Introduction

The Banking Sector

The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social, and economic characteristics.
India has a large population and land size, a diverse culture, and extreme disparities
in income, which are marked among its regions. There are high levels of illiteracy
among a large percentage of its population but, at the same time, the country has a
large reservoir of managerial and technologically advanced talents. Between about 30
and 35 percent of the population resides in metro and urban cities and the rest is
spread in several semi-urban and rural centers. The country’s economic policy
framework combines socialistic and capitalistic features with a heavy bias towards
public sector investment. India has followed the path of growth-led exports rather
than the “exporlted growth” of other Asian economies, with emphasis on self-reliance
through import substitution.
These features are reflected in the structure, size, and diversity of the country’s
banking and financial sector. The banking system has had to serve the goals
of economic policies enunciated in successive five year development plans,
particularly concerning equitable income distribution, balanced regional economic
growth, and the reduction and elimination of private sector monopolies in trade and
industry. In order for the banking industry to serve as an instrument of state policy, it
was subjected to various nationalization schemes in different phases (1955, 1969, and
1980). As a result, banking remained internationally isolated (few Indian banks had
presence abroad in international financial centers) because of preoccupations with
domestic priorities, especially massive branch expansion and attracting more people
to the system. Moreover, the sector has been assigned the role of providing support to
other economic sectors such as agriculture, small-scale industry exports, and banking
activities in the developed commercial centers (i.e., metro, urban, and a limited
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number of semi-urban centers).The banking system’s international isolation was also
due to strict branch licensing controls on foreign banks already operating in the
country as well as entry restrictions facing new foreign banks. A criterion of
reciprocity is required for any Indian bank to open an office abroad.
These features have left the Indian banking sector with weaknesses and strengths. A
big challenge facing Indian banks is how, under the current ownership structure, to
attain operational efficiency suitable for modern financial intermediation. On the
other hand, it has been relatively easy for the public sector banks to recapitalize,
given the increases in nonperforming assets (NPAs), as their Government dominated
ownership structure has reduced the conflicts of interest that private banks would
face.
Financial Structure
The Indian financial system comprises the following institutions:
1. Commercial banks
a. Public sector
b. Private sector
c. Foreign banks
d. Cooperative institutions
(i) Urban cooperative banks
(ii) State cooperative banks
(iii) Central cooperative banks

2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)
c. State industrial development corporations(SIDCs)
3. Nonbanking financial companies (NBFCs)
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4. Capital market intermediaries
About 92 percent of the country’s banking segmentis under State control while the
balance comprises private sector and foreign banks. The public sector commercial
banks are divided into three categories.

State bank group (eight banks): This consists ofthe State Bank of India (SBI) and
Associate Banks of SBI. The Reserve Bank of India (RBI) owns the
majority share of SBI and some Associate Banks of SBI.1 SBI has 13 head offices
governed each by a board of directors under the supervision of a central
board. The boards of directors and their committees hold monthly meetings while the
executive committee of each central board meets every week.
Nationalized banks (19 banks): In 1969, the Government arranged the
nationalization of 14 scheduled commercial banks in order to expand the branch
network, followed by six more in 1980. A merger reduced the number from 20 to 19.
Nationalized banks are wholly owned by the Government, although some
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of them have made public issues. In contrast to the state bank group, nationalized
banks are centrally governed, i.e., by their respective head offices. Thus, there is only
one board for each nationalized bank and meetings are less frequent (generally, once
a month). The state bank group and nationalized banks are together referred to as the
public sector banks (PSBs). Tables 1 and 2 provide details of public issues and post-
issue shareholdings of these PSBs.

Regional Rural Banks (RRBs): In 1975, the state bank group and nationalized banks
were required to sponsor and set up RRBs in partnership with individual states to
provide low-cost finance ingand credit facilities to the rural masses.
Table 3 presents the relative scale of these public sector commercial banks in terms
of total assets. The table clearly shows the importance of PSBs.

More than 40,000 NBFCs exist, 10,000 of which had deposits totalling Rs1,539
billion as of March 1996. After public frauds and failure of some NBFCs, RBI’s
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supervisory power over these high-growth and high-risk companies was vastly
strengthened in January1997. RBI has imposed compulsory registration
and maintenance of a specified percentage of liquid reserves on all NBFCs.

Reserve Bank of India and Banking and Financial Institutions

RBI is the banker to banks—whether commercial, cooperative, or rural. The
relationship is established once the name of a bank is included in the Second
Schedule to the Reserve Bank of India Act, 1934.Such bank, called a scheduled bank,
is entitled to facilities of refinance from RBI, subject to fulfilment of the following
conditions laid down in Section 42 (6) of the Act, as follows:
• It must have paid-up capital and reserves of an aggregate value of not less than an
amount specified from time to time; and
• It must satisfy RBI that its affairs are not being conducted in a manner detrimental
to the interests of its depositors. The classification of commercial banks into
scheduled and non scheduled categories that was introduced at the time of
establishment of RBI in 1935 has been extended during the last two or three decades
to include state cooperative banks, primary urban cooperative.
banks, and RRBs. RBI is authorized to exclude the name of any bank from the
Second Schedule if the bank, having been given suitable opportunity to increase the
value of paid-up capital and improve deficiencies, goes into liquidation or ceases to
carry on banking activities.
A system of local area banks announced by the Government in power until 1997 has
not yet taken root. RBI has given in principle clearance to five
applicants. Specialized development financial institutions (DFIs) were established to
resolve market failures in developing economies and shortage of long-term
investments. The first DFI to be established was the Industrial Finance Corporation of
India (IFCI) in 1948, and was followed by SFCs at state level set up under a special
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statute. In 1955, Industrial Credit and Investment Corporation of India (ICICI) was
set up in the private sector with foreign equity participation.
This was followed in 1964 by Industrial Development Bank of India (IDBI) set up as
a subsidiary of RBI. The same year saw the founding of the first mutual fund in the
country, the Unit Trust of India (UTI).
A wide variety of financial institutions (FIs) has been established. Examples include
the National Bank for Agriculture and Rural Development (NABARD), Export
Import Bank of India (Exim Bank), National Housing Bank (NHB), and Small
Industries Development Bank of India (SIDBI),which serve as apex banks in their
specified areas of responsibility and concern. The three institutions that dominate the
term-lending market in providing financial assistance to the corporate sector are
IDBI, IFCI, and ICICI. The Government owns insurance companies, including Life
Insurance Corporation of India (LIC) and General Insurance Corporation (GIC).
Subsidiaries of GIC also provide substantial equity and loan assistance to the
industrial sector, while UTI, though a mutual fund, conducts similar operations. RBI
also set up in April 1988 the Discount and Finance House of India Ltd.
(DFHI) in partnership with SBI and other banks to deal with money market
instruments and to provide liquidity to money markets by creating a secondary
market for each instrument. Major shares of DFHI are held by SBI.

Liberalization of economic policy since 1991 has highlighted the urgent need to
improve infrastructure in order to provide services of international standards.
Infrastructure is woefully inadequate for the efficient handling of the foreign trade
sector, power generation, communication, etc. For meeting specialized
financing needs, the Infrastructure Development Finance Company Ltd. (IDFC) was
set up in 1997. To nurture growth of private capital flows, IDFC will seek to
unbundle and mitigate the risks that investors face in infrastructure and to create an
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efficient financial structure at institutional and project levels. IDFC will work on
commercial orientation, innovations in financial products, rationalizing the legal and
regular framework, creation of along-term debt market, and best global practices on
governance and risk management in infrastructure projects .
Magnitude and Complexity of the Banking Sector
The magnitude and complexity of the Indian banking sector can be understood better
by looking at some basic banking data.

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In terms of growth, the number of commercial bank branches rose eightfold from
8,262 in June 1969 (at the time of nationalization of 14 banks) to 64,239 in June
1998. The average population per bank branch dropped from 64,000 in June 1969 to
15,000 in June 1997, although in many of the rural centers (such as in hill districts of
the North), this ratio was only 6,000 people per branch. This was achieved through
the establishment of 46,675 branches in rural and semi-urban areas, accounting for
73.5 percent of the network of branches. As of March 1998, deposits of the banking
system stood at Rs6,013.48 billion and net bank credit at Rs3,218.13 billion.
The number of deposit accounts stood at 380 million and the number of borrowing
accounts at 58.10million. Tables 5, 6, and 7 reflect the diversification of branch
network attained by commercial banks, the regional balance observed since
nationalization, and stagnation in branch expansion in the post-reform period. There
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has been a net decline in the number of rural branches and a marginal rise in the
number of semi-urban branches.
The outreach of cooperative banks and RSBs
In an effort to increase the flow of funds through cooperative banks, the resources of
the main refinancing agency, NABARD, were boosted substantially through deposits
under the Rural Infrastructure Development Fund placed by commercial banks, as
well as through the improvement of NABARD’s capital base and increase in the
general line of credit by RBI. The functioning of cooperative banking institutions did
not show much improvement during 1996/97 and 1997/98. With deposits and credit
indicating general deceleration, the overdue position of these institutions remained
more or less stagnant. However, cooperative banks emulated the changing structure
and practices of the commercial banking sector in revamping their internal systems,
ensuring in the process timely completion of audit and upgrading of their financial
architecture. In various regions, there is a differing pattern of cooperative banking,
determined according to the strength of the cooperative movement. Some
cooperatives such as those in the dairy and sugar sectors are as big as corporate
entities. In fact, dairy cooperatives compete with multinational corporations such as
Nestlé. There is also a category in the cooperative sector called primary (urban)
cooperative banks (PCBs).As of March 1998, there are 1,416 reporting PCB scatering
primarily to the needs of lower- and middle income groups. These are mainly
commercial in character and located mostly in urban areas. Some have become a
competitive force with notably big branch network and high growths recorded. As of
1998, PCBs have deposits of Rs384.72 billion and advances of Rs264.55 billion
The advances of PCBs fall in the majority of categories of priority sectors prescribed
for PSBs and their recovery performance is better than that of PSBs. The cooperative
banks also perform basic functions of banking but differ from commercial banks in
the following respects:
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• commercial banks are joint-stock companies under the Companies Act of 1956, or
public sector banks under a separate Act of the Parliament

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Cooperative banks were established under the Cooperative Societies Acts of different
states;
• cooperative banks have a three-tier setup, with state cooperative bank at the apex,
central/district cooperative banks at district level, and primary cooperative societies at
rural level;
• only some of the sections of the Banking Regulation Act of 1949 (fully applicable
to commercial banks), are applicable to cooperative banks, resulting in only partial
control by RBI of cooperative banks; and
• cooperative banks function on the principle of cooperation and not entirely on
commercial parameters

Policy Issues in the Banking Sector

The Nonperforming Asset Problem

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OPTIMISM WITH RESPECT TO THE NONPERFORMING ASSET
PROBLEM
The NPAs of public sector banks were recorded at about Rs457 billion in 1998
(Table 11). By 1997/98 banks had managed to recover Rs250 billion and provisioned
for Rs181.39 billion. But since new sets of loans go bad every year, the absolute
figures could be increasing. About 70 percent of gross NPAs are locked up in “hard-
core” doubtful, and loss assets ,accumulated over years. Most of these are backed by
securities, and, therefore, recoverable. But these are pending either in courts or with
the Board for Industrial and Financial Reconstruction (BIFR).

