Drishti Interview 2016

BANKING MADE SIMPLE
(Insight into Current Banking Scenario)

Version: 2.0 (May 2016)
( A Very useful book on Current Topics of Day to Day

Banking and all Knowledge Based Examinations )
COMPILED BY
Sanjay Kumar Trivedy (Divisional Manager )

Canara Bank, Government Link Cell, Nagpur, PGNS Complex, Modi No. 3, First Floor,
Sitabuldi, Nagpur-440012,: 0712 – 2522271,2522272 / 07774069639
E-mail: linkcellnagpur@canarabank.com; sanjaytrivedy@canarabank.com
Preface
Dear Friends,
Banking/Financial sector in our country has witnessed a sea change in last few years &
banking business has become more complex & difficult in the driven era of knowledge &
technology. An official working in the Banking sector has to keep pace with Updated
knowledge, skills & attitude. This is required everywhere. Promotion is nothing but a
reward/transformation that brings changes in the status and dignity of individual &
society at large.
This book titled Drishti – A book on Current Banking Topics ( 2014-16) has many
unique features to its credit & consists of all topics which is very required for Interview
/Promotion Test / Knowledge with clear concept & simple language. All the topics have
been compiled from Various Financial Journals/ Magazines & RBI sites/ speeches on
Current topics. Nearly twenty new topics have been added and two old topics removed
from version 1.0 March 2016.
I have taken special care to present the various concepts and textual information with
salient features like (i) more emphasis on clarity on topics (ii)complete coverage on the
subject matter for Promotion test, Group Discussion as well as interview (iii )the
knowledge requirement at higher level Interview taken care ( iv ) Simple Language ,
easy to understand & (v ) updates with recent policy guidelines correct information &
relevant topics. I am confident that it will be much helpful for the Promotion aspirants
to have success in their test as well as interview.
During preparation of this book, I have received tremendous support from Sri B P Desai
Sir (Our Ex. AGM & now Faculty on Contract at RSTC, Mumbai) and Probationary officer
Mr. Mohit Bansal ( New Marine Lines Branch). Special Thanks to my wife Mrs Renu, who
is also a banker, my son Master Ritwiz Aryan for all support to me.
As any work will have scope for some improvement, I shall be grateful if any feedback is
provided for improvement in contents of the book.
I wish you all the best for the written test & hope the study material will help in
achieving the goal.
Place : Nagpur SANJAY KUMAR TRIVEDY

Date : 19.05.2016 Divisional Manager, Government Link Cell, Nagpur
Compiled by Sri Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur 1|Page
DRISHTI - INDEX
SI. CONTENTS Page
No No.
1 World Economic Outlook Update 5
2 Economic Outlook for Southeast Asia, China & India 2015 7
3 Indian Economic Survey 2015-16 7
4 SWOT Analysis of Indian Economy 11
5 Foreign Trade Policy 2015-20 12
6 Good and Service Tax 15
7 Mudra Bank 16
8 Monetization of Gold 19
9 Black Money Act 2015 20
10 Financial Bench Mark India Pvt. Ltd. 21
11 Impact of Greece Crisis on India Economy 23
12 New Development Bank 24
13 Indian Banking 2020: Opportunities and Challenges 25
14 A new banking landscape for New India 28
15 Banking Renaissance – Inclusion, Innovation & Implementation 31
16 Banks in India – Challenges & Opportunities 35
17 Danger posed by shadow banking systems to the global financial System – the 39
Indian case
18 Designing banking regulation in aspiring economies – the challenges 44
19 Emerging contours of regulation and supervision in the Indian banking sector 48
20 Talent Management in Banks 52
21 Should Technology players be allowed to trigger more central role in 54
Banking?
22 Key Issue for Discussion – Banking Industry 57
23 Leadership Issues in Indian Banking 62
24 Leveraging Technology for Business Development in Bank 68
25 IT Vision Documents 2011-17 70
26 Guidelines for Licensing of Small Finance Banks in the Private Sector 70
27 RBI Guidelines for Licensing of Payments Banks 71
28 Domestic Systemically Important Banks (D-SIBs) 73
29 Capacity Building in Banks and non-Banks 74
30 Base Rate – Revised Guidelines 74

31 Interest Equalization Scheme 77
32 Gold Monetization Scheme 78
33 Sovereign Gold Bond 2015-16 81
34 Interest Subvention Schemes 82
35 New Monetary Policy Statement ( 2016-17) 84
36 Indradhanush Plan for Public sector Banks 88
37 Concurrent Audit System in Commercial Banks 91
38 Financial Frauds 92
39 LRS for Resident Individuals 97
40 Priority Sector Lending – New Guidelines 99
41 IFSC Banking Units 104
42 Relief Measures – Natural Calamity 106
43 Recapitalization of Public Sector Banks 108
44 Dealing with Loan Frauds 109
45 Banks into Insurance Business 114
46 Gyan Sangam 116
47 Joint Lender Forum & CAP 116
48 Strategic Debt Restructuring - SDR 117
49 Willful Defaulter 119
50 Non-Cooperative Borrowers 122
51 Revitalizing Distress Assets 122
52 Debt Restructuring Scheme 125
53 Report on Mid-Term Financial Inclusion Path 126
54 Atal Pension Yojana (APY) 128
55 PMSBY 130
56 PMJJBY 132
57 Sukanya Samridhi Schemes 133
58 Financial Inclusion Fund 134
59 Financial Inclusion & PMJDY 136
60 Risk Management 137
61 India Vision 2020 139
62 Frame work for Revival of MSMEs 142
63 Start Up India Scheme 144
64 Monetary Policy Committee 146
65 Prime Minister Fasal Bima Yojana 148
66 Money Bill 150
67 Peer to Peer Lending 151
68 Panama Papers 153
69 Priority Sector Lending Certificate 154
70 Gyan Sangam - II 155
71 Real Estate Regulatory Bill 156
72 New Bankruptcy Code 157
73 Basel & Risk Management 160
74 Liquidity Coverage Ratio ( LCR) 167
75 Special Mention Account 168
76 BCSBI 170
77 RBI Scheme – 5/25 172
78 Make in India 173
79 Union Budget 2016-17 173
80 Indian Accounting Standard 178
1. WORLD ECONOMIC OUTLOOK
Four key developments have shaped the global outlook since the release of the October 2014 World
Economic Outlook (WEO).
First, oil prices in U.S. dollars have declined by about 55 percent since September. The decline is partly
due to unexpected demand weakness in some major economies, in particular, emerging market
economies—also reflected in declines in industrial metal prices. But the much larger decline in oil prices
suggests an important contribution of oil supply factors, including the decision of the Organization of the
Petroleum Exporting Countries (OPEC) to maintain current production levels despite the steady rise in
production from non-OPEC producers, especially the United States. Oil futures prices point to a partial
recovery in oil prices in coming years, consistent with the expected negative impact of lower oil prices on
investment and future capacity growth in the oil sector.
Second, while global growth increased broadly as expected to 33/4 percent in the third quarter of 2014, up
from 31/4 percent in the second quarter, this masked marked growth divergences among major
economies. Specifically, the recovery in the United States was stronger than expected, while economic
performance in all other major economies—most notably Japan fell short of expectations. The weaker-
than-expected growth in these economies is largely seen as reflecting ongoing, protracted adjustment to
diminished expectations regarding medium-term growth prospects, as noted in
recent issues of the WEO.
Third, with more marked growth divergence across major economies, the U.S. dollar has appreciated
some 6 percent in real effective terms relative to the values used in the October 2014 WEO. In contrast,
the euro and the yen have depreciated by about 2 percent and 8 percent, respectively, and many
emerging market currencies have weakened, particularly those of commodity exporters.
Fourth, interest rates and risk spreads have risen in many emerging market economies, notably
commodity exporters, and risk spreads on high-yield bonds and other products exposed to energy prices
have also widened. Long-term government bond yields have declined further in
major advanced economies, reflecting safe haven effects and weaker activity in some, while global equity
indices in national currency have remained broadly unchanged since October.
Developments since the release of the October WEO have conflicting implications for the growth
forecasts. On the upside, the decline in oil prices driven by supply factors—which, as noted, are expected
to reverse only gradually and partially—will boost global growth over the next two years or so by lifting
purchasing power and private demand in oil importers. The impact is forecast to be stronger in advanced
economy oil importers, where the pass-through to end-user prices is expected to be higher than in
emerging market and developing oil importers. In the latter, more of the windfall gains from lower prices
are assumed to accrue to governments (for example, in the form of lower energy subsidies), where they
may be used to shore up public finances. However, the boost from lower oil prices is expected to be more
than offset by an adjustment to lower medium-term growth in most major economies other than the United
States. At 3.5 and 3.7 percent, respectively, global growth projections for 2015–16 have been marked
down by 0.3 percent relative to the October 2014 WEO.
Among major advanced economies, growth in the United States rebounded ahead of expectations after
the contraction in the first quarter of 2014, and unemployment declined further, while inflation pressure
stayed more muted, also reflecting the dollar appreciation and the decline in oil prices. Growth is projected
to exceed 3 percent in 2015–16, with domestic demand supported by lower oil prices, more moderate
fiscal adjustment, and continued support from an accommodative monetary policy stance, despite the
projected gradual rise in interest rates. But the recent dollar appreciation is projected to reduce net
exports.
In the euro area, growth in the third quarter of 2014 was modestly weaker than expected, largely on
account of weak investment, and inflation and inflation expectations continued to decline. Activity is
projected to be supported by lower oil prices, further monetary policy easing (already broadly anticipated
in financial markets and reflected in interest rates), a more neutral fiscal policy stance, and the recent euro
depreciation. But these factors will be offset by weaker investment prospects, partly reflecting the impact
of weaker growth in emerging market economies on the export sector, and the recovery is projected to be
somewhat slower than forecast in October, with annual growth projected at 1.2 percent in 2015 and 1.4
percent in 2016.
In Japan, the economy fell into technical recession in the third quarter of 2014. Private domestic demand
did not accelerate as expected after the increase in the consumption tax rate in the previous quarter,
despite a cushion from increased infrastructure spending. Policy responses—additional quantitative and
qualitative monetary easing and the delay in the second consumption tax rate increase—are assumed to
support a gradual rebound in activity and, together with the oil price boost and yen depreciation, are
expected to strengthen growth to above trend in 2015–16.
In emerging market and developing economies, growth is projected to remain broadly stable at 4.3
percent in 2015 and to increase to 4.7 percent in 2016—a weaker pace than forecast in the October 2014
WEO. Three main factors explain the downshift:
Lower growth in China and its implications for emerging Asia: Investment growth in China declined in the
third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected
to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence
the forecast assumes less of a policy response to the underlying moderation. Slower growth in China will
also have important regional effects, which partly explains the downward revisions to growth in much of
emerging Asia. In India, the growth forecast is broadly unchanged, however, as weaker external demand
is offset by the boost to the terms of trade from lower oil prices and a pickup in industrial and investment
activity after policy reforms.
A much weaker outlook in Russia: The projection reflects the economic impact of sharply lower oil prices
and increased geopolitical tensions, both through direct and confidence effects. Russia’s sharp slowdown
and ruble depreciation have also severely weakened the outlook for other economies in the
Commonwealth of Independent States (CIS) group.
Downward revisions to potential growth in commodity exporters: In many emerging and developing
commodity exporters, the projected rebound in growth is weaker or delayed compared with the October
2014 projections, as the impact of lower oil and other commodity prices on the terms of trade and real
incomes is now projected to take a heavier toll on medium-term growth. For instance, the growth forecast
for Latin America and the Caribbean has been reduced to 1.3 percent in 2015 and 2.3 percent in 2016.
Although some oil exporters, notably members of the Cooperation Council for the Arab States of the Gulf,
are expected to use fiscal buffers to avoid steep government spending cuts in 2015, the room for
monetary or fiscal policy responses to shore up activity in many other exporters is limited. Lower oil and
commodity prices also explain the weaker growth forecast for sub-Saharan Africa, including a more
subdued outlook for Nigeria and South Africa.
Risks to the Outlook, Old and New
Sizable uncertainty about the oil price path in the future and the underlying drivers of the price decline has
added a new risk dimension to the global growth outlook. On the upside, the boost to global demand from
lower oil prices could be greater than is currently factored into the projections, especially in advanced
economies. But oil prices could also have overshot on the downside and could rebound earlier or more
than expected if the supplyresponse to lower prices is stronger than forecast. Important other downside
risks remain. In global financial markets, risks related to shifts in markets and bouts of volatility are still
elevated. Potential triggers could be surprises in activity in major economies or surprises in the path of
monetary policy normalization in the United States in the context of a continued uneven global expansion.
Emerging market economies are particularly exposed, as they could face a reversal incapital flows. With
the sharp fall in oil prices, these risks have risen in oil exporters, where external and balance sheet
vulnerabilities have increased, while oil importers have gained buffers. In the euro area, inflation has
declined further, and adverse shocks—domestic or external—could lead to persistently lower inflation or
price declines, as monetary policy remains slow to respond. In many major economies, there are still
some downside risks to prospective potential output, which would feed into near-term demand.
Geopolitical risks are expected to remain high, although related risks of global oil market disruptions have
been downgraded in view of ample net flow supply.
Policies
Weaker projected global growth for 2015–16 further underscores that raising actual and potential output is
a policy priority in most economies, as discussed in previous issues of the WEO. There is an urgent need
for structural reforms in many economies, advanced and emerging market alike, while macroeconomic
policy priorities differ. In most advanced economies, output gaps are still substantial, inflation is below
target, and monetary policy remains constrained by the zero lower bound. The boost to demand from
lower oil prices is thus welcome, but additional policy measures are needed in some economies. In
particular, if the further declines in inflation, even if temporary, lead to additional downdraft in inflation
expectations in major economies, monetary policy must stay accommodative through other means to
prevent real interest rates from rising. Fiscal adjustment must be attuned in pace and composition to
supporting both the recovery and long-term growth. In this respect, there is a strong case for increasing
infrastructure investment in some economies. In many emerging
market economies, macroeconomic policy space to support growth remains limited. But in some, lower oil
prices will alleviate inflation pressure and external vulnerabilities, thereby allowing central banks not to
raise policy interest rates or to raise them more gradually.
Oil exporters, for which oil receipts typically contribute to a sizable share of fiscal revenues, are
experiencing larger shocks in proportion to their economies. Those that have accumulated substantial
funds from past higher prices and have fiscal space can let fiscal deficits increase and draw on these
funds to allow for a more gradual adjustment of public spending to the lower prices. Allowing substantial
exchange rate depreciation will be the main means available to others to cushion the impact of the shock
on their economies. Some will have to strengthen their monetary frameworks to avert the possibility that
depreciation will lead to persistently higher inflation and further depreciation.
Lower oil prices also offer an opportunity to reform energy subsidies and taxes in both oil exporters and
importers. In oil importers, the saving from the removal of general energy subsidies should be used toward
more targeted transfers, to lower budget deficits where relevant, and to increase public infrastructure if
conditions are right.
2. Economic Outlook for Southeast Asia, China & India 2015

