The Base

After independence the Government of India (GOI) adopted planned economic development for
the country (India). Accordingly, five year plans came into existence since 1951. This economic
planning basically aimed at social ownership of the means of production. However, commercial
banks were in the private sector those days. In 1950-51 there were 430 commercial banks. The
Government of India had some social objectives of planning. These commercial banks failed
helping the government in attaining these objectives. Thus, the government decided to
nationalize 14 major commercial banks on 19th July, 1969. All commercial banks with a deposit
base over Rs.50 crores were nationalized. It was considered that banks were controlled by
business houses and thus failed in catering to the credit needs of poor sections such as cottage
industry, village industry, farmers, craft men, etc. The second dose of nationalisation came in
April 1980 when banks were nationalized.

Objectives Behind Nationalisation of Banks in India

The nationalisation of commercial banks took place with an aim to achieve following major
objectives.

1. Social Welfare : It was the need of the hour to direct the funds for the needy and required
sectors of the indian economy. Sector such as agriculture, small and village industries
were in need of funds for their expansion and further economic development.
2. Controlling Private Monopolies : Prior to nationalisation many banks were controlled
by private business houses and corporate families. It was necessary to check these
monopolies in order to ensure a smooth supply of credit to socially desirable sections.
3. Expansion of Banking : In a large country like India the numbers of banks existing those
days were certainly inadequate. It was necessary to spread banking across the country. It
could be done through expanding banking network (by opening new bank branches) in
the un-banked areas.
4. Reducing Regional Imbalance : In a country like India where we have a urban-rural
divide; it was necessary for banks to go in the rural areas where the banking facilities
were not available. In order to reduce this regional imbalance nationalisation was
justified:
5. Priority Sector Lending : In India, the agriculture sector and its allied activities were the
largest contributor to the national income. Thus these were labeled as the priority sectors.
But unfortunately they were deprived of their due share in the credit. Nationalisation was
urgently needed for catering funds to them.
6. Developing Banking Habits : In India more than 70% population used to stay in rural
areas. It was necessary to develop the banking habit among such a large population.

The history of nationalization of Indian banks dates back to the year 1955 when the Imperial
Bank of India was nationalized and re-christened as State Bank of India (under the SBI Act,
1955). Later on July 19, 1960, the 7 subsidiaries of SBI viz. State Bank of Hyderabad (SBH),
State Bank of Indore, State Bank of Saurashtra (SBS), State Bank of Mysore (SBM), State Bank
of Bikaner and Jaipur (SBBJ), State Bank of Patiala (SBP), and State Bank of Travancore (SBT)
were also nationalized with deposits more than 200 crores.
In the Indian banking scenario, most public sector banks are referred to as Nationalised Banks.
This classification is, however, inaccurate. According to the IMF (International Monetary Fund),
“Nationalisation” is defined as “government taking control over assets and over a
corporation, usually by acquiring the majority or the whole stake in the corporation”. In 1949,
during the early years of the country’s independence, India’s central bank, the RBI (Reserve
Bank of India) became the first bank to be nationalised. This was an important move since the
RBI would soon become the regulatory authority for banking in India. Most Indian banks at that
time were privately owned. Thus, the Indian government then recognized the need to bring them
under some form of government control to be able to finance India’s growing financial needs. -
Year of
S.No. Bank Name
Nationalisation

1 Allahabad Bank 1969

2 Andhra Bank 1980

3 Bank of Baroda 1969

4 Bank of India 1969

Bank of
5 1969
Maharashtra

6 Canara Bank 1969

Central Bank of
7 1969
India

8 Corporation Bank 1980

9 Dena Bank 1969

10 Indian Bank 1969

Indian Overseas
11 1969
Bank

Oriental Bank of
12 1980
Commerce

Punjab & Sind

13 1969
Bank

Punjab National
14 1969
Bank
15 Syndicate Bank 1969

16 UCO Bank 1969

Union Bank of
17 1980
India

United Bank of
18 1969
India

1980
19 Vijaya Bank

19 + SBI + its 5 associates + IDBI = 26.

On 10 February, 2016, the RBI(Reserve Bank of India) released the February 2016 issue of its
monthly bulletin which includes the Sixth Bi-monthly Monetary Policy Statement and Speeches
by the Top Management and Current Statistics.

Nationalisation in Two Phases

By the early 1960s, the Government of India realized that a significant share of deposits coming
from the masses of India was controlled by 14 privately owned commercial banks. Indian
agriculture and industries were booming and the need for finance was high. Financial regulations
were also very important at that time since those would help shape the nature of the country’s
economy for decades to come. Nationalisation became the watchword even the state airline, Air
India, was nationalised in 1953. Acquisition of the Imperial Bank of India in 1955 was the next
big step.

With Mrs. Indira Gandhi’s taking over as the Prime Minister of India, the Indian National
Congress rallied for a state takeover of some of the major banks in the country. In what can be
deemed a rather hasty move, the government promulgated an ordinance - the Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 - thereby nationalising
all the 14 banks that were under consideration with effect from the midnight of 19 July 1969. As
a follow-up to passing the ordinance, the Banking Companies (Acquisition and Transfer of
Undertaking) Bill was taken up by the Parliament for discussion. It received a clear majority as
well as the assent of the President within a month of issuing the ordinance.

In 1980, when Mrs. Gandhi was re-elected as the Prime Minister for her third term at the PMO,
she initiated a second spate of bank nationalization. This time about six banks were nationalised
and the Government of India controlled over 90 percent of the banking business in the country.
Of the 20 banks that were nationalised, New Bank of India was later (in 1993) merged with
Punjab National Bank.
Why were these banks nationalised?The nationalization of banks was a significant move
undertaken by the government for the development of the country. Firstly, it instilled public
confidence in the banking system encouraging the masses to save and invest. It allowed for
elimination of regional bias and promoted opening up of branches in the remote areas of the
country as well, thus strengthening the banking network. By elimination of monopoly or credit
competition, nationalization streamlined banking practices in the country, thereby directing funds
where it was most necessary – towards industrial and sectoral development – as planned by the
RBI and the Indian government.
IS SBI A NATIONALISED BANK?

The State Bank of India was founded as the Imperial Bank of India in January 1921 through the
merger of Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1955, the Reserve Bank of
India bought a 60-percent stake in the bank and renamed it State Bank of India (SBI Act, 1955).
During the nationalisation of banks in 1969, and again in 1980, SBI was not added to the list of
the ‘nationalised banks’ since it was already a state-owned financial institution. In 2008, the
Government of India took over the RBI's stake in the bank to avoid any conflict of interests
within the RBI (which both owned and regulated the SBI). Now though the SBI and its
subsidiaries are often referred to as a nationalised bank, it is a Public Sector Undertaking (PSU)
and not one of the nationalised banks of India. It is India's largest banking and financial services
enterprise as of now.
Similarly, IDBI Bank Ltd. is also a public sector bank but not one of the nationalised banks of
India. IDBI Bank was established in 1964 (IDBI Act, 1964) to aid developmental finance in the
country. Initially, it was a financial institution and did not participate in core banking activities.
IDBI Bank was inducted into banking in 2003 and was merged with IDBI Ltd. - a company, in
which the Government of India holds about 70-percent stake, in 2005.
Public-sector banksThere are currently 27 public sector banks in India out of which 19 are
nationalised banks and 6 are SBI and its associate banks, and rest two are IDBI Bank and
Bharatiya Mahila Bank, which are categorised as other public sector banks. There are total 93
commercial banks in India.[1]

State Bank and its associates

1. State Bank of India

2. State Bank of Patiala
3. State Bank of Mysore
4. State Bank of Travancore
5. State Bank of Bikaner and Jaipur
6. State Bank of Hyderabad

Nationalised banks

1. Allahabad Bank
2. Andhra Bank
 3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab & Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

Other public sector banks

1. IDBI Bank
2. Bharatiya Mahila Bank[2]

Private-sector banks

1. HDFC Bank
2. ICICI Bank
3. Axis Bank
4. Bandhan Bank[3]
5. Catholic Syrian Bank
6. City Union Bank
7. Dhanlaxmi Bank
8. ING Vysya Bank (merged with Kotak Mahindra Bank in April 2015)[4]
9. Jammu and Kashmir Bank
10. Karur Vysya Bank
11. Kotak Mahindra Bank[5]
12. Lakshmi Vilas Bank
13. Nainital Bank
14. RBL Bank
15. South Indian Bank
16. Tamilnad Mercantile Bank
17. Yes bank
18. Federal Bank
19. DCB Bank
20. Indus Ind Bank
Foreign banks

 AB Bank Ltd
 ABN-AMRO Bank N.V.
 Abu Dhabi Commercial Bank Ltd.
 American Express Banking Corp.
 Antwerp Diamond Bank NV
 BNP Paribas
 Bank of America N.T. & S.A.
 Bank of Bahrain & Kuwait B.S.C.
 Bank of CeylonBank of Nova Scotia
 Barclays Bank PLC
 Calyon Bank
 Chinatrust
 Citibank
 Deutsche Bank
 DBS Bank Ltd.

Financial inclusion or inclusive financing is the delivery of financial services at affordable

costs to sections of disadvantaged and low-income segments of society, in contrast to financial
exclusion where those services are not available or affordable. An estimated 2 billion working-
age adults globally have no access to the types of formal financial services delivered by
regulated financial institutions. For example, in Sub-Saharan Africa, only 24% of adults have a
bank account even though Africa's formal financial sector has grown in recent years.[1] It is
argued that as banking services are in the nature of a public good, the availability of banking and
payment services to the entire population without discrimination is a key objective of financial
inclusion.

