Commercial Bank

Management
BY : APARNA V.
SME-BFSI
What is a Bank :
an organization which keeps money safely for its customers; the office or building of
such an organization. You can take money out, save, borrow or exchange money at
a bank
• Functions of Banks
• Acceptance of deposits from the public.
• Provide demand withdrawal facility.
• Lending facility.
• Transfer of funds.
• Issue of drafts.
• Provide customers with locker facilities.
• Dealing with foreign exchange.
 • Banking Structure :The Banking system of a country is an important pillar holding up the financial
system of the country’s economy. The major role of banks in a financial system is the mobilization of
deposits and disbursement of credit to various sectors of the economy. The existing, elaborate
banking structure of India has evolved over several decades.
• So there are three major types of banks in India: Commercial banks, cooperative banks and
development banks. The Reserve Bank is the head of all types of banks operating in India, that means
every bank has to follow the rule and regulation of RBI.
• •Structure of the Indian Banking System :
• •1. Scheduled, Non-Scheduled Banks and Development Banks
• Banks that are included in the second schedule of the Reserve Bank of India Act, 1934 are
considered to be scheduled banks.
• All scheduled banks enjoy the following facilities:
• Such a bank becomes eligible for debts/loans on bank rate from the RBI
• Such a bank automatically acquires the membership of a clearing house.
• All banks which are not included in the second section of the Reserve Bank of India Act,
1934 are Non-scheduled Banks. They are not eligible to borrow from the RBI for normal
banking purposes except for emergencies.
• Scheduled banks are further divided into commercial and cooperative banks.

• •
• •2. Commercial Bank The institutions that accept deposits from the general public
and advance loans with the purpose of earning profits are known
as Commercial Banks.
• Commercial banks can be broadly divided into public sector, private sector,
foreign banks and RRBs.
• In Public Sector Banks the majority stake is held by the government. After the recent
amalgamation of smaller banks with larger banks, there are 12 public sector banks in India
as of now. An example of Public Sector Bank is State Bank of India.
• Private Sector Banks are banks where the major stakes in the equity are owned by
private stakeholders or business houses. A few major private sector banks in India are
HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.
• A Foreign Bank is a bank that has its headquarters outside the country but runs its offices
as a private entity at any other location outside the country. Such banks are under an
obligation to operate under the regulations provided by the central bank of the country as
well as the rule prescribed by the parent organization located outside India. An example of
Foreign Bank in India is Citi Bank.
• Regional Rural Banks were established under the Regional Rural Banks Ordinance,
1975 with the aim of ensuring sufficient institutional credit for agriculture and other rural
sectors
• . The area of operation of RRBs is limited to the area notified by the Government. RRBs are
owned jointly by the Government of India, the State Government and Sponsor Banks. An
example of RRB in India is Arunachal Pradesh Rural Bank, Maharashtra gramin, Vidarbha
konkan etc..
 • Public Sector Banks (PSBs): (12)
• Those banks in which more than 50% stake is held by Government of India is defined as Public Sector Banks and the shares of these
banks are listed on the stock exchange too. Few examples of banks are given below although the total number of PSBs are 27.
• State Bank of India, Bank of India, Punjab National Bank, Allahabad Bank, Central Bank of India, Indian Bank, Bank of
Baroda,UCO Bank,Canara Bank.
• Private Sector Banks: (24)
• Private Sector banks are those banks where major stakes (51%) is of private entities. The shares of private sector banks are also
listed in the stock exchange.
• Few big names of private banks are below.
• HDFC Bank,ICICI Bank,Axis Bank,Yes Bank,Kotak Mahindra Bank,IndusInd Bank,IDFC First Bank
• Foreign Banks:
• The banks which are incorporated or have their headquarters in a foreign country and open their branches in India as per RBI Act
1934 is known as foreign banks.
• Some examples of the foreign bank are:
• City Bank , HSBC Bank, Standard Chartered Bank
• Regional Rural Banks (RRB):
• These banks are generally operating at the regional area to facilitate backward people in society. The purpose of RRBs to offer the
banking services at the doorstep of rural masses especially in remote areas. These banks provide services like deposits, withdrawals,
short term credit to the small farmers, labours, small entrepruners to increase their productivity.

•
Pvt Sector Bank Names:

Axis Bank, Bandhan Bank, CSB

Bank, City Union Bank, DCB
Bank, Dhanlaxmi Bank, Federal
Bank,

HDFC Bank, ICICI Bank, IDBI

Bank, IDFC First Bank, IndusInd
Bank, Jammu and Kashmir Bank,

Karnataka Bank, Karur Vysya

Bank, Kotak Mahindra Bank,
Lakshmi Vilas Bank, Nainital
Bank,

RBL Bank, South Indian Bank,

Yes Bank
• 3. Co-operative Banks: (31)
• The cooperative banks are a small scale banking functioning on no profit no loss basis for mutual cooperation and help. These banks
generally focus on financial help for rural agriculture development. On the basis of levels of operating level, the cooperative banks
are of three categories.
• State Cooperative Bank (working at State level)
• Central Cooperative Bank (working at District level)
• Primary Agricultural Credit Society (working at Rural level)
• A Cooperative Bank is a financial entity that belongs to its members, who are also the owners as well as the
customers of their bank. They provide their members with numerous banking and financial services. Cooperative
banks are the primary supporters of agricultural activities, some small-scale industries and self-employed
workers. An example of a Cooperative Bank in India is Mehsana Urban Co-operative Bank.
• At the ground level, individuals come together to form a Credit Co-operative Society. The individuals in the society
include an association of borrowers and non-borrowers residing in a particular locality and taking interest in the
business affairs of one another. As membership is practically open to all inhabitants of a locality, people of different
status are brought together into the common organization. All the societies in an area come together to form a
Central Co-operative Banks.
• Cooperative banks are further divided into two categories - urban and rural.
• Rural cooperative Banks are either short-term or long-term.
• Short-term cooperative banks can be subdivided into State Co-operative Banks, District Central Co-operative Banks, Primary
Agricultural Credit Societies.
• Long-term banks are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or
Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
• Urban Co-operative Banks (UCBs) refer to primary cooperative banks located in urban and Semi-urban
• Non- scheduled Banks:
• The banks which are not listed in the 2nd schedule of RBI Act 1934 is called Non-scheduled banks. Non-scheduled banks
by definition are those which are not listed in the 2nd schedule of the RBI act, 1934. They don't conform to all the criteria
under clause 42, but dully follow specific guidelines as laid down by RBI. Banks with a reserve capital of less than 5 lakh
rupees qualify as non-scheduled banks.
• These banks are not allowed to deal in foreign exchange. Basically, all commercial banks are in the list of scheduled
categories. Also, non-schedule banks do not have to maintain the Cash Reserve Ratio (CRR) or Statutory Liquid Ratio
(SLR) unlike scheduled banks. There was a bank whose name was Bank of Jammu and Kashmir was under non-scheduled
category but in 2010 this also converted in a scheduled bank. Non- scheduled banks are also known as Local Area Banks ,
although there are only 4 local area banks in India which are as follows.
• Coastal local area Bank ltd:
• This Vijaywada, Andhra Pradesh based bank was established on 27 Dec 1999 and operating in Krishana, Guntur and West
Godavari.
• Capital local area bank ltd:
• This bank was established on 14 Jan 2000 and operating in Jalandhar, Kapoorthala and Hoshiarpur in Punjab.
• Krishana Bhima Samuriddhi Local area bank ltd:
• This bank was established on 28 Feb 2001 and based at Mahboobnagar, Andhra Pradesh. The area of operations is
Mahboobnagar in Andhra Pradesh and Raichur, Gulbarga in the State of Karnataka.
• Subhadra Local area bank ltd:
• This bank is based at Kolhapur having only 8 branches.
Feature Scheduled Banks Non-Scheduled Banks

Privileges and Access to Central Bank Credit Have access to central bank credit facilities. Do not have access to central bank credit facilities.