The key points of the medium-term economic outlook are as follows:
Despite slight moderation in the first quarter of this year, growth in Emerging Asia should remain robust, at
6.5% over 2015-19. The Chinese economy is slowing, but the large ASEAN economies are showing
resilience and growth momentum remains broadly similar to the past ten years (5.6% over 2015-19). The
CLM countries are expected to become the new centres of growth in ASEAN, with average annual growth
in each exceeding 7%.
Overall, current account imbalances are gradually improving, particularly in the ASEAN-5. The CLM
countries will continue to show a deficit in the medium term. There are signs that FDI is slowing in the
region. Additional efforts to attract and hold investors will be required.
Generally speaking, there will be no dramatic changes in fiscal conditions, though trends will differ by
country. While Malaysia and the Philippines may improve, Thailand and Viet Nam will worsen in the
medium term. Overall, fiscal reforms need to be strengthened further.
Emerging Asian countries may have to contend with external risks. For instance, the normalisation of US
monetary policy, the slowdown in the Chinese economy, the implementation of structural policies related
to “Abenomics” in Japan and uncertainties concerning the growth prospects of the Euro areas. However,
the impact of these factors on the region will be moderate, since markets have already factored these
changes in their expectations. Transformations in the political landscape will affect different countries in
different ways. There are worries over the current political unrest in Thailand in particular. Overall,
effective capital flow management (of both inflows and outflows) will remain a challenge in the region in
the medium term.
Further acceleration of regional integration by 2015, in furtherance of the goal of the ASEAN Economic
Community (AEC), will be necessary – particularly to narrow disparities within the region.
Lessons from experiences with public sector reforms in Emerging Asia:
Emerging Asian countries have been actively engaged for several decades in reforms to improve the
quality of their public sectors. These public sector reforms (PSRs) encompass public financial
management reforms (PFM) to improve budgeting, expenditure implementation, and tax administration;
and administrative reforms to streamline the organisation of government activities, decentralise functions
to sub-national governments, strengthen the civil service and combat corruption.
Public sector reforms are motivated by the recognition that the effectiveness and efficiency of the public
sector in managing its finances, implementing government programmes and delivering public services are
critical to the success of overall development and the achievement of key development objectives. The
rapid growth and profound transformation that Emerging Asia has undergone have made PSR of special
importance to the region. Public sector reforms can contribute to economic and social development in a
number of ways, including by:
-improving the capacity of governments to effectively and efficiently carry out their policies;
-reducing costs and improving the overall efficiency of the business sector;
-improving the business climate through greater certainty about government policies and greater ---
macroeconomic stability; increasing international competitiveness, particularly for FDI;
-strengthening the effectiveness of policies to reduce poverty and to achieve inclusive and green growth;
and improving the credibility of the government and political processes and overall social cohesion.
3. Indian Economic Survey 2015-16