In the Indian context, the term ‘financial inclusion’ was used for the first time in April 2005 in
the Annual Policy Statement presented by Y.Venugopal Reddy,the then Governor, Reserve Bank
of India.[5] Later on, this concept gained ground and came to be widely used in India and abroad.
While recognizing the concerns in regard to the banking practices that tend to exclude rather than
attract vast sections of population, banks were urged to review their existing practices to align
them with the objective of financial inclusion.[5] The Report of the Internal Group to Examine
Issues relating to Rural Credit and Microfinance (Khan Committee) in July 2005 drew strength
from this announcement by Governor Y. Venugopal Reddy in the Annual Policy Statement for
2005-06 wherein he had expressed deep concern on the exclusion of vast sections of the
population from the formal financial system.[6] In the Khan Committee Report, the RBI exhorted
the banks with a view to achieving greater financial inclusion to make available a basic "no-
frills" banking account. The recommendations of the Khan Committee were incorporated into the
mid-term review of the policy (2005–06).[7] Financial inclusion again featured later in 2005 when
it was used by K.C. Chakraborthy, the chairman of Indian Bank. Mangalam became the first
village in India where all households were provided banking facilities. Norms were relaxed for
people intending to open accounts with annual deposits of less than Rs. 50,000. General credit
cards (GCCs) were issued to the poor and the disadvantaged with a view to help them access
easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the
services of non-governmental organizations (NGOs/SHGs), micro-finance institutions, and other
civil society organizations as intermediaries for providing financial and banking services. These
intermediaries could be used as business facilitators or business correspondents by commercial
banks. The bank asked the commercial banks in different regions to start a 100% financial
inclusion campaign on a pilot basis. As a result of the campaign, states or union territories like
Puducherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all their
districts. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers'
accounts and service them through a variety of channels by leveraging on IT. However, illiteracy
and the low income savings and lack of bank branches in rural areas continue to be a roadblock
to financial inclusion in many states and there is inadequate legal and financial structure.

The government of India recently announced “Pradhan Mantri Jan Dhan Yojna,”[8] a national
financial inclusion mission which aims to provide bank accounts to at least 75 million people by
January 26, 2015. To achieve this milestone, it’s important for both service providers and policy
makers to have readily available information outlining gaps in access and interactive tools that
help better understand the context at the district level. MIX designed the FINclusion Lab India FI
workbook[9] to support these actors as they craft strategies to achieve these goals.

In India, RBI has initiated several measures to achieve greater financial inclusion, such as
facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps are:

Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum
balance as well as charges that make such accounts accessible to vast sections of the population.
Banks have been advised to provide small overdrafts in such accounts.

Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank

accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by
stipulating that introduction by an account holder who has been subjected to the full KYC drill
would suffice for opening such accounts. The banks were also permitted to take any evidence as
to the identity and address of the customer to their satisfaction. It has now been further relaxed to
include the letters issued by the Unique Identification Authority of India containing details of
name, address and Aadhaar number.

Engaging business correspondents (BCs): In January 2006, RBI permitted banks to engage
business facilitators (BFs) and BCs as intermediaries for providing financial and banking
services. The BC model allows banks to provide doorstep delivery of services, especially cash
in-cash out transactions, thus addressing the last-mile problem. The list of eligible individuals
and entities that can be engaged as BCs is being widened from time to time. With effect from
September 2010, for-profit companies have also been allowed to be engaged as BCs. India map
of Financial Inclusion by MIX provides more insights on this.[10] In the grass-root level, the
Business correspondents (BCs), with the help of Village Panchayat (local governing body), has
set up an ecosystem of Common Service Centres (CSC). CSC is a rural electronic hub with a
computer connected to the internet that provides e-governance or business services to rural
citizens.[11]
Use of technology: Recognizing that technology has the potential to address the issues of
outreach and credit delivery in rural and remote areas in a viable manner,banks have been
advised to make effective use of information and communications technology (ICT), to provide
doorstep banking services through the BC model where the accounts can be operated by even
illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing
confidence in the banking system.[11]

Adoption of EBT: Banks have been advised to implement EBT by leveraging ICT-based
banking through BCs to transfer social benefits electronically to the bank account of the
beneficiary and deliver government benefits to the doorstep of the beneficiary, thus reducing
dependence on cash and lowering transaction costs.

GCC: With a view to helping the poor and the disadvantaged with access to easy credit, banks
have been asked to consider introduction of a general purpose credit card facility up to `25,000 at
their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit
to banks’ customers based on the assessment of cash flow without insistence on security, purpose
or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw
up to the limit sanctioned.

Simplified branch authorization: To address the issue of uneven spread of bank branches, in
December 2009, domestic scheduled commercial banks were permitted to freely open branches
in tier III to tier VI centres with a population of less than 50,000 under general permission,
subject to reporting. In the north-eastern states and Sikkim, domestic scheduled commercial
banks can now open branches in rural,semi-urban and urban centres without the need to take
permission from RBI in each case, subject to reporting.

Opening of branches in unbanked rural centres: To further step up the opening of branches in
rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the
opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly,
banks have been mandated in the April monetary policy statement to allocate at least 25% of the
total number of branches to be opened during a year to unbanked rural centres.

Financial Inclusion Index

On June 25, 2013, CRISIL, India's leading credit rating and research company launched an index
to measure the status of financial inclusion in India. The index- Inclusix- along with a report, [12]
was released by the Finance Minister of India, P. Chidambaram[13] at a widely covered program
at New Delhi. CRISIL Inclusix is a one-of-its-kind tool to measure the extent of inclusion in
India, right down to each of the 632 districts. CRISIL Inclusix is a relative index on a scale of 0
to 100, and combines three critical parameters of basic banking services — branch penetration,
deposit penetration, and credit penetration —into one metric. The report highlights many hitherto
unknown facets of inclusion in India. It contains the first regional, state-wise, and district-wise
assessments of financial inclusion ever published, and the first analysis of trends in inclusion
over a three-year timeframe. Some key conclusions from the study are:[14]
  The all-India CRISIL Inclusix score of 40.1 is low, though there are clear signs of
progress – this score has improved from 35.4 in 2009.
 Deposit penetration is the key driver of financial inclusion – the number of savings
accounts (624 million), is almost four times the number of loan accounts (160 million).
 618 out of 632 districts reported an improvement in their scores during 2009-2011.
 The top three states and Union Territories are Puducherry, Chandigarh, and Kerala; the
top three districts are Pathanamthitta (Kerala), Karaikal (Puducherry), and
Thiruvananthapuram (Kerala).

Tracking Financial Inclusion through Budget Analysis

While financial inclusion is an important issue, it may also be interesting to assess whether
such inclusion as earmarked in policies are actually reaching the common beneficiaries.
Since the 1990s, there has been serious efforts both in the government agencies and in the
civil society to monitor the fund flow process and to track the outcome of public
expenditure through budget tracking. Organisations like International Budget Partnership
(IBP) are undertaking global surveys in more than 100 countries to study the openness
(transparency) in budget making process. There are various tools used by different civil
society groups to track public expenditure. Such tools may include performance
monitoring of public services, social audit and public accountability surveys. In India, the
institutionalisation of Right to information (RTI) has been a supporting tool for activists
and citizen groups for budget tracking and advocacy for social inclusion.

Pradhan Mantri Jan Dhan Yojana

Indian Prime Minister Narendra Modi announced this scheme for comprehensive financial
inclusion on his first Independence Day speech on 15 August 2014. The scheme was
formally launched on 28 August 2014[18] with a target to provide 'universal access to
banking facilities' starting with Basic Banking Accounts with overdraft facility of Rs.5000
after six months and RuPay Debit card with inbuilt accident insurance cover of Rs. 1 lakh
and RuPay Kisan Card & in next phase, micro insurance & pension etc. will also be added.
[18]
In a run up to the formal launch of this scheme, the Prime Minister personally mailed to
CEOs of all banks to gear up for the gigantic task of enrolling over 7.5 crore (75 million)
households and to open their accounts.[19] In this email he categorically declared that a
bank account for each household was a "national priority".

On the inauguration day of the scheme, 1.5 Crore (15 million) bank accounts were opened.[20]

Why Financial Inclusion in India is Important ?The policy makers have been focusing on financial inclusion of
Indian rural and semi-rural areas primarily for three most important pressing needs:

1. Creating a platform for inculcating the habit to save money – The lower income category has been living under
the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes
 them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit
to save. Capital formation in the country is also expected to be boosted once financial inclusion measures
materialize, as people move away from traditional modes of parking their savings in land, buildings, bullion, etc.

2. Providing formal credit avenues – So far the unbanked population has been vulnerably dependent of informal
channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal
banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the
countryside. A classic example of what easy and affordable availability of credit can do for the poor is the micro-
finance sector.

3. Plug gaps and leaks in public subsidies and welfare programmes – A considerable sum of money that is meant
for the poorest of poor does not actually reach them. While this money meanders through large system of
government bureaucracy much of it is widely believed to leak and is unable to reach the intended parties.
Government is therefore, pushing for direct cash transfers to beneficiaries through their bank accounts rather than
subsidizing products and making cash payments. This laudable effort is expected to reduce government’s subsidy
bill (as it shall save that part of the subsidy that is leaked) and provide relief only to the real beneficiaries. All these
efforts require an efficient and affordable banking system that can reach out to all. Therefore, there has been a push
for financial inclusion.

What are the steps taken by RBI to support financial inclusion?

RBI set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the
commission were incorporated into the mid-term review of the policy (2005–06) and urged banks to review their
existing practices to align them with the objective of financial inclusion. RBI also exhorted the banks and stressed
the need to make available a basic banking 'no frills' account either with 'NIL' or very minimum balances as well as
charges that would make such accounts accessible to vast sections of the populationOf the many schemes and
programmes pushed forward by RBI the following need special mention.

A. Initiation of no-frills account – These accounts provide basic facilities of deposit and withdrawal to
accountholders makes banking affordable by cutting down on extra frills that are no use for the lower section of the
society. These accounts are expected to provide a low-cost mode to access bank accounts. RBI also eased KYC
(Know Your customer) norms for opening of such accounts.

