Bank Balance sheet

• Assets are the uses of the funds

• Liabilities are the sources of the funds
Liabilities

• Capital

– Authorised Capital
– Issued Capital
– Subscribed Capital
– Called up Capital
– Paid up Capital
 Reserves and Surplus
• Statutory Reserve
– As per Banking Regulation Act 1949 part of
the profit is to be transferred to this reserve
• Capital Reserve
– Surplus arising out of revaluation
• Share Premium
• Revenue and other reserve
• Balance in P & L A/c.
– Profit after appropriation
Deposits
• Demand Deposits
• Term Deposits
• FCNR Deposits
• Deposits from other banks
 Borrowings
• Borrowings from within India
• Refinance or borrowing from RBI
• Borrowings from Commercial Banks
• Borrowings from NABARD, Exim Bank
• Borrowings from Abroad
• Overseas borrowings by Indian branches
• Overseas borrowings by foreign branches
Other Liabilities and Provisions
• Bills Payable
• DD, BC, etc.
• Inter Office Adjustment
• Interest Accrued
• Interest accrued but not due
• Others
• Provision for Income tax
• Unexpired discount
• Outstanding charges like rent etc.
 Assets
• Cash and Balance with RBI
– Cash in Hands – Foreign currency and cash
– Balances in overseas branches
• Balance with RBI
– CRR
– Balance in currency chest
Balance with banks and money at
call and short notice
• Amount held by bank in current account
and fixed deposit with other banks
• Money at call and short notice
 Investments
• Government Securities
– Securities issued by Central and State Govt.
• Approved Securities
– SLR Securities
• Shares
– Investment in Subsidiaries
– Bonds/Debentures
– Investment in gold,CPs,CDs.
 Advances
• Three formats are required
– Types or nature of advances
– Secured and unsecured advances
– Sectoral credit advances
 Types /Nature of Advances
• Bills Purchased and discounted
• Cash Credit
• Overdraft
• Demand loan
• Term loan
Secured/ Unsecured Advances
• Secured by tengible assets
• Covered by bank/ Govt. guarantee
• Unsecured advances
 Sectoral Advances
• Priority sector
• Public sector
• Advances made to other banks
• All other advances
 Fixed Assets
• Land and Buildings
• Furniture and Fixtures
• Computers
• Vehicles
• All other fixed assets
 Other Assets
• Inter office adjustment
• Interest Accrued
• Tax paid in advance
• Stationery and Stamps
• Non banking assets acquired in
satisfaction of claims
 Others
• Accumulated losses
 Contingent Liabilities
Off Balance sheet items
• Liability which may or may not arise
– Claims against bank not acknowledge as debt
– Liability for partly paid investment
– Outstanding forward exchange contract
– Guarantees given by bank, in & outside India
– Acceptance and endorsements
 Income Statement of Banks
• Interest earned
– Interest on advances and discount on bills
– Dividend and interest income from investment
– Interest on balances with RBI and inter bank
funds
 Income Statement of Banks
• Other income
– Commission, exchange and brokerage
– Profit on sale of investment
– Profit on revaluation of investment (Any loss
will be shown as deduction)
– Profit on sale of land building & other assets
– Profit on exchange transaction
– Dividend income from subsidiaries
– Recoveries from bad debts written off
– Miscellaneous income
 Income Statement of Banks
• Interest expended
– Interest on deposit
– Interest on RBI / inter bank borrowings
– Other interest (e.g. interest on refinancing
from other institutions)
 Income Statement of Banks
• Operating expenses
– Payment to and provisions for employees
– Rent, taxes, lighting
– Printing and stationery and Advertisement
– Depreciation
– Directors’ fees and Auditors’ fees and Law charges
– Postage, Telephone etc
– Repairs and maintenance
– Insurance
– Other expenses
• Provisions and Contingencies
– Provision for NPAs
Various Ratios to be worked out
• Payment to and provision for employees as % of
total expenses
• Interest income as % of total income
• Non interest income as % of total income
• Interest exp. as % of total exp.
• Non int.exp. as % of total exp.
• Net profit as % of working funds*
• Credit deposit ratio
• Spread as % of total working fund

*Working funds means total assets

 NIM and RoI
Total int. income on loans and
investments – Total int. cost on
borrowed funds
NIM = --------------------------------------- X 100
Earning Assets
-------------------------------------------------------------------
Return Net Profit
On = -------------------------- X 100
Investment Capital employed
 Bank Deposits
• Deposits
– It is a major source of funds for banks
• Types of Deposits
– Demand Deposit
– Time Deposit
• Demand Deposits further sub-divided
– Current Deposit
– Saving Deposit
dr.pt 1
 Pricing of the deposits
• Banks need to monitor the cost of their
funding sources because of
– Change in cost of funding would require
changes in assets yield
– It can alter liability mix and liquidity
– It will affect competitiveness of the bank in
the market

dr.pt 2
 Factors to be considered while
deciding pricing of deposits
• Service cost and minimum balance
requirement
• Deposit volume
• Lending and investment avenues
• Relationship with customer
• In case of new product, promotional
pricing
• Product differentiation
dr.pt 3
 Factors affecting bank deposits
• Increase in national income
• Expansion of banking facility
• Increase of banking habit
• Increase in the relative rate of return on
deposit
• Increase in deficit financing
• Increase in bank credit
• Inflow of deposits from NRIs
dr.pt 4
 Measures to increase bank
deposits
• Offering properly graded interest rate on
term and saving deposit
• Raising deposit insurance cover
• Discontinuing TDS in respect of interest
income from deposits (Not in the control of a bank)
• Improving internal efficiency and
reducing bad debts and frauds
• Improving customer service
dr.pt 5
 General guide lines for opening
deposit accounts
• “Know Your Customer” guidelines
issued by RBI to be followed
• The objective is prevent financial fraud,
identify money laundering and criminal
activities and monitoring large value
cash transactions