BACKGROUND:
 Economic Survey is a flagship annual document of the Ministry of Finance, Government of India.
Economic Survey reviews the developments in the Indian economy over the previous 12 months,
summarizes the performance on major development programs, and highlights the policy initiatives of the
government and the prospects of the economy in the short to medium term. This document is presented
to both houses of Parliament during the Budget Session.
 The Union Finance Minister presented the Economic Survey 2015-16 in the Parliament. The survey has
projected India's growth to be in the range of 7.0% to 7.75% in 2016-17.
 The Central Statistics Office estimates that growth this year will be 7.6 per cent, lower than the 8.1-8.5
per cent projected in the last Survey.
MACRO ECONOMIC OUTLOOK:
 The macro-economy has been rendered more stable, reforms have been launched, the deceleration in
growth has ended and the economy appears now to be recovering, the external environment is benign,
& challenges in other major economies have made India the near-cynosure of eager investors.
 Macroeconomic fundamentals have dramatically improved for the better, reflected in both temporal and
cross-country comparisons.
 Inflation has declined by over 6 percentage points since late 2013, and the current account deficit has
been reduced from a peak of 6.7 percent of GDP (in Q3, 2012-13) to an estimated 1.0 percent in the
coming fiscal year.
 Foreign portfolio flows (of US$ 38.4 billion since April 2014) have stabilized the rupee, exerting
downward pressure on long-term interest rates, reflected in the yield on 10-year government securities,
and contributed to the surge in equity prices (31% since April in rupee terms, and even more in US
dollars, ranking it the highest amongst emerging markets).
 In a nearly 12-quarter phase of deceleration, economic growth averaged 6.7% but since 2013-14 has
been growing at 7.2% on average, the later based on the new growth estimates
 India ranks amongst the most attractive investment destinations, well above other countries. It ranks
well above the mean for its investment grade category. The reality and prospect of high & rising growth,
combined with macroeconomic stability, is the promise of India going forward.
 Macro-economic management and policy reforms have been initiated in a number of areas and major
ones are on the horizon. The policy reforms of the new government, actual and prospective have
attracted worldwide attention. The cumulative impact of these reforms on reviving investment and
growth could be significant.
 The macroeconomic response to the favourable terms of trade shock has led to an appropriately
prudent mix of increased government savings and private consumption.
INDIA’S INCREASING IMPORTANCE TO GLOBAL GROWTH:
 India’s contribution to global growth in PPP terms increased from an average of 8.3 per cent during the
period 2001 to 2007 to 14.4 per cent in 2014.
 As per IMF data, India’s share in world GDP has increased from an average of 4.8 per cent during
2001-07 to 6.1 per cent during 2008-13 and further to an average of 7.0 per cent during 2014 to 2015 in
current PPP terms.
HIGHLIGHTS
GDP Growth
 After achieving 7.2% economic growth in 2014-15, the growth in economy will be 7.6%, the fastest in
the world, in the current fiscal
 GDP growth rate for next fiscal projected in the range of 7 % to 7.75 %
 On the domestic front, two factors – if the Seventh Pay Commission is implemented and return of
normal monsoon – can boost consumption through increased spending from higher wages allowances
of government workers.
 Three downside risks - trouble in global economy could worsen the prospect of exports; contrary to
expectations, oil price rise would enhance the pull from consumption; and the most serious risk is the
combination of these two.
Fiscal Deficit
 2015-16 fiscal deficit, seen at 3.9% of GDP, seems achievable. 2016-17 expected to be challenging
from fiscal point of view. According to IMF Fiscal deficit is expected to decline from 4.2 % of GDP in
2014-15 to 4.0 % of GDP in 2015-16
 Credibility and optimality argue for adhering to 3.5% of GDP fiscal deficit target.
 Subsidy bill to be below 2% of GDP next fiscal. Inflation
 CPI inflation seen around 4.5 to 5% in 2016-17;
 Expect RBI to meet 5% inflation target by March 2017;
 Prospect of lower oil prices over medium term likely to
dampen inflationary expectations
 7th pay commission recommendations not likely to destabilise prices; to have little impact on inflation.
Current Account Deficit
 2016/17 current account deficit has declined and seen around 1-1.5% of GDP.
 Foreign exchange reserves have risen to US$ 351.5 billion in early Feb,16
Currency
 Rupee’s value must be fair, avoid strengthening; fair value can be achieved through monetary
relaxation
 India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment
in China. Rupee’s gradual depreciation can be allowed if capital inflows are weak.
Taxes
 Tax revenue expected to be higher than budgeted levels in 2015-16;
 Proposes widening tax net from 5.5% of earning individuals to more than 20%;
 The promise to reduce corporate tax to 25% from 30% should be recalled
 Favours review and phasing out of tax exemptions; easiest way to widen the tax base not to raise
exemption thresholds;
Banking & Corporate sector
 Critical short term challenges confronting the Indian economy is the twin balance sheet problem – the
impaired financial positions of the public sector banks and some corporate houses.
 Recognition, Recapitalization, Resolution, & Reform needed to resolve Twin Balance Sheet challenge
of PSBs & corporate firms.
 Banks should value their assets as for as possible to true value(Recognition). Once Banks do so, their
capital, as per the demands of the Banks, must be safeguarded via infusions of equity
(Recapitalization).
 The underlying stressed assets in the corporate sector must be sold or rehabilitated (Resolution).
 The future incentives for the private sector and corporates must be set right(Reform) to eschew a
repetition of the problem.
 PSU banks’ capital need at Rs 1.8 lakh crore (1.8 trillion) by FY19
 Government could sell off certain non-financial companies to infuse capital in State-run banks;
 Government proposes to make available 700 billion rupees via budgetary allocations during current
and succeeding years in banks.
Agriculture and food management
 India ranks first in Milk production, accounting for 18.5% of world production. India recording a growth
of 6.26 % whereas World Milk production increases by 3.1%;
 Egg and fish production has also registered an increasing trend over the years;
 Fertiliser subsidy should shift to direct cash transfer;
 Agriculture sector needs a transformation to ensure sustainable livelihoods for the farmers and food
security;
 Percentage share of horticulture output in agriculture is more than 33%.
Services sector
 Services sector remains the Key Driver of Economic Growth contributing almost 66.1% in 2015-16;
 Services sector growth in 2015-16 seen at 9.2%
 There has been a rising trend in FDI equity inflows to the services sector in the first seven months of
2015-16 with FDI inflows growing by 74.7%.
Human Capital, education and health
 To attain growth rate of around 8 to 10%, three-pronged strategy to be adopted by encouraging
competition and investing health and education and in the process not neglecting agriculture;
 The social infrastructure scenario in the country reflects gaps in access to education, health and
housing amenities. Inclusive growth in India requires bridging gaps in educational outcomes and
improved health attainments across the population.
 The total expenditure on Social Services including Education, Health, Social Security, Nutrition,
Welfare of SC/ST/OBC etc. during 2014-15 (RE) was 7 % of GDP while it was 6.5% during 2013-14.
 The declining educational outcomes reflected in lower reading levels in both public and private sector
schools are areas of concern. According to Annual Status of Education Report (ASER) 2014, there is
sharp decline between 2007 to 2014 in the number of children in Standard V who can read a textbook
of Standard II, in both government and private schools.
 The Gender Parity Index (2013-14 Provisional) shows an improvement in girls’ education, with parity
having been achieved between girls and boys at almost all levels of education. ‘Digital Gender Atlas for
Advancing Girl’s Education in India’ was launched last year to help identify low-performing geographic
pockets for girls, particularly from marginalized groups. A number of scholarship schemes to encourage
enrolment and learning levels among different groups are in operation.
National Scholarship Portal, a single window system for various types of scholarship schemes
administered by different Ministries/Departments has been introduced under Direct Benefit Transfer
(DBT) mode. During 2015-16, about 90 lakh Minority students are to be benefited under the Pre-
matric, Post-matric and Meritcum-Means scholarship schemes, while about 23.21 lakh SC students
benefited under Pre-matric, 56.30 lakh under Post-matric and 3354 under the Rajiv Gandhi National
Fellowship including the Top Class Education scholarship scheme are to be assisted.
 The expenditure on health as a percentage of total expenditure on social services increased from
18.6% in 2013-14 to 19.3% in 2014-15 and 19.5% in 2015-16.
 The ‘under five mortality’ has declined from 126 in 1990 to 49 in 2013. As per NFHS-4, the percentage
of children fully immunized in the age group (12-23 months) is above 80 per cent in Sikkim and West
Bengal. All the 12 states surveyed have more than 50 per cent children fully immunized. Similarly
under Mission Indradhanush, 352 districts of the country have been covered with 20.8 lakh children
and 5.8 lakh pregnant women immunized in the first phase. 17.2 lakh children and 5.1 lakh pregnant
women have been immunized in the second phase and 17 lakh children and 4.8 lakh pregnant women
immunized in the third phase of the Mission Indradhanush.
 Initiatives such as Rashtriya Bal Swasthya Karyakram (RBSK) and Rashtriya Kishor Swasthya
Karyakram’ (RKSK) have been launched in 2013 and 2014 respectively under the NHM to provide
comprehensive health care.
 The immunization coverage of children, health of pregnant women, declining role of public health
delivery systems and the lack of adequate skilled personnel are the main challenges in the health
sector at present. There are persistent regional disparities in access to housing and sanitation facilities
with some States lagging behind with less than 25 per cent coverage in sanitation facilities.
 There is a need to focus on the quality of education in both the public and private sectors. To
strengthen the delivery of public health services and infrastructure facilities, both public investments
and leveraging of private investments are necessary. The adoption of technology platforms and
innovative models by leveraging Jan-Dhan-Aadhaar-Mobile (JAM) scheme can improve the efficiency
in delivery of services.
Power sector
2014-15 marked the highest ever increase in generation capacity: 26.5 GW, much higher than the
average annual addition of around 19 GW over the previous five years;
Capacity enhancements have brought down the peak electricity deficit to its lowest ever level of 2.4%;
Renewables have received a major policy push. Targets have been revised from 32 Gigawatts to 175
Gigawatts by 2022;
CONCLUSION:
 For achieving double-digit growth, it is critical that India particularly overcome the development
challenges through innovative models of delivery of services.
 The development of a country is incomplete without improvement in its social infrastructure. To
capitalize and leverage the advantages that India will have on the demographic front with a large
segment in the productive age group, social infrastructure requires fresh impetus with focus on
efficiency to improve the quality of human capital.
 To foster education and skill development of its diverse population, including the marginalized sections,
women and the differently-abled, and to provide quality health and other social services, the
Government has identified the potential of technology platforms which can significantly improve
efficiency in the system.
 The Government has introduced the game changing potential of technology-enabled Direct Benefits
Transfers (DBT), namely the JAM (Jan Dhan-Aadhaar-Mobile) number trinity solution, which offers
exciting possibilities to effectively target public resources to those who need them the most, and
include all those who have been deprived in multiple ways. The progress is already evident with
overhauling of the subsidy regime and a move to Aadhaar-DBT.
 Aadhaar seeding in the beneficiaries’ databases of six DBT schemes [(LPGDBTL- 54.96 per cent,
MGNREGS - 54.10 per cent, Pradhan Mantri Jan Dhan Yojana (PMJDY) - 42.45 per cent, Public
Distribution System (Ration Card) - 38.96 per cent, National Social Assistance Programme (NSAP) -
24.31 per cent and Employees’ Provident Fund (EPF) Scheme 17.55 per cent)] has risen significantly
by the end of December 2015.
 Riding on the technological platform that the Digital India Programme is expected to provide, integration
of various beneficiary’ databases with Aadhaar and appropriate process re-engineering would result in
substantial saving of effort, time and cost, simultaneously ensuring full traceability of flow of funds from
the Government to the beneficiary. Transparency and accountability of flow of funds through technology
Compiled by Sri Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur 10 | P a g e
intervention will bring in the desired educational and health outcomes for the population and pave the
way for a healthy and educated India in the near future.
4. SWOT ANALYSIS OF INDIAN ECONOMY