NPAs in Indian banks as a percentage of total assets is quite low. The NPA problem
of banking institutions in India is exaggerated by deriving NPA figures based on
percentage against risk assets instead of total earning assets. The
Indian banking system also makes full provisions and not net of collaterals as
practiced in other countries.
Narasimham Committee (II) noted the danger of opaque balance sheets and
inefficient auditing systems resulting in an underrating of NPAs. Nevertheless,

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there is a general feeling that the NPA problem is manageable. Considerable attention
is being devoted to this problem by RBI, individual banks, and shareholders
(Government and private).With the increasing focus internationally on NPAs during
the 1990s affecting the risk-taking behavior of banks, governments and central banks
have typically reacted to the problem differently depending on the politico-economic
system under which the banks operate. In some countries such as Japan, banks have
been encouraged to write off bad loans with retained earnings or new capital or both.
This ensures that the cost of resolving the NPA problem is borne by the banks
themselves. However, this policy is not suitable for countries such as India where the
banks neither have adequate reserves nor the ability to raise new capital. In some
countries, the banks are State owned so the final responsibility of resolving the
problem lies with the respective national government. In these cases, the governments
concerned have been forced to securitize the debt through debt underwriting and
recapitalization of the banks. For instance, in Hungary, guarantees were established
for all or part of the bad loans with the banking system, while in Poland, loans have
been consolidated with the help of long-term restructuring bonds. Most of these
countries have emphasized efforts to recover the bad loans from the borrowers,
usually in conjunction with one or both the measures mentioned above. If direct sale
of the assets of defaulting firms was deemed nonviable, banks were encouraged to
coerce these firms to restructure. The former Czechoslovakia and Poland, for
example, consolidated all NPAs into one or more “hospital” banks, which were then
vested with the responsibility to recover the bad loans. In Poland, this centralization
of the recovery process was supplemented by regulations that authorized the loan
recovery agency to force the defaulting industrial units to either restructure or face
liquidation. Other countries such as Bulgaria created “hospital” banks and legalized
swap of debt for equity that gave banks stakes in the defaulting firms, and hence
provided them with the incentive and the power to restructure the enterprises. In
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India, conversion of loans into equity is an option that should be seriously considered
instead of attempting recovery solely through either or both legal means and an asset
reconstruction company (ARC). Unlike NPAs, the substitute asset of equity will be
an intangible investment ready for sale to potential buyers. The DFIs have a formal
conversion clause for debt to be exchanged for equity that ought to be exercised not
only if it is an NPA but also if the equity is appreciating. This clause has not been so
far much exercised

MAIN CAUSES OF NONPERFORMING ASSETS

One of the main causes of NPAs in the banking sector is the directed loans system
under which commercial banks are required to supply a prescribed
percentage of their credit (40 percent) to priority sectors. Table 12 shows that credit
supply of PSBs to the priority sectors has increased gradually to a little more than 40
percent of total advances as of March 1998. Loans to weaker sections of society
under state subsidy schemes have led borrowers to expect that like a non refundable
state subsidy, bank loans need not be repaid.
Directed loans supplied to the “micro sector” are problematic of recoveries especially
when some of its units become sick or weak. Table 13 shows PSB
loans to sick/weak industrial units. Nearly 7 percent of PSB’s net advances was
directed to these units .Clearly, these units are one of the most significant sources of

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NPAs, rather than bank mismanagement on the scale that has been seen in Japan and
some Southeast Asian countries. The weakness of the banking sector revealed by the
accumulated NPAs stems more from the fact that Indian banks have to serve social
functions of supporting economically weak sectors with loans at subsidized rates.
The Narasimham Report (II) recommended that
the directed credit component should be reduced from 40 to 10 percent. As the
directed credit component of the priority sectors arises from loan schemes requiring
Government approval of beneficiaries, banks’ selection standards with regard to
eligible borrowers are being interfered with. The nexus of subsidies should be
eliminated from bank loan schemes. Targets or prescribed percentages of credit
allocation toward the priority sectors should not be confused

with directed credit. Government subsidy schemes were intended originally

to prompt bankers to lend to weaker sectors. But as the directed credit component
became partly politicized and bureaucratized, the realization has grown that priority
sector bank credit should operate with the required degree of risk management.
However, the dangers of the priority credit system sound banking should not be
exaggerated. The shackles of “directed lending” have been removed and replaced by
tests of commercial viability. Economic activities classified under priority sector have
undergone a metamorphosis and upgrade since 1969 when banks were first
nationalized and assigned the role of financing the sector. The expansion of the

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definition of the priority sector, upgrade in the value limit to determine small-scale
industry (SSI) status, and provision for indirect lending through placement of funds
with NABARD and SIDBI have lightened the performance load of banks. Thus,
priority sector financing is no longer a drag on banks. But in the long term, Indian
banks should be freed from subsidized lending. The scope in India for branch
expansion in rural and semi-urban areas is vast and also necessary. Increasingly,
NBFCs operating at such places are coming under regulatory pressure and are likely
to abandon their intermediation role. Banks will have to move in to fill the void and
these branches will find priority sector financing as the main business available
especially in rural/semi-urban centers.
Operational restructuring of banks should ensure that NPAs in the priority sectors are
reduced, but not priority sector lending. This will remain a priority
for the survival of banks. Any decisions about insulating Indian banks from priority
sector financing should not be reached until full-scale research is undertaken, taking
into account several sources including records of credit guarantee scheme
noncompliance shall be disclosed. It is possible that a company can get away with
noncompliance merely by making the required disclosures.
The “going concern” is a fundamental accounting concept that allows financial
statements to be prepared on the assumption that the enterprises will continue
in operational existence in the foreseeable future.
The Institute of Chartered Accounts of India in 1998 issued a Statement on Standard
Auditing Practices (SAP 16) that aims to establish auditors’ responsibilities regarding
the appropriateness of the going concern assumption as a basis for preparing financial
statements. It also elaborates the need for planning and conducting audits, gathering
sufficient evidence, and exercising judgment whether the going concern assumption
made by directors is appropriate. The practice was to be followed for accounting

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period commencing on or after April 1999. The conclusion that a financial statement
has been prepared for a going concern depends on a few fundamental uncertainties.
Prominent among these is availability of future funding, which may affect future
results as well as investments needed and changes in capital structure.
In addition, auditors will have to look at cash generated from operations and other
cash inflows, capital funding and Treasury policies, inherent strengths and resources
of the business, and availability of liquidity at the end of the period. All these extend
the scope of the audit. Even if one accepts that auditors are capable of providing
information about business risks that is useful to investors and other parties, it is
questionable whether the benefits of expanding the auditors role in this direction are
likely to outweigh costs.
Auditors are also required under the new statement to add a paragraph in their audit
report that highlights the going concern problem by drawing attention to
the relevant note in the financial statement. They must qualify their report, however,
if the management does not make adequate disclosure in the financial
statements.
Clients are unlikely to welcome the going concern role in this direction are likely to
outweigh costs. Auditors are also required under the new statement
to add a paragraph in their audit report that highlights he going concern problem by
drawing attention to the relevant note in the financial statement. They
must qualify their report, however, if the management does not make adequate
disclosure in the financial statements

COMPARISON WITH ASIAN COUNTRIES

NPA figures may be high in Indian banks, but certain factors need to be noted before
comparing the country’s system with that of other Asian nations. For instance, only
48 percent of banking institutions’
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assets are in corporate loans. The high level of pre-emption of bank funds by the
Government in the form of cash reserve requirement (CRR) and statutory liquidity
requirement (SLR) is one of the reasons for low profitability of banks and poor
returns on assets. However, in times of stress, such as the recent economic crisis,
these same assets provide balance sheet strength. India’s contrast with the crisis-
affected countries is clear from Table 14. Bank recapitalization needs in India are the
lowest as a percentage of gross domestic product (GDP) while their contribution to
developmental banking is high. This emphasizes the need for the Government to back
the PSBs even in the weak category.

NONPERFORMING ASSETS OF ALL-INDIA FINANCIAL

INSTITUTIONS
The net NPAs-total loans ratio at IDBI stood at10.1 percent, ICICI at 7.7 percent, and
IFCI at 13.6 percent as of 31 March 1998. However, loans from other AIFIs such as
LIC, GIC, UTI, and their subsidiaries, Risk Capital and Technology Corporation
(RCTC), Technology Development and Information Company of India (TDICI), and
Tourism Finance Corporation of India (TFCI), to the industrial sector have been
substantial, but the data on their NPAs are not readily available. For state-level
institutions such as SFCs and SIDCs, which lend to medium-size industry and SSI
sectors, the NPA data are also not readily available. State-level institutions benefit
from a special recovery procedure allowed under their separate enactment. With the
exception of IDBI, ICICI, and IFCI, the other AIFIs are not under RBI’s regulatory

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discipline. There is a need to study features of their loan operations, credit control,
and NPAs.

PUBLIC SECTOR BANKS’ BAD DEBTS:PARLIAMENTARY REVIEW

Government ownership in banks attracts parliamentary review. The Estimates
Committee of Parliament takes a serious view of adverse comments made against top
managements of PSBs and NPAs on account of transgression of powers. The
committee called for a total revamp of the training system for bank officers. The
committee also noted that public sector undertaking (PSU) banks have to be able to
contain NPAs at a par with international standards where the tolerable levels of NPAs
are “around 3 to 4 percent.”

Disclosure, Accounting Framework, and Supervision

Greater transparency in banks’ balance sheets and penal action by RBI, including
against bank auditors, require highly focused action. Internal audits in banks, now
supervised by audit committees of respective boards, have been more a formality than
reflecting management’s reporting responsibility to the stockholders of the banks.
High standards of preventive and detective (internal) controls are required. Risk
management with respect to “off-balance sheet items” requires considerable attention
as evidenced by instances of losses on letters of credits and guarantees business. This
applies also to auditing off-balance sheet items. At the macro level, the size of NPAs
as a percentage of GDP provides a good measure to assess the soundness of the
system. The issue needs to be tackled in terms of market segments from which NPAs
have emerged: not putting them simply under the umbrella of “priority sector,” or
“non priority sector” but individually, in much wider market segments (for example,
agriculture as a market segment has itself many sub segments).

