for rescheduling. The banks may also have to postpone payment of interest by borrowers.

In regard to category (b) i.e. where the borrower's assets are partially/totally damaged, the rescheduling by way of extension of loan period may be determined on the basis of overall repaying capacity of the borrower vis-a-visi his total liability (old term loan, restructured crop loan, if any and the fresh crop/term loan being given) less the subsidies received from the Government agencies, compensation available under the insurance schemes, etc. While the total repayment period for the restructured/fresh term loan will differ on case-to-case basis, generally it should not exceed a period of 10 years.

Other Loans: SLBC/DCC can take a decision, depending on the severity of the calamity, as to whether a general reschedulement of all other loans (i.e. besides the agriculture loans as indicated above) such as loans granted for allied activities and loans given to rural artisans, traders, micro/small industrial units or in case of extreme situations, medium enterprises is required.

The primary consideration before the banks in extending credit to any unit for its rehabilitation should be thl viability of the venture after the rehabilitation programme is implemented.

Asset Classification: The asset classification status of these loans will be as under: a) The restructured portion of the short term as well as long-term loans may be treated as current dues and need not be classified as NPA. The asset classification of these fresh term loans would thereafter be 11 governed by the revised terms and conditions. Nevertheless, banks are required to make higher provi- 1

8-60 Concept Briefs

sions for such restructured standard advances as prescribed by Department of Banking Regulation from time to time. b) The asset classification of the remaining amount due, which have not been restructured, will continue to be governed by the original terms and conditions. Consequently, the dues from the borrower may be classified by the lending bank under different asset classification categories viz. standard, sub- standard, doubtful and loss. c) Additional finance, if any, may be treated as "standard asset" and its future asset classification will be governed by the terms and conditions of its sanction. The benefit of asset classification of the restructured accounts as on the date of natural calamity will be available only if the restructuring is completed within a period of three months from the date of natural calamity. In the event of extreme calamity, when the SLBC/DCC is of the view that this period will not be sufficient for the banking sector to reschedule all the loans, they should immediately approach RBI (concerned Regional Office) giving the reasons for seeking extension. These requests will be considered on the basis of merit of each case.

The accounts that are restructured for the second time or more on account of natural calamities would retain the same asset classification category on restructuring. Accordingly, for once restructured standard asset, the subsequent restructuring necessitated on account of natural calamity would not be treated as second restructuring, i.e., the standard asset classification will be allowed to be maintained. All other restructuring norms, however, will apply.

Utilisation of Insurance Proceeds: While the above measures relating to rescheduling of loans are intended to provide relief to the farmers, the insurance proceeds should, ideally, compensate their losses. In terms of orders issued by Ministry of Agricul- ture and Cooperation, National Crop Insurance Programme (NCIP) has been implemented across the Country from Rabi 2013. The loanee farmers are compulsorily covered under the NCIP-component Scheme as notified by the State Governments. While restructuring the loans in the areas affected by natural calamities, banks should also take into account the insurance proceeds, if any, receivable from the Insurance Company. They should adjust these proceeds to 'restructured accounts'. However, it should be done in cases where they have granted fresh loans to the borrowers.

Sanctioning of Fresh Loans: Once the decisions on the rescheduling of loans is taken by SLBC/DCC, pending such conversion of short-term loans, banks may grant fresh crop loans to the affected farmers which will be based on the scale of finance for the particular crop and the cultivation area, as per the extant guidelines.

The bank assistance in relation to agriculture and allied activities (poultry, fishery, animal husbandry, etc.) would also be needed for long term loans for a variety of purposes such as repair of existing economic assets or acquisition of new assets. Similarly, rural artisans, self-employed persons, micro and small industrial units, etc. in the areas affected by natural calamities may require the credit to sustain their livelihood. Banks may, of their own, assess and decide on the quantum of fresh loans to be granted to the affected borrowers taking into consideration, amongst others, their credit requirements and the due procedure followed for sanctioning of loans. Banks may also grant consumption loans up to Rs. 10,000/- to existing borrowers without any collateral. The limit may, however, be enhanced beyond Rs.10,000/- at the discretion of the bank.

and Conditions: nee, Security and Margin:

8-61 MM Special Guide Credit should not be denied for want of personal guarantees. Where the bank's existing security has been eroded because of damage or destruction by floods, assistance will not be denied merely for want of additional fresh • security. The fresh loan may be granted even if the value of security (existing as well as the asset to be acquired from the new loan) is less than the loan amount. For fresh loans, a sympathetic view will have to be taken.

• Where the crop loan (which has been converted into term loan) was earlier given against personal security/ hypothecation of crop and the borrower is not able to offer charge/mortgage of land as security for the converted loan, he should not be denied conversion facility merely on the ground of his inability to furnish land as security. If the borrower has already taken a term loan against mortgage/charge on land, the bank should be content with a second charge for the converted term loan. Banks should not insist on third party guarantees for providing conversion facilities.

Where land is taken as security, in the absence of original title records, a certificate issued by the Revenue Department officials may be accepted for financing farmers who have lost proof of their titles i.e. in the form of deeds, as also the registration certificates issued to registered share-croppers.

Margin requirements may be waived or the grants/ subsidy given by the concerned State Government may be considered as margin.

Rate of Interest: The rates of interest will be in accordance with the directives of the Reserve Bank. In respect of current dues in default, no penal interest will be charged. The banks should also suitably defer the compounding of interest charges. Banks may not levy any penal interest and consider waiving penal interest, if any, already charged in regard to the loans converted/rescheduled. Depending on the nature and severity of natural calamity, the SLBC/ DCC shall take a view on the interest rate concession that could be extended to borrowers so that there is uniformity in approach among banks in providing relief.

Other Ancillary Relief Measures Besides rescheduling of existing loans and providing fresh loans to the affected persons, banks may also follow the following guidelines.

Know Your Customer Norms — Relaxations: It needs to be recognized that many persons displaced or adversely affected by a major calamity may not have access to their normal identification and personal records. In such cases, where the affected persons are not able to provide standard identification documents, as permitted under the regulation and as a consequence, it is not possible for bank branches to follow the KYC guidelines as prescribed, they may resort to non-documentary verification methods. They can open a small account based on the photograph and signature or thumb impression in front of the bank official. The above instructions will be applicable to cases where the balance in the account does not exceed Rs. 50,000/- or the amount of relief granted (if higher) and the total credit in the account does not exceed Rs. 1,00,000/- or the amount of relief granted, (if higher) in a year.

Providing access to Bank Accounts: In areas where the bank branches are affected by natural calamity and are unable to function normally, banks may operate from temporary premises, under advice to RBI. For continuing the temporary premises beyond 30 days, specific approval may be obtained from the concerned regional office(RO) of RBI. Banks may also ensure rendering of banking services to the affected areas by setting up satellite offices, extension counters or mobile banking facilities under intimation to RBI.

8-62 Concept Briefs

To satisfy customer's immediate cash requirements, restoration of the functioning of ATMs at the earliest or .. . .'. making alternate arrangements for providing such facilities may be given due importance. Banks may consider putting in place arrangements for allowing their customers to access other ATM networks, Mobile ATMs, etc.

Other measures that banks may take, at their discretion, to alleviate the condition of affected persons could be waiving ATM fees, increasing ATM withdrawal limits; waiving overdraft fees; waiving early withdrawal penalties on time deposits; waiving late fee for credit card/other loan installment payments and giving option to credit card holders to convert their outstanding balance to EMIs repayable in 1 or 2 years. Besides, all charges debited to the farm loan account other than the normal interest may be waived considering the hardship caused to farmers.

Applicability of the guidelines in the case of riots and disturbances: Whenever RBI advises the banks to extend rehabilitation assistance to the riot/disturbance affected persons, the aforesaid guidelines may broadly be followed by banks for the purpose. It should, however, be ensured that only genuine persons, duly identified by the State Administration as having been affected by the riots/ disturbances, are provided assistance as per the guidelines.

With a view to ensuring quick relief to the affected persons, it has been decided that the District Collector, on occurrence of the riots/ disturbances, may ask the Lead Bank Officer to convene a meeting of the DCC, if necessary and submit a report to the DCC on the extent of damage caused to life and property in the area affected by riots/disturbances. If the DCC is satisfied that there has been extensive loss to life and property on account of the riots/ disturbances, the relief as per the above guidelines may be extended to the people affected by the riots/disturbances. In certain cases, where there are no District Consultative Com- mittees, the District Collector may request the convener of the State Level Bankers' Committee of the State to convene a meeting of the bankers to consider extension of relief to the affected persons. The report submitted by the Collector and the decision thereon of DCC/ SLBC may be recorded and should form a part of the minutes of the meeting. A copy of the proceedings of the meeting may be forwarded to the concerned Regional Office of the Reserve Bank of India.

21. PRIORITY SECTOR ADVANCES (Changes—April 2015)

Priority Sector Lending — Changes Based on the recommendations of the Internal Working Group, headed by Lily Vaders, Chief General Manager, RBI on priority sector lending, RBI has since issued revised guidelines. A Model Test covering the entire revised guidelines is given below. 1. Which committee's recommendations led to changes in priority sector lending w.e.f 23.04.2015? A The recommendations of an Internal working group, headed by lily vaders, chief general manager, RBI led to the changes in priority sector lending. 2. What are the different categories of advances under priority sector finance: A i) Agriculture ii) Micro, Small and Medium Enterprises iii) Export Credit iv) Education v) Housing vi) Social Infrastructure • vii) Renewable Energy

"4:„°, 8-63 • • •

MM Special Guide viii) Others 3. What is the priority sector target fro SCBs and foreign banks with 20 branches and above? A 40 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii)] or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Foreign banks with 20 branches and above have to achieve the Total Priority Sector Target within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 as per the action plans submitted by an Internal working group set up by RBI and approved by RBI. 4. What is the priority sector target for foreign banks with less than 20 branches? A 40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher; to be achieved in a phased manner by 2020. 5. Is there any distinction between direct and indirect advances under Agriculture segment? A No. It has been abolished now. 6. What is the priority sector target for agriculture? A 18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 per cent by March 2016 and 8 per cent by March 2017. 7. What is the priority sector target for agriculture for foreign banks? A Foreign banks with 20 branches and above have to achieve the Agriculture Target within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 as per the action plans submitted by the Internal working group and approved by RBI. The sub-target for Small and Marginal farmers would be made applicable post 2018 after a review in 2017. 8. Is there a sub-target for Micro Enterprises? A Yes. 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher to be achieved in a phased manner i.e. 7 per cent by March 2016 and 7.5 per cent by March 2017. 9. What is the target for Weaker Sections? A 10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. 10. What is the target for foreign banks as regards Weaker Sections? A Foreign banks with 20 branches and above have to achieve the Weaker Sections Target within a maximum period of five years starting from April I, 2013 and ending on March 31, 2018 as per the act ion plans submitted by Internal working group and approved by RBI. 11. What is the time-period within which foreign banks with less than 20 branches has to achieve the priority sector target of 40%? A: Financial Year The Total Priority Sector as percentage ofANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher 2015-16 32 2016-17 34 2017-18 36 2018-19 38 2019-20 40

The additional priority sector lending target of 2 percent of ANBC each year from 2016-17 to , 2019-20 has to be achieved by lending to sectors other than exports. The sub targets for these banks, if to be made applicable post 2020, would be decided in due course. 12. What is ANBC and how it is computed?

8-64 Concept Briefs

A: ANBC means Adjusted Net Bank Credit. Net Bank Credit means Bank Credit in India minus bills Rediscounted with RBI and other approved Financial Institutions. Adjusted Net Bank Credit is worked out as per table below:

Bank Credit in India [As prescribed in item No.VI I of Form 'A' under Section 42 (2) of the RBI Act, 1934]. Bills Rediscounted with RBI and other approved II Financial Institutions Net Bank Credit (NBC)" III (I-II)

Bonds/ debentures in Non-SLR categories under IV HTM category+ other investments eligible to be treated as priority sector +Outstanding Deposits under RIDF and other eligible funds with NABARD, NHB and SIDBI on account of priority sector shortfall + outstanding PSLCs Eligible amount for exemptions on issuance of V long-term bonds for infrastructure and affordable housing as per circular DBOD.BP.BC.No.25/08.12.014/ 2014-15 dated July 15, 2014. Eligible advances extended in India against the VI incremental FCNR (B)/ NRE deposits, qualifying for exemption from CRR/ SLR requirements. ANBC III+IV-V, VI

• For the purpose of priority sector computation only. Banks should not deduct / net any amount like provisions, accrued interest, etc. from NBC. It has been observed that some banks are subtracting prudential write off at Corporate/Head Office level while reporting Bank Credit as above. In such cases it must be ensured that bank credit to priority sector and all other sub-sectors so written off should also be subtracted category wise from priority sector and sub-target achievement. All types of loans, investments or any other items which are treated as eligible for classification under priority sector target/sub-target achievement should also form part ofAdjusted Net Bank Credit. (RBI) 13. What are the classifications of lending to agriculture? A Agriculture lending now includes: (a) Farm Credit (which will include short-term crop loans and medium/long-term credit to farmers) (b) Agriculture Infrastructure and (c) Ancillary Activities. 14. What are the various types of farm credit to individual farmers, SHGs and JLGs that are classified as farm credit? A: Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e.

8-65 MM Special Guide groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in Agriculture and AlliedActivities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. This will include: (i) Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities. (ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. (iv) Loans to farmers up to Rs.50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months. (v) Loans to distressed farmers indebted to non-institutional lenders. (vi) Loans to farmers under the Kisan Credit Card Scheme. (vii) Loans to small and marginal farmers for purchase of land for agricultural purposes. 15. What are the various types of farm credit to Corporate farmers, FPCs of individual farmers, partnership firms and cooperatives that are classified as farm credit? A: All agriculture activities and Allied activities viz dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of Rs.2 cr per borrower. This will include: (i) Crop loans to farmers which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities. (ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.) (iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. (iv) Loans up to Rs.50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months. 16. What are the loans that are classified as agri infrastructure loans? A: i) Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of their location. ii) Soil conservation and watershed development iii) Plant tissue culture and agri-biotechnology, seed production, production of bio- pesticides, bio-fer- tilizer, and vermi composting. 17. What is the criterion for classifying loan as an agri infrastructure loan? A: Aggregate sanctioned limit of Rs.100 cr per borrower from the banking system will apply. 18. What are the loans for various ancillary activities that are classified as priority sector advance? A: (i) Loans up to Rs.5 crore to co-operative societies of farmers for disposing of the produce of members. (ii) Loans for setting up of Agriclinics and Agribusiness Centres. (iii) Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs.100 crore per borrower from the banking system. (iv) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers' Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture. (v) Loans sanctioned by banks to MFIs for on-lending to agriculture sector subject conditions. 1 (vi) Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sec-

8-66 Concept Briefs `•: ' q tor shortfall. 19. Who are included in calculating the sub-target under agriculture lending? A: 0 Farmers with landholding of up to 1 hectare are considered as Marginal Farmers. 0 Farmers with a landholding of more than 1 hectare and upto 2 hectares are considered as Small Farmers. 0 Landless agricultural labourers, tenant farmers, oral lessees and share-croppers. 0 Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual Small and Marginal farmers directly engaged in Agriculture and Allied Activities, provided banks maintain disaggregated data of such loans. 0 Loans to farmers' producer companies of individual farmers, and co-operatives of farmers directly engaged in Agriculture and Allied Activities, where the membership of Small and Marginal Farmers is not less than 75 per cent by number and whose land-holding share is also not less than 75 per cent of the total land-holding. 20. What is the investment criteria in plant & machinery for manufacturing sector enterprises? A: Micro Enterprises Does not exceed twenty five lakh rupees Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees Medium Enterprises More than five crore rupees but does not exceed ten crore rupees 21. What is the investment criteria in equipment for service sector? A: Micro Enterprises Does not exceed ten lakh rupees Small Enterprises More than ten lakh rupees but does not exceed two crore rupees Medium Enterprises More than two crore rupees but does not exceed Five crore rupees 22. What is the criteria for classification of loans to Micro and Small and Medium (Service) Enterprises as priority sector? A: Bank loans up to Rs.5 cr to Micro and small enterprises and Rs.10 cr to Medium Enterprises engaged in services as defined under MSMED Act, 2006. 23. Are advances to KVI sector units classified as eligible for the sub-target under Micro enterprises? A Yes. 24. What are the other types of advances to MSMEs that are eligible for classification as priority sector advances? A. (i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries. (ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries. (iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector subject to conditions. (iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver's Card etc. in existence and catering to the non-farm entrepreneurial credit needs of individuals). (v) Factoring transactions on 'with recourse' basis (Aug'16) (vi) Outstanding deposits with SIDBI on account of priority sector shortfall. 25. A small Manufacturing unit's investment in plant and machinery crosses the limit of Rs.5.00 cr as on 01.04.2015. Will the advance to the unit continue to enjoy the priority sector status? A Yes. Up to 3 years from the date it crosses the limit.

8-67 t>5 • MM Special Guide 26. Is export credit a priority sector advance for a domestic bank? A: Yes, subject to the following. Incremental export credit over corresponding date of the preceding year, up to 2 percent ofANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit of Rs.25 crore per borrower to units having tumover of up to Rs.100 crore. 27. What is the present stipulation for foreign banks in respect of export credit? Foreign banks with 20 branches and above: A: Incremental export credit over corresponding date of the preceding year, up to 2 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, effective from April 1, 2017 (As per their approved plans, foreign banks with 20 branches and above are allowed to count certain percentage of export credit limit as priority sector till March 2016). Foreign banks with less than 20 branches: Export credit will be allowed up to 32 percent ofANBC or Credit EquivalentAmount of Off-Balance Sheet Exposure, whichever is higher. 28. Are educational loans classified as priority sector loans? Loans to individuals for educational purposes including vocational courses up to Rs.10 lakh irrespective of the sanctioned amount will be considered as eligible for priority sector. 29. What are the present stipulations for treating Home Loans under priority sector? • (i) Loans to individuals up to Rs.28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs.20 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs.35 lakh and Rs.25 lakh respectively. The housing loans to banks' own employees will be excluded. 30. Are advances for social infrastructure classified as priority sector? A: Bank loans up to a limit of Rs.5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres. 31. Are advances for renewal energy production classified as PS? A: Bank loans up to a limit of Rs.15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for nonconventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual house- . holds, the loan limit will be Rs.10 lakh per borrower. 32. What are the criteria for classifying loans to SHG / JLG as PS advance? A: a) Loans up to Rs.50,000/- per borrower provided directly by banks to individuals and their SHG/JLG. b) The individual borrower's household annual income in rural areas does not exceed Rs.100,000/- a n d in non-rural areas Rs.1,60,000/-. 33. Up to what limit loans to distressed formers is classified as PS advance? A: Up to Rs.1 lac per borrower to prepay their debt to non-institutional lenders. 34. What are the criteria for classifying loans under PMJDY as PS advance? A: a) Overdrafts extended by banks up to Rs.5,000/- under Pradhan Mantri Jan-Dhan Yojana (PMJDY) accounts. b) The borrowers' household annual income does not exceed Rs.100, 000/- for rural areas and Rs.1,60,000/- for non-rural areas. Concept Briefs

22. FINIANCIALLITERACY- FAQ

. ' 1. What is financial literacy? Ans: "A combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound fmancial decisions and ultimately achieve individual financial wellbeing. 2. What is the objective of promoting financial literacy? Ans: The objective of promoting financial literacy is to disseminate information regarding RBI and banking concepts to various target groups like school and college children ,women, rural & urban poor, senior citizens, defence personnel etc., 3. Why financial literacy is considered necessary? Ans: Financial inclusion, essentially, involves two elements, one of access and the other of awareness of the banking services and products. Financial .inclusion emphasises both on access and awareness with access assuming greater priority. 4. What is financial stability? Ans: Financial stability refers to the avoidance of financial crises as also to the ability of the financial system • to limit, contain, and deal with the emergence of imbalances before they pose a threat to the economic processes. 5. How are financial stability and financial literacy inter-related? Ans: The sub-prime. crisis of 2008 (USA) is.aglaring example of how lack of financial literacy can impact financial stability. The genesis of the crisis was in the sale of inappropriate mortgage products to sub- prime borrowers, who did not understand the product characteristics. 6. How does financial literacy help? Ans :Financial literacy involves imparting knowledge about the risk and return of fmancial products to the users and providers of these products. It is this knowledge that helps in containing risks and maintaining stability in the financial system. 7. What is the relationship between financial literacy and customer service? Ans: Financial literacy is an essential pre-requisite for ensuring customer protection. It addresses the problem of information asymmetry between the financial intermediary and the consumer arising out of the low levels of transparency and the consequent inability of customers in identifying and understanding the fine-print from a large volume of information. 8. Apart from disseminating of knowledge what else financial literacy tries to achieve? Ans: Besides imparting knowledge, information about the existence of an effective grievance redressal mechanism is essential for instilling confidence among the unbanked population. 9. How would the above help the customers? Ans: The measure enables population groups that would have newly entered into the formal financial system through the fmancial inclusion initiatives to overcome apprehensions, if any, regarding the complex and unfriendly financial market place which is unfamiliar to them. Awareness about the consumer protection mechanism is critical as any unsavoury experience could result in them being permanently lost to the financial system. 10. Who needs to be financially literate? Ans: Every one associated with the financial system , including all users of fmancial services, be it the financially excluded resource-poor, the lower and middle income groups or the high net worth individuals; the providers of services; and even the policy makers and the regulators needs to be financially literate. 11. In what respect the resource-poor people need to become financially literate? Ans: For the resource-poor population, which operates at the margin, household cash management can be daunt- ing under difficult circumstances, with few resources to fall back upon. Financial literacy efforts, in case

8-69 MM Special Guide

of such population groups, essentially, involves educating them about the benefits of being part of the formal financial system and managing short term volatility in incomes and meeting unexpected emergencies without getting trapped in unnecessary debt. 12. What are the major barriers for the resource-poor people in participating in the financial system? Ans: Deep entrenched behavioural and psychological factors are the major barriers for this group in being part of the formal financial system and financial literacy drive attempts to break this barrier. 13. What does financial inclusion attempt at the middle and lower-middle income group people in participating in the financial system? Axis: Middle and lower-middle income groups that are participating in financial markets are either savers or borrowers or both, i.e. they are already financially included. Financial literacy efforts aims at enhancing their knowledge about the market and new products/services. A large section of our population that has a bank account refrains from participating in the capital market on account of lack of knowledge. Financial literacy, in such cases, would focus on creating awareness about the way the capital market functions and also about the fact that the equity market provides relatively higher returns as compared to other investments, over a longer time horizon. 14. What is the focus of financial literacy for high net worth individuals? Ans: Imparting knowledge about the financial markets, new and innovative products & instruments is important as it helps them in making better use of the available avenues in the financial market. This • knowledge is also useful for getting better returns from their investments in the market and to avail credit at relatively low rates. 15. What would be the focus of financial literacy drive in regard to the providers of services, policy makers and the regulators? Ans: Financial literacy for the providers of financial services would involve understanding the risks involved in their businesses and in the products that they offer to their customers. As market players, they need to understand risks inherent in complex financial products and choose wisely while committing funds. For service providers, financial literacy also involves understanding the needs of existing and potential customers and creating products and services suited to those needs. Literacy is a must for opinion makers and policy makers in order to gauge the needs of the population and financial institutions; to understand the risks inherent in products and markets; and to create a policy environment conducive to attainment of the national goals. 16. How does RBI propose to spread Financial Literacy? Ans: A strong institutional architecture guiding and coordinating the efforts of various stakeholders towards spreading fmancial literacy is necessary. The Financial Stability and Development Council (FSDC), which is chaired by the Union Finance Minister with heads of all financial sector regulatory authorities as members fills this gap. FSDC is mandated, inter alia to focus on spread of financial inclusion and financial literacy. 17. What is the role of RBI in financial inclusion? Ans: The Reserve Bank, besides its role as a member of the FSDC, has also taken numerous initiatives for spreading financial inclusion and financial literacy, both in terms of creating an enabling policy environment and providing institutional support. 18. What are the steps taken by RBI for ensuring financial literacy ? Ans: Initiatives such as setting up Rural Development and Self- Employment Training Institutes (RUDSETIs) and Financial Literacy and Credit Counselling Centres (FLCCs) by different banks are aimed at ensuring financial literacy. 19. What areas are covered under financial literacy? Ans: Banking, Investment in Mutual Funds and Stock Market and Insurance. In Banking various types of

8-70 Concept Briefs

savings facilities available; also of types of credit facilities available and the implication of the various terms and conditions on the financial health. Knowledge of role of CIBIL and other credit information companies. 20. What are other initiatives taken by RBI?. Ans: Some of the other steps taken by RBI to promote financial literacy are as under: • Outreach visits by Top Executives of Reserve Bank of India to remote villages on a continuous basis — to spread the message of financial awareness and literacy. • RBI website - A link on Financial Education in the RBI website for the common man, containing material in 13 Indian languages which includes comic books on money and banking for children, essay competition etc. • Awareness - by distributing pamphlets, comic books, enacting plays and skits, arranging stalls in local fairs, exhibitions, participation in information / literacy programmes organized by Press • Inclusion of Financial Education material in school curriculum by various State Governments • Use of mobile Financial Literacy vans by banks in the North Eastern States • Weekly Radio programmes on FL in some States by banks & similar programmes in Tribal districts by NABARD • Awareness programmes on various Government Sponsored self employment schemes involving bank loans & subsidy by Government agencies like KVIC,DICs, SC/ST corporations • Mass media campaigns tie ups with educational institutes, financial awareness workshops/ help lines, books, pamphlets and publications on FL by NGOs, Financial market players etc. • National & State level rural livelihood missions have large number of field functionaries for proper handholding support to large number of Self Help Groups • Large number of other websites/portals of banks/ /State Level Bankers Committees disseminating information on banking services • Conduct of training programmes for farmers clubs, NGOs & SHG members by NABARD (Source: RBI)

23. GOPALAKRISHNA WORKING GROUP ON IT & ELECTRONIC BANKING- FAQ

The Working Group on IT & Electronic Banking was set up by RBI in April 2010 under the Chairmanship of G Gopalakrishna, Retired ED, RBI. 1. What are the various aspects studied by the Q Gopalakrishna (Retired ED, RBI) WG on IT? Ans: The Committee examined a host of issues under 9 broad areas 1. IT Governance, 2. Information Security, 3. IS Audit, 4. IT Operations, 5. IT Services Outsourcing, 6. Cyber Fraud, 7. Business Continuity Planning, 8. Customer Awareness programmes and 9. Legal issues.

8-71 MM Special Guide I T Governance: 2. What is the board level arrangement recommended by the committee as regards I.T. Governance? Ans: Create an exclusive Board level IT Strategy Committee with a minimum of two directors as members, one of whom should be an independent director. 3. What is the role of the proposed IT Steering committee? Ans: IT Steering Committee to assist the Management in the implementation of the Board approved IT strategy and assess whether the IT Governance structure fosters accountability, is effective and transparent, has well defined objectives and actions and unambiguous responsibilities for each level in the organization. Key focus areas of IT Governance that need to be considered include strategic alignment, value delivery, risk management, resource management and performance management 4. What is enterprise data dictionary? Ms: The Bank has to maintain an enterprise data dictionary that incorporates the organization's data syntax rules. This should enable the sharing of data among applications and systems, promote a common understanding of data among IT and business users and preventing incompatible data elements from being created.

Information Security: 5. What are the recommendations regarding information security function? Ans: A sufficiently senior level official of the rank of GM/DGM/AGM needs to be designated as the Chief Information Security Officer (CISO) responsible for articulating and enforcing the policies that a bank uses to protect its information assets apart from coordinating the information security related issues / implementation within the organization as well as relevant external agencies. Risk assessment is the core competence of information security management for a bank. The risk assessment must, for each asset within its scope, identify the threat/vulnerability combinations that have a likelihood of impacting the confidentiality, availability or integrity of that asset - from a business, compliance and/or contractual perspective. 6. What are the observations of the committee regarding digital evidence? Ans: Digital evidence needs to be considered as similar to any other form of legal proof. It needs to withstand challenges to its integrity, its handling must be carefully tracked and documented, and it must be suitably authenticated by the concerned personnel. A policy needs to be in place in this regard. 7. What precaution has been advised regarding data transfer from one process to another or from one application to another? Ars: Data transfer from one process to another or from one application to another, particularly in respect of critical or financial applications, should not have any manual intervention in order to prevent any unauthorized modification. The process needs to be automated and properly integrated through "Straight Through Processing" methodology with an appropriate authentication mechanism and audit trails. 8. What is the recommendation of the committee as regards critical functions in the bank? Ans: Critical functions , for example relating to financial, regulatory and legal, MIS and risk management, need to be done through proper application systems and not manually or in a semi-automated manner through spreadsheets which pose risks relating to data integrity and reliability. Use of spreadsheets in this regard should be restricted and should be replaced by appropriate IT applications in a phased manner within a definite timeframe. Commercial banks should implement ISO 27001 based Information Security Management System (ISMS) best practices for their critical functions. Additionally, other reputed security/IT control frameworks may also be considered by banks. In view of the proliferation of cyber attacks and their potential consequences, banks should implement two-factor authentication for critical activities like fund transfers and changing customer related details

8-72 Concept Briefs

through intemet banking facility. 9. What protection has been recommended for malware control? Ans: A robust process needs to be in place for "effective malware control". Typical controls to protect against malicious code use layered combinations of technology, policies and procedures and training. •, • The controls are preventive and detective/corrective in nature. :1 i 10. What additional safety practice has been recommended to enhance online processing security? Ans: To enhance online processing security, confirmatory second channel procedures(like telephony, SMS, ii rt email etc.) should be applied with regard to transactions above pre-set values, creation of new account linkages, registration of third party payee details, changing account details or revision to funds transfer limits. In devising these security features, the bank should take into account their efficacy and differ- ing customer preferences for additional online protection. Al 11. Why the Committee has recommended to move over from magnetic stripes cards to chip based cards? i i it Ans: Chip based cards house data on microchips instead of magnetic stripes, making data more difficult to steal and cards more difficult to reproduce. It is recommended that RBI may consider moving over to chip based cards along with requiring upgradation of necessary infrastructure like ATMs/POS terminals in this regard in a phased manner. • 12. What is the change recommended for signature based authorization system used POS terminals? Ans: For debit / credit card transactions at the POS terminals, PIN based authorization system needs to be put in place (without any looping) in place of the existing signature based system and the non-PIN

based POS terminals need to be withdrawn in a phased manner.

.:• . I T Operations: 13. What are the recommendations of the committee in respect of Service Level Management ti1 Process? Ans: Banks need to institute a Service Level Management process for planning, coordinating, and drafting, agreeing, monitoring and reporting of service attributes used to measure the quality of service. The framework needs to include guidelines for ongoing reviews of service achievements to ensure that the required and cost-justifiable service quality is maintained and gradually improved. The Service Level Management framework defined by the banks should also have guidelines defined for logging and management including escalation of complaints and compliments. 14. What are the recommendations of the committee in respect of Capacity Management process? Ans: A Capacity Management process is required to ensure that cost-justifiable IT capacity for IT services exists and matches the current and future business requirements as identified in the Service Level Agreement. Banks adopting the capacity management process should ensure that the framework encompasses all areas pertaining to technology i.e. hardware, software, human resources, facilities etc.

I.T. Services Outsourcing: 15. Who is ultimately responsible for outsourcing operations in the Bank? Ans: The Board and senior management are ultimately responsible for outsourced operations and for managing risks inherent in such outsourcing relationships. Responsibilities for due diligence, oversight and management of outsourcing and accountability for all outsourcing decisions continue to rest with the bank, Board and senior management. 16. What are the core issues to be addressed in the contracts with service providers? Ans: Banks should ensure that the contract brings out the nature of the legal relationship between the parties (agent, principal or otherwise), and addresses risks and mitigation strategies identified at the risk evalua-

8-73 MM Special Guide lion and due diligence stages. Contracts should clearly define the roles and responsibilities of the parties to the contract and include suitable indemnification clauses. Any 'limitation of liability' consideration incorporated by the service provider should be assessed in consultation with the legal department. 17. What is the most important factor to be ensured in outsourcing? Ans: Outsourcing should not impede or interfere with the ability of the bank or the regulator in performing its supervisory functions and objectives. Asa practice, institutions should conduct pre- and post- outsourcing implementation reviews. 18. What ongoing precautions are to be observed as regards service providers? Ans: An institution should, at least on an annual basis, review the financial and operational condition of the service provider to assess its ability to continue to meet outsourcing obligations. Banks should ensure that their business continuity preparedness is not compromised on account of outsourcing. Banks, while framing the viable contingency plan, need to consider the availability of alternative service providers or the possibility of bringing the outsourced activity back-in house in an emergency (for example, where number of vendors for a particular service is extremely limited) and the costs, time and resources that would be involved and be prepared to take quick action, if warranted.

I S Audit: 19. Where Audit Committee is located I what is the composition of Audit Committee? Ans: Banks should enable an adequately skilled composition of the Audit Committee to manage the complexity of the IS Audit oversight. A designated member of the Audit Committee needs to possess the relevant knowledge of Information Systems, IS Controls and audit issues. The designated member should also have relevant competencies to understand the ultimate impact of deficiencies identified in IT Internal Control framework by the IS Audit function. The Board or its Audit Committee members should seek training to fill any gaps in the knowledge related to IT risks and controls. 20. What is an Audit Charter / Audit Policy? Ans: An Audit Charter / Audit Policy is a document which guides and directs the activities of the Internal Audit function. IS Audit policy/charter should be subjected to an annual review to ensure its continued relevance and effectiveness. 21. What are testing accelerators'? Ans: Banks should consider using testing accelerators — tools and techniques that help support the procedures. IS Auditors will be performing — to increase the efficiency and effectiveness of the audit.

Cyber Fraud: 22. What the committee has recommended as regards electronic frauds of less than Rs.1 cr? Ans: Most retail cyber frauds and electronic banking frauds would be of values less than Rs. I crore and hence may not attract the necessary attention of the Special Committee of the Board. Since these frauds are large in number and have the potential to reach large proportions, it is recommended that the Special Committee of the Board be briefed separately on this to keep them aware of the proportions of the fraud and the steps taken by the bank to mitigate them. The Special Committee should specifically monitor the progress of the mitigating steps taken by the bank in case of electronic frauds and the efficacy of the same in containing fraud numbers and values. 23. The committee has recommended that banks should share crucial staff data with CIBIL. What is it? Ans: Banks have started sharing negative/fraudulent list of accounts through CIBIL Detect. Banks should also start sharing the details of employees who have defrauded them so that they do not get hired by other banks/ financial institutions. 11111111111M. 8-74 Concept Briefs

Business Continuity Planning (BCP): 24. What are the observations of the WG regarding the responsibility of the bank's board and the senior management regarding BCP? Ans: A bank's Board has ultimate responsibility and oversight over the business continuity planning of a bank and needs to approve the Business Continuity policy of the bank. A bank's Senior Management is responsible for overseeing the business continuity planning process which inter-alia includes determining how the institution will manage and control identified risks, prioritizing critical business functions, allocating knowledgeable personnel and sufficient financial resources to implement the BCP. 25. What is pandemic planning? Ans: Pandemic planning is a strategic approach to business Continuity that anticipates and prepares the organisation for facing a wide spread, dangerous out-break. 26. What is the recommendation as regards DR drills? Ans: DR drills currently conducted periodically come under the category of planned shutdown. Banks have to evolve a suitable methodology to conduct drills which are closer to a real disaster scenario so that the confidence levels of the technical team taking up this exercise are built up to address requirements in the event of a real disaster.

Customer Awareness Programmes: 27. What are the recommendations of the WG as regards Customer Education in the area? Ans: Banks need to follow a systematic process to develop an awareness programme through the stages of planning and design, execution and management, and evaluation and course correction. Since awareness programmes should be customized for the specific audience, it is important to identify and segment the target users for the programmes - like bank customers, employees, law enforcement personnel, fraud risk professionals, media partners, etc.