Eligible to participate in RBI-operated

Clearing Facilities May not have direct access to clearing facilities.
clearinghouses.

Benefit from deposit insurance provided by May not have the same level of deposit insurance
Deposit Insurance
agencies like DICGC. coverage.

Regulated by the RBI but may face less stringent

Regulatory Oversight Subject to stringent regulatory requirements.
regulations.

Offer essential banking services but cater to

Functions and Operations Provide a wide range of banking services.
specific segments.

Contribute to financial inclusion by diversifying

Importance in the Banking Sector Play a significant role in the banking system.
banking services.
• 3) Development Banks:
• The development banks were established for the purpose of development of different sectors like agriculture, housing, small industry and
foreign trade. These banks don’t deal in public. Following are the list of development banks.
1. IFCI (Industrial Finance Corporation of India)
2. NABARD (National Bank for Agriculture and Rural Development)
3. EXIM Bank (Export-Import Bank)
4. NHB (National Housing Bank)
5. SIDBI (Small Industries Development Bank of India)
6. MUDRA Bank (Micro Unit and Development Refinance Agency Bank)
• IFCI (Industrial Finance Corporation of India):
• This was the first Development Bank of India which was established in 1948 by the Government of India. The headquarters of IFCI is
situated in New Delhi. The main purpose of this bank was to provide long term finance to the industrials.
• NABARD (National Bank for Agriculture and Rural Development):
• This bank was established on 12 July 1981 by the recommendation of B. Shivaraman Committee being headquartered in Mumbai. The
initial capital of this bank was 100 crores later RBI sold its stakes to Government of India which holds 99% stakes of NABARD now.
• NABARD was established especially for the development of agriculture and rural area and handle financial problems mainly related to
agricultural and rural development.
• EXIM BANK (Export-Import Bank):
• This bank was established to encourage foreign trade of India. Its main objective is to arrange funds for the companies which are dealing in
export-import business. This is fully owned bank of Government of India and established under Export-Import Bank of India Act 1982.
 • NHB (National Housing Bank):
• This bank was established on 9 July 1988 by the Government of India. This bank is regulated under the National
Housing Bank Act 1988 and also is the supreme bank of the housing and finance.
• The main objective behind setting up this bank was to make available easy and affordable housing loans at the
regional and local level.
• NHB is also responsible for regulating activities of the housing finance companies in India.
• SIDBI (Small Industries Development Bank of India):
• SIDBI was established on 2nd April 1990 under the Small Industries Development Bank of India
Act 1990 having its headquarter in Lucknow (UP). SIDBI was set up for the promotion, financing and
development of small, micro, medium industry in India.
• Moreover, the objective of SIDBI is to strengthen and facilitates entrepreneurs who are facing financial problems in
expanding their businesses.
• MUDRA Bank (Micro Unit Development and Refinance Agency Bank):- Loan Bank
• MUDRA Bank was established on 8 April 2015 and launched by the Prime Minister Shri Narendra Modi with the
initial capital of 2000 crores and a credit guarantee fund of 3000 crores under Pradhan Mantri MUDRA scheme.
• Initially, this bank is functioning as Non- financial company and subsidiary of SIDBI. Later on, this will be made a
separate institution.
• The principal objective of this bank to provide loans to small manufacturing unit, shopkeepers and street vendors
at low-interest rates under the following schemes.
1. Shishu (up to 50,000)
2. Kishore (up to 5 lakh)
3. Tarun (up to 10 lakh)
• Before we go into Nationalization of banks in India, we must know a few brief introductions of
History of Banking in India. In the 18th century, three banks were established in India which are given
below.
• Bank of Calcutta (1806)
• Bank of Bombay (1840)
• Bank of Madras (1847)
• These banks were known as The Presidency Banks and later on, these Presidency Banks were renamed
to Imperial Bank of India in 1921. Further, this Imperial Bank of India converted to present State Bank
of India. To understand nationalization of banks this short history of banking of India was necessary.
• Definition of Nationalization:-
• Nationalization of Banks or any private organisation or entity may be defined as “ Whenever a Central
Government or State Government of a country take over stakes of any private banks or private
organisation/ entities by investing their funds and acquire more than 50% stakes of that private entity
with respect to a specific Acts, ordinance or any other types of laws.”
• This process of taking over the private ownership banks or organisation to
make public ownership is known as Nationalization.
• The nationalization of banks in India and why it was needed and when it occurred in the banking history of India.
• Origin of Nationalization of banks in India:-
• Banking reforms started immediately after independence because India was under the developing phase at that time.
When it comes to Nationalization of banks in India, it became started when Reserve Bank of India was nationalized
on 1st Jan 1949 by RBI Act 1949 although RBI was the Central Bank of India. Therefore it can’t be kept in the list of
nationalized bank of India.
• At that time, agriculture was the major source of bread and butter for Indians and the name of banks were pointing out
some or the other regions or state like Allahabad Bank, Punjab National Bank, Bank of Baroda, Andhra Bank etc. Therefore
the majority of people didn’t trust banks to deposit their money. They wanted to deposit their money in the Post Office
rather than in Banks.
• This was the major issue for the Government of India and the Government wanted to resolve this problem as soon as
possible. Thus to enhance the trust of the public in banks Government took action and nationalized Imperial Bank of India
and renamed as State Bank of India in 1955 by SBI Act 1955.
• But the results which Government of India expected were not satisfactory as the Government wanted to provide banking
facility to rural areas, micro, small and medium-size industrial. Thus Government needed some more banks to penetrate
the rural areas, therefore, Government decided to merge home-state banks which were operating in different regions
with State Bank of India as a subsidiary of SBI by a special act SBI Subsidiary Act 1959.
• As we knew above Imperial Bank of India was nationalized and renamed as State Bank of India in 1955. Although SBI
comes under the definition of nationalized banks. But according to the official website of Reserve Bank of India SBI is kept
under the different category. This is because the State Bank of India and it’s associate’s banks ( SBI Subsidiary banks) were
nationalized under different laws. Thus SBI Group is governed by the SBI Act 1955 and SBI Subsidiary Bank Act 1959.
• List of Nationalized Banks in India:-
 • It was 1969 when Mrs Indira Gandhi was the Prime Minister of India and Mrs Gandhi wanted to expand the services of
banking to the remote areas, small entrepreneurs, self-employed and small farmers, labours but private banks didn’t ready
to open their branches into rural areas.
• Therefore, the Government of India issued an ordinance Acquisition and Transfer of Undertaking Ordinance
1969 and nationalized 14 major private commercial banks with effect from midnight of 1st July 1969 whose capital was up
to 50 crores.
• The list of all 14 banks nationalized in 1969 is given below.
1. Central Bank of India
2. Bank of Maharashtra
3. Dena Bank
4. Punjab National Bank
5. Syndicate bank
6. Canara Bank
7. Indian Bank
8. Indian Overseas Bank
9. Bank of Baroda
10. Union Bank of India
11. Allahabad Bank
12. United Bank of India
13. UCO Bank
14. Bank of India
 • This was the first phase of nationalization of banks India, the second phase of nationalization of
• banks happened in 1980. This time 6 more banks having capital up to 200 crores were nationalized by the
Government of India. Even this time Mrs Indira Gandhi was the Prime Minister of India.
• The list of 6 banks nationalized in 1980 is here.
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab and Sindh Bank
6. Vijaya Bank
• Thus we have understood the Nationalization of banks in India, now the question arises, how many
banks were nationalised in till now?
• Although the total number of nationalized banks in India is 20 yet later in 1993, New Bank of India merged
with Punjab National Bank. This was the first time in the banking history of India when two nationalized
banks had merged together.
• Hence the total number of Nationalized Banks in India became 19 only
of Nationalised banks as of 2022 is only 12.
• List of Merged Public Sector Banks in India
• In a move to restructure and redefine the country's banking space, in 2021, the
government of India merged 10 Public Sector (PSU) Banks into 4 banks.
• A merger is an agreement between entities where they pool in their assets and
liabilities and become one entity. The merger of Public Sector Banks (PSBs) is where
the PSBs are merged with 'anchor' banks. As of today, India has 12 Public Sector
Banks, including Bank of Baroda and State Bank of India.
• Merits of Public Sector Bank Mergers
• The bank's service delivery will see a huge improvement.
• Mergers enable a large capital base that will aid the acquirer to offer a bigger loan
amount.
• Customers of the bank will have a much wider range of products they can choose
from in mutual funds, insurance products, loans and deposits.
• The need for recapitalisation from the government will reduce after a merger.
• The bank will have an opportunity to establish technological advancements in their
processes.
 List of Merged Banks
•* Vijaya Bank and Dena Bank were merged with Bank of Baroda from April 1, 2019
*State Bank of India was merged with its associate banks and Bharatiya Mahila Bank in 2017.