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PRUDENTIAL NORMS
RBI is considering changes in asset classification, income recognition, and
provisioning norms in line with recommendations of the Basle Committee on
Banking Supervision that were made public in October 1998. It remains to be seen if
RBI will give banks and FIs discretion in the classifications of assets,
partially replacing the prevailing rigid norms and redefining provisioning norms
taking into account collateral. According to current practice, banks and FIs are
required to make 10 percent provisioning on substandard assets and 20 percent on
doubtful assets, even if the assets are backed by collateral.
The Basle Committee on Banking Supervision circulated a consultative paper entitled
“Sound Practices for Loan Accounting, Credit Risk Disclosure, and Related Matters,”
complementing the Basle core principles in the fields of accounting, and disclosure
for banks’ lending business and related credit risk.
RBI has already taken steps to implement the Basle core principles, which broadly
deal with risk management, prudential regulations relating to capital adequacy, and
various internal control requirements. Banks and FIs have been insisting that existing
asset classification rules are rigid leaving no scope for discretion, while the Basle
Committee has said that recognition and measurement of impairment of a loan cannot
be based only on specific rules. The committee has also indicated that banks should
identify and recognize impairment in a loan when the chances of recovery are dim. It
also stated that the focus of assessment of each loan asset should be based on the
ability of the borrower to repay the loan. The value of any underlying collateral
factors also plays a major role in this assessment. Another major difference between
the Basle Committee recommendations and the existing asset classification
norms in India relates to “restructured” loans. According to the Basle Committee
norms, a restructured troubled loan would not automatically be classified as an
impaired loan. In India, however, any restructuring automatically classifies the assets
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as impaired. Banks and institutions are required to classify the restructured loans as
substandard for two years and are prohibited from booking interest during this period.
The “relaxation” in asset classification norms will mean little in the Indian context. In
developed financial systems, it is beneficial to have flexibility in determining weights
for NPAs .However, liberal measures should be introduced only when all local
players employ greater transparency in the asset classification process. It is necessary
to first ensure that companies and borrowers follow norms of disclosure and
transparency. Much needs to be done in this respect by the Institute of Chartered
Accountants of India.
The condition of Indian banks under the present norms has improved, contributing to
a better culture of recovery. The borrowers must respond with better performance

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RATING OF BANKS
RBI has subjected banks to ratings under capital adequacy, asset quality, compliance,
and system (CACS); and capital adequacy, asset quality, management, earnings,
liquidity, and systems (CAMELS) models for differentiating supervisory priorities.
When reforms were first introduced under recommendation of the Narasimham
committee (I), the 27 (then 28) PSBs were placed under A, B, and C categories; i.e.,
sound banks, banks with potential weakness, and sick banks, respectively.
Accordingly, recapitalization and restructuring were carried out for B and C
categories. For individual ratings by international rating agencies, a bank is assessed
as if it were entirely independent and could not rely on external support. The ratings
are designed to assess a bank’s exposure to risks, appetite for risks, and management
of risks.
Any adverse or inferior rating is an indication that it may run into difficulties such
that it would require support. Such credit rating announcements ignore the
public sensitivity to which the banking system is constantly exposed. The individual
and support ratings are further explained in Table 18.
The public expects banks to try to anticipate changes, recognize opportunities, deal
with and manage risks to limit losses, and create wealth
through lending. While the best banks may always play a super-safe role by confining
operations to choice centers and business segments, banks in India are expected to
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operate on a high-risk plane. As such, the Government should support banks even
during stages when they are nudged to offer equity to the public.

Regulatory Issues
INDIAN BANKS’ ASSOCIATION
The Indian Banks’ Association (IBA) should evolve into a self-regulatory
organization (SRO) that would work toward strengthening India’s fairly weak
banking sector and the sector’s moral regulator. Its broad agenda should be to
encourage the continued implementation of prudential business practices. IBA is
completing an organizational restructuring after which it will examine its role as an
SRO. It is now an advisory organization of banks in India and its members
include most of the PSBs, private banks, and foreign banks. Its main activities
involve generation change of ideas on banking issues, policies; and practices;
collection and analysis of sectoral data; personnel administration; and wage
negotiations between labor unions and bank managements. But in its new role, it
would reportedly expand its functions to supplement RBI’s role as a legal regulator

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with a focus on strengthening the sector. While the sector’s risk profile improved
considerably after prudential norms were introduced in 1994, by international
standards, India’s banking sector is perceived as fairly weak with poor asset quality
by leading agencies such as Standard & Poor’s. The SRO would examine and
recommend the implementation of more stringent prudential norms as laid out in the
recommendations of the Narasimham Committee (II). It would encourage practices to
strengthen the sector. Its expanded role could incorporate vigilance, improvement in
accounting standards and balance sheet practices, encouraging provisioning, and
tackling the problem of weakness and deteriorating asset quality in the banking
sector.
IBA as an SRO would have to ensure that banks follow at least a certain minimum
level of prudential practices. This can, however, be all very well in theory but
difficult to practice because an SRO is more of a culture than an institution. It takes a
long time to breed a culture of self-regulation. The respect for a supervisor has to be
earned and does not happen overnight. IBA has to transform itself into a “real”
industry body once the IBA management committee acts on the blueprint for change
proposed by a consulting firm. The proposal is to overhaul the structure of the
organization to increase efficiency. The new focus is on networking as IBA was, for a
long time, working in isolation. Now the objective is to emerge as a representative
body for the banking industry. IBA has already started interacting with different
industries and looking into various aspects of financing software companies, the film
industry, construction companies, and the shipping industry.

Asset Liability Management

MATURITY MISMATCH
Interest rates have changed several times over the past seven years causing maturity
transformations in assets and liabilities and their frequent re pricing.
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A clear and continuous statement of rate sensitive assets and rate sensitive liabilities
has to form the basis of interest rate risk management. RBI is expected to issue
guidelines that show that management- driven asset liability management (ALM)
initiatives in banks are absent. This is also the reason why India’s money market has
remained mostly as a call money market that is meant for clearing day to day
temporary surpluses and deficits among banks. Traditionally, many banks, including
the foreign banks, have used “call” money as a regular funding source. PSBs are
notably absent players in the market for term funds since they lack data on maturity
gaps and interest rate gaps to be complied under ALM discipline. The common
complaints about difficulties in collection of data from hundreds of rural and semi
urban branches will not be combated unless there is computerization in these
branches to facilitate data compilation progressively. According to RBI and many
PSBs, about 80 percent of deposits are term deposits (one to three years). Long-term
lending (three to five years) comprises about 30 percent of total loans and thus,
maturity mismatch is not a serious issue. However, this claim may not be valid as
maturity of deposits and term loans are not disclosed. Moreover, banks have invested
a large portion of funds in Government securities and debentures (long-term assets).
RBI should highlight and address the real maturity mismatch issue. Call money
market is an age-old terminology that RBI itself has to stop referring to in its
publication. The “call” segment of the market is different from the “term” segment in
all sophisticated market centers in the world.

SINGLE CUSTOMER LIMIT

Single customer limits are set at less than 25 percent of net worth of the bank for a
single customer, and less than 50 percent of net worth of the bank for a group. By
definition, a loan includes debentures issued by the customer. As loans of PSBs are
limited, they would be able to comply with these ceilings.
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However, small private banks may exceed these ceilings if proper supervisory
measures are not undertaken
Function of Bank Capital

CAPITAL ADEQUACY
Capital adequacy is a self-regulatory discipline and cannot save banks that are
distressed. As such, the time required for meeting bank capital adequacy must
be shortened to a minimum. The CAMEL rating system clearly recognizes the
strength of bank capital as just one requirement and also an end product of other
processes, mostly management driven. It is essential to amplify the quality of
earnings as it is the first thing that catches shareholders’ attention. History shows that
banking problems germinate during years of economic boom. When the earnings
component becomes volatile and susceptible to sharp growth that is not sustainable,
the quality of loan/risk assets can become suspect.
PSBs are owned by the Government, therefore, they have implicit guarantees from
the Government, resulting in the lack of capital adequacy ratio(CAR) norm. Given
the recommendation of the Narasimham Committee (I) in 1991 on the BIS standard
of capital adequacy, a CAR of 8 percent was to be achieved by March 1996. Twenty-
six out of 27 PSBs had complied with this requirement as of March 1998.
Narasimham Committee (II) recommended CAR targets of 9 percent by 2000 and 10
percent by 2002.As many PSBs have already high CARs (some indicated an average
CAR of about 9.6 percent as of March 1998), such targets could be attained.
Moreover, as 35 percent of deposits are allocated to CRR and SLR, coupled with
investment in Government guaranteed bonds, risk assets are not preferred. However,
RBI has introduced a calculation method that 60 percent of approved securities
should be market, and the ratio will be raised to 100 percent in a few years. Despite

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the higher mark-to-market ratio, many banks increased investments in approved
securities to comply with CAR.
The banks will have difficulties raising more capital in the near future, with capital
markets sluggish, investor confidence low, and bank issues unpopular
with investors. The need for general provisioning on standard assets increases the
pressure on profitability of banks as Government-guaranteed securities
are prone to default. RBI has decided to implement certain recommendations
of Narasimham Committee (II).
• Banks are to achieve a minimum of 9 percent CAR by 31 March 2000. Decisions on
further enhancement will be made thereafter.
• An asset will be treated as doubtful if it has remained substandard for 18 months
instead of 24 months. Banks may make provisions in two phases. On 31 March 2001
provisioning will be at not less than 50 percent on the assets that have become
doubtful on account of the new norms.
• On 31 March 2002, a balance of 50 percent ofthe provisions should be made in
addition to the provisions needed by 31 March 2001. A proposal to introduce a norm
of 12 months will be announced later.
• Government-guaranteed advances that have turned sticky are to be classified as
NPAs as per the existing prudential norms effective 1 April 2000. Provisions on these
advances should be made over a period of four years such that existing/old
Government-guaranteed advances that would become NPAs on account of new asset
classification norms should be fully provided for during the next four years from the
year ending March 1999 to March 2002 with a minimum of 25 percent each year. To
start with, banks should make a general provision of a minimum of 0.25 percent for
the year ending 31 March 2000.The decision to raise further the provisioning
requirement on standard assets shall be announced in the process.

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• Banks and financial institutions should adhere to the prudential norms on asset
classification ,provisioning, etc., and avoid the practice of ever greening.
Banks are advised to take effective steps for reduction of NPAs and also put in place
risk management systems and practices to prevent re-emergence of fresh NPAs.
• PSBs shall be encouraged to raise their tier-2 capital, but Government guarantee to
bond issues for such purpose is deemed inappropriate.
• Banks are advised to establish a formal ALM system beginning 1 April 1999.
Instructions on further disclosures such as maturity pattern of assets and liabilities,
foreign currency assets and liabilities, movements in provision account, and NPAs,
will be issued in due course.
• Arrangements should be put in place for regular updating of instruction manuals.
Compliance has to be reported to RBI by 30 April 1999.
• Banks are to ensure a loan review mechanism for large advances soon after their
sanction and continuously monitor the weaknesses developing in the accounts in
order to initiate corrective measures in time.
• A 2.5 percent risk weight is to be assigned to Government/approved securities by
March 2000.
• Risk weights to be assigned for Government guaranteed advances sanctioned
effective 1 April1999 are as follows:
– central Government: 0 percent;
– state government: 0 percent;
– governments that remained defaulters as of 31 March 2000: 20 percent; and
– governments that continue to be defaulters after 31 March 2001: 100 percent.
The latest figures (as of 1997/98) for banks’ and selected financial institutions’
capital adequacy are shown in Tables 19 and 20. Table 19 indicates that most PSBs
have comfortable CARs but once the accounts are recast in conformity with the
forthcoming provisioning norms, banks will have to start planning for capital issues.
27 | P a g e
The size of bank issues, sequencing, and readiness of the capital market to absorb all
public offerings will pose tremendous challenges to bank management. The time
frame allowed for adjustments seem to be insufficient since profitability cannot be
raised rapidly enough to accommodate additional provisioning and still be considered
attractive investors. This raises a question on how far banks will actively support
growth through new financing initiatives. Clearly, additional returns to inject better
profitability in the short run have to come from (already shrunk) avenues of short-
term financing and not from new industrial and infrastructure projects, which entail
long gestation periods.
TIER-2 CAPITAL FOR BANKS
To meet CAR requirements, seven banks—Canara Bank, Punjab National Bank,
Central Bank of India, Indian Overseas Bank, United Bank of India, Federal
Bank (private sector), and Vijaya Bank—are finalizing plans to raise about Rs20
billion worth of subordinated debt, which qualifies as tier-2 capital.
The funds will be raised in the form of bonds from the domestic private placement
markets in 1998/99.With this, the total amount of tier-2 borrowing (primarily
debentures and bonds as against equity shares, which are considered tier-1 capital)
planned in November 1998 to February 1999 might have exceeded Rs150 billion.
While RBI regulations have capped the coupon rate on bank offerings to 200 basis
points (bp) above the coupon rate on similar Government securities, none of these
banks can hope to find market interest at such fine rates. A five- to six-year bank
borrowing will have to be capped at about 14 percent as similar Government
borrowing was effected at coupon of 11.78-11.98 percent in 1998-1999. However,
with the top of the line FIs raising five-year funds at 14 percent, these banks will have
to offer more incentives to investors. Public issue timing and pricing is a new
challenge for PSBs. There are reports that some banks have invested in tier-2 capital
issues of other banks and it remains to be seen how it will affect their CAR.
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Mergers and Recapitalization
CONSOLIDATION OF THE BANKING INDUSTRY
Global trends in the banking industry in recent years have focused on cost
management, which drove banks to venture into non traditional functions, standardize
products, centralize activities, and form mergers and alliances to gain capital strength
and access to broader customer bases. Such global trends are found in India, with the
exception of consolidation. The Indian banking system is still in the growth phase.
The impulses of consolidation are not yet seen in private banks and much less so in
PSBs whose policies originate from the Government. Even the merger of one PSB
with another that took place five years ago in the early period of banking sector
reforms benefited neither bank.
The increasing forays of banks into new areas and convergence of business
operations of banks, DFIs, and NBFCs raise the issue of merging banks, based on
specific business complementarities. Mergers would be determined by the size of the
balance sheet, or by efficiency, competitiveness and strategic repositioning to reduce