dr.pt 6
Salient features of KYC norms
• Proper introduction while opening account is
necessary
• Identity of the account holder is to be
established
• Photograph of the account holder
• Proof of address is necessary
• Specimen signature of the account holder is
to be obtained
• Monitoring and reporting suspicious
transaction
dr.pt 7
 Deposit Insurance
• In case of bank failure to protect the
saving of small depositors either fully or
in part
• Mostly Govt. established and managed
• May or may not be a part of Central Bk.
• DICGC in India (Up to Rs.5,00,000)
• Problem of moral hazard
dr.pt 8
 When insured bank fails
• Insuring agency may ask some healthy
bank to take over failed bank
• It can take charge and manage
operation of failed bank till suitable
buyer is found
• It can pay off the deposit up to the
maximum amount insured

dr.pt 9
 Non deposit source of funds
• Concept of “Funding Gap”
• It is the difference between current and
projected credit and deposit flows
• If projected credit > projected deposit
flow, bank need to raise additional funds
• If it is reversed, bank needs to find out
profitable investment avenues

dr.pt 10
 Various non deposit sources
• Borrowing from Central Bank
• Certificate of Deposits
• Foreign Funds
• Commercial Papers
• Other Money Market borrowings

dr.pt 11
 Selection of non deposit source

• Factors to be considered while selecting

non deposit source
– Cost
– Risk
– Period for which the funds required
– Prevailing regulations for each of these
sources

dr.pt 12
Reserve requirements for banks
• Primary Reserve
– CRR (As per Section 42 (1) of The RBI Act)
– SLR (As per Section 24(2-A) of The BR Act)
• CRR is for immediate liquidity need
• SLR for profitability with liquidity and to
augment Govt. borrowing program
• CRR and SLR are prescribed as minimum
percentage of “Net Demand and Time
Liabilities” (NDTL)
dr.pt 1
 NDTL
• It is the aggregate of liabilities to others plus net
inter-bank liabilities
• Net inter-bank liabilities = Liabilities of the
banking system – (less) assets with the banking
system
• What is Banking System?
– It covers PSBs, RRBs, Co-op. banks, Pvt. banks,
foreign banks and notified FIs
– It excludes RBI, NABARD, SIDBI, Exim bank, Primary
co-op. societies and Co-op. land devt. Banks.

dr.pt 2
 Computation of NDTL
• Demand Liabilities
– CASA
– Margin held against LG / LC(Demand deposit)
– Balance in overdue fixed deposits
– Outstanding DD / MT / TT
– Unclaimed deposits
– Credit balance in cash credit account
– Deposits held as security for advances
payable on demand

dr.pt 3
 Computation of NDTL
• Time Liabilities
– All fixed deposits
– Margin held against LG / LC (Time deposit)

dr.pt 4
 Computation of NDTL
• Other demand and time liabilities
– Loans / borrowings from abroad by banks in
India
– Money at call and short notice from outside
the banking system
– Interest accrued on deposits
– Unpaid dividends
– Suspense account balance due to other
banks or public
– Collection of bills on behalf of other banks
dr.pt 5
 Liabilities not to be included for
NDTL
• Paid up capital and any reserves
• Refinance from RBI, NABARD, NHB, SIDBI,
Exim bank etc
• Claims received from DICGC pending
adjustments
• Amount received from ECGC invoking
guarantee
• Amt. received from court receiver
• Amt. received from insurance on ad-hoc
settlement of claims pending court judgment
dr.pt 6
 Maintenance of CRR
• NDTL is to be measured on every
alternate Friday which is known as
‘Reporting Friday’
• Maintenance of CRR commences after a
fortnight from reporting Friday
• For e.g. CRR for NDTL measured on 12th
Jan. is to be maintained from 27th Jan

dr.pt 7
 Maintenance of CRR
• From NDTL those liabilities which are
announced exempted by RBI are deducted to
get “Reservable Liabilities”-RL
• CRR is applied on this RL
• CRR to be maintained as deposit with RBI or
cash balance with Currency Chest
• If a bank fails to maintain CRR on daily basis
penal int. is charged for that day which is slightly
higher than bank rate

dr.pt 8
 Example
• If Reservable Liability is Rs.1000 Cr. on
reporting Friday & CRR is 10 %
• Daily balance of Rs.100 Cr. is to be maintained
for next 14 days.
• If instead of Rs.100 Cr. actual balance
maintained is Rs.95 Cr. for 13 days
• On last day i.e. 14th day balance should be Rs.
165 Cr. [(14x100) – (13x95)]
• In other words daily deficit of Rs.5 Cr.for 13 days
is to be met on last day
dr.pt 9
 SLR
• SLR is to be maintained on NDTL in any of
the following forms
– Cash
– Gold valued at market price
– Approved securities valued at price specified
by RBI time to time
• Computation of NDTL for SLR is slightly
different to that of CRR

dr.pt 10
 NDTL for SLR

• The maintenance period for SLR is similar to

that of CRR
• 100 % of SLR is to be maintained on daily basis
• Penalties for non maintenance of SLR is similar
to that of CRR

dr.pt 11
 Banks Lending
• Elements of lending decisions
– Increasing loan portfolio
– Maintaining loan quality
– Diversification of risk
– Ensuring profitability
– Ensuring liquidity
– Regulatory requirements
– Capital constraint

dr.pt 1
 Loan Policy
• It is normally a written document
authorized by Board
• It is a guideline for lending decision

dr.pt 2
 Contents of loan policy
• Loan objectives
– Bank’s priorities among the conflicting objectives of
liquidity, profitability, assets quality
• Composition of loan portfolio by sectors,
geographical areas, size of the loan etc
• Credit appraisal procedure
• Credit administration
– It contains loan sanctioning power of officers at
various hierarchical levels.