B. Banking service reaches homes through business correspondents – The banking systems have started to adopt
the business correspondent mechanism to facilitate banking services in those areas where banks are unable to open
brick and mortar branches for cost considerations. Business Correspondents provide affordability and easy
accessibility to this unbanked population. Armed with suitable technology, the business correspondents help in
taking the banks to the doorsteps of rural households

C EBT – Electronic Benefits Transfer – To plug the leakages that are present in transfer of payments through the
various levels of bureaucracy, government has begun the procedure of transferring payment directly to accounts of
the beneficiaries. This “human-less” transfer of payment is expected to provide better benefits and relief to the
beneficiaries while reducing government’s cost of transfer and monitoring. Once the benefits starts to accrue to the
masses, those who remain unbanked shall start looking to enter the formal financial sector.

Why is financial inclusion needed in India? - (A Graphical Representation )

 July 20, 2016

Centre injects money into public sector banks

1. News: In a bid to boost credit growth in the economy, the Centre announced a sum of Rs
22,915 crore for recapitalisation of 13 public sector banks
2. Union Budget: Proposed allocation of Rs 25,000 crore infusion in FY 2017, in line with
the Indradhanush
3. The remaining amount will be released later according to performance which would
depend on efficiency improvements, growth in both credit and deposits, and reduction in
the cost of operations
4. The banks’ lending capacities are restricted by poor asset quality and weak
capitalisation
5. The infusions required in the current year were calculated from the Compound Annual
Growth Rate (CAGR) of credit growth for the last 5 years and the banks’ projections of
credit growth

The Hindu

June 14, 2016

State-owned banks widen reach quicker than private lenders

1. Context: Recent data released by the Reserve Bank of India comparing private and
public sector banks
2. Public sector banks have increased their presence across the country in terms of ATMs
and points of sale devices, far faster than private sector banks have
3. ATMs & POS: There were 142,500 PSB ATMs as of March 2016, which amounts to
72% of the total number of ATMs in the country
4. The issuance of credit cards and the share in credit card transactions are two areas where
the private sector outshines the public sector
5. There are 27 public sector banks and 19 private sector banks in operation currently

The Hindu
April 26, 2016

RBI to ease registration process for NBFCs

1. Context: RBI to simplify the registration process for NBFCs

2. The new application forms will be simpler and the number of documents required to be
submitted will be reduced
3. The entire process could be made online for ease, speed and transparency
4. NBFC sector cannot be on a par with the banking sector and the step is meant to
‘harmonise, not equalise’
5. Why? Totally exempting small NBFCs from regulations may not be feasible from the
customer service point of view
Disposal of non-banking assets.—Notwithstanding anything contained in section 6, no banking company
shall hold any immovable property howsoever acquired, except such as is required for its own use, for
any period exceeding seven years from the acquisition thereof or from the commencement of this Act,
whichever is later or any extension of such period as in this section provided, and such property shall be
disposed of within such period or extended period, as the case may be: Provided that the banking
company may, within the period of seven years as aforesaid deal or trade in any such property for the
purpose of facilitating the disposal thereof: Provided further that the Reserve Bank may in any particular
case extend the aforesaid period of seven years by such period not exceeding five years where it is
satisfied that such extension would be in the interests of the depositors of the banking company.While
acquiring a non banking asset towards satisfaction of claims of NPA account , whether the interest
receivable upto date can be capitalized and recovered out of acquired assets value subject to obtaining
Recovery Certificate( RC), Confirmation of DDR ( Registrar) and consent of borrower .
Approved securities:state bonds which can be held by banks to form part of their reserves

Guarantees
Guarantees are given as security to support the performance of a customer to third parties. The
main types of guarantees provided are:

Financial guarantees given to banks and financial institutions on behalf of customers to secure
loans, overdrafts, and other banking facilities; and

Other guarantees are contracts that have similar factures to the financial guarantee contracts but
fail to meet the strict definition of a financial guarantee contract under IFRS. These include
mainly performance and tender guarantees.

Documentary Credits
Documentary credits commit the Group to make payments to third parties, on production of
documents, which are usually reimbursed immediately by customers.

Loan Commitments:Loan commitments are defined amounts (unutilised credit lines or undrawn
portions of credit lines) against which clients can borrow money under defined terms and conditions.
Revocable loan commitments are those commitments that can be cancelled at any time (without giving
a reason) subject to notice requirements according to their general terms and conditions. Irrevocable
loan commitments result from arrangements where the Group has no right to withdraw the loan
commitment once communicated to the beneficiary.

bank endorsement

6. An individual will authorize payment to an unknown party. The most common is writing a
check endorsed with the word "cash" on it.
7. A bank endorsement is an assurance that it will stand behind a check or other negotiable
instrument that one of its customers creates.
8. How it works (Example):
9.
Let's say you want to buy 1,000 cars from a Canadian wholesaler on the Internet. You are in the
United States. You agree on a price and plan to pay via check. The seller wants you to get a bank
endorsement, which assures him that he will get his money even if you don' t have enough in your
checking account.

Bankers' acceptances and time drafts are two types of bank endorsements. Similar to bank
guarantees, the bank issuing John Doe's check declares (for a fee) that the payment will be delivered
in accordance with the terms and conditions agreed upon by the seller.

In some cases, the receiving bank will place a stamp on the back of the check, indicating that it has
received and processed the payment. This creates a paper trail.

Why it Matters:

Bank endorsements are common in international trade when the two parties don't know each other
well. They ensure that a seller will be paid in accordance with an agreement, which can help buyers
stand out from other buyers and act quickly.

Guarantees on Behalf of Share and Stock Brokers/ Commodity Brokers

Banks can issue BGs on behalf of share and stock brokers in favour of StockExchanges towards
security deposit, margin requirements as per Stock ExchangeRegulations.
•BGs can also be issued on behalf of commodity brokers in favour of national levelcommodity
exchanges viz. National Commodity & Derivatives Exchange
(NCDEX), Multi Commodity Exchange of India Limited
(MCX) and NationalMulti-Commodity Exchange of India Limited (NMCEIL), in lieu of
marginrequirements as per the Commodity Exchange Regulations.
•Banks are required to obtain a minimum margin of 50% (out of which cashmargin to be 25%) while
issuing such guarantees in both the above cases and toobserve usual and necessary safeguards
including the exposure ceilings.
Acceptances and EndorsementsThis item appears as a contra item on both the sides of the
balance sheet. It represents the liability of the bank in respect of bills accepted or endorsed on
behalf of its customers and also letters of credit issued and guarantees given on their
behalf.For rendering this service, a commission is charged and the customers to whom this
service is extended are liable to the bank for full payment of the bills. Hence, this item is
shown on both sides of the balance sheet.
National Electronic Funds Transfer (NEFT) is one of the most prominent electronic funds
transfer system of India. Started in November 2005,[1] NEFT is a facility provided to bank
customers to enable them to transfer funds easily and securely on a one-to-one basis. It is done
via electronic messages. This is not on real-time basis like RTGS (Real Time Gross Settlement).
This is a "net" transfer facility which is executed in hourly batches resulting in a time lag. NEFT
facilities are available in 30,000 bank branches all over the country and work on a batch mode.

RBI explains this scheme as "National Electronic Funds Transfer (NEFT) is a nation-wide
payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and
corporates can electronically transfer funds from any bank branch to any individual, firm or
corporate having an account with any other bank branch in the country participating in the
Scheme."NEFT has gained popularity due to it saving on time and the ease with which the
transactions can be concluded, This reflects from the fact that 42% of all electronic transactions
in the 2008 financial year were NEFT transactions.

Detailed process NEFT is as follows[2][3]

Step-1 : Customer fills an application form providing details of the beneficiary (like name, bank,
branch name, IFSC, account type and account number) and the amount to be remitted. The
remitter authorizes his/her bank branch to debit his account and remit the specified amount to the
beneficiary. This facility is also available through online banking and some banks offer the
NEFT facility even through the ATMs.

Step-2 : The originating bank branch prepares a message and sends the message to its pooling
centre (also called the NEFT Service Centre).

Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated by
National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available
batch.

Step-4 : The Clearing Centre sorts the funds transfer transactions destination bank-wise and
prepares accounting entries to receive funds from the originating banks (debit) and give the funds
to the destination banks(credit). Thereafter, bank-wise remittance messages are forwarded to the
destination banks through their pooling centre (NEFT Service Centre).

Step-5 : The destination banks receive the inward remittance messages from the Clearing Centre
and pass on the credit to the beneficiary customers’ accounts.

Service Charges for NEFT Transactions

The structure of charges that can be

a) Inward transactions at destination bank branches (for credit to beneficiary accounts):

 Free, no charges to be collected from beneficiaries

b) Outward transactions at originating bank branches (charges for the remitter):

 For transactions up to ₹10,000 (not exceeding) : ₹2.50 (+ Service Tax)

 For transactions above ₹10,000 up to ₹1 lakh (not exceeding) : ₹5 (+ Service Tax)
 For transactions above ₹1 lakh and up to ₹2 lakhs (not exceeding) : ₹15 (+ Service Tax)
 For transactions above ₹2 lakhs : ₹25 (+ Service Tax)

Settlement TimingsCurrently, NEFT operates in hourly batches - there are twelve settlements
from 8:00 AM to 7:00 PM on week days and six settlements from 8 am to 1 pm on Saturdays.
[2]
Any transaction initiated after a designated settlement time would have to wait till the next
designated settlement time. As of 2013, all transactions initiated before 5 PM will be settled on
same day. No transactions are settled on weekly holidays and public holidays.Transaction
Timings for NEFT, Monday to Saturday (Except 2nd and 4th Saturday) is 8:00 AM to 6:30 PM.