Anchor Bank Banks Merged

Anchor Bank Banks Merged
•Oriental Bank of Commerce
Punjab National Bank
•United Bank of India
Canara Bank •Syndicate Bank
Indian Bank •Allahabad Bank
•Andhra Bank
Union Bank of India
•Corporation Bank
•Dena Bank
Bank of Baroda
•Vijaya Bank

•State Bank of Bikaner and Jaipur

•State Bank of Hyderabad
•State Bank of Mysore
State Bank of India
•State Bank of Patiala
•State Bank of Travencore
•Bharatiya Mahila Bank
• The Indian banking system consists of commercial banks, which may be public scheduled or
non-scheduled, private, regional, rural and cooperative banks. The banking system in India defines
banking through the Banking Companies Act of 1949.
• In this post, we take a look at the Evolution of banks in India, the different categories and the impact
of nationalised banks.
• Phase 1: The Pre-Independence Phase
• There were almost 600 banks present in India before independence. The first bank to be established
as the Bank of Hindustan was founded in 1770 in Calcutta. It closed down in 1832. The Oudh
Commercial Bank was India’s first commercial bank in the history of the evolution of banking in India.
• A few other banks that were established in the 19th century, such as Allahabad Bank (Est. 1865) and
Punjab National Bank (Est. 1894), have survived the test of time and exist even today.
• Some other banks like the Bank of Bengal, Bank of Madras, and Bank of Bombay – established in the
early to mid-1800s – were merged as one to become the Imperial Bank, which later became the State
Bank of India.
• Phase 2: The Post-Independence Phase
• After independence, the evolution of the banking system in India continued pretty much the same as
before. In 1969, the Government of India decided to nationalize the banks under the Banking
Regulation Act, 1949. A total of 14 banks were nationalised, including the Reserve Bank of India (RBI).
• In 1975, the Government of India recognized that several groups were financially excluded. Between
1982 and 1990, it created banking institutions with specialized functions in line with the evolution of
financial services in India.
• NABARD (1982) – to support agricultural activities
• EXIM (1982) – to promote export and import
• National Housing Board – to finance housing projects
• SIDBI – to fund small-scale industries
• Phase 3: The LPG Era (1991 Till Date)Libralisation, Privatization , Globalisation
• From 1991 onwards, there was a sea change in the Indian economy. The
government invited private investors to invest in India. Ten private banks were
approved by the RBI. A few prominent names which exist even today from this
liberalisation are HDFC, Axis Bank, ICICI, DCB and IndusInd Bank.
• In the early to mid-2000s, two other banks, Kotak Mahindra Bank (2001) and Yes
Bank (2004), received their licenses. IDFC and Bandhan banks were also given
licenses in 2013-14.
• Other notable changes and developments during this era were:
• Foreign banks like Citibank, HSBC and Bank of America set up branches in India.
• The nationalization of banks came to a standstill.
• RBI and the government treated public and private sector banks equally.
• Payments banks came into existence.
• Small finance banks were permitted to set up their branches throughout India.
• Banks began to digitalize transactions and various other related banking
operations.
• Which banks are Privatised in 2021?
• Finance minister Nirmala Sitharaman had announced privatisation of two public sector banks as part of the
disinvestment programme for this fiscal. Niti Aayog had reportedly shortlisted Central Bank of India and
Indian Overseas Bank for the purpose.
• As per the 'Disinvestment Policy' of the Government of India (GOI), following are the main objectives of
disinvestment in India: To reduce the financial burden on the government. To improve public finances.
To encourage a wider share of ownership.
Budget 2021: Govt. to disinvest two public sector banks & one public general insurance company..
“In 2021-22 we would also bring the IPO of the LIC this fiscal,” she said. The Central government had
announced the stake sale in the LIC during Budget 2020-21.
The government currently owns 100% in the LIC, while it holds around a 46.5% stake in the IDBI Bank. It aims
to garner ₹90,000 crore from the listing of the LIC and stake dilution in the IDBI Bank in the next fiscal out of
total disinvestment target of ₹2.10 lakh crore.
Ms. Sitharaman said that the strategic sale of the BPCL, the IDBI Bank, the Air India, Shipping Corp, Container
Corp and other disinvestments would be completed in 2021-22, in spite of COVID-19. The amendments
necessary to implement these would be submitted to the House in this session itself, she said.
Indicating that the disinvestment process was in full swing, the Minister said that the Niti Aayog had been
asked to come up with the list of companies that may be disinvested next.
Idle assets will not contribute to Atma Nirbhar Bharat,” she said, adding “I have estimated receipts of ₹1.75
lakh crore from disinvestment in 2021-22.”
The government chooses a disinvestment strategy to reduce the fiscal burden and raise
money to meet public needs.
They may also be done to privatize the assets. Disinvestment can realize the long-term
growth of the country.
 • Deployment of Funds
1. PBs cannot undertake lending activities.
2. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the
RBI on its outside demand and time liabilities. PBs are also required to
invest minimum 75 per cent of its “demand deposit balances” in
Statutory Liquidity Ratio (SLR) eligible Government securities/treasury
bills with maturity up to one year and hold maximum 25 per cent in
current and time/fixed deposits with other scheduled commercial banks
for operational purposes and liquidity management.
• Capital requirement
1. The minimum paid-up equity capital for payments banks shall be Rs.
100 crore.
2. The payments bank will have a leverage ratio of not less than
3% which basically mean that its outside liabilities should not exceed
33.33 times its net worth (paid-up capital and reserves).
 • List of Payment Banks in India
1. Aditya Birla Nuvo
2. Airtel M Commerce Services - Active
3. Cholamandalam Distribution Services
4. Department of Posts - Active
5. FINO PayTech – Active
6. National Securities Depository- Active
7. Reliance Industries (JIO)- Active
8. Shree Dilip Shantilal Sanghavi (Sun Pharmaceuticals)
9. Paytm payment bank
10. Tech Mahindra
11. Vodafone M-Pesa
12. India Post ( Starts operation by 21 Aug )
• *Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have
surrendered their licenses.
 • List of Payment Banks in India
1. Aditya Birla Nuvo
2. Airtel M Commerce Services - Active
3. Cholamandalam Distribution Services
4. Department of Posts - Active
5. FINO PayTech – Active
6. National Securities Depository- Active
7. Reliance Industries (JIO)- Active
8. Shree Dilip Shantilal Sanghavi (Sun Pharmaceuticals)
9. Paytm payment bank
10. Tech Mahindra
11. Vodafone M-Pesa
12. India Post ( Starts operation by 21 Aug )
• *Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have
surrendered their licenses.
• The primary objective of setting up payments banks was to
“further financial inclusion by providing small savings accounts and
payments/remittance services to migrant labour workforce,
low-income households, small businesses, other unorganized
sector entities and other users, by enabling high volume-low value
transactions in deposits and payments/remittance services in a
secured technology-driven environment.”
• Payment banks, which were supposed to be the next big thing,
sadly have not lived up to the hype so far. The jury is still out on
whether the PBs will ever succeed in the country, but one thing is
clear: it won’t be easy for them to survive.
 RRB’s (43)
Company type Government owned Banks, regulated by RBI &
Supervised by NABARD.
Industry RBanking, financial services
Founded 2 October 1975; 48 years ago
Number of locations 21871
Products Retail banking, corporate banking, investment
banking, mortgage loans, wealth
management, debit cards, UPI, internet
banking, mobile banking, finance and insurance