dr.pt 3
 Contents of loan policy
• Other matters
– Type of collateral bank can accept as security
– Margin on various securities
– Credit monitoring system
– Credit to deposit ratio bank should maintain
– Loan agreement and method of communication of
sanction
– Procedure for rescheduling / restructuring
• Method of maintaining credit file for each loan
a/c.
dr.pt 4
 Credit appraisal procedure
• Collecting basic information about the
borrower and purpose of loan
• Financial appraisal
– Past financial statements (Capacity)
– Cash flow statements (Cash flow)
– Various ratios / net worth (Capital)
– Various financial projections (Conditions)
– Collateral offered (Collateral)
– Integrity of borrower (Character)
– Compliance with laws & regulations(Compliance)
dr.pt 5
 Credit appraisal procedure
• Due diligence
– Checking the details given by borrowers like
address, borrower’s workplace, industrial
relations etc
• Recommendation for acceptance or
rejections of proposal

dr.pt 6
 Sanction letter
• Once the loan is sanction, borrower is informed
by sanction letter which contains
- Nature / type of credit facility
- Interest payable
- Repayment terms
- End use of the loan / credit
- Prime and collateral security
- Details of personal / third party guarantee
- Penal provision in case of default
- Details of processing charges

dr.pt 7
 Factors affecting loan policy
• Capital position
– A bank with a strong capital position can
follow liberal lending policy
• Deposit variability
– Increase and decrease in deposits in the bank
influence the lending policy
• Profit targets
– The bank which has set profit as principle
goal would have aggressive lending policy
dr.pt 8
 Factors affecting loan policy
• Monetary policy
– Any change in CRR / SLR would affect
lending policy
• State of local and national economy
– Seasonal or cyclical fluctuations in the local
area served or national economy influence
lending policy
• Availability of expertise in lending
– Availability of skilled staff for taking lending
decisions affects thedr.ptlending policy 9
 Types of lending
• Fund based lending
• Non fund based lending
• Assets based lending
• Fund based lending is also classified on
the basis of tenure of loans
– Short term loans
– Long term loans
– Revolving credits
dr.pt 10
 Credit delivery system
• Cash Credit
• Overdraft
• Bill financing
– Clean bills
– Documentary bills
• Term loan
• Consortium advance / Loan syndication
• Demand loan
• Personal loan

dr.pt 11
 Pricing of Loans
• Loan pricing is different from product
pricing because
– Every loan has different risk profile
– Loan pricing is also influenced by relationship
of borrower with bank (How far the borrower
is profitable to the bank)
• Loan price = Cost of funds + Servicing
cost + Risk premium + Desired profit

dr.pt 12
 Cost of funds
• What is cost of funds?
– Is it the average cost of the deposits and
borrowings?
– Is it the cost of the fund bank has borrowed
specially to finance particular loan?
• It depends upon availability of funds with
the bank and bank’s investment policy

dr.pt 13
 Servicing cost
• Cost incurred to provide service for credit
and non credit facilities avails by the
borrower
• For e.g. loan administration cost

dr.pt 14
 Risk factor
• Credit scoring is followed
• Credit scoring include following criteria and
borrower is rated as per these criteria
– Financial condition
– Availability of inputs / infrastructure
– Management efficiency
– Sources of alternate finance
– Extent of debt
– Business environment / Govt. policy
– Stability of income
– Types of collateral / guarantee

dr.pt 15
 Profit margin
• Based on expected return on equity
• It depends upon market expectations and
shareholders’ required return

dr.pt 16
 Loan pricing history
• 1997
– RBI introduced concept of PLR
• 2003
– Banks were allowed to lend top rated
corporate at sub PLR (Below PLR)
• 2010
– Sub PLR lending was stopped by RBI and
Base Rate was introduced
– Lending rate was linked to average cost of
funds dr.pt 17
 Loan pricing in history
• 2015
– RBI observed that the ‘base rate’ system is
not serving the purpose of monetary policy
transmission
– RBI’s policy rate action is not passed on
appropriately to borrowers
• September 2015
– RBI has recommended that lending rate be
linked with marginal cost of funds
– It justify the interest dr.pt
to old and new customers18
 Methods of accepting security
• Pledge
• Hypothecation
• Assignment
• Lien
• Mortgage
• Charge

dr.pt 19
 What is Basel?
• Basel is a city in Switzerland
• It is the headquarters of the Bank of
International Settlement (BIS), which
works for
– Fostering cooperation among central banks
– With a goal of financial stability
– Came out with common standards of banking
regulations

dr.pt 1
 Bank of International Settlement
BIS
• BIS was established by a group of
countries like USA, Canada, Japan and
other European countries
• It is not any regulatory body
• Countries involved in set up of BIS have
agreed to apply set standards to them
• Eventually, standards set by BIS are used
by other countries as well
dr.pt 2
 BIS’s objectives
• Formulate broad supervisory standard and
guidelines
• Recommend statements of best practices
• Encourage convergence towards common
approaches and standards
• Ensuring safety and soundness of banks
• Creating competition based on bank’s
strength and not by differences in each
country’s rule
dr.pt 3
 Introduction to Basel norms
• Basel norms are the international banking
regulations issued by the Basel Committee
on Banking Supervision (BCBS)
• The BCBS is housed in the BIS offices in
Basel, Switzerland.
• BCBS is the primary global standard setter
for the prudential regulation of banks
across different countries.