29 | P a g e
intermediation costs, expand delivery platforms, and to operate on economies of
scale. The Government is disinclined to urge mergers whereas RBI wants market
forces to decide. In the corporate world, 50 percent of mergers fail due to cultural
incompatibility of the two organizations coming together. The Government in
1996/97 favored merging banks to create megabanks of international size and
competitiveness. The only merger that materialized was five years ago between ICICI
(a DFI) and the financially ailing Imperial Tobacco Company (an NBFC of the
multinational: ITC). ICICI had the incentive of a tax shield advantage in addition to
expansion into retail business and a network advantage. But the resulting merger was
widely regarded as unsuccessful for both parties. Mergers of international banks are
being evolved to develop synergy and worldwide international competitiveness.
Indian banks have a long way to go in this regard. The country has a lot of small
banks not interested in the global market, for they lack the required expertise. They
need to remain focused on doing what they do best—understanding their local market
base. The danger is that of becoming too specialized, because when business drops,
the difficulties start. Banks need to diversify. In the right place and with the right
focus, there is room for big multinationals and small private banks operating within a
country. A smooth merger may be possible among the eight state banks because of
their 50 years of staffing and management homogeneity, while small private banks
may be forced to merge to remove diseconomies of scale. Consolidation will remain
a matter of theoretical discussion at least until after the merger of New Bank of India
with Punjab National Bank has been studied. The problem of weak PSBs is a separate
one.
Banks that were nationalized in 1969 had a regional branch network and influence
before nationalization. Instead of mergers, they should be given freedom to expand
their branch network in regions of their choice to facilitate relocation of staff that

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were rendered surplus due to computerization. SBI has allowed its associate banks to
expand in their respective regions.
Such a policy may accelerate improvement in the population per branch ratio and also
productivity.

RECAPITALIZATION
The Government owns the core of the Indian banking sector, a factor that has
contributed to its quick recovery from capital shortage. It did not need to adopt the
complicated procedures observed in the rehabilitation processes of Japan and Korea
to inject public funds into major banks. The Government even helped the nationalized
banks increase their CARs

Recapitalization has been going on since 1991 in line with the implementation of the
recommendations of Narasimham Committee (I). The total amount of

31 | P a g e
net contribution of the Government to the nationalized banks up to February 1998
was Rs194.03 billion, which was 5.5 percent of total assets as of March 1997.
Needless to say, this recapitalization of the nationalized banks has been supported by
India’s taxpayers. Additionally, some PSBs issued equity or subordinated debt to
increase CARs. Three nationalized banks (Dena Bank, Bank of Baroda, and Bank
ofIndia) raised capital of Rs17.05 billion through public
issues. In contrast, four PSBs obtained capital by issuing subordinated debt.
However, the precise figure of the amount of capital derived from the subordinated
debt is not available. This process of bank recapitalization was and RBI are major
holders of PSBs. Thus, in theory, there should exist no conflict between shareholders
and the regulatory authorities that monitor the process on behalf of depositors and
other debt holders. This conflict sometimes complicates and hinders the process of
disposing of distressed banks in a fully privatized banking industry, such as that in
countries like Japan. The public issues by PSBs suggest that the Indian Government
believes that bailout of such banks through capital injection is costly. However,
according to the recap italization figures of nationalized banks, the Government has
not yet abandoned the policy of restricting interface of PSBs with the capital market.
It will take a long time for the capital market to play a pivotal role in monitoring and
disciplining bank managements in India. Meanwhile, the shortage of capital seems to
be getting worse in the cooperative bank sector although the expert committee
organized by NABARD recommends that the stringent capital adequacy norm should
be extended to cooperative banks and RRBs.
The committee recommends that the Government rescue program should be quickly
implemented to assist cooperative banks to achieve 4 percent capital
adequacy level by the end of March 1999.

32 | P a g e
ASSET RECONSTRUCTION FUND
Developmental banking remains the need of the country and the Government should
concretely demonstrate the will to back the risk-taking ventures of banks. The ability
of public sector banks to raise equity from the markets will depend upon how
Government chooses to back the banks. An asset reconstruction fund (ARF) is a
solution that will favor bad banks while penalizing good ones. The current thinking is
that an ARF would be formed for weak banks with equity contribution from PSBs.
This would amount to withdrawing equity from such banks in times when they have
to meet stringent CAR deadlines. It is the weak banks and their borrowers who must
struggle to reform the balance sheet. Debt recovery processes in India are tortuously
lengthy and ARF will not deliver goods better than the banks and their particular
branches out of which funds have been lent. Unlike the banking crises in Asia, Latin
America, or the savings and loans problem in the US (in 1989),Indian banks’ NPA
problem was not caused by excessive risk concentrations. The real sector (which has
been buoyant in Asia) has not undergone structural changes to be internationally
competitive and Indian banks have remained at the receiving end. PSBs should seek
conversion of non payable debt obligations of the defaulting borrowers into equity
and line up cases for sale/mergers. What banks can do in this respect, ARF will not
be able to do. Instead, a lot of time will be wasted in finding equity for ARF and
assembling NPA assets from banks for transfer to ARF. The need is to reform the real
sector and also to develop preventive controls in banks.
The weak PSBs owned by the Government are of the “too big to fail type” and have
been in existence for nearly a century. The critical policy initiative should be to
reform and recapitalize them instead of relieving them of bad debts the through an
ARF vehicle.

33 | P a g e
ASSET RESTRUCTURING COMPANY
The Union Finance Ministry is considering asking the strong PSBs to set up an ARC
for the weak banks who have problems in recovering their bad
loans. It is proposed that the debt funding of ARC be through the issuance of
Government-guaranteed bonds. Although the Finance Ministry has not yet
taken a final decision on the modalities of an ARC, an internal study on establishing
an ARC is being worked out.

Operational Efficiency

The most important problem facing Indian banks is how to improve their operational
efficiency. Overall efficiency of the banking sector may be measured by an index of
financial deepening defined by the ratio of total bank deposits to GDP. This index
increased substantially between the 1970s and the
mid-1980s (see Table 22). The improvement can be partly explained by the
expansion of the branch network in India. However, in spite of the branch network
expansion ,financial deepening still remains at a low level(less than 40 percent) by
global standards. The Indian financial deepening index is slightly higher than those of

34 | P a g e
Restructuring Commission for Weak Bank

BANK RESTRUCTURING
The Narasimham Committee (II) recommended a restructuring commission as an
independent agency to run weak banks to restore them to operational health over a
period of three to five years. Also, such banks should operate as “narrow banks,” i.e.,
deploy only deposits for investment in Government securities.
The recommendations ignore that the weak(public sector) banks are old banks and
they should be dealt with according to causes of deterioration such as mis-
management, lack of supervision, and political interference.
The Government and RBI instituted restructuring exercises for weak banks detected
based on the implementation of recommendations of the Narasimham
Committee (I) in 1992/93. There are only three PSBs (India Bank, United
Commercial Bank, and United Bank of India) that still require treatment.
What has gone wrong with these banks is well known and remedial measures should
lie with individual banks according to the nature of their respective sickness.
Since investment in Government securities now carries risk weight, narrow banking
may not be the correct solution. The weak banks must improve the bottom line of
each branch by adding earning assets. In the absence of these, they may end up with
“one-legged managers,” i.e., who know only how to raise deposits (liabilities) but are
averse to risk management (of assets). These banks are too big and rationalization or
closure of branches is not going to mitigate their major weaknesses. A long-term
solution will lie only financial strengthening and efficiency. Since mergers with the
strong banks have been ruled out, the Government as the owner must stand by these
banks while firmly rooting out bad managers and deficiencies. Restructuring does not
have fixed rules and has to be bank specific, depending on several factors, as follows:
• importance of the banking system to the economy,
35 | P a g e
• methods for developing institutional arrangements,
• maturity of society, and
• political system.
Redimensioning (i.e., downsizing) by closure of branches will go against India’s
development objective of reducing the population-branch ratio. The much neglected
cooperative banking sector cannot fill the increasing service delivery gap for a
population that is rapidly rising. This suggests that there is plenty of room for the
Indian banking sector to increase its presence in the financial system. Commercial
banks in India will also have to service the demands of the different economic
segments. They must not ignore nor prefer to serve only one of these at the expense
of the others. Banking services have to be designed and delivered in response to the
wide disparity in standards and ways of living of rural, semi-urban, urban, and
metropolitan populaces.
For example, the banking needs of a vast majority of the Indian population residing in
the rural and semi urban areas are relatively simple. In these markets, availability of
services, timely credit, and low cost

36 | P a g e
Bank Computerization

Entry of new private sector banks, PCBs, and foreign banks offering most modern
technology banking has forced PSBs to address computerization problems more
seriously in recent years. The pace of computerization has remained slow even
though opposition from staff unions has softened. The Central Vigilance Commission
wants 100 percent computerization in Indian banks to check frauds, delays, etc. The
general perception is that in recent years, the prime focus of bank computerization
has been less on the number of branches computerized but more on better
connectivity, say, between the head office and regional offices of a bank with select
branches. These are usually banks that handle large corporate borrowing accounts on
one side, and those that are in high deposit zones, on the other. While the private
sector banks have been upgrading technology simultaneously with branch expansion,
many of the top PSBs have completed automating their branches in the urban areas.
The next step to total branch automation is networking these branches. PSBs need to
frame a strategy to choose the branches that have to be included in their networking
scheme. Since it would be a daunting task for them to connect all the 64,000 branches
spread across the country, as a first step, they are following the 80-20 thumb rule. It
assumes that 80 percent of bank’s business is carried out by only 20 percent of its
branches. It is the branches with substantial business, most of which lie in the urban
areas, that are initially targeted for interconnection. A major problem PSBs have to
face once IT implementation reaches its optimum level is staff retention. While the
private sector banks have been recruiting trained and experienced IT professionals, it
may not be possible for PSBs to do likewise. They will have to train their existing
staff to function effectively in the new environment. And once the requisite skills are
acquired by employees, they may have trouble retaining staff. PSBs can only allocate
limited capital resources to computerization. They will have to choose between high
37 | P a g e
cost of computerization at metro and urban centers and low cost computerization at
rural, semi-urban branches. Also, they will have to factor returns on IT assets, and
growth and productivity improvements. Newly opened private sector banks, foreign
banks,and a few other Indian banks have started Electronic Money activities, which
open up business opportunities but carry risks that need to be recognized and
managed prudently. The Basle Committee on Banking Supervision has raised issues
of critical importance to banking authorities in this regard. There is no evidence that
these aspects are being looked into in India, yet there is a need for auditing firms to
be aware of this issue. Despite recapitalization, the overall performance of PSBs
continues to lag behind those of private sector and foreign banks. Questions of
ownership, management, and governance are central to this issue.
Under public ownership, it is almost impossible to draw a distinction between
ownership responsibility and managerial duty. For this reason, Government owned
banks cannot insulate themselves from interference .Inevitably, some PSBs are
overregulated and over administered.
A central concern is that banking operation flexibility, which is essential for
responding to changing conditions, is difficult to implement. Under public control,
the efficiency objective in terms of cost, profitability ,and market share is
subordinated to the vaguely defined public interest objective .Moreover, it is not only
difficult to inject competition between PSBs since they have a common ownership,
but Government-imposed constraints have also meant that they have not been able to
effectively compete with private sector banks. India still has to find a middle path of
balancing divergent expectations of socioeconomic benefits while promoting
competitive capitalism. Political sensitivities can make privatization difficult but the
Government aims to bring down its holdings to 51 percent. When that happens, a
great stride will have been completed. In 1998, announcements have been made on

38 | P a g e
corporatization of IDBI and reduced Government holdings in Bank of Baroda, Bank
of India, Corporation Bank, Dena Bank, IDBI, Oriental Bank of Commerce, and SBI.