2016 NEFT HolidaysRTGS / NEFT is not allowed on Sundays, second and fourth Saturday of
the month and the declared bank holidays for the calendar year 2016

What is NEFT?National Electronic Funds Transfer (NEFT) is a nation-wide payment system

facilitating one-to-one funds transfer. Under this Scheme, individuals can electronically transfer
funds from any bank branch to any individual having an account with any other bank branch in
the country participating in the Scheme Use NEFT service to transfer funds anywhere using the
following modes:

 Internet Banking
 iMobile
 m.dot
 Pockets
 icicibankpay
 What are the transaction or service charges for NEFT transactions?

Transaction Charges NEFT

Amounts upto Rs 10,000 Rs 2.50 + Service Tax
Amounts above Rs 10,000 and upto Rs 1 lakh Rs 5 + Service Tax
Amounts above Rs 1 lakh and upto Rs 2 lakh Rs 15 + Service Tax
Amounts above Rs 2 lakh and upto Rs 5 lakh Rs 25 + Service Tax
Amounts above Rs 5 lakh and upto Rs 10 lakh Rs 25 + Service Tax

NEFT Transaction timings ?

Transaction Timings NEFT

Monday to Saturday
(Except 2nd and 4th 8:00 AM to 6:30 PM
Saturday)
NPAs do not just reflect badly in a bank’s account books, they adversely impact the national
economy. Following are some of the repercussions of NPAs:

 Depositors do not get rightful returns and many times may lose uninsured deposits. Banks
may begin charging higher interest rates on some products to compensate Non-
performing loan losses
 Bank shareholders are adversely affected
 Bad loans imply redirecting of funds from good projects to bad ones. Hence, the
economy suffers due to loss of good projects and failure of bad investments.
 When bank do not get loan repayment or interest payments, liquidity problems may
ensue.

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking
system, which was operating in a closed economy, now faces the challenges of an
open economy.

 On one hand a protected environment ensured that banks never needed to develop
sophisticated treasury operations and Asset Liability Management skills.
 On the other hand a combination of directed lending and social banking relegated
profitability and competitiveness to the background. The net result was
unsustainable NPAs and consequently a higher effective cost of banking services.
 One of the main causes of NPAs into banking sector is the directed loans system
under which commercial banks are required a prescribed percentage of their credit
(40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up
in 'hard-core' doubtful and loss assets, accumulated over the years.
 The problem India Faces is not lack of strict prudential norms but
 i. The legal impediments and time consuming nature of asset disposal proposal.
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.


Non Performing Assets (NPA) April 28, 201513 Comments The assets of the banks which don’t
perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans.
Bank’s assets are the loans and advances given to customers. If customers don’t pay either
interest or part of principal or both, the loan turns into bad loan. According to RBI, terms loans
on which interest or installment of principal remain overdue for a period of more than 90 days
from the end of a particular quarter is called a Non-performing Asset. However, in terms of
Agriculture / Farm Loans; the NPA is defined as under: For short duration crop agriculture loans
such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons ,
it would be termed as a NPA. For Long Duration Crops, the above would be 1 Crop season from
the due date. Contents [hide] Provisioning Coverage Ratio Standard Asset Classification of the
NPAs Example of NPA Implications of the NPAs on Banks Gross NPA and Net NPA NPA and
SARFAESI Act Reselling of NPAs Provisioning Coverage Ratio For every loan given out, the
banks to keep aside some extra funds to cover up losses if something goes wrong with those
loans. This is called provisioning. Provisioning Coverage Ratio (PCR) refers to the funds to be
set aside by the banks as fraction to the loans. Standard Asset If the borrower regularly pays his
dues regularly and on time; bank will call such loan as its “Standard Asset”. As per the norms,
banks have to make a general provision of 0.40% for all loans and advances except that given
towards agriculture and small and medium enterprise (SME) sector. However, if things go wrong
and loans turn into bad loans, the PCR would increase depending up the classification of the
NPA as discussed in next section.

Classification of the NPAs

Banks are required to classify nonperforming assets further into three main categories (Sub-
standard, doubtful and loss) based on the period for which the asset has remained non
performing. This is as per transition of a loan from standard loan to loss asset as follows: If the
borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is
termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal
to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as
follows: 15% of outstanding amount in case of Secured loans 25% of outstanding amount in case
of Unsecured loans If sub-standard asset remains so for a period of 12 more months; it would be
termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to
make provisioning as follows: Up to one year: 25% of outstanding amount in case of Secured
loans; 100% of outstanding amount in case of Unsecured loans 1-3 years: 40% of outstanding
amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans more
than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding amount
in case of Unsecured loans If the loan is not repaid even after it remains sub-standard asset for
more than 3 years, it may be identified as unrecoverable by internal / external audit and it would
be called loss asset. An NPA can declared loss only if it has been identified to be so by internal
or external auditors.

Example of NPA

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010.
But the party does not make a payment. So It will be an Standard Asset from January 1, 2010 till
June 1, 2010 (Due Date) It will be a Special Mention Account From June 2, 2010 till August 29,
2010 (90 days) It will be Sub-standard from August 30, 2010 till August 29, 2011 It will be
doubtful from August 30, 2011 till August 29, 2012 It may remain doubtful Asset for a period of
3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it
will be assigned a loss asset; however, the period may be anything above 3 years. Implications of
the NPAs on Banks The most important implication of the NPA is that a bank can neither credit
the income nor debit to loss, unless either recovered or identified as loss. If a borrower has
multiple accounts, all accounts would be considered NPA if one account becomes NPA

. Gross NPA and Net NPA The NPA may be Gross NPA or Net NPA. In simple words, Gross
NPA is the amount which is outstanding in the books, regardless of any interest recorded and
debited. However, Net NPA is Gross NPA less interest debited to borrowal account and not
recovered or recognized as income. RBI has prescribed a formula for deciding the Gross NPA
and Net NPA. NPA and SARFAESI Act The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to
take legal recourse to recover their dues. When a borrower makes any default in repayment and
his account is classified as NPA; the secured creditor has to issue notice to the borrower giving
him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets
and can also give it on lease or sell it; as per provisions of the SAFAESI Act. Reselling of NPAs
If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset
Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL). These sales
are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for
at least 15 months before it sells to other bank. They purchase such loans on low amounts and try
to recover as much as possible from the defaulters. Their revenue is difference between the
purchased amount and recovered amount.
The classical definition of banking is that acceptance of deposits for the purpose of lending.
Whereas they pay interest at different rates for the deposits they are accepting from the
customers called depositors, they have to collect interest for the advances they lend to the
customers called borrowers. They keep a certain margin between the interest charged and interest
paid. The margin should be in such a way that the banks can afford to pay all expenses in
conducting the banking activities. The balance amount after payment of all expenses and charges
will be the profit for the banks and the profit is shared between the shareholders

In case, the banks are not able to recover the amount lent to their borrowers, the level of profits
come down.

Based on the record of recovery of interest and/or principal and for the purpose of income
recognition, all loan accounts are classified as performing assets or non performing assets. In
classifying the non performing assets, the availability of security or net worth of the
borrower/guarantor is not considered for such classification.

Non performing assets are a drain to the banks. Unless and otherwise proper remedial measures
are taken the quantum of non performing assets cannot be reduced and the bank will incur losses
to a great extent.

Non performing assets impact on the bank’s profitability in several ways as indicated below:

They reduce the net interest income as the interest is not charged to these accounts

All non performing assets need to be prudentially provided for. This will again lead to reduced
profitability

Servicing NPAs becomes costly in terms of time, money and manpower. They reduce employee
productivity and overall profitability

Non performing assets affect recycling of bank credit as lendable resources shrink and adversely
impact profitability. Higher time value of money can be ensured only by faster recycling of
money lent

Non performing assets affect the liquidity position of the bank, create assets and liability
mismatch and force the bank to raise resources at high cost
They affect the service to good customers, as their needs may not be met. This leads to loss of
business and reduction in profit

Banks, which make low profits, have lower capital adequacy ratio and lower the capital
adequacy ratio limits further asset creation. Such banks face difficulties in their growth,
expansion/diversification plans, as they do not have the wherewithal to march boldly on these
fronts. In the absence of vibrant growth and dynamic expansion, the only consequences are
stagnation and negative growth

High non performing assets shadow the image of the banks in both domestic and international
markets. This leads to business contraction and low profitability

NPAs leads to adverse selection because in their efforts to increased the income from lending,
such banks lend at higher interest rates to low rated borrowers

High non performing assets, low profitability, riskier business and high NPAs work in a vicious
cirfcle against the bank and may jeopardize the very survival of the bank

Commercial banks should envisage the importance of recovery of loans among the employees.

Whether an individual who lends an amount of Rs. 1.00 lakhs to another individual will keep
quit, in case the other person is not coming forward to pay the dues?

The same logic applies for banks also. Banks should strengthen their workforce, they should
form exclusive recovery force and by announcing proper rewards, the recovery performance can
be improved thereby improving the image of the bank also

CORRECTION ACTION PLAN (CAP)Correction action plan introduces for not

reconstruction or recovery, but to arrive at an early and feasible solution to preserve the
economic value of underlying asset as
well as lenders loan. Options under corrective action plan include:-

 Rectification:- obtain special commitment from

borrower to regularize the account so that account comes out of SME status or
does not slip into the NPA category. Commitment should be indentifying new cash flow
within time period, bank may provide additional finance to the borrower
 Restructuring:- restructuring of loan done only when
borrower is not willful defaulter and borrower is in prima facie. At this
stage, commitment from promoter for extending their personal guarantees along
with their net worth statement support by copies of legal titles to assets may
be obtained along with declaration that they would not undertake any traction
that would alienate asset without the permission of the joint lender forum.
 Recovery: - this option use only when first two option
not feasible. in this joint lenders forum use best recovery process to recover
loan
  NPA (Non-performing Assets) - All those assets which don't generate regular income are
known as NPA.

Causes of NPAs

 Default - One of the main reason behind NPA is default by borrowers.