Legal Issues: 28. What are the recommendations for mitigating legal risks? Ans: The Risk Management Committee at the Board level needs to put in place processes to ensure that legal risks arising from cyber laws are identified and adequately addressed. It also needs to ensure that the concerned functions are adequately staffed and the personnel handling it are trained to carry out the function efficiently. The Operational Risk Group needs to incorporate legal risks as part of the operational risk framework and take steps to mitigate the risks assessed. The legal function within the bank needs to advise business groups on legal issues arising out of the use of Information Technology. 29. What are the punishments provided under I T Act for various offences? Ans: The IT Act, 2000 as amended, exposes the banks to both civil and criminal liability. The civil liability could consist of exposure to pay damages by way of compensation up to Rs. 5 crore under the amended Information Technology Act before the Adjudicating Officer and beyond Rs. 5 crore in a court of competent jurisdiction. The top management of banks could also suffer exposure to criminal liability given the provisions of Chapter XI of the amended Information Technology Act and the exposure to criminal liability could consist of imprisonment for a term which would extend from three years to life imprisonment, as also a fine. Further, various computer related offences are enumerated under various provisions of the Act. Though Section 66D of the amended IT Act could broadly be said to cover the offence of phishing, the attempt to commit the act of phishing is not made punishable. It is suggested that there is a need to specifically provide for punishment for an attempt to phish as well, in order to deter persons from attempting it. (Note: Many of the recommendations have been implemented by RBI)

8-75 MM Special Guide 24. ECONOMIC SURVEY 2015-16

The Finance Minister Arun Jaitley presented the Economic Survey 2015-16. The Survey was prepared by the Chief Economic Advisor, Arvind Subramanian. The Survey states that India is poised to become a world leader in the face of weak growth and pessimism in the global scene. India has been viewed as the destination for stability and growth because of its commitment to low inflation and its efforts towards fiscal consolidation. The remarkable aspect of this growth is that it is taking place in the midst of a second consecutive drought in the country and a sluggish world economy. Reforms of the GOI: . Liberalising Foreign Direct Investment (FDI) like passing of the Insurance Bill . Addressing corruption through efforts like transparent auction of public assets . Clarifying tax proposals like settlement of the Minimum Alternate Tax (MAT) on foreign companies . Pursuing efforts to promote the ease of doing business . Ensuring there is public investment in the face of diminishing private investment . Instituting crop insurance programmes . Addressing social practices such as open defecation by building toilets . Avoiding policy reversals to build trust and maintain confidence of industry India must continue on its path of fiscal consolidation. While measures taken by the Government have helped facilitate growth, there is an urgent necessity to pass key reforms like the Goods and Services Tax (GST). India must continue to maintain its low inflation rates. There is room to ease the monetary policy as seen in signs such as the high levels of debts of corporates, moderating inflation, widening gaps in output and the weak global economy. Economy: . Economic growth rate at constant prices is expected to be 7.6% in this fiscal; though this is lower than the 8.1-8.5% envisaged in the last Survey, it is still the highest in the world. It was 7.2% in 2014- 15. Real growth is expected to be 7-7.75% in this fiscal. Growth rate can possibly reach 8% in 2 years. While growth, in the medium run will range between 7 and 7.5%, in the long run, it has the potential to be 8-10%. . The external environment is challenging at the moment though India is considered the only stable hub of activity. However, if global growth continues to be sluggish, India will also be adversely affected. Medium term growth is expected to be 7-7.75% with downside risk in the form of the weak global growth outlooks. Reforms are required to bring in macroeconomic stability in the economy. . A normal monsoon (leading to higher agricultural incomes) and increased spending from higher wages (with the implementation of the 7in Pay Commission) will help to boost consumption. Obstacles to Growth: The growing Non Performing Assets (NPAs) or stressed asset problem of Public Sector Banks (PSBs) and the growing unserviceable debt of large corporates are the main hurdles to India's continued growth prospects. ,. ... F Global Economy: The global economy poses a few threats to India's growth possibilities: o Increase in oil prices contrary to expectations could increase the pressure on India's trade and Current Account Deficit (CAD). Oil prices are expected to hover around US$ 35 per barrel in FY17 as compared to US$ 45 per barrel in 2015-16. o Slow growth in importing countries could further add to the declining export growth trend in India in the last year. Fiscal Deficit and Tax Collection: o The fiscal deficit target of 3.9% of GDP for FY16 is achievable though there are multiple challenges to it. o Fiscal deficit of 3.5% of GDP is expected for FY17 as fiscal consolidation has progressed well. o The Survey proposes to widen the tax base from 5.5% to 20% of earning individuals. LI 8-76 Concept Briefs o It favours phasing out of tax exemptions as it believes that increasing exemptions would not help achieve this objective of widening the tax base. Instead, it suggests that the rich should be taxed across agriculture, industry, services and real estate. o Spectrum auctions and disinvestment can help buoy revenue. o Indirect tax collections have been robust. Direct taxes grew by 10.7% in the first 9 months of 2015- 16. o Quality of spending by the GOI at various levels has improved because of a shift from r evenue to investment. The Government has focussed on social sectors. o The Survey suggests that the GOI should move towards EET or Exempt, Exempt, Taxable in its taxation of savings. This means that there should be tax exemption at the time of investment and earning of interest but not when the investment is withdrawn.

Investment and Capital Markets: o India has the potential to be a leading destination for investment with its high growth rate. o Indian stocks have been resilient despite crashes in high growth nations like China. However, markets have been subdued because of the global market conditions. o India must improve its investment in education and health. It is the worst among the BRICS nations. o Corporate, bank balance sheets remain stretched, affecting prospects for reviving private investments. Subsidies: . Rs.1 lakh crore is spent on subsidising rich people who do not need it. It does not even cover the middle class section of society but the high end earners. . This is in the form of small savings schemes (subsidy on Public Provident Fund is about Rs.11,900 crore) and subsidies on cooking gas (Rs.40,151 crore), electricity (Rs.37,170 crore), kerosene (Rs.5,501 crore), gold (Rs.4,093 crore) railways (Rs.3,671 crore), aviation turbine fuel (Rs.762 crore). These subsidies amount to about Rs.91,350 crore. The total subsidy adds up to Rs.1,03,249 crore. . For the consolidation of the fiscal deficit as well as for the welfare of the economy, as a whole, Government intervention must be corrected so that the benefits go to the right people. This will 'lend credibility to other market-oriented reforms". This substantial leakage from the Government's funds is a lost opportunity that could have helped the truly needy. . Spreading the JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile) will help the Government achieve its goals in financial inclusion and uniform growth. It can also help plug leakages in istribution of subsidies and distortion in prices. . Rs.73,000 crore or 0.5% of GDP was budgeted towards fertiliser subsidies in 2015-16; over 70% of this goes towards subsidy of urea. Price distortions and inefficient distribution and black markets have defeated the purpose of benefitting the small farmer. The Survey suggests direct transfer of fertilisers to the farmers to reduce leakages. It also suggests a cap on the number of subsidised bags a household of a small fanner gets. Biometric authentication would be required for purchase. . Subsidy rationalisation is still a work-in-progress. Inflation: . Inflation has been in the 4.5-5% range for most of 2015-16. . RBI is expected to contain inflation within 5% by March 2017. . Increase in wages that will follow the implementation of the 7th Pay Commission will not destabilise prices though it will complicate the fiscal consolidation process. . Consumer Price Index (CPI) inflation is expected to be about 4.5-5%. . Oil prices are still expected to be low or on the decline and this reduces inflationary pressures. . Efficient food supply management has helped contain food inflation. Agriculture: o Agricultural growth is expected to be low for the second consecutive year because of weak monsoons; however, it has been better than the last year. Growth has been lower in 2015-16 than the average of 8-77 MM Special Guide the last decade. o There has been a decline in production and the area of sown crops. I „ o If El Nino is replaced by the La Nina, harvest in 2016-17 is likely to be better. The effect of El Nino is reducing; however, it is expected to neutralise by the time monsoons are expected. Good mon soons will help increase agricultural incomes and hence, rural consumption. o Production of foodgrains is expected to be 2532 Million Tonnes (MT) in 2015-16 as compared to 252 MT in 2014-15. o India ranks first in milk production in the world with 185% of world production. The annual output in 2014-15 was 1463 MT as compared to 137.69 MT in 201344. o Since there is scarcity of water, recycled water must be used Efficient irrigation facilities as well as efficient use of all inputs will help improve agricultural productivity. o According to the Central Statistics Office (CSO), the growth in the 'agriculture, forestry and fishing' sector is estimated at 1.1% in 2015-16. Industry: . Because of acceleration in manufacturing at 9.5% in 2015-16 as compared to 5.5% in 2014-15, there has been improvement in industrial growth. . According to the Index of Industrial Production (IIP), industry grew by 3.1% during the April- December 2015-16 period as compared to 2.6% during year-ago period; this was due to higher growth in the mining and manufacturing sector. . There should be easy modes of entry and exit from industry that will encourage entrepreneurship. An easy exit route will ensure that small firms with low productivity may shut down, rather than increase their debt. Services: . Though growth in this sector moderated, it is still a strong catalyst of economic growth. . Growth in this sector is expected to be 9.2% in 2015-16. . The services sector has been the main driver of the economy and has contributed 69% to total growth during 2011-12 to 2015-16. External Sector: . The Indian Rupee has depreciated against the Dollar in the last year because of a hike in the Federal Reserve's rate; however, the Rupee has strengthened against other currencies. Increase in bank borrowings post the hike in interest rates by the Federal Reserve has helped in maintaining demand for the Indian Rupee. . Current Account Deficit (CAD) is expected to be 1-1.5% in FY17. It should be fully financed with stable flows. Currently, the CAD is at a comfortable level. . Net investment by Foreign Portfolio Investors (FPIs) in the Indian market was Rs.63,663 crore in 2015 as compared to Rs.2,56,213 crore in 2014. . Foreign exchange reserves were US$ 351.5 billion in February 2016. This is owing to the healthy flow of capital and remittances into the economy despite the decline in oil prices. . Net FDI flows were US$ 27.7 billion in the April-December 2015 period as compared to US$ 21.9 billion in the year-ago period. . Exports declined by 17.6% in the April 2015 to January 2016 period as compared to decline of 1.3% in 2014-15. Employment: . The unorganised sector has helped in keeping the rate of unemployment low. . Between 1989 and 2010, 3.7 million manufacturing jobs out of 10.5 million jobs (i.e. about 35%) were in the formal sector...... Since formal jobs create more worker protection, the challenge of job creation relates to creation of formal sector jobs.

Social Security: Several schemes were launched in 2015 to help safeguard the interests of the uninsured such al

8-78 I Concept Briefs

Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jivan Jyoti Bima Yojana (PMJJBY), and the Atal Pension Yojana(APY) schemes. Infrastructure: . In keeping with its ambitious goal to provide power to the whole nation, the GOI has promoted various policy initiatives in the power sector such as Ujwal DISCOM Assurance Yojana (UDAY), Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Domestic Efficient Lighting Program (DELP), National Tariff Policy, 2016 and National Smart Grid Mission. . To improve urban infrastructure, the GOI has launched the Smart Cities mission. . Make in India, Ease of Doing Business, Skill India, Startup India are among the initiatives of the GOI to promote manufacturing and general business in the country. Banking: . The stressed assets of banks have been on the rise since 2010, a dangerous phenomenon, as the deadline to conform to BASEL III norms is approaching. . Gross Non Performing Assets (NPAs) are over 5% of the total loans and total stressed assets (total declared and potential bad loans) are about 11%. . Cumulative Gross NPAs of 24 listed PSBs including SBI and its associates were Rs.3,93,035 crore as on December 31, 2015. . Banks will require capital to the tune of Rs.1.8 lakh crore by 2018-19. The GOI has committed Rs.70,000 crore over 4 years for capitalization of banks - Rs.25,000 crore each in FY16 and FY17 and Rs.10,000 crore each in FY18 and FY19. . The Survey has suggested that the GOI sells some firms to recapitalise banks. For example, it may sell non-financial companies and invest in Public Sector Banks (PSBs). . The Survey refers to the debts of corporates and problems of PSBs as the Twin Balance Sheet (TBS) problem posing a major impediment to private investment in the economy affecting a full-fledged economic recovery. Solving this problem will require the 4 Rs - Recognition, Recapitalisation, Resolution and Reform. . Banks must value their assets as close to the market value as possible (recognition). They must then raise required capital to ensure adequate capitalisation (recapitalisation). Stressed assets in the corporate sector must be sold or rehabilitated (resolution) and future incentives must be set right (reform) to avoid repetition of the same problem. Climate Change and Sustainable Development: The Economic Survey says that India has set ambitious targets for itself through its Intended Nationally Determined Contributions (INDC). It has stated that India has played a crucial role in the climate talks in Conference of Parties (COP) - 21. As on January 4, 2016, India had 1593 out of 7685 projects registered under Clean Development Mechanism (CDM) of UNFCCC; this is the second highest number of projects registered under CDM. Model Questions with Answers: 1) Who prepares the Economic Survey that is tabled in Parliament by the Finance Minister? 2) What are the 4 Rs the Survey talks about with respect to banking? 3) Expand INDC. 4) Which sector contributes most to employment in India - organised or unorganised? 5) What is the Twin Balance Sheet problem? 6) Expand UDAY with respect to the power sector. 7) Which phenomenon is likely to improve harvest in 2016? 8) What is the JAM trinity? 9) What is the fiscal deficit target for the current fiscal? 10) Which sector has been credited with improved industrial growth in this fiscal? Answers: 1) Chief Economic Advisor (currently, Arvind Subramanian)

8-79 MM Special Guide 2) Recognition, Recapitalisation, Resolution and Reform 3) Intended Nationally Determined Contributions 4) Unorganised 5) Debts of corporates and Public Sector Banks 6) Ujwal DISCOM Assurance Yojana 7) La Nina 8) Jan Dhan Yojana, Aadhaar and Mobile 9) 3.9% of GDP 10) Manufacturing

25. UNION BUDGET 2016-17

The Union Budget 2016-17 was presented in Parliament on February 29, 2016 by the Finance Minister Arun Jaitley. The GOI has stated that India is expected to grow at 7.6% in this fiscal - 2015-16. India has been hailed as a 'bright spot' by the International Monetary Fund (IMF) in a slowing global economy. The country's growth has been strong despite a second consecutive drought and a sluggish world economy which grew at 3.1% in 2015. The forex reserves touched an all-time high of about 350 billion dollars. The GOI has reiterated its commitment to the poor and downtrodden. (The Government has further added that despite the increased devolution to states as per the 14s, Finance Commission, planned expenditure has been increased in RE 2015-16.) Challenges Ahead: The precarious global situation with weak growth prospects and the additional burden on the exchequer because of the 7th Pay Commission and the recommendations of the One Rank One Pension (OROP) are the main challenges facing the Government in 2016-17. Main Goals: o Ensuring macroeconomic stability o Prudent fiscal management o Increasing local demand o Providing crop insurance to farmers - Pradhan Mantri Fasal Bima Yojana (PMFBY) o Focussing on the farm, infrastructure and social sector o Generating employment o Capitalising banks o Undertaking key economic reforms and policy initiatives: . Giving statutory backing to AADHAAR . Passing the Goods and Services Tax (GST) bill . Enacting insolvency and Bankruptcy Laws. . Incentivising gas discovery . Freeing the transport sector . Undertaking banking sector reforms . Significant changes in the Foreign Direct Investment (FDI) policy The GOI plans to take its 'Transform India' plan forward with the following 9 pillars: I. Agriculture and Farmer Welfare: . Rs.35,984 crore to be allocated towards agriculture and farmers' welfare Rs.20,000 crore Long Term Irrigation Fund to be created within NABARD . 89 irrigation projects to be fast-tracked . 28.5 lakh hectares to be brought under irrigation under Pradhan Mantri Krishi Sinchai Yojana Rs.15,000 crore towards interest subvention . Under MGNREGA, work on 5 lakh farm ponds and dug wells and 10 lakh compost pits, to produce manure, to be undertaken Rs.6,000 crore to be raised through multilateral funding for managing ground water resources . Soil health card scheme to cover all 14 crore farm holdings by March 2017 8-80 Concept Briefs

. 2,000 model retail outlets of fertiliser companies to be provided with soil and seed-testing facilities over the next 3 years . Allocation to Pradhan Mantri Gram Sadak Yojana to be increased to Rs.19,000 crore . Rs.5,500 crore to be allocated towards Prime Minister Fasal Bima Yojana (PMFBY) . Rs.850 crore to be set aside for dairying projects . Rs.412 crore to be set aside for organic farming . Unified Agricultural Marketing ePlatform to provide common e-platform for wholesale markets . Target of assistance to farmers after calamities at Rs.9 lakh crore in FY 17 IL Rural Sector: . Rs.87,765 crore allocated to the rural sector . Rs.2.871akh crore to be given as grant to Gram Panchayats and Municipalities . Rs.38,500 crore to be allocated to MGNREGS . 300 Rurban Clusters to be developed under Shyama Prasad Mukherjee Rurban Mission . Target for 100% rural electrification set at May 1, 2018; currently, as of February 23, 2016, 5,542 villages electrified, out of 18,542 villages as on April 1, 2015 . Villages free from open defecation to get priority in allocation from Centrally Sponsored Schemes . Digital Literacy Mission Scheme to cover 6 crore more households within 3 years . Rs.655 crore to be allocated to Rashtriya Gram Swaraj Abhiyan III. Social Sector: o Rs.1,51,581 crore to be allocated to the social sector including education and health care o Rs.2,000 crore to be allocated towards providing Liquefied Petroleum Gas (LPG) connections to Below Poverty Line (BPL) families o Up to Rs.1 lakh per family health care cover for families under a new health protection scheme; up to Rs.1.3 lakh for senior citizens o Under Jan Aushadhi Yojana, about 3,000 stores to be opened in 2016-17 o At least 2 projects per bank branch to be facilitated under "Stand Up India Scheme" to encourage entrepreneurs o A National Scheduled Caste and Scheduled Tribe Hub to be set up o Rs.100 crore to be allocated for celebration of 350th birth anniversary of Guru Gobind Singh o Rs.100 crore to be allocated for celebration of birth centenary of Pandit Deen Dayal Upadhyay IV. Education, Skills and Job Creation: . 62 new Navodaya Vidyalayas to be opened . Rs.1,000 crore capital to be set aside for Higher Education Finance Agency .10 public and 10 private institutions to be provided with regulatory architecture to become worldclass . Digital Depository for School Leaving Certificates, College Degrees, Mark Sheets, etc. to be set up. Skill Development: o Rs.1,804 crore to be allocated to skill development o Massive Open Online Courses (MOOCs) to provide entrepreneurship education and training o 1,500 multi-skill training institutes to be set up Job Creation: . Rs.1,000 crore allocated for GOI to pay 8.33% contribution to all new employees who join the Employee Provident Fund Organisation (EPFO) for the first 3 years . 100 model career centres to be operationalised by end of FY17 V. Infrastructure and Investment: Rs.97,000 crore to be allocated to the road sector in FY17 - Rs.55,000 crore for roads and highways, another Rs.15,000 crore to be raised through bonds and Rs.27,000 crore for Pradhan Mantri Gram Sadak Yojana (PMGSY) including the States' share . Rs.2,21,246 crore to be allocated to the infrastructure sector • . 10,000 km of National Highways to be approved in 2016-17 . Plan to be formulated to revive unserved and under-served airports in partnership with State • F 1 8-81 MM Special Guide Governments . Comprehensive Plan to increase investment in nuclear power generation to be formulated . More marketing freedom to be given to encourage gas-discovery production from deep-water and high pressure/temperature areas . Efforts on to revitalise Public Private Partnerships (PPP) by issuing guidelines to renegotiate PPP Concession Agreements and introducing Public Utility (Resolution of Disputes) Bill and a new credit rating system for infrastructure projects . Reforms to be undertaken in sectors such as insurance, pension, Asset Reconstruction Companies and stock exchanges . 100% FDI to be allowed through Foreign Investment Promotion Board (FIPB) in marketing of locally- manufactured food products . New policy to govern GOI's divestment and strategic sale programmes to be formulated VI. Financial Sector Reforms: . Code to help Resolution of Financial Finns to be introduced . Rs.25,000 crore to be allocated to the banking sector for recapitalisation in 2016-17 . Monetary Policy Framework and Monetary Policy Committee to get a statutory basis through the Finance Bill 2016 . RBI to facilitate retail participation in Government Securities . Financial Data Management Centre to be set up. . Target of amount sanctioned under Pradhan Mantri Mudra Yojana to be increased to Rs.1.8 lakh crore. . SARFAESI Act to be amended to enable ARC'S sponsors to hold 100% stake in the ARC. . General Insurance Companies to be listed in stock exchanges Central Legislation to be introduced to deal with illicit deposit-taking. . SEBI to develop new derivative products VII. Governance and Ease of Doing Business (EODB): o Direct Benefits Transfer (DBT) to be introduced with fertilisers on a pilot basis o 3 lakh.Fair Price shops to be automated by March 2017 o Price Stabilisation Fund with Rs.900 crore corpus to stabilise prices of pulses o Bill for targeted delivery of subsidies and other benefits and services through the AADHAAR network to be introduced o Annual programme - 'Ek Bharat Shreshta Bharat' to integrate people from different states through language, culture, trade and travel/tourism o Companies' Act to be amended to provide a conducive environment for start-ups VIII. Fiscal Discipline: o Fiscal deficit target to be retained at 3.9% in RE 2015-16 and 3.5% in BE 2016-17 o Revenue deficit target to be decreased from 2.8% to 2.5% in RE 2015-16 o Plan expenditure at Rs.5.51akh crore and non-plan expenditure of Rs.14.28 lakh crore out of total expenditure of Rs.19.78 lakh crore o NHAI, PFC, REC, IREDA, Inland Water Authority and NABARD bonds to the tune of Rs.31,300 crore to be raised to fund infrastructure spending o All new schemes to have a sunset date and an outcome review o By 2017-18 no differentiation between Plan Expenditure and Non-Plan Expenditure o Sectors like agriculture, minorities, infrastructure, SCs and STs, women, health, child development and social sector to get special attention IX. Tax Reforms: A) Small Tax Payer: . There is no change in the income tax slabs for individuals. The exemption limit for an individual resident under 60 years of age is Rs.2.5 lakh, for senior citizens Rs.3 lakh and for super senior citizens Rs.5 lakh with education cess of 3%. 8-82 Concept Briefs

. Tax rebate under Section 87A for those individuals who earn less than Rs.5 lakh p.a. to be in creased from Rs.2,000 to Rs.5,000 . Deduction for rent paid to be increased from Rs.24,000 to Rs.60,000 under Sec 80 GG for those who live in rented houses and do not get House Rent Allowance (HRA) . Presumptive taxation under Sec 44 AD for small and medium enterprises (non-corporates) whose turnover is less than Rs.2 crore to be exempt from maintaining books of accounts . Presumptive taxation extended to those professionals who earn gross receipts of up to Rs.50 lakh @ 50% of gross receipts B) Employment Generation and Growth: o The GOI is phasing out some Income Tax exemptions so it can reduce corporate tax over time: . Accelerated depreciation to be maximum of 40% from April 1, 2017 . Benefits of deduction for research to be maximum of 150% from April 1, 2017 and 100% from April 1, 2020 . Benefits to new SEZs u/s 10AA for companies that commence business before March 31, 2020 . Weighted deduction u/s 35CCD for skill development to continue till April 1, 2020 o Corporate Tax: . New companies incorporated on or after March 1, 2016 can pay tax CO 25% + surcharge + cess if they do not claim profit or investment-linked deductions or avail of investment allowance and accelerated depreciation . Corporate tax for 2016-17 for companies with turnover of less than Rs.5 crore in 2015-16 to be 29% + surcharge + cess o 100% deduction of profits for 3 out of 5 years for start-ups set up between April 2016 and March 2019; capital gains not to apply if invested in notified fund of funds; however, Minimum Alternate Tax (MAT) to apply o 10% tax on income from worldwide exploitation of patents developed and registered by a resident in India o 5% deduction on income of Non-Banking Finance Companies (NBFCs) on account of provision of bad and doubtful debts o Benefit of long term capital gains of unlisted companies for 2 years (down from 3 years) o General Anti-Avoidance Rules (GAAR) to be implemented from Apri11, 2017 o Complete pass-through of income tax to be provided to securitisation trusts including ARC trusts; • while trusts have to deduct TDS, the investor is liable to tax, not the trust o Service tax exempted for services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana o Service tax to be exempted for General Insurance services under Niramaya Health Insurance scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability o Basic customs duty reduced to 5% while excise duty reduced to 6% on refrigerated containers C) Make in India Customs and excise duties changed to reduce the cost of inputs used in domestic industry in sectors such as hardware used in information technology, capital goods, defence production, mineral oils and chemicals and petrochemicals, paper, paperboard and newsprint, ship repair and overhauling of aircrafts D) Pensioned Society: . At retirement, withdrawal up to 40% of National Pension Scheme (NPS) corpus exempt from tax; annuity fund that the legal heir inherits not taxable . If corpus of recognised provident funds or superannuation funds are created after April 1, 2016, tax exemption available on withdrawal of 40% of corpus at retirement . Service tax on single-premium annuity (insurance) policies reduced from 3.5% to 1.4% of premium paid in certain cases. . Rs.1.5 lakh p.a. limit for employer's contribution to recognised provident fund or superannuation fund for taking tax benefit - . 8-83 MM Special Guide E) Affordable Housing: . 100% deduction in profits earned by undertakings for flats approved between June 2016 and March 2019 and built within 3 years with area . up to 30 sq. m in the 4 metros . up to 60 sq. m in other cities MAT to apply . For loans up to Rs.35 lakh, Rs.50,000 p.a. additional interest deduction for first time home buyers where house cost < Rs.50 lakh . No Dividend Distribution Tax (DDT) on income distribution by Special Purpose Vehicle (SPY) to Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT) with specified shareholding . No service tax to be levied on construction of affordable houses up to 60 sq. m under Central or State Government schemes . No excise duty on Ready Mix Concrete in addition to Concrete Mix F) Resource Mobilisation for Agriculture, Rural Economy and Clean Environment: Funds will be raised through the following methods for investment in these sectors: o 10% additional tax on gross dividend payable by those receiving annual dividend of over Rs.10 lakh o Surcharge increased from 12% to 15% for those with income of over Rs.1 crore; this excludes companies, co-operative societies and firms o 1% TDS on luxury cars of over Rs.10 lakh and purchase of goods and services in cash exceeding Rs.2 lakh o Securities Transactions Tax (STT) of options increased from 0.017% to 0.05% o 6% equalisation levy of gross amount for payment to NRIs of over Rs.1 lakh p.a. for B2B transactions o 0.5% Krishi Kalyan cess on all taxable services from June 1, 2016 - this will be used for welfare of farmers and improvement of agriculture o 1% infrastructure cess on small petrol, LPG and CNG cars, 2.5% cess on diesel cars up to certain capacity and 4% cess on higher engine capacity vehicles to address traffic situation o Excise duty of 1% without input tax credit or 12.5% with input tax credit on jewellery (except diamond and precious stone-studded ones) with a higher exemption and exemption limit of Rs.6 crore and Rs.12 crore respectively o Excise duty on branded readymade garments with retail value of Rs.1,000 or more increased from 0% to 2% without input tax credit and from 6%/12.5% with input tax credit to 12.5% o Clean Environment Cess (renamed from Clean Energy Cess) levied on coal, lignite and peat to be raised from Rs.200/tonne to Rs.400/tonne o Excise duty increased from 10% to 15% on tobacco products other than beedi G) Clarity in Taxation: . Limited period Compliance Window (June 1 to September 30 2016) to allow domestic taxpayers to pay tax on undisclosed income @ 30% , surcharge @ 7.5% and penalty @ 7.5% totalling 45% of the undeclared income; declarants to get immunity from prosecution . 7.5% surcharge on undisclosed income or asset to be used as Krishi Kalyan surcharge for agriculture and the rural economy . No penalty on cases with disputed tax of up to Rs.10 lakh; cases with disputed tax of over Rs.10 lakh liable to 25% of the minimum penalty imposable . 50% penalty for under-reporting of income and 200% for misreporting of facts . 1 year time limit to dispose taxpayers' petitions for interest or tax waivers . Assessing officer to grant stay of demand when assessee pays 15% of disputed demand when appeal is pending before the Income Tax (IT) Commissioner (Appeals) . Monetary limit for deciding an appeal by a single member bench of ITAT raised from Rs.15 lakh to Rs.50 lakh

8-84 Concept Briefs . Disallowance to be limited to 1% of the average monthly value of investments yielding exempt income but not exceeding the actual expenditure u/s 14A H) Rationalisation and Simplification of Tax: o 13 cesses to be abolished to reduce multiplicity of taxes where revenue < Rs.50 crore p.a., o No higher TDS for NRIs who submit documents in place of PAN o Central Excise assessee may revise returns o Deferred payment of customs duties for importers and exporters with proven track record o Higher free baggage allowance for international passengers and baggage declaration filing only for those with dutiable goods o 11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) to be set up to deal with backlog of cases o Indian Customs Single Window Project at major ports and airports from April 1, 2016 I) Accountability: The Income Tax (IT) Department has made efforts to obviate the need for the tax payer to visit IT offices: . Scope for e-assessments extended to all assessees in 7 mega cities . e-Sahyog to be expanded to reduce compliance cost and resolve mismatches in returns GOI to pay 9% interest from 6% in case of delay in executing Appellate order for over 90 days . Direct tax proposals will result in revenue loss of Rs.1,060 crore. . Indirect tax proposals will yield Rs.20,670 crore. . Net revenue gain is expected to be Rs.19,610 crore. FDI Proposals to facilitate Ease of Doing Business in India: . Foreign investment in insurance and pension sector through the automatic route, up to 49%, subject to control being retained by the Indian management . 100% FDI in Asset Reconstruction Companies (ARCs) through the automatic route . Hybrid instruments to be included among foreign instruments subject to conditions . FDI to be allowed in more NBFC activities beyond the specified 18 activities . Foreign investors to be given residency status to encourage them to "Make in India"; currently, they only get business visa for up to 5 years at a time . Investment limit for Foreign Portfolio Investors (FPIs) to be increased from 24% to 49% in Central Public Sector Enterprises (CPSEs), listed in stock exchanges except for banks . Centre / State Investment Agreement to be introduced to ensure effective implementation of bilateral investment treaties with foreign nations; those Indian states that sign this will be seen as attractive investment destinations Deepening the Corporate Bond Market: . RBI to develop an online platform for repo markets in corporate bonds . RBI to encourage large borrowers to access the market rather than go to banks . SEBI to introduce an electronic auction platform of primary debt offers . RBI and SEBI to offer an information repository of corporate bonds for both primary and secondary segments Comments: A key feature of the budget is enhanced attention to rural economy. Fiscal discipline has been prioritised even as spending on crucial sectors such as infrastructure has been increased with more roads on the anvil. The farm sector has also been given much-required attention as necessitated by the back-toback drought. The crop insurance scheme, in particular, is a big positive for farmers. The housing sector allocations are in conformance to the Prime Minister's plan of Housing for All by 2022. However, nothing more has been allocated to the banking sector towards recapitalisation. The original Rs.70,000 crore capital infusion as per the Indradhanush plan, of which Rs25,000 crore was promised for FY17, has not been increased. This will put onus on the banks to raise capital from the ,--:-.- .s: markets. It is a pro-poor Budget that aims to boost the prospects of the farm sector in keeping with

8-85 MM Special Guide

Non debt Where the Rupee Comes From Capital receipts ___ All Figures in Paise

Service to and othe taxes 9

8-86

Concept Briefs Errry . Disallowance to be limited to 1% of the average monthly value of investments yielding exempt income but not exceeding the actual expenditure u/s 14A • H) Rationalisation and Simplification of Tax: o 13 cesses to be abolished to reduce multiplicity of taxes where revenue < Rs.50 crore pa., o No higher TDS for NRIs who submit documents in place of PAN o Central Excise assessee may revise returns o Deferred payment of customs duties for importers and exporters with proven track record o Higher free baggage allowance for international passengers and baggage declaration filing only for those with dutiable goods o 11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) to be set up to deal with backlog of cases o Indian Customs Single Window Project at major ports and airports from April 1, 2016 I) Accountability: The Income Tax (IT) Department has made efforts to obviate the need for the tax payer to visit IT offices: . Scope for e-assessments extended to all assessees in 7 mega cities . e-Sahyog to be expanded to reduce compliance cost and resolve mismatches in returns . GOI to pay 9% interest from 6% in case of delay in executing Appellate order for over 90 days . Direct tax proposals will result in revenue loss of Rs.1,060 crore. . Indirect tax proposals will yield Rs.20,670 crore. . Net revenue gain is expected to be Rs.19,610 crore. FDI Proposals to facilitate Ease of Doing Business in India: . Foreign investment in insurance and pension sector through the automatic route, up to 49%, subject to control being retained by the Indian management . 100% FDI in Asset Reconstruction Companies (ARCs) through the automatic route . Hybrid instruments to be included among foreign instruments subject to conditions . FDI to be allowed in more NBFC activities beyond the specified 18 activities . , Foreign investors to be given residency status to encourage them to "Make in India"; currently, they only get business visa for up to 5 years at a time . Investment limit for Foreign Portfolio Investors (FPIs) to be increased from 24% to 49% in Central Public Sector Enterprises (LFSEs), listed in stock exchanges except for banks . Centre / State Investment Agreement to be introduced to ensure effective implementation of bilateral investment treaties with foreign nations; those Indian states that sign this will be seen as attractive investment destinations Deepening the Corporate Bond Market• . RBI to develop an online platform for repo markets in corporate bonds . RBI to encourage large borrowers to access the market rather than go to banks . SEBI to introduce an electronic auction platform of primary debt offers . RBI and SEBI to offer an information repository of corporate bonds for both primary and secondary segments Comments: A key feature of the budget is enhanced attention to rural economy. Fiscal discipline has been prioritised even as spending on crucial sectors such as infrastructure has been increased with more roads on the anvil. The farm sector has also been given much-required attention as necessitated by the back-toback drought. The crop insurance scheme, in particular, is a big positive for farmers. The housing sector allocations are in conformance to the Prime Minister's plan of Housing for All by 2022. However, nothing more has been allocated to the banking sector towards recapitalisation. The original Rs.70,000 crore capital infusion as per the Indradhanush plan, of which Rs.25,000 crore was promised for FY17, has not been increased. This will put onus on the banks to raise capital from the markets. It is a pro-poor Budget that aims to boost the prospects of the farm sector in keeping with

8-85 Concept Briefs

Prime Minister Narendra Modi's vision of doubling farm income by 2022 - India's 75a, year of independence. While no revolutionary reformshave been suggested, the success of the next fiscal will largely be based on whether or not the GOI can pass important bills that will attract much-anticipated investment. There is a strong opinion that there is no grand strategy in this budget.

Rs. crore Particulars 2014-15 2015-16 2015-16 2016.17 Budget Revised Budget Actuals Estimates Estimates Estimates Revenue Receipts 1101472 1141575 1206084 1377022 Capital Receipts 562201 635902 579307 601038 Total Receipts 1663673 1777477 1785391 1978060 Non Plan Expenditure 1201029 1312200 1308194 1428050 Plan Expenditure 462644 465277 477197 550010 Total Expenditure 1663673 1777477 1785391 1978060 Revenue Deficit 365519 394472 341589 354015 Effective Revenue Deficit 234759 268000 209585 187175 Fiscal Deficit 510725 555649 535090 533904 Primary Deficit 108281 99504 92469 41234

As a % of GDP Revenue Deficit 2.9 2.8 2.5 2.3 Effective Revenue Deficit 1.9 2 1.5 1.2 Fiscal Deficit 4.1 3.9 3.9 3.5 Primary Deficit 0.9 0.7 0.7 0.3

26. DIGITAL INDIA

Prime Minister (PM) Narendra Modi has launched the ambitious Digital India programmewherein he envisions a technologically-advanced India that is accessible to and used by all Indians. The distribution network of telecom companies, courtesy the ubiquitous cell phone,is expected to aid in reaching out to the vast majority of the population. This programme is co-ordinated by the Department of Electronics and Information Technol- ogy (Deity) and implemented by various departments in the Government. It is also a huge opportunity for the sagging Indian industry to invest in infrastructure and services in the country. Current Scenario: According to the National Sample Survey Organisation (NSSO), the number of households where at least one person had access to intemet was 16.1% in rural areas, 48.7% in urban areas and 26.7% overall. A Boston Consulting Group (BCG) report had estimated that India has 190 million intemet users in 2014 - the third largest in the world after China (620 million) and the US (275 million). The International Telecommunications Union (ITU) has estimated that only about 18% of Indians used the interne in 2014.