Importance of Branches
BRAND IDENTITY
PSBs and the rural banking system have to build up the transaction and advisory
services of their branches. In a competitive marketplace, a retail branch environment
that can project and deliver the brand promise has become increasingly important. As
retail banks undertake strategic reengineering of distribution and delivery strategies,
product and service enhancement and network downsizing, they ignore the role of the
branch and the power of a brand at their peril, since the branch is a retail bank’s shop
window and platform for differentiating its products and services. With the growth of
automated transactions, the role of the branch is changing and must reflect new
marketing and brand communication strategies. Is the branch to be a retail
opportunity drawing customers for financial services advice, or is it an outpost of
technology and remote transaction efficiency? Can the branch network provide both?
The answers lie in the strength, depth, and clarity of an organization’s brand identity,
which is the foundation upon which a retail bank can communicate its unique product
or service.

INTERDEPARTMENTAL COORDINATION
Branch investment and reengineering is often the responsibility of operations or
premises departments with little regard for coordination with marketing departments.
In order to maximize the benefits of branch investment or reengineering, astute
management teams should integrate all aspects of their brand and its customer
interface under identity management to harness the power of the bank.

39 | P a g e
REGIONAL SPREAD OF BANKING
RBI currently uses only demographic data for issuing branch licenses. The
“population served per branch” criterion is the yardstick that is routinely used to
measure the adequacy or otherwise of banking facilities in regions that have been
demographically demarcated as follows: rural (population below 10,000), semi-urban
(population between 10,000 and 100,000), urban (population between 100,000 and 1
million), and metropolitan (population above one million).Dividing the total
population by the number of bank branches, the population per branch has fallen
from 64,000 in 1969 to 15,000 as of June 1997. This does not take into account,
however, staff redundancies likely from computer-based banking including the
spread of automated teller machine (ATM) outlets.
Even in the most advanced branch banking and computerized banking environments
such as Canada, the ratio of population to branch is only 3,000 and if ATM banking
is included as branch-type retail outlet, the ratio is still lower. In India, foreign banks
are fast experiencing staff redundancy and aging problems but not allowed to branch
out freely into places requiring competition, especially in foreign trade financing .The
Government needs to expand the branch network to ensure a reduction in the
population per branch ratio further to 10,000 (phase I), 5,000 (phaseII), and 3,000
(phase III) by including, if necessary, ATMs and similar outlets as branches at metro
and urban centers.

40 | P a g e
SPREAD OF CREDIT CARD CULTURE
It would be worthwhile for RBI to reward banks through a special subsidy for
spreading a credit card culture on the basis of the number of credit cards and annual
transition volumes. The largest bank, SBI, did not even have a credit card until the
formation of its joint venture with GE Capital in 1998/99.

NARROW BANKING
Weaker banks have been under pressure to cease lending and concentrate on
investments in Government securities, which are subject to depreciation
risks. Narrow banking is therefore not a solution for weak banks. Enhancing the
branch network can improve the bottom line and should be explored. Such
banks require all-round restructuring.

41 | P a g e
Credit Delivery System
Indian banks’ low coverage of bills and receivables financing, and low level of
exposure of bank clientele to the foreign trade segment. Partly these should be
ascribed to a lack of banking services or expertise of centers where demand for the
services exists but is met by distantly placed branches. Inadequate bills and direct
receivables financing results in underutilization of network branches through which
collections can take place.

42 | P a g e
ABOUT YES BANK

YES BANK, India's new age private sector Bank, is an outcome of the professional
entrepreneurship of its Founder, Rana Kapoor and his highly competent top
management team, to establish a high quality, customer centric, service driven,
private Indian Bank catering to the "Future Businesses of India". YES BANK is the
only Greenfield license awarded by the RBI in the last 15 years, associated with the
finest pedigree investors. YES BANK has fructified into a "full service" commercial
Bank that has steadily built Corporate and Institutional Banking, Financial
Markets, Investment Banking, Corporate Finance, Branch Banking, Business
and Transaction Banking, and Wealth Management business lines across the
country, and is well equipped to offer a range of products and services to corporate
and retail customers.

The Bank has adopted international best practices, the highest standards of service
quality and operational excellence, with innovative state-of-the-art technology, and
offers comprehensive banking and financial solutions to all its valued customers. A
key strength and differentiating feature of YES BANK is its knowledge driven
approach, which goes beyond the traditional realm of banking, and helps adoption of
a diagnostic and prescriptive approach towards superior product structuring.

At YES BANK, we are committed to supporting the sustainable growth and

development of sunrise sectors in the country, by facilitating overall growth through
strategic knowledge initiatives. YES BANK has formed a specialized 'Development
and Knowledge Banking Division' focusing on key growth sectors like
Infrastructure, Food & Agribusiness, Telecommunications, Information Technology,
Lifesciences, Infrastructure, Renewable Energy, Media & Entertainment,
Manufacturing and Textiles, among others. YES BANK's unique knowledge driven

43 | P a g e
sectorial approach provides industry specific financial solutions which facilitate
superior structuring and tailored financial solutions. Based on efficient product
delivery, industry benchmarked service levels, and strong client orientation, YES
BANK already services a number of leading companies in India.

YES BANK has a vision to champion 'Responsible Banking' in India where the
concepts of Corporate Social Responsibility and Sustainability are embedded in the
DNA of the organization and integrated in its Business Focus. YES BANK is
committed to adding long term value to society, to differentiate itself in the
marketplace based on a strong 'sustainability mandate' and to build in flexibility and
openness as part of its core strategy. The Bank has engaged with global thought
leadership forums like the Clinton Global Initiative (CGI), Triple Bottom Line
Investing (TBLI) and Tallberg Forum. YES BANK has recently become the first
Indian Bank to become a signatory to the United Nations Global Compact. YES
BANK has also launched YES SAMPANN, a microfinance initiative of the Bank
focused on developing a pioneering strategy of Direct Intervention for the
microfinance domain in collaboration with ACCION International, USA.

YES BANK has invested in the best IT systems and practices in order to make its
technology platform a strategic business tool for building a competitive advantage.
The Bank has outsourced a significant part of its technology, infrastructure and
hardware requirements, which has enabled the Bank to achieve high standards of
customer service at comparatively lower cost structures. YES BANK is committed
to executing a concerted strategy by continuously launching innovative and secure
banking channels to enhance customer satisfaction and increase focus on providing
convenience and choice to our clients. The Bank has partnered Obopay USA, to
launch secure mobile payment solutions for the first time in India.

44 | P a g e
YES BANK has been recognized amongst the Top and the Fastest Growing Bank
in various Indian Banking League Tables by prestigious media houses and Global
Advisory Firms, and has received national and international honours for our various
Businesses including Corporate Finance, Investment Banking, Treasury, Transaction
Banking, and Sustainable practices through Responsible Banking. The Bank has
received several recognitions for our world-class IT infrastructure, and payments
solutions, as well as excellence in Human Capital.

   
Financial Trust
   
The vast banking experience of Founder, Rana Kapoor, has been strengthened by
the financial support of Rabobank Netherlands, a AAA rated private Bank, and
  respected global institutional investors like Orient Global, Rabobank, Franklin
Templeton, AIF Capital, Swiss Re, Khazanah Nasional, Fidelity amongst others to
provide YES BANK a strong foundation of enduring financial trust.         
   
Human Capital
   
At YES BANK, we look to offer comprehensive banking and financial solutions.
Which is why, we have inducted top quality Human Capital across all our banking
  functions, including Corporate & Institutional Banking, Financial Markets,
Investment Banking, Business & Transactional Banking and Retail Banking &
Wealth Management.
 

Knowledge Banking
   
  Our differentiated view of banking as a knowledge-based industry has ensured that

45 | P a g e
 our Bankers are also industry experts in sectors like Food & Agribusiness, Life
Sciences, Telecommunications, Media & Technology, Infrastructure, Retailing &
Textiles and Select Engineering. These Knowledge Bankers offer invaluable and
in-depth insights into these sectors, thereby helping our clients to develop great
ideas and nurture them to fruition.
   
Technology Edge
   
Technology is another key differentiator at YES BANK. Our alliances with best-
of-breed technology partners ensure proactive, on-demand support to meet our
 
growth requirements, as well as the continuous development of our systems
infrastructure and delivery channels.
   
Corporate Governance
   
Our foundations have been inscribed with stringent Corporate Governance
measures, whereby transparency, disclosure norms and accountability have
 
paramount importance, in order to safeguard the trust and wealth of each and every
stakeholder and customer.
   
Responsible Banking
 
Our commitment extends further, from our customers, investors, stakeholders and
employees to society at large. By focusing on sustainability and corporate social
responsibility, we aspire to be a role model institution in Responsible Banking.    
   
Growth
 
  Indeed, at YES BANK, we look to partner the growth of our clients, while they
gain from leveraging our financial expertise, thereby enabling us to accomplish our
mission of “Creating and Sharing Value”.
CORPORATE AND RETAIL BANKING

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Our Corporate and Institutional Banking ('C&IB') team provides comprehensive
financial and risk management solutions to the following categories of clients:

 Large Indian Corporates & Groups

 Multinational Companies
 Central & State Governments
 Government Bodies
 Public Sector Enterprises

Knowledge Banking

Our knowledge-driven sectoral approach provides industry specific financial

solutions catering to your business.

Superior Delivery Platforms

We provide you with easy access to multiple technology-enabled channels,

including corporate internet banking, mobile banking and phone banking, to help
you manage your business better. Our partnerships with reputed technology
service providers enable us to offer you customized, multi-product solutions.

The YES Experience

They believe that they can make a significant difference to their clients' business
by improving their financial and operational efficiency. Their Knowledge Bankers
are supported by dedicated service managers and corporate service centres, to
provide you with a truly rewarding banking experience.