 Economic conditions - Economic condition of a region effected by natural calamities or
any other reason may cause NPA.

 No more proper risk management - Speculation is one of the major reason reason
behind default. Sometimes banks provide loans to borrowers with bad credit history.
There is high probability of default in these cases.

 Mis-management - Often ill-minded borrowers bribe bank officials to get loans with an
intention of default.

 Diversion of funds - Many times borrowers divert the borrowed funds to purposes other
than mentioned in loan documents. It is very hard to recover from these kind of
borrowers.

 In case you have any query or you want to add anything then comment below. If I find
any comment is adding value to the post then I will add that comment to the post.

NPA arises due to a number of factors or causes like:-

 Speculation : Investing in high risk assets to earn high income.

 Default : Willful default by the borrowers.
 Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances
without security or references, etc.
 Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of
business.
 Internal reasons : Many internal reasons like inefficient management, inappropriate technology,
labour problems, marketing failure, etc. resulting in poor performance of the companies.
 External reasons : External reasons like a recession in the economy, infrastructural problems,
price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by
government, natural calamities, etc.
 Example of NPA

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010.
But the party does not make a payment. So It will be an Standard Asset from January 1, 2010 till
June 1, 2010 (Due Date) It will be a Special Mention Account From June 2, 2010 till August 29,
2010 (90 days) It will be Sub-standard from August 30, 2010 till August 29, 2011 It will be
doubtful from August 30, 2011 till August 29, 2012 It may remain doubtful Asset for a period of
3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it
will be assigned a loss asset; however, the period may be anything above 3 years.
  Implications of the NPAs on Banks

The most important implication of the NPA is that a bank can neither credit the income nor debit
to loss, unless either recovered or identified as loss. If a borrower has multiple accounts, all
accounts would be considered NPA if one account becomes NPA. Gross NPA and Net NPA The
NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the amount which is
outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is
Gross NPA less interest debited to borrowal account and not recovered or recognized as income.
RBI has prescribed a formula for deciding the Gross NPA and Net NPA. NPA and SARFAESI
Act The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their
dues. When a borrower makes any default in repayment and his account is classified as NPA; the
secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the
dues are not paid, the bank can take possession of the assets and can also give it on lease or sell
it; as per provisions of the SAFAESI Act. Reselling of NPAs If a bad loan remains NPA for at
least two years, the bank can also resale the same to the Asset Reconstruction Companies such as
Asset Reconstruction Company (India) (ARCIL). These sales are only on Cash Basis and the
purchasing bank/ company would have to keep the accounts for at least 15 months before it sells
to other bank. They purchase such loans on low amounts and try to recover as much as possible
from the defaulters. Their revenue is difference between the purchased amount and recovered
amount.

Effects of NPA

 The day to day operating the account becomes difficult as Bank starts adjusting money
deposited against their dues.
 The reputation of the borrower in the market is adversely affected.
 The Bankers attitude towards the borrower becomes more arrogant, authoritative and
threatening, instead of extending helping hand to them to get out of the situation.
 This leads to demoralization of the borrower who has been working with the Bank for number of
years and as customer has contributed in the profit of the Bank.
 The principle of customer care is neglected and customer torture begins. This brings the
borrower in a helpless situation and at the mercy of the Bank.

Recovery Steps:
Bank has to identify as to how each loan or advance has become NPA and it has to be tackled as
a strategy.
i. If further assistance will help unit to generate income, then by taking additional collateral
security it has to be recovered.
ii. By asking the borrower to sell surplus assets NPA can be recovered
iii. Court or legal proceedings are cumbersome and that have to be resorted only as a last resort.
iv. By compromise, negotiated deal by reducing interest or by waiving penalty so for levied in
the account of borrower
v. By inducting additional partners, promoters additional capital, management can be brought
 in which can turn the unit to be viable.
vi. By converting a portion of Advance of funded term loan levy lower rate to enable the unit to
generate income and then to recover
vii. By opening back to back LC encourage unit to do some trading activity which will not need
additional funds, but the expertise of the unit can be utilised to generate additional profit and
then recover NPA.
viiii. Bank can allow operations in the account when the unit is in bad shape, but retain a small
portion to enable it to service the interest and thus unit will not be classified as NPA.
ix. By declaring unit as wilful defaulter take action, publish in newspaper and coerce the unit to
repay.
x. SARFESI proceedings

Recovery of Non-Performing Advances is a focussed area for different Banks as they donot yield any
return.
Apart from regular notice, legal notices are served besides filing of money and mortgage suits in civil and
in DRT courts for realisation of dues if loan amount exceeds Rs10lacs.
Further if mortgaged property is available notice before 60 days is issued under SERFAESI Act. Then on
an appointed day public auction of property is made to realise the loan dues.
In case of agriculture, retail and other small loans assistance of District Legal Aid Authority is sought
through Lok Adalat to realise the dues.

Ways:
1.Saleofassetsfunded
2.Settlementwithcustomer
3. Legal action against the customer and get his assets attached.

TOOLS FOR RECOVERING NPA

For recovery of NPA there are different tools are available. The important purpose of these tools
are to recover the loan amount from borrower. These tools can beuse according to Loan
amount.Following are the different recovery tools.

 LOK ADALATS
 DEBT RECOVERY TRIBUNALS (DRT)
 SARFAESI ACT, 2002
 ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL)
 CORPORATE DEBT RESTRUCTURING (CDR)
 Asset management company (AMC)

REFORMS
the government is mulling Indradhanush-II, expanding the scope of banking reforms to get rid of
bad loans, manage risks better, bring millions of un-banked and under-banked people into the
fold as well as create a holding company for the public sector banks (PSBs).
Indradhanush - a seven-pronged strategy to revamp functioning of PSBs through professional
appointments, creation of Banks Board Bureau (BBB), re-capitalisation, de-stressing,
empowerment, accountability, and governance reforms - was launched by Prime Minister
Narendra Modi-led government in August last year.

RAINBOW OF HOPE FOR INDIAN BANKING

FOCUS AREAS UNDER INDRADHANUSH-II

 Moving from recognising NPAs to setting up resolution mechanisms

 Risk analysis strategies and risk management practices
 Financial inclusion and expansion of digital banking
 Credit growth and use of modern technology
 Further push to restructurings, as well as M&As
 Creation of Bank Investment Company (BIC), a holding company for PSBs

Amid rising stress levels among the PSBs, some of the ideas for Indradhanush-II were discussed
during the second edition of Gyan Sangam, a bankers' retreat held in March.
"There is a thinking within the government that we should have an Indradhanush-II. In all
fairness, we have done appointments, formed a Banks Board Bureau, gone ahead with
recapitalisation and initiated consolidation process with the State Bank of India merger plan.
There is scope for more," said a senior finance ministry official.
Indradhanush-II is likely to chart out the process for resolution of non-performing assets (NPAs).
"The focus will now shift towards the resolution process from just recognising the NPAs. A
framework is being worked upon on how resolutions could move expeditiously," the official
added.
State-run lenders posted losses of over Rs 20,000 crore in the fourth quarter of 2015-16, only on
account of cleaning-up effort launched by the Reserve Bank of India (RBI). As a part of asset
quality review, the RBI had directed banks to classify several accounts as NPAs in the third and
fourth quarters of FY16.
The proposed resolution process for banks is also being discussed by the department of economic
affairs. "Resolution process is still work in progress. This is one area which will be central to the
next stage of reforms," said another top official.
Apart from resolution, risk management, financial inclusion, expansion of digital banking, credit
growth and use of modern technology are among the areas that are likely find a mention in
Indradhanush-II.
"The whole idea is to go after the root cause of stress and address it. We will focus on risk
analysis strategies and risk management practices," said the official. It is also likely to give a
push to restructuring as well as mergers and acquisitions

WHAT INDRADHANUSH HAS ACHIEVED SO FAR

Appointments
  Managing directors and non-executive chairmen of five PSBs appointed

Banks Board Bureau

 BBB begins functioning from April 1, with ex-CAG Vinod Rai as chairman
 To come up with mechanism for resolution of NPAs

Capitalisation

 Rs 25,000 crore allocated to PSBs in FY16

 Additional Rs 25,000 crore to be infused in FY17, followed by Rs 10,000 crore each in
FY18 and FY19
 FM Arun Jaitley has promised additional capital allocation, if needed

De-stressing PSBs

 Imposed anti-dumping duty and minimum import price on steel

 Launched UDAY to bail out power discoms
 Action on textiles and further action on steel being planned

Consolidation

 SBI has proposed to merge with its five associate banks and the Bharatiya Mahila Bank

Some elements of the existing plan are likely to be reviewed. "None of these measures can be
implemented within a fixed time period. It is important to ensure that the decision is right from
the viewpoint of the prevalent market conditions. They need to be reviewed from time to time,"
added the official.Bad loans declared by PSBs rose from Rs 2.67 lakh crore in March 2015 to Rs
3.60 lakh crore at the end of December 2015. The gross NPAs increased from 5.43 per cent of
advances in March 2015 to 7.3 per cent of advances in December.The consolidation process has
already begun with the SBI proposing to merge with its five associate banks as well as the
newly-created Bharatiya Mahila Bank.After the formation of BBB, led by former comptroller
and auditor general (CAG) Vinod Rai in April, a legislation to create a holding company for
PSBs is also in the making. The holding company, to be named as Bank Investment Company
(BIC), will free the management of banks from direct government interference. Rai recently said
the proposal for BIC will be discussed after consolidation and appointments are taken care of.
Many see Indradhanush as most comprehensive reform of PSBs undertaken since nationalisation
of banks in 1970.Total stressed assets of Indian banking system stand at Rs 8 lakh crore. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
(also known as Sarfaesi Act) would be amended to enable banks to recover NPAs speedily, with
fewer legal hurdles.The Debt Recovery Tribunal (DRT) will also be streamlined to shift its
processes online and ensure faster processing of cases. As part of recapitalisation drive, the
government has promised to infuse Rs 70,000 crore in PSBs in a four-year period. PSBs received
Rs 25,000 crore last year and will get an equivalent amount this year, followed by Rs 10,000
crore each in FY18 and FY19.
What is 'Retail Banking'Retail banking, also known as consumer banking, is the typical mass-
market banking in which individual customers use local branches of larger commercial banks.
Services offered include savings and checking accounts, mortgages, personal loans, debit/credit
cards and certificates of deposit (CDs). In retail banking, the focus is on the individual consumer.