Owner Government of India (50%),

Nationalised Banks (35%),
State Governments (15%)
Parent Ministry of Finance, Government of India
Types of Loans in India
Secured and Unsecured Loans
Secured Loans :
Home, Vehicle, Gold, LAP,
LAS , LAFD ,LAINSU, WCLoan.
Unsecured Loans:
PL, Edu Loan, SH term Busi
Loans, credit cards, etc..
https://youtu.be/fH-3pykVVmQ
 FIXED FLOATING

Interest rate on your home loan Interest rate on your home loan
remains fixed throughout the loan changes based on change in the
tenure. lender’s benchmark rate.

Fixed rates are slightly higher than Floating rates are slightly lower than
floating rates. fixed rates.

If you are comfortable with the If you are unsure about where
prevailing interest rates, are interest rates are heading, opt for a
reasonably sure that interest rates floating rate home loan.
will rise in future, opt for a fixed rate
home loan.

There is a prepayment penalty in There is no prepayment penalty in

case of fixed rate home loans. case of floating rate home loans.
Floating vs Fixed ROI
• Opt for a floating rate home loan if -
• You expect interest rates to fall
• You are unsure about interest rate movements
• You want some savings on your interest cost in the near term
• Opt for a fixed rate home loan if -
• You are comfortable with the EMI you are committing to pay
• You expect interest rates to rise
• If interest rates have come down and you wish to lock in at that rate
• If you are unable to decide, opt for a combination loan which
is part fixed and part floating
• You can switch between a fixed and floating rate at a
nominal fee
• Retail Loans
• Housing Loan. Vehicle Loans.Education Loan.
• Personal/Gold Loan.Loan to Senior Citizens. Loan Against Property
• Personal loans .Credit cards.
• Corporate Loans
• 1.Term Loan(Lumpsum 1-5 yrs) , 2.Start up Loans
• 3.Working Capital Loans , 4.Loan Against Property
• 5. Invoice Financing 6.Equiptment Financing
• 7.Business Loans for Women Entrepreneurs(discounted ROI)
• 8.Overdraft 9.Merchant Cash Advance
• 10.Business Credit Cards(Eg.Bajaj)

• Export Finance: Important to follow FEMA (Foreign Exchange Management Act)

guidelines.
• Types of Credit Facilities :
• CC Cash credit is provided to the business owners to carry out their regular business expenses. In Cash credit, the borrower is
given access to a current account from which they can withdraw money within a predefined limit for an agreed amount of time.
The interest is charged on the daily closing balance of the account rather than the borrowing limit.
• OD This Credit Facility is offered to Current Account holders in a particular bank, to borrow the fund more than their existing
balance for a specific period. These credits are secured by the physical assets, pledge of FDs, Securities or Mortgage of some
immovable property in some cases.
• Demand Loans Demand Loans, sometimes known as working capital loans, are offered by the lender to the Borrower for the
short-term.
• As the name suggests, the Borrower has to repay the loan on the demand of the lender. There is no fixed tenure for the repayment.
The Borrower can repay the loan in advance without paying any prepayment charges. These loans are generally offered against
tangible assets or similar securities.
• Bills Finance It is a binding short-term financial instrument that mandates one party to pay a specific sum of money to another at a predetermined
date or on-demand. Also known as a bill of exchange, it essentially denotes, in writing, that one person (debtor) owes money to another (creditor).
• Drawee Bill Scheme it refers to the unconditional bill finances. Drawee is a legal and banking term used to describe the party that has been
directed by the depositor to pay a certain sum of money to the person presenting the check or draft. A typical example is if you are cashing a
paycheck.
• Drawer & Drawee : The maker of a bill of exchange or cheque is called the "drawer"; the person thereby directed to pay is called the
"drawee".(mostly the bank)
• Payee : Payee: The beneficiary, i.e. to whom the amount is to be paid.
• Bills Discounting Under this type of lending, Bank takes the bill drawn by borrower on his
(borrower's) customer and pay him immediately deducting some amount as discount/commission
. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collects the total amount.
• Priority Sector Advances / Lending :
• Priority Sectors Lending is the role exercised by the RBI to banks, imploring them to dedicate funds for specific sectors of
the economy like agriculture and allied activities, education and housing and food for the poorer population.
• Loans to individuals for educational purposes, including vocational courses, not exceeding Rs 20 lakh are
considered eligible for priority sector classification. Loans currently classified as a priority sector would continue till maturity.
• The categories under priority sector are as follows:
• Agriculture.
• Micro, Small and Medium Enterprises. (MSME)
• Export Credit.
• Education.
• Housing.
• Social Infrastructure.
• Renewable Energy.
• Others.(best eg Gold Loan)

• Morarji Desai Introduced PSL in India.