Strength
 Agriculture
 High percentage of cultivable land.
 Huge pool of labour force
 Huge English speaking population, availability of skilled manpower
 Extensive higher education system, third largest reservoir of engineers
 Rapid growth of IT and BPO sector bringing valuable foreign exchange
 Abundance of natural resources
Weakness
 Very high percentage of workforce involved in agriculture which
contributes only 17.2% of GDP.
 Around a quarter of a population below the poverty line
 High unemployment rate
 Poor infrastructural facilities
 Low productivity
 Huge population leading to scarcity of resources
 Low literacy rates
 Rural-urban divide, leading to inequality in living standards
Opportunities
 Scope for entry of private firms in various sectors for business
 Inflow of Foreign Direct Investment is likely to increase in many sectors
 Huge foreign exchange earning prospect in IT and ITES sector
 Huge population of Indian Diaspora in foreign countries (NRIs)
 Huge domestic market: Opportunity for MNCs for sales
 Vast forest area and diverse wildlife
 Huge agricultural resources, fishing, plantation crops, livestock
Threats
 Global economy recession/slowdown
 High fiscal deficit
 Threat of government intervention in some states
 Volatility in crude oil prices across the world
 Growing Import bill
 Population explosion, rate of growth of population still high
 Agriculture excessively dependent on monsoon
STRENGTHS OPPORTUNITIES
, -
Strong economic fundamentals. Knowledge Industries - Huge foreign exchange
earning
Adequate Foreign Exchange Reserves. Services.
Economy in 8-9% growth mode / trajectory. Agriculture.
Large pool of skilled workforce. Huge domestic market : Opportunity for MNCs
Rapid growth of IT and BPO sector. Scope for entry of private firms in various sectors of
Extensive higher education system business.
In flow of FDI likely to increase.
- third
largest reservoir of engineers.
Stable economy and able to sustain external Huge population of Indian Diaspora in foreign countries.
changes. (NRIs).
Huge natural gas deposits found in India, vast forest
area and diverse wildlife, huge agricultural resources,
fishing, plantation crops, livestock.
WEAKNESSES THREATS
High Twin Deficits: Fiscal deficit Global economy recession / slow down.
& Current
Lack of investment in Infrastructure sector. Competition from low-cost economies like China.
Archaic Labour Laws. Agriculture excessively dependent on monsoons.
Lack of Power Sector Reforms. i Domestic political uncertainty.
Very high percentage of workforce involved s Volatility in crude oil prices across the world and
in growing import bill.
Around a quarter of a population below Population explosion - rate of growth of pdpulation still
the high.
Low .roductivit Twin deficits -' High fiscal deficit and Current Account
Rural-urban divide, leadingto deficit.
inequality
living standards.
5. FOREIGN TRADE POLICY : 2015 – 20
The Government has unveiled a forward-looking and contemporary Foreign Trade Policy (FTP)
for 2015-2020, seeking to strengthen merchandise and services exports. The policy has set a
target to double India’s exports in goods and services from $465 billion to $900 billion and upping
the Indian share of the world exports from the current 2 percent to 3.5 percent over the over the
next five years. The policy is a framework for increasing export of goods and services as well as
generation of employment in keeping with the vision of Make in India.
 The FTP spoke for the first time about global value chains and their relevance in world trading
order. Global value chains are fast becoming the most important aspect of any bilateral and
multilateral trading arrangement. Global value chains are typically created by integrating goods
and services from various countries into one composite production network to produce a single
product or service. These are turning out to be a prominent feature in mega-regional trade pacts
such as the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and the Investment
Partnership and Regional Comprehensive Economic Partnership.
 A big positive step has been taken by clubbing a series of export promotion schemes
under two schemes namely:
a) Merchandise Exports from India Scheme (MEIS): This will be targeted for export of
specified goods to specified markets. The MEIS has replaced five existing schemes.
b) Services Exports From India Scheme (SEIS): This is meant for export of notified services.
SEIS has replaced the existing Served From India Scheme (SFIS).
 One significant announcement in the policy is that it will move away from relying largely on
subsidies and sops. This is prompted by World Trade Organisation (WTO) requirements that
export promotion subsidies should be phased out. Export-promotion measures have to move
towards a more fundamental systemic measure rather than incentivising and depending on
subsidies alone. There is, therefore, a need to ensure that the exports and services are
internationally competitive. Brand India must be synonymous with reliability and quality.
 The FTP has acknowledged the domestic challenges – infrastructure, transaction costs,
complex procedures and constraints in manufacturing – is equally, if not more, important than
tackling external ones. As the trade policy document points out, the latter are largely
imponderables outside any COUNTRY’S CONTROL
HIGHLIGHTS OF FTP 2015-2020
A) SIMPLIFICATION & MERGER OF REWARD SCHEMES:
1) Merchandise Exports from India Scheme (MEIS):
a) Earlier there were 5 different schemes (Focus Product Scheme, Market Linked Focus Product
Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for rewarding
merchandise exports with different kinds of duty scrips with varying conditions (sector specific or
actual user only) attached to their use. Now all these schemes have been merged into a single
scheme, namely Merchandise Export from India Scheme (MEIS) & there would be no
conditionality attached to scrips issued under the scheme.
b) Rewards for export of notified goods to notified markets under ‘Merchandise Exports from
India Scheme (MEIS) shall be payable as percentage of realized FOB value in free foreign
exchange. The debits towards basic customs duty in the transferable reward duty credit scrips
would also be allowed adjustment as duty drawback.
2) Service Exports from India Scheme (SEIS):
a) Served from India Scheme (SFIS) has been replaced with Service Exports from India Scheme
(SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian Service
Providers’. Thus SEIS provides for rewards to all Service providers of notified services, who are
providing services from India, regardless of the constitution or profile of the service provider.
b) The rate of reward under SEIS would be based on net foreign exchange earned. The reward
issued as duty credit scrip, would no longer be with actual user condition and will no longer be
restricted to usage for specified types of goods but be freely transferable and usable for all types
of goods and service tax debits on procurement of services / goods.
3) Incentives (MEIS & SEIS) to be available for SEZs: The FTP has proposed to extend
incentives (MEIS & SEIS) to units located in SEZs also.
4) Duty credit scrips to be freely transferable and usable for payment of custom duty,
excise duty and service tax:
a) All scrips issued under MEIS & SEIS & goods imported against these scrips would be fully
transferable.
b) Basic Customs Duty paid in cash or through debit under Duty Credit Scrip can be taken back
as Duty Drawback as per DoR Rules, if inputs so imported are used for exports.
5) Status Holders: The nomenclature of Export House, Star Export House, Trading House, Star
Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four,
Five Star Export House. The criteria for export performance for recognition of status holder have
been changed from Rupees to US dollar earnings. The new criteria is:
STATUS CATEGORY EXPORT PERFORMANCE FOB / FOR (as converted) Value (in US $ million) during
current & previous 2 years
One Star Export House 3
Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000
6) Approved Exporter Scheme – Self certification by Status Holders: Manufacturers who are
also Status Holders will be enabled to self-certify their manufactured goods as originating from
India with a
view to qualify for preferential treatment under different Preferential Trading Agreements [PTAs],
Free Trade Agreements [FTAs], Comprehensive Economic Cooperation Agreements [CECAs]
and Comprehensive Economic Partnerships Agreements [CEPAs] which are in operation.
B) BOOST TO “MAKE IN INDIA”:
Reduced Export Obligation (EO) for domestic procurement under EPCG Scheme: Specific
Export Obligation under EPCG scheme, in case capital goods are procured from indigenous
manufacturers, which is currently 90% of normal export obligation (6 times at the duty saved
amount) has been reduced to 75%, in order to promote domestic capital goods manufacturing
industry.
C) TRADE FACILITATION & EASE OF DOING BUSINESS:
a) Online filing of documents / applications and Paperless trade in 24×7 environment: In
order to move further towards paperless processing of reward schemes, the policy has decided
to develop an online
procedure to upload digitally signed documents by Chartered Accountant / Company Secretary /
Cost Accountant. Further, as a measure of ease of doing business, landing documents of export
consignment as proofs for notified market can be digitally uploaded.
b) Online inter-ministerial consultations: The FTP proposes to have Online inter-ministerial
consultations for approval of export of SCOMET items, Norms fixation, Import Authorisations,
Export Authorisation, in a phased manner, with the objective to reduce time for approval. As a
result, there would not be any need to submit hard copies of documents for these purposes.
c) Simplification of procedures/processes, digitisation and e-governance: i) Under EPCG
scheme, obtaining & submitting a certificate from an independent Chartered Engineer, confirming
the use of spares,
tools, refractory & catalysts imported for final redemption of EPCG authorizations has been
dispensed with. ii) At present, the EPCG Authorisation holders are required to maintain records
for 3 years after redemption of Authorisations. Now the EPCG Authorization Holders shall be
required to maintain records for a period of two years only. Government’s endeavour is to
gradually phase out this requirement as the relevant records
such as Shipping Bills, e-BRC are likely to be available in electronic mode.
FOREIGN TRADE POLICY : 2015–20 Exporter Importer Profile: Facility has been created to
upload documents in Exporter / Importer Profile. There will be no need to submit copies of
permanent records / documents (e.g. IEC, Manufacturing licence, RCMC, PAN etc.) repeatedly.
iii) Online message exchange with CBDT, MCA and DGFT: FTP has decided to have on line
message exchange with CBDT for PAN data and with Ministry of Corporate Affairs for CIN and
DIN data. For faster and paperless communication with various committees of DGFT, dedicated
e-mail addresses have been provided to each Norms Committee, Import Committee and Pre-
Shipment Inspection Agency for faster communication.
D) OTHER NEW INITIATIVES:
 EOUs, EHTPs, STPs have been allowed to share infrastructural facilities among themselves to
enable them to utilize their infrastructural facilities in an optimum way and avoid duplication of
efforts and cost to create separate infrastructural facilities.
 Inter unit transfer of goods and services have been allowed among EOUs, EHTPs, STPs, and
BTPs. This will facilitate group of those units which source inputs centrally in order to obtain bulk
discount. This will reduce cost of transportation, other logistic costs and result in maintaining
effective supply chain. Further, EOUs have been allowed facility to set up Warehouses near the
port of export so as to reduce the lead time for delivery of goods.
 At present, in a period of 5 years EOU units have to achieve Positive Net Foreign Exchange
Earning (NEE) cumulatively. Because of adverse market condition or any ground of genuine
hardship, then such period of 5 years for NFE completion can be extended by one year.
 At present, EOUs/EHTP/STPI units are permitted to transfer capital goods to other EOUs,
EHTPs, STPs, SEZ units. Now a facility has been provided that if such transferred capital goods
are rejected by the recipient, then the same can be returned to the supplying unit, without
payment of duty.
 EOUs having physical export turnover of Rs.10 cr and above, have been allowed the facility of
fast track clearances of import and domestic procurement. They will be allowed fast tract
clearances of goods, for export production, on the basis of pre-authenticated procurement
certificate, issued by customs/central excise authorities. They will not have to seek procurement
permission for every import consignment.
 Validity of SCOMET export authorisation has been extended from the present 12 to 24
months. It will help industry to plan their activity in an orderly manner and obviate the need to
seek revalidation or relaxation from DGFT.
 Normal export obligation period under advance authorization is 18 months. Export obligation
period for export items falling in the category of defence, military store, aerospace & nuclear
energy shall be 24 months from the date of issue of authorization or co-terminus with contracted
duration of the export order, whichever is later. This provision will help export of defence items &
other technology items.
 e-Commerce Exports: Goods falling in the category of handloom products, books / periodicals,
leather footwear, toys and customized fashion garments, having FOB value up to ₹ 25000 per
consignment shall be eligible for benefits under FTP. Such goods can be exported in manual
mode through Foreign Post Offices. at New Delhi, Mumbai and Chennai. Export of such goods
under Courier Regulations shall be allowed manually on pilot basis through Airports at Delhi,
Mumbai and Chennai as per appropriate amendments in regulations to be made by Department
of Revenue.
Additional Ports allowed for Export & Import: Calicut Airport, Kerala & Arakonam ICD, Tamil
Nadu have been notified as registered ports for import & export.
 Duty Free Tariff Preference (DFTP) Scheme: India has already extended duty free tariff
preference to 33 Least Developed Countries (LDCs) across the globe. This is being notified
under FTP.
Government has already recognized 33 towns as export excellence towns. It has been decided
to add Vishakhapatnam and Bhimavaram in Andhra Pradesh as towns of export excellence.
 With respect to the coverage of the 3 per cent interest subvention scheme, the government
has stated that it is in the process of identifying the sectors. The Budget has allocated Rs 1,625
crore.
The FTP also introduced a concept of import appraisal mechanism which will be done on a
quarterly basis by the commerce department. In a view to boost exports from SEZs the
government also expanded the benefits under MEIS and SEIS to the units located inside the tax-
free zones.
6. GOODS AND SERVICES TAX (GST)