Retail banking aims to be the one-stop shop for as many financial services as possible on behalf
of individual retail clients. Consumers expect a range of basic services from retail banks, such as
checking accounts, savings accounts, personal loans, lines of credit, mortgages, debit cards,
credit cards and CDs. Most consumers utilize local branch banking services, which provide
onsite customer service for all of a retail customer's banking needs. Through local branch
locations, financial representatives provide customer service and financial advice. Financial
representatives are also the lead contact for underwriting applications related to credit-approved
products.

Expanded Services in Retail BankingBanks are adding to their product offerings to provide a
greater range of services for their retail clients. In addition to basic retail banking accounts and
customer service from local branch financial representatives, banks are also adding teams of
financial advisors with broadened product offerings, with investment services such as wealth
management, brokerage accounts, private banking and retirement planning. Some of these
ancillary services are also offered through outsourced third-party affiliations. All of the expanded
offerings allow for increased convenience through greater connectivity of accounts, which helps
customers to access funds and make personal transactions more quickly and easily.

Refers to the division of a bank that deals directly with retail customers. Also known as
consumer banking or personal banking, retail banking is the visible face of banking to the
general public, with bank branches located in abundance in most major cities. Banks that focus
purely on retail clientele are relatively few, and most retail banking is conducted by separate
divisions of banks, large and small. Customer deposits garnered by retail banking represent an
extremely important source of funding for most banks.

Products and Services – Retail Banking

Retail banking encompasses a wide variety of products and services, including:

 Checking and savings accounts – customers are generally charged a monthly fee for
checking accounts; savings accounts offer slightly higher interest rates than checking
accounts but generally cannot have checks written on them.
 Certificates of Deposit and Guaranteed Investment Certificates (in Canada) – these are
the most popular investment products with conservative investors, and an important
funding source for banks since the funds in these products are available to them for
defined periods of time.
 Mortgages on residential and investment properties – because of their size, mortgages
account for both a substantial part of retail banking profits, as well as the biggest chunk
of a bank’s exposure to its retail client base.
  Automobile financing – banks offer loans for new and used vehicles, as well as
refinancing for existing car loans.
 Credit cards – the high interest rates charged on most credit cards makes this a lucrative
source of interest income and fees for banks.
 Lines of credit and personal credit products – Home equity lines of credit (HELOC) have
diminished significantly in their importance as a profit center for banks after the housing
collapse in the U.S. and subsequent tightening of mortgage lending standards.
 Foreign currency and remittance services – the increase in cross-border banking
transactions by retail clients, and the higher spreads on currencies paid by them, makes
these services a profitable offering for retail banking.
 Retail banking clients may also be offered the following services, generally through
another division or affiliate of the bank:
 Stock brokerage (discount and full-service),Insurance,Wealth management,Private
banking

Retail banking encompasses the services offered to consumers by commercial banks. The term
"retail" refers to the almost storefront-shopping nature of commercial banking services.Most
commercial banks have extensive retail banking services and products to reach a wide consumer
base. Here's a brief story about Bob's day at his bank XYZ. He arrives at the bank one day to
deposit a $2000 paycheck into his account. He decides to deposit $1000 of the paycheck into his
existing checking account. The other $1000 he decides to use to open a savings account. Bob sits
with a bank representative who explains the various savings account options and helps him with
opening an account once he's made a decision. Additionally, the account representative informs
Bob of retirement plans the bank offers as well as educational savings plans for his children.
Before he leaves, Bob also takes information on auto loans offered by the bank since he is
considering purchasing a new car. While at the bank, Bob was able, in one place, to deposit
money, open a savings account and find information relating to banking products he may need in
the future.

Retail banking is a framework that allows commercial banks to offer banking products and
services in one place at virtually any of their branch locations. The retail banking aspect turns
commercial banks into a kind of "store" (or retailer) where clients are able to purchase multiple
banking products.

SCOPE FOR RETAIL BANKING IN INDIA - October 4th, 2010

o All round increase in economic activity

o Increase in the purchasing power. The rural areas have the large purchasing power at their
disposal and this is an opportunity to market Retail Banking.
o India has 200 million households and 400 million middleclass population more than 90% of
the savings come from the house hold sector. Falling interest rates have resulted in a shift. “Now
People Want To Save Less And Spend More.”
o Nuclear family concept is gaining much importance which may lead to large savings, large
number of banking services to be provided are day-by-day increasing.
o Tax benefits are available for example in case of housing loans the borrower can avail tax
benefits for the loan repayment and the interest charged for the loan

CREDIT WORTHINESS

Before banks extend credit, they verify the prospective borrower's credit history and ability to
repay, among other things.

Require a credit application. Every business requesting credit should complete a credit
application that includes basic information like address, contact information and tax ID number,
as well as references from other businesses that have extended credit to them. Be sure to check
the applications, too, Coté says. Too many small companies collect the data and then fail to
verify it, he says.

Check publicly available information. The company's social media streams, the news release
section on its website and information available through simple search engine exploration can
help you determine whether the company is having problems that may affect its ability to pay.
Publicly traded companies also must regularly file fact-filled reports about the state of the
business with the Securities and Exchange Commission. These are usually available on the
company's website or through sec.gov, using the site's EDGAR service.

Use credit evaluation tools. Business credit evaluation tools provide different information at
varying costs..

Gathering information about customers' cash flow isn't just something you do at the outset of a
relationship, Coté says. Watching out for problems that could affect your customers' ability to
pay you can help you avoid getting burned.

Credit appraisal is the step which decides everything. Credit Appraisal is the process by which a
lender appraises the creditworthiness of the prospective borrower. It is a very important step in
determining the eligibility of a loan borrower for a loan. Every potential borrower has to go
through the various stages of a credit appraisal process of the bank, which might include an
interview with the bank officials.

However, just like every bank charges different rates for different loans from different
customers, in the same way, each bank has its own set criteria that one must satisfy to qualify as
a certified borrower of money/assets from the bank. All banks have their own rules to decide the
credit worthiness of their borrowers.

As has been mentioned, the eligibility of a borrower for a loan depends on her/his
creditworthiness, however, how is that determined?

Creditworthiness of a customer lies in assessing if that customer is liable to repay the loan
amount in the stipulated time, or not. Here also, every bank has their own methodology to
determine if a borrower is creditworthy or not. It is determined in terms of the norms and
standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower
needs to be very careful in planning his financing modes. However, the borrower alone doesn’t
have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk
exposure. All banks employ their own unique objective, subjective, financial and non-financial
techniques to evaluate the creditworthiness of their customers.

While assessing a customer, the bank needs to know the following information: Incomes of
applicants and co-applicants, age of applicants, educational qualifications, profession,
experience, additional sources of income, past loan record, family history, employer/business,
security of tenure, tax history, assets of applicants and their financing pattern, recurring
liabilities, other present and future liabilities and investments (if any). Out of these, the incomes
of applicants are the most important criteria to understand and calculate the credit worthiness of
the applicants. As stated earlier, the actual norms decided by banks differ greatly. Each has
certain norms within which the customer needs to fit in to be eligible for a loan. Based on these
parameters, the maximum amount of loan that the bank can sanction and the customer is eligible
for is worked out. The broad tools to determine eligibility remain the same for all banks.

I render loan such business loan, agricultural loan, education loan, house loan, automobile loan,
etc. If you are in need of a loan, kindly fill the borrower form below with your valid details and
reply back for more information at [email protected]

Full Name:
Country:
State:
Sex:
Age:
Home Address:
Amount Needed:
Currency Needed:
Loan Duration:
Monthly income:
Phone: Number:
Occupation:
Purpose for Loan:
Website you saw our ads:

credit evaluation and approval is the process a business or an individual must go through to
become eligible for a loan or to pay for goods and services over an extended period. It also refers
to the process businesses or lenders undertake when evaluating a request for credit. Granting
credit approval depends on the willingness of the creditor to lend money in the current economy
and that same lender's assessment of the ability and willingness of the borrower to return the
money or pay for the goods obtained—plus interest—in a timely fashion. Typically, small
businesses must seek credit approval to obtain funds from lenders, investors, and vendors, and
also grant credit approval to their customers.
EVALUATING CREDIT WORTHINESS

In general, the granting of credit depends on the confidence the lender has in the borrower's
credit worthiness. Credit worthiness—which encompasses the borrower's ability and willingness
to pay—is one of many factors defining a lender's credit policies. Creditors and lenders utilize a
number of financial tools to evaluate the credit worthiness of a potential borrower. When both
lender and borrower are businesses, much of the evaluation relies on analyzing the borrower's
balance sheet, cash flow statements, inventory turnover rates, debt structure, management
performance, and market conditions. Creditors favor borrowers who generate net earnings in
excess of debt obligations and any contingencies that may arise. Following are some of the
factors lenders consider when evaluating an individual or business that is seeking credit:

Credit worthiness. A history of trustworthiness, a moral character, and expectations of continued

performance demonstrate a debtor's ability to pay. Creditors give more favorable terms to those
with high credit ratings via lower point structures and interest costs.

Size of debt burden. Creditors seek borrowers whose earning power exceeds the demands of the
payment schedule. The size of the debt is necessarily limited by the available resources.
Creditors prefer to maintain a safe ratio of debt to capital.