8-87

• , , „„ MM Special Guide

The PM aspires to radically raise this low level of intemet penetration in the Indian population, He has based his vision on the idea that "IT (India Today) + IT (Information Technology) = IT (India Tomorrow)." Members of Monitoring Committee: The Prime Minister will be the Chairman of the Monitoring Committee on Digital India. Other members will include the Finance Minister, Minister of Communications and IT, Minister of Rural Development, Minister of Human Resource Development and Minister of Health. There will also be special invitees such as the Principal Secretary to the PM and the Cabinet Secretary. Cost of Programme: This programme is likely to cost Rs.1,00,000 crore for current ongoing schemes and Rs.13,000 crore for new schemes and activities. Key Points of the Programme: The crux of the Prime Minister's focus has been on: 1. Providing digital infrastructure as a utility: This includes o Phone connectivity for all o Bank account for all o High-speed broadband intemet connection o Access to Common Service Centres o Secure access to the cyber world o Private space in the public cloud 2. Digitally empowering citizens: This includes o making available all documents and certificates on the cloud o making all citizens digitally literate o enabling access of digital resources to all and in different Indian languages o making citizens' entitlements portable through cloud 3. Offering Government services electronically: This includes o carrying out financial transactions electronically replacing cash o offering Government services digitally to make doing business easier o citizens accessing services on the cloud o accessing services in real-time with a mobile phoneor online Target: The programme hopes to achieve the following 9 pillars by 2019: 1. Mobile phone connectivity for all 2. Broadband intemet connection for 2.5 lakh villages 3. 4,00,000 Public Internet Access Points in villages and Post Offices 4. E-governance with electronic databases, public grievance redressals through IT and automated processes within the Government 5. Electronic delivery of services or eKranti - wireless intemet connections in 2.5 lakh schools and broadband in all schools, online healthcare services, online courts, mobile banking, Common Service Centres CSCs), technology for farmers for loans and ordering inputs and mobile emergency services 6. Elimination of imports by 2020 — development of skill and building of infrastructure to enable in-house manufacturing to eliminate imports completely 7. Training of1.7 crore people in Information Technology (IT), electronics and telecomto facilitate direct employment of 1.7 crore and indirect employment of 8.5 crore people 8. Interactive exchange of information between citizens and Government, transfer of information to citizens for special occasions through messaging, open access of documents for the general public and communication of Government programmes through social media 9. Early harvest programmes The Early Harvest programmes include those that must be implemented very quickly. This includes: o Biometric attendance where Government employees can log into their workplaces from any office in Delhi o Wi-Fi for all universities in the National Knowledge Network (NKN) E-greetings from the Government for festivals and special days

8-88 Concept Briefs

o Mass messaging platform for all elected representatives and Government employees o Upgradation of e-mail infrastructure to ensure secure e-mail facility for 50 lakh Government employees in Phase II; Phase 1 already covered 10 lakh employees Industry Reactions: There is hope and optimism amongst industrialists as they expect these reforms to lift industrial productivity.Leaders of India's industries have committed to investing Rs.4.5 lakh crore that will generate 1.8 million jobs in Digital India in the form of manufacturing cheap mobile phones and developing cloud computing.Infosys co-founder, N R Narayana Murthy has expressed confidence in this initiative and is hopeful that it will increase employment. Reliance Industries' Chairman Mukesh Ambani has stated that his company will invest Rs.2.5 lakh crore in various schemes in this programme and will facilitate the employment of 5 lakh people. Reliance Communications' Anil Ambani has also committed Rs.10,000 crore over the next few years.Aditya Birla Group Chairman Kumaramangalam Birla has also pledged US$ 7 billion over the next 5 years in building networks and deploying Wi-Fi. The Government has also been actively trying to shed India's image of being a difficult place to do business in as reflected by the World Bank's ranking of India at 142 among the list of 189 nations in terms of Ease of Doing Business. PM Narendra Modi has ambitious goals for the country and aims to transform India into a nation of digitally empowered citizens who can access services and carry on activities at the click of a button. While this is a huge challenge for any country in the world, let alone the second-most populous one, his efforts and ideas are laud- able and will pave the way for India to reform and transform into a leader in technology, health, education and banking as envisaged.

27. Smart Cities

Smart cities have gained recognition in India because of Prime Minister Narendra Moth's plan to establish 100 smart cities in the country to make them citizen-friendly and liveable. Definition: A smart city is an urban centre that efficiently manages the available resources of the place to provide facilities like water supply and electricity and overall advanced infrastructure and communication systems with the help of technology. Amenities in a Smart City: A smart city will ideally possess the following facilities: • 24/7 Water and electricity supply • Good sanitation system and waste management system - 100% treatment of waste • Affordable housing for all • Reliable public transport and urban mobility N • Well-developed Information Technology (IT) connectivity • E-governance • Electronic service delivery • Safety of citizens, especially the elderly • Usage of clean energy fuels • Efficient traffic management and smart parking systems $ • Timely grievance redressal system and active citizen part mil, • • Sustainable environment Programme: The Ministry of Urban Development (MoUD) is compiling a list of cities that will be developed as smart cities. 20 cities were chosen this year. 40 each will be chosen in the next 2 years for development. There will be at least one smart city in each state. A City Challenge Competition will be held to choose the cities nominated by States. An expert panel called Smart City Council India with national and international experts will choose the cities based on the Smart City Proposal (SCP) presented by MM Special Guide the city and certain other criteria. Eligibility Criteria for Becoming a Smart City: Each city will be measured based on certain criteria before they are chosen as cities to be developed as smart cities. Some of the criteria are as follows: • Municipal budget expenditure for the last 2 years must be made available online. • Monthly e-newsletter must be published; The first issue to be released to be eligible to become a smart city. • There must be an increase of 5% in coverage of toilets since Census 2011. • Urban Local Bodies (ULBs) must have paid their employees' salary regularly. • The number of urban reforms and completed projects and the percentage of internally-generated revenues used for capital works will also be a factor. • The system of levying penalty for delays in services must have started. • Internally generated revenues must be on an upward trend in the last 3 years (2012-15). Area-wise Development: The cities chosen include state capitals, places of religious and cultural importance and cities with tourist attraction. Some of the proposals for development in smart cities will include • developing green field projects where smart solutions and innovative planning will be used to develop vacant plots • redevelopment where existing built-up area will be replaced with a new layout plan with better infrastructure • retrofitting where an existing built-up area is improved with more features and infrastructure. Budget Rs.100 crore per annum for 5 years (2015-16 to 2019-20) will be allocated from Central funds to each city chosen to become a smart city. The State Govt/LTLB has to make matching contribution. The GOI has stated that it will relax Foreign Direct Investment (FDI) to enable foreign funds to finance the huge expense of urbanisation. States also have to set up a Special Purpose Vehicle (SPV) and source private funds to carry on this initiative. First List of Smart Cities: The 20 cities that were chosen this year in the first round are Bhubaneswar (Odisha), Pune (Maharashtra), Jaipur (Rajasthan), Surat (Gujarat), Kochi (Kerala), Ahmedabad (Gujarat), Jabalpur (Madhya Pradesh), Visakhapatnam (Andhra Pradesh), Solapur (Maharashtra), Davangere (Karnataka), Indore (Madhya Pradesh), New Delhi Municipal Corporation, Coimbatore (Tamil Nadu), Kakinada (Andhra Pradesh), Belagavi (Karnataka), Udaipur (Rajasthan), Guwahati (Assam), Chennai (Tamil Nadu), Ludhiana (Punjab) and Bhopal (Madhya Pradesh). Example of a Smart City Proposal (SCP): Pune Municipal Corporation had drafted a Smart City Plan of Rs.3,860 crore that is meant to enable 24x7 water supply, slum rehabilitation schemes, river improvement, Bus Rapid Transit System (BRTS) routes and solid waste processing plants among other things. The city will be divided into 11 sectors for this purpose. Rs.194 crore is expected from the Centre and Rs.98 crore from the State. Need for Smart Cities: India's rate of urbanisation is exploding. With the high levels of migration of people from rural to urban areas, there is an urgent need to develop urban areas to cope up with the huge influx. 40% of the population is expected to be living in urban areas by 2030. There is a real threat that current urban areas will become unliveable in the near future because of haphazard and thoughtless development. The success of this programme will depend on the role that states and ULBs play in the development of the smart cities. It is a golden opportunity to attract investment and develop Tier 2 and Tier 3 cities. Citizen participation and expert advice will be key as innovative and cost-effective ideas will be required to make this enormous and ambitious exercise fruitful and effective. Note: For more information, please read Smart City Mission Statement and Guidelines released by the Ministry of Urban Development, GOI.

8-90 Concept Briefs

28. SOVEREIGN GOLD BOND SCHEME

As announced in Budget 2015-16, the Cabinet has recently approved (Sep'15) the Sovereign Gold Bond 11 Scheme. The Government is seeking to divert customers' funds from physical gold to financial assets. Purpose: • The GOI wants to curb the import of gold as gold is an idle asset and does not contribute to economic activity. • About 300 tonnes of physical bars and coins are purchased for investment annually. (The GOI expects to reduce the demand for physical gold to this extent; and ultimately will have a positive impact on current account deficit.) Modus Operandi: The Government plans to issue sovereign gold bonds through the RBI. Customers can purchase these bonds that will be linked to the price of gold. It saves them the hassles involved in securing, storing and determining the purity of physical gold. There will be intermediaries — banks, Non-Banking Finance Compa- nies, Post Offices and such others, who will issue and redeem these bonds. The issuing agency will pay the distribution costs and sales commission involved in issuing bonds and the Government will reimburse the amount spent. Features ofSeries III Scheme launched; Oct 24 to Nov 14, 2016: Government of India has vide its Notification F.No. 4(16)-W&M/2016 dated October 20. 2016 announced that the Sovereign Gold Bonds 2016 — Series III ("the Bonds") will be open for subscription from October 24, 2016 to November 2, 2016. The Government of India may, with prior notice, close the Scheme before the specified period. The terms and conditions of the issuance of the Bonds shall be as follows:

1. Eligibility for Investment: The Bonds under this Scheme may be held by a person resident in India, being an individual, in his capacity as such individual, or on behalf of minor child, or jointly with any other individual. The bond may also be held by a Trust, Charitable Institution and University. "Person resident in India" is defined under section 2(v) read with section 2(u) of the Foreign Exchange Management Act, 1999. 2. Form of Security The Bonds shall be issued in the form of Government of India Stock in accordance with section 3 of the Government Securities Act, 2006. The investors will be issued a Holding Certificate (Form C). The Bonds shall be eligible for conversion into de-mat form. 3. Date of Issue Date of issuance shall be November 17, 2016. 4. Denomination The Bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the Bonds shall be one gram with a maximum limit of subscription of five hundred grams per person per fiscal year (April-March). 5. Issue Price Nominal value of the Bonds shall be fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited for the week (Monday to Friday) preceding the subscription period. The issue price shall be Rs. 50 per gram less than the nominal value. • 6. Interest The Bonds shall bear interest at the rate of 2.50 percent (fixed rate) per annum on the nominal value. Interest shall be paid in half-yearly rests and the last interest shall be payable on maturity along with the principal. 7. Receiving Offices Scheduled commercial banks (excluding RRBs), designated Post Offices (as may be notified), Stock Holding Corporation of India Ltd (SHCIL) and recognized stock exchanges viz., National Stock exchange of India Limited

8-91 MM Special Guide and Bombay Stock Exchange are authorized to receive applications for the Bonds either directly or through agents. 8. Payment Options Payment shall be accepted in Indian Rupees through Cash (up to a maximum of Rs.20,000/-) or Demand — : Drafts b orChequ.Cheque favouror Electronic bankingf.fiWhere payment is made through cheque or demand draft, the same shall e drawn n of receiving .: : 9. Redemption i. The Bonds shall be repayable on the expiration of eight years from November 17, 2016, the date of issue of Gold bonds. Pre-mature redemption of the Bond is permitted from fifth year of the date of , issue on the interest payment dates. - ii. The redemption price shall be fixed in Indian Rupees on the basis of the previous week's (Monday- r... Friday) simple average closing price for gold of 999 purity, published by IBJA. iii. The receiving office shall inform the investor of the date of maturity of the Gold Bond one month before its maturity. 10. Repayment The receiving office shall inform the investor of the date of maturity of the Bond one month before its maturity. 11. Eligibility for Statutory Liquidity Ratio (SLR1 Investment in the Bonds shall be eligible for SLR. 12. Loan against Bonds The Bonds may be used as collateral for loans. The Loan to Value ratio will be as applicable to ordinary gold loan mandated by the RBI from time to time. The lien on the Bonds shall be marked in the depository by the authorized banks. II13. 13. Tax Treatment !. ' Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax . arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to ..• long term capital gains arising to any person on transfer of bond. .1.• 14. Applications ., Subscription for the Bonds may be made in the prescribed application form (Form 'A') or in any other form i as near as thereto stating clearly the grams of gold and the full name and address of the applicant. The receiving office shall issue an acknowledgment receipt in Form 'B' to the applicant. 15. Nomination Nomination and its cancellation shall be made in Form 'D' and Form `E' respectively, in accordance with „.., the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in part III, Section 4 of the Gazette of India dated December 1, 2007. 16. Transferability The Bonds shall be transferable by execution of an Instrument of transfer as in Form 'F', in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in part III, Section 4 of the Gazette of India dated December 1, 2007. 17. Tradability of bonds The Bonds shall be eligible for trading on a date notified by the Reserve Bank of India.

29. Gold Monetization Scheme The Government also approved the Gold Monetization Scheme (GMS). This scheme is meant to mobilise idle gold lying with households and institutions offering them a chance to take advantage of a possible increase in prices of gold. It also offers interest on the gold deposits to the customer. The scheme is a modification of the existing Gold Deposit Scheme and Gold Metal Loan Scheme with the objective of making ill the existing schemes more effective and enabling the mobilised gold to be put to productive use. 8-92 Concept Briefs

Purpose: • Many customers purchase gold for investment purposes. This gold lies idle in the hands of households and institutions. By depositing it with authorised agencies, customers can earn interest. The deposited gold can also be made available as raw materials for the gems and jewellery sector on loan from the banks. • The Government has been attempting to reduce demand for gold as it is an uneconomic asset. Modus Operandi: Customers can take their gold to Purity Testing Centres (there are about 350 Hallmarking Centres) that will give a certificate of the purity, quantity and value of gold deposited by customers for a fee. The customer can produce this certificate to a bank and have a Gold Savings Account opened. The bank will deposit the quantity of gold mentioned in the certificate in the customer's account. The bank will pay interest, to be decided by it, to the customer in terms of gold. The testing centres will send the gold deposited with them to refiners who will store it in warehouses for a fee or store it with the banks themselves. • Features of Gold Monetization Scheme: O Quantity: The minimum quantity of gold that can be deposited is 30 grams of 995 fineness. Small investors can also avail of this facility; no max. O Form: Gold deposits may be in the form of bullion or jewellery. 0 Term: Deposits may be short-term (1-3 years), medium-term (up to 5 to 7 years) or long-term (up to . . 12-15 years). 0 Principal and Interest: Those who deposit gold with authorised agencies will receive interest on it. Both the Principal and Interest will be paid to the customer in terms of grams of gold. Redemption may be in cash or gold for short-term deposits only. For other terms, redemption in Rupee only. . air, 0 Taxation: Gold deposited in these schemes is expected to be exempted from capital gains tax, wealth tax and income tax. O Use of Deposits: The deposited gold may be • kept with the RBI and used as part of Statutory Liquidity Reserve(SLR)/ Cash Reserve Ratio (CRR) requirements by banks. • converted to coins and sold • sold to generate foreign currency • lent to jewellers • delivered at domestic commodity exchanges where banks trade in gold. Used by RBI for replenishing its reserves. O Interest: Banks can decide the interest rates for short term deposits; for other tenures: RBI to decide in consultation with the Govt. O Doubts about success of the scheme: The scheme envisages melting of the gold jewellery offered by the investors; at the time of maturity only melted gold will be returned. Apart from the sentimental hurdle, the customer may lose 5 —15% of making charges. SBI has garnered only 8 tonnes of gold under the existing scheme, in the last about two decades. Also, gold purity has to be assessed at the recognised — centres only. In view of the vastness of the country and the few number of such centres, it will be difficult to mobilise gold deposits from far and wide and lend to jewellers in certain pockets only. The customers may also be worried about possible tax scrutiny. Probably, temple trusts might be persuaded to invest. Scope: Collection and deposit of gold will require a lot of infrastructure to ensure safety and security of the gold and hence this will be launched in selected cities initially. Finance Minister Arun Jaitley has stated that these schemes are not immunity schemes but a means for customers to make better use of their idle assets. India imports about 1000 tonnes of gold annually. It is also the Government's effort to reduce import of the metal to ensure that India's deficit situation is in check.

8-93 MM Special Guide 29A. Revamped Gold Deposit Scheme (R- GDS) of SBI: RBI has since modified the GMS scheme incorporating the Revamped Gold Deposit Scheme (R-GDS) and GMS-Linked Gold Metal Loan. Features of R-GDS of SBI: Revamped Gold Deposit Scheme (R- GDS) is in the nature of a fixed deposit in gold. Main features of R-GDS: Medium and Long Term Government Deposit (MLTGD): Tenure: 5-7 years and 12-15 years. The deposit will be accepted by the Bank on behalf of the Central Government. Redemption of the deposit will be only in INR equivalent of the value of gold as per then prevailing price of gold. Headings Details Purpose To mobilize the idle gold in the country and put it into productive use.- To provide the customers an opportunity to earn interest income on their idle gold holdings. Eligibility Any Resident Indian of the following categories: • Individuals, singly or jointly (as Former or Survivor) • Proprietorship & Partnership firms. HUFs Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Companies Minimum Quantity 30 gms (gross)(No upper limit for deposit) Types of deposit Short Term Bank Deposit (STBD): Tenure 1 to 3 years. Redemption either in rupee equivalent or gold.Medium and Long Term Government Deposit (MLTGD): Tenure: 5-7 years and 12-15 years. The deposit will be accepted by the Bank on behalf of the Central Government. Redemption of the deposit will be only in INR equivalent of the value of gold as per then prevailing price of gold. Rate of Interest & Payment STBD:The current interest rates are: 0.50% p.a. for 1 year, 0.55 % for 2 years and 0.60% for 3 years. Option for Interest Payment: STBD: Non-Cumulative (on 31st March) every year or Cumulative (On Maturity)MLTGD: 5-7 years: 2.25% p.a.12- 15 Years: 2.50% pa.The principal and interest on STBD shall be denominated in gold. In the case of MLTGD, the principal will be denominated in gold. However, the interest on MLTGD shall be calculated in Indian Rupees with reference to the value of gold at the time of the deposit. Acceptance of gold Gold i.e. Gold bars, Coins, Jewellery etc. will be accepted in scrap form only.Customers to submit Application Form, Identification Proof, Address Proof and Inventory Form. Issue of Gold Deposit Certificate Gold Deposit Certificate (in 995 fineness) will be issued by Nodal Branch and will be sent to the depositor by Bullion Branch, Mumbai. Issue of Gold Deposit Certificate Gold Deposit Certificate will be issued by Nodal Branch (i.e. Bullion Branch, Mumbai). The certificate will be issued for pure gold contents (i.e. in 995 fineness)• Gold Deposit Certificate (GDCs) will be sent to the depositor by Nodal Branch i.e. Bullion branch, Mumbai.

8-94 Concept Briefs

Effective Date Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold whichever is earlier. Nomination facility Available for deposits in single names in individual capacity. Repayment STBD: Option to take repayment of principal either in gold or equivalent rupees as on the date of maturity. IVILTGD: Redemption of the deposit will be only in INR equivalent of the value of gold as per then prevailing price of gold Premature payment STBD:Premature payment permitted after a lock-in period of 1 year with a penalty on applicable interest rate.MLTGD: A Medium Term Government Deposit (MTGD) is allowed to be withdrawn any time after 3 years and a Long Term Government Deposit (LTGD) after 5 years. Premature penalty will be as per RBI Notification dated 21.01.2016.

30. RBI's Guidelines for Small Finance Banks and Payment Banks

The World Bank has estimated that only 35% of India's adult population has a bank account with a financial institution. To enable all of the population to participate in India's development, RBI has come up with the idea of differentiated banks like Local Area Banks (LABs), small and payment banks that cater to niche areas. RBI has recently released guidelines for the establishment of small and payment banks so that different entities can set up banks to facilitate the national objective of financial inclusion.

Small Finance Banks v Purpose: These banks are meant to provide savings credit to small businesses, small and marginal fanners, micro and small industries and other entities in the unorganised sector. .• Powers: Small banks do not have any restrictions in the scope of their activities. Their main objective is to serve the un-banked and underserved population with the basic banking functions of accepting deposits and offering loans. • Capital Requirements Small banks must have a minimum paid-up equity capital of Rs.100 crore. Pro- moters must bring in at least 40% of the initial capital. This must be reduced to 26% within 12 years of the commencement of the business. 4.'• Promoters: Promoters include • Resident individuals who have at least 10 years of experience in banking or finance • Companies or societies owned and controlled by residents • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs) and Local Area Banks (LABs) who may convert themselves into small banks. • Fit and proper promoter groups who have run their businesses soundly for at least 5 years • Foreign Shareholding: It is restricted to 74% with at least 26% held by residents as is the norm for other private commercial banks. :• Reserve Ratios: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) will be the same as for existing commercial banks. Currently, CRR is 4% and SLR is 21.5%. • PSL: 75% of the Adjusted Net Bank Credit (ANBC) must be advanced towards Priority Sector Lending (PSL). :• Loans: 50% per cent of loans must be towards loans and advances of up to Rs.25 lakh. The maximum loan size and investment exposure limit to a single obligor is 10% and to group obligors is 15% of its capital funds. 4:4 Transition: Those small banks that perform well can become universal banks with RBI's approval. They Prudential regulation The prudential regulatory framework for the small finance banks (SFBs) will largely be drawn from the Basel standards. However, given the financial inclusion focus of these banks, it will be suitably calibrated.

Capital Adequacy Framework: Minimum Capital Requirement 15% Common Equity Tier 1 6% Additional Tier 1 1.5% Minimum Tier 1 capital 7.5% Tier 2 capital 7.5% Capital Conservation Buffer Not Applicable Counter-cyclical capital buffer Not Applicable Pre-specified Trigger for conversation of AT1 CETI at 6% up to March 31, 2019 and 7% thereafter

Leverage Ratio: Levarage Ratio 4.5% Calculated as percentage of Tier 1 capital to Total Exposure

Liquidity Coverage Ratio and Net Stable Funding Ratio LCR, as applicable to scheduled commercial banks, will be applicable to small finance banks. The transition period for the SFBs for achieving the prescribed level of LCR would be as follows:

Till By By By By Dec. Jan 1, Jan Jan 1, Jan 1, 31, 2018 1, 2020 2021 2017 2019 Min 60% 70% 80% 90% 100% LCR

NSFR will be applicable to small finance banks on par with scheduled commercial banks as and when finalised.

Capital Measurement Approaches: Credit Risk: Basel II Standardized Approach for credit risk. The use of external rating based risk weight for rated exposure andregulatory retail approach for small retail loans is permitted.

Para-banking activities: SFBs will not be permitted to undertake any pars-banking activity except that allowed as per the Licensing Guidelines and the related FAQs issued.

8-96 Concept Briefs

Rural Branches: SFBs are required to have 25% of their branches in unbanked rural centres within one year from the date of commencement of operations. KYC requirements At their discretion, SFBs may (like all other banks) decide not to take the wet signature while opening accounts, and instead rely upon the electronic authentication/confirmation of the terms and conditions of the banking relationship/account relationship keeping in view their confidence in the legal validity of such authentications/ confirmations. However, all the extant regulations concerning KYC including those covering the Central KYC Registry, and any subsequent instructions in this regard, as applicable to commercial banks, would be applicable to SFBs.

Payment Banks • Purpose: These banks are meant to offer small savings accounts and remittance services to low income households, migrant labourers, small businesses and other entities in the unorganised sector. • Powers and Restrictions: o They can take a deposit of Rs.1,00,000 per customer initially. o They can open current and savings accounts for customers. o They can issue debit and ATM cards but not credit cards. o They can offer remittance services to and from other banks. o They can offer utility payment services. o They can distribute non-risk sharing financial products like insurance and mutual funds. o They can act as Business Correspondents of other banks. o They must not offer loans to customers. o They cannot take NRI deposits. o They should invest all monies in Govt. Securities and Treasury bills up to maturity of 1 year (i.e SLR securities). o They cannot set-up subsidiaries to undertake non-banking financial services. •• Capital Requirement: Payment banks must have a minimum paid-up equity capital of Rs.100 crore. The promoter's share must be 40% for the first 5 years from the commencement of the business. • Promoters: The following entities, owned and controlled by residents of India may become promoters of payment banks: o Non-bank Pre-paid Payment Instrument (PPI) issuers o Individuals / professionals o Non-Banking Finance Companies (NBFCs) o Corporate Business Correspondents (BCs) o Mobile telephone companies o Super-market chains o Companies o Real sector cooperatives o Public sector entities o Promoters may enter a Joint Venture (JV) with existing commercial banks The entities must be 'fit and proper' with a good track record and experience in running their businesses for at least 5 years. :• Reserve Ratios: Payment banks must maintain CRR along the same lines as scheduled commercial banks (SCBs). They must also invest at least 75% of their demand deposit in SLR-eligible securities with maturity up to 1 year. They can hold up to 25% in current and time deposits with other SCBs to serve their liquidity management needs.

8-97

MM Special Guide • Leverage: The leverage ratio must not exceed 3%. This means that debt must not be more than 3 times the equity plus reserves. .• Technology: Payments banks must be well-networked and must adopt high levels of technology from the beginning. • Customer Grievance: A customer grievance cell must be in place to handle customer complaints. RBI's in-principle approval will be valid for 18 months. Note: RBI has issued the guidelines based on Nachiket Mor Committee Recommendations.

Operating Guidelines for Payments Banks: Prudential regulation The prudential regulatory framework for payments banks (PBs) will largely be drawn from the Basel standards. However, given the financial inclusion focus of these banks, it will be suitably calibrated.

Capital adequacy framework: Minimum Capital Requirement 15% Common Equity Tier I 6% Additional Tier 1 1.5% Minimum Tier 1 Capital 7.5% Tier 2 Capital 7.5% Capital Conservation Buffer Not Applicable Counter-cyclical capital buffer Not Applicable Pre-specified Trigger for conversation of AT I CET 1 at 6% up to March 31, 2019, and 7% thereafter. Large exposures limits (for investments in deposits of scheduled commercial banks) The exposure in this regard to an individual scheduled commercial bank shall not be more than five per cent of the total outside liabilities of the PB. Capital Measurement Approaches: Credit Risk Basel II Standardized Approach for credit risk. Investment classification and valuation norms (i) PBs shall, on any given day, maintain a minimum investment to the extent of not less than 75 per cent of `demand deposit balances' - DDB (including the earnest money deposits of BCs) as on three working days prior to that day, in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR). (ii) Further, PBs shall, on any given day, maintain balances in demand and time deposits with other scheduled commercial banks, which shall not be more than 25 per cent of its DDB (including the earnest money deposits of BCs) as on three working days prior to that day. (iii) The investments and deposits made according to (i) and (ii) above, together shall not be less than 100 per cent of the DDB (including the earnest money deposits of BCs) of the PB unless it is less to the extent of balances kept with RBI. Note: Balances with other scheduled commercial banks in excess of 25 per cent of DDB (including the earnest money deposits of BCs), is permissible to the extent the excess amount is sourced from funds other than DDB (including the earnest money deposits of BCs).

Para-banking activities PBs will not be permitted to undertake any para-banking activity except those allowed as per the Licensing Guidelines and the related FAQs issued.

8-98 '11114111111fr"--"--"M

Concept Briefs

Product approval (i) At the time of submitting application for licence, the PBs should submit to RBI a list of financial products they intend to offer with a clear description. (ii) Any new products proposed to be introduced thereafter should be intimated to RBI for information. If required, RBI may place suitable restrictions on the design, functioning, or other features of the product including discontinuing the product.

Banking Operations 6.1 Authorization ofAccess Points (i) The annual plans for opening of physical access points by the PBs for the initial five years would need prior approval of RBI. The first of such plan shall be submitted to RBI before commencement of business. After the initial stabilisation period of five years, and after a review, RBI may liberalize the requirement of prior approval. (ii) An employee of the PB should be available for sufficient duration, at a fixed location known to the customers at the district level, to attend to customer grievances and support the agent supervision. This fixed location may also be used to conduct the banking business of the PB, and it will be considered as a physical access point for the purposes of assessing the requirement of opening at least 25 per cent physical access points in rural centres. Bank deposits (i) As provided in the current RBI directions, PBs can accept only savings and current deposits. The aggregate limit per customer shall not exceed '100,000, as provided in the Licensing Guidelines. However, the RBI will have no objection to the PBs making arrangements with any other scheduled commercial bank / SFB, for amounts in excess of the prescribed limits, to be swept into an account opened for the customer at that bank. This arrangement should be activated with the prior written consent of the customer. KYC requirements (i) At their discretion, PBs may (like all other banks) decide not to take the wet signature while opening accounts and instead rely upon the electronic authentication/confirmation of the terms and conditions of the banking relationship/account relationship keeping in view their confidence in the legal validity and authenticity of such authentications/confirmations. However, all the extant regulations concerning KYC including those covering the Central KYC Registry, and any subsequent instructions in this regard, as applicable to commercial banks, would be applicable to PBs. (ii) PBs should ensure that every customer, including customers of mobile companies on-boarded comply with the KYC regulations, which could include simplified account opening procedures. It is clarified here that if the KYC done by a telecom company, which is a promoter / promoter group entity of the PB, is of the same quality as prescribed fora banking company, PBs may obtain the KYC details of the customer from that telecom company, subject to customer consent.

31. RBI's Charter of Customer Rights

The Reserve Bank of India has released a Charter of Customer Rights, which enshrines broad, overarching principles for protection of bank customers and enunciates the 'five' basic rights of bank customers. These are: (i) Right to Fair Treatment; (ii) Right to Transparency; Fair and Honest Dealing; (iii) Right to Suitability; (iv) Right to Privacy; and (v) Right to Grievance Redress and Compensation. The Reserve Bank has also advised the Indian Banks' Association (IBA) and the Banking Codes and Standards Board of India (BCSBI) to formulate a "Model Customer Rights Policy" encapsulating the principles enshrined in the Charter. The policy, if needed, would have to be suitably dovetailed with the "Model Customer Rights Policy" proposed to be formulated by IBA/BCSBI. (RBI — Dec'2014)

8-99 MM Special Guide Charter of Customer Rights 1. Right to Fair Treatment: Both the customer and the financial services provider (FSP) have a right to be treated with courtesy. The customer should not be unfairly discriminated against on grounds such as gender, age, religion, caste and physical ability when offering and delivering financial products.

2. Right to Transparency, Fair and Honest Dealing: The FSP (financial services provider) should make every effort to ensure that the contracts or agreements it frames are transparent, easily understood by and well communicated to, the common person. The product's price, the associated risks, the terms and conditions that govern use over the product's life cycle and the responsibilities of the customer and financial service provider, should be clearly disclosed. The customer should not be subject to unfair business or marketing practices, coercive contractual terms or misleading representations. Over the course of their relationship, the financial services provider cannot threaten the customer with physical harm, exert undue influence, or engage in blatant harassment. 3. Right to Suitability: The products offered should be appropriate to the needs of the customer and based on an assessment of the customer's financial circumstances and understanding.

4. Right to Privacy: Customers' personal information should be kept confidential unless they have offered specific consent to the financial services provider or such information is required to be provided under the law or it is provided for a mandated business purpose (for example, to credit information companies). The customer should be informed upfront about likely mandated business purposes. Customers have the right to protection from all kinds of communications, electronic or otherwise, which infringe upon their privacy.

5. Right to Grievance Redress and Compensation: The customer has a right to hold the financial services provider accountable for the products offered and to have a clear and easy way to have any valid grievances redressed. The provider should also facilitate the redress of grievances stemming from its sale of third party products. The financial services provider must communicate its policy for compensating mistakes, lapses in conduct, as well as non-performance or delays in performance, whether caused by the provider or otherwise. The policy must lay out the rights and duties of the customer when such events occur.

32. Cheque Related Frauds - Preventive Measures (RBI)

The Reserve Bank, has advised scheduled commercial banks (excluding RRBs) / local area banks to review and strengthen the controls in the cheque presenting / passing and account monitoring processes and to ensure that all procedural guidelines including preventive measures are followed meticulously by the dealing staff/officials. An indicative list of some of the preventive measures, that banks may follow, are as under: • Ensuring the use of 100 percent Cheque Truncation System (CTS) - 2010 compliant cheques; • Strengthening the infrastructure at the cheque handling service branches and bestowing special attention on the quality of equipment and personnel posted for CTS based clearing, so that it is not merely a mechanical process; • Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/her as long as he/she remains a customer of the bank; • Examination under ultra violet lamp for all cheques beyond a threshold of say, Rs.2 lakh; ' . • Checking at multiple levels, of cheques above a threshold of say, Rs.5 lakh; • Close monitoring of credits and debits in newly opened transaction accounts based on risk . categorisation;

8-100 Concept Briefs

• Sending SMS alert to payer/drawer when cheques are received in clearing; In addition to the above, banks may consider the following preventive measures for dealing with suspicious or large value cheques (in relation to an account's normal level of operations): • Alerting the customer by a phone call and getting the confirmation from the payer/drawer. • Contacting base branch in case of non-home cheques. The above may be resorted to selectively if not found feasible to be implemented systematically. The Reserve Bank has also advised banks to take appropriate precautionary measures to ensure that the confidential information, such as, customer name/account number/signature, cheque serial numbers and other related information are neither compromised nor misused either from the bank or from the vendors' (printers, couriers etc.) side. The Reserve Bank has further advised the banks to take due care and ensure secure handling of cheques from the time they are tendered over the counters or dropped in the collection boxes by customers. It has been reported that in some cases even though the original cheques were in the custody of the customer, cheques with the same series had been presented and encashed by fraudsters. The Reserve Bank, on November 13, 2014, has also advised primary (urban) co-operative banks (UCBs), to review and strengthen the controls in the cheque presenting/passing and account monitoring processes and to ensure that all procedural guidelines including preventive measures are followed meticulously by the dealing staff/officials. Monetary and Credit Information Review (MC1R —Nov'14).