CONCEPT:
“Goods and Services Tax”, is a comprehensive indirect tax levy on manufacture, sale and
consumption of goods as well as services at the national level. The GST is a Value Added Tax
(VAT) to be implemented in India from April 2016. It will replace all indirect taxes levied on goods
and services by the Indian Central and State governments and aimed at being comprehensive for
most goods and services.
As India is a federal republic, GST will thus be implemented concurrently by the central and state
governments as the Central GST and the State GST respectively.
BACKGROUND:
Goods and Service Tax (GST) is a method of taxation levied only at one point by eliminating
taxation at different levels of point. This is in contrast to the current system, where taxes are
levied separately on goods and services. At present, a manufacturer needs to pay taxes when a
finished product moves out of a factory and again taxed at a retail outlet when sold. Moreover,
same product is taxed again when goods are moved from one state to another. However, the
GST is payable only at the final point of consumption.
GST, which will replace all indirect taxes on goods and services by the central and state
governments, needs individual states to agree with the implementation, and this has seen a
mixed attempt so far. There has been a constant tussle between the state and the central
governments that has deferred its implementation several times.
LATEST GUIDELINES:
 Displaying the government's intent on implementing a new indirect tax regime for India, the
Finance Minister announced that the proposed Goods and Services Tax (GST) Bill will be put
in place with a state-of-the art Indirect Tax system by April 1, 2016.
 In a bid to move closer to the Goods and Services Tax (GST) regime, service tax rate has been
raised from 12.36 percent to 14 percent.
 Currently, no tax credits are provided for interstate transactions. GST would introduce uniform
taxation laws across states and different sectors.
 The taxes would be divided between the state and centre, based on a formula that would
be acceptable to both. Also, it would be easier to supply goods and services uniformly
across the country, as no additional taxes would have to be paid across different states.
IMPLICATIONS:
 To make a smooth transition to the proposed goods and services tax (GST) regime from
April 1, 2016, the government brought several new items under the service tax net, which are
presently covered in the list of exemptions or in the negative list. All the services provided by the
government to business entities are brought under tax unless specifically exempt. Access to
amusement facilities, admission to concerts, non-recognised sporting events & job work for
production of liquor are among items that have newly come under service tax.
 Government expects that the GST implementation supports to boost Indian economy by
improving business climate in the country.
 GST will help e-commerce companies rationalise supply chains by addressing the taxation
issues.
 GST, by subsuming a large number of central and state taxes into a single tax, would mitigate
cascading, or double taxation in a major way and pave the way for a common national market.
 The implementation of GST is expected to be detrimental to the growth of the hospitality
industry as also a whole lot of services including air travel, phone bills and eating out more
expensive. It will also be a major roadblock for travel agents working on marginal profits.
 The move will also make services including cable and DTH connections, beauty parlour
charges, courier services, laundry services, ordering stock broking, asset management and
insurance costlier.
 Implementation of GST will make smoking and consumption of other tobacco items costlier
whereas packaged fruits and vegetables will become cheaper as pre-cooling, ripening, retail
packing and labelling of these items have been exempted from service tax.
 This move is criticized on the ground that the proposal to levy a Swachh Bharat cess of 2% on
the value of the services would effectively take the service tax rate to 16% & this would
increase the cost of services consumed by the common man.
 The Budget also subsumed education cess on the 12% excise duty & raised it marginally to
12.5% from the current 12.36%.
According to critics, the divergence of the 12.5% excise duty rate and the 14% service tax
rate would create complexities while the country is about to make a transition to GST. Increase in
the service tax rate to 14% suggests that the GST rate would not be the one single rate of 12%
recommended by the 13th Finance Commission. It could now well be in the range of 20%+,
which implies substantial exemptions from the GST base
7. MUDRA BANK
MUDRA BANK
Introduction: Mudra Bank stands for Micro Units Development Refinance Agency (MUDRA). MUDRA
Bank was announced by the Finance Minister Arun Jaitley in his FY 15-16 Budget speech. Micro Units
Development and Refinance Agency Bank (or MUDRA Bank) is a public sector financial institution. Mudra
Bank is being set up through a statutory enactment and will be responsible for developing and refinancing
through a Pradhan Mantri MUDRA Yojana. Although 20% of the country's population is dependent on 5.7
crore micro and small entrepreneurs, they do not have access to institutional credit. Since small
entreprenuers are businssess are often cut off from banking system because of limited branch presence,
Mudra Bank will partner with local coordinators and provide finance to "Last Mile Financiers" of
small/micro businesses. The aim is to provide financial assistance to the "unfunded" small entrepreneurs
who provide employment to a large number of people. The Government will ensure that measures to be
taken up by MUDRA are targeted towards mainstreaming young, educated or skilled workers and
entrepreneurs including women entrepreneurs. The MUDRA banks will be set up under the Pradhan
Mantri MUDRA Yojana scheme. It will provide its services to small entrepreneurs outside the service area
of regular banks, by using last mile agents. About 5.77 crore (57.7 million) small business have identified
as target clients using the NSSO survey of 2013. Only 4% of these businesses get finance from regular
banks. The bank will also ensure that its clients do not fall into indebtness and will lend responsibly. The
bank will cater to 5.77 crore small business units that are spread all across India who currently find it
difficult to access credit from the regular banking system.
Objectives: The principal objectives of the MUDRA Bank are:
1. Regulate the lender and the borrower of microfinance and bring stability to the microfinance system
through regulation and inclusive participation.
2. Extend finance and credit support to Microfinance Institutions (MFI) and agencies that lend money to
small businesses, retailers, self-help groups and individuals.
3. Register all MFIs and introduce a system of performance rating and accreditation for the first time.
This will help last-mile borrowers of finance to evaluate and approach the MFI that meets their
requirement best and whose past record is most satisfactory. This will also introduce an element of
competitiveness among the MFIs. The ultimate beneficiary will be the borrower.
Provide structured guidelines for the borrowers to follow to avoid failure of business or take corrective
steps in time. MUDRA will help in laying down guidelines or acceptable procedures to be followed by the
lenders to recover money in cases of default
4. Develop the standardised covenants that will form the backbone of the last-mile business in future.
5. Offer a Credit Guarantee scheme for providing guarantees to loans being offered to micro businesses.
6. Introduce appropriate technologies to assist in the process of efficient lending, borrowing and
monitoring of distributed capital.
7. Build a suitable framework under the Pradhan Mantri MUDRA Yojana for developing an efficient last-
mile credit delivery system to small and micro businesses.
8. Laying down responsible financing practices to ward off indebtedness and ensure proper client
protection principles and methods of recovery.
Major Product Offerings: MUDRA Bank has classified the borrowers into three segments: the starters, the
mid-stage finance seekers and the next level growth seekers. The Bank will nurture small businesses
through different stages of growth and development of businesses termed as Shishu, Kishor and Tarun.
Shishu: This will be the first step when the business is just starting up. The loan cover in this stage will be
upto Rs 50,000.
Kishor: In this stage, the entreprenuer will be eligible for a loan ranging from Rs 50,000 to Rs 5 lakh.
Tarun: This last and final category will provide loans for upto Rs 10 lakh.
Initially, sector-specific schemes will be confined to “Land Transport, Community, Social & Personal
Services, Food Product and Textile Product sectors”. Over a period of time, new schemes will be
launched to encompass more sectors.
Some of the Offerings Planned for the Future: (a) MUDRA Card; (b) Portfolio Credit Guarantee; (c) Credit
Enhancement
Impact of MUDRA Bank: Majority of Indians are poor and live in rural and interior parts of India. In case of
MUDRA, guidance, support, training and financial assistance will be provided resulting in jump in GDP.
MUDRA Bank is a step by the government that can give birth to a new set of entrepreneurs. MUDRA Bank
will instill a new confidence in the small entrepreneurs that have been to exploitation at the hands of
money lenders so far.
Recovery method: Mudra Bank will ensure clients are properly protected and will lay down principles and
methods of loan recovery in case of a default. The Bank will also rigidly follow "responsible financing
practices" so deter borrowers from indebtedness.
Corpus: The Bank will be set up with a corpus of Rs 20,000 crore and a credit guarantee fund of Rs 3,000
crore.
Organisation: The bank will initially function as a non-banking financial company and a subsidiary of the
Small Industries Development Bank of India (SIDBI). Later, it will be made into a separate company. It will
also serve as a regulator for other micro-finance institutions (MFIs) and provide them refinancing services.
It will provide guidelines for MFIs and give them ratings.
MICRO, SMALL AND MEDIUM ENTERPRISES
Definition of MSE: The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium
enterprises is as under:
(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as
specified below:
(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs.
25 lakh;
(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs.
25 lakh but does not exceed Rs. 5 crore; and
(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than
Rs.5 crore but does not exceed Rs.10 crore.
Investment in plant and machinery is the original cost excluding land and building and the items specified
by the Ministry of Small Scale Industries.
(b) Enterprises engaged in providing or rendering of services as specified below:
(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;
(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but
does not exceed Rs. 2 crore; and
(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but
does not exceed Rs. 5 crore.
Investment in equipment is the original cost excluding land and building and furniture, fittings and other
items not directly related to the service rendered.
Status of lending to MSE as part of Priority sector: Bank’s lending to the Micro and Small enterprises
engaged in the manufacture or production of goods is reckoned for priority sector advances. However, in
case of service enterprises, bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises
is covered under priority sector. Lending to Medium enterprises is not eligible to be included for the
purpose of computation of priority sector lending.
Targets for lending by banks to MSMEs: In terms of the recommendations of the Prime Minister’s Task
Force on MSMEs (Chairman: Shri T.K.A. Nair, Principal Secretary), banks should achieve a 20 per cent
year-on-year growth in credit to micro and small enterprises, a 10 per cent annual growth in the number
of micro enterprise accounts and 60% of total lending to MSE sector as on preceding March 31st to
Micro enterprises. In order to ensure that sufficient credit is available to micro enterprises within the MSE
sector, banks should ensure that:
(a) 40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises
having investment in plant and machinery up to Rs. 10 lakh and micro (service) enterprises having
investment in equipment up to Rs. 4 lakh ;
20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with
investment in plant and machinery above Rs. 10 lakh and up to Rs. 25 lakh, and micro (service)
enterprises with investment in equipment above Rs. 4 lakh and up to Rs. 10 lakh. Thus, 60 per cent of
MSE advances should go to the micro enterprises.
Specialized bank branches for lending to the MSMEs: Public sector banks should open at least one
specialized branch in each district. Banks may categorize their MSME general banking branches having
60% or more of their advances to MSME sector, as specialized MSME branches. As on March 2014 there
are 2887 specialized MSME branches.
Rules for calculating the working capital requirements of borrowers: As per Nayak Committee Report, in
case of working capital limits up to Rs 5 crore to Small manufacturing enterprises, operating cycle is
assumed to be of 3 months. Accordingly, working capital requirement is computed at 25% of projected
annual sales and working capital limit is computed on the basis of minimum 20% of their projected annual
Turnover.
Composite Loan: A composite loan limit of Rs.1crore can be sanctioned by banks to enable the MSME
entrepreneurs to avail of their working capital and term loan requirement through Single Window.
Cluster financing: Cluster based approach to lending is more beneficial (a)in dealing with well-defined
and recognized groups (b) availability of appropriate information for risk assessment (c) monitoring by the
lending institutions and (d) reduction in costs. Therefore, banks should treat it as a thrust area and
increasingly adopt the same for SME financing. United Nations Industrial Development Organisation
(UNIDO) has identified 388 clusters spread over 21 states in various parts of the country. The Ministry of
Micro, Small and Medium Enterprises has also approved a list of clusters under the Scheme of Fund for
Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development
Programme (MSE-CDP) located in 121 Minority Concentration Districts. Banks should open more MSE
focussed branch offices at different MSE clusters which can also act as counselling centres for MSEs.
Each lead bank of the district may adopt at least one cluster.
Collateral security: Banks should not accept collateral security in the case of loans upto Rs 10 lakh to units
in the MSE sector. Further, banks may, on the basis of good track record and financial position of MSE
units, waive collateral requirement for loans up to Rs.25 lakh.
Credit Rating: Though Credit rating is not mandatory in case of MSE borrowers, it is in the interest of the
MSE borrowers to get their credit rating done as it would help in credit pricing of the loans taken by them
from banks.
Delayed payment of dues to the MSE borrowers: For the goods and services supplied by the MSEME
units, payments have to be made by the buyers as under: (i) The buyer is to make payment on or before
the date agreed on between him and the supplier in writing or, in case of no agreement, before the
appointed day. The agreement between seller and buyer shall not exceed more than 45 days; (ii) If the
buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest
with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at
three times of the Bank Rate notified by Reserve Bank. While sanctioning/renewing credit limits to their
large corporate borrowers (i.e. borrowers enjoying working capital limits of Rs. 10 crore and above from
the banking system), banks should fix separate sub-limits, within the overall limits, specifically for
meeting payment obligations in respect of purchases from MSEs either on cash basis or on bill basis
Guidance by banks to MSE entrepreneurs: Banks provide following services to the MSE entrepreneurs:
(i) Rural Self Employment Training Institutes (RSETIs): RSETIs are managed by banks with active
co-operation from the Government of India and State Governments. RSETIs conduct various short
duration (ranging preferably from 1 to 6 weeks) skill upgradation programmes to help the existing
entrepreneurs compete in this ever-changing global market. RSETIs ensure that a list of candidates
trained by them is sent to all bank branches of the area and co-ordinate with them for grant of financial
assistance under any Govt. sponsored scheme or direct lending.
(ii) Financial Literacy and consultancy support: Through Financial Literacy centres, banks provide
assistance to the MSE entrepreneurs in regard to financial literacy, operational skills, including
accounting and finance, business planning etc.
Role of Banking Codes and Standard Board of India (BCSBI) for MSEs: The Banking Codes and
Standard Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small
Enterprises. This is a voluntary Code, which sets minimum standards of banking practices for banks to
follow when they are dealing with Micro and Small Enterprises (MSEs).
Sick unit: A Micro or Small Enterprise may be said to have become Sick, if (a) Any of the borrowal
account of the enterprise remains NPA for three months or more or (b) there is erosion in the net worth
due to accumulated losses to the extent of 50% of its net worth during the previous accounting year. If a
sick unit is found potentially viable it can be rehabilitated by the banks. The viability of the unit is
decided by banks. The decision on viability of the unit should be taken at the earliest but not later than 3
months of the unit becoming sick under any circumstances. A unit should be declared unviable only if
the viability status is evidenced by a viability study. For micro (manufacturing) enterprises, having
investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in
equipment up to Rs. 2 lakh, the Branch Manager may take a decision on viability and record the same,
along with the justification. The declaration of the unit as unviable, as evidenced by the viability study,
should have the approval of the next higher authority/ present sanctioning authority for both micro and
small units. For sick units declared unviable, with credit facilities of Rs. 1 crore and above, a Committee
approach may be adopted. The rehabilitation package should be fully implemented by banks within six
months from the date the unit is declared as potentially viable/viable. During this six months period of
identifying and implementing rehabilitation package banks/FIs are required to do “holding operation”
which will allow the sick unit to draw funds from the cash credit account at least to the extent of deposit
of sale proceeds.
8. MONETISATION OF GOLD
CONCEPT:
 Gold Monetisation refers to converting gold into a legal tender to spur spending and
investment and limiting the need to import gold. The Govt. in the budget announced schemes to
curb gold imports and monetise large idle stocks of the precious metal.
 The Govt. proposes to introduce a gold monetisation scheme, which will replace both the
present gold deposit and gold metal loan schemes. The new scheme will allow the depositors of
gold to earn interest and the jewellers to obtain loans in their metal account. Banks / dealers
would also be able to monetize this gold. This will bring down India's gold imports significantly.
BACKGROUND:
 Gold in India is considered as hedge fund and associated to status symbol and customs thus
cuffing the hands of the govt. to impose such restriction over possessions. Most of the gold
possessed is in the form of ornaments.
 World Gold Council estimates that Indian households owns more than 22,000 tonnes of gold.
Mostly this gold is neither traded, nor monetized and on the other side India imports 800-1000
tonnes of gold every year.
 This huge amount of imported yellow metal adds pressure to current account of the Govt. It is
the second item after crude oil which adds burden to our import bill. Budget 2015 offered few
schemes and alternatives to buying gold by offering the monetization of gold and sovereign gold
bond.
LATEST GUIDELINES:
 Gold monetisation scheme will allow gold depositors to earn interest and jewellers to obtain
loans in their metal accounts.
 Sovereign Gold Bond is an alternative financial asset to stop people from buying the precious
metal physically. It will carry a fixed rate of interest and also be redeemable in terms of the face
value of the gold at the time of redemption by the holder of the bond. Sovereign gold bond can
generate substantial buffer stock of gold that can be utilized in the international market.
 Govt. proposes to introduce Indian gold coin with the Ashoka Chakra embossed on its face. It
will help reduce the demand for coins minted outside India and also help to recycle the gold
available in the country.
IMPLICATIONS:
 The scheme will bring out idle gold with the common man into the system with benefit of
nominal returns.
 The move would also help in correcting trade deficit & current a/c deficit, net difference
between outflows & inflows of foreign currencies.
 Gold monetisation Scheme will help in to reduce the demand of overseas gold and curb the
black money. The amount generated by the government through Sovereign Gold Bond will help
in to build infrastructure.
 Gold Monetization Scheme will increase the availability of the yellow metal in the domestic
market & help jewellers. Moreover, there is a possibility that the gold prices may come down
whenever imports come down which would enable end user to save on cost while buying gold
jewellery. The introduction of India branded gold coin is expected to have a healthy impact on
the country’s gold sector, provided trade is liberalised without artificial curbs and higher duties.
 Standard India gold coins will ensure gold availability aligned to customer preferences and will
help curb the unofficial market. With the introduction of an Indian gold coin, it will prevent the
outflow of cash to external markets as Indian consumers depend on foreign gold coins to meet
their needs.
The monetisation scheme will drive orderly recycling & enhance transparency as it has the
potential to translate gold savings into economic investments.
9. BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND

ASSETS) AND IMPOSITION OF TAX ACT, 2015
Black Money Act has been passed by both the Houses of the Parliament. The Act has received the
assent of the President of India on 26 May 2015. It came into effect from 1 July 2015. The salient
features of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 are as under:-
Objective: It aims to curb black money, or undisclosed foreign assets and income and imposes tax and
penalty on such income. Starting financial year 2015 16 undisclosed foreign income & assets will be
taxed under this new law. Such income & assets will no longer be covered under the existing Income
Tax Act, 1961.
Scope: The Act will apply to all persons resident in India including their legal heirs. Since this bill is
applicable to Residents – there is no exemption for expatriates who may become residents by virtue of
their extended stay. Provisions of the Act will apply to both undisclosed foreign income and assets
(including financial interest in any entity).
Rate of tax:
1. Undisclosed foreign income or assets shall be taxed at the flat rate of 30 percent.
2. No exemption or deduction or set off of any carried forward losses which may be admissible under
the existing Income-tax Act, 1961, shall be allowed.
3. The Black Money Act does not provide for the Central Government to enter into agreements with
other countries for granting relief in respect of income on which tax has been paid in India as well as
the other country, i.e., granting of relief from double taxation. Accordingly, a credit for taxes paid in
the foreign country in relation to undisclosed incomes / assets will not be available under the Black
Money Bill.
Penalties: Violation of the provisions of the proposed new legislation will entail stringent penalties as
given below:
1. The penalty for non-disclosure of income or an asset located outside India will be equal to three
times the amount of tax payable thereon, i.e., 90)% of the undisclosed income or the value of the
undisclosed asset. This is in addition to tax payable at 30%.
2. Failure to furnish return in respect of foreign income or assets shall attract a penalty of Rs.10 lakh.
The same amount of penalty is prescribed for cases where although the assessee has filed a return
of income, but he has not disclosed the foreign income and asset or has furnished inaccurate
particulars of the same.
Prosecutions:
2. 1. The punishment for willful attempt to evade tax in relation to a foreign income or an asset located
outside India will be rigorous imprisonment from three years to ten years. In addition, it will also
entail a fine Failure to furnish a return in respect of foreign assets and bank accounts or income will
be punishable with rigorous imprisonment for a term of six months to seven years. The same term of
punishment is prescribed for cases where although the assessee has filed a return of income, but
has not disclosed the foreign asset or has furnished inaccurate particulars of the same.
3. The above provisions will also apply to beneficial owners or beneficiaries of such illegal foreign
assets.
4. Abetment or inducement of another person to make a false return or a false account or statement or
declaration under the Act will be punishable with rigorous imprisonment from six months to seven
years. This provision will also apply to banks and financial institutions aiding in concealment of
foreign income or assets of resident Indians or falsification of documents.
Safeguards: The principles of natural justice and due process of law have been embedded in the Act by
laying down the requirement of mandatory issue of notices to the person against whom proceedings are
being initiated, grant of opportunity of being heard, necessity of taking the evidence produced by him
into account, recording of reasons, passing of orders in writing, limitation of time for various actions of
the tax authority, etc. Further, the right of appeal has been protected by providing for appeals to the
Income-tax Appellate Tribunal, and to the jurisdictional High Court and the Supreme Court on
substantial questions of law.
To protect persons holding foreign accounts with minor balances which may not have been reported out
of oversight or ignorance, it has been provided that failure to report bank accounts with a maximum
balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution.
One time compliance opportunity: The law also provides a one time compliance opportunity for a limited
period to persons who have any undisclosed foreign assets which have hitherto not been disclosed for
the purposes of Income-tax. Such persons may file a declaration before the specified tax authority within
a specified period, followed by payment of tax at the rate of 30% and an equal amount by way of penalty.
Such persons will not be prosecuted under the stringent provisions of the new Act. It is to be noted that
this is not an amnesty scheme as no immunity from penalty is being offered.
10. FINANCIAL BENCHMARK INDIA PVT LTD