dr.pt 4
 Basel I
• It was introduced in 1988
• 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
• India has adopted Basel I guidelines in
1999
dr.pt 5
 Basel II
• Basel II was introduced in 2004
• It is based on three pillars
– Capital adequacy
– Supervisory review
– Market discipline

dr.pt 6
 Capital adequacy (Pillar I)
Owned funds
Capital adequacy = ------------------------------
Risk weighted assets
Credit Risk, Market Risk and Operational
Risk are covered under Basel II
Computation of risk weighted assets
– Standardized approach
– Internal Rating Approach
dr.pt 7
 Standardized approach
• Regulator provides the risk weights for
different class of assets
• Banks have to follow the given weights
• Banks may depend upon risk weights
given by external approved credit rating
agencies

dr.pt 8
 Internal rating approach
• Bank can develop and adopt their own
formulas
• Banks have to estimate “probability of
default” on the basis of historical time
series analysis
• Approval of national supervisor is required

dr.pt 9
 Market Risk
• It is to be estimated based upon “Value at Risk”
(VaR)
– VaR indicates the possible maximum loss which will
be suffered in a specific period and at a specified
confidence level from a fall in the price of a security or
exchange rate
• It is estimated on the basis of
– Historic data of the security price or exchange rate
– Likely future market movements
• The concept is applied to calculate risk of a
security or a portfolio or forex position
dr.pt 10
 Operational Risk
• There is no clearly established measure to
calculate operational risk
• Here, losses are categorized according to
– The type of event
– Its occurrence in the business line (like corporate
finance, retail banking, agency services etc.)
• Individual banks have to finalized measurement
approach
• It should be consistent with regulatory guidance

dr.pt 11
 Supervisory Review (Pillar II)
• This pillar specifies responsibility on the
directors and senior management for
– Arrangement of capital requirements
– Estimating futuristic capital requirements
– Measures to meet them
– Proper documentation of procedures and
formulas adopted for risk calculation
– Documenting compliance with operational
manuals
dr.pt 12
 Market Discipline (Pillar III)
• It covers the disclosures to be made to
stakeholders with their contents and frequency
• Banks do have statutory and traditional
disclosure through annual reports
• Basel II calls for different types of disclosures
like
– Risk philosophy (how risks are identified and
managed)
– Risk profile (Different types of risks)
– Exposure classifications (Risk in absolute amount)
– Review of assets portfolio with risk return
considerations dr.pt 13
 How Basel II is an improvement
over Basel I?
• Under Basel I only credit risk was covered
while under Basel II market and
operational risks are also covered
• Under Basel I for risk measurement one
size rule was applied to all while under
Basel II internal rating approach is
adopted

dr.pt 14
 Basel III

• Basel III was introduced in 2010

• These guidelines were introduced in
response to the financial crisis of 2008
• The focus area under Basel III are
– Quality, quantity and international consistency
of capital
– Strengthening of liquidity standard
– Discourage excessive leverage and risk
taking
dr.pt 15
 Quality and quantity capital
• The capital adequacy ratio is to be
maintained at 12.5 %
• Of the total risk weighted assets
– The minimum Tier 1 capital ratio have to be
maintained at 10.5 %
– The minimum Tier 2 capital ratio have to be
maintained at 2%

dr.pt 16
 Capital conservation buffer
• Additional capital conservation buffer of
2.5 % of risk weighted assets in the form
of common equity is introduced
• It is to absorb the possible losses arising
from extreme movements in market
• It is to be reached by 2019 by banks
• Counter-cyclical buffer is also to be
maintained at 0-2.5%
dr.pt 17
 Liquidity coverage ratio
• LCR requires banks to have sufficient high
quality liquid assets specified by
supervisors
• Banks are required to hold an amount of
high-quality liquid assets that's enough to
fund cash outflows for 30 days
• This is to protect bank from short term
disruption to access funds

dr.pt 18
 Leverage Ratio
• Risk based capital requirement measures is
supplemented by non risk based leverage ratio
• This is a ratio of Tier I capital to the bank’s total
non weighted assets and off balance sheet
exposure
• It is 3.5 % from 2019

RBI guidelines for implementation of Basel III in India is from April 2024

dr.pt 19
 Prudential norms for capital
adequacy
• Introduced with a view to adopt Basel
committee norms
• Risk element in various types of assets
are considered
• Each assets are assigned prescribed risk
weight
• Banks have to maintain prescribed ratio of
capital funds on the aggregate of risk
weighted assets on an ongoing basis
 Example
Book Risk Total
value of weight Risk
assets weighted
assets
Loans to Govt 500 0 0
Secured loans 800 0.50 400
Unsecured loans 200 1 200
TOTAL 1500 600