33. Draft Indian Bankruptcy Law

The Bankruptcy Law Reforms Committee (BLRC) headed by former law secretary Dr. T K Viswanathan was set up in August 2014 by the Ministry of Finance. It has sought to consolidate the various existing bankruptcy laws and make one comprehensive law that encompasses all parties and possible situations to resolve insolvency of various entities within a short time. It covers individuals, partnership firms and companies. India's Ranking in the World: India has been ranked at 130 in the Ease of Doing Business index by the World Bank in its Doing Business 2016 report. In 2005, it took 4 months to open a business as compared to 29 days now. India has been ranked at 137 out of 189 countries in terms of resolving insolvency proceedings from 136 a year ago. In Mumbai, the average time taken to deal with insolvency cases is 4.3 years with a recovery rate of 25% while in other developed nations within the Organisation of Economic Co-operation and Development (OECD), (members with high income), it takes 1.7 years with a recovery rate of 72%. Case for Bankruptcy Law: A bankruptcy law that facilitates speedy action in case of insolvency proceedings would help various parties (shareholders, debtors, creditors, employees and so on) Also, it would modernise the outdated system which has resulted in protracted delays in settlement of various issues. The Bill aims at the following. § Within a limited period of time, action (restructuring or selling off of assets) may be taken. o Debtors can come up with a recovery plan at an earlier stage. o Banks can take over assets sooner and with more certainty. o Faster resolution of these cases will encourage investors to invest in companies in India as they can be more confident of withdrawing their investment within a fixed period of time. § Various authorities (DRT, NCLT, High Courts and the Board for Industrial and Financial Reconstruc- tion) have overlapping powers in India. Creditors file law suits under different Acts. This causes delay in processing applications and confusion in taking a unified approach to resolution. § Other developed countries already have a bankruptcy law that attempts to revive the ailing company and

8-101 . ,.. , P.1.'1!..... 1!'' MM Special Guide it if that does not work out, ensures optimal distribution of assets post liquidation. ;.' [ The committee has recommended a new institutional arrangement for handling insolvency cases: (i) Insolvency Regulator 1 (ii) Insolvency Adjudicating Authority (iii) Insolvency professional agencies and information utilities. Draft Bill: The committee has recommended a Draft Bill to be passed into law by the Parliament. Process: Before the bankruptcy proceedings start, the draft Bill envisages two processes: o Fresh Start Process: Here, individuals with less than Rs.60,000 gross annual income and less than Rs.20,000 aggregate value will be eligible to apply fora discharge of their debts. These debts must be liquidated, unsecured and not excluded debts of less than Rs.35,000 to qualify for discharge. The insolvency professional will prepare a list of all these debts and the Adjudicating Authority will have the power to discharge the debt. The debtor can then start anew. o Insolvency Resolution Process: Creditors and debtors try to arrive at a mutually-agreeable plan facilitated by an insolvency professional. A bankruptcy trustee will take care of the disposal and distribution of assets. The recommendations of the Committee are as follows: 4 Professionals' Regulation: Insolvency professionals will take care of the proceedings of insolvency; , • '?i they are to manage the debtor's affairs. This will ensure that managers of the debtor firm do not indulge in asset-stripping. An insolvency regulator will supervise insolvency professionals and agencies and informational utilities enforcing discipline and a strict code of ethics and professional standard among .,..LI them. The Central Government will take care of the role of the Regulator till such time one is appointed , - to ensure that the process of insolvency gets under way immediately. Insolvency professional will replace the court appointed official liquidators. -.; • Plan: The insolvency professional must come up with a plan that at least 75% of the financial creditors must approve. Promoters, competitors and Private Equity funds may suggest ways to revive the firm through infusion of capital, debt restructuring and by bringing in new shareholders. In case this fails, an Adjudicating Authority will take care of liquidation. • Adjudicating Authority: The adjudicating authority will have the power to arbitrate cases by or against the debtor: § For individuals and unlimited liability partnership firms, the Adjudicating Authority will be the Debt Recovery Tribunal (DRT). The Debt Recovery Appellate Tribunal (DRAT) will hear appeals from the DRT. § For companies and limited liability entities, the Adjudicating Authority will be the National Company Law Tribunal (NCLT). The National Company Law Appellate Tribunal (NCLAT) will hear appeals of the NCLT. Information Utilities: An individual insolvency database with details of the status of insolvency of individuals is also proposed. This new system with information utilities, who are to provide timely information of defaults, will ensure that the problem of information asymmetry between creditors and debtors regarding the financial status of the firm is taken care of. Time for Resolution: The Committee has suggested that applications for insolvency be dealt with within 180 days; this is extendable by another 90 days for exceptional cases by the Adjudicating Authority. During this time, the assets of the firm remain with it and no claims may be pursued against the debtor. This is to encourage creditors to pursue collective action against the debtor rather than individual ones. A fast track resolution process will be applicable to certain entities — the period of resolution of insolvency proceedings in this case is 90 days. This may be extended by 45 days on a one-time basis. 8-102 Concept Briefs

Proceeds from the realisation of assets may be distributed according to a predetermined order in favour of creditors. Comment: The Committee's recommendations are a positive step towards encouraging a transparent and quick way out for failed firms. It also promotes a more capable and liquid credit system and enables entrepreneurs to invest without fear of locking their funds indefinitely. The challenge for this legislation to be effective lies in the quality of the professionals that will run the bankruptcy proceedings insolvency professionals, regulators, information utilities and the tribunals. Also, the new Law's powers in relation to the existing ones such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Secu- rity Interest (Sarfaesi) must be clearly demarcated to avoid conflicts. The Bill has to be passed by the Parliament to become law.

34. FATCA

FATCA: The Foreign Asset Tax Compliance Act (FATCA) is a US federal law that was passed in March 2010; it seeks to increase international tax compliance. It targets US tax payers who evade tax payment in USA using offshore accounts and transactions. It legislates that if a US tax resident has an account with a country, that country is liable to share this information with it. The main objective of this law is to curb tax evasion. This law requires 2 entities to report to the US Government: § US tax payers — about foreign financial accounts and assets held abroad § Foreign Financial Institutions situated outside the US — about accounts that US tax payers hold with them India and FATCA: The Indian Government signed an MoU (Model I Inter-Govemmental Agreement - IGA which is a bilateral agreement) with the US Government in July 2015 to share tax information and to implement the FATCA w.e.f. September 30, 2015. While this means that the Indian Government must disclose financial details of US tax payers in the country, it also means that it will get information regarding its own tax payers' financial accounts in the US. This will help India address the burgeoning issue of black money. FFIs and FATCA: Foreign Financial Institutions (FFIs) have an option of signing agreements directly with US tax authorities. The FFI must be registered with the US Internal Revenue Service (IRS). State Bank of India (SBI) has also signed an agreement with the US Internal Revenue Service (IRS) and will share information directly with it as an FFI. SBI has taken MIN (Global Intermediary Identification Number), a unique 19 character number from U S. India and CRS: CRS (Common Reporting Standard) relates to OECD. The Indian Government has already signed the Organisation of Economic Co-operation and Development (OECD)'s Common Reporting Stan- dard (CRS) or Standard for Automatic Exchange of Financial Account Information (AEoI), wherein India and 60 other signatories will share tax and specified financial information. This was a voluntary agreement to enable countries to uncover fmancial information of their tax payers abroad. Accounts to be Reported: Any savings bank, current account, overdraft, credit balance in TL/DL or overdraft, term deposit or prepaid card accounts and in any currency must be reported to US authorities. Reporting Information: Reporting Financial Institutions (RFIs) have to report the following: • For individual accounts: Name, address, US Taxpayer Identification Number (TIN) and account number of each specified US person • For custodial accounts: Gross interest, dividend, other income generated during the calendar year and gross proceeds from the sale of property where RFIs acted as custodian For depository accounts: Gross amount of interest paid, gross amount of US-sourced dividend paid and gross amount of interest paid on depository account Banks and financial institutions in India will submit the details of US reportable accounts of individual and entity to the identified nodal agency CBDT (Central Board of Direct Taxes) who in turn will share such data to US IRS.

8-103 MM Special Guide FATCA Reporting in India: The Indian Government has notified rules with respect to FATCA reporting:

Account Details a financial account identified, Reportable Account following the specified due diligence procedures, as held by: (a) a reportable person; or (b) entity not based in the US but controlled by a specified US person; or (c) a passive non-financial entity with one or more controlling persons. a financial account held by a US US person or entity not based in the Reportable Account US but controlled by a specified US Person _ a reportable account which is not a Other Reportable Account US reportable account

US Reportable Other Reportable Account Account financial account financial account opened on or opened on. or New Account after 1st July 2014 after 10 January 2016 US Reportable Other Reportable Account Account financial account financial account maintained as on maintained as on Pre-Existing Account 30 June 2014 30 December 2015 A financial institution other than art Non-participating financial Indian financial institution and institution financial institutions based on jurisdiction having art agreement with the US for implementation of FATCA.

Pre-existing accounts are further classified into: Identification of reportable accounts among pre-existing entity accounts: a) The reporting financial institution is not required to review, identify, or report following reportable pre- existing entity accounts with a balance: US Reportable Account: USD 250K as on the 30 June, 2014 or 31 Dec 2015. • Other Reportable Account: > USD 250K as on the 31 December, 2015 or 31 Dec 2016. Non-Compliance: Failure to share information will entail a 30% withholding tax on payment transactions sourced 8-104 Concept Briefs

from the US. These transactions could include payment of rent, interest, dividend, salaries, sale proceeds of US stocks, interest earned on deposits of foreign branches of domestic banks and soon. Since most global transactions (about 70%) take place in US Dollars, this is a real threat for those countries that do not comply. Impact of FATCA on Indian FIs: The reporting requirements under FATCA will necessitate painstaking and time- consuming operations for Indian Financial Institutions (FIs) as they will have to update Know Your Customer (KYC) details of all their customers with new account opening forms among other formalities. The Central Bureau of Direct Taxes (CBDT) is also required to share tax information of Non Resident Indians (NRIs) in the US. The higher compliance cost to Indian FIs is likely to deter institutions like mutual funds from accepting investments from the US. On the other hand, the Indian Government will benefit from additional tax information regarding its own taxpayers and learn about their foreign income. The Indian banking and financial system has to rework some of its processes upon the introduction of FATCA and CRS. The annual reporting to agencies outside India will take place through CBDT, the intermediary. Under the agreement, reporting under FATCA will start after 30th September 2015 and reporting for CRS will start after 3I st December 2015. Before the actual reporting under FATCA and CRS start, banks have to redesign their account opening forms - for both domestic and NRI customers - to include information relating to the reporting requirements under FATCA and CRS. The banks will have to introduce data fields in their CBS system to capture the related information and train their personnel for the additional task. Effect on NRIs who are resident in USA: NRIs resident in USA have to declare their global income / assets to US authorities. There are many Indians who hold American passport for prestige, travel convenience etc. Many of them are taking steps to surrender US passport and take Indian passport

35. Crop Insurance Scheme: National Crop Insurance Programme (NCIP) Part I Rashtriya Fasal Bima Karyakram (RFBK)

(Central sector scheme launched by Mo Agriculture to insulate farmers against agricultural risks.) NCIP provides risk mitigation mechanism for the farmers, apart from acting as collateral security against the loans extended to them. To help the farmers in mitigating their losses adequately and promptly, Gol introduced National Crop Insurance programme (NCIP) from 1st Nov 2013 consequent on the withdrawal of National Agriculture Insurance Scheme (NAIS).NCIP is a multi-agency programme offering three component schemes: a) Modified National Agriculture Insurance Scheme (MNAIS) (Component-1) b) Weather Based Crop Insurance Scheme (WBCIS) (Component-2) c) Coconut palm Insurance Scheme (CPIS). (Component-3) The component schemes of MNAIS and WBCIS offer various improvements over erstwhile scheme. General aspects: O The schemes Cl and C2 will be implemented in all districts from Rabi 2013-14 and NAIS rolled back simultaneously. O Loanees will be covered compulsorily (100%) under the component scheme notified by the concerned state and non- loanees on voluntary basis can choose either Cl or C2. O Experienced private sector insurers will also be permitted to implement NCIP besides Agricultural Insurance Company of India (AIC). O Crop loans granted against pledge of gold / omaments are also eligible for compulsory coverage, subject to insurability of crop and seasonality discipline. O Two indemnity levels under MNAIS - 80% and 90% are available corresponding to risk level of the area. The implication will be that the risk home by the insured farmers is considerably lower compared to the erstwhile schemes.

8-105 -

- - MM Special Guide

O Provision for add-on / index plus products for horticultural crops for compensating losses due to hailstorm, cloudburst, etc. under WBCIS component. O Improved basis for working out threshold yield, thus increasing the effective guaranteed yield for the fanner. O Unit of insurance has been brought down to village/ panchayat for major crops in MNAIS component thus reducing the basis risk i.e. the possibility of the claim being different from the actual loss. O Premiums actuarially priced with upfront subsidy from central and state government ranging from 25% to 50% under WBCIS and 40% to 75% under MNAIS. O Coverage available against localized calamities, prevented sowing, post-harvest loss under MNAIS. MNAIS also has a facility for making on-account payment for major calamities. O Time limits for of claims: MNAIS — within 30 days of receipt of yield data & WBCIS — within 45 days of receipt of weather data. O Service Charges to banks: A 60% increase in service charges payable to banks @4% from 2.5% under MNAIS component of the premium collected from farmers. OPERATIONAL GUIDELINES issued by GOI for scheme implementation are uploaded on the website of the Department ofAgriculture & Cooperation- www.agricoop.nic.in. ACTION POINTS FOR IMPLEMENTATION OFNCIP: a) In case of loanee farmers, under compulsory component, sum insured should be at least equal to the amount of crop loan sanctioned / advanced. However, farmers may opt for higher insured sum which may extend up to value of threshold yield. b) Non-loanee farmers can be covered under the scheme on voluntary basis. Sum insured is up to value of threshold yield, but if the farmers desire higher coverage, they may opt up to 150% value of average yield. c) All back up records and registers relating to compliance with the schemes and its seasonality discipline should be maintained. d) Proposal, declaration forms, premium and related data are to be submitted separately for loanee and non- loanee farmers, to nodal branch within the cut-off date stipulated. e) The Nodal Branch may also collect requisite details from concerned branch in soft copy for further reconciliation and ensure submission to insurance companies within stipulated time. f) The list of insured fanners and beneficiaries with all requisite details are uploaded in insurance company website. Branches should cross check the insured farmers' data uploaded in the insurance company website. g) Branches to ensure that cultivators are not deprived of any benefit under the Scheme due to errors / omissions / commissions of the Nodal Branch / Branch and in case of such error, the Nodal Branch / Branch shall be liable for such omissions and its consequences. h) Special workshops to be organized for branches /Nodal branches involved in agricultural finance . Claims: The State Government carries out crop cutting experiments for each insured crop in the defined area. Within one month thereafter, it has to advise GIC, the details of short-yields (i.e. yields less than the threshold yields). The GIC will determine the indemnity to be paid for each branch and effect the payment of its share to nodal branches. Simultaneously, it will advise the State Crop Insurance Fund to pay its share. However, in the event of localised calamities such as hailstorm, land-slide, cyclone, flood, etc, individual claims of affected farmers will be entertained separately. Nodal Offices: * Each branch has to remit the insurance premia to the nodal branch which will in turn forward it to the implementing Agency (IA) * The crop insurance declarations have to be sent to the IA on monthly basis within one month from the cut off date. * Claims received by Nodal Offices will be remitted to branches within 7 days; the branches have to credit the beneficiary's account within 7 days.

8-106 Concept Briefs

Modified National Agricultural Insurance Scheme Special features: Objectives: to provide insurance coverage and financial support in the event of prevented sowing and failure of any notified crop as a result of natural calamities, pest and diseases. To help stabilize farm income particularly in disaster years. In addition to Agricuture Insurance Company of India Ltd, trained, experienced private sector insurance companies short listed by Department of Agriculture and Cooperation will also be allowed on selective basis. Crops covered: Food crops, oil seeds, horticulture crops and annual commercial crops. These are covered subject to availability of past yield data based on requisite number of crop cutting experiments conducted for adequate number of years. Ten years' historical data is adequate for setting premium rates, fixing indemnity limit, and threshold yield etc. Risks covered: (a) Standing crop (sowing to harvesting).Natural fire and lightning. Flood, inundation and landslide. Drought and dry spell. Pest and diseases. Storm, cyclone typhoon etc. (b) (Prevented sowing/Planting risk): Deficit rainfall, adverse seasonal conditions. Farmer has intention to sow and incurred expenses but could not sow. Eligible indemnity maximum 25% of sum assured. (c) Post-harvest losses: Cover only crops which are allowed to dry in the field after harvest, against perils of cyclone in coastal areas. Maximum period two weeks from harvest. Assessment of damage on individual basis. Risks not covered: Losses arising out of war, nuclear, preventable risks and malicious damage. Sum insured (a) Loanees: on compulsory basis: Minimum: equal to the amount of crop loan sanctioned. Maximum: threshold yield value of the insured crop at the option of borrower. (Higher of the two viz.loan amount and value of threshold yield will be the sum assured).Premium will be additional component to the SOF for the crop. (b) Non-loanees: on voluntary basis: up to the value of threshold yield with premium subsidy or he may opt for higher coverage without premium subsidy for the excess coverage. Premium: Worked out before the starting of season on actuarial basis for each notified crop and subsidised by central and state government on 50:50 basis. However premium rates will be capped at 11% and 9% (of sum assured) for food and oil seeds crop of kharif and Rabi season respectively. For annual and horticultural crops it will be 13%. Scheme approach: based on "Area approach". (A)For widespread calamities: Defined areas (i.e. unit area of insurance — may be village or village panchayat) for major crops. For other crops it may be Village panchayat or taluk as decided by state govt. (B)For Localised risks: Hail storm, landslide etc. on individual basis. For other calamities-Area approach. Seasonality discipline: Differs from state to state to state and cut off dates are fixed for various stages of crop insurance based on historical onset of monsoon. In case of three crop pattern, modified seasonality discipline will be fixed by State Level Coordination Committee on crop Insurance (SLCCCI). Estimation of crop yield: Based on required number of Crop Cutting Experiments (viz. Village level minimum size of CCE -4 for major crops and 8 for other crops; Taluk level-16 and district level-24.If adequate yield data is not available, alternative yield assessment standardised techniques will be adopted by insurers. Levels of indemnity: Two levels viz .90% and 80% corresponding to risk level of the area as determined by the implementing agency will be available for all notified crops. Threshold yield(TY) or guaranteed yield in an insurance unit will be the average yield of crop in the preceding seven normal years multiplied by level of indemnity. At least five years data is a must. Nature of coverage and indemnity: (a) Widespread calamities: If the AY per ha (decided based on CCC) in the season falls short of specified TY, all the fanners in the area are deemed to have suffered the loss.

8-107 MM Special Guide

!,: j In the light of this, Indemnity= Shortfall in yield X Sum insured for farmer divided by Threshold Yield. (Shortfall=Threshold Yield minus Average Yield for defined area.) (i) On account payment of claims: In case of adverse seasonal conditions during crop season, claim amount up to 25% of likely claims would be released subject to adjustment against the claims assesses on yield 4 ;jill basis. This will be considered only if the expected yield is less than 50% of normal yield. The criteria for on account payment will be decided by state govt. based on proxy indicators. (ii) Prevented sowing/planting claims: Extent of claim will be based on rainfall position issued by Indian Meteorological Department for the area during sowing season and acreage sown particulars issued by state govt. Maximum claim 25% of sum insured. Once it is paid, insurance cover stands terminated. (iii)Post- harvest losses: available for only those crops which are in "cut and spread position" for drying against perils of cyclone in coastal areas after harvest of the crop. State govt will bring out the list of such crops. Cover available only for a maximum period of two weeks (14 days) from harvesting, assessed on individual basis. (b) Localised Risks: Cover against identified local risks viz. hailstorm and landslide. Basis for assessment of loss will be cost of input spent until the time of occurrence of peril and expected loss in fmal yield. Commission/service charges payable to nodal bank branches: 4% of premium collected. Monitoring: at levels of district, state and nation by state govt, implementing agencies and GOI.State level coordination committee on crop insurance will be responsible for monitoring of the scheme along with insurance companies.

35A. NATIONAL CROP INSURANCE PROGRAMME. PART-II WEATHER BASED CROP INSURANCE SCHEME (NBCIS). COMPONENT- II OF NCIP.

Objective: To compensate the anticipated crop loss due to incidence of adverse weather conditions like excess/ deficit rainfall, unseasonal rains, heat (temperature), frost, relative humidity etc. Main features: O Compensation for crop loss computed based on adverse weather conditions recorded in the meteorological laboratories set up for this purpose. O Provision for add-on/index plus products for horticultural crops against the perils of hailstorm, cloudburst etc. O Crops covered: Major cereals, millets, pulses, and oil seeds, commercial and horticultural crops notified by SLCCCI. O Covers loanees and non- loanees. For loanee farmers insurance is compulsory and for non-loanee farmers on voluntary basis. O Implemented by AIC and empanelled private sector insurance companies. O Areas where WBCIS will be implemented will be advised by concerned state governments. O Non- loanee farmers can choose between MNAIS and WBCIS and also the insurance company of their choice. O Maximum amount of sum insured will be equivalent to cost of cultivation of the notified crop. Non- loanee farmers can insure for a lower amount but not less than 50% of maximum limit of sum assured. O Premium rates for each season, for each notified crop and for each notified Reference Unit Area shall be calculated by insurers using standard premium rating methodology and declared in the notification before the commencement of the season. Premium rates are capped at 10% during kharif and 8% for Rabi for food crops and oil seeds. For annual, commercial and horticultural crops, 12% on actuarial basis. Concept Briefs

Minimum Net premium payable by the fanners (after adjustment of subsidy receivable from center and state government on 50:50 basis) ranges from 2% to 4.8% and maximum net premium works out to 6%. Area approach: A Reference Unit Area (RUA) will be considered as a Unit Area of Insurance for acceptance of risk and assessment of compensation. All insured cultivators of notified crop in the notified RUA shall deemed to be on par. RUA are linked to specific Reference Weather Stations (RWS) commissioned for providing weather data. RUA is a geographical area around a RWS pre notified by State Level Coordination Committee on Crop Insur- ance (SLCCCH.Normally the RUA shall be restricted to 10 km radius around RWS in case of rainfall and wind parameters and 100 km in case of frost, heat and relative humidity etc. Covers all notified crops notified by SLCCCI in the RUA. Risk period would be from sowing period to maturity of the crop. This would be notified by SLCCCI before the commencement of risk period. All farmers including tenant farmers and share croppers who are raising notified crops in the RUA are eligible to be covered. Nodal bank branches will be paid service charges @4% of premium amount collected from farmers and paid to insurance companies. Compensation (Pay-out): It will arise only in case of Adverse Weather Incidence (AWD. It is equivalent to the deviation between Trigger Weather data and Actual weather data recorded at a RWS during the specified time period. Trigger weather is a predetermined weather parameter applicable for a notified crop in a notified RUA. In case of AWI all the insured cultivators growing the Notified crop in the RUA are deemed to have suffered the same proportion of crop loss and become eligible for same rate of compensation. Pay-out would normally be made to nodal banks by insurers within 45 days of closing of insurance period subject to availability of actual weather data.. Pay- out will be automatic i.e. Pay-out will be credited automatically to the insured's bank account through Nodal bank. Component M- COCONUT PALM INSURANCE SCHEME (CPIS) Objective: Insuring Coconut palms against natural disasters and other perils and providing relief to coconut growers in case of loss of crop. To encourage palm growers for replanting and rejuvenation of palm trees for better farm returns. Implemented in selected districts in all states and UTs. Applicability: All healthy and nut-bearing trees. Dwarf and hybrid varieties: age range of 4 to 60 years. Tall varieties: age range of 7 to 60 years. Eligibility: Farmers offering at least 5 healthy nut-bearing palms of any variety in a contiguous area. Risks covered: Loss/death of palm tree or it becoming unproductive due to perils such as cyclone, drought, flood, pest and diseases etc. (Refer circular for complete list). Risks not covered: Loss by war, theft, nuclear radiation, improper maintenance of palm etc. (Refer circular). Sum insured: Rs.900 per palm (for age group of 4 to 15 years) and Rs.1750 per palm (for age group of 16 to 60 years). For the former case, premium per plant per year is Rs.9 and for the latter case Rs.14. Self- declaration of farmer will be acceptable for deciding the age group of palm tree, subject to verification by insurance company. Premium subsidy: 50% by Coconut Development Board, 25% by concerned state govt, and remaining 25% is payable by Insured farmer. Insurance term: Policy for a maximum period of 3 years. (Rebate in [email protected]% for two year policy and 12.5% for three year policy. Claims: Loss of palms has to be intimated to insurance company within 15 days of occurrence of peril. 8-109 MM Special Guide 36. Strategic Debt Restructuring (SDR) Scheme (RBI)

In the last 3-4 years NPAs of banks have been mounting (Rs.5.9 lakhs cr at Mar'16). Financial Stability Report for June 2016 observes that gross NPA percentage could touch even 9.3 by March end, 2017 in a severe stress scenario and 8.5 in the baseline scenario from 7.6 as on March end, 2016. Against the backdrop of such a steep rise in NPAs, in December 2015 Reserve Bank of India (RBI) asked banks to clean up their balance sheet by March 31, 2017, which calls for reorganizing visibly stressed assets and coming up with an NPA resolution plan, focusing on arresting slippage in loan asset quality and loan recovery on a war footing. In Feb 2014, RBI had issued a "Framework for Revitalising Distressed Assets in the Economy — Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)", wherein change of management was envisaged as a part of restructuring of stressed assets. It stated that the general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders. The NPA problem has intensified for the banks in the recent past. With a view to contain the NPA menace, RBI has issued on 08.06.15 further guidelines on the matter. Again, modifications were issued on 25-02-16 and 10-11-16.

With the above principle in view and also to ensure more 'skin in the game' of promoters, JLF/Corporate Debt Restructuring Cell (CDR) may consider the following options when a loan is restructured: - Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices; Promoters infusing more equity into their companies; - Transfer of the promoters' holdings to a security trustee or an escrow arrangement till turnaround of company. This will enable a change in management control, should lenders favour it. 2. It has been observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational/ managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be a preferred option. 3. Guidelines under JLF and CDR mechanism state that the restructuring package should also stipulate the timeline during which certain viability milestones (e.g. improvement in certain financial ratios after a period of time, say, 6 months or 1 year and soon) would be achieved. The JLF must periodically review the account for achievement/non-achievement of milestones and should consider initiating suitable measures including recovery measures as deemed appropriate. With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may, at their discretion, undertake a 'Strategic Debt Restructuring (SDR)' by converting loan dues to equity shares.

Salient aspects of SDR: i. At the time of initial restructuring, the JLF must incorporate, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones and/or adhere to 'critical conditions' as stipulated in the restructuring package. This should be supported by necessary approvals/authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable the lenders to exercise the said option effectively. Restructuring of loans without the said approvals/authorisations for SDR is not perrnittectIf the borrower is not able to achieve the viability milestones and/or adhere to the 'critical conditions' referred to above, the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership. If found viable under such examination, the JLF may decide whether to invoke the SDR, i.e. convert the whole or part of the loan and interest outstanding into equity shares in the borrower company, so as to acquire majority shareholding in the company;

8-110 Concept Briefs

The Strategic Debt Restructuring (SDR) has been introduced with a view to ensuring more stake of promoters in Ai li1:3 reviving stressed accounts and providing banks with enhanced capabilities to initiate change of ownership, where 1 necessary, in accounts which fail to achieve the agreed critical conditions and viability milestones. Therefore, :. banks should consider using SDR only in cases where change in ownership is likely to improve the economic value of the loan asset and the prospects of recovery of their dues. In this regard, the instructions on SDR on the issue of triggering invocation of SDR must be scrupulously followed. It is reiterated that the trigger for SDR must be non-achievement of viability milestones and /or non-adherence to 'critical conditions' linked to the option of invoking SDR, as stipulated in restructuring agreement, and SDR cannot be triggered for any other reason.

ii. Provisions of the SDR would also be applicable to the accounts which have been restructured earlier. iii. The decision on invoking the SDR by converting the whole or part of the loan into equity shares should be taken by the JLF as early as possible but within 30 days from the above review of the account. Such decision should be well documented and approved by the majority of the JLF members (minimum of 75% of creditors by value and 60% of creditors by number); iv. In order to achieve the change in ownership, the lenders under the JLF should collectively become the majority shareholder by conversion of their dues from the borrower into equity. However the conversion by JLF lenders of their outstanding debt (principal as well as unpaid interest) into equity instruments shall be subject to the member banks' respective total holdings in shares of the company conforming to the statutory limit in terms of Section 19(2) of Banking Regulation Act, 1949; v. Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company; vi. The share price for such conversion of debt into equity will be determined as per the method described later. vii. Henceforth, banks should include necessary covenants in all loan agreements, including restructuring, supported by necessary approvals/authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable invocation of SDR in applicable cases; viii. The JLF must approve the SDR conversion package within 90 days from the date of deciding to undertake SDR; ix. The conversion of debt into equity as approved under the SDR should be completed within a period of 90 days from the date of approval of the SDR package by the JLF. x. The invocation of SDR will not be treated as restructuring for the purpose of asset classification and provisioning norms; xi. On completion of conversion of debt to equity as approved under SDR, the existing asset classification of the account, as on the reference date will continue for a period of 18 months from the reference date. Thereafter, the asset classification will be as per the extant IRAC norms, assuming the aforesaid 'stand-still' in asset classification had not been given. However, when banks' holding are divested to a new promoter, the asset classification will be as per the pars 3 (XIV) below. xii. Banks should ensure compliance with the provisions of Section 6 of Banking Regulation Act and JLF should r. closely monitor the performance of the company and consider appointing suitable professional management to run the affairs of the company; xiii. JLF and lenders should divest their holdings in the equity of the company as soon as possible. On divestment of banks' holding in favour of a 'new promoter', the asset classification of the account may be upgraded to `Standard'. However, the quantum of provision held by the bank against the said account as on the date of divestment, which shall not be less than what was held as at the 'reference date', shall not be reversed. At the time of divestment of their holdings to a 'new promoter', banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as 'restructuring' subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance. Banks

8-111 MM Special Guide may reverse the provision held against the said account only when all the outstanding loan/facilities in the account perform satisfactorily during the 'specified period' (as defined in the extant norms on restructuring of advances), i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period. In case, however, satisfactory performance during the specified period is not evidenced, the asset classification of the restructured account would be governed by the the extant IRAC norms as per the repayment schedule that existed as on the reference date indicated at pars 4 (ii) below, assuming that 'stand-still' / above upgrade in asset classification had not been given. However, in cases where the bank exits the account completely, i.e. no longer has any exposure to the borrower, the provision may be reversed/absorbed as on the date of exit. In partial modification of the paragraph 3. xiii of the above-mentioned circular on the issue of divestment of banks' holding in favour of a 'new promoter', it has been decided that the asset classification benefit will be available to the lenders provided they divest a minimum of 26% of the shares of the company (and not necessarily 51% ab initio as required hitherto) to the new promoters within the stipulated time line of 18 months and the new promoters take over management control of the company. Lenders would thus have the option to exit their remaining holdings gradually, with upside as the company turns around. Lenders should, however, grant the new promoters the 'Right of First Refusal' for the subsequent divestment of their remaining stake. In terms of extant instructions, JLFs are required to adhere to certain prescribed timelines during SDR process. In partial modification of the extant instructions, it is advised that the JLF can have flexibility in the time taken for completion of individual activities up to conversion of debt into equity in favour of lenders (i.e. up to 210 days from the review of achievement of milestones/critical conditions) as per the SDR package approved by JLF. It is also clarified that the benefit of 'stand-still' in asset classification will apply from the reference date itself. However, if the targeted conversion of debt into equity shares does not take place within 210 days from the review of achievement of milestones/critical conditions, the benefit will cease to exist. Thereafter, the loans will be classified as per the conduct of the account as per the extant Income Recognition, Asset Classification and Provisioning norms. Para 3.xiii of the circular dated June 8, 2015 on 'SDR Scheme' prescribe the following: JLF should divest their holdings in the equity of the company as soon as possible. On divestment of banks' holding in favour of a 'new promoter', the asset classification of the account may be upgraded to 'Standard'. However, the quantum of provision held by the bank against the said account as on the date of divestment, which shall not be less than what was held as at the 'reference date', shall not be reversed. It is possible that the lenders may not be able to sell their stake to new promoters within the 18 month period, thus revoking the 'stand-still' benefit, which may result in sharp deterioration in the classification of their remaining loan exposures from what prevailed on the 'reference date'. In order to avoid the cliff effect of resultant provisioning, banks should build provisions such that, by the end of the 18 month period from the reference date, they hold provision of at least 15 per cent of the residual loan. The required provision should be made in equal instalments over the four quarters. This provision shall be reversed only when all the outstanding loans/facilities in the account perform satisfactorily during the `specified period' (as defined in the extant norms on restructuring of advances) after transfer of ownership/management control to new promoters. It is clarified that `stand-still' clause only applies to asset classification and banks shall not recognise income on accrual basis if the interest is not serviced within 90 days from the due date. We also invite attention to Paragraph 3.xiii of the circular ibid which prescribes that at the time of divestment of their holdings to a 'new promoter', banks may refmance the existing debt of the company considering the changed risk profile of the company without treating the exercise as `restructuring' subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance. In this regard, it is advised that banks should strictly adhere to the provisioning as prescribed under SDR framework while refinancing the existing debt of the company under the 'new promoter'. It is clarified that if banks partially write off the existing loan which is being refinanced, the abovementioned provision for diminution in fair value will be net of the amount written off.

8-112 ••„... : .•

• • • .• • • .- • • • • • . . . •-....,„

Concept Briefs 1111111.11.11raiv. The asset classification benefit provided at the above paragraph is subject to the following conditions: a. The 'new promoter' should not be a person/entity/subsidiary/associate etc. (domestic as well as overseas), from the existing promoter/promoter group. Banks should clearly establish that the acquirer does not belong to the existing promoter group; It is reiterated that banks should exercise the necessary due diligence in this regard. And "The new promoter should have acquired at least 26 per cent of the paid up equity capital of the borrower company and shall be the single largest shareholder of the borrower company. Further, the new promoter shall be in 'control' of the borrower company as per the definition of 'control' provided in the Companies Act 2013/ regulations issued by the Securities and Exchange Board of India/any other applicable regulations/accounting standards as the case may be." Banks should explore the possibility of preparing a panel of management firms/individuals having expertise in running firms/companies who could be considered for managing the companies till ownership is transferred to • the new promoters. Banks may consult IBA and other industry bodies in this regard. In no case should the current management be allowed to continue without the representatives of banks on the Board of the company and without supervision by an entity/person appointed by the banks. The general principle of restructuring should be that the shareholders bear the first loss rather than the lenders. Accordingly, personal guarantees/commitments obtained from existing promoters should also cover losses • incurred by lenders. Therefore, banks should devise an appropriate mechanism as per the bank's board approved policy towards invocation/release of personal guarantees and this should be based on the principle of reasonable satisfaction of lenders' claims. This could include pledge of the existing promoters' share in favour of the lenders if not already done. In any case, personal guarantees should be released only after transfer of ownership and/or management control to the new promoters. 4. The conversion price of the equity shall be determined as per the guidelines given below: (i) Conversion of outstanding debt (principal as well as unpaid interest) into equity instruments should be at a 'Fair Value' which will not exceed the lowest of the following, subject to the floor of 'Face Value' (restriction under section 53 of the Companies Act, 2013): a) Market value (for listed companies): Average of the closing prices of the instrument on a recognized stock exchange during the ten trading days preceding the 'reference date' indicated at (ii) below; b) Break-up value: Book value per share to be calculated from the company's latest audited balance sheet (without considering 'revaluation reserves', if any) adjusted for cash flows and financials post the earlier restructuring; the balance sheet should not be more than a year old. In case the latest balance sheet is not available this break-up value shall be Re.1 . • - (ii) The above Fair Value will be decided at a 'reference date' which is the date of JLF's decision to undertake SDR. 5. The above pricing formula under Strategic Debt Restructuring Scheme has been exempted from the 1111111H. Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2009 subject to certain conditions. Also, no open offer need be made. Further, in the case of listed companies, the acquiring lender on account of conversion of debt into equity under SDR has also been exempted from the obligation to make an open offer under regulation 3 and regulation 4 of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Accordingly, it is clarified that the SDR framework will also be available to an ARC, which is a member of the JLF undertaking SDR of a borrower company. 6. In addition to conversion of debt into equity under SDR, banks may also convert their debt into equity at the time of restructuring of credit facilities under the extant restructuring guidelines.