We recognise the need to develop public private partnerships to build a strong

47 | P a g e
platform for economic and social growth within the country. To fulfill this
mission, it is our endeavour to assist the Government and the Public Sector by
providing knowledge-based advisory and financial solutions across key growth
sectors, including:

 Food & Agribusiness

 Life Sciences
 Technology
 Infrastructure, comprising of renewable energy, education, healthcare and
water management

At YES BANK, our teams of Knowledge Bankers work with various government
ministries and departments, autonomous bodies and public sector enterprises at the
Central, State and City level to develop and implement policies, plans and
programs for the effective growth of India's socio-economic infrastructure.

Their Senior Relationship Managers, who have extensive experience in working

closely with government organizations, collaborate closely with our Product
Managers to help Government and Institutional organizations evaluate their
financial needs and provide tailor-made financial solutions to best suit their
requirements.

Types of Banking

Corporate & Institutional Banking

YES Bank has made consistent efforts in the Corporate and Institutional Banking
Segment to ensure every partnership delivers profits as well as long-lasting
environmental and social value. The Corporate & Institutional Banking (C&IB)

48 | P a g e
division at YES Bank provides comprehensive financial and risk
management solutions to clients having a turnover of over INR 10,000 million.
The relationship experts across this business unit, provide financial solutions to the
following categories of institutions:
• Large Indian Corporate Groups
• Public Sector Enterprises
• Central and State Governments
• Government Bodies
• Multinational Companies
• Financial Institutions and Banks
YES Bank provides a comprehensive range of client-focused Corporate Banking
Services, including Working Capital Finance, specialised Corporate Finance,
Trade, Cash Management & Transactional Services, Treasury Services, Investment
Banking Solutions and Liquidity Management Solutions to name a few. All
product offerings are suitably structured after in-depth research and assessment,
taking into account the client's risk profile and specific needs, because at your
Bank, maintaining high credit quality, is of utmost priority YES Bank is
committed to provide innovative financial solutions by leveraging on superior
product delivery ,knowledge-based advisory, industry benchmark service levels
and a strong client orientation. YES Bank has made significant inroads into
developing core relationships with a number of Indian companies while joining
hands with various Governmental institutions at the central, state and city levels.
Industry specific financial solutions by offering tailor-made services to best suit
client requirements, helps lower entry barriers, strengthen business relationships,
superior structuring, and risk mitigation.

Commercial Banking
49 | P a g e
By continuously evolving sector-specific products and services, the Bank paves
the path for a sustainable future for Emerging Corporates. YES Bank understands
the financial needs of growth focused, fast paced enterprises that are emerging as
leaders in their respective industry domains through YES BANK’s Knowledge
Banking approach, and our objective of being the Bank for ‘Future Industries of
India’. YES Bank has institutionalized
Commercial Banking (CB) dedicated to serve this specialised segment of
companies, with an annual turnover between INR 1,000 million and INR 10,000
million and provide a strong backbone as Partners to clients
throughout their lifecycle, and be a key strategic value driver.
CB targets companies in the "high octane" middle market segment, operating
across Future Industries of India like Food and Agribusiness, Life Sciences &
Biotechnology, Media and Entertainment, Engineering, Telecommunications,
Information Technology, Infrastructure and Retailing. Thereby laying the
foundation of long term growth.
CB’s relationship managers aim to deliver the highest standards in service to its
customers by following a Money Doctor approach of diagnostic and prescriptive
solutions through a careful evaluation of client specific financial
needs and providing tailor-made solutions to them. These include structured
products based on the customer’s risk profile and growth requirements as well as
general banking products and services like Working Capital Term Funding,
Liabilities, Investments, Insurance, Trade Finance and Treasury amongst others

Branch Banking
YES Bank believes in providing a holistic banking experience to all its customers
through its high quality, state-of the-art branch network, using cutting-edge
technology, a truly customer-centric offering, and vastly differentiated marketing
50 | P a g e
and branding strategies across major towns and cities in India. Backed by aesthetic
design, the Bank’s retail branches are not only strategically located at premium
high-street locations but also benchmarked with world-class design standards to
ensure smoother and convenient customer engagement. The Bank's branches are
highly accessible. The various consistent and evocative touch points facilitate
warmth, coherent communication and a consistent customer experience. The focus
is not only in transacting but also in engaging, informing and involving, in a
personalised manner thereby providing incremental value for the time spent inside
the branch by the customer. Currently, the Bank’s customers are being served
through an extensive branch network, comprising of 132 branches in 106 locations
across India as well as 94 off-site ATMs in Mumbai, Pune and the NCR region.
Further, the Bank has 5 branch licences, granted by the Reserve Bank of India
(RBI) which are in the process of being operation a lised, that will take the
expanded branch network to 137 branches in the course of the next financial year.
While YES Bank’s branches have been designed to cater to all segments of
customers under the ‘One-Bank’ model, Business Banking and Retail Banking &
Wealth Management customers are the most frequent users of this
world class infrastructure. The two segments, as elaborated subsequently, together
constitute the Branch Banking business. This relationship line is an area of very
high focus for your bank and significant investments have been
made to provide an exceptional experience to its customers.

Under the aegis of Branch Banking, various innovative liability & financial
products are provided across both
segments, like:
_ Savings Accounts (with multiple variants)
_ Current Accounts (with multiple variants)
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_ No-frills Accounts
_ Non-resident Accounts (with multiple variants)
_ Fixed Deposits
_ 5-Year Tax Efficient Fixed Deposits
_ Smart Saver Savings Accounts – A unique proposition, which provides high
returns of a Fixed Deposit with the complete liquidity of a Savings Account.
_ YES Smart Salary Account – An innovative corporate salary programme, backed
by superior technology that enables convenience and direct access.

YES COMMUNITY
YES Bank also believes that the branches need to play a significant role in
Community engagement in the branch serving area. In line with this belief the
Bank is driving a unique Responsible Banking initiative, called YES
COMMUNITY through the Bank’s branches. The aim of YES COMMUNITY is
to espouse causes which are in public interest and add long term value to the
society.

Business Banking
YES Bank believes in generating stake holder value through responsible business
practices. In meeting this responsibility, the Bank contributes significantly to
society by aligning Small and Emerging businesses to support a strong economy
and a sustainable environment. Hence, the Bank has established YES BUSINESS,
a dedicated Business Banking unit, driven by our unique Knowledge Banking
approach, backed by a team of experts, along with a suite of products, services and
resources. YES Bank ensures that identified Small & Medium Businesses, with
annual turnover of INR 100 million to INR 1000 million, excel in the future as
they are the driving force and role model spearheading a large number of
52 | P a g e
innovations, and are key contributors to the sustainable development and growth of
the economy. YES Bank caters to all the service requirements of these SME’s
across various product segments like Fund based lending, Cash Management,
Payment Solutions, Direct Banking, Trade services and Advisory through a strong
branch network of 49 branches across significant SME clusters. The Relationship
Managers at the Bank invest in understanding your diverse and dynamic needs.
The core objective of Business Banking is to easily enable SME access to finance
(including term finance), and business development services, thereby fostering
growth, competitiveness and employment creation that are key
to achieving sustainable economic growth.
YES Bank's strategy to attract SME customers include:
• Offering a customised service proposition tailor-made for high transactional
volumes in the key businesses of IT/ITES, Foreign Trade, Logistics,
Travel/Tourism, Media and Entertainment, Gems and Jewellery, Trusts, Societies
& NGOs, Realty, Professional Services and various Business associations using a
combination of Relationship, Knowledge and Product Capital.
• Offering holistic banking solutions to customers through the services of Business
Banking Relationship Managers and Service Managers for all their banking needs
(including business, wealth management and advisory) at the branch level.
• Offering liability products like Cash Management Services (CMS), Payment
Solutions, Net Banking, Phone Banking and Trade Services.
Retail Banking & Wealth Management By operating in a responsible framework,
YES Bank caters to the Banking and Wealth Management needs of individuals
(Indian Residents and NRIs) and small businesses with credibility. The Retail
Banking & Wealth Management business (RB&WM) of the Bank goes beyond the
traditional realm of banking and delivers long term value through :
Customized Relationship Segments
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_ Premium Touch points - Direct Access
_ Advisory & Wealth Services
1. Relationship Segments
YES Bank invests in enduring customer relationships through its extensive array
of Retail Banking and Wealth Management Offerings. The Bank categorizes its
relationship base of Retail Banking & Wealth Management
customers into three distinct categories based on the relationship size:
_ (YES Prosperity) which provides value-added services to customers offering
them a combination of superior service standards and expertise in wealth
management.
_ (YES First) which offers a combination of superior service standards, expertise
in wealth management and value-added services like convenience benefits,
concierge solutions and lifestyle services to its HNI customers.
_ (YES Private) which offers personalised, confidential and tailor-made wealth
management and financial solutions to HNIs with additional services in the area of
Private Equity, Art and Real Estate Advisory along with convenience benefits,
concierge solutions and lifestyle services.
_ (Global Indian Banking) encompasses the above three segments with the
unanimous objective of providing a superior service experience to the Non
Resident Indian customer, by leveraging basic banking facilities, online
remittances, differentiated wealth management and investments in alternate asset
classes.
2. Premium Touch points - Direct Access
YES Bank aims at providing every Retail Banking client, an array of customised
solutions to meet all financial needs, combined with a world-class Branch
Ambience, convenience of Direct Access, an exemplary Service
Culture and Knowledge Expertise to deliver a ‘Superior Service Experience'.
54 | P a g e
Direct Access
Even though the branches of the Bank’s is extremely convenient and suitable, the
Bank has customers can avail of a 24x7 consistent superior service experience
through various direct access touch points, branded 'YES TOUCH'.
These services are being extended in record time, across various channels like
Internet, Mobile, ATM and Phone using the latest technology. Customers can
access all your Bank’s products and services through a well structured
website at www.yesbank.in