Total risk weighted assets is 600

9 % on 600 = 54
Capital required is 54
 Capital adequacy framework
• Capital funds
• Risk adjusted assets
• Off balance sheet items
• Capital adequacy for subsidiaries
 Capital funds
• Capital adequacy norms were introduced
in April 1992
• Made effective from March 1996
 Capital funds
• Until 2003 CAR was applicable only to
credit risk
• For market risk for investment
– For Held For Trading category introduced
during 2004 – 05
– For Available For Sale category introduced in
2006
• Under Basel II CAR is also for operational
risk
 Elements of capital fund for Indian
banks
• Tier I Capital (Core Capital)
– Permanent shareholders equity – consist of
paid up capital, statutory and other reserves,
less: Investment in subsidiaries, intangible
assets, and cumulative losses, if any
– Perpetual debt instruments
– Perpetual non cumulative preference shares
Capital funds for Indian banks..
• Tier II Capital (Supplementary capital)
– Redeemable preference shares
– Revaluation reserve
– Hybrid debt capital instruments
– Long term subordinated debt
– Debt capital instruments – bonds / debentures
 Limit
• Tier II capital is limited to 100 % of Tier I
capital
• Tier II capital can be considered for the
purpose of capital adequacy only up to an
amount equal to Tier I capital
• Subordinated debt is limited to 50 % of
Tier I capital
 Capital funds for Indian banks..
• Tire III capital
– It includes only short term subordinated debt
• Tire III capital can be considered for
supporting market risk only. Not for credit
risk
• Tire I & II capital can be used to support
market risk
 Capital funds for foreign banks
• Tier I capital
– Interest free funds from HO kept in Indian books for
the purpose of meeting CAR
– Statutory reserve kept in Indian books
– Capital reserve arising due to sale of assets in India
not eligible for repatriation till bank function in India
– Interest free funds remitted from abroad for
acquisition of property in India
– Inter office adjustment bal. with HO or overseas
branches. If it is credit bal. – ignore. If it is debit bal. it
is to be set-off against capital
 Capital funds for foreign banks
• Tier II capital
– Same as applicable to Indian banks
• Minimum CAR
– For Indian as well as foreign banks 9 % on an
ongoing basis
 Risk adjusted assets
• Bank should maintain CAR for
– Credit risk
– Market risk on securities (Held for Trading & Available
for Sale)
– Open gold position
– Open forex position
– Trading position in derivatives
– Derivatives for hedging
• Each of the above assets is to be assigned
prescribed weight in percentage
 Off balance sheet items
• Multiply face value of off balance sheet
items by credit conversion factor
• This should then be again multiplied by the
prescribed risk weight
 Capital adequacy for subsidiaries
• While computing capital fund parent bank
(holding co.) may consider following points
– Non bank subsidiaries have to maintain CAR
prescribed by their respective regulator
– In case of any short fall by subsidiary the
parent bank should maintain capital in
addition to its own CAR
Insolvency and Bankruptcy Code
2016

dr.pt 1
 Background
• NPA is a major problem in Indian banking sector
• Borrowers have no fear of default
• They were borrowing and not repaying
• Now if they don’t repay loan, there is fear that
they may lose their business
• The bankruptcy code is a one stop solution for
resolving insolvencies
• Before IBC, it was a long process to recover loan
from defaulters

dr.pt 2
 Adjudication authority
• National Company Law Tribunal (NCLT) would
deal with insolvency cases of
– Corporates
– Limited liability partnership
• Debt Recovery Tribunals (DRT) will deal with
– Individual cases
– Partnership
• Adjudication Authority have exclusive
jurisdiction to deal with insolvency cases
dr.pt 3
Financial and Operational Creditors
• The IBC makes the difference between
Financial and Operational Creditors
• Creditors holding financial debt are called
financial creditors, e.g. those banks from
whom a firm borrowed money for business
• Creditors holding operational debt are called
operational creditors, e.g. those suppliers
from whom a firm purchased goods on credit

dr.pt 4
 Default under IBC
• Default means when debt exceeding INR 1
lakh is due and is not repaid by the Corporate
debtor (Limit is enhanced to INR 1 Cr on 24th
March 2020)
• Such cash flow-based assessment of
insolvency can lead to an early detection of
insolvency
• Under non IBC laws net worth or balance
sheet based assessments is prescribed

dr.pt 5
 Who can file for corporate insolvency
resolution?
• Financial creditor
• Operational creditor
• Corporate debtor
• Once the petition is accepted by the AA, the
board of the Corporate debtor is suspended and
Interim Resolution Professional is appointed
• Appointment of interim resolution professional is
made to
– Protect and preserve the value of the property of the
corporate debtor
– To manage the operations of the corporate debtor
dr.pt 6
 Powers of Resolution Professional
• Once the RP is appointed the powers of the
board of directors of the corporate is suspended
• The officers and managers of the corporate
debtor shall report to the interim RP
• Provide access to such documents and records of
the corporate debtor as may be demanded by the
interim RP
• Management of the company needs to support
the RP in performing his/her duties
dr.pt 7
 Duties of Resolution Professional
• To collect all information relating to the assets,
finances and operations of the corporate debtor
for determining its financial position
• To receive and collate all the claims submitted
by creditors to him/her
• To constitute a committee of creditors
• Take custody of assets and monitor the assets.