8-113 J•' ;•;,,1 ' •• • •

• ": ' ••••,..- • : • •• - •

MM Special Guide 7. Acquisition of shares due to such conversion will be exempted from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para-Banking activities and intra-group exposure. However, this will require reporting to RBI (reporting to DBS, CO every month along with the regular DSB Return on Asset Quality) and disclosure by banks in the Notes to Accounts in Annual Financial Statements. Equity shares of entities acquired by the banks under SDR shall be assigned a 150% risk weight for a period of 18 months from the 'reference date' indicated in paragraph 4(ii). After 18 months from the 'reference date', these shares shall be assigned risk weights as per the extant capital adequacy regulations. 8. Equity shares acquired and held by banks under the scheme shall be exempt from the requirement of periodic mark-to-market (stipulated vide Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks) for the 18 month period as indicated above. However, there is a possibility of banks facing a cliff-effect of provisioning at the end of the 18 month period on account of mark-to-market requirement (if a part of the equity shares are retained) and/or on account of recognising loss on sale of equity shares to the new promoters. In view of this, it has been decided that banks should periodically value and provide for depreciation of these equity shares as per IRAC norms for investment portfolio. Banks will, however, have the option of distributing the depreciation on equity shares acquired under SDR, over a maximum of four calendar quarters from the date of conversion of debt into equity i.e., the provisioning held for such depreciation should not be less than 25% of the depreciation during the first quarter, 50% of the depreciation as per the current valuation during the second quarter, and so on. Furthermore, banks desiring to have a longer period for making provisions, say 6 quarters, can start making ex-ante provisions in anticipation of MTM requirement, from the reference date itself. 9. Conversion of debt into equity in an enterprise by a bank may result in the bank holding more than 20% of voting power, which will normally result in an investor-associate relationship under applicable accounting standards. However, as the lender acquires such voting power in the borrower entity in satisfaction of its advances under the SDR, and the rights exercised by the lenders are more protective in nature and not participative, such investment may not be treated as investment in associates'. The guidelines contained in paragraph 3 and 6 will also be applicable to cases where change in ownership has been carried out under the circular DERHP.BC.No.41/21.04.048/2015-16 dated September 24, 2015 on Prudential Norms on Change in Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme). In addition, paragraph 7 of this circular will also be applicable to such cases subject to the condition that lenders along with the new promoters should hold at least 51 per cent of the paid up equity capital of the borrower company. These revised guidelines will be applicable prospectively. However, it would be prudent if banks follow these guidelines even in cases where JLF has already decided to undertake SDR. Banks shall make disclosures on invocation of SDR in annual financial statements

37. Framework for Revitalizing distressed assets

Framework for Revitalizing distressed assets RBI has issued guidelines to banks in Feb'2014 regarding revitalizing distressed assets. Gist: (i) The guidelines are applicable to Consortium and Multiple Banking arrangements. (ii) Banks are required to identify incipient stress in an a/c by locating 3 sub —categories under SMA as below: SMA Sub Basis for classification categories SMA - 0 Principal of interest payment not overdue for more than 30 days but account showing signs of incipient stress SMA -1 Principal or interest payment overdue between 31 - 60 days ;.; 8-114 Concept Briefs

SMA - 2 Principal or interest payment overdue between 61 - 90 days (iii) RBI to set up a central repository of information on large credits (CRILC). CRILC will collect, store, disseminate credit data to lenders. Banks are required to report credit information (including SMA classification) on all borrowers with aggregate F & NF based exposure of Rs 50mm and above with them. (iv) A Joint Lenders Form (JLF) has to be mandatorily formed by banks as soon as an account is reported by any lender as SMA — 2 to CRILC. It is a committee of lenders. It is to be formed if the aggregate exposure (both FB and NFB) in an account is Rs.1000m and above (ie Rs.100 cr and above). JLF may be formed even if aggregate exposure is less than Rs.100 cr. A borrower may also request formation of JLF. (v) A JLF agreement will be signed by all the banks concerned. JLF should explore the possibility of the borrower setting right the irregularities / weaknesses in the account. (vi) Corrective Action Plan (CAP) by JLF: JLF shall explore options to resolve the stress in the account. An early solution has to be worked out to preserve the economic value of the underlying assets as well as the lenders' loans, Eg. (i) Rectification: Borrower commits himself to regularise the account. (ii) Restructuring: (a) The account may be restructured if it is primafacie viable and the borrower is not a wilful defaulter. (b) A commitment from promoters for extending personal guarantees has to be obtained. They should also give a declaration that they would not alienate assets. A 'stand still' clause can be stipulated in the agreement to enable a smooth process of restructuring. (c) Recovery: If Rectification or Restructuring is not feasible, recovery process may be initiated. Joint Lenders' Forum Empowered Group (JLF — EG) JLF will finalise the CAP and the same will be placed before an Empowered Group (EG) of lenders, which will be tasked to approve the rectification/restructuring packages under CAPs. In partial modification to this, it is advised that approval ofJLF-EG is mandatory only in races of rectification with additional finance and cases of restructuring under a CAP. The JLF-EG shall have the following composition: i. A representative each of SBI and ICICI Bank as standing members; a. The top two banks in the system, in terms of advances, namely SBI and ICICI Bank, will continue to be permanent members of JLF EG, irrespective of whether or not they are lenders in the particular JLF. b. If SBI and ICICI Bank are the lenders in a JLF, the JLF-EG would consist of these two banks, the three lenders (other than ICICI Bank and SBI) having largest exposures to the borrower and the two largest banks in terms of advancesl which do not have any exposure to the borrower. c. If either of SBI or ICICI bank is a lender, the JLF-EG would consist of these two banks, the four lenders (other than ICICI Bank and SBI) having largest exposures to the borrower and the next largest bank in terms of advances2 which does not have any exposure to the borrower. d. If neither SBI nor ICICI Bank are the lenders in a JLF, then the JLF-EG would consist of these two banks and the five lenders having largest exposures to the borrower. e. All the JLF-EG members would have equal voting rights irrespective of size of exposure to the borrower. ii. A representative each of the top three lenders to the borrower. If SBI or ICICI Bank is among the top three lenders to the borrower, then a representative of the fourth largest or a representative each of the fourth and the fifth largest lenders as the case may be; iii. A representative each of the two largest banks in terms of advances] who do not have any exposure to the borrower; and iv. The participation in the JLF-EG shall not be less than the rank of an Executive Director in a PSB or equivalent The JLF convening bank will convene the JLF-EG and provide the secretarial support to it.

8-115 MM Special Guide Details of Restructuring process: (i) Consent of minimum of 75% of creditors by value and 50% of creditors by number in the JLF is necessary for the restructuring process. If JLF decides restructuring as CAP, it can either refer the account to CDR cell or restructure it independent of the CDR mechanism; in this case, restructuring package has to be finalised within 30 days from the date of signing of the final CAP agreement. For aggregate exposure less than Rs.50 cr the JLF should convey the same to the borrower within 15 days. If the aggregate exposure is Rs 50 cr and above the package has to be evaluated by an Independent Evaluation Committee (IEC) of experts. IEC to submit its recommendations within 30 days. Thereafter, if the JLF decides to go ahead with the restructuring, the borrower has to be advised within 15 days. Asset classification benefit available under CDR is also available for the account. Restructuring can be considered only for standard, SMA or Sub — Standard assets. Generally, doubtful assets are not eligible. The viability of the account should be determined by the JLF based on acceptable viability benchmarks determined by themillustratively, the parameters may include the Debt Equity Ratio, Debt Service Coverage Ratio, Liquidity/ Current Ratio and the amount of provision required in lieu of the diminution in the fair value of the restructured advance, etc. Further, the JLF may consider the benchmarks for the viability parameters adopted by the CDR mechanism. JLF may refer the account to CDR cell after a decision to restructure is taken. CDR cell will prepare the Techno- Economic viability study and restructuring plan within 30 days. Detailed guidelines are provided is the regard. In case of disagreement among lenders on deciding the CAP on rectification or restructuring, resulting in delay in initiating timely corrective action it has been decided that dissenting lenders who do not want to participate in the rectification or restructuring of the account as CAR which may or may not involve additional financing, will have an option to exit their exposure completely by selling their exposure to a new or existing lender(s) within the prescribed timeline for implementation of the agreed CAP. The exiting lender will not have the option to continue with their existing exposure and simultaneously not agreeing for rectification or restructuring as CAP. The new lender to whom the exiting lender sells its stake may not be required to commit any additional finance, if the agreed CAP involves additional finance. In such cases, if the new lender chooses not to participate in additional finance, the share of additional fmance pertaining to the exiting lender will be met by the existing lenders on a pro-rata basis. If the dissenting lender is not able to exit by arranging a buyer within the above prescribed time, it has to necessarily adhere to the agreed CAP and provide additional finance, if the CAP so envisages. Further, it has been observed that, in some cases, there are undue delays by banks in communicating their decision on CAP, which defeats the very purpose of this framework for initiating prompt corrective measures in cases of stressed accounts. It has, therefore, been decided to put in place an incentive structure for banks to communicate their decision on the agreed CAP in a time bound manner. Furthermore, additional funding provided under restructuring/rectification as part of the CAP will have priority in repayment over repayment of existing debts. Therefore, instalments of the additional funding which fall due for repayment will have priority over the repayment obligations of the existing debt. Necessary conditions shall accordingly be incorporated in the JLF agreement.

Other Issues/Conditions Relating to Restructuring by JLF/CDR Cell 5.1 Both under JLF and CDR mechanism, the restructuring package should also stipulate the timeline during which certain viability milestones (e.g. improvement in certain financial ratios after a period of time, say, 6 months or 1 year and so on) would be achieved. The JLF must periodically review the account for achievement/ non-achievement of milestones and should consider initiating suitable measures including recovery measures as deemed appropriate.

8-116 Concept Briefs

The general principle of restructuring should be that the shareholders bear the first loss rather than the debt . . holders. With this principle in view and also to ensure more 'skin in the game' of promoters, JLF/ CDR may consider the following options when a loan is restructured: Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices; Promoters infusing more equity into their companies; - Transfer of the promoters' holdings to a security trustee or an escrow arrangement till turnaround of company. This will enable a change in management control, should lenders favour it. In case a borrower has undertaken diversification or expansion of the activities which has resulted in the stress on the core-business of the group, a clause for sale of non-core assets or other assets may be stipulated as a condition for restructuring the account, if under the TEV study the account is likely to become viable on hiving- off of non-core activities and other assets. For restructuring of dues in respect of listed companies, lenders may be ab-initio compensated for their loss/ sacrifice (diminution in fair value of account in net present value terms) by way of issuance of equities of the company upfront, subject to the extant regulations and statutory requirements. In such cases, the restructuring agreement shall not incorporate any right of recompense clause. However, if the lenders' sacrifice is not fully compensated by way of issuance of equities, the right of recompense clause may be incorporated to the extent of shortfall. For unlisted companies, the JLF will have option of either getting equities issued or incorporate suitable `right to recompense' clause. If acquisition of equity shares, through this process, results in exceeding the extant regulatory Capital Market Exposure (CME) limit, the same will not be considered as a breach of regulatory limit. However, this will require reporting to RBI and disclosure by banks in the Notes to Accounts in Annual Financial Statements. In order to distinguish the differential security interest available to secured lenders, partially secured lenders and unsecured lenders, the JLF/CDR could consider various options like: Prior agreement in the ICA among the above classes of lenders regarding repayments, say, as per an agreed waterfall mechanism; - A structured agreement stipulating priority of secured creditors; - Appropriation of repayment proceeds among secured, partially secured and unsecured lenders in certain pre-agreed proportion. Prudential Norms onAsset Classification and Provisioning: While a restructuring proposal is under consideration by the JLF/CDR, the usual asset classification norm would continue to apply. The process of re-classification of an asset should not stop merely because restructuring proposal is under consideration by the JLF/CDR. As a measure to ensure adherence to the proposals made in these guidelines as also to impose disincentives on borrowers for not maintaining credit discipline, accelerated provisioning norms are being introduced. Accelerated Provisioning In cases where banks fail to report SMA status of the accounts to CRILC or resort to methods with the intent to conceal the actual status of the accounts or evergreen the account, banks will be subjected to accelerated provisioning for these accounts and/or other supervisory actions as deemed appropriate by RBI. The current provisioning requirement and the revised accelerated provisioning in respect of such non performing accounts are as under: AssetClassification Period as NPA CurrentProvisioning (%) Revised accelerated provisioning (%) Sub-standard (secured) Up to 6months 15 No change 6 months to I year 15 25 Sub-standard (unsecuredab-initio) Up to 6months 25 (other than Infrastructure loans) 25 20 (infrastructureloans)

8-117 •,,,,,,.• • I r":r• MI ,7 ," , ' i • r ' , 11 el,

MM Special Guide 6 months to lyear 25 (other than infrastructure loans) 40 20 (infrastructure loans) Doubtful I 2nd year 25 (secured portion) 40 (secured portion) 100 (unsecured portion) 100 (unsecured portion) Doubtful II 3rd & 4th year 40 (secured portion) 100 for both secured and unsecured portions 100 (unsecured portion) Doubtful III 5th year onwards 100 100

Further, any of the lenders who have agreed to the restructuring decision under the CAP by JLF and is a signatory to the ICA and DCA, but changes their stance later on, or delays/refuses to implement the package, will also be subjected to accelerated provisioning requirement as indicated above, on their exposure to this borrower i.e., if it is classified as an NPA. If the account is standard in those lenders' books, the provisioning requirement would be 5%. Further, any such backtracking by a lender might attract negative supervisory view during Supervisory Review and Evaluation Process. Presently, asset classification is based on record of recovery at individual banks and provisioning is based on asset classification status at the level of each bank. However, if lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame, the account will be subjected to accelerated provisioning as indicated above, if it is classified as an NPA. If the account is standard in those lenders' books, the provisioning requirement would be 5%. If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds of repayment by the borrower among the lenders as per agreed terms resulting into down gradation of asset classification of the account in books of other lenders, the account with the escrow maintaining bank will attract the asset classification which is lowest among the lending member banks, and corresponding provisioning requirement.

Wilful Defaulters and Non-Cooperative Borrowers Instructions regarding treatment of Wilful Defaulters as laid down by RBI on July 1, 2014 and updated in January 2015 have to be complied with. Banks are required to strictly adhere to these guidelines. In addition to these instructions and with a view to ensuring better corporate governance structure in companies and ensuring accountability of independent/professional directors, promoters, auditors, etc. henceforth, the following prudential measures will be applicable: (a) The provisioning in respect of existing loans/exposures of banks to companies having director/s (other than nominee directors of government/financial institutions brought on board at the time of distress), whose name/s appear more than once in the list of wilful defaulters, will be 5% in cases of standard accounts; if such account is classified as NPA, it will attract accelerated provisioning as indicated above. This is a prudential measure since the expected losses on exposures to such borrowers are likely to be higher. It is reiterated that no additional facilities should be granted by any bank/FI to the listed wilful defaulters. (b) With a view to discouraging borrowers/defaulters from being unreasonable and non-cooperative with lenders in their bonafide resolution/recovery efforts, banks may classify such borrowers as noncooperative borrowers, after giving them due notice if satisfactory clarifications are not furnished. Banks will be required to report classification of such borrowers to CRILC. Further, banks will be required to make higher/accelerated provisioning in respect of new loans/exposures to such borrowers as also new loans/exposures to any other company promoted by such promoters/ directors or to a company on whose board any of the promoter / directors of this non-cooperative borrower is a director. The provisioning applicable in such cases will be at the rate of 5% if it is a standard account and accelerated provisioning as above, if it is an NPA. This is a prudential measure since the expected losses on exposures to such non-cooperative borrowers are likely to be higher. Concept Briefs

The RBI defines a non-coperative borrower as follows: A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders' efforts for recovery of their dues by • not providing necessary information sought, denying access to assets financed / collateral securities, obstructing sale of securities, etc. In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues. The RBI defines "willful default" as follows: A "wilful default" would be deemed to have occurred if any of the following events is noted:- (a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations. (b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. (d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

Dissemination of Information At present, the list of Suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) is submitted by banks to the Credit Information Companies (CICs) of which they are member(s), who display the same on their respective websites as and when received. The list of non-suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) is confidential and is disseminated by RBI among banks and FIs only for their own use. In order to make the current system of banks/FIs reporting names of suit filed accounts and nonsuit filed accounts of Wilful Defaulters and its availability to the banks by CICs/RBI as current as possible, banks are advised to forward data on wilful defaulters to the CICs/Reserve Bank at the earliest but not later than a month from the reporting date and they must use/ furnish the detailed information as per prescribed format. In terms of RBI's Master Circular on Wilful Defaulters in case any falsification of accounts on the part of the borrowers is observed by the banks / FIs, and if it is observed that the auditors were negligent or deficient in conducting the audit, banks should lodge a formal complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) to enable the ICAI to examine and fix accountability of the auditors. RBI reiterates these instructions for strict compliance. Pending disciplinary action by ICAI, the . complaints may also be forwarded to the RBI (Department of Banking Supervision, Central Office) and IBA for records. IBA would circulate the names of the CA firms against whom many complaints have been received amongst all banks who should consider this aspect before assigning any work to them. RBI would also share such information with other financial sector regulators/Ministry of Corporate Affairs (MCA)/Comptroller and Auditor General (CAG). Further, banks may seek explanation from advocates who wrongly certify as to clear legal titles in respect of assets or valuers who overstate the security value, by negligence or connivance, and if no reply/satisfactory clarification is received from them within one month, they may report their names to IBA. The IBA may circulate the names of such advocates/valuers among its members for consideration before availing of their services in future. The IBA would create a central registry for this purpose.

8-119 MM Special Guide 38. Scheme for Sustainable Structuring of Stressed Assets (S4A)

RBI introduced Strategic Debt Restructuring (SDR) in June 2015 to bypass legal hurdles faced by the bank while taking over a defaulting company by converting their debt into equity to acquire management control and finding a new buyer for the equity holding. If the bank does not find a new buyer during the period, the asset has to be classified as an NPA. Banks found that the period of 18 months was too short to comply with the requirements and made a representation to RBI for allowing more time for resolution in large accounts following which the RBI decided to introduce a Scheme for Sustainable Structuring of Stressed Assets (S4A) in June, 2016. Key Points of the Scheme: Eligible Accounts For being eligible under the scheme, the accounts should meet all the following conditions: (i) The project has commenced commercial operations; (ii) The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs.500 crore (including Rupee loans, Foreign Currency loans/Extemal Commercial Borrowings,); (iii) The debt meets the test of sustainability as below. Debt Sustainability A debt level will be deemed sustainable if the Joint Lenders Forum (JLF)/Consortium of lenders/bank conclude through independent techno-economic viability (TEV) that debt of that principal value amongst the current funded/ non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 percent of current funded liabilities. Sustainable Debt The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity: (a) The current promoter continues to hold majority of the shares or shares required to have control; (b) The current promoter has been replaced with a new promoter, in one of the following ways: i. Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter; ii. In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme); (c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and i. allow the current management to continue or ii. hand over management to another agency/professionals under an operate and manage contract. Note: Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter. 6.2 In any of the circumstances mentioned above, the JLF/consortium/bank shall, after an independent TEV, bifurcate the current dues of the borrower into Part A and Part B. 1 (a) Determine the level of debt (including new funding required to be sanctioned within next six months and ,. non-funded credit facilities crystallising within next 6 months) that can be serviced (both interest and principal) within the respective residual maturities of existing debt, from all sources, based on the cash flows available from the current as well as immediately prospective (not more than six months) level of operations. . Where there is more than one debt facility, the maturity profile of each facility shall be that which exists on the date of finalising this resolution plan. The level of debt so determined will be Part A. (b) The difference between the aggregate current outstanding debt, from all sources, and Part A will be Part B. ,

.. 8420 LAill Concept Briefs

(c) The security position of lenders will, however, not be diluted and Part A portion of loan will continue to have at least the same amount of security cover as was available prior to this resolution. The Resolution Plan The Resolution Plan shall have the following features: a. There shall be no fresh moratorium granted on interest or principal repayment for servicing of Part A. .'.. b. There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing . . of Part A, as compared to repayment schedule and interest rate prior to this resolution. c. Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments. Valuation and marking to market For the purpose of this scheme, the fair value for Part B instruments will be arrived at as per the following methodologies: Equity: The equity shares in the bank's portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. Equity shares for which current quotations are not available or where the shares are not listed on the stock exchanges, should be valued at the lowest value arrived using the following valuation methodologies: a Break-up value (without considering 'revaluation reserves', if any) which is to be ascertained from the company's latest audited balance sheet (which should not be more than one year prior to the date of valuation). In case the latest audited balance sheet is not available the shares are to be valued at Re.1 per company. The independent TEV will assist in ascertaining the break-up value. b. Discounted cash flow method where the discount factor is the actual interest rate charged to the borrower plus 3 per cent, subject to floor of 14 per cent. Cash flows ( cash flow available from the current as well as immediately prospective (not more than six months) level of operations) occurring within 85 per cent of the useful economic life of the project only shall be reckoned. Redeemable cumulative optionally convertible preference shares/optionally convertible debentures: The valuation should be on discounted cash flow (DCF) basis. These will be valued with a discount rate of a ,..-.., minimum mark up of 1.5 per cent over the weighted average actual interest rate charged to the borrower for the various facilities. Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined as above on DCF basis should be discounted further by at least 15 per cent if arrears are for one year, 25 per cent if arrears are for two years, so on and so forth (i.e., with 10 percent increments). Where the resolution plan does not involve a change in promoter or where existing promoter is allowed to operate and manage the company as minority owner by lenders, the principle of proportionate loss sharing by the promoters should be met, that is, lenders shall require the existing promoters to dilute their shareholdings, by way of conversion of debt into equity /sale of some portion of promoter's equity to lenders, at least in the same proportion as that of part B to total dues to lenders. JLF/Consortium/bank should also obtain promoters' personal 110 guarantee in all such cases, for at least the amount of PartA. The upside for the lenders will be primarily through equity/quasi equity, if the borrowing entity tums around. The existing promoter or the new promoter may have the right of first refusal in case the lenders decide to sell the share, at a price beyond some predetermined price. The lenders may also include appropriate covenants to cover the use of cash flows arising beyond the projected levels having regard to quasi-equity instruments held in Part B. Other important principles for this scheme are the following: a The RI/Consortium/bank shall engage the services of credible independent professional agencies without ismi conflict of interest to conduct the TEV and prepare the resolution plan.

8-121 MM Special Guide b. The resolution plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50 percent of lenders by number in the JLF/consortium/bank. c. At individual bank level, the bifurcation into Part A and part B shall be in the proportion of Part A to Part B at the aggregate level. Overseeing Committee: An Overseeing Committee (OC), comprising of eminent persons, will be constituted by IBA in consultation with RBI. The members of OC cannot be changed without the prior approval of RBI. The resolution plan shall be submitted by the JLF/consortium/bank to the OC. The OC will review the processes involved in preparation of resolution plan, etc. for reasonableness and adherence to the provisions of these guidelines, and opine on it. The OC will be an advisory body. Asset Classification and Provisioning (A) Where there is a change of promoter: In case a change of promoter takes place, i.e. a new promoter comes in, the asset classification and provisioning requirement will be as per the SDR' scheme or 'outside SDR' scheme as applicable. (B) Where there is no change of promoters: i. Asset classification as on the date of lenders' decision to resolve the account under these guidelines (reference date) will continue fora period of 90 days from this date. This standstill clause is permitted to enable JLF/consortium/bank to formulate the resolution plan and implement the same within the said 90 day period. If the resolution is not implemented within this period, the asset classification will be as per the extant asset classification norms, assuming there was no such 'stand-still' ii. In respect of an account that is 'Standard' as on the reference date, the entire outstanding (both Part A and part B) will remain Standard subject to provisions made upfront by the lenders being at least the higher of 40 percent of the amount held in part B or 20 percent of the aggregate outstanding (sum of Part A and part B). For this purpose, the provisions already held in the account can be reckoned. iii. In respect of an account that is classified as a non-performing asset as on the reference date, the Part B instruments shall continue to be classified as non-performing investment and provided for as a non- performing asset as per extant prudential norms, as long as such instruments remain in Part B. The sustainable portion (Part A) may optionally be treated as 'Standard' upon implementation of the resolution plan by all banks, subject to provisions made upfront by the lenders being at least the higher of 50 percent of the amount held in part B or 25 percent of the aggregate outstanding (sum of Part A and part B). For this purpose, the provisions already held in the account can be reckoned. (Modified instructions of RBI November 10, 2016) iv. In all cases, lenders may upgrade Part B to standard category and reverse the associated enhanced provisions after one year of satisfactory performance of Part A loans. In case of any pre-existing moratorium in the account, this upgrade will be permitted one year after completion of the longest such moratorium, subject to satisfactory performance of Part A debt during this period. However, in all cases, the required MTM provisions on Part B instruments must be maintained at all times. The transition benefit available in terms of paragraph 9(B)(vi) can however be availed. (Modified instructions of RBI November 10, 2016) v. Any provisioning requirement on account of difference between the book value of Part B instruments and their fair value shall be made within four quarters commencing with the quarter in which the resolution plan is actually implemented in the lender's books, such that the MTM provision held is not less than 25 percent of the required provision in the first quarter, not less than 50 percent in the second quarter and soon. For this purpose, the provision already held in the account can be reckoned. vi. If the provisions held by the bank in respect of an account prior to this resolution are more than the cumulative provisioning requirement prescribed in the applicable sub-paragraphs above, the excess can

8-122 Concept Briefs

be reversed only after one year from the date of implementation of resolution plan subject to satisfactory performance during this period. vii. The resolution plan and control rights should be structured in such a way so that the promoters are not in a position to sell the company/firm without the prior approval of lenders and without sharing the upside, if any, with the lenders towards loss in Part B. viii. If Part A subsequently slips into NPA category, the account will be classified with slippage in category with reference to the classification obtaining on the reference date and necessary provisions should be made immediately. Fees and Charges The IBA will collect a fee from the lenders as a prescribed percentage of the outstanding debt of the borrowal entity to the consortium/JLF/consortium/bank and create a corpus fund. This fund will be used to meet the expenses of the OC. Mandatory Implementation Once the resolution plan prepared/presented by the lenders is ratified by the OC, it will be binding on all lenders. They will, however, have the option to exit as per the extant guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP). 39. Unified Payments Interface

The National Payments Corporation of India (NPCI) has launched the Unified Payments Interface (UPI), a system allowing transfer of money between two parties. This is an additional layer of software that enables digitalisation in various components of the payment system. The objective of the UPI is to make the payments process as simple as sending a text message on the mobile phone. With UPI, customers can transfer funds through a unique virtual address, mobile phone number or Aadhaar number. A virtual address is an alias to a bank account that allows a customer's account to be uniquely mapped to the mobile phone number. Nandan Nilekani, advisor of NPCI has said, "The robust system (of UPI) will help India leapfrog the desktop and the credit-card economy to become a mobile-first economy, accelerating e-commerce and driving a host of financial services." How It Works: • Users must download the UPI- supported app from any bank's site. They must hold an Aadhaar number, bank account and a smartphone for this. • They must, subsequently, open an account with a unique virtual UPI ID. •. Transfer of funds may take place between 2 UPI IDs. Features: o Speed and Limit: Amounts up to Rs.1 lakh per transaction may be transferred or received in Real Time i.e. instantaneously; it will, therefore, expedite payment operations considerably. o Authentication: UPI works on a single-click 2 factor authentication. It will allow customers to have multiple virtual addresses for multiple accounts with different banks. o Timing: The portal will work 24/7 so transfers may happen at any time. This is better than the existing systems which enable transfers within the hour only during working hours of the bank. o Interbank Operability: Every bank is a member of the NPCI, which is responsible for the successful transmission of all retail payments in India. This will make the payment system fully interoperable without any closed systems; customers will be able to undertake bank account to bank account transfers easily. Otherwise, a bank's mobile app does not transact with other banks' apps. o Minimal Information: Recipients need not reveal confidential bank account information (such as IFSC code, and other bank account details); to the sender. They may be identified with nicknames. Senders can transfer funds based on the nickname. This chosen name could even be the Aadhaar number.

8-123 MM Special Guide o Financial Inclusion: Since making payments will be more hassle-free and quicker than the current modes of transfers - National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and Immediate Payments Service (IMPS), this can go a long way towards helping India achieve its objective of Financial Inclusion (FI). UPI is considered an improved version of the IMPS, which, according to Nandan Nilekani, "does not have an easy debit capability". The simplicity will ensure that the masses are included by enabling them to adopt modern practices more willingly. o Cashless Society-Cum Security: UPI will promote RBI's objective of a cashless society. In India, only about 6% of transactions are cashless. Card-related transactions are on the rise; however, even here, many retailers do not have card acceptance infrastructure. Transactions on the omnipresent smartphone can increase safety and security and even reduce corruption. o Usage: The service can be used to replace cash-on-delivery during e-commerce site purchases, payment to auto rickshaws and cabs, toll payments, payments to restaurants, retail outlets and hospitals and so on. This is because there is independence from any particular mobile wallet platform or bank account. Challenges: Security is the most important aspect of this system. The encryption standards must be very strong. There must be end-to-end encryption to ensure that there is no leakage of data in transit. Currently, for card-related online transactions, banks have agreements with merchants. This takes care of issues that may arise in relation to frauds. It is imperative that fraud analytics and dispute resolution mechanisms are addressed by this interface. Current Status: Managing Director (MD) and Chief Executive Officer (CEO) of NPCI, A P Hota has stated that a total of 33 banks have agreed to offer this service to their customers and many more are expected to join this year. Some of these banks have already begun the process of integrating the UPI with their mobile apps. These include State Bank of India (SBI), Canara Bank, Bank of India (BOI), ICICI Bank, HDFC Bank, Punjab National Bank, Bank of Baroda, HSBC, and Citi Bank — these banks are in the process of integrating the interface with their mobile apps. However, Chief Operating Officer (COO) of NPCI, Dilip Asbe has stated that it will take 2 months for these banks to offer this to customers as tests for security and convenience have to be undertaken first. RBI Governor Raghuram Rajan has stated that the banking system is in the midst of a revolution. He has further said that India has the most sophisticated public payments infrastructure in the world. The UnifiedPayments Interface (UPI) is being hailed as an idea that will revolutionise the payments system in the country. According to RBI data, there were Rs.46,029 crore worth of mobile banking transactions in December 2015, a jump of 46% compared to the previous month. The scope of this technology is vast considering the widespread usage of the ubiquitous smartphone and the objective to remove the hurdles of mobile banking transactions. It is a step forward in the Prime Minister's vision of a Digital India.

40. On-tap Licensing of Universal Banks in the Private Sector Draft Guidelines Various expert opinions had suggested in the past that there was a requirement for the RBI to frame a clear policy on the banking structure in India. Among these were the recommendations of the Narasimham Committee and the Raghuram G. Rajan Committee. The discussion papers they released suggested that RBI replace its existing 'stop and go' policy, (where RBI gave an in-principle approval for new banks from time to time) with a 'continuous authorisation' policy. In line with this, RBI has issued some draft guidelines for on-tap licensing of universal banks in the private sector. Universal Banks are those banks that offer a wide variety of financial services for commercial and investment purposes. These may include credit, loans, deposits, asset management, investment advisory, payment processing, securities transactions, underwriting and financial analysis. On-tap licensing will ensure that individuals and entities may apply for licences to open banks at any time. There will not be a fixed deadline or last date for application of licences. Eligible Promoters: o Promoters may be resident individuals and professionals with 10 years' experience in banking and finance. 8-124 Concept Briefs o Non-Banking Finance Companies (NBFC_s) controlled by residents and with a 10 year successful track record are eligible promoters. These entities must have total assets of at least Rs.50 billion. Their non-financial business must not be more than 40% of their total income or assets. o Other entities and groups in the private sector that are owned and controlled by residents with 10 years of successful track records are also eligible promoters. o Large businesses and industrial houses are not allowed to be promoters but they may invest up to 10% in them. Any group with Rs.5,000 crore or more of assets and with non-financial business accounting for 40% or more of the total income or assets of the group is called a large industrial house or business house. However, if the group has Rs.5,000 crore or more in assets but with nonfinancial business accounting for less than 40% of the total income or assets of the group, it will be eligible as a promoter. Non Operative Financial Holding Company: . It is not mandatory to have a Non-Operative Financial Holding Company (NOFHC), if the promoter is an individual or a standalone entity that does not have any group entities. . Promoters must hold at least 51% of the total paid-up equity capital of the NOFHC. Earlier, it was to be completely owned by them. . With RBI's approval, a separate entity under the NOFHC may undertake specialised activities, as long these activities are not also undertaken by the bank. Capital Requirement: . The initial minimum voting paid-up equity capital required is Rs.5 billion. . The net worth must always be at least Rs.5 billion after that. . Promoters must hold 40% stake in the voting paid-up equity capital of the bank. This amount will be locked in for 5 years from the date of commencement of business of the bank. . The promoters' stake will be reduced to 15% of the voting paid-up equity capital within 12 years of commencement of business. Foreign Investment: Foreign investors may invest up to 74% of the paid-up equity of the bank. This is as per the extant Foreign Direct Investment (FDI) policy. Regulations and Listing: o The bank must comply with the Banking Regulations Act, 1949. o It must conform to prudential guidelines prescribed for Scheduled Commercial Banks (SCBs). o The bank must submit a realistic business plan that addresses the national objective of financial inclusion. o The bank must open at least 25% of its branches in rural unbanked centres, where the population is less than 10,000. o Priority Sector Lending targets and sub-targets will apply to it, as for SCBs. o The Board of the bank must have a majority of independent directors. o The bank must list on stock exchanges within 6 years of commencement of business of the bank. Application Process: . RBI will set up a Standing External Advisory Committee (SEAC) where applications will be referred. . RBI will give approval based on this Committee's recommendations. . RBI's in-principle approval will be valid for a period of 18 months from the date it is granted. RBI has favoured large business houses mostly in the financial business to open banks. While large groups like Tatas, Birlas and Bajajs may not qualify under these terms, the guidelines will make it easier for eligible players to make formal applications to open banks and help achieve the objective of financial inclusion.

8-125 MM Special Guide 41. Some Important Aspects of Loan Policy (SBI)

1. Loan Policy is applicable to the domestic and international operations of the Bank. Foreign branches have to comply with the regulatory guidelines of the host country additionally. 2. All new loan products have to be reviewed 6 months after their approval. Existing products: once a year. 3. "Due Diligence" has to be carried out on all borrowers, promoters, directors so that we are satisfied about their credentials, also to comply with KYC / AML. Important data - base to be verified. i) CICs Defaulters' List/ Wilful Defaulters' List (suit filed as well as non-suit filed) and also verify Credit History by means of Credit History Reports provided by them. ii) For all loan accounts above Rs.5 crore, banks are required to report particulars of account and account classification including SMAs to Reserve Bank of India through the reporting system commonly known as CRILC (Central Repository of Information on Large Credits). The details must be checked at the time of appraising prospective new connections, as well as at the time of processing renewal/enhancement proposals in respect of existing borrowers by undertaking a search in CRILC database. iii) Employees PF Organisation Site for defaulting companies iv) ECGC caution list/Specific Approval List etc. v) Banned List of Promoters of SEBI vi) Loan Rejections / CRA Slippages in CPPD site vii) List of Disqualified Directors available in the website of Ministry of Corporate Affairs (MCA) i.e.http:/ /www.mca.gov.in viii) i-Probe ix) List of Non-Cooperative borrowers x) IBG defaulters list xi) Audited financials submitted by the companies should be independently verified with the audited financial statement filed with MCA. xii) Reasons for change in the accounting year as well as in auditors, if any, should be ascertained. xiii) ROC Search 4. No loan should be given to companies for buy - back of their shares/securities. 5. No new unit should be financed which consumes / produces ozone Depleting Substances; also to ,4 units in Medium / Small Business Segments producing aerosol units using chlorofluoro carbons (CFC). 6. Maximum exposure: (i) Individuals : Rs.50 cr (ii) Non - Corporates: Rs.100 cr (iii) Corporates; Prudential norms of RBI are applicable 7. Unsecured exposure: • RBI has defined unsecured exposure as an exposure where the realisable value of the security (primary plus collateral), as assessed by the Bank / approved valuers / RBI's inspecting officers, is ab-initio not more than 10% of the outstanding exposure. Security will mean tangible security properly charged to the Bank and will not include intangible securities like guarantees, comfort letters etc. The Bank has adopted the above definition and it has been decided to restrict unsecured exposure (Domestic + IBG) so defined to 25% of Bank's outstanding total exposure (Domestic + IBG). 8. Non - Fund based Exposure: Not to exceed 100% of Bank's total Fund based exposure. 9. Accounts of units rated up to SB - 10 are to be reviewed annually; SB - 11 and worse to be reviewed halfyearly. 10. There are 6 external credit rating agencies - CARE, CISIL, India Ratings, ICRA, Brickwork and SMERA. 11. ECR to be obtained for all exposures of Rs.10 cr and above. 12. Term Loans: Maturity of any term loan, including moratorium: Normally 10 years with certain specified exceptions. The tenor is to be considered from the day of first drawdown.