Advisory & Wealth Services

Since inception, YES Bank has developed and followed an integrated approach to
providing complete 'Wealth
Management Solutions', based on comprehensive Risk Profiling, Asset Allocation
and Investment Monitoring Process.
These solutions are anchored on timely advice provided to customers in the form
of regular performance updates and reports on product and market developments,
based on their investment strategy. YES Bank provides an
impressive line-up of reputed third party products including Investments (across
mutual funds of 29 AMCs), Bancasurance (Life Insurance - Max New York Life
Insurance, General Insurance – Bajaj Allianz General
Insurance), Structured Products and Alternative Investments (art advisory and
realty funds) to customers, thereby helping them attain a higher level of
diversification in their investment portfolio.
YES Bank also provides regular liability products like Savings Accounts, Non-
resident Accounts, Current Accounts and Fixed Deposits catering to basic client
needs.
Industry Redefining Features powering Customer Satisfaction
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YES Bank has created and implemented several industry redefining features, in its
endeavour to provide a superior banking experience. The Bank is committed to
continuously introduce products and services on a sustained basis that
revolutionize the traditional banking experience in India by bringing the fastest,
most efficient and convenient services to our valuable customers.
Wide range of transactions that can be conducted Online include:
• Real time payments using RTGS and NEFT payment systems
• Requests for demand drafts, cheque books, query cheque status, stop payments,
purchase fixed deposits and TDS enquiry on fixed deposits amongst others.
• Pay utility bills to over 115 billers across India and make donations to various
religious and charitable institutions
• View and download account statements across multiple formats
• View and initiate standing instructions
• Set various email alerts based on transaction thresholds and account activities
• Integrated view across Corporate and Cash Management services (payments and
collections)
• Differential bulk transactions along with file-level encryption, for corporate
clients
• Air-ticket reservations and e-shopping funded by direct debit to the customer's
account
• Real time payments to various e-brokerage accounts
• Foreign exchange trading for corporate clients
• Request and view real-time balances and transaction information
Indian Financials Institutions Group YES Bank believes in creating superior
sustainable value for its stakeholders, customers, employees and
communities through responsible partnerships with various Banks and Financial
Institutions nationally.
56 | P a g e
The Indian Financial Institutions (IFI) team at your Bank spearheads relationship
development efforts with various Banks and Financial Institutions nationally. The
team achieves this by supporting product delivery while creating and sharing
industry knowledge with internal and external stakeholders. Indian Financial
Institutions (IFI) Relationship Management experts at the Bank offer an array of
services to the following set of clients:
_ Domestic Banks (Govt. owned, Private and co operatives)
_ Mutual Funds
_ Insurance Companies
_ Non Banking Finance Companies (NBFC)
_ Private Equity Funds
_ Brokers (both Capital market and Commodity market)
The IFI team members at YES Bank leverage their existing relationships with
various Banks and Financial Institutions to raise resources, and to set up counter
party limits for your Bank. Additionally, IFI offers a wide variety of products
including Debt, Trade Finance, Guarantees, Treasury Services, Working Capital
Finance, Cash Management & Transactional Services and Liquidity Management
Solutions to YES Bank's customers by entering into partnerships with other Banks
and Financial Institutions. YES Bank has a strategic tie-up with NABARD to offer
Food and Agriculture Consultancy Services and with SIDBI to offer SME
Consultancy to the Bank’s customers. This relationship with other Banks &
Financial Institutions is also leveraged for syndication of loans for the Bank's
Wholesale and Commercial Banking customers and to raise resources through
refinancing the Bank's loan portfolios. The IFI team leads the Bank’s efforts
towards raising debt capital in the form of Hybrid Tier I and Tier II bonds from
various Indian Institutions. International Banking As a global corporate citizen, the
Bank extends its responsible partnerships to financial institutions and customers
57 | P a g e
across the world. Through in-depth knowledge of growth sectors, the Bank caters
to their present as well as the future needs with unmatched credibility.
International Banking has augmented the network and visibility of YES Bank’s
brand and presence internationally. International Banking continues to further
strengthen its international strategy with a clear focus on servicing the
correspondent banks’ businesses in India. Additionally, the division provides a
suite of advisory services to international corporations who are keen to expand or
enter the Indian market under the aegis of a dedicated India Business Facilitation
Desk (IBFD), which provides advisory services to corporates at every step of
business establishment on various sectors through the Knowledge Banking
initiatives apart from providing complete banking solutions.
These initiatives intend to evolve customer centric solutions for YES Bank's
International customers such as:
_ Foreign Banks with or without any presence in India
_ Multilateral Agencies.
_ Foreign Institutions such as US-EXIM, Coface, Euler Hermes amongst others
_ Private Equity Fund houses with a focus on India
_ NBFCs registered in India and backed by Foreign banks.
The International Banking business offers a complete suite of products including
Debt, Trade Finance, Treasury services, Investment Banking solutions, Financial
Advisory and Global Indian Banking to international customers of the Bank. These
products are offered through partnerships and tie-ups with International Banks and
Institutions in the target geographies.
YES Bank has entered into cooperation agreements with two international banks
viz. Mashreq Bank, Dubai and UBI Banca, Italy. The cooperation is envisaged
across various banking products, which has provided further
traction to the international business of the Bank.
58 | P a g e
The differentiated and innovative Knowledge Banking approach has not only
created a niche position for YES Bank in the international market, but has also
helped the division to reach out across multiple geographies while
providing specialised services to corporations eager to enter India. The dedicated
India Business Facilitation Desk (IBFD) compliments international corporations at
every step of business establishment ranging from providing sectoral advisory to
complete banking solutions including support services like setting up of an
office /establishment in India. The division also provides value-added services
including macro-economic analysis, trade and investment assessment, advisory,
regulatory and country specific framework, education and knowledge exchange,
cultural adaptability and exchange.
FINANCIAL MARKETS
YES Bank believes in delivering value by striking a healthy balance between
economic and social returns. Its sustainable approach towards Financial Markets
(FM) business model provides effective Risk Management solutions relating to
foreign currency and interest rate exposures of clients.
FM assists clients in creating a complete understanding of market rates faced by
them in respect of Capital Raising, Investments, Exports, Imports and any other
market risks. YES Bank provides innovative and customized solutions to clients to
enhance returns/reduce cost of financing through a host of product offerings
including Foreign Exchange Forwards, Options and Swaps. The client offerings
are supported by professionals comprising of Economists and Research Analysts
who provide latest analysis and tools for generating quality.

INVESTMENT BANKING AND FINANCIAL ADVISORY

YES Bank sees Sustainability as a key driver for economic growth and to create a
competitive advantage in the market. Through in-depth knowledge on the
59 | P a g e
emerging sectors of the economy, the Bank identifies and harnesses
untapped opportunities to deliver long term value to all its customers.
YES Bank has further reinforced its position as a provider of high quality and
knowledge based advisory services in Investment Banking. This fiscal year has
witnessed several additions to the client base and a consummation of over 75
transactions since the inception of the Bank across various product categories
within the Corporate Finance and Capital Markets offerings of the Financial
Advisory (FA)/Investment Banking Group. The performance of the team is
reflected in the consistent ranking received by the Bank on being amongst the Top
10 deal makers across prestigious league tables.
YES Bank's Investment Banking division constantly endeavours to work as a
'trusted advisor' at every stage of the customer’s life cycle. This firm commitment
has led to the generation of repeat business from several of our
privileged clients .Risk Management ideas and solutions.

CORPORATE FINANCE
YES Bank's contribution in the Corporate Finance domain is a reflection of its
long-standing commitment to sustainable development. Leveraging on its in-depth
knowledge of the emerging sectors and strategies that create long term value, the
Bank continues to be a positive contributor to a sustainable economy.
YES Bank's Corporate Finance practice offers clients a combination of advisory
services and customized structured financial products to meet varied client
requirements. The team provides an “out-of-the-box” solution driven approach to
create win-win solutions for companies as well as lenders. YES Bank assists its
clients in obtaining superior financial returns in a risk mitigated manner due to
60 | P a g e
substantial “knowledge arbitrage”, over the market.
To ensure valuable insights, the Bank has built a robust internal system for
tracking the exposure to sensitive sectors such as capital markets and real estate on
a daily basis, vis-a-vis internal limits and the regulatory limits as stipulated by the
Reserve Bank of India.

TRANSACTION BANKING
YES Bank has expanded the scope of Responsible Banking right from transaction
execution to information facilitation, serving the core objective of optimum
management of all operational, administrative and regulatory
activities. To fulfill this promise, the Transaction Banking Group (TBG) at YES
Bank has integrated and upgraded its product suite to offer a 'Composite Package'
enabling total outsourcing of the corporate treasury functions for its
clientele across multiple relationship segments viz. Corporate & Institutional
Banking; Commercial Banking; Small and Medium Enterprises and Government
Corporations.
“Financial Supply Chain Management” of the corporate is the focus of this core
product team. It broadly consists of three specialized product domains namely
Cash Management and Direct Banking Services, Trade Finance and
Services and Capital Markets, Escrow Account and Securities Services. Unique
and customized product propositions have been successfully developed and
implemented by the group, for specific industry verticals, at times have played a
pioneering role in the market.

KNOWLEDGE BANKING
Through in-depth knowledge of the emerging sectors, YES Bank, there has been
significant traction in developing new opportunities and ideas that add long-term
61 | P a g e
shareholder value. YES Bank focuses on key growth sectors such
as Food and Agribusiness, Life Sciences, Media and Entertainment, Auto
Components Engineering, Telecommunications, Information Technology,
Infrastructure and Retailing amongst others, which are the Future
Industries of India. YES Bank is committed to supporting the sustainable growth
and development of these sunrise sectors in the country to facilitate overall
development through strategic initiatives. While several
divisions work together for the above objective, there are three main units that
specifically reflect the Knowledge Banking approach.
Food and Agribusiness Strategic Advisory and Research (FASAR)
Strategic Initiatives and Advisory Government (SIG)
RESPONSIBLE BANKING
Through responsible initiatives, YES Bank reaches out to the emerging sectors and
the financially un-banked sections of the society, and support a sustainable future.
Mainstreaming sustainability for the Indian banking community by adopting a
multi-stakeholder approach to dialogue with peers, governmental and non-
governmental bodies, industry and academia.
• Operating in a 'Sustainability Zone' by working in a zone between pure profit &
pure philanthropy to address Environmental, Social and Governance (ESG) issues.
This approach not only promotes new sustainable businesses but also mitigates
risks associated with poor environmental or social performance.
• Offering innovative financial solutions to address a wide spectrum of issues from
sustainable livelihoods, food security, climate change, public health, education,
information technology and biotechnology among

CREDIT RATING
For Tier I Subordinated Perpetual Bonds Brickwork Ratings India Pvt. Ltd has
62 | P a g e
assigned BWR AA+ (Double A Plus) (Outlook: stable) rating to the Tier I
Subordinated Perpetual Bond Issue of the Bank of Rs 90 Crore vide its letter dated
September 16 2009. This rating indicates the instruments are considered to offer
high credit quality in terms of timely servicing of debt obligations. The text of the
rating letter from Brickwork is reproduced elsewhere in this Disclosure Document.
ICRA has assigned a ‘LA +’ (LA Plus) rating to the Tier-I subordinated perpetual
bond Issue of the Bank of Rs. 90Crore vide its letter dated November 25, 2009.
This rating indicates the adequate credit-quality-rating assigned by ICRA. The
rated instrument carries average credit risk. The text of the rating letter from ICRA
is reproduced elsewhere in this Disclosure Document.
CARE has assigned a ‘CARE A+’ (A Plus) rating to the Tier-I Perpetual Bond
Issue of the Bank of Rs. 90 Crore vide its letter dated December 3, 2009.
Instruments with this rating are considered to offer adequate safety for
timely servicing of debt obligations. Such instruments carry low credit risk. The
text of the rating letter from CARE is reproduced elsewhere in this Disclosure
Document.
The rating is not a recommendation to buy, sell or hold the Bond and investors
should take their own decision.
The rating may be subject to revision or withdrawal at any time by the assigning
rating agency and each rating should be evaluated independently of any other
rating. The rating obtained is subject to revision at any point of
time in the future. The rating agency has a right to suspend, withdraw the rating at
any time on the basis of new information, etc.

CAPITAL STRUCTURE as on December 31, 2009

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** The Bank has allotted 3,83,62,709 equity shares on January 27, 2010 to
Qualified Institutional Buyers under Qualified Institutional Placement and
7,51,345 equity shares on February 9, 2010 to employees under various
ESOP schemes.

Total Ownership of the Bank as at February 12, 2010

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Details of debt securities issued and sought to be listed including face value, nature
of debt securities mode of issue i.e. public issue or private placement
Face Value and Issue Price of Bond
Each Bond has a face value of Rs 10,00,000/- and are issued at par price i.e. Rs
10,00,000/-

Nature of the Bond

All Bonds being issued under this Disclosure Document are unsecured which A
means that they are not secured by any of our assets. The Bonds rank Pari passu
among themselves and with other Tier I indebtedness of the Bank. The claims of
the investors in Bonds being issued for inclusion in Tier I capital shall be (a)
superior to the claims of investors in equity shares, and (b) subordinated to the
claims of all creditors

Mode of issue

The Bonds will be issued on Private Placement basis.