Loan size. Creditors prefer large loans because the administrative costs decrease proportionately
to the size of the loan. However, legal and practical limitations recognize the need to spread the
risk either by making a larger number of loans, or by having other lenders participate.
Participating lenders must have adequate resources to entertain large loan applications. In
addition, the borrower must have the capacity to ingest a large sum of money.

Frequency of borrowing. Customers who are frequent borrowers establish a reputation which
directly impacts on their ability to secure debt at advantageous terms.

Length of commitment. Lenders accept additional risk as the time horizon increases. To cover
some of the risk, lenders charge higher interest rates for longer term loans.

Social and community considerations. Lenders may accept an unusual level of risk because of
the social good resulting from the use of the loan. Examples might include banks participating in
low-income housing projects or business incubator programs.

The analysis of the creditworthiness involves preliminary study of the factors and pre-
requisites which can affect adversely the duly repayment of the credit.
The in-depth study of the financial situation of the loan applicant does not harm the
good relations between him and the bank. Establishing firm grounds for the credit rela-tions is
seen as an inherent characteristic element of the credit activity. The study of the financial
situation, which is carried out by qualified and experienced bank experts, may disclose a number
of shortcomings which until that moment have been unknown to the
administrative and managerial staff and in this way the study can turn out to be extremely
useful for the loan applicant too.
If the commercial bank does not have staff that is well qualified and capable of carry-ing out a
comprehensive and systematic economic analysis of the financial stability and creditworthiness
of the potential borrowers, it is advisable that they use the services of a specialized company.
This conclusion stems from the significance of the analysis of the creditworthiness, which is of
utmost importance in taking decisions concerning the credit that has been applied for and is of
great importance to the credit institution.
To that aim we should point out that creditworthiness check is needed with financially
stable loan applicants in order to securethe foundation for outlining measures for pre-
venting unfavourable trends from the moment they appear. Ascertaining the fact that re-payment
of the extended credit is not regular is not sufficient. It is necessary to study carefully its
spending in order to rule out the possibility that the credit resources are not spent as designated
but are channeled into new investments and activities, which the credit bank has not studied and
therefore could be very risky.
In western European bank literature the prerequisites for creditworthiness are divided
into personal and financial.
Personal prerequisites are - the will to work and demonstrate enterprise along with audacity in
decision-making and ability to respond quickly and adequately to the changing economic
environment. The ability to evaluate correctly the business opportunities that arise and the
initiative to choose new goals and ways of achieving them is of great im-portance. To the
personal creditworthiness prerequisites belong: the ability to make an estimate when comparing
incomes and expenditures for the corresponding business activ-ity, the ability of management to
stimulate for higher achievements and to implement ef-fective management, profound
knowledge of the industry and the market and the specific risks involved in this activity,
sufficient experience in solving financial issues and in man-aging credit resources.
The data about the financial and economic situation of the loan applicant are defined
as financial creditworthiness prerequisites.
These include forecasts about expected devel-opment of the industry and the role that the
enterprise plays in it, a study whether the loan can be repaid in accordance with the terms and
using revenue from the activity of the business entity. In order to do this, the credit bank
requiresall documents and data related to the borrower's accountability.
When analyzing creditworthiness, along with the required prerequisites for credit-worthiness it is
necessary to carry out a comprehensive study of the factors that determine
it. It is believed that creditworthiness depends on several major factors: the borrower's efficiency,
his reputation, his capacity for profit making, the value of his assets, the state of the economic
situation, his profitability, etc. In order to conduct a thorough study of the above mentioned, it is
necessary to use a number of indicators for the credit analysis.
Firstly, the commercial bank determines the efficiency of its client. Some legal aspects
of the future deal belong here: studying the Articles of Association of the loan applicant,
his rights over his assets, the advantage over other creditors in the event of bankruptcy
etc. It is necessary that matters related to real efficiency be studied in depth. Any over-
sight hides the risk of incurring losses for the bank.
The client's reputation is of great importance when taking a decision for extending a credit. The
process of establishing reputation is a long one. During the assessment process one can use
information referring to repayment of previous loans. It is widely accepted
that if the client was accurate then there is good reason to expect that he will be accurate in this
deal too.
Profitability is also of importance when assessing creditworthiness. The profits made are the
main source used to repay the extended loan. A borrower's profitability is based on a number of
circumstances – prices of output; production costs; product quality; ad-vertising quality;
location; existing competitive enterprises; availability of raw materials for production, as well as
their price rate; qualification, professional and other qualities of staff; management competence
and others. The assets, owned by the borrower, are an important factor in analyzing
creditworthiness. This property is seen as a possibility tosecure the debt. It is important to know
whether the borrower has state-of-the-art equipment, new machinery and if he is involved in
commercial activity, whether the shops and warehouses are modern, how much stock
they have etc. The availability of enough assets, which can be used to secure the credit, lowers
the credit risk, but banks have to try and find borrowers who can repay the funds they have
received out of the income they get from their running activity.
Creditworthiness is directly influenced by the state of the economic situation. The re-spective
borrower can be perfectly assessed in terms of his reputation, profitability and assets and yet
credit extension might turn out to be inexpedient because of the unfavour-able economic
situation. It is necessary to estimate the position that the loan applicant has in his industry in
terms of competition, technology, production demand etc. Every credit deal has its specific
characteristic features and the importance of the in-dividual factors can be estimated in different
ways. When granting a credit, one should estimate its repayment relying not only on a static
picture of the financial situation of the loan applicant, but also relying on analyses and forecasts
for its development. This can be achieved by observing the profit made over the latest accounting
period and then proceed with preparing forecasts for the financial results through analyzing the
most important visible internal and external influences. This look into the future does not claim
absolute accuracy, but it determines the development trends and this is the basis that the credit
bank needs.
An additional factor playing part in analyzing creditworthiness is the borrower's cur-
rent profitability. His profitability on depositing the credit application is of importance only as a
facilitating starting point for getting the accurate assessment. We have often seen companies with
slender or no profit at all, using the loan they have received, activate and put together their
resources and their production capacity and thus turn into highly efficient economic entities. At
the same time, profitable companies, which receive loans under conditions that they cannot meet,
can worsen their financial situation todegree,endangering the repayment of the loan. Borrower's
liquidity indicators are also considered when taking a decision to extend a loan. The profitable
companies are usually also liquid, but this cannot be taken for granted, especially in a situation
with a high rate of investment.
Valuable information about the financial state of the loan applicants can be achieved through
analyzing the movement in their bank accounts. It is possible to follow the pro-gress of the
economic activity with their help, the changes in the turnover volume, the regularity of payments
to their partners, to financial institutions etc. This is facilitated by making a card-index catalogue
– depositors and borrowers. These catalogues contain in-formation about the assets in the clients'
accounts, about outstanding payments, repayment of past credits, drawn overdrafts etc. This is
information about the bank's real clients, but this catalogue may contain information about
potential clients, clients who have applied for a loan in the past, but their applications have been
rejected, or about clients that the bank has tried to attract as depositors.
STAGES OF THE CREDIT ANALYSIS
The credit analysis can be defined as a process of determining the current creditwor-thiness of
the loan applicant and forecasting the tendencies in its future development.The priority of the
credit analysis is to determine the following:
1. The managerial qualities of the loan applicant;
2. His ability to regularly repay the loan, the interest accrued and charges by using his
current revenue from his business activity at present and in the future;
3. The amount of his capital and the possibility to use it to secure the borrowing of
the commercial bank-creditor in the event of risky situations;
4. The influence of micro and macro environment over the business activity of the company
during the current period and in the future and respectively over his abil-ity to service the bank
loan;
5. Specific risk situations which can affect the borrower's money inflow and conse-
quently result in problems with the repayment of the loan;
6. The correspondence between the extended credit and the real need for it;
7. The correspondence between the term of credit and the circulation speed of the
funds for the raising of which it was extended.
The credit inspector can work out a correctstand during the decision-taking process about the
credit applied for on the basis of a comprehensive credit analysis. The informa-tion gathered
during the credit analysis is ofgreat significance to the accurate structuring of the credit, which
would contribute to lowering the credit risk. This information can also be used if the need arises
for restructuring the extended credit in such a way that it brings higher profits to the borrower
from utilizing the resources and respectively the profitabil-ity of the bank-creditor.
The stages of the credit analysis are as follows:
1. Collecting and analyzing information about the company applying for a loan and
formulating indicators about its financial situation; 2. Collecting and analyzing information about
the credit event; 3. Assessing the credit risk; 4. Checking the reliability of the information,
provided by the company applying for a loan; 5. Preparing an analysis of the credit risk;
6. Taking a decision; 7. Setting the credit terms.
At the first stage of the credit analysis – collecting and analyzing information about the
borrowing company and formulating a number of indicators about its financial situa-tion – the
credit bank requires the borrower's annual financial reports on the current and past
accountingperiods as well as all other accounting documents, which it finds neces-sary.
At the second stage of the credit analysis – collecting and analyzing information about the credit
undertaking – the credit bank accumulates information about the amount and the aim of the
requested loan along with the sources for its repayment. This information plays a vital role in
monitoring whether the amount of the requested loan corresponds to the realfinancial needs of
the loan applicant,if the period corresponds to the circulation speed of the funds for which it was
granted, if the repayment sources are sufficient, andwhat is the state and value of the security, if
such is provided for. At this stage it is very important for the credit bank to collect information
about the behaviour of the company applying for credit during previous credit periods etc.
The analysis of the cash flow is of great importance to the credit risk evaluation. When checking
the reliability of the information provided by the loan applicant, it is of primary importance that
the credit inspector should carry out cross-checks, which will give a clear idea abouthecompany's
equipment, the professional qualification of the administrative and managerial staff, the type and
quality of the production, the quality of service, the general social climate in the company, and
the working conditions. The checks on-site are also very useful at the stage when the control
over the expedient ab-sorption of the extended credit is exercised
ACCOUNTING INFORMATION AND CREDITWORTHINESS ANALYSIS
The minimal required number of accounting reports, pre-sented by the loan applicants is as
follows:
accounting balance sheet; profit and loss account; statement of liability on previous credits and
their servicing; statement of changes in equity; statement of cash flow; audit reports on the
company's financial situation
In the recent few days we have heard a lot that government is been infusing lot of money in the
public sector banks….. To understand why??? We have to first understand that what BASEL
ACCORD or BASEL NORMS is all about.