• NPA Classification Norms
• As per RBI's notification on Prudential norms on Income Recognition, Asset Classification and Provisioning
pertaining to Advances - Clarifications ('RBI Circular') dated November 12, 2021 norms of NPA has been revised.
•
• Key Highlights of revised NPA norms:
1. The timelines for Special Mention Account (SMA) categorisation have been modified, the overdue timeline for
SMA 0, SMA 1 and SMA 2 shall be upto 30, more than 30 upto 60 and more than 60 upto 90 days. Please refer to
the note below for details.
2. The Classification of borrower accounts as Special Mention Account (SMA) as well as Non-Performing Asset
(NPA) shall be done as part of the day-end process for the relevant date. The SMA or NPA classification date shall
be the calendar date for which the day end process is run. The said SMA classification of borrower accounts are
applicable to all loans (except agri advances), including retail loans, irrespective of size of exposure
3. Loan accounts classified as NPAs may be upgraded as 'standard' assets only if entire arrears of interest and
principal are paid by the borrower.
4. In cases of loans where moratorium has been granted for repayment of interest, lending institutions may recognize
interest income on accrual basis for accounts which continue to be classified as 'standard'
5. If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the
moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium
period need not be reversed
Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)
As per circular DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 by RBI on 'Prudential Framework for
Resolution of Stressed Assets’,
lenders will recognize incipient stress in borrower accounts, immediately on default, by classifying them as
special mention accounts (SMA).The SMA categories shall be as follows:

Loans other than revolving facilities

Basis for classification - Principal or
SMA Sub-categories interest payment or any other amount
wholly or partly overdue
SMA-0 Upto 30 days
SMA-1 More than 30 days and upto 60 days
SMA-2 More than 60 days and upto 90 days
 NPA Management
•The Narasimham Committee recommendations were
made, among other things, to reduce the
Non-Performing Assets (NPAs) of banks
•To tackle this, the government enacted the
Securitization and Reconstruction of Financial Assets
and Enforcement of Security Act (SARFAESI) Act, 2002
•Enabled banks to realize their dues without
intervention of courts
 SARFAESI Act
•Enables setting up of Asset Management Companies to acquire
NPAs of any bank or FI (SASF, ARCIL are examples)
•NPAs are acquired by issuing debentures, bonds or any other
security
•As a second creditor can serve notice to the defaulting borrower
to discharge his/her liabilities in 60 days
•Failing which the company can take possession of assets,
takeover the management of assets and appoint any person to
manage the secured assets
•Borrowers have the right to appeal to the Debts Tribunal after
depositing 50% of the amount claimed
by the second creditor.
• If the interest or principal remains overdue for a period 90 days or three months and above the loan account is classified as
a Non-Performing Asset (NPA). Once an asset is classified as NPA, it will move back to 'Standard' category if the DPD (days past due) count
comes to '0' DPD.
• As per RBI's guidelines, the lending institutions will flag borrower accounts as overdue at the day-end processes for the due date, irrespective
of the time of running such processes. The classification of borrower accounts as SMA or NPA shall also be done as part of the day-end
process for the relevant date. In other words, the SMA or NPA classification date shall be the calendar date for which the day end process is
run.
• What is "Days Past Due (DPD)"
• It indicates whether you have been consistent in your repayments and if you have missed any, how many instalments you have missed and by
how many days.
• The counting of DPD will be considered based on the oldest payment due date and the number of days falling due shall be counted to classify
the loan account as NPA.
• In case the due date and billing date are different, the former would be considered for the purpose of calculating the DPD (days past due).
• Receipt of Payment Instrument
• In the situation wherein the payments instrument has been collected from the borrower but the same is pending for clearance or has not been
deposited in the bank, only the actual collection of repayment as sufficient discharge of payment obligation by the borrower.
•
• Upgradation of NPA accounts
• For upgrading accounts classified as NPAs to 'standard' asset category upon payment of only interest overdues, partial overdues, etc. or upon
the DPD (days past due) status coming to zero days.
• The loan accounts classified as NPAs may be upgraded as 'standard' assets only if entire arrears of interest and principal are paid by the
borrower. Partial payment, such as payment of only interest or only one installment, shall not result in the upgradation of the loan account.
• Once a loan account is classified as an NPA, it shall remain as such till the time the entire outstanding amount is repaid.
• Categories of NPAs
• The RBI has categorized NPAs into three broad categories depending on the period of default. The following are the
subcategories of NPAs –
• Sub-Standard Asset: Any loan or advance is a sub-standard asset if it remains outstanding or NPA for a period less than or
equal to 12 months.
• Doubtful Asset: Any loan or advance is a doubtful asset if it remains outstanding or NPA for a period of more than 12
months and is already classified as a sub-standard asset.
• Loss Asset: Any loan or advance is a loss asset if it remains “uncollectibleˮ or has little to no recovery value, as its
continuance as a bankable asset is unsuggestible. Therefore, the bank may consider some recovery value left in it as the
asset has not been written off wholly or in parts.
• Provisions for Non-Performing Assets
• Provision for Non Performing Assets means the banks keep aside a certain amount from their profits in a particular quarter
for NPAs. This is because this asset can turn into losses in the future. Thus, by this method, banks can maintain a healthy
book of accounts by provisioning for bad assets. Moreover, banks make provisions based on the NPA category, as
mentioned above. Also, the provisions depend on the type of bank. For instance, Tier-I and Tier-II banks have different
provisioning norms.
• One can understand the NPA provisions by looking at the bankʼs auditorʼs report. As per RBI, banks have to make their NPA
numbers public from time to time. There are two metrics that help to understand the NPA situation of the bank.
• Gross Non Performing Asset GNPA: Gross Non Performing Asset is the absolute amount that shows the total value of
loans for a bank that are due within the 90 days period in a particular quarter or financial year.
• Net Non Performing Asset NNPA: Net Non Performing Asset shows the exact value of NPAs after the bank makes
specific provisions for it. It is arrived at by subtracting the doubtful and unpaid assets from the gross NPA.
• How Do NPAs Work?
• The lender does not switch the loans or advances into the NPA category unless a specific period of non-payment has
gone. Also, banks or lenders consider all the factors that may make the borrower delay in making interest and principal
payments. Sometimes, they also give the borrower a grace period for payments. Banks typically consider it a loan overdue
even after the grace period. However, banks still wait for a period of 90 days of non-payments and then consider the loan
as a non performing asset.
• After a prolonged period of non-payment, the bank will force the borrower to liquidate any assets or mortgage as a part of
the loan agreement. If the borrower does not pledge any assets, then the bank may write off the loan as bad debt and sell it
to the bad bank . The bad banks aim to ease the burden on banks by taking the bad loans off their balance sheet and
lending them to customers again without constraints.
• For instance, if someone takes out a second mortgage and that loan becomes an NPA. The bank will send a notice for
foreclosure on the home because it is being used as collateral for the loan.
• Significance of Non-Performing Assets
• It is important that the borrower and lender must be aware of the performing and non performing assets. For the borrower,
if the asset is non performing and does not pay the interest, it can have a negative impact on their creditworthiness and
growth. Also, it will hamper their ability to obtain a loan in future.
• Similarly, for bank or lender, the interest they earn on loans is a main source of income. Thus, a non performing asset will
negatively affect their ability to generate income and thus impact their overall profitability. Also, it is important that the
banks keep constant track of their non performing assets. This is because too many NPAs can adversely affect their
liquidity or growth abilities.
• A non performing asset can be manageable; however, it depends on how many they are and their past due period. In the
short term, banks can tolerate a good amount of NPAs. But if the volume of NPAs increases over a period of time, it can
threaten the financial health and future success of the bank or lender. This is why banks keep NPAs in their books, hoping
to recover the money or make provisions for it. If they are unable to recover, they write it off entirely as bad debt.
• The RBI uses the following instruments for qualitative control of
credit:
• CRR Cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs to maintain as
liquid cash. This is an RBI requirement, and the cash reserve is kept with the RBI. A bank does not earn interest
on this liquid cash maintained with the RBI and neither can it use this for investing and lending purposes.
• 4.50 percent of their Net Demand and Time Liabilities (NDTL)
• SLR the Statutory liquidity ratio is the Government term for the reserve requirement that commercial banks are
required to maintain in the form of cash, gold reserves, Govt. bonds and other Reserve Bank of India- approved
securities before providing credit to the customers.It is 18% as on Nov 2022.
• OMO Open Market Operations refers to buying and selling of bonds issued by the Government in the open
market.
• Margin Requirements. Margin Requirement is the percentage of marginable securities that an
investor must pay for with his/her own cash. It can be further broken down into Initial Margin Requirement and
Maintenance Margin Requirement.
• For Eg: a person mortgages his house worth one crore rupees with the bank for a loan of 80 lakh rupees
. The margin requirement in this case will be 20 lakh rupees.
• CRR – Cash Reserve Ratio
• The Central Bank of India requires commercial banks to keep a certain
percentage of their total deposits in the form of cash reserves.
• The banks are not permitted to use this amount with the Central Bank for
economic and commercial purposes.
• It is the mode of maintaining economic liquidity and the flow of money.
• If the Reserve Bank of India wishes to increase the money supply in the
economy, it will reduce the CRR rate., thereby allowing banks to spend/
lend more.
• Conversely, if the RBI plans to limit the money supply in the economy, it will
increase the CRR rate, and hence the banks will have limited funds to lend
as their greater amount of funds (or cash) shall be blocked with the Reserve
Bank.
• SLR – Statutory Liquidity Ratio
• The percentage of Net Time and Demand Liabilities the bank keeps in the form of liquid
assets.
• A unique way of sustainable stability is by putting a cap on the customer’s credit facility.
• The major reason to have a huge SLR is to fulfill the unexpected demands from the
depositors.
• The banks usually maintain a higher SLR than what is required
• Time Liabilities is the amount payable to the depositors after a specific time
• Demand Liabilities is the amount payable to the depositors when the demand arises
• Consider a CRR rate of 4%. This means for every Rs. 100 deposited, Rs. 4 must be
deposited with the Central Bank and shall not be used commercially. The remaining Rs.
96 can be used for commercial and lending purposes.
• Consider an SLR rate of 15%. This means the banks shall keep Rs. 15 to meet the
customers’ requirements, and the remaining Rs. 85 shall be available to the bank for other
operations and commercial purposes.
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Funds management is the overseeing and handling of a financial institution's cash flow. The fund
manager ensures that the maturity schedules of the deposits coincide with the demand for loans. To
do this, the manager looks at both the liabilities and the assets that influence the bank's ability to
issue credit.
Funds management—also referred to as asset management—covers any kind of system that
maintains the value of an entity. It may be applied to intangible assets (e.g., intellectual property and