8-126 Flovii:•:' :. Concept Briefs , ,, , lYiii:;[,, , • . ... :4. .i.::,.... 13. Hunting Limits: Pre-approved lines of credit are extended for booking quality business of corporates

I rated AA & better, and preferably in the top quartile of their respective segment / line of activity. 14. Early Sanction Review and Loan Review Mechanism: Early Sanction Review (ESR): With a view to improving the quality of sourcing, presanction process and capturing at an early stage the critical risks in sanction, a system of quick review of sanctions has been put in place. ESR is overseen by the Inspection and Management Audit Department, and covers review of all loans above Rs.1 crore but less than Rs.5 crores. On similar lines, LRM (Loan Review Mechanism), which is a regulatory requirement for review of loans of Rs. 5 crore and above, within a period of 3 months to 6 months from the date of sanction/ renewal, is also overseen by the Inspection and Management Audit Department. Data upload for the purpose must be ensured in all cases latest within 10 days of sanction. 15. The working capital facilities sanctioned but not availed within a period of three months from the date of sanction would lapse and require revalidation.

42. Brexit

Britain's exit from the European Union (EU) has been referred to as 'Brexit'. On June 23, 2016, the UK (including England, Scotland, Northern Ireland and Wales) voted 52-48% to separate from the European Union (EU) in a referendum. History of EU: The European Union (EU) is a 28-member union of various countries of Europe. It was formed in 1957 and was called the European Economic Community (EEC); its objective was to prevent wars and strengthen economic ties. Britain joined it in 1973. In 1993, EEC was renamed the EU. Facts about the EU: • The EU provides a free-moving no-borders access to all its member nations. Goods, services, people and capital can move freely as the whole EU region is considered one market. • It also provides human rights protection to all the residents of the member states. • 19 of the countries had adopted the Euro as a common currency in 2002. Britain chose to retain its independent currency - the British Pound. •For the benefits accruing to them, the member states have to pay an annual membership fee. As of 2015, Britain paid £12.9 billion towards employment, trade, security, environment protection, administration and economic benefits. It received £4.5 billion, in turn, in the form of grants and subsidies. • The EU was awarded the Nobel Peace Prize in 2012 for its efforts at integration. Bodies Governing EU: The European Parliament, European Council and the European Commission run the EU. The region has common laws and legislation framed by the European Commission and passed by the European Parliament. The European Council discusses issues facing the member states. The common central bank is the European Central Bank (ECB). The European Court of Justice (ECJ) ensures laws apply equally across the regions governed by EU law. The Head Quarters of EU is Brussels. Separation from EU: Great Britain will be the first country to invoke Article 50 of the 2009 Lisbon Treaty. UK will withdraw from the EU in a period of 2 years as the separation process unfolds. Implications for Britain: There is a lot of uncertainty regarding the trading relations Britain will enjoy with its European neighbours and the rest of the world. This is likely to affect trade and investments into the nation as both consumer and business confidence will be low. This will, in turn, affect its trading partners. Indices around the world from Japan to the US crashed consequent upon the verdict of the referendum. The Bank of England pledged £250 billion to help contain the accompanying volatility. Immediate Fallout: The British Pound fell to the lowest level since 1985. It fell 10% before closing 6.5% lower against the US Dollar. This will make it more expensive for UK residents to buy houses, petrol, go on holidays and

8-127 MM Special Guide import from other countries. • UK's Prime Minister David Cameron, who came to power a year ago for his second term, on promise that he would hold such a referendum, stated that the UK needed new leadership to take it' through this phase. He announced that he would resign by October 2016. Other Repercussions: . , . • There are fears of a new recession as UK leaves the EU and its benefits. This will lead to loss of jobs and growth in the rate of unemployment. As UK will now not enjoy immigration rights into other EU ; ' 1 nations that it has so far enjoyed, its citizens will experience reduced opportunities for work. This may, however, be offset by a reduction in the number of immigrants applying for jobs in the UK. t •) • There is a fear that other countries will also follow suit and this will lead to the break-up of the European Union (EU). As UK has expressed doubts about co-existence within the EU, it will undermine the trust built by the other member states. ; - The spirit of xenophobia has been encouraged and spread. This will make UK a less attractive for foreign companies to set up shop. It may also encourage anti-immigrant policies around the globe. •Scotland, which voted for 'Remain', might now seek another referendum to leave the UK. Repercussions for India: Despite pessimism in the markets, India need not be overly worried about the immediate fallouts of Brexit since the separation from the Union will not happen immediately. • In the 2016 financial year, India's bilateral trade with UK was worth US$ 14.02 billion. India exported goods and services worth US$ 8.83 billion while imports from the UK were at US$ 5.19 billion. This could slow down till Britain's trading position is more clearly established. - The SENSEX crashed 4.04% or 1000 points after news of the 'leave' vote came out but settled at about 2.24% below the previous day's close at 26,397. - The Indian Rupee also fell by 1.07% to 67.97 against the Dollar after breaching the 68 mark. - While Indian exports, especially in the Information Technology (IT) sector, may slow down, India has its own domestic market to cushion it. European markets constitute 30% of India'S US$ 100 billion IT industry. However, existing contracts, that may have become unviable because of the fall in the value of the British Pound, may be replaced with new ones with the UK directly. •Capital flows into the country could be affected as investors may become risk-averse and choose to park their funds in safer heavens like the US Dollar. . .. • Earnings of companies like Tata Motors, Motherson Sumi that have exposure to UK and European •:. r markets will be hit temporarily. i Case for Remain: - Britain's export market is predominantly the European market - 50% of its exports go there. It enjoys ' - a zero tariff market in its imports and exports. Without this access, Britain's trade is likely to suffer. - The EU was a huge source of Foreign Direct Investment (FDI) for UK. Now inflows of foreign capital will be curtailed. -The free movement of EU citizens ensured that any shortage in labour faced by British companies would be filled by immigrants. • Britain's voice in the world was enhanced because it was part of the EU. It had a set stage to voice its opinions that it will now have to build on its own. Case for Leave: - , - Many British have felt that Britain was being held back because of its integration with the EU. • There was a general feeling that Britain had lost its decision-making powers to the European bureaucracy. It was thought that Britain would become more independent and better-off without being part of the EU. • Immigration that was a by-product of freedom of movement has been an issue that has troubled the . . British. In 2015, Britain had 333,000 immigrants, triple the expected number. Recent terrorist attacks in urope and the US and the Syrian refugee crisis have scared the populace of this adverse outcome of ,

vote against globalisation and for protectionism is the most poignant message from the referendum. Concept Briefs

While only time will tell how many of these fears are real and how many overreactions, there is now a very real threat that London will lose its position as the hub of finance and as a gateway to Europe. India will have to build robust trade relations with other EU nations. Economic growth and increase in employment will depend on how the UK re-builds itself as a nation that no longer enjoys the huge benefits and the protective blanket of the European Union. However, Britain can still try to establish trading advantages with the EU without being part of it like Norway currently does.

43. Marginal Cost of Funds based Lending Rate (MCLR)

1... Interest Rates on Advances — Base Rate In the first Bi-monthly Monetary Policy Statement 2015-16 announced on April 7, 2015 RBI stated that in order to improve the efficiency of monetary policy transmission, it will encourage banks to move in a timebound manner to marginal-cost-of-funds-based determination of their Base Rate'. It has now been decided by RBI that banks shall follow the following guidelines for pricing their advances: a) Internal Benchmark i. All rupee loans sanctioned and credit limits renewed w.e. f. April I, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the intemal benchmark for such purposes. ii. The MCLR will comprise of: a. Marginal cost of funds; b. Negative carry on account of CAR; c. Operating costs; d. Tenor premium. in. Marginal Cost of funds The marginal cost of funds will comprise Marginal cost of borrowings and return on networth. The detailed methodology for computing marginal cost of funds is given by RBI. iv. Negative Carry on account of CRR Negative carry on the mandatory CRR which arises due to retum on CRR balances being nil, will be calculated as under: ' Required CRR x (marginal cost) / (1- CRR) The marginal cost of funds arrived at (iii) above will be used for arriving at negative carry on CRR. v. Operating Costs All operating costs associated with providing the loan product including cost of raising funds will be included under this head. It should be ensured that the costs of providing those services which are separately recovered by way of service charges are not included in this component. vi. Tenor premium These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor. vii. Since MCLR will be a tenor linked benchmark, the MCLR of a particular maturity should be arrived at by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating costs. viii. Accordingly, banks shall publish the internal benchmark for the following mai a. overnight MCLR, b. one-month MCLR, c. three-month MCLR, d. six month MCLR, 8-129 MM Special Guide e. One year MCLR. In addition to the above, banks have the option of publishing MCLR of any other longer maturity. b) Spread i. Banks should have a Board approved policy delineating the components of spread charged to a customer. The policy shall include principles: a. To determine the quantum of each component of spread. b. To determine the range of spread for a given category of borrower / type of loan. c. To delegate powers in respect of loan pricing. ii. For the sake of uniformity in these components, all banks shall adopt the following broad components of spread: a. Business strategy The component will be arrived at taking into consideration the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc. b. Credit risk premium The credit risk premium charged to the customer representing the default risk arising from loan sanctioned should be arrived at based on an appropriate credit risk rating/scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc. iii. The spread charged to an existing borrower should not be increased except on account of deterioration in the credit risk profile of the customer. Any such decision regarding change in spread on account of change in credit risk profile should be supported by a full-fledged risk profile review of the customer iv. The stipulation contained in sub-paragraph (iii) above is, however, not applicable to loans under consortium / multiple banking arrangements.

c) Interest Rates on Loans i. Actual lending rates will be determined by adding the components of spread to the MCLR. Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked to that benchmark ii. The reference benchmark rate used for pricing the loans should form part of the terms of the loan contract.

d) Exemptions from MCLR i. Loans covered by schemes specially formulated by Government of India wherein banks have to charge interest rates as per the scheme, are exempted from being linked to MCLR as the benchmark for determining interest rate. ii. Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package, are exempted from being linked to MCLR as the benchmark for determining interest rate. iii. Loans granted under various refinance schemes formulated by Government of India or any Government Undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent refinance is available are exempted from being linked to MCLR as the benchmark for determining interest rate. Interest rate charged on the part not covered under refinance should adhere to the MCLR guidelines. iv. The following categories of loans can be priced without being linked to MCLR as the benchmark for determining interest rate: (a) Advances to banks' depositors against their own deposits. (b) Advances to banks' own employees including retired employees. (c) Advances granted to the Chief Executive Officer / Whole Time Directors. (d) Loans linked to a market determined external benchmark.

8-130 Concept Briefs

(e) Fixed rate loans granted by banks. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines. e) Review of MCLR i. Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date with the approval of the Board or any other committee to which powers have been delegated. ii. However, banks which do not have adequate systems to carry out the review of MCLR on a monthly basis, may review their rates once a quarter on a pre-announced date for the first one year i.e. upto March 31, 2017. Thereafter, such banks should adopt the monthly review of MCLR as mentioned in (i) above. f) Reset of interest rates i. Banks may specify interest reset dates on their floating rate loans. Banks will have the option to offer loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR. ii. The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim. iii. The periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract. g) Treatment of interest rates linked to Base Rate charged to existing borrowers i. Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the case may be. ii. Banks will continue to review and publish Base Rate as hitherto. iii. Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms. However, this should not be treated as a foreclosure of existing facility. h) Time frame for implementation In order to give sufficient time to all the banks to move to the MCLR based pricing, the effective date of these guidelines is April 1, 2016. Gist: 1. Base Rate will be referred to as Marginal Cost of Funds based Lending Rate (MCLR) in future. 2. There will be 5 MCLRs. a. overnight MCLR, b. one-month MCLR, c. three-month MCLR, d. six month MCLR, e. One year MCLR. Banks to publish the internal benchmark for these maturities. 3. Actual lending rates will be determined by adding the components of spread to the MCLR (spread based on business strategy, credit risk premium etc.). 4. Banks shall not lend below the MCLR of a particular maturity for all loans linked to that benchmark. 5. MCLRs to be reviewed every month on a pre-announced date 6. Banks should re-set the floating interest rates linked to MCLR not later than 1 year. 7. MCLR based pricing should come into effect from 1.4.2016.

8-131 MM Special Guide 44. Gist of Policy Guidelines (2016-17) (SBI) Parameters and targets to be achieved:

S.L.No. Parameters Target 1. Operating Profit to increase by minimum 15% 2. Net Profit to increase by minimum 27% 3. Net Interest Income to increase by minimum 7% _ 4. Overheads to increase by maximum 5% 5. Cost to Income ratio — should not exceed 48%

6. NIM Domestic — Minimum 3.05% 7. CASA — Minimum 44% 8. Gross NPA — Ratio below 4.5%

9. Growth in Deposits YoY 14.25% 10. Growth in Advances YoY 14.50% 11. Other Income to increase by 22% 12. ROA — Minimum 0.75%

13. ROE — Minimum 10%

70% of SME growth should be through risk-mitigated products like e-DFS, e-VFS, CGTMSE guaranteed a/ cs, LC Backed Bill Discounting, ABLs etc. Strategies for Business: Retail Segment: Home Loans and Auto Loans by continuing Griha Tara Campaign. Personal loans to CSP customers to be a focus area. Agri Business: To finance the whole Agri Chain, in a risk mitigated manner NPAs and Provisioning The Asset Quality Review (AQR) by RBI has greatly increased our Bank's percentage of stressed assets and resulted in huge increase in provisions. As the impact of AQR and continued stress in certain sectors is expected to remain during FY 17, the resultant impact on profitability has to be mitigated by all round efforts to prevent fresh slippages and to some extent by reducing provisioning requirements on account of data errors to near-zero. A few points to be meticulously followed are: - Business Groups will need to assess slippages and to forecast, at the beginning of every quarter, what their provisions will be. - Monitoring of the movement in NPA slippages and provisions must be done every month at Performance Review meetings at all levels. iaTAi 8-132 Concept Briefs General: - Slippages to be closely monitored and accounts upgraded. - Provision to be made every month. Cross - Selling (Personal Banking): Should aim at selling at least 3 products per customer in 2016 -17 - 3 to new customers and 2 more to existing customers - and target 100% growth in income from cross-selling. International Banking: The long term business goal of IBG is to contribute 25% to both the top line and the bottom line of the Bank within a timeline of 3-5 years. It is also envisaged that by FY 17, IBG would be able to contribute 18% to the top line and 20% to the bottom line of the Bank. Others: - Reducing vacant locker percentage to less than 5%. - Use of Contact Center as a single point of contact for customers. - Encouraging more digital communication and transactions (migration to alternate channels). - Removing Redundancies at all levels, be it floor space, unwanted stationery or telephones. - Religiously perform Self-Audit at the operational levels to remove redundancies. MM Special Guide

45. SBI - IMPORTANT STATISTICS (Amounts in Rs. cr)

4' SI no Details 31.3.2016 30.9.2016 a) Authorised Capital 5000.00 Cr 5000.00 Cr b) Paid up Capital 776.28 Cr 776.28 Cr c) Govt. share 60.18 % 60.18 % d Number of domestic branches 16,784 17,142 (Rural and Semi urban65%) e) No. of Employees: 2,07,739 2,01,783 f) Business per employee Rs.15.60 Cr Rs.16.57 Cr g) Profit per employee Rs.4.79 lakhs Rs.5.01 lakhs (Annualised) h) Total Assets Rs.22,59,063 Cr Rs.23,85,514 Cr i) Total Income 1,91,843 Cr 99,671.89 Cr j) Total Expenditure 1,81,892 Cr 94,512.61 Cr k) Net Profit 9951 Cr 5059 Cr 1) Earnings Per Share Rs.12.98 Rs .13 m) Return on Average Assets 0.46% 0.44% n) Return on Equity 7.74% 7.38% o) Expenses to income ratio 49.13% 49.95% p) Dividend Declared 260% q) Capital Adequacy ratio (CAR) 13.12% 12.17% BASEL III r) Net Interest margin 327% 3.05% s) Deposits 17,30,722 Cr 18,58,999 Cr CASA Deposit ratio 43.84% 42.74% t) SB Deposits Rs.5,81,664 Cr Rs.6,41,995 Cr u) Advances (Net) Rs.14,63,700 Cr Rs.14.63,700 Cr v) Advances (Gross) Rs.15,09,500 Cr Rs.14,84,831 Cr w) CD Ratio 83.51% (March 2016) x) Average cost of Deposits 6.22% 5.94% y) Yield on Advances 10.00% 9.54% z) Market share : i) Advances 16.30% 16.13% (June 2016) ii) Deposits 17.57% 17.53% aa) Gross NPA % 6.5% 7.14% ab) Gross NP A 98,172.8 Cr 1,05,783 Cr ac) Total Provisions Rs.33,307 Cr Rs.17,219 Cr Provision for NPAS Rs.26,984 Cr Rs.14,009 Cr ad) Net NPA % 3.81% 4.19% Net NPA 55,807 Cr 60,013 Cr ae) Provision Coverage Ratio (PCR) 60.69% 62.12%

•• Concept Briefs 46. Restructuring of Bank NPAs

In FY 2015-16, RBI had conducted reviews and stress tests on banks similar to those performed by US and European banks to check the health of the banking industry. The result of the Asset Quality Reviews (AQRs) was that it enabled banks to ascertain the true level of NPAs in their books. RBI had initially asked banks to classify 150 accounts as bad loans and make accelerated provisions for them. RBI Governor Raghuram Rajan had set a deadline of March 2017 for banks to clean up their books. Since then, Public Sector Banks (PSBs), in particular, have started realistic provisioning of bad debts in their books and this has led to posting of record losses in the third and fourth quarters of 2015-16. While this is a positive step that will help banks reveal the hidden stressed accounts in their books the true balance sheet picture is still not out. Therein lies the risk for banks and investors. NPA Situation: Gross Non Performing Assets (GN'PAs) of banks was Rs.5,94,929 crore at the end of March 2016. This is a significant jump when compared to the previous quarter end. At the end of December 2015, GNPA was about Rs.4 lakh crore. Public Sector Banks (PSBs) account for about 90% of this. When the AQR exercise began in September 2015, GNPA was Rs.3,49,113 crore. There has been a consistent trend of increase in NPAs, quarter-on-quarter, year-on-year. RBI Deputy Governor S S Mundra had stated that the rising levels of stressed assets were becoming apparent from the beginning of 2012. Stressed assets were 9.8% at the end of March 2012; this increased to 14.5% by December 2015. For PSBs, stressed assets increased from 11% to 17.7%.

Major Banks' NPAs:

Bank Mar 2016 quarter (Rs.crore) Dec 2015 quarter % (Rs.crore) change SBI 98,173 72,792 34.9 PNB 55,818 34,338 62.6 Bank of India 49,879 36,519 36.6

Bank of Baroda 40,521 38,934 4.1 Canara Bank 31,638 19,813 59.7 I 0 B 30,049 22,672 32.5 IDBI Bank 24,875 19,615 26.8 Union Bank 24,171 18,495 30.7 Central Bank 22,721 17,564 29.4 UCO Bank 20,908 14,932 40 Source: Capitaline Plus

Causes of High Levels of NPAs: The high levels of NPAs in banks is partly because of the slow economic recovery that led to the defaulting of loans of large corporates. Fraudulent promoters, wilful defaulters and Ponzi borrowers have also caused some part of defaults. The review has forced Ponzi borrowers (those who start projects with the idea of selling it at a higher value at a later date rather than to genuinely create value) to resort to distress sales. However, RBI Governor Raghuram Rajan has stated that there are many genuine cases of corporates unable to pay their dues because of the economic downturn. The central bank has made efforts to ease the process of debt collections for lenders through various restructuring exercises. Restructuring Exercises Undertaken by RBI: RBI had undertaken a number of steps like Corporate Debt Restructuring (CDR) to enable banks to restructure loans and control NPAs. It tried out debt-for- 8-135 MM Special Guide equity swaps in a bid to help lenders recover their dues: I. Strategic Debt Restructuring (SDR): Here, a consortium of lenders converts a part of the loan in a distressed company into equity. The consortium will hold at least 51% of the stake. The consortium will manage the firm more effectively and sell off to another promoter within 18 months. For this period, the loans that are restructured under this scheme are not to be classified as NPAs. Banks also must only provision 5% in most cases. Therefore, for 18 months, banks can report lower provisions and higher profits. In the event that they do not find another promoter to whom NPAs can be sold, the relaxations cease to exist and 100% provisioning of loans must be made. II. Formation of Joint Lenders' Forum (JLF): RBI had suggested that an empowered group of lenders take over the management of stressed assets. A Joint Lenders' Forum (JLF) was to closely monitor stressed assets, detect early signs of defaults and come up with Corrective Action Plans (CAPs). III. 5/25 Scheme: RBI had introduced the 5/25 scheme wherein it allowed banks to extend loans with terms of 25 years to be refinanced every 5 years. This was to encourage lenders to invest in long-term infrastructure projects. Air IV. Scheme for Sustainable Structuring of Stressed Assets (S4A): RBI has suggested this scheme recently to help genuine large corporates (where the aggregate institutional lenders' exposure along with interest is over Rs.500 crore in the account) facing issues in repayment. Here, the sustainable debt level of the stressed borrower must be determined. The bank will determine the amount of debt that it believes the firm can service to be termed 'sustainable debt' - Part A and the balance due to be converted into equity/quasi equity instruments - Part B - the bank may capitalise on this when there is an upturn in the borrower's performance and the markets. When there is no change in the promoter, banks may convert a portion of Part B into Part A. This is to free up credit and investment into crucial sectors such as infrastructure and iron and steel.

Credit-Deposit Growth Rate: The high levels of stressed assets had limited banks' ability to lend when the economic growth was also not as high as in previous years. India's annual loan growth rate was 10.7% in 2015-16, a 10-year low, while deposits grew by 9.7% - a 50-year low. •i, There is a fear that banks have been 'ever-greening their portfolios' masking bad debts as standard assets and lowering their provisioning before the clean-up exercise was mandated by the RBI. This has led to loss of credibility of banks that had enjoyed the trust of investors in the past. On the other - hand, it is more likely that investors will be interested in picking up stakes in banks once their books are clean. This will help banks increase their capital helping them conform to BASEL III norms. The GOI has also offered to infuse capital with its Indradhanush plan wherein it will infuse capital of Rs.70,000 crore in PSBs over 4 years - Rs.25,000 crore each in 2015-16 and 2016-17 and Rs.10,000 crore each in 2017-18 and 2018-19.

47. Restructuring of Banks

With BASEL III norms about to become effective from March 2019 and banks' bad loans on the rise, there has been an urgent need to revamp the banking scene in the country, particularly the state- owned banks. With this in mind, the Finance Ministry of the GOI has suggested that banks restructure through consolidation. The Bank Board Bureau (BBB) had also been set up by the Government to consider issues such as consolidation in the Public Sector Banks (PSBs). BBB: The GOI had announced that a holding company structure should be set up for PSBs and hence set up a Banks Board Bureau (BBB) with former Comptroller and Auditor General (CAG) Vinod Rai as the Chairman. The BBB's role is to • monitor PSBs based on key performance indicators and improve their governance • discuss strategies to improve growth and development of PSBs • replace the existing appointment board for Whole Time Directors (WTDs) and non-executive Chairman for PSBs 8-136 Concept Briefs • guide banks on mergers and acquisitions and consolidation The Finance Ministry has suggested that banks consolidate because of their burgeoning levels of NPAs and low capital base. As BASEL III norms will kick in soon, it is important for banks to have adequate capital with the buffer especially since the level of bad loans have shot up considerably. RBI's Asset Quality Review (AQR) clean-up exercise has revealed the low quality of the assets in the books of banks. RBI has asked banks to clean up their books by March 2017. Mergers: The GOI plans to consolidate the 27 state-owned banks and create a few (perhaps 4-5) large banks. Finance Minister Arun Jaitley has stated that India needs global-sized banks. The GOI is exploring various means of restructuring - divestment, strategic sale and privatisation, asset recycling and buybacks. Recently, it has asked State Bank of India to merge with its five associates - State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore, State Bank of Bikaner and Jaipur and State Bank of Mysore - and the Bharatiya Mahila Bank (BMB). The Cabinet has already approved it. It also plans to ask others in the industry to consolidate - it may consider merging smaller PSBs with the bigger ones - for example, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India. But since all these involve talks with trade unions, it has not committed to any timeline. History of State Bank Mergers: State Bank of India (SBI) had already merged the State Bank of Saurashtra with itself in 2008 and State Bank of Indore in 2010. Since then, there has been much talk and news of further mergers with its associates but since the environment was not conducive, it has not gone forward. If the planned merger with the other associates goes through, SBI will get Rs.5,000 crore of fixed capital from the associate banks and BMB, according to SBI Chairman Arundhati Bhattacharya. The merger will also cost Rs.3,000 crore. SBI's balance sheet is likely to go up from Rs.28 lakh crore to Rs.37 lakh crore, deposits to Rs.21 lakh crore and advances to Rs.17.5 lakh crore, post-merger. SBI's ranking among global banks is also likely to increase from 52 in 2015 to 45 in terms of size of balance sheet, according to statistics from Bloomberg.

Recapitalisation: PSU banks control 70% of the deposits and advances of the banking industry. How- ever, their asset quality and profitability have been falling drastically with all major PSBs declaring losses in the last 2 quarters. The GOI has promised that it will infuse 14.25,000 crore capital in Public Sector Banks (PSBs) as part of its 'Indradhanush' plan. According to this plan, banks will have to raise Rs.1.1 lakh crore from the market while the GOI plans to infuse Rs.70,000 crore over 4 years. Rs.25,000 crore of this was disbursed last fiscal and Rs.10,000 crore each will be disbursed in the next 2 fiscals. The GOI has promised to infuse capital as and when necessary in PSBs. It will reward those banks that are more efficient.

NPA Situation: Gross NPAs of banks have increased to Rs.5.81 lakh crore in 2015-16 from Rs.3 lakh crore a year ago. PSBs have added Rs.1 lakh crore in bad loans in the quarter ended 31 December 2015; this is an increase of 29% as compared with end-September 2015, a result of RBI calling for banks to properly categorise bad loans in its AQR. Because of the recession, several large corporate borrowers have not been able to repay their loans. RBI Deputy Governor S S Mundra has stated that the rising levels of stressed assets were becoming apparent from the beginning of 2012._Stressed assets were 9.8% at the end of March 2012; this increased to 14.5% by December 2015. For PSBs, stressed assets increased from 11% to 17.7%. Pros of Restructuring: o Economies of Scale: Larger banks lead to more efficiency and lower costs. o Network: With new small finance banks about to open in rural areas, PSBs can only improve their reach and compete with mergers. o Avoid Duplication: There are many overlaps between SBI and its associates which could be eliminated with restructuring such as multiple branches in the same area that end up eating into each other's businesses. Duplication of technology and infrastructure could also be avoided. 8-137 MM Special Guide Challenges: • Unions (representing 8,00,000 employees) are likely to oppose it as they will consider it a threat to their employment and longevity prospects. Mergers are usually accompanied by issues relating to work culture, banking technology, career progression, seniority, pay package and so on. Hence, the GOI and PSBs must have in-depth discussions with the unions and get them on board regarding the plans for restructuring. • Also, very large banks are likely to cause huge upsets in the system, as a whole, in case of defaults. Globally, there was a case for not having 'too big to fail' banks after the 2008 sub- prime crisis. There is a threat of systemic failure caused by defaults in one leading to a cas- cading effect on all the rest. Financial instability is, thus, a possible outcome. RBI's Opinion: RBI Deputy Governor S S Mundra has stated that the merger of banks should wait till the clean-up exercise is completed so that a realistic idea of the worth of the bank can be gauged. The situation is still very fluid and both the GOI and banks are exploring different ways to tackle the twin problems of deteriorating asset quality and low capital. As this has affected the credit growth rate of PSBs, the situation needs to be addressed on an urgent footing.

48. Cyber Security Framework in Banks (RBI):

Use of Information Technology by banks and their constituents has grown rapidly and is now an integral part of the operational strategies of banks. The Reserve Bank, had, provided guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds (G.Gopalakrishna Committee) in April 2011, indicating that the measures for implementation cannot be static and banks need to pro-actively create/fine-tune/modify their policies, procedures and technologies based on new developments and emerging concerns.

Since then, the use of technology by banks has gained further momentum. On the other hand, the number, frequency and impact of cyber incidents / attacks have increased manifold in the recent past, more so in the case of financial sector including banks, underlining the urgent need to put in place a robust cyber security/resilience framework at banks and to ensure adequate cyber-security preparedness among banks on a continuous basis. In view of the low barriers to entry, evolving nature, growing scale/velocity, motivation and resourcefulness of cyber-threats to the banking system, it is essential to enhance the resilience of the banking system by improving the current defences in addressing cyber risks. These would include, but not limited to, putting in place an adaptive Incident Response, Management and Recovery framework to deal with adverse incidents/disruptions, if and when they occur.

Banks should immediately put in place a cyber-security policy elucidating the strategy containing an appropriate approach to combat cyber threats given the level of complexity of business and acceptable levels of risk, duly approved by their Board.

It may be ensured that the strategy deals with the following broad aspects: Cyber Security Policy to be distinct from the broader IT policy / IS Security Policy of a bank In order to address the need for the entire bank to contribute to a cyber-safe environment, the Cyber Security Policy should be distinct and separate from the broader IT policy / IS Security policy so that it can highlight the risks from cyber threats and the measures to address / mitigate these risks. The size, systems, technological complexity, digital products, stakeholders and threat perception vary from bank to bank and hence it is important to identify the inherent risks and the controls in place to adopt appropriate cyber-security framework. While identifying and assessing the inherent risks, banks are required to reckon the technologies adopted, alignment with business and regulatory require-

8-138 ' ' '71;9:Orgrii

. . ,

Concept Briefs ments, connections established, delivery channels, online / mobile products, technology services, organisational culture and internal & external threats. Depending on the level of inherent risks, the banks are required to identify their riskiness as low, moderate, high and very high or adopt any other similar categorisation. Riskiness of the business component also may be factored into while assessing the inherent risks. While evaluating the controls, Board oversight, policies, processes, cyber risk management architecture including experienced and qualified resources, training and culture, threat intelligence gathering arrangements, monitoring and analysing the threat intelligence received vis-a- vis the situation obtaining in banks, information sharing arrangements (among peer banks, with IDRBT/RBI/CERT-In), preventive, detective and corrective cyber security controls, vendor management and incident management & response are to be outlined.

Arrangement for continuous surveillance Testing for vulnerabilities at reasonable intervals of time is very important. The nature of cyber- attacks are such that they can occur at any time and in a manner that may not have been anticipated. Hence, it is mandated that a SOC (Security Operations Centre) be set up at the earliest, if not yet been done. It is also essential that this Centre ensures continuous surveillance and keeps itself regularly updated on the latest nature of emerging cyber threats.

IT architecture should be conducive to security The IT architecture should be designed in such a manner that it takes care of facilitating the security measures to be in place at all times. The same needs to be reviewed by the IT Sub Committee of the Board and upgraded, if required.

Comprehensively address network and database security Recent incidents have highlighted the need to thoroughly review network security in every bank. In addition, it has been observed that many times connections to networks/databases are allowed for a specified period of time to facilitate some business or operational requirement. However, the same do not get closed due to oversight making the network/database vulnerable to cyber-attacks. It is essential that unauthorized access to networks and databases is not allowed and wherever permitted, these are through well-defined processes which are invariably followed. Responsibility over such networks and databases should be clearly elucidated and should invariably rest with the officials of the bank.

Ensuring Protection of customer information Banks depend on technology very heavily not only in their smooth functioning but also in providing cuffing-edge digital products to their consumers and in the process collect various personal and sensitive information. Banks, as owners of such data, should take appropriate steps in preserving the Confidentiality, Integrity and Availability of the same, irrespective of whether the data is stored/in transit within themselves or with customers or with the third party vendors; the confidentiality of such custodial information should not be compromised at any situation and to this end, suitable systems and processes across the data/information lifecycle need to be put in place by banks. A Cyber Crisis Management Plan (CCMP) should be immediately evolved and should be a part of the overall Board approved strategy. Considering the fact that cyber-risk is different from many other risks, the traditional BCP/DR arrangements may not be adequate and hence needs to be revisited keeping in view the nuances of the cyber-risk. In India, CERT-IN (Computer Emergency Response Team - India, a Government entity) has been taking important initiatives in strengthening cyber- security by providing proactive & reactive services as well as guidelines, threat intelligence and assessment of preparedness of various agencies across the sectors, including the financial sector. CERT- IN also have come out with National Cyber Crisis Management Plan and Cyber Security Assessment Framework. CERT-Irt/NCIIPC/RBI/IDRBT guidance may be referred to while formulating the CCMP. 8-139 MM Special Guide CCMP should address the following four aspects: (i) Detection (ii) Response (iii) Recovery and (iv) Containment. Banks need to take effective measures to prevent cyber-attacks and to promptly detect any cyber-intrusions so as to respond / recover / contain the fall out. Banks are expected to be well prepared to face emerging cyber-threats such as 'zero-day' attacks, remote access threats, and targeted attacks. Among other things, banks should take necessary preventive and corrective measures in addressing various types of cyber threats including, but not limited to, denial of service, distributed denial of services (DDoS), ransom-ware / crypto ware, destructive malware, business email frauds including spam, email phishing, spear phishing, whaling, vishing frauds, drive-by downloads, browser gateway fraud, ghost administrator exploits, identity frauds, memory update frauds, password related frauds, etc. Cyber security preparedness indicators The adequacy of and adherence to cyber resilience framework should be assessed and measured through development of indicators to assess the level of risk/preparedness. These indicators should be used for comprehensive testing through independent compliance checks and audits carried out by qualified and competent professionals. The awareness among the stakeholders including employees may also form a part of this assessment.

Sharing of information on cyber-security incidents with RBI It is observed that banks are hesitant to share cyber-incidents faced by them. However, the experience gained globally indicates that collaboration among entities in sharing the cyber-incidents and the best practices would facilitate timely measures in containing cyber-risks. It is reiterated that banks need to report all unusual cybersecurity incidents (whether they were successful or were attempts which did not fructify) to the Reserve Bank. Banks are also encouraged to actively participate in the activities of their CISOs' Forum coordinated by IDRBT and promptly report the incidents to Indian Banks - Center for Analysis of Risks and Threats (IB-CART) set up by IDRBT. Such collaborative efforts will help the banks in obtaining collective threat intelligence, timely alerts and adopting proactive cyber security measures.

An immediate assessment of gaps in preparedness to be reported to RBI The material gaps in controls may be identified early and appropriate remedial action under the active guidance and oversight of the IT Sub Committee of the Board as well as by the Board may be initiated immediately. The identified gaps, proposed measures/controls and their expected effectiveness, milestones with timelines for implementing the proposed controls/measures and measurement criteria for assessing their effectiveness including the risk assessment and risk management methodology followed by the bank/proposed by the bank, as per their selfassessment, may be submitted to the Cyber Security and Information Technology Examination (CSITE) Cell of Department of Banking Supervision, Central Office not later than July 31, 2016 by the Chief Information Security Officer.

Organisational arrangements Banks should review the organisational arrangements so that the security concerns are appreciated, receive adequate attention and get escalated to appropriate levels in the hierarchy to enable quick action.

Cyber-security awareness among stakeholders / Top Management / Board It should be realized that managing cyber risk requires the commitment of the entire organization to create a cyber-safe environment. This will require a high level of awareness among staff at all levels. Top Management and Board should also have a fair degree of awareness of the fine nuances of the threats and appropriate familiarisation may be organized. Banks should proactively promote, among their customers, vendors, service providers and other relevant stakeholders an understanding of the bank's cyber resilience objectives, and require and ensure appropriate action to support their 8-140 Concept Briefs synchronised implementation and testing. It is well recognised that stakeholders' (including customers, employees, partners and vendors) awareness about the potential impact of cyber-attacks helps in cybersecurity preparedness of banks. Banks are required to take suitable steps in building this awareness. Concurrently, there is an urgent need to bring the Board of Directors and Top Management in banks up-to-speed on cyber-security related aspects, where necessary.