dr.pt 8
 Creditors committee
• The resolution professional, after evaluating
all claims received against the company shall
review the financial position of the company
and constitute a committee of creditors
• The committee of creditors would consist of
Financial creditors of the Corporate debtor
• The Operational creditors and Corporate
debtor will be non-voting members on the
creditors committee

dr.pt 9
 Resolution plan
• Creditors committee need to approve the
resolution plan given by the RP such as
– The sale of assets
– Raising interim funding
– Settlement of legal disputes etc.
– Liquidation of the company
• All decisions taken by the creditors committee
will be by way of a majority of 75% of the
Financial creditors by value

dr.pt 10
 Approval process
• Once the Adjudicating Authority is satisfied
with the resolution plan it shall by order
approve the resolution plan
• Such approved resolution plan shall be
binding on
– The corporate debtor
– Employees
– Shareholders
– Creditors

dr.pt 11
 Liquidation
• Liquidation is the last resort followed in following
circumstances
– Creditors committee does not reach an agreement
within stipulated days
– Creditors committee decides to go for liquidation
– Corporate debtors fails to adhere to resolution plan
• Once the AA passes the order for liquidation, the
resolution professional become liquidator and
usual process of liquidation begins

dr.pt 12
 Liquidity Risk Management
• This risk arises due to mismatch of assets and
liabilities
• Short term borrowing and long term lending
results into this risk
• Short term borrowing at lower cost and long
term lending at a higher yield
• Profit is ensured but liquidity risk arises
• Banks need to maintain short as well as long
term liquidity
dr.pt 1
 Approaches to Liquidity Risk Mgt.
• Fundamental Approach
– To ensure long term liquidity

• Technical Approach
– To ensure short term liquidity

dr.pt 2
 Fundamental Approach
• To reduce long term liquidity risk
• Adjustment of maturity of assets and liabilities
• Diversification and broadening of sources and
uses of funds
• This is done by either liability creation or by
assets liquidation

dr.pt 3
 Assets Management
• Holding near cash assets
• Depending on Primary or Secondary reserve
• Primary reserve – CRR
• Secondary reserve – Marketable securities
held for liquidity purpose

dr.pt 4
 Liability Management
• Sources of fund is focused
• Funds are borrowed as per need
• Cost of borrowing and maturity of instruments
is important

dr.pt 5
 Applicability
• Depends upon
– Size of the bank
– Nature of operation of bank
• For small size bank
– Assets management is better option
– Major portion is retail deposit. Liquidity
requirement is relatively low
• For large size bank
– Liability Management is better option

dr.pt 6
 Technical Approach
• Short term liquidity management
• Linked to cash flow arising due to operational
transaction
• Bank should know its cash requirement and
cash flow to ensure safe level of liquidity
• For this purpose there are two approaches
– Working Fund Approach
– Cash Flow Approach

dr.pt 7
 Working Fund Approach
• It focus on actual cash position on factual data
• Working Funds includes
– Owned Funds
– Deposits
– Float Funds

dr.pt 8
 Owned Funds
• Liquidity for owned funds is nil

dr.pt 9
 Deposits
• Liquidity requirement for deposits depends upon
maturity profile of deposits
• Volatile funds
– Current a/c, short term deposits
– 100 % liquidity is required
• Vulnerable funds
– Saving deposits
– Less than 100 % liquidity is required
• Stable funds
– Term deposits
– Least liquidity is required
dr.pt 10
 Float Funds
• Funds are in transit
• DD, BC, etc.
• 100 % liquidity is required

dr.pt 11
Assessing liquidity position on the basis of
working fund
• Decide average cash balance to be maintained
as a % of working fund
• Decide range of acceptable variance
• If average balance is within this range liquidity
is ensured
• If not corrective action is required
– Either deploying surplus fund
– Or borrowing to meet the deficit

dr.pt 12
 Cash Flow Approach
• It takes into account potential increase or
decrease in deposits / lending
• Trends can be established on the basis of
historical data
• Planning horizon is to be decided

dr.pt 13
 Basic steps in Cash Flow Approach
• Estimate anticipated change in deposit
• Estimate cash inflow by loan recovery
• Estimate cash outflow by deposit withdrawal
and loans
• Estimate liquidity need over the planning
horizon
• Accurate forecasting & good data collection
network is required for the success of this
approach
dr.pt 14
 Non – Performing Assets
• An assets including a leased assets, becomes
non performing when it ceases to generate
income for the bank
• An NPA shall be a loan or an advances where
interest and / or installment of principal
remain overdue for a period of more than 90
days from due date

dr.pt 1
 Classification of NPAs
• NPAs are classified into following three
categories
– Sub-standard Assets
– Doubtful Assets
– Loss Assets
• Sub-standard assets is one which was
classified as NPA for a period not exceeding
one year

dr.pt 2
 Classification of NPAs
• Doubtful assets is one which was classified as
NPA for a period exceeding one year
• In other words an assets would be classified as
doubtful if it remained in sub-standard
category for 12 months
• Loss assets is one which is identified by the
bank or internal or external auditor or by the
RBI inspection, but the amount has not been
written off wholly

dr.pt 3
 Guidelines for NPAs classification
• Bank should established proper internal system
to eliminate delay in identification of NPAs
• Responsibility for ensuring proper assets
classification is to be fixed by the bank
• Special attention is to be given to high value
accounts
• High value is to be decided by the bank
depending upon their respective business level

dr.pt 4
 Provisioning norms for NPAs
• Primary responsibility to make adequate
provisions for NPAs as per prescribed norms, is
that of a bank
• The important provision norms are as under
• For Loss Assets
– 100% of the outstanding amount

dr.pt 5
 Provisioning norms for NPAs
• For Doubtful Assets
– 100 % of the outstanding amount not covered by
realizable value of security
• As regard to the secured portion of doubtful
assets
– Up to 1 year; 25 % of the outstanding amount
– 1 to 3 years; 40% of the outstanding amount
– More than 3 years; 100 % of the outstanding
amount