goodwill), and tangible assets (e.g., equipment and real estate). It is the systematic process of
operating, deploying, maintaining, disposing, and upgrading assets in the most cost-efficient and
profit-yielding way possible.
• Divisions of Use
• Fund management may be divided into four industries:
• Financial investment industry
• Infrastructure industry
• Business and enterprise industry
• The public sector
• The most common use of "fund management" refers to investment management or financial
management, which are within the financial sector responsible for managing investment funds for
client accounts. The fund manager's duties include studying the client's needs and financial goals,
creating an investment plan, and executing the investment strategy.
1.Capital adequacy issues in banking
2.Risk management in Banks and ALM
3.Special Issues in the Indian Banking sectors
• Basel norms
• Assets Reconstruction Companies
• Securitization Act
CAPITAL ADEQUACY
means maintaining ENOUGH
CAPITAL as a cushion for
relevant risks (unexpected
loss) of a bank in terms of
REGULATORY GUIDELINES.
for Risk Management. To
Safeguard the Depositors
Interest.
The capital adequacy
ratio (CAR) is a measure of
how much capital a bank has
available, reported as a
percentage of a
bank's risk-weighted credit
exposures. The purpose is to
establish that banks have
enough capital on reserve to
handle a certain amount of
 • The Capital Adequacy Ratio (CAR), also known as the Capital to Risk (Weighted) Assets Ratio (CRAR), is a
measure used in banking to determine the adequacy of a bank's capital in relation to its risk-weighted assets. It is a
critical metric to ensure that a bank has enough capital to absorb potential losses and continue its operations,
safeguarding depositors and maintaining stability in the financial system.
• Key Points:
1. Formula:
2. CAR=Tier 1 Capital+Tier 2 CapitalRisk-Weighted Assets×100\text{CAR} = \frac{\text{Tier 1 Capital} + \text{Tier 2
Capital}}{\text{Risk-Weighted Assets}} \times 100CAR=Risk-Weighted AssetsTier 1 Capital+Tier 2 Capital ×100
1. Tier 1 Capital: This includes core capital such as equity capital and disclosed reserves. It's the primary capital and is considered
the most reliable form of financial strength.
2. Tier 2 Capital: This includes supplementary capital such as subordinated debt, hybrid instruments, and revaluation reserves.
3. Risk-Weighted Assets (RWA): These are the bank’s assets weighted according to their risk level. For example, loans
are considered riskier than government securities, so they are given higher weights.
4. Regulatory Requirements: Central banks and regulatory authorities set minimum CAR requirements for banks to
ensure they can absorb a reasonable amount of loss and still meet their obligations. For example, under the Basel
III framework, the minimum requirement is typically 8%, though some countries may impose stricter
requirements.
5. Purpose: CAR is essential in ensuring that banks can withstand financial stress, prevent insolvency, and maintain
trust in the banking system.
• Importance:
• Protection Against Insolvency: A higher CAR means a bank has more capital
relative to its risk exposure, which reduces the likelihood of insolvency.
• Regulatory Compliance: Banks must maintain a minimum CAR as mandated by
regulatory bodies like the Basel Committee on Banking Supervision.
• Financial Stability: Ensures that the bank can continue operations during economic
downturns or financial crises.
• The CAR is a vital tool for regulators to monitor and ensure the safety and
soundness of the banking system.
• The Basel norms are a set of international banking regulations developed by the Basel Committee on
Banking Supervision (BCBS) to strengthen the regulation, supervision, and risk management of banks.
These norms are implemented in three stages: Basel I, Basel II, and Basel III.
• Basel I (1988)
• Focus: Capital Adequacy
• Objective: Ensure that banks have enough capital to cover credit risks.
• Key Requirement: Introduced the Capital Adequacy Ratio (CAR) with a minimum requirement of 8% of
risk-weighted assets. This was primarily focused on credit risk and provided a simple framework for risk
assessment.
• Basel II (2004)
• Focus: Risk Management
• Objective: Improve the banking sector’s ability to deal with financial stress, enhance risk management,
and increase transparency.
• Key Pillars:
• Minimum Capital Requirements: Expanded to cover not just credit risk but also market and
operational risks.
• Supervisory Review: Introduced guidelines for regulatory authorities to evaluate how well banks
are assessing their capital needs relative to their risks.
• Market Discipline: Increased disclosure requirements, encouraging transparency and market
discipline.
• Basel III (2010-2017)
• Focus: Strengthening Regulation and Risk Management Post-Crisis
• Objective: Address the deficiencies in financial regulation revealed by the 2008 financial crisis and improve the banking sector’s
ability to deal with economic stress.
• Key Enhancements:
• Higher Capital Requirements: Increased the quality and quantity of capital, especially with more emphasis on Tier 1
capital.
• Leverage Ratio: Introduced a non-risk-based leverage ratio to serve as a backstop to the risk-based CAR.
• Liquidity Standards:
• Liquidity Coverage Ratio (LCR): Banks must hold enough high-quality liquid assets to survive a 30-day stressed funding
scenario.
• Net Stable Funding Ratio (NSFR): Requires banks to maintain a stable funding profile in relation to the composition
of their assets and off-balance sheet activities.
• Countercyclical Buffer: Additional capital buffer to be built up during economic booms and drawn down in downturns.
• Each Basel norm builds upon the previous one, enhancing the regulatory framework to address emerging risks
and ensure the stability of the global banking system.
• Risk Management Framework:
• Risk Identification: Recognizing the various risks that the bank faces.
• Risk Assessment: Measuring the potential impact of each identified risk,
often using models and historical data.
• Risk Mitigation: Implementing strategies to minimize or control the impact
of risks. This can include hedging, diversification, setting limits, and
insurance.
• Risk Monitoring: Continuously tracking risk exposures and the
effectiveness of risk management strategies.
• Risk Reporting: Communicating risk exposures, management actions, and
outcomes to stakeholders, including the bank’s board and regulatory
bodies.
• Asset-Liability Management (ALM)
• 1. Purpose of ALM:
• Balance Sheet Management: ALM is a strategic approach to managing a bank's
balance sheet to ensure liquidity, manage interest rate risk, and maximize
profitability.
• Liquidity Management: Ensuring that the bank has enough liquid assets to meet its
short-term obligations.
• Interest Rate Risk Management: Managing the gap between assets and liabilities
that reprice or mature at different times to minimize the impact of interest rate
fluctuations on the bank’s net interest margin.
• ALM Committees (ALCO):
• Role: The Asset-Liability Committee (ALCO) is responsible for overseeing the ALM
process. It sets policies, reviews risk exposures, and makes strategic decisions on
managing the bank's assets and liabilities.
• Key Functions: ALCO regularly reviews the bank’s liquidity position, interest rate
risk profile, capital adequacy, and investment strategies to ensure alignment with
overall risk management goals.
• Relationship Between Risk Management and ALM
• Risk management and ALM are closely intertwined. Effective ALM is a key
component of a bank's broader risk management strategy, particularly in managing
liquidity and interest rate risks. By aligning the maturity and repricing profiles of
assets and liabilities, banks can better manage their risk exposures and ensure
long-term financial stability.
• Asset Reconstruction Companies (ARCs) are specialized financial institutions in India that focus on the recovery and resolution of
non-performing assets (NPAs) or bad loans of banks and financial institutions. They play a crucial role in the financial system by
helping banks clean up their balance sheets, thus enabling them to focus on their core business of lending.
• Key Functions and Operations of ARCs:
• 1. Acquisition of Non-Performing Assets (NPAs):
• ARCs acquire bad loans or NPAs from banks and financial institutions at a discounted price. This transfer helps banks to offload their
stressed assets and focus on healthier parts of their portfolio.
• Once the NPAs are transferred, the responsibility of recovering the dues from the borrowers shifts from the bank to the ARC.
• 2. Asset Reconstruction and Resolution:
• ARCs employ various strategies to recover or reconstruct these assets, which may include restructuring the loan, converting debt into
equity, or liquidating the collateral.
• They may work with the defaulting borrower to restructure the debt and revive the business, or they might sell off the asset to
recover the dues.
• 3. Securitization of Assets:
• ARCs can securitize the acquired assets by converting them into marketable securities. These securities are then sold to investors,
allowing ARCs to generate funds for further purchases of NPAs.
• This process involves issuing security receipts (SRs) to Qualified Institutional Buyers (QIBs), which are backed by the underlying NPAs.
• 4. Legal Framework:
• ARCs in India operate under the regulatory framework provided by the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002. The SARFAESI Act empowers ARCs to enforce the security interests without
the intervention of courts, facilitating a quicker resolution process.
• ARCs are regulated by the Reserve Bank of India (RBI), which sets guidelines on their operations,
including capital requirements, the acquisition of assets, and other prudential norms.
• Benefits of ARCs:
• Reduction of NPAs: By acquiring and resolving NPAs, ARCs help reduce the burden of bad
loans on banks, improving their financial health.
• Focus on Core Banking: Banks can concentrate on their primary business of lending,
leaving the complex and time-consuming process of bad loan recovery to ARCs.
• Financial Stability: Effective resolution of NPAs contributes to the overall stability of the
banking sector and the broader economy.
• Challenges Faced by ARCs:
• High Acquisition Costs: Often, banks expect higher prices for their NPAs, leading to
challenges in acquiring assets at a reasonable discount.
• Resolution Difficulties: Recovering value from distressed assets can be difficult, especially
when dealing with large or complex cases where the borrower’s business may be
fundamentally weak.
• Regulatory and Operational Hurdles: ARCs must navigate various legal and operational
challenges, including delays in court proceedings and the difficulty of managing the
acquired assets effectively.
A mortgage-backed security (MBS) is a classic example of
securitization. A group of home loans are sold by the original lender to
another financial institution, which turns the package of mortgages into
one distinct unit that the public can invest in.