For further details of the Bonds, please refer to the “Terms of the Present Issue” of
the Bonds set out in 28 of
this Disclosure Document
CREDIT RATING
For Tier I Subordinated Perpetual Bonds
65 | P a g e
Brickwork Ratings India Pvt. Ltd has assigned BWR AA+ (Double A Plus)
(Outlook: stable) rating to the Tier I
Subordinated Perpetual Bond Issue of the Bank of Rs 90 Crore vide its letter dated
September 16 2009. This rating indicates the instruments are considered to offer
high credit quality in terms of timely servicing of debt obligations. The text of the
rating letter from Brickwork is reproduced elsewhere in this Disclosure Document.
ICRA has assigned a ‘LA +’ (LA Plus) rating to the Tier-I subordinated perpetual
bond Issue of the Bank of Rs. 90 Crore vide its letter dated November 25, 2009.
This rating indicates the adequate credit-quality-rating assigned by ICRA. The
rated instrument carries average credit risk. The text of the rating letter from ICRA
is reproduced elsewhere in this Disclosure Document. CARE has assigned a
‘CARE A+’ (A Plus) rating to the Tier-I Perpetual Bond Issue of the Bank of Rs.
90 Crore vide its letter dated December 3, 2009. Instruments with this rating are
considered to offer adequate safety for timely servicing of debt obligations. Such
instruments carry low credit risk. The text of the rating letter from CARE is
reproduced elsewhere in this Disclosure Document. The rating is not a recomm
endation to buy, sell or hold the Bond and investors should take their own
decision.
The rating may be subject to revision or withdrawal at any time by the assigning
rating agency and each rating should be evaluated independently of any other
rating. The rating obtained is subject to revision at any point of
time in the future. The rating agency has a right to suspend, withdraw the rating at
any time on the basis of new information, etc.
Issue size Rs 87 Crore including Green Shoe Option
Details of utilization of the issue proceeds
OBJECTS OF THE ISSUE OF BONDS
The present issue of bonds is being made for augmenting the Tier-I Capital of the
66 | P a g e
Bank for strengthening its Capital Adequacy and for enhancing the long-term
resources of the Bank. The Main Object Clause of the Memorandum of
Association of the Bank enables it to undertake the activities for which the funds
are being raised through the present issue and also the activities, which the Bank
has been carrying on till date. The proceeds of these issues will be used by the
Bank for its regular business activities.
Any material event/development or change at the time of issue or subsequent to
the issue which may affect the issue or the investor’s decision to invest/ continue
to invest in the debt securities
There has been no material event/development or change at the time of the issue of
the Bonds or subsequent to the issue which may affect the issue or the investor’s
decision to invest/continue to invest in the bonds
11. Particulars of the debt securities issued i) for consideration other than cash,
whether in whole or part (ii)
at a premium or discount, or (iii) in pursuance of an option
The Bank has not issued any debt securities issues (i) for consideration other than
cash whether in whole or part (ii) at a premium or discount or (iii) in pursuance of
an option
Information relating to the terms of offer or purchase

TERMS OF PRESENT ISSUE

The Bonds offered are subject to provisions of the Companies Act, 1956,
Securities Contract Regulation Act, 1956, Memorandum and Articles of
Association of the Bank, Terms of this Disclosure Document, Instructions
contained in the Application Form and other terms and conditions as may be
incorporated in the Trustee Agreement and Bond Trust Deed. Over and above such
terms and conditions, the Bonds shall also be subject to the applicable
67 | P a g e
provisions of the Depositories Act 1996 and the laws as applicable, guidelines,
notifications and regulations relating to the allotment & issue of capital and listing
of securities issued from time to time by the Government of India (GoI), Reserve
Bank of India (RBI), Securities & Exchange Board of India (SEBI), concerned
Stock Exchange(s) or any other authorities and other documents that may be
executed in respect of the Bonds
BASIC TERMS OF ISSUE
The Bank proposes to issue Unsecured Non-convertible Tier I Subordinated
Perpetual Bonds in the nature of Promissory Notes as part of Tier I Capital of the
face value of Rs. 10,00,000 each at par,

Depository Terms

Any material event/development or change at the time of issue or subsequent to

the issue which may affect the issue or the investor’s decision to invest/ continue
to invest in the debt securities
There has been no material event/development or change at the time of the issue of
the Bonds or subsequent to the issue which may affect the issue or the investor’s
decision to invest/continue to invest in the bonds

11. Particulars of the debt securities issued i) for consideration other than cash,
whether in whole or part (ii )at a premium or discount, or (iii) in pursuance of an
option

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Mumbai, January 20, 2010: The Board of Directors of YES BANK Ltd. took on
record the unauditednQ3FY10 results at its meeting held in Mumbai today.
Commenting on the results and financial performance, Rana Kapoor,
Founder/Managing
Director & CEO, YES BANK said, “YES Bank has achieved record profits second
time sequentially on the back of strong and sustainable net interest income and
exceptional credit growth of 71.1% y-o-y and 14.8% q-o-q, despite muted credit
growth in the industry. They continue to maintain extremely high productivity and
have posted ROEs in excess of 20%
for the 5th successive quarter. We are building a robust branch banking model and
are in the process of hiring and retaining world class human capital as the Bank
enters its second version of its growth strategy with the Vision to become the Best
Quality Bank of the World

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* Net Profit without adjusting for fixed income gains was up by 19.0% y-o-y

* * Total Net Income without adjusting for fixed income gains up by 7.9% y-o-y

Summary Balance Sheet

Q3FY10 Performance highlights

• Strong Net Interest Income (NII): Net Interest Income (NII) for Q3FY10 grew by
69.5% to Rs. 210.9 crore (Rs. 124.5 crore in Q3FY09) on account of strong growth
in advances & investments and improved Net Interest Margin (NIM). NIM for
Q3FY10 increased to 3.1% as compared to 2.8% in Q3FY09. Gross yield on
advances for Q3FY10 was 10.3%
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(13.7% in Q3FY09) while cost of funds reduced to 6.6% from 9.6% in Q3FY09.
• Exceptional growth in Advances and Deposits: Total Advances grew by 71.1% to
Rs. 18,710.4 crore as at December 31, 2009 from Rs. 10,934.9 crore as at
December 31, 2008, despite muted credit growth in the industry. Investments grew
by 19.1% to Rs. 8,282.0 crore as at December 31, 2009 from Rs. 6,952.8 crore as
at December 31, 2008.
Total Deposits grew by 62.8% to Rs. 22,038.6 crore as at December 31, 2009 from
Rs. 13,539.1 crore as at December 31, 2008. Current and Savings Account
deposits grew by 79.4% to Rs. 2,228.9 crore while Term Deposits grew by 61.1%
to Rs. 19,809.7 crore during the same period. The Bank’s Balance Sheet grew by
49.8% to Rs. 29,587.5 crore as at December 31, 2009 from Rs 19,746.6 crore as at
December 31, 2008.
Break-up of the total non-Priority Sector Lending as at December 31, 2009 was as
follows
- Wholesale Banking (72.6%), Commercial Banking (23.1%), and Branch Banking
(4.3%).
• Sustainable Non Interest Income streams: Transaction Banking and Financial
Advisory business continue to show traction y-o-y and sequentially. Non Interest
Income was Rs. 127.8 crore for the quarter (Rs. 189.4 crore in Q3FY09). For the 9
months ended December 31st 2009, non-interest income grew 10.6% to Rs. 415.4
crore (Rs. 375.7 crore for the 9 months ended December 31, 2008) and contributed
43.3% for 9 months ended December 31 ,2010.
Components of Non interest income for Q3FY10 were as follows: Transaction
Banking –
Rs. 37.1 crore, Financial Advisory – Rs.57.0 crore, Financial Markets – Rs. 28.0
crore and 3rd party distribution / retail fee – Rs. 5.7 crore.
• Operating and Net profit: Operating profit for Q3FY10 was up 17.3% to Rs.
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216.2 crore as compared to Rs. 184.4 crore for Q3FY09 driven primarily by
sustained revenune growth from multiple revenue streams and lower operating cost
to income ratio of 36.2% in Q3FY10 (41.3% in Q3FY09).
Profit after tax for Q3FY10 was up 19.0% at Rs. 125.9 crore as compared to Rs.
105.8 crore for Q3FY09, which is the highest ever in the Bank’s history.
Consistently healthy Asset Quality: Gross Non Performing Assets as a proportion
of Gross advances was at 0.29% while Net Non Performing Assets as a proportion
of Net advances was at 0.09% as at December 31, 2009 as against 0.44% and
0.15% respectively as at December 31, 2008.
Bank’s total loan loss coverage ratio was at 270% while specific provisioning
cover was at 70.1% as at December 31, 2009.
The Bank’s restructured advances declined by Rs. 21.9 crores during the quarter.
Total restructured advances were Rs. 134.0 crore as at December 31, 2009 (Rs.
155.9 Crs as of September 30, 2009) which constituted 0.71% of the Gross
Advances as at December 31, 2009.
• Strong Shareholders’ returns: RoE of 26.3% (annualized) and RoA of 1.80%
(annualized) for the quarter consistently continue to be amongst the highest in the
Banking industry. RoE has been consistently greater than 20% and RoA has been
more than 1.5% for the last 5 consecutive quarters.

• Capital Funds: Tier I Capital stood at 9.0% and total CRAR stood at 16.2% as at
December 31, 2009.

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CSR activities:
Responsible Banking is one of the key differentiators of YES BANK with the
objective of developing innovative business solutions to social and environmental
problems. YES BANK operates in a ‘Sustainability Zone’ where wider economic,
environmental and social objectives are met by supporting new emerging
businesses that not only promote financial growth but also enhance social and
environmental causes across a range of its client base and their stakeholders, thus
constituting the economic pyramid as a whole. To this end, YES BANK offers
innovative financial solutions to address a wide spectrum of issues regarding
sustainable livelihoods, food security, public health, education & CLIMATE
CHANGE.

YES BANK has created a differentiated proposition in the cluttered financial

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services market-space by institutionalizing ‘sustainability’ as a key ingredient in
all internal and external processes. Responsible Banking comprises of two highly
empowered and integrated units; Responsible Banking in Thought that provides
cutting edge thought leadership in the sustainability space and Responsible
Banking in Action that develops specific banking products and services in line
with the Responsible Banking strategy.

RESPONSIBLE BANKING IN THOUGHT provides THOUGHT LEADERSHIP

and incubates new business opportunities in the development space through CSR
and sustainability initiatives while establishing linkages with like-minded domestic
and international governmental, non-governmental and private organizations of
repute. This group also actively engages in developing innovative business
approaches to development, along with a new set of investors, i.e. the Socially
Responsible Investor Community as well as the Community Development
Organizations. The division also serves as a specialized resource cell for
mainstreaming sustainability internally into the Bank’s business groups. The key
initiatives of Responsible Banking in Thought are listed below
 THOUGHT LEADERSHIP
 RESPONSIBLE CORPORATE CITIZENSHIP ADVISORY (RCC)
 YES COMMUNITY

YES BANK also encourages its clients and stakeholders to adopt

PHILANTHROPY to actively participate In India’s development & poverty
alleviation. The BANK has associated itself with India’s most credible NGOs
doing some commendable work in their areas.

RESPONSIBLE BANKING IN ACTION comprises of three special business

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verticals with products aligned to our sustainability strategy, identifying new
markets and promoting sustainable development. YES BANK has successfully
established three dedicated business verticals;

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