dr.pt 6
 Provisioning norms for NPAs
• For Sub-standard Assets
– 15 % on secured exposure
– 25 % on unsecured exposure
• For Standard Assets
– 0.25 % on direct advances to agriculture and SMEs
– 0.40 % on other advances
– The provision on standard assets should not be
reckoned for arriving at Net NPAs

dr.pt 7
 Reasons for NPAs
• Poor loan repayment culture
• Lack of fear of delinquency
• Easy access to credit during high credit growth
period leads to over-leverage by corporate
• Option of restructuring of loans
• Frequent loan waivers in different States
makes rural and farm credit NPAs
• Stalled projects due to Govt. restrictions
dr.pt 8
 Reasons for NPAs
• Limitations in tracking credit history of a
borrower
• Accommodative stance during credit
monitoring to avoid large scale NPAs
• Adverse business cycle and economic
downturn
• Confidence of the borrower that for large
NPAs bank will bail out
• Willful defaulters
dr.pt 9
 Management of NPAs
• Reduction in NPAs, both existing as well as new, is
essential for financial strength of a bank
• For preventing new NPAs, proper pre sanction
appraisal and post sanction monitoring is
required
• For reduction in existing NPAs broadly two types
of measures are available
– Non legal measures
– Legal measures

dr.pt 10
 Legal measures
• Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest
Act 2002 (SARFAESI Act)
– This Act allows the secured creditor (bank) to take
possession of securities without any intervention
of court
– The borrower is required to discharge his liability
within 60 days from the date of notice given by
bank

dr.pt 11
 SARFAESI Act
• If the borrower is failed to do so bank is entitle
to take possession and sell the secured assets
• Borrower is allowed to seek protection with
the deposit of 75 % of the amount claimed by
the bank with DRT
• Hon Supreme Court upheld SARFAESI Act but
struck down section 17 (2) i.e. 75 %
requirements

dr.pt 12
 Legal Measure
• Asset Reconstruction Companies (ARCs)
– It is established under SARFAESI Act either by
Govt. or by banks & FIs
– ARCs are established to acquire, manage and
recover NPAs from banks
– Banks’ balance sheet get cleared from NPAs
– ARCs may issue debenture or bonds towards
acquisition of NPAs of banks
– ARCs would maximize recovery value by
attachment, liquidation, further sale etc

dr.pt 13
 Legal Measure
• Insolvency and Bankruptcy Code (IBC)
– By amending Banking Regulation Act 1949, banks
are authorized to initiate insolvency resolution
process against the corporate debtors
– Prevention to resort to abuse the legal system

dr.pt 14
 Priority Sector Lending
• PSL concept was introduced by Govt. after
bank nationalization in 1969
• PSL intended to ensure lending from
banking sector to the hitherto neglected
sector in providing institutional finance
• PSL should constitute at least 40 % of
aggregate bank credit
• PSL is done at a lower rate of interest than
normal rate charged by banks to others
dr.pt 1
 Priority Sector includes
• Agriculture and allied activities
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Weaker Sections (defined separately)
– For each of above category there is limit of loan
amount to be qualified as priority sector lending

dr.pt 2
 Weaker Sections
• Small and Marginal Farmers
• Artisans, village and cottage industries where
individual credit limits do not exceed ₹ 1 lakh
• Beneficiaries under Government Sponsored
Schemes such as National Rural Livelihoods
Mission (NRLM), National Urban Livelihood
Mission (NULM) and Self Employment Scheme for
Rehabilitation of Manual Scavengers (SRMS)
• Scheduled Castes and Scheduled Tribes
dr.pt 3
 Weaker Sections
• Beneficiaries of Differential Rate of Interest
(DRI) scheme
• Self Help Groups
• Distressed farmers indebted to non-
institutional lenders
• Distressed persons other than farmers, with
loan amount not exceeding ₹ 1 lakh per
borrower to prepay their debt to non-
institutional lenders
dr.pt 4
 Weaker Sections
• Individual women beneficiaries up to ₹ 1 lakh per
borrower
• Persons with disabilities
• Overdrafts upto ₹ 5,000/- under Pradhan Mantri
Jan-DhanYojana (PMJDY) accounts, provided the
borrowers’ household annual income does not
exceed ₹ 100,000/- for rural areas and ₹
1,60,000/- for non-rural areas
• Minority communities as may be notified by
Government of India from time to time
dr.pt 5
 Lead Bank Scheme
• LBS was introduced by RBI in Dec. 1969
• It is a scheme wherein a bank need to adopt an
area (district) and take responsibility for the
development of adequate banking and credit
structure in that area. It has to work as a ‘Lead
bank’ of that area
• The RBI has allotted all the district, except
metropolitan cities, to nationalized bank and they
are designated as lead bank for that district
dr.pt 6
 Objectives of Lead Bank Scheme
• To survey the potential of agriculture, industry
and banking development in the district
• To mobilize deposits on massive scale
• To increase lending for development especially to
weaker section
• To expand the network of bank branches
• To prepare district credit plan, follow coordinated
credit program with other banks and credit
agencies for financing priority sector

dr.pt 7
 LBS and private sector banks
• The LBS was reviewed in 2009 by RBI and
found that the objectives of LBS are useful to
achieve in rural and semi urban areas
• Following changes were made in LBS
– Private sector banks were involved
– Metropolitan areas which were excluded earlier
are included after review so as to address the
issue of financial exclusion in urban areas