What is the 'Basel Accord'

The Basel Accords are three sets of banking regulations (Basel I, II and III) set by the Basel
Committee on Bank Supervision (BCBS), which provides recommendations on banking
regulations in regards to capital risk, market risk and operational risk. The purpose of the accords
is to ensure that financial institutions have enough capital on account to meet obligations and
absorb unexpected losses.

Must read BASEL II and BASEL III notes

Basel is a city in Switzerland which is also the headquarters of Bureau of International
Settlement (BIS).
BIS fosters co-operation among central banks with a common goal of financial stability and
common standards of banking regulations.
The Bank for International Settlements (BIS) established on 17 May 1930,is the world's oldest
international financial organization. There are two representative offices in the Hong Kong and
in Mexico City. In total BIS has 60 member countries from all over the world and covers approx
95% of the world GDP.
OBJECTIVE-
The set of agreement by the BCBS(BASEL COMMITTEE ON BANKING SUPERVISION),
which mainly focuses on risks to banks and the financial system are called Basel accord. The
purpose of the accord is to ensure that financial institutions have enough capital on account to
meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking
system.
Up till now BASEL ACCORD has given us three BASEL NORMS which are BASEL 1,2 and 3
but before coming to that we have to understand following terms-

 CAR/CRAR- Capital Adequacy Ratio/ Capital to Risk Weighted Asset Ratio

 RWA- Risk Weighted Assets

Formulae for CAR=Total Capital/RWA*100

Now here, Total Capital= Tier1+ Tier2 capital
Tier 1 - The Tier-I Capital is the core capital…….
 For example - Paid up Capital , Statutory Reserves, Other disclosed free reserves, Capital
Reserves which represent surplus arising out of the sale proceeds of the assets, other intangible
assets are belongs from the category of Tier1 capital.
Tier 2 - Tier-II capital can be said to be subordinate capitals.
For example - Undisclosed reserves, Revaluation Reserves, General Provisions and loss
reserves , Hybrid debt capital instruments such as bonds, Long term unsecured loans, Debt
Capital Instruments etc are belongs from the category of Tier2 capital.RISK WEIGHTED
ASSETS -RWA means assets with different risk profiles; it means that we all know that is much
larger risk in personal loans in comparison to the housing loan, so with different types of loans
the risk percentage on these loans also varies.
BASEL-1
 In 1988,The Basel Committee on Banking Supervision (BCBS) introduced capital measurement
system called Basel capital accord,also called as Basel 1. . It focused almost entirely on credit
risk, It defined capital and structure of risk weights for banks.
 The minimum capital requirement was fixed at 8% of risk weighted assets (RWA).
 India adopted Basel 1 guidelines in 1999.

The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital
adequacy of financial institutions. The capital adequacy risk (the risk that a financial institution
will be hurt by an unexpected loss), categorizes the assets of financial institutions into five risk
categories (0%, 10%, 20%, 50% and 100%). Under Basel I, banks that operate internationally are
required to have a risk weight of 8% or less

Basel I, that is, the 1988 Basel Accord, is primarily focused on credit risk and appropriate risk-
weighting of assets. Assets of banks were classified and grouped in five categories according to
credit risk, carrying risk weights of 0% (for example cash, bullion, home country debt like
Treasuries), 20% (securitisations such as mortgage-backed securities (MBS) with the highest
AAA rating), 50% (municipal revenue bonds, residential mortgages), 100% (for example, most
corporate debt), and some assets given No rating. Banks with an international presence are
required to hold capital equal to 8% of their risk-weighted assets (RWA).

The tier 1 capital ratio = tier 1 capital / all RWA

The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA

Leverage ratio = total capital/average total assets

Banks are also required to report off-balance-sheet items such as letters of credit, unused
commitments, and derivatives. These all factor into the risk weighted assets. The report is
typically submitted to the Federal Reserve Bank as HC-R for the bank-holding company and
submitted to the Office of the Comptroller of the Currency (OCC) as RC-R for just the
bank.From 1988 this framework was progressively introduced in member countries of G-10,
comprising 13 countries as of 2013: Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States
of America.Over 100 other countries also adopted, at least in name, the principles prescribed
 under Basel I. The efficacy with which the principles are enforced varies, even within nations of
the Group.

BASEL-2
 In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined
and reformed versions of Basel I accord.
 The guidelines were based on three parameters which are as follows-
 Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
 Banks were needed to develop and use better risk management techniques in monitoring and
managing all the three types of risks that is credit and increased disclosure requirements.
 The three types of risk are- operational risk, market risk, capital risk.
 Banks need to mandatory disclose their risk exposure, etc to the central bank.
 Basel II norms in India and overseas are yet to be fully implemented.
 The three pillars of BASEL-3 can be understand from the following figure---

The second Basel Accord, called Revised Capital Framework but better known as Basel II,
served as an update of the original accord. It focuses on three main areas: minimum capital
requirements, supervisory review of an institution's capital adequacy and internal assessment
process, andeffective use of disclosure as a lever to strengthen market discipline and encourage
sound banking practices including supervisory review. Together, these areas of focus are known
as the three pillars.
Basel III
In the wake of the Lehman Brothers collapse of 2008 and the ensuing financial crisis, the BCBS
decided to update and strengthen the Accords. It saw poor governance and risk management,
inappropriate incentive structures and an overleveraged banking industry as reasons for the
collapse. In July 2010, an agreement was reached regarding the overall design of the capital and
liquidity reform package. This agreement is now known as Basel III.Basel III is a continuation of
the three pillars, along with additional requirements and safeguards, including requiring banks to
have minimum amount of common equity and a minimum liquidity ratio. Basel III also includes
additional requirements for what the Accord calls "systemically important banks," or those
financial institutions that are colloquially called "too big to fail."The implementation of Basel III
has been gradual and began in January 2013. It is expected to be completed by Jan. 1, 2019.
 BASEL-3

 In 2010, Basel III guidelines were released. These guidelines were introduced in response to the
financial crisis of 2008.
 In 2008, Lehman Brothers collapsed in September 2008, the need for a fundamental strengthening
of the Basel II framework had become apparent.
 Basel III norms aim at making most banking activities such as their trading book activities more
capital-intensive.
 The guidelines aim to promote a more resilient banking system by focusing on four vital banking
parameters viz. capital, leverage, funding and liquidity.
 Presently Indian banking system follows basel II norms.
 The Reserve Bank of India has extended the timeline for full implementation of the Basel III
capital regulations by a year to March 31, 2019.
IMPORTANT POINTS REGARDING TO THE IMPLEMENTATION OF BASEL-3

 Government of India is scaling disinvesting their holdings in PSBs to 52 per cent.

 Government will soon infuse Rs 6,990 crore in nine public sector banks including SBI,
Bank of Baroda (BoB), Punjab National Bank (PNB) for enhancing their capital and
meeting global risk norms.
 This is the first tranche of capital infusion for which the government had allocated Rs
11,200 crore in the Budget for 2014-15.
 The government has infused Rs 58,600 crore between 2011 to 2014 in the state-owned
banks.
 Finance Minister Arun Jaitley in the Budget speech had said that "to be in line with
Basel-III norms there is a requirement to infuse Rs 2,40,000 crore as equity by 2018 in
 our banks. To meet this huge capital requirement we need to raise additional resources to
fulfill this obligation.

What is the 'Basel Accord'

The Basel Accords are three sets of banking regulations (Basel I, II and III) set by the Basel
Committee on Bank Supervision (BCBS), which provides recommendations on banking
regulations in regards to capital risk, market risk and operational risk. The purpose of the accords
is to ensure that financial institutions have enough capital on account to meet obligations and
absorb unexpected losses.

BREAKING DOWN 'Basel Accord'

The BCBS was founded in 1974 as a forum for regular cooperation between its member countries on
banking supervisory matters. The BCBS describes its original aim as the enhancement of "financial
stability by improving supervisory knowhow and the quality of banking supervision worldwide." Later
on, it turned its attention to monitoring and ensuring the capital adequacy of banks and the banking
system.

Basel I
The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital
adequacy of financial institutions. The capital adequacy risk (the risk that a financial institution
will be hurt by an unexpected loss), categorizes the assets of financial institutions into five risk
categories (0%, 10%, 20%, 50% and 100%). Under Basel I, banks that operate internationally are
required to have a risk weight of 8% or less.

Basel II
The second Basel Accord, called Revised Capital Framework but better known as Basel II,
served as an update of the original accord. It focuses on three main areas: minimum capital
requirements, supervisory review of an institution's capital adequacy and internal assessment
process, andeffective use of disclosure as a lever to strengthen market discipline and encourage
sound banking practices including supervisory review. Together, these areas of focus are known
as the three pillars.

Basel III
In the wake of the Lehman Brothers collapse of 2008 and the ensuing financial crisis, the BCBS
decided to update and strengthen the Accords. It saw poor governance and risk management,
inappropriate incentive structures and an overleveraged banking industry as reasons for the
collapse. In July 2010, an agreement was reached regarding the overall design of the capital and
liquidity reform package. This agreement is now known as Basel III.

Basel III is a continuation of the three pillars, along with additional requirements and safeguards,
including requiring banks to have minimum amount of common equity and a minimum liquidity
ratio. Basel III also includes additional requirements for what the Accord calls "systemically
important banks," or those financial institutions that are colloquially called "too big to fail."
The implementation of Basel III has been gradual and began in January 2013. It is expected to be
completed by Jan. 1, 2019.