Securitization is a powerful financial tool that enhances

liquidity and risk management in banking.
• Securitization in banking is a financial process where certain types of assets, typically loans, are
pooled together, and their cash flows are used to create and sell new securities. This process
allows banks and other financial institutions to convert illiquid assets, such as loans, into liquid,
tradable securities. Securitization is a key tool for managing risk, improving liquidity, and freeing
up capital for further lending.
• Key Concepts in Securitization:
• 1. Asset Pooling:
• Banks select a group of similar assets, such as mortgages, auto loans, or credit card receivables,
and pool them together.
• These assets are then transferred to a special purpose vehicle (SPV), a separate legal entity
created specifically for the securitization process.
• 2. Special Purpose Vehicle (SPV):
• The SPV is crucial because it isolates the pooled assets from the bank's balance sheet, which
means that the bank's creditors have no claim on the assets in case of the bank's insolvency.
• The SPV issues securities backed by the pooled assets. These securities are known as asset-backed
securities (ABS), and in the case of mortgages, they are often called mortgage-backed securities
(MBS).
• 3. Tranching:
• The securities issued by the SPV are typically divided into different tranches (slices) based on risk and return profiles.
• Senior tranches are the safest, as they are the first to receive payments from the underlying assets and have the lowest
risk of default. As a result, they offer lower returns.
• Mezzanine and junior tranches have higher risk and higher potential returns because they are paid after the senior
tranches.
• The junior tranche is the riskiest, as it is the last to be paid, and thus has the highest return potential.
• 4. Credit Enhancement:
• To make the securities more attractive to investors, credit enhancements are often used. These may include reserve
funds, over-collateralization, or guarantees from third parties, which reduce the risk of default on the securities.
• 5. Issuance and Sale of Securities:
• The SPV sells the tranches to investors in the capital markets. Investors could be institutions such as pension funds,
mutual funds, insurance companies, or even other banks.
• The proceeds from the sale of these securities go back to the originating bank, providing it with immediate liquidity.
• 6. Cash Flow Management:
• As borrowers repay their loans, the cash flows are collected by the SPV and distributed to investors according to the
priority of their tranche. This means senior tranche holders are paid first, followed by mezzanine and junior tranche
holders.
 syllabus
• Commercial Bank Management (217P01C414)
• Objective:
• To make students aware about banking sectors of India, its composition, operations, significance, and regulations.
• Contents:
1.Introduction to Banking
2.Role of banks in an economy
3.Structure, growth and development of banks in India
4.Study of bank balance sheet and profit and loss account
5.Funds management in banks
6.Deposits and Lending by banks including priority sector
7.NPA Management in banks
8.Capital adequacy issues in banking
9.Risk management in Banks and ALM
10.Special Issues in the Indian Banking sectors
• Basel norms
• Assets Reconstruction Companies
• Securitization Act
11.Cooperative banks, RRBs and rural banking in India
• Text Books:
• Management of Banking and Financial Services by Justin Paul
• Reference Books:
Commercial Bank Management by Peter Rose
• Journals:
1. Journal of Banking
2. Bank Quest
3. Prajanan
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, commonly known as the SARFAESI Act, is a key piece of legislation in
India designed to allow banks and other financial institutions to recover non-performing
assets (NPAs) more efficiently. The act provides a legal framework for the securitization of
financial assets, the reconstruction of distressed assets, and the enforcement of security
interests without the need for court intervention.
• Key Provisions of the SARFAESI Act:
• 1. Securitisation of Financial Assets:
• The act allows banks and financial institutions to securitize their financial assets, meaning
they can bundle their loans and other receivables into marketable securities. This process
helps them convert illiquid assets into liquid ones, thus improving liquidity and reducing
the risk associated with non-performing assets (NPAs).
• 2. Asset Reconstruction:
• The act facilitates the formation of Asset Reconstruction Companies (ARCs), which are
specialized entities that purchase NPAs from banks at a discount. ARCs then work to
recover the loans or restructure them to maximize the value of the assets.
• Enforcement of Security Interest:
• One of the most significant provisions of the SARFAESI Act is that it allows banks to enforce their security interest in a defaulted
loan without the need to go to court. This means that if a borrower defaults on a loan, the bank can seize and sell the assets
pledged as collateral without needing a court order. This provision significantly speeds up the recovery process.
• 4. Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI):
• The act led to the establishment of CERSAI, a central registry where all securitization transactions, loans, and security interests can
be registered. This helps prevent fraud by ensuring that the same asset is not used as collateral for multiple loans.
• 5. Process of Recovery:
• The act specifies a clear procedure for the recovery of NPAs:
• Notice of Default: The bank must issue a notice to the borrower, giving them 60 days to repay the loan or face enforcement action.
• Enforcement Actions: If the borrower fails to repay within the notice period, the bank can take possession of the secured asset, take over the
management of the business, or appoint a receiver to manage the business.
• Sale of Assets: The bank can sell or lease the seized assets to recover the outstanding loan amount.
• 6. Appeals and Redressal:
• Borrowers have the right to appeal to the Debts Recovery Tribunal (DRT) if they believe the bank’s actions under the SARFAESI Act
are unjust. They can further appeal to the Appellate Tribunal if needed.
• 7. Exclusions:
• The SARFAESI Act does not apply to agricultural land, as the government wanted to protect the interests of farmers. Also, loans
below a certain threshold amount are excluded to prevent excessive burdens on small borrowers.
• Impact of the SARFAESI Act:
• 1. Enhanced Recovery Mechanism:
• The SARFAESI Act has significantly improved the ability of banks and financial institutions to recover loans, thereby reducing the burden of NPAs on their balance
sheets.
• 2. Development of Secondary Markets:
• The act has facilitated the development of secondary markets for NPAs, allowing ARCs and other investors to buy distressed assets and participate in the recovery
process.
• 3. Reduced Court Burden:
• By allowing out-of-court settlements, the SARFAESI Act has reduced the burden on courts, leading to faster resolution of loan defaults.
• 4. Improvement in Credit Discipline:
• The threat of swift enforcement under the SARFAESI Act has improved credit discipline among borrowers, as they are more likely to repay their loans to avoid losing
their assets.
• Challenges and Criticisms:
• 1. Implementation Issues:
• In practice, there have been delays in the enforcement process due to various legal and procedural challenges, including resistance from borrowers and legal loopholes.
• 2. Misuse by Banks:
• There have been instances where banks have misused the provisions of the SARFAESI Act to take harsh measures against borrowers without adequate cause, leading to
criticism.
• 3. Limited Scope:
• The act primarily benefits secured creditors (those with collateral). Unsecured creditors, such as suppliers and employees, do not receive similar protections, which can
be a disadvantage in the event of a company’s liquidation.
• Overall, the SARFAESI Act is a crucial piece of legislation that has strengthened the financial sector in India by providing a
robust mechanism for the recovery of bad loans. However, its effective implementation and the need to address certain
challenges remain essential for realizing its full potential.