BACKGROUND:
 The board of Financial Benchmarks India (FBIL) has taken over the responsibility of
administration of the overnight inter-bank Mibor benchmark rate - a function which was
performed by the National Stock Exchange till now. The move is seen as a first step in the
process of taking over responsibility of benchmark setting over a period of time.
The new firm comes into existence after an RBI committee led by ED Sh. P. Vijaya Bhaskar
was formed in 2013 following reports of widespread rigging of the Libor in Europe and
suggested that Indian money markets should move their benchmark rates to transaction-based
rather than a poll-based system to ensure that benchmark interest rates are not manipulated.
RBI had accepted the committee’s recommendations and directed FIMMDA, FEDAI and IBA to
take necessary action in 2014 in order to overcome the possible conflicts of interest in the
benchmark setting process arising out of the current governance structure of FIMMDA and
FEDAI and advised the formation of an independent body either separately or jointly.
 FBIL, which is a three-way joint venture between Fixed Income, Money Market and
Derivatives Association of India (76 per cent stake), Foreign Exchange Dealers Association
of India (14 per cent) and Indian Banks’ Association (10 per
cent), will bring out the new benchmark -FBIL Overnight Mumbai Interbank Outright Rate (FBIL-
Overnight Mibor).
 Earlier, the National Stock Exchange (NSE) system used to poll rates to get the daily
benchmark rate, which meant that banks could say whatever rate they felt which kept the
possibility of rigging alive.
 Now FBIL will arrive at the benchmark by taking only the rates at which trades are dealt,
which will negate the possibility of rigging and will replace National Stock Exchange and
Thomson Reuters in administering the overnight rate benchmark.
FBIL BOARD: The FBIL board is headed by former RBI Deputy Governor Usha Thorat and
includes five other members, namely, former FIMMDA Chief Executive C.E.S. Azariah; FEDAI
CEO D.G. Patwardhan; N.R. Prabhala, head of research of the RBI-backed Centre for Advanced
Financial Research and Learning; D.V.S.S.V. Prasad, current FIMMDA CEO; and former State
Bank of India Managing Director Sangeet Shukla.
IMPLICATIONS:
 The new benchmark will be known as the FBIL Overnight Mumbai Interbank Outright Rate
(FBIL-Overnight Mibor) and will be administered by the board of Financial Benchmarks India
Private Ltd (FBIL) and based on trade-weighted call money transactions conducted on
Clearing Corporation of India's Negotiated Dealing System-Call platform between 0900-1000
IST.
 The new method, which follows an announcement by the Reserve Bank of India in 2013, will
mark a contrast to the current MIBOR, which is compiled by polling market participants and
is used to benchmark overnight pricing of call money rate in India.
 Mibor is the rate at which banks lend and borrow overnight money to each other and Mibor
is currently calculated everyday by the NSE as a weighted average of inter-bank offer
(lending) rates of a group of 30 banks.
 The new benchmark will apply on a prospective basis to contracts that have trade dates on
or after Wednesday.
 The current FIMMDA-NSE Mibor polled overnight benchmark will cease to be published
from the effective date. All transactions outstanding on the effective date referenced to the
current benchmark FIMMDA-NSE Mibor will automatically switch to the new reference rate.
FBIL said the methodology will be continuously reviewed in the light of further data and
developments in best practices for domestic and global markets.
PROPOSED MEASURES TO STRENGTHEN THE FRAMEWORK FOR BS:
To strengthen the governance framework for Benchmark Submitters (BS), following measures
are proposed:
 BS may put in place an internal Board approved policy on governance of the benchmark
submission process. The policy may ensure that clearly accountable personnel at appropriate
senior positions with requisite knowledge and expertise are responsible for benchmark
submission.
 BS may put in place an effective conflicts of interest policy which facilitates identification of
potential and actual conflicts of interest with respect to benchmark submission and lays down
procedures to be followed for management, mitigation or avoidance of such conflicts.
 BS may establish a maker-checker system to ensure integrity of the submission. The
submissions may be periodically reviewed by appropriate senior level officials in terms of
minimum variance threshold with respect to the published benchmark levels.
 BS may establish appropriate internal controls to secure compliance with the benchmark
submission procedures. The transactions which are taken as the basis for submission may be
recorded so as to verify that they represent bonafide arm’s length commercial transactions,
and are not undertaken solely for the purpose of benchmark submission. The personnel
involved in benchmark submission may document the verifiable basis for their qualitative
assessment in absence of actual transaction data.
 BS may establish a whistle blowing policy to facilitate early detection of any potential
misconduct or any irregularities in data submission.
 BS may retain all records relating to benchmark submissions for a minimum period of 8
years.
 BS may subject the benchmark submission to periodic internal audit, and where
appropriate, to external audit.
 BS may undertake submissions by way of written communications or contribution devices
to leave audit trail to eliminate possibilities of errors.
 BS may conduct a reality self-check of their existing governance framework vis-à-vis these
guidelines and report the status to the respective benchmark administrator.
 BS may periodically submit a confirmation to Benchmark Administrator for having
compiled with the regularity guidelines and provisions of Code of Conduct to be issued by the
respective Benchmark Administrator.
Thus, Benchmark submitter will improve integrity and credibility of the local financial market as
well as the real sector and there will also be periodic review of the benchmark methods to ensure
they are robust and conform to the best governance standards.
11. IMPACT OF GREECE CRISIS ON INDIAN ECONOMY