dr.pt 8
 Regional Rural Banks
• RRBs were established in 1975 as per the
following structure of sponsorship
– Central Govt. 50 % of capital
– State Govt. 15 % of capital
– Sponsored bank 35 % of capital
• The main objectives of RRBs are
– Create supplementary channel of rural credit
– Enlarge institutional rural credit
– Development of the rural economy

dr.pt 9
 Problems of PSL
• Haphazard lending due to high target of 40 %
• Difficult to administer distribution, follow-up
and recovery of tiny loans
• Uneven distribution of loans in favour of
developed states in order to attain 40 %
national target
• Reduces banks’ profitability due to
– High target
– High collection cost
– Lower interest rate

dr.pt 10
 Recommendations for PSL
• The Narasimham committee on Financial
sector Reform in 1991recommended that
– The PSL should be redefined
– Lending should be reduced to 10 % from the
present 40 %
– PSL should be reviewed after the period of
three years
• However, Govt. did not accepted these
recommendations

dr.pt 11
 Recommendations for PSL
• Panel of bankers constituted by IBA
recommended that
– PSL should be restricted to core sector only
– Other sector should be left to commercial
judgment of the bank
– For Govt. sponsored scheme bank should be
involved in selection of beneficiary
– Deregulation of interest rate on PSL
• However, Govt. did not accepted these
recommendations

dr.pt 12
 Risk Management
• Risk can not be avoided, it can be
minimized
• It helps bank to reduce their risk without
severely reducing their income
• Risk Management is a 4 step process
– Risk identification
– Risk measurement
– Policy / strategy formulation
– Risk monitoring
dr.pt 1
 Risk identification
• To identify the risk, it is to be properly
defined
• Understanding the activity originating the
risk
• Understanding the implication of the risk
• It is important to minimize such risk

dr.pt 2
 Risk Measurement
• To manage the risk effectively, its
measurement is must
• Risk measurement is a crucial task
• Its accuracy depends upon information
available
• Accuracy depends upon the reporting
system of the bank
• Technology and MIS plays crucial role
dr.pt 3
 Policy / Strategy formulation
• Policy is a long term frame work to tackle
risk
• It depends upon bank’s objective and risk
tolerance level
• The risk level should not be too high to
manage and too low to adversely affecting
profitability
• Strategy is to implement policy
• It is short term
dr.pt 4
 Risk Monitoring
• Bank is working under continuous
changing environment
• Constant monitoring of the risk is required
• Continuous monitoring helps to keep the
risk under the set target
• If it goes out of target restoration become
easy

dr.pt 5
 Interest Rate Risk
• Gain or loss that arises due to sensitivity
of interest income / interest expenditure to
the interest rate fluctuation

dr.pt 6
 Interest rate risk management
• Approaches used to tackle interest rate
risk are
– Maturity gap method
– Rate adjusted gap method
– Interest rate sensitivity analysis

dr.pt 7
 Maturity gap method
• Objective of this method is to stabilize /
improve the net interest income
• Gap = RSA – RSL
• RSA > RSL = Gap is positive
• RSL > RSA = Gap is negative
• RSA = RSL = Gap is zero

dr.pt 8
 Effect on income
• If gap is positive
– Increase in interest rate will increase income
– Decrease in interest rate will decrease income
• If gap is negative
– Decrease in interest rate will increase income
– Increase in interest rate will decrease income
• If gap is zero
– Bank remains neutral to int. rate fluctuation
dr.pt 9
 Utility of this approach
• For given level of gap with forecast of rise
or fall in interest rate following strategy can
be adopted
– Maintain positive gap when int. rate is rising
– Maintain negative gap when int. rate is falling
– Maintain zero gap to hedge over any
movement in interest rate
• Zero gap will reduce int. rate risk but not
lead to any speculative gain

dr.pt 10
 Utility contd….
• Maturity gap approach is useful to assess
the impact of % change in the int. rate on
NII
• Change in NII = Gap x Change in int. rate
• If gap is positive, say 1000 and int. rate
increase by 1%, change in NII is
• 1000 x 0.01 = 10
• Conversely if int. rate decrease by 1 %
• 1000 x -0.01 = -10
dr.pt 11
 Utility contd….
• Change in NII affects NIM
• Bank need to decide tolerance limit for
change in NIM
• Accordingly target gap can be decided,
and changes can be made in assets and
liabilities

dr.pt 12
 Limitations of gap mgt.
• Success depends upon the accuracy of
forecasting
• Gap measurement is easy but not gap
management
• Treasurer may not have flexibility in
managing gap
• It assumes that change in int. rate
immediately affects all RSA and RSL
dr.pt 13
 Rate adjusted gap method
• Maturity gap method assumes uniform
change in int. rate on all assets and
liabilities
• In reality this may not happen due to
following reasons
– Market perception towards change in int. rate
may be different than actual rise / fall in the
benchmark rate
– Regulatory requirement
dr.pt 14
 Rate adj. gap method contd…
• Here RSA and RSL will be adjusted by
assigning weight based on estimated
change in assets and liabilities
• Rate adj. gap = (RSA1 x WA1 + RSA2 x
WA2 + …..) – (RSL1 x WL1 + RSL2 x
WL2 +……)
• By assigning weight the outcome my be
different than that of maturity gap method
dr.pt 15
Interest rate sensitivity analysis
• Here projections are made about changes
in the balance sheet
• Its effect on income and spread is studied
• Such changes are then tested against
rising or falling int. rate
• Its effect on spread is studied
• In the light of such study necessary
changes are made in the balance sheet
dr.pt 16