(Extract from RBI Circular dated June 2, 2016)

49. GIST OF MOBILE BANKING GUIDELINES - RBI (1.7.2016) Introduction: The rapid growth of mobile users in India, through wider coverage of mobile phone networks, have made this medium an important platform for extending banking services to every segment of banking clientele in general and the unbanked segment in particular. For the purpose of the instructions contained in this Master Circular, 'Mobile Banking transaction' means undertaking banking transactions using mobile phones by bank customers that involve accessing / credit / debit to their accounts Banks are permitted to offer mobile banking services (through SMS, USSD or mobile banking application) after obtaining necessary permission from the Department of Payment & Settlement Systems, Reserve Bank of India. Mobile Banking services are to be made available to bank customers irrespective of the mobile network. Regulatory & Supervisory Issues Banks which are licensed, supervised and having physical presence in India, are permitted to offer mobile banking services. Only banks who have implemented core banking solutions are permitted to provide mobile banking services. The services are restricted only to customers of banks and/or holders of debit/credit cards issued as per the extant Reserve Bank of India guidelines. Only Indian Rupee based domestic services shall be provided. Use of mobile banking services for cross border inward and outward transfers is strictly prohibited. Banks may also use the services of Business Correspondent. The guidelines issued by Reserve Bank on "Know Your Customer (KYC)", "Anti Money Laundering (AML)" and "Combating the Financing of Terrorism (Ct. I)" from time to time would be applicable to mobile based banking services also. Banks shall file Suspicious Transaction Report (STR) to Financial Intelligence Unit - India (FIU-IND) for mobile banking transactions as in the case of normal banking transactions. Registration of customers for mobile service Banks shall put in place a system of registration of customers for mobile banking. Banks should strive to provide options for easy registration for mobile banking services to their customers, through multiple channels, thus minimizing the need for the customer to visit the branch for such services. The time taken between registration of customers for mobile banking services and activation of the service should also be minimal. The system put in place by banks for registration of customers for mobile banking for new as well as existing account holders (where mobile number is either registered with the bank or is not available) , is varied across banks. Thus, there is a need for greater degree of standardization in procedures relating to the above particularly when customers are using inter-operable mobile banking platforms. All banks shall carry out necessary changes in their respective ATM switches to enable customer registration for mobile banking at all their ATMs. In order to address the challenges in extending the facility of MPIN generation to the customers registered for mobile banking, banks have to explore various options. In order to quicken the process of MPIN generation and also widen the accessibility to their mobile banking registered customers, 8-141 MM Special Guide banks can consider adopting various channels / methods such as a. Through the ATM channels (similar to option available for change of PIN on their own ATMs as well as in inter-operable ATM networks) b. Through an option provided in the USSD menu for mobile banking (both their own USSD platform, if any, as well as under the inter-operable USSD Platform for mobile banking) c. Banks' own internet banking website, with necessary safeguards d. Use of MPIN mailers (like PIN mailers for cards) e. Common website can also be designed as an industry initiative Banks may also undertake customer education and awareness programme in multiple languages through different channels of communication to popularise their process of mobile banking registration/activation and its usage etc. On registration of the customer, the full details of the Terms and Conditions of the service offered by the bank shall be communicated to the customer.

Technology and Security Standards Information Security is most critical to the business of mobile banking services and its underlying operations. Therefore, technology used for mobile banking must be secure and should ensure confidentiality, integrity, authenticity and non-repudiability. Transactions up to Rs 5000/- can be facilitated by banks without end-to-end encryption. The risk aspects involved in such transactions may be addressed by the banks through adequate security measures. Inter-operability Banks offering mobile banking service must ensure that customers having mobile phones of any network operator is in a position to avail of the service, i.e. should be network independent. Restriction, if any, for the customers of particular mobile operator(s) are permissible only during the initial stages of offering the service, up to a maximum period of six months subject to review. V.: The long term goal of mobile banking framework in India would be to enable funds transfer from • account in one bank to any other account in the same or any other bank on a real time basis irrespective •= of the mobile network a customer has subscribed to. This would require interoperability between mobile banking service providers and banks and development of a host of message formats. To ensure inter-operability between banks, and between their mobile banking service providers, banks shall adopt the message formats like ISO 8583, with suitable modification to address specific needs. Transaction limit Banks are permitted to offer mobile banking facility to their customers without any daily cap for transactions involving purchase of goods/services. However, banks may put in place per transaction limit depending on the bank's own risk perception, with the approval of its Board. Remittance of funds for disbursement in cash In order to facilitate the use of mobile phones for remittance of cash, banks are permitted to provide fund transfer services which facilitate transfer of funds from the accounts of their customers for delivery in cash to the recipients. The disbursal of funds to recipients of such services can be facilitated at ATMs or through any agent(s) appointed by the bank as business correspondents. The recipient can be a non - account holder also. Such fund transfer service shall be provided by banks subject to the following conditions:- a) In case of cash out, the maximum value of such transfers shall be Rs 10,000/- per transaction. Banks may place suitable cap on the velocity of such transactions, subject to a maximum value of Rs 25,000/- per month, per beneficiary. b) The disbursal of funds at the agent/ATM shall be permitted only after identification of the recipient.

8-142 Concept Briefs

In this connection, attention of banks is drawn to the provisions of the Notification dated November 12, 2009, issued by Government of India, under Prevention of Money Laundering Act, 2002, as amended from time to time. c) Banks may carry out proper due diligence of the persons before appointing them as authorized agents for such services. d) Banks shall be responsible as principals for all the acts of omission or commission of their agents. Banks wishing to provide mobile banking services shall seek prior one time approval from Reserve Bank of India by furnishing full details of the proposal.

50. Goods and Services Tax (GST) Act 2016

The Goods and Services Tax (GST) Bill seeks to address the problem of the high, complex and multiple taxation system that exists in India currently. The GST is an indirect tax on the supply of goods and services that seeks to make the whole Indian market one, common and unified market covered by a single rate of tax. Finance Minister Arun Jaitley has called GST "one of the most significant tax reforms in the history of India". Levy of GST: There will be a Central GST (CGST), levied and collected by the Centre and a State GST (SGST), levied and collected by the State. IGST— Integrated GST will apply on interstate transactions and will be decided by the Centre. It is included in the CGST and SGST and is not a separate third tax. The credit of CGST paid on inputs will be available for paying CGST on the output. Similarly, for SGST. No cross credit is allowed. Both CGST and SGST will be chargeable on the same value or price of the good or service i.e. if CGST is 12% and SGST is 12%, on a transaction value of Rs.100, CGST will be Rs.12 and SGST will be Rs.12. Current Multiple Taxation System: The Central Government charges central excise duty, additional excise duty, service tax, additional customs duty or countervailing duty and special additional customs duty. The State Government charges Value Added Tax/Sales Tax, entertainment tax, octroi and entry tax, purchase tax, luxury tax, apart from taxes on lottery and gambling. It also collects central sales tax actually levied by the Centre. The GST will subsume all these into one tax. Key Features of GST: There is no differentiation between goods and services. It is a destination-based tax on the manufacture, sale and consumption of goods and services at the national level. This means that revenues will accrue to the state where the consumption of the good or service takes place. It is a tax on the output. Tax credits are available for the tax paid on inputs. Hence, it is a tax on value-addition only. The final consumer will only bear tax paid by the last dealer in the supply chain. • CGST and SGST will both be applicable on every transaction. Double taxation is avoided. History: The GST was first introduced in a report by the Kelkar Task Force in 2003. The Union Budget of 2006- 07 proposed a single tax for India. An Empowered Committee of State Finance Ministers was formed to prepare a roadmap for the design of the GST. Several discussion papers and reports were subsequently released but the Bill has largely languished for want of consensus between different political parties at the Centre and various states. Legislation: The Constitution Amendment Bill for Goods and Services Tax (GST) was passed by the Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016 and has been approved by The President of India post its passage in the Parliament and ratification by more than 50 percent of state legislatures. States have been hopeful of widening their tax base and plugging leakages as well as increasing the ease of doing business. There have been several discussions in Parliament and the GOI has been in dialogue with various states to put the GST in place. While the Congress government has been demanding capping of the GST at 18%, the 8-143 MM Special Guide Finance Minister Arun Jaitley has stated that the GST Council will determine an optimum rate and states will be compensated based on this rate. GST Council: The GST Council shall decide exemptions, taxes that will be subsumed, laws, levies, threshold for exemption, floors and bands for the applicable rates, special provisions for the Northeast and Jammu & Kashmir and such other details. Exempted goods and services: GST will not be charged on some products and on some transactions that are below threshold limits. Liquor consumed by humans will not be charged under GST. Also, petroleum and its products - high speed diesel, natural gas, aviation turbine fuel and petrol will only be charged at a later date. States will levy a separate tax for these till then. Some other common use items like bread, eggs, cereals and salt among others may also not be taxed under GST. The GST Council will decide when the GST will apply to all these. CAB, 2014: Currently, states are allowed to tax sale of goods while the Centre is allowed to tax goods and services up to the point of production. Thus, neither is allowed to tax supply of goods and services in total under prevalent laws. Additionally, states are not allowed to tax imports. The Constitutional (122nd) Amendment Bill (CAB) has given both the Central Government and the states the power to make laws with respect to GST. It has also permitted the subsuming of different taxes into one. It also allows levying of Interstate Goods and Services Tax (IGST) on inter-state transactions of goods and services, creation of the GST Council and compensation to states for loss of revenue. GST Explained With Examples: I. GST vs Current Indirect taxes: Assume uniform tax rates of 10% for all taxes including GST. In this example, it is obvious that the current tax regime allows tax on tax as well as double tax at all stages of production and sale. GST only taxes the value addition on the product and hence avoids these pitfalls. Hence, there will be lower taxes for consumers also.

Particulars Current Tax Regime GST Regime Cost of Raw Material (RM) 90 90 Tax on Raw Material 10 10 Cost to Manufacturer 100 100 Value Added by Manufacturer 30 30 Tax Payable by Manufacturer 13 13-10(tax already paid on RM=3) Cost to Wholesaler 143 133 Value Added by Wholesaler 20 20 Tax Payable by Wholesaler 10% of 163 = 16.3 10% of 153 less 13 = 2.3 Cost to Retailer 143+20+16.3 = 179.3 133+20+2.3 = 155.3 Retailer's Profit Margin/Value Addition 10 10 2 3 --- Tax Payable by Retailer 10% of 189.3 = 18.93 10% of 165.3 less (10+3+ . ) 1.23 Cost to Final Consumer 208.23 166.53 Value of Good 150 150 Total Taxes Paid 10+13+16.3+ 18.93= 58.23 10+3+2.3+1.23 = 16.53

2016 Source: http://finmin.nic.in/press_room/ /GST_FAQ.pdf Need for GST: India is ranked 157th out of 189 by the World Bank in terms of simplicity of its tax system. This low rank is because of the number of taxes charged by the state and the centre. This array of taxes has led to delays in sales and delivery of products as each state in the country has its own rules and tax rates. GST provides a fitting solution for this issue.

8-144 Concept Briefs

Benefits of GST: • Tax on Value Addition: Tax credits will be available for each stage of production at the next stage of value addition. This will make products cheaper for distributors and consumers as tax on tax will be avoided. The final consumer will only be charged tax on the last stage of the supply chain. Reduced Costs for Businesses: It will reduce the costs of businesses as they may operate from a single warehouse than open multiple warehouses in different states. This will avoid queuing up of delivery trucks at state borders till complex tax structures that depend on the state where goods are manufactured, sold and delivered are understood, calculated and paid. Companies will also benefit from a uniform tax structure and online registration, payment and returns system. • Increase in Investments: GST will increase investments in the country as a single tax across the country will ensure ease of doing business. This is because it will not matter where businesses are established in terms of taxation. Companies will be free to access markets in places far away from their base of production as they need not pay a separate tax for entry into those markets. • Export Competitiveness: Domestically-produced goods, will become more competitive when compared to imported goods and this will spur the GOI's Make in India efforts. Exports will also get a boost from better tax structures and hence pricing of indigenous products. • Increased Revenues for Governments: An online system of payment of Income Tax (IT) will make tax evasion difficult and hence increase revenue of the Government. GST is expected to increase India's . - , .1 , • GDP by 2 percentage points. This system will also be easier for the Government to administer and will plug leakages in the system. • Easier Administration: The simpler structure of taxation will be easier for state and central governments to administer. Tax compliance is also likely to be more and cost of collection lesser. Concerns Regarding Implementation of GST: • The GOI is hopeful that the GST can be implemented by April 1, 2017. There is scepticism about when the GST will be implemented given the amount of legislation that is required before it can become a reality. • The Finance Ministry has also sought to dispel worries that a high rate of GST will adversely affect Consumer Price Index (CPI) inflation. • States have been anxious about loss of revenue that will arise from implementation of this common tax. The Centre's compensation package is a point of contention. The fixing of the Revenue Neutral Rate (RNR) will be largely instrumental in resolving conflicts on compensation. It will take some time for the positive effects of the tax to trickle down to the final consumer's budget. This might mean that consumers pay more initially than they currently do on some goods and services. GOI Voice: Prime Minister (PM) Narendra Modi has stated that the GST will help the poor and small businesses and create more jobs. It will also curb black money and corruption as input credits are available for businesses that produce real bills. Arvind Subramanian, the government's Chief Economic Adviser (CEA), calls the whole construct "a voluntary pooling of sovereignty in the name of co-operative federalism". The GOI expects A 50% of states to ratify the GST Bill in 30 days. s Global Scene: 160 countries USA does not have a GST regime around the world have a Goods and Services Tax or a Value Added Tax system around the world. Average rate of VAT around the world is 15.8%. The European T Union has an indirect tax rate of 21.5%. India's Value Added Tax (VAT) system does not include services. France introduced GST in 1954. Since the legislation surrounding the GST is likely to take a long time to be passed by both the Centre and States across the country, the implementation of the GST is still not expected to take place any time soon despite the Centre's deadline of April 1, 2017. With lower taxes on a wider range of goods and services replacing a narrower range that attached high taxes, the implementation of the GST is likely to be a win-win-win for Governments, businesses and consumers.

8-145 MM Special Guide Position as of December 2016. After Parliament passed the landmark constitutional amendment in August 2016 and more than half of state legislatures ratified it by mid-September, the GST Council, headed by the Union Finance Minister Arun Jaitley and comprising the racepresentatives of the states, has taken several key decisions. However, the April 1, 2017 deadline for rolling out the goods and services tax (GST) may not be met. The FM has said that as it was a transactional levy unlike the Income Tax, it could be implemented anytime during the financial year and because of constitutional necessity the time frame is between April 1 and September 16, 2017. The GST Council has resolved 10 issues and only one pertaining to administration of tax is pending, he said.

Dual GST within State: Working E pie SGST Pad • Rs 10 State i - -

SGSr SCS1 Rao a Rs 10 %LT P2,1 Rs 1_ @10% 1Rs 30- Ps. 20 Irsodt Tax [fedi* 181. 20- Rs 10 law Ta.

CGS-1 Pa4 = Rs. 10 50sr Paid=Rs. 10 L0:31 Pa.c Rs 10 II.. 20- Rs. 10 Isput tax Crecliti iRs 30- 115.2011,00E Tao Credal

Centre

CGST Tax b,roace A @10% TaxlrcedceB Tax Invoice C

Cost of Goods = rs.100 Cost of Goads= Rs.200 Cost of Goods Rt:300 , 30370) 3616' Rs. 10 305T 0 10,4 = tis. 20 scsi 5s 1.0%. Rs, 30 MST 0) 1096 Ps. 10 COST 410% a Rs 20 COOT @ 10%. Rs, 10 total =k.. 120 Tota! a Rs. 140 Total..360

8-146 Concept Briefs

51. Real Estate Regulation

The Real Estate (Regulation and Development) Bill was first introduced in Parliament in 2013. Recently, the Parliament passed the Bill that will become a law with the President's ratification. The aim of the Bill is to establish a real estate regulatory body that will ensure transparency in this sector. Need for Law: India's real estate sector has been unorganised and unregulated without transparent practices. This sector is infamous for murky deals, delays in construction with inadequate or no compensation to buyers, overpricing and underreporting which has made it an ideal nesting ground for money launderers. Buyers have been largely unprotected and at the mercy of big builders, developers and sellers without legal recourse in the event of a dispute. This Bill will address the concerns of the buyer community and ensure that they are not subject to unfair practices. Features of the Bill: 1. Validity: • This Bill will apply to projects under development as well as new ones. It will also apply to commercial and residential projects.

8-147 MM Special Guide 2. Registration: Builders developing properties over 500 square metres and with over 8 apartments must register under the Real Estate Regulatory Authority (RERA) before booking or selling apartments. This Authority is to be set up within one year of the Act coming into force. Till such time, developers must register with a local authority appointed by the State or Central Government. The Regulatory Authority must grant or reject approval for the project within 30 days of the date of the application. 3. Transparency: Developers must disclose all information with respect to the development - project layout, design, status of land approvals, schedule and completion of project to both the Regulatory Authority as well as to consumers. This level of transparency will increase accountabilityand credibility of developers and, thus, increase their access to funds through foreign investment and loans. 4. Usage of Funds: This Bill ensures that 70% of the funds collected from buyers is used for the purpose of construction of the respective project only. These funds must be deposited in an escrow account. This will prevent usage of funds meant for one project in another. 5. Compensation for Delays: Buyers and sellers have not been subject to the same rate of penalties, so far, in case of delays in the project. Buyers have had to fend for themselves when there are delays in projects. The costs to the buyer include interest on home loan, penalties on delay in payments to the developer and loss in rentals receivable from the project because of delays as well as in terms of rent payable to current accommodation. Now, in case of delays, sellers will pay the same rate of interest that buyers are subject to for late payment of instalments. The buyer can also claim the entire amount paid to the developer, with interest if the developer's registration is cancelled, or if the developer does not plan to continue as promoter or if he does not stick to the terms of agreement. 6. Area: Sellers cannot sell the property based on super built-up area which includes flat area as well as common areas. They must disclose the carpet area of the flat on sale and sell units based on it. 7. Advance Payment Promoters must not demand more than 10% of cost of apartment, land or building as advance payment before getting into an agreement of sale in writing and registering it. 8. Changes in Plan: Promoters will not be allowed to make any changes in the sanctioned plan such as in specifications or amenities without the consent of two-thirds of the buyers excluding the promoters. Similarly, the developer is not allowed to transfer majority rights of the project to a third party without the consent of two-thirds of the buyers. 9. Insurance of Land: Land will have to be insured and this will protect both developers and buyers from frauds. 10. Structural Defect Buyers can hold sellers responsible for any structural defect within 5 years of possession. The builder must rectify the same within 30 days of such information without charging anything further from the buyer. 11. Penalty: a) Penalty for the developer not registering with the Authority can be up to 10% of the estimated cost of the project. b) Punishment for the developer for not conforming to the Appellate Tribunal's rules could lead to imprisonment of up to 3 years or penalty up to 10% of the estimated cost or both. c) Falsification of information to the Regulatory Authority by the developer can also attract up to 5% penalty. d) The allottee is also liable to 5% penalty if he does not conform to the directions of the Regulatory Authority. • 12. Disputes: Appellate tribunals must adjudicate cases in 60 days (currently 90 days) and regulatory authorities must take care of complaints in 60 days (currently, there is no time frame). This will expedite grievance redressal. Shortcomings of the Bill: One of the major shortcomings of the Bill is that it does not address concerns for the environment. It does not make provisions for drawing of ground water, developing on lake beds and flood plains, and rehabilitating displaced populations. It has focussed on addressing the woes of the middle class buyers without much attention to the lower classes. 8-148 Concept Briefs Repercussions for Realty Sector: . Keeping 70% of the funds collected in an escrow account will affect liquidity for the developer. On the other hand, foreign investors are more likely to be interested in an organised and well- regulated sector. This will increase funds to the sector. . In the long run, projects will be developed more efficiently as transactions will be transparent a n d above-board. . Since the Bill is to be applied retrospectively, most of the current projects will be forced to conform to these new terms. This will lead to huge expenses for developers. . With added disclosures and transparency, developers, who obtain approvals from the Regulatory Authority, will gain credibility. Effect on the Banking and Financial Sector: The transparent dealings and clear-cut and professional mode of operation suggested in the Bill will give developers easier access to loans from banks and financial institutions. The realty sector is saddled with huge debts. Banks may be more willing to lend to them if their projects are completed on time and according to the original plan. This Bill is a step in the right direction. The Government's efforts and intentions are commendable. However, the reality is that there are a huge number of pending project approvals. So, it will be a challenge for the GOI to adhere to its own timeline. It must set up the Regulatory Authority and ensure that it addresses any loophole that may present itself during the implementation of the consumer-friendly features of the Bill. - 1 , tr , , 1 . ;',14

, :v . iN'

Y F

N :

, , ,.. ,v5o,47..AtV,k PART - 9 MODEL TESTS

MODEL TEST WTTHANSWERS BASED ON JAN'2016 INFORMATION: Im.r.riiirammensm. 1) Going forward, the GOI has announced that the LPG subsidy will be available only for those earning less than Rs. . 2) The 51st Jnanpith Award has been given to . 3) The new CEO of Wipro is . 4) The BS Banker of the Year 2014-15 is 5) Which Indian was ranked No.1 Test bowler for 2015 by the ICC? 6) What is the name of the Committee that was appointed by the Supreme Court to revamp the administration of the BCCI? 7) What is the BS-VI standard? 8) Recently there was a terrorist attack by Pakistani terrorists at an IAF base. Name the place. 9) Reporting of transactions in immovable property worth Rs. or above is now mandatory. 10) SBI plans to open a branch for servicing start-ups initially in . 11) Who is the CEO of NITI Aayog? 12) The CEO of Fliplcart is . 13) FIFA's Ballon d'Or for 2015 was awarded to 14) Surface Pro 4 is a product by . 15) SEBI has stated that any platform of a commodity derivative exchange that has not seen trading activity for months must exit. 16) In which country SBI has opened a branch in Jan 16? 17) What is the exposure ceilings fixed by RBI for IBU's (IFSC's Banking units)? 18) Who got the ET Award 2015 for Business Leader of the year? 19) Who was conferred the ET Lifetime Achievement Award? 20) A start-up is an entity that has an annual turnover of Rs. in any preceding year and that is less than years old. 21) Which Indian actor recently won a People's Choice award? - ..ir 22) The Filmfare award for Best Film 2015 was given to . 23) Which country produces largest quantity of fruits? 24) Who won the Premier Badminton League? 25) The Supreme Court appointed the committee to suggest changes to the administration of the BCCI. 27) Storehouses of bank notes and coins stocked on behalf of the RBI are called . 28) The father of India's space programme is . 29) The 103rd Indian Science Congress was held at . 30) Banks are to be given °A commission for mobilising gold under the Gold Monetisation Scheme. 31) RBI has directed banks to offer loans up to Rs. to Women Self-Help Groups (SHGs) in rural areas at % for 2015-16. C

ANSWERS: 1) 10 lakh per annum 2) Raghuveer Chaudhary, novelist and poet of Gujarat 3) Abidali Neemuchwala

9-1 MM Special Guide 4) Axis Bank's Shikha Sharma 5) Ravichandran Ashwin 6) Lodha Committee 7) It is the latest emission standard instituted by the GOI to reduce the harmful fumes released by vehicles. B S stands for Bharat Stage. 8) Pathankot, Punjab 9) 301aldi 10) Bengaluru 11) Amitabh Kant 12) Binny Bansal 13) Lionel Messi of Argentina 14) Microsoft 15) 12 16) South Korea; in Seoul. 17) Single borrowers: 5% of the parent bank's Tier 1 capital; group borrowers: 10%. 18) Uday Kotak, Executive Vice Chairman/ MD, Kotak Mahindra Bank. 19) S. Ramadorai, Adviser to PM, National Council for Skill Development 20) 25 crore; 5 21) Priyanlca Chopra 22) Bajirao Mastani 23) China 24) Delhi Acers beating Mumbai Rockets 25) Justice Lodha 26) Alice G Vaidyan 27) Currency chests 28) Vikram Sarabhai 29) Mysuru 30) 2.5 31) 31alch; 7

MODELTEST WITH ANSWERS BASED ON FEB'2016 INFORMATION: 1) Who won the men's and women's singles titles at the 2016 Australian Open tennis championships? 2) Who won the women's doubles titles at the 2016 Australian Open tennis championships? 3) India's growth rate for 2014-15 was %. 4) The CEO of Corporation Bank is 5) The present repo rate is %. 6) With which holiday planner has SBI recently partnered? 7) Which initiative of Facebook has the TRAI banned recently? 8) is the highest producer of milk in the world. 9) Recently, there was an avalanche in that led to the death of 10 Indian soldiers. It is also considered the highest battleground in the world. 10) The present SEBI Chief is 11) The U-19 cricket world cup winning team was 12) The EPF rate for 2015-16 is %. 13) RBI must file an AIR for remittances of services providers exceeding Rs. for receipt of services from overseas entities. 14) RBI has allowed banks to qualify _% of their Statutory Liquidity Ratio (SLR) bonds as Liquidity

9-2

Finance & Economy Coverage Ratio (LCR). 5) The Pension Fund Regulatory and Development Authority (PFRDA) has allowed private pension funds to invest % ofththeir corpusin Alternative Investment Fund (AI F) schemes. %. 6) 100 basis points(bps) 17) The next IMF Chief will be . 18) The head of the GST panel is . 19) Which company was named 'Best Company of the Year 2015' by Business Standard? 20) Who wrote 'To Kill a Mockingbird'? 21) Which Indian company has come out with a smartphone for just Rs.251? 22) The Prime Minister of Nepal is" ' . 23) Which country is about to hold a referendum to decide whether or not to stay in the European Union (EU)? 24) The 2016 Olympics will be held at . 25) What is SDF? 26) The 2016 South Asian Games were held at . 27) As per the latest ICC rankings is ranked No. 1 .

Answers: 1) Novak Djokovic of Serbia and Angelique Kerber of Germany 2) Sania Mirza of India and Martina Hingis of Switzerland 3) 7.2 (recently revised by the Govt. from 7.3%) 4) Jai Kumar Garg 5) 6.75 6) Thomas Cook India Ltd. 7) Free Basics 8) India 9) Siachen, Himalayas 10) U K Sinha; he was re-appointed for another year •.,-/ 11) West Indies beating India 12) 8.8 13) 50 lakh 14) 10 15) 2 16) 1 17) Current head Ms.Christine Lagarde of France (her term extended for 5 years). 18) Amit Mita 19) Eicher Motors 20) Harper Lee of USA 21) Ringing Bells 22) K P Sharma Oli 23) United Kingdom (UK) 24) Rio de Janeiro 25) Special Drawing Facility (earlier called as special Ways & Means Advances). It is granted against collateral of State Govt's investments. Interest rate will be one percent less than Reporate. 26) Guwahati 27) Australia

MODEL TEST WITH ANSWERS BASED ON MAR'2016 INFORMATION: 1) In Strategic Debt Restructuring involving debt-equity swaps, RBI has stated that banks must provision _% .—. of the value of the residual loan to protect themselves against drop in the value of the . .. .` equity. . . 2) Forbes magazine 2016 has named , . . 3) Who is the Chairman of the Bank Board Bureau?he richest person in the world. z - . 4) The Companies Act 2013 states that MDs cannot stay on in their posts after the age of years. 5) Withdrawal of _% of the NPS corpus is tax-free. ,-i-. - ti 6) iWork@home is an initiative by to allow women managers to work from home for a long period .., . r:' of time. i.. 9-3 MM Special Guide 7) Who was awarded the Dadasaheb Phalke award for 2015? 8) Who won the T20 Asia Cup? 9) Which Indian bank received preliminary approval to open branches in Myanmar? 10) Who won the Best Actor Oscar in 2016? 11) Mother Teresa was awarded the Nobel Prize for in 1979. 12) The new President of Myanmar is • 13) Which Indian statesman's wax statue is soon to be released in Madam Tussauds? 14) Expand PSLV. 15) Which bank had the highest market share in India in mobile banking in December 2015? 16) The Irani Cup is associated with . 17) If a bill is introduced as a money bill in the Lok Sabha, it does not need the approval of the Rajya Sabha though the Upper House can make recommendations. True or False? 18) Which Indian film has the highest insurance cover? 19) Recently, the US President visited , becoming the first President of the US to visit it in 88 years.

Answers: I) 15 2) Bill Gates, with a net worth of US$ 75 billion 3) Former CAG, Vinod Rai 4) 70 5) 40 6) ICICI Bank Ltd. 7) Actor Manoj Kumar 8) India beating Bangladesh 9) State Bank of India (SBI) 10) Leonardo DiCaprio for The Revenant 11) Peace 12) HtinKyaw 13) Indian Prime Minister Narendra Modi 14) Polar Satellite Launch Vehicle 15) State Bank of India; 35% 16) Cricket 17) True 18) Enthiran 2 or Robot 2 starring Rajinikanth 19) Cuba

MODELTESTWITHANSWERS BASED ON APR1L'2016 INFORMATION: 1) Who won the Best Actor award at the National Film Awards? 2) Who holds the Guinness World Record for recording the highest number of songs in different languages? 3) Who is horn Sharmila? 4) The GOI has allowed % FDI in e-commerce sites with model. 5) The maximum foreign investment permissible in G Secs is 6) MCLR has to be adopted by banks for floating rate loans and for fixed rate loans up to 3 years (True / False) 7) In which country the Stock Exchange has now started functioning after a gap of 20 years. 8) Who won the 2016 T20 men's and women's World Cup? 9) India's fastest train is running between and . 10) Which company was the contractor to the recently-crashed Vivekananda flyover construction project?

9-4 Banking, Finance & Economy

11) Which state recently completely banned sale and consumption of alcohol? 12) Who is the first woman CM ofJ&K? 13) What is the repo rate now? The reverse repo and MSF are % and % respectively. 14) What is the Statutory Liquidity Ratio (SLR)? 15) What is the minimum percentage of CRR that should be maintained by banks on a daily basis? 16) NASSCOM's Chairman is 17) is Femina Miss India 2016. 18) What is the minimum size of Priority Sector Lending Certificates that can be bought by banks to make up their PSL targets? 19) Who is the first Indian artistic gymnast to qualify for the Olympics? 20) Who won sportsman of the year at the Laureus Awards for 2015? 21) What was the name of the police horse which recently died from injuries sustained during a riot in Dehradun? 22) With which sport is the Azlan Shah Cup associated? 23) The US federal jury has levied a fine notice of US$ 940 million on an Indian company for theft of trade secrets / confidential data. Name the company. 24) Which auto company has recently admitted to falsifying fuel efficiency tests? 25) It has been proposed to change Gurgaon's name to 26) What is 'State Bank of India No Queue'? 27) Recently, the Supreme Court asked the RBI to give it a list of defaulters with over Rs. due to the banking system. 28) The nearest star to the Earth, after the Sun, is the 29) Stephen Hawkins is a British 30) There has been a huge global fallout of the leaked papers with information regarding prominent individuals, with interest in foreign companies all over the world. 31) The first small finance bank that was opened was the

Answers: 1) Amitabh Bachchan for Piku 2) P Susheela of India 3) Manipuri activist protesting the AFSPA, Who is on a fast for the last 16 years. 4) 100; marketplace 5) Rs.20,500 cr for Central Govt. securities and Rs.7000 cr for State Govt. securities. 6) Tme 7) Myanmar 8) West Indies beating England (men's) and West Indies beating Australia (women's) 9) Gatimaan Express 10) IVRCL ofHyderabad 11) Bihar 12) Mehbooba Mufti Sayeed 13) 6.5%; 6 and 7 14) 21.25 (w.e.f ) 15) 90% (effective from the fortnight beginning 16.04.2016). 16) C P Gumani 17) Priyadarshini Chatterjee 18) Rs25.00 lakhs 19) Dipa Kannalcar 20) Tennis player Novak Djokovic of Serbia 21) Shaktiman 22) Hockey

9-5 MM Special Guide 23) TCS 24) Japan's Mitsubishi 25) Gurugram 26) It is a mobile app to save its customers time while availing banking services. 27) 500 crore 28) Alpha Centauri 29) physicist 30) Panama 31) Capital Small Finance Bank

MODELTEST WITH ANSWERS BASED ON MAY'2016 INFORMATION: I) As per a GOI notification, all cell phone must have a from January 1, 2017. 2) The EPF rate for 2015-16 has been fixed at %. 3) RBI has suggested that banks base the pricing of their loans on the . 4) With the Parliament passing the amendments to the Mines and Minerals Development and Regulation (MMDR) Act, transfers of captive mines that were not is possible. 5) Recently, the High Court has directed the Union of India to demolish a high-profile and controversial residential building in Mumbai on allegations of irregularities in allotment and ownership. Name the building. 6) What is the present MCLR of SBI? 7) When central banks print more currency and give it directly to the public, to encourage them to spend more and boost economic growth, it is called . 8) When unaccounted-for, untaxed money leaves the country only to find its way back through a web of transactions as white money, it is called . 9) From April 1, 2017, capital gains tax of % of the prevailing domestic rates will be levied for gains arising out of sale of shares in India by a company resident in Mauritius. 10) For companies, resident in Mauritius, to avail of the concessional levy of 50% of the domestic capital gains tax, they must spend at least in the preceding 12 months. 11) Telecom companies will not be liable to pay penalty to the TRAI for call drops as per a Supreme Court directive. True/False? 12) The new ICC Chairman is , 13) The CEO of Apple Inc. is . 14) For the purpose of stipulating limits for shareholding in private sector banks, RBI has divided investors into persons and persons. 15) The Chief Minister of West Bengal is . 16) The Chief Minister of Tamil Nadu is . 17) The new Chief Minister of Kerala is . 18) The new Chief Minister of Assam is . 19) Foreign shareholding in private sector banks is capped at % of paid-up capital of the investee bank. 20) Where will the 2016 Olympics be held? 21) Who is the youngest Formula One Grand Prix winner? 22) Which nation's athletics team has been banned from the 2016 Olympics? 23) India has recently signed an agreement to develop the Chabahar port with 24) Liquor baron Vijay Mallya owes over Rs.9,400 crore to Indian banks. In which country is he currently residing? 25) Which of the following are boxers from India? i) Ashwini Ponnappa ii) Mary Kom It iii) Sarita Devi iv) Deepika Kumari

9-6 Banking, Finance & Economy

26) Which of the following is not a cricket team in the IPL? i) Delh Daredevils ii) Kolkata Knight Riders iii) Royal Challengers Bangalore iv) Sunrise Hyderabad v) Jaipur Pink Panthers 27) The Agusta Westland corruption scandal relates to the purchase of 28) People who purchase cars over Rs.10 lakh must pay a tax of %. 29) The Indian Income Tax (IT) Department has decided to publish names of those defaulting tax payers owing over Rs. to it. 30) A capital gains tax rate of % is chargeable on sale of shares of unlisted companies held for over 24 months. Answers: I) panic button 2) 8.8% 3) Marginal Cost of Lending Rate (MCLR) 4) auctioned 5) Adarsh 6) 9.15%. 7) Helicopter drop money 8) Round tripping 9) 50 10) US$ 40,000 or Rs.27 lakh 11) True 12) Shashank Manohar of India 13) Tim Cook 14) natural; legal 15) Mamata Banerjee 16) J Jayalalithaa 17) Pinarayi Vijayan 18) Sarbananda Sonowal 19) 74 20) Rio de Janeiro, Brazil 21) Max Verstappen 22) Russia; there has been evidence of state-sponsored doping programmes 23) Iran 24) UK 25) Mary Kom and Sarita Devi 26) Jaipur Pink Panthers; it is a Pro Kabaddi league 27) Helicopters 28) 1% 29) 1 crore 30) 0 MODEL TEST WITH ANSWERS BASED ON JUNE'2016 INFORMATION:

1) Who is the Chief of UIDAI? a. Ajay Shushan Pandey b.Nandan Nilekani c. Narayana Murty d.Narendra Modi 9-7 MM Special Guide e. None of the above 2) Expand NPCI. a. New Payments Corporation of India b.National Payments Company of India c. National Public Corporation of India d.National Payments Corporation of India e. National Pension Company of India 3) Which feature of ICICI Bank's mobile app enables transfer of image of the cheque issued by a customer to the Bank? a. eftCheques b. IndApp c. Positive Pay d.iMobile e. i-Connect 4) Who is the new Chief Minister of Puducherry? a. J Jayalalithaa b.ANamassivayam c. Sheila Dixit d.Mani Shankar Aiyar e. V Narayanasamy 5) Who won IPL 9? a. Royal Challengers b.Sunrisers Hyderabad c. Delhi Daredevils d.Gujarat Lions e. Kolkata Knight Riders 6) According to SEBI, mutual fund houses cannot restrict redemption requests up to Rs. a. 1 lakh b. 3 lakh c.2 lakh d.4 lakh e. 2.5 lakh 7) Where is India's largest defence ammunition storage yard? a. Pokhran, Rajasthan b. Pulgaon, Maharashtra c. Narora, UP d. Tarapur, Maharashtra e. None of the above 8) Which country's laws bans abortion except to save a woman's life? a. Ireland b. USA c. UK d. India e. None of the above 9) Who won the 2016 French Open women's title? a. Serena Williams b. Garbine Muguruza c. Samantha Stosur d. Maria Sharapova e. Venus Williams 10) Who won the 2016 French Open Men's title? a. Roger Federer b. Andy Murray c. Rafael Nadal d. Novak Djokovic e. Stanislas Wawrinka 11) Whom did Martina Hingis team up with to win the 2016 Mixed Doubles French Open title? a. Roger Federer b. Mahesh Bhupathi c. Ivan Dodig d. Sania Mirza e. Leander Paes 12) World Environment Day is observed on? a. June 4 b. June 5 c. May 5 d. July 4 e. June 15 13) Which of the following have pledged to give away at least half of their wealth towards philanthropic initiatives? a. Warren Buffet b. Azim Premji c. Bill Gates d. Kiran Mazumdar Shaw e. All of the above 14) According to the draft civil aviation policy, cancellation fee cannot be more than a. The basic fare plus taxes b. taxes c. the basic fared. twice the basic fare e. half the total fare 15) According to the draft civil aviation policy, an airlines can fly abroad if

9-8 Banking, Finance & Economy

a. it has at least 5 years' experience in flying domestically b. it has at least 20 aircrafts c. Both a and b d. a orb e. None of the above 16) For an account to be eligible under RBI's S4 A scheme, the aggregate exposure of all the institutional lenders must be above Rs. a. 500 crore b. 1,000 crore c. 750 crore d. 1,250 crore e. None of the above 17) The policy repo rate is %. a. 6 b. 6.25 c.6.5 d.7 e. 7.5 18) Which technology company has recently agreed to acquire professional social networking site Linkedln? a. Google b. Microsoft c. Apple d. Facebook e. None of the above 19) As per norms for PSU Capital Restructuring effective from April 2017, all Central Public Sector Enterprises must pay a minimum dividend of % after tax or % of networth whichever is higher. 20) International Yoga Day is celebrated on a. June 22 b. June 23 c. June 21 d.May 21 e. May 22 21) The coach of the Indian cricket team will be a. Ravi Shastri b. Anil Kumble c. Venkatesh Prasad d. Sunil Gavaskar e. None of the above 22) Which country has recently voted to leave the EU? a. Scotland b. Great Britain c. France d. Greece e. None of the above 23) Maharashtra has recently given a minority status. a. Jews b. Christians c. Sikhs d.Muslims e.Parsees 24) The Draft National Forest Policy aims to bring of India's geographical land under forestcover. a. One-half b. One-fourth c. One-fifth d.One-third e.One-tenth 25) The CEO of Japanese company Softbank is a. Masayoshi Son b.Nikesh Arora c. Anshu Jain d.Jack Ma e. None of the above 26) The Chairman of ISRO is a. Vilcram Sarabhai b. K Radhalcrishnan c. AS Khan Kumar d.ShaileshNayak e. None of the above 27) With which sport is Lewis Hamilton associated? a. Badminton b.Formula One Car Race c. Athletics d.Tennis e. Football 28) The US FTC recently penalised a Bengaluru-based company for tracking the location of customers without their consent. Name the company. a. InMobi b. Infosys c. Wipro d. Ola Cabs e. Google 29) Which of these are candidates in the 2016 US Presidential elections now? a. Bernie Sanders b. Donald Trump c. Hilary Clinton d. Ted Cruz

9-9 MM Special Guide e. b and c 30) According to the draft GST Bill, GST is chargeable at the time of a. Purchase b. Sale c. Supply and purchased. Supply e. None of the above 31) According to the GST Bill a supplier in North Eastern States and Sikkim will have to pay GST if his annual turnover is over Rs. a. 10 lakh b.5 lakh c. 15 lakh d.2.5 lakh e. 7.5 lakh

Answers: 1)a 2)d 3)c 4)e 5)b 6)c 7)b 8)a 9)b 10)d 11)e 12)b 13) e 14) c 15) b 16) a 17) c 18) b 19) 30%; 5% 20) c 21) b 22) b 23) a 24) d 25) a 26) c 27) b 28) a 29) e 30) d 31) b

MODELTEST WITH ANSWERS BASED ON JULY'20161NF'ORMATION: 1) According to RBI, which is the richest Indian state in terms of GDP? a. Tamil Nadu b. Uttar Pradesh c. Maharashtra d. Karnataka e. None of the above 2) Which voluntary group has India recently become a full member of? a. Missile Technology Control Regime b. Nuclear Suppliers' Group c. Nuclear Non Proliferation Treaty d. Association of Southeast Asian Nations e. None of the above 3) What does AIM stand in terms of multi-lender financial institutions? . a. All India Investment and Infrastructure Bank b. Asian Industrial Infrastructure Bank c. American Infrastructure Investment Bank d. Asian Infrastructure Investment Bank e. None of the above 4) Who won the 2016 COPA America or South American Football Championship? a. Argentina b. Ecuador c. Uruguay d. Chile e. Paraguay 5) Who is the recently appointed Dy. Governor of RBI in the place of Mr.H.R.Khan. a. Mr. N.S.Viswanathan b. Mr. Arvind Subramanian c. Mr. Arvind Panagariya d. Ms. Arundhati Bhattarcharya e. Mr. K.J.Nayak 6) What is India's rank in the Human Capital Index released by the World E----"^ c^^—') a. 105 b. 90 c. 110 d. 85 e. 125 7) SBI plans to offer banking services through Facebook and Twitter. This a. Mingle b. Jingle c. SBI Buddy d. SBI Digital Villages e. None of the above 8) The HRD Minister is a. Smriti Irani b. Ravi Shankar Prasad

9-10 Banking, Finance & Economy

c. Prakash Javadekar d. Piyush Goel e. Narendra Modi 9) The GOI has offered interest subvention of 5% on short term crop loans up to Rs. if farmers repay their loans on time. a. 5 laid) b. 2 laldt c. 1 latch d. 3 lalch e. 4 lakh 10) Recently NASA's spacecraft entered the orbit of Jupiter. Name the space craft. t . .'`' a. Orion b. Juno c. Challenger d.Discovery e. Endeavour 11) With whom has SBI entered into an agreement for setting up a Payments Bank Joint Venture? ; ... , a. Reliance Industries Ltd. b. Tata Finance •44-'' c. Birla Cements Ltd. d. Sundaram Finance Ltd. e. Ashok Leyland Ltd. 12) Which Bank has launched ' SME Bank' that will provide complete digital banking services? a. ICICI Bank Ltd. b. HDFC Bank c. Kotak Mahendra Bank d. Axis Bank e. Yes Bank 13) Who is the Prime Minister of Britain? a) Theresa May b) David Cameron c) Andrea Leadsom d) Boris Johnson e) Stephen Crabb 14) Who won the Euro Cup 2016? ..,?...i; a) Spain b) Portugal 44,..,.. c) France d) Italy e) Germany 15) Who won the 2016 Wimbledon Men's Singles Championships? a) Novak Djokovic b) Milos Raonic ' • c) Roger Federer d) Andy Murray • e) Rafael Nadal 16) Whose autobiography is Ace Against Odds? a) M S Dhoni b) Virat Kohli c) Saina Nehwal d)Abhishek Bhindra e) Sania Mirza -`, 17) The Chief Minister of Arunachal Pradesh is a) Under President's rule • b) Perna Khandu c) Nabam Tuki d) Kalikho Pul e) None of the above 18) Why has Rohit Khandelwal been in the news recently? a) He bagged a Yash Raj productions movie. b) He has replaced Nikesh Arora at Softbank. c) He won the 2016 Mr. World title. d) He is BJP's candidate for the post of Chief Minister in Uttar Pradesh. e) None of the above 19) With which sport is Kerry Hope associated? " a) Wrestling b) Athletics c) Pole-vaulting d) Boxing e) None of the above 20) The GOI has stopped LPG subsidies for those eaming over Rs.______.

9-11 MM Special Guide a) 5 lakh b) 10 lakh c) 7.5 lakh d) 12 lakh e) None of the above 21) Who is the youngest Chief Minister (CM) in India? a) Pema Khandu b) Devendra Fadnavis c)Arvind Kejriwal d)AlchileshYadav e) None of the above 22) The new Chief Economist of the World Bank will be a) Kaushik Basu b) Paul Tomer c) Raghuram Rajan d)Arvind Panagariya e) None of the above 23) Which of the following sports person's samples have tested positive for performance-enhancing drugs recently? a)NarsinghYadav b) Praveen Rana c) Sushil Kumar d)AbhinavBhindra e) None of the above 24) Which civil rights activist has recently announced the end of her hunger strike? a) from Sharmila b)Arundhati Roy c) Medha Patkar d) Pramila Nesargi e) None of the above 25) Indians are now allowed to bring home Rs. worth of goods purchased in duty-free shops in international airports. a) 5,000 b) 10,000 c) 15,000 d) 25,000 e) None of the above 26) Who wrote 'Who Moved My Interest Rate — Leading the Reserve Bank through Five TurbulentYears'? a) Bitnal Jalan b) Y V Reddy c)D Subbarao d) C Rangarajan e) None of the above

Answers: 1) c (with GDP of Rs.9.5 lakh crore in 2014-15) 2)a 3)d 4) d 5)a 6)a 7) a 8) c 9) d 10)b 11) a 12) b 13) a 14)b 15)d 16) e 17) b 18) c 19) d 20) b 21) a 22) b 23) a 24) a 25) d 26) c

MODEL TEST VVITHANSWERS BASED ON AUG'2016 INFORMATION:

1) Expand CIBIL. a. Credit Investment Bank of India Limited b. Catholic Investment Bank of India Limited c. Credit Information Bureau of India Limited Banking, Finance & Economy

d. Credit Industrial Bank of India Limited e. None of the above 2) What is minimum capital required for starting a private sector Bank? 3) What is the FDI permitted in a new private sector bank? 4) What is the stipulation with regard to branch opening by new private sector banks? 5) Gujarat's CM is ' . a. Anandiben Patel b. Vijay Rupani c. Nitin Patel d. Amit Shah e. None of the above 6) The COI's inflation target is over the next 5 years. a. 4% plus or minus 2% b. 5% plus or minus 1% c. 4% plus or minus 1% d. 5% plus or minus 2% e. None of the above 7) RBI's policy repo rate is % a. 6 b. 6.5 c. 6.25 d. 7 e.6.75 8) Most bitcoin trading happens in a. US Dollars b. British Pounds c. Singapore Dollars d. Chinese Yuan e. Japanese Yen 9) RBI's accounting year is a. April-March b. January-December c. July-June d. August-July e. None of the above 10) India's is ranked on UN's Global Innovation Index for 2016. a. 81st b. 65th c. 66th d. 25th e. 50th f. None of the above 11) The Railway Minister is a. Suresh Prabhu b. Sadananda Gowda c. Mamata Banerjee d. Mallikarjun 'Charge e. None of the above 12) RBI has proposed that in case a customer's involvement in a fraud is not established and he reports it within 4 to 7 working days, his liability will be . a. maximum of Rs.10,000 b. unlimited c. limited to Rs.5,000 d. Not liable e. None of the above 13) There will be no separate Rail budget for the year 2017-18 and it will be merged with union budget. (True / False) 14) Who won the women's badminton Olympic gold in the 2016 Rio Olympic Games? a. P V Sindhu b. Saina Nehwal c. Li Xuerui d. Carolina Marine. Nozomi Okuhara 15) Sakshi Malik is a a. wrestler b. boxer c. discus thrower d. badminton player e. tennis player 16) India won the most Olympic medals in the Olympic Games. a. Beijing b. London c. Rio d. Sydney e. Athens 17) India's shooter Abhinav Bhindra won a gold medal in the Olympic Games. a. Sydney b. Beijing c. Rio d. London e. Athens 18) Which team's athletics and Paralympics team had been banned in the Rio Olympics because of doping charges? a. Germany b. Lithuania c. Russia d. China e. Pakistan

9-13 MM Special Guide 19) The 2020 Olympic Games will be held in a. New York b. Seoul c. Paris d. Madrid e. Tokyo 20) The new Governor of RBI will be a. Arvind Panagriya b. Kaushik Basu c. UrjitPatel d. R Gandhi e. S S Mundra 21) Who won the most number of individual gold meda a. Usain Bolt b. Michael Phelps c. Mark Spitz d. Max Whitlock e. Simone Biles 22) What is the name of India's only gymnastics finalii a. Deepika Kumari b. Dipa Karmakar c. Lalita Bata d. 0 P Jaisha e. Sudha Singh 23) Which country won the most number of medals al a. USA b. UK c. China d. Japan e. Russia 24) Where will the 2016 Kabaddi World Cup take ph a. Canada b. India c. Bangladesh d. UK e. USA 25) Shareholders will get shares of SBI for shares of SBBJ according to the swap ratio proposed. a. 22;10 b. 28,22 c. 28;10 d. 22;1 e. 28;1 26) RBI has named and as Domestic Systemically Important Banks (D-SIBS) for 2016. a. SBI and ICICI Bank b. ICICI Bank and HDFC Bank c. SBI and Axis Bank d. SBI and PNB e. HDFC Bank and ICICI Bank

Answers: 1) C 2) US $ 5 billion (Rs.500 cr) 3) 74% of equity paid up capital. 4) 25% of the branches of the bank must be in rural and unbanked villages. 5) b 6) a 7) b 8) d 9) c 10) c 11) a 12) e 13)True 14) d; she beat India's P V Sindhu 15) a 16) b; 6 medals in 2012 17) b; 10m rifle shooting event 18) c 19) e 20) c 21) b; he won 5 gold medals and 1 silver 22) b 23) a ' 24) b; in Ahmedabad, Gujarat 25) c 26) a MODEL TEST WITH ANSWERS BASED ON SEP'2016 INFORMATION: 1) Which Indian bank has launched Project Artificial Intelligence (A1)1 a. HDFC Bank b. ICICI Bank c. Axis Bank • d. SBI e. Punjab National Bank 1 2) Who was the President that was recently impeached for concealing the country's financial problems by manipulating the budget? a. Xi Jinping b. Dilma Rousseff c. Shinzo Abe

9-1.4 Banking, Finance & Economy ..,...... „

d. Vladimir Putin e. None of the above 3) Whose medal (2012 Olympics) was upgraded recently because of a doping disqualification of the .., winner? a. Yogeshwar Dutt b. Sushil Kumar c. Kamm Malleswari d. Saina Nehwal e. Mary Kom 4) Perpetual bonds are considered as for the purpose of calculating the Capital Adequacy Ratio that banks need to maintain according to BASEL III norms. a. Debt b. Quasi-debt c. Equity d. Any of these e. None of these 5) The Chairman of UIDAI is . a. J Satyanaray ana b.Ajay Bhushan Pandey c. Nandan Nilekani d. Arvind Panagariya e. None of these 6) Ratan Tata, Nandan Nilekani and Vijay Kelkar are joining together to form a microfmance company called . a. Bandhan Finance b. Tata Finance c. SKS Microfmance d. Avanti Finance e. None of the above 7) What is RBI's accounting year? a. April — March b. Jan - Dec c. July — June d. Oct — Sep e. None of these 8) Who won the men's singles title at the 2016 US Open tennis championships? a. Stan Wawrinka b. Novak Djokovic c. Andy Murray d. Kei Nishikori e. Rafael Nadal 9) Who won the women's singles title at the 2016 US Open tennis championships? a. Serena Williams b. Venus Williams c. Karolina Pliskova d. Angelique Kerber e. Caroline Wozniacki 10) With which mobile operator has Reliance Communications recently announced merger plans? a. Airtel b. Aircel c. Vodafone ,.. , d. Tata DoCoMo e . Idea Cellular 11) Which phone has recently been banned on flights by India for safety reasons? W3 z a) Samsung's Galaxy Note 7 b) Apple's iPhone 7 c) Xiaomi's Redmi Note 4G d) Google's Moto X e) None of the above 12) Expand FATF in relation to international bodies. a) Financial Authorities Task Force b) Financial Action Task Force rat c) Federation ofAssociations' Trade Fund d) Financial Association of Traders' Forum e) None of the above 13) Recently Deepa Malik won a Paralympics medal in the event. a) discus-throwing b) shotput c) javelin d) shooting e) archery 14) won the most number of medals in the 2016 Rio Paralympics. a) China b) USA c) Croatia d) UK e) Ukraine 15) In which field did India's Thangavelu Mariyappan get a gold in the 2016 Rio Paralympics? a) Long Jump b) Shotput c) Javelin- throw d) High Jump e) Discus-throw 16) The GST Bill required at least states to ratify it before the President's assent to become a law.

9-15 MM Special Guide a) 12 b) 14 c) 16 d) 18 e) 20 17) Which company's email accounts (500 million) were hacked into in 2014 with account names and addresses, among other details, being compromised recently? a) Yahoo Mail b) Gmail c) Rediffmail d) Facebook e) None of the above 18) Who, among the following, is the richest Indian according to Forbes' India's 100 Richest People? a) Anil Ambani b) Azim Premji c) Dilip Shanghvi d) Kumaramangalam Birla e)MukeshAmbani . • .„ . Answers: 1) a 2) b 3) a 4) c 5) a 6) d 7)c 8)a 9) d 10) b 11)a 12) b 13) b 14) a 15) d 16) c 17) a 18) e

MODELTEST WITH ANSWERS BASED ON OCT'2016 INFORMATION

1. The number of projected foreign tourists visiting India in 2016 (Calendar year) is 2. India's rank in the Global Hunger index released by the International Food Policy Research Institute is

3. Nobel Prize for Economics (2016) was conferred on and for their work on 'Contract' theory. 4. Who was awarded the Nobel Prize for Literature, 2016? 5. Who is the Chairman of Bank Boards Bureau? 6. Which of the following is true as regards Sovereign Gold Bonds (2016-17)- Series III? a) Min permissible investment: 1 gm of gold; max:500 gins per person per year b) Tenor: 8 years; with exit option from the 5'5 year. c) Issued at a discount of Rs.50 a gram d) Interest rate: 2.5% e) All of these 7. Who is the present chairman of Tata Sons Ltd? 8. As per RBI directions FIIs are required to convert themselves to Foreign Portfolio Investors (PPI) before

9. Who is the non-executive Chairman ofYes Bank? 10. Vigilance Awareness Week is observed by PSUs every year between and I I. Repo Rate has been reduced by RBI in its Oct'2016 monetary review. The Repo Rate stood at: 12. What is the new name of C1BIL Ltd? 13. What is the minimum Capital requirement for the small finance banks and payments banks? 14. Payment banks can accept only savings and current deposits. The aggregate limit per customer shall not exceed 15. As per RBI instructions, photographs of only wilful defaulters strictly identified as per RBI guidelines can be published. Photographs of any other defaulting borrowers shall not be published (True/False) 16. RBI may impose a penalty / fine on payment system operators / payment banks with a minimum of and a maximum of

9-16 if Banking, Finance & Economy

Answer: ! 1. 9 Million 2. 97 out of 118 3. Oliver Hart of Harvard and Bengt Holmstrom of MIT, USA 4. Bob Dylam (Robert Allen Zimmerman) 5. Vinod Rai 6. e 7. Ratan Tata replacing Cyrus Mistry 8. end March'2017 9. Ashok Chawla (also, Chairman ofNSE) 10. 31" October; 55 November 11. 6.25% 12. Trans Union CIBIL Ltd. 13. 15% (Common Equity Tier I Capital:6%) 14. Rs.1,00,000 15. True 16. Rs.5 latch and Rs.1 Cr

MODEL TEST WITH ANSWERS BASED ON NOV'2016 INFORMATION 1. SBI has waived charges for Rupay cards with a view to 2. SBI has reduced MCLR by 15 bps to 3. RBI has advised banks to provide all cash withdrawals from ATMs free of cost to their customers till on account of demonetization problems. 4. RBI has permitted Indian banks to issue rupee denominated bonds overseas for a) Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital. b)Debt capital instruments qualifying for inclusion as Tier 2 capital. c) Financing of Infrastructure and Affordable Housing. d) All of these 5. India's first payment bank has been started by ; it has commenced a pilot project in - and pays a maximum SB Interest rate of 6. Who has been appointed as the new chairperson of World Federation of Exchanges in USA? 7. ECGC was set up in the year . It has entered its diamond jubilee year on 8. The proposed date for the 2017-18 budget is 9. Railway budget will be part of the union budget starting from 10. Who is the chairman of the committee appointed by the Supreme Court to review the functioning of Consumer Forums? 11. Interest Rate Futures is now permitted by RBI on any rupee denominated money market interest rate or money market instrument on SEBI authorized Exchanges (True/False) 12. RBI has advised banks to permit 2 additional months for repayment of dues falling between and

13. India's rating by Standard & Poor's is - 14. Which of the following is true as regards Sovereign Gold Bonds? a) They are Govt Securities b) Can be pledged / hypothetical as collateral for any loan c) Banks and other eligible holders can acquire more than 500 gms of SGBs in a fiscal year through transfers .. etc. d) All of these xr~

. 9-17 •.. 0," l, ' of,

• . • • ' • ,••• - , • • •

•

.;' MIYLS,peeial Guide 15. Which bank has launched the first robot in India? 16. 26.11.16 was observed as 17. Centres with population up to have been classified as rural centres by RBI, for the purpose of branch-opening. (applicable up 18. The limit for semi-closed prepaid payment Instrument (PPI) has been enhanced to to 30.12.2016) . , 19. Maximum Investment permitted for FP1s in the unlisted corporate debt securities and securitized debt instruments shall not exceed Cr.

Answer: 1. encourage shops to accept them even for small value of transactions 2. 9.15% 3. 30.12.2016 4. d 5. Airtel; Rajasthan; 7.25% 6. National Stock Exchange's MD, Chitra Ramakrislman 7. 1957; 04.10.2016 8. 01.02.2017 9. 2017-18 budget 10. Former Supreme Court Judge, Arij it Pasayat 11. True 12. 1"November and 31" December; Rs.10 Cr 13. BBB- With a stable outlook 14. d 15. City Union Bank, Tamil Nadu. The robot is named Lakshmi 16. The Constitution Day (The Constitution was adopted on 26.11.1949 and it came in to effect on 26.01.1950) 17. 9,999 18. Rs.20,000/- 19. Rs.35,000

MODEL TEST WITH ANSWERS BASED ON DEC'2016 INFORMATION 1. In which subsidiary SBI has recently sold a part of its stake to foreign investors? 2. SBI has sold 3.9% of its stake in SBI life to and its affiliate KKR. 3. With which Insurance Company Max Life is proposed to be merged? 4. RBI has relaxed the two-factor authentication for online payment below Rs.2000 (True/False) 5. RBI has reduced its growth forecast for 2016-17 from 7.6% to 6. Which stock exchange has proposed to make an IPO? 7. The MSS (Market Stabilisation Scheme) bond is issued by RBI on behalf of the Central Govt to absorb excess liquidity in the system. On account of demonetization the bank deposits have increased considerably leading to excess liquidity. Therefore, the Central Govt has increased the ceiling on the issue of MSS bonds to Rs. for 2016-17 from Rs.30000Cr. 8. The present SLR is 9. The Bureau of Indian Standards (BIS) functioning under Ministry of Consumer Affairs has made it compulsory for 3 categories of gold ornaments to be "hall-marked". What are they? 10. What is Team Indus? 11. What is Legion? 12. What is the present Repo Rate? 13. Who is the chairman of the 4 member Insolvency and Bankruptcy Board of India?

9-18 Banking, Finance & Economy

14. Who is the new chairman of LIC? 15. Banks are now required by the Govt to report any breach in their IT Systems within minutes as the firewall against cyber hackers is strengthened in view of the large number of digital transactions? 16. What is the rate of interest payable on EPF deposit for 2016-17? 17. Who has been selected as the Banker of the year in the Annual Business Standard Awards? 18. Which of the following is true as regards Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS) 2016? a) It is applicable to every declarant under the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana b) The deposits shall be held in the Bonds Ledger Account with RBI c) The scheme is valid from 17.12.2016 to 31.03.2017 d) At least 25% of the undisbursed income shall be deposited by the declarant e) All of these.

Answer: 1. SBI Life 2. Temasek, a Singapore based investment company 3. HDFC life 4. True 5. 7.1% 6. NSE 7. Rs.6 lakh cr 8. 20.75% 9. 22 carat, 18 carat and 14 carat 10. India's first private mission to Moon. It is participating in the Google Lunar XPrize Competition. 11. It is a hacker group that has breached into the high profile Twitter a/cs of Rahul Gandhi, Vijay Mallya etc. 12. 6.25% 13. M.S. Sahoo. He was earlier SEBI member. Till recently he was a member in Competition Commission of India (CCI) 14. Vijay Kumar Sharma 15. 120 16. 8.65% 17. Aditya Puri, MD, HDFC Bank 18. e

9-19 F

., ' ..,v - , - ....4.

---:', • .. ,

.., .- .

.....- . . . , . "f---f- ../..

, . . - , . \ y - - ..._ ..- 4., , .,i ivo ,;- .,., , . . ,.. • 0..-i' --,,,.,.;,,,, , ..- -111*"4.';'1 ; , . '- ' ' •''',-::.;11- : --,.. af-4* ' PART - 10 PSYCHOMETRIC TESTS

Psychometric tests measure mental abilities, eg. verbal ability, spatial ability, personality, temperament, motivation, etc. Psychometric tests fall into 3 broad categories. - General Intelligence tests - Attainment or mastery tests - Aptitude tests General Intelligence tests : Overall ability to succeed in a particular activity is tested. Attainment tests: These tests measure one's 'natural' ability to do things. No specialist knowledge is tested. Only the potential of a person is tested.

Psychometric tests are highly technical and have to be designed and administered by trained psychologists.

Ability tests About 50 human abilities can be measured by these tests. Abilities can be classified into cognitive abilities, psycho-motor abilities, physical abilities and sensory abilities. Most selection tests for employment or promotion concentrate on 6 main types of cognitive reasoning test. These are: - Abstract reasoning tests - Numerical reasoning tests - Perceptual ability tests - Spatial abilities test and - Mechanical abilities test Abstract reasoning (also called non-verbal reasoning): General intellectual reasoning is measured. By studing a series of figures/symbols, one may be required to identify the next item in the sequence.

Verbal reasoning: Spelling, grammar, sentence completion abilities, etc., are tested to assess the ability to understand and use words.

Numerical reasoning (also called quantitative ability): The questions range from simple arithmetic to problems covering areas like numbers, fractions, interest calculations, averages, percentages, profit and loss, time and work, sequences, partnership set theory, probability, mathematical logic, data interpretation, skill to interpret graphs, etc.

In recruitment tests in banks, Reasoning Aptitude, English language skills and General Knowledge are tested. It was indicated that psychometric tests may be incuded in MMII and III exams in SBI. We feel questions on reasoning and quantitative aptitude may be included. A number of such tests are given in competitive exam magazines. Practice is essential for securing high marks.

Personality Tests Personality tests are administered to find out various personality traits of an applicant. Eg.: Extroversion - Introversion

10-1 MM Special Guide

Thinking - Feeling Sensing - Intuition Personality tests are also devised for measuring motivation, leadership, risk-taking etc. As stated already these tests have to be prepared by trained psychologists and administered by trained personnel. So far in SBI, psychometric tests are used in the recruitment of Probationary Officers.

Key aspects of psychometric tests There are no right or wrong answers There are no model answers The answers must be ticked / responded to without too much thinking / critical analysis etc. There need be no anxiety in answering these tests.

. 2 10- -: ...:-.) .. • .„, ::::, • PART - 11 VERY LATEST DEVELOPMENTS

1. Implementation of Indian Accounting Standards (Ind AS): RBI has directed banks to submit Proforma Ind AS Financial Statements for the half-year ended September 30, 2016 latest by November 30, 2016 to RBI. Banks shall be guided by the Ind As notified by the Ministry of Corporate Affairs, GOI under the Companies (Indian Accounting Standards) Rules 2015 and Companies (Indian Accounting Standards) (Amendment) Rules 2016. The proforma Ind As Financial statements shall include the following: a) Balance sheet including statement of changes in equity b) Profit and Loss account c) Notes 2. SBI Merger: the Swap ratio approved is as under: a) SBBJ will get 28 shares of SBI of Face value of Rs.l/- each for every 10 shares of SBBJ of Face value of Rs. I 0/- each b) 22 shares of SBI of Face value of Rs.1/- each will be swapped for 10 shares of Face value of Rs.10/- each of SBT and SBM. c) SBI holds 99% of SBH and SBP and will merge line-by line with them 3. RBI has named SBI and ICICI Bank as Domestic Systemically important banks and they are required to maintain additional Common Equity Tier I (CETI) over and above the Capital Conservation buffer of 0.6% and 0.2% respectively effective from 01.04.2019. 4. Factoring Transactions on 'with recourse basis' under taken by MSMEs will come under priority sector lending. 5. Mc Urjit Patel: Former Dy Govemor has been appointed as new RBI governor 6. RBI has permitted that lender with bad loans (stressed assets) can now sell them to other banks, Nonbanking Finance companies (NBFCs) and financial institutions. Currently banks can sell these assets to ARCs or Securitisation Companies. Further, hitherto banks were permitted to sell only NPAs to other banks. 7. Tata Son's chairman Emeritus Ratan Tata, Infosys Cofounder Nandan Nilekani and former Finance Secretary Vijay kelkar have joined together to start a micro finance company called Avanti Finance to help the poor. 8. Digi Locker: The platform launched in July 2015 under Centre's Digital India Initiative, helps Citizens to digitally store passport. Mark sheets and degree certificates. The documents can be accessed anytime, anywhere and can be shared online. 9. Working Capital Finance: In view of rising non-performing assets (NPAs). SBI has moved towards projected cash flow financing from the earlier practice of balance sheet financing. 10. FXout: Outward remittance product of SB1. Now, remittances can be made in 4 currencies-US D, GBP, EURO and AU D. 11. Currency Chest branches: Service charge for cash deposited by non-chest bank branch: Increased to Rs.5 per packet. 12. Saka Samvat. It is the National Calendar starting from March 22, 1957. A cheque can be dated under the Saka Samvat. After verifying that such a cheque has not become stale, it should be paid. MM Special Guide 13. FDI in insurance sector: increased to 49% under automatic route. 14. HOPELOANS: Launched by SBI in this festive season (1st Oct to 31st Dec 2016). For every loan disbursed during the festive season, SBI will contribute a sum to an NGO in the field of Education. Health, Community welfare, Environment etc. 15. Shankar Acharya Panel: The panel headed by former Chief Economic Adviser to the Govt, Shankar Acharya has recommended that the Govt financial year be changed to January- December from April to March. 16. Viral Acharya (42), presently professor at Stem Business School of New York University has been appointed as Dy. Governor of RBI. He is appointed to fill up the vacancy arising out of elevation of Dr. Urijit Patel as Governor of RBI. He did his B.tech in Computer Science and Engineering followed by Ph.D in Finance. His interest include cricket, poetry and singing. He will be the youngest Dy. Governor of RBI. 17. National Stock Exchange's IPO: NSE has filed with SEBI its draft prospectus for an IPO of Rs.10,000 Cr. It will be an Offer for Sale (OFS) of 111.4 m equity shares. Issue size could be Rs.9000 to Rs.10,125 Cr, the highest since the Coal India's IPO of Rs.15,000 Cr in 2010. 18. RBI relaxes loan repayment norms for small borrowers: RBI had earlier advised banks to give extended repayment period of 60 days for loans due during the period 01.11.2016 to 31.12.2016. Now the time-period has been extended to 90 days. The reckoning for sub-standard status will commence after this period. The relaxation is applicable to working capital loan, crop loans and term loans for business purposes. The limit sanctioned must have been less than Rs.1 Cr. The relaxation is applicable to banks, NBFCs, HFCs, PACSs, State and Central Cooperative banks. The relaxation is to mitigate the hardship of demonetization. 19. Cabinet Clears sale of India's 1" pharma co: In the second strategic sale approval in over 12 years, the Union Cabinet cleared the sale of India's first pharma company, Bengal Chemical and Pharmaceu- tical Ltd (BCPL), as well as Hindustan Antibiotics Ltd (HAL) after selling off their surplus land. The cabinet also approved the closure of Indian Drugs and Pharmaceutical Ltd (IDPL) and Rajasthan Drugs and Pharmaceuticals Ltd (RDPL). This will be the first privatisation exercise since the sale of Jessop and Co under the NDA government headed by Atal Bihari Vajpayee in 2003-04. 20. Ratan Watal Panel on E-payments: A panel constituted by the government to strengthen the digital payment ecosystem has called for a shift in regulatory approach in order to promote competition, innovation, open access and consumer protection. The panel also wants the government to hive off payment regulation into an independent authority within the Reserve Bank of India (RBI). The Committee on digital payments, headed by Ratan Watal, has also suggested that cash payments should be disincentive by imposing a nominal tax on cash transaction and handling charges on cash payments beyond a certain limit made to government departments or utilities. Noting that India's cash-to-GDP ratio of more than 12% is the highest in the world, the report has set a vision of reducing this to 6% over a period of three years. Watal, who is currently principal adviser, NITI Aayog, has suggested special emphasis on increasing digitization in low-value transactions. "The share of digital payments is about 5% of total personal consumption or even lower at 2% of total transactions," the report said. Meanwhile, the government also proposes to have a sector-neutral 'Financial Redressal Agency' (FRA) 't to address the grievances of retail consumers against all financial service providers (FSPs). The FRA was proposed by the Financial Sector Legislative Reforms Commission (FSLRC) and the government has invited comments on this proposal.

• 11-2 Psychometric Tests

While several of the 11-member Watal committee's recommendations on promoting digital payments have been overtaken by announcements made by the government in the wake of demonetisation, what stands out is the change in approach to innovation. While earlier the regulator was wary of innovation in the financial sector, the committee talks about creating a 'regulatory sandbox' to experiment with fm-tech solutions where the consequence of failure can be protected. While the RBI has had a protectionist approach with regard to banks, the panel wants payments to be made interoperable between banks and non-banks: "Mobile number and Aadhaar-based fully inter operable payments should be prioritized. NPCI may enable this on its platforms over 60 days," the report said. The report has also suggested that the ownership of the National Payments Corporation of India should be payment-centric and include more banks and non-banks. 21. Venezuela, the South American country took away the legal tender status of its 100 bolivar bill, which accounted for 77% of the nation's cash volume. Its resulted in cash chaos and long queues at banks. The demonetisation has been effected to eradicate mafia. Riots have erupted in the country in protest. 22. SBI chooses Shikri, a village in Maharashtra for hi-tech payments pilot: SBI chooses Ganapati makers' village for hi-tech payments pilot. Shirki, in the Raigad district of Maharashtra, is a typically prosperous village blessed by rain gods: Houses here are pucca- most have a motorcycle; some even hatchbacks. About 100 km south of Mumbai, the village is also famous for producing some of the best Ganapati idols in the state, with its artisans in great demand during the festive season. State Bank of India (SBI), the country's largest bank launches the pilot of its Aadhaar based payments system from this village. The Aadhaar Merchant Payment System (AMPS)- that employs technology developed by the Tata Consultancy Services and the National Payments Corporation of India- is aimed at helping people go fully cashless. In this system, customers don't need to carry even their credit or debit cards or a cell phone to make a transaction. All they need to do is tell the merchant concerned their Aadhaar number and name of the bank. "We plan to operationalised the system with the lowest common denominator of bandwidth." 23. HDFC Bank uses CHATBOTS to Foray into commerce on Social Media: Next time you are on Facebook and you realise you need to recharge your phone instead of opening a separate page for it, you can chat with an HDFC Bank bot and complete your transaction. The bank explains that this is their foray into the space with the help of social media; these chat hots (the term for a computer program designed to simulate conversation with human users, especially over the internet) can help you with transactions such as recharge, bill payment, booking a cab, etc. "This will open conversational commerce and also help us in personalizing a digital experience which otherwise is fairly impersonal. We did our research where we realised that not only the younger generation but even the older population is more comfortable with chatting instead of calling. There- fore, we thought chatbots would be important," said Nitin Chugh, head, digital banking, HDFC Bank.

11-3 rA X • r- f !ti.0'• • • ;,• • •

' • • , • , • •,