 India may suffer capital outflows: As per the Finance Secretary, the economic crisis in
Greece may trigger capital outflows from India and the government is consulting the RBI to
deal with the situation.
 India's Software and Engineering exports may take a hit: Engineering exporters' body
EEPC India fear that the economic crisis in Greece will impact engineering exports from India
as European Union is the largest destination for such shipments.
 Rupee might Depreciate: Economists argue that there could be some temporary volatility in
the financial market and if Greece exit happens, then rupee might depreciate.
 Sharp volatility in stock markets: India's stock markets fell as much as 2.2% on Greece
worries. The BSE Sensex and Nifty closed at their lowest in nearly two-and-a-half weeks.
 Domestic demand drives India's growth: Growth in India is driven by domestic demand and
is expected to pick up. Most multilateral agencies see India as a bright spot with GDP growth
in 7-8% range.
 India has enough forex reserves: As per RBI governor, the Indian economy will see through
any impact of the Greece crisis. Robust forex reserves, which are at an all-time high of $355
billion, will cushion any possible impact of the crisis.
LATEST BAILOUT:
Greece and the rest of the eurozone have finally reached an agreement that could lead to a
third bailout and keep the country in the single currency bloc.
Greek Financial Deal:
a) €86 bn total bailout from the European Stability Mechanism (ESM), plus IMF contribution to
recapitalise banks, repay debts, interest payments etc.
b) €50bn Trust fund from privatising assets, i.e.,
 €25 bn to repay capitalization loan for banks.
 €12.5 bn to reduce debt to GDP ratio.
 €12.5 bn for investment.
c) € 12 bn Bridging loan to repay European Central Bank by mid August.
d) € 35 bn EU funding for growth and new jobs.
Greece has agreed to undertake sweeping austerity & economic reforms. The highlights
are:
 GREEK ASSETS TRANSFER: Up to €50bn worth of Greek valuable assets will be transferred
to a new independent fund that will monetise the assets through privatisations and other
means. The valuable assets are likely to include things such as planes, airports, infrastructure
and banks.
 PENSIONS: Greece has been told that it needs to pass measures to improve long-term
sustainability of the pension system. The group of lenders believes that Athens can save
0.25% to 0.5% of GDP in 2015 and 1% of GDP in 2016 by reforming pensions.
 VAT AND OTHER TAXES: The latest agreement demands measures for the streamlining of
the VAT system and the broadening of the tax base to increase revenue.
 STATISTICS OFFICE: Another demand is for legislation on the safeguarding of the full legal
independence of ‘ELSTAT’, the Greek statistics office.
 BALANCING THE BOOKS: Greece has been told it must legislate to introduce ‘quasi-
automatic spending cuts’ if it deviates from primary surplus targets.
BRIDGING FINANCE: Talks will begin immediately on bridging finance to avert the collapse of
Greece’s banking system and help cover its debt repayments. Greece must repay more than €7
bn to the European Central Bank (ECB) in July & August, before any bailout cash can be handed
over.
 DEBT RESTRUCTURING: Greece has been promised on restructuring its debts. The Euro
group also ruled out any ‘haircuts’, leaving the €240bn Greece owes to Brussels, the ECB and
the International Monetary Fund (IMF) on the books.
 LIBERALISING THE ECONOMY: The new deal also calls for more ambitious product market
reforms that will include liberalising the economy with measures ranging from bringing in
Sunday trading hours to opening up closed professions.
 ENERGY MARKET: Greece has been told to get on with privatising its energy transmission
network operator (ADMIE).
 FINANCIAL SECTOR: Greece has been told to strengthen its financial sector, including taking
decisive action on nonperforming loans and eliminating political interference.
SHRINKING THE STATE: Greece has been told to depoliticise the Greek administration and to
continue cutting the costs of public administration
12. The New Development Bank (NDB)

The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a
multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South
Africa) as an alternative to the existing US-dominated World Bank and International Monetary Fund. The
bank is set up to foster greater financial and development cooperation among the five emerging markets.
Together, the four original BRIC countries comprise in 2014 more than 3 billion people or 41.4 percent of
the world’s population, cover more than a quarter of the world’s land area over three continents, and
account for more than 25 percent of global GDP. The bank will be headquartered in Shanghai, China.
Unlike the World Bank, which assigns votes based on capital share, in the New Development Bank each
participant country will be assigned one vote, and none of the countries will have veto power.
History
The New Development Bank was agreed to by BRICS leaders at the 5th BRICS summit held in Durban,
South Africa on 27 March 2013. On 15 July 2014, the first day of the 6th BRICS summit held in Fortaleza,
Brazil, the group of emerging economies signed the long-anticipated document to create the $100 billion
BRICS Development Bank and a reserve currency pool worth over another $100 billion. Both will counter
the influence of Western-based lending institutions and the dollar. Documents on cooperation between
BRICS export credit agencies and an agreement of cooperation on innovation were also signed.
Shanghai was selected as the headquarters after competition from New Delhi and Johannesburg. An
African regional center will be set up in Johannesburg.
The first president will be from India, the inaugural Chairman of the Board of directors will come from
Brazil and the inaugural chairman of the Board of Governors will be Russian.
Development capital
The bank's primary focus of lending will be infrastructure projects with authorized lending of up to $34
billion annually. South Africa will be the African Headquarters of the Bank named the "New Development
Bank Africa Regional Centre". The bank will have starting capital of $50 billion, with capital increased to
$100 billion over time. Brazil, Russia, India, China and South Africa will initially contribute $10 billion each
to bring the total to $50 billion. Each member cannot increase its share of capital without all other 4
members agreeing. This was a primary requirement of India. The bank will allow new members to join but
the BRICS capital share cannot fall below 55%.
Contingent Reserve Arrangement (CRA)
The CRA is a framework for the provision of support through liquidity and precautionary instruments in
response to actual or potential short-term balance of payments pressures.
The objective of this reserve is to provide protection against global liquidity pressures. This includes
currency issues where members' national currencies are being adversely affected by global financial
pressures.
The Bank would also provide assistance to other countries suffering from the economic volatility in the
wake of the United States' exit from its expansionary monetary policy.
This fund will consist of $10 billion of "paid-in capital" ($2 billion from each member to be provided over
seven years) and an additional $40 billion to be "paid upon request". Out of the total initial capital of $100
billion, China will contribute $41 billion, Brazil, Russia and India would give $18 billion each, and South
Africa would contribute $5 billion. It is scheduled to start lending in 2016.
13. Indian Banking 2020 : Opportunities and Challenges
Ten Major Trends that will Shape the Indian Banking Industry
1. Mortgages to cross Rs 40 trillion by 2020:
Mortgages typify the retail banking opportunity in an economy. The total mortgages in the books of the
banks have grown from 1.5 percent to 10 percent of the total bank advances, in a period of ten years. The
ratio of total outstanding mortgages, including the Housing Finance Companies (HFCs) to the GDP is
currently 7.7 percent. If by 2020, this ratio were to reach 20 percent, a number similar to that of China, we
could expect the mortgage industry growing at an average rate of over 20 percent during the next decade.
The outstanding mortgages are expected to cross Rs 40 trillion which is higher than the entire loan book
of the banking industry pegged at Rs 30 trillion
. Wealth management will be big business with 10X growth:
Going forward, wealth is expected to get further concentrated in the hands of a few. The top band of
income distribution is expected to grow most rapidly over the next decade. By2020, the top 5 percent
households, predominantly residing in the metros and Tier I cities, will account for 30 percent of the total
disposable income. Wealth management services will be demanded by the nouveau rich and will be an
integral part of the product portfolio for both, private as well as public sector banks
“The Next Billion” will be the largest segment:

It is the fact that the income group right below the middle class in the annual house hold income range of
Rs 90,000 to Rs 200,000 per annum will be the largest group of customers. These customers will be
profitably served only with low cost business models having low break even ticket size of business. The
next decade would witness banks experimenting with different low cost business models, smaller cost
effective branches and new use of technology to serve this segment profitably
The number of branches to grow 2X; ATMs to grow 5X:
India has a very low penetration of branches and ATMs as compared to some of the other developed and
developing nations. It is evident that the bank branches and ATMs are by far the most popular channels,
despite a decade of promotion of alternate channels. The experience in developed economies also
corroborates that branches and ATMs continue to be the critical channels, although certain transactions
have shifted to alternate channels. As such, there is a requirement of at least 40,000–50,000 additional
branches and 160,000– 190,000 additional ATMs in the coming decade. This will be 3 times more than
the branches and ATMs launched in the last decade
5. Mobile banking to see huge growth and will redefine transaction banking paradigm:
As illustrated in Exhibit 1f, the uptake of internet and call centers is low in all segments other than
foreign banks. Comparing with usage pattern in US, the significant potential in online and phone
channels is apparent. However, India may evolve differently. The penetration of internet and broad band
access in India has been low so far. However, with the advent of mobile banking, the access to banking
facilities could completely get revolutionized over the next decade. As illustrated inExhibit 1g, even if
25–30 percent of mobile users have GPRS / 3G activated, there would be 250 million to 300 million
customers who would access banking services over the mobile. On the other hand, customer survey of
over 3000 customers in urban areas has indicated that call centers and internet are the most
dissatisfying channels. We expect the Indian banking industry to invest significant attention in
technology innovation to drive next generation framework for transaction banking. Indian banks could
set an example for the rest of the world
Customer Relationship Management (CRM) and data warehousing will drive the next wave of
technology in banks:
Exhibit 1h illustrates that the average number of banking products per customer in India is significantly
lesser than the global benchmarks. There is a significant potential for cross selling amongst all categories
of banks in India. Given that cross selling is highly cost–effective as compared to all other means of
customer acquisition, banks will adopt CRM strategies aggressively in pursuit of cost–effective business
models described in point 3 above.
Banking margins will come under pressure:
The next decade will see a dramatic change in margins as the wholesale debt markets deepen and
corporate customers access the whole sale markets directly. Further, should the savings bank rate be
liberalized, banks will move to a regime of low margins. Exhibit 1i illustrates the findings of a recent IBA
survey conducted across banks to understand their perception of the future trends. The public sector
banks expect to see their margins squeeze with a much higher likelihood as compared to the private
sector / foreign banks. Exhibit 1j illustrates the actual NIM of the public sector banks and private sector
banks over the last 5 years. The NIM of the public sector banks has consistently declined and this perhaps
reflects in the pessimistic view on future margins adopted by the public sector.
New models to serve the Small and Medium Enterprises (SME):
Exhibit 1k illustrates the results of a survey conducted by FICCI to gauge the level of satisfaction among
large, medium and small business customers with regard to banking services. The large customers are
more satisfied across all dimensions as compared to the medium and small sized ones. The smallest
businesses are most dissatisfied. Due to higher risk and lower ticket size, the SME typically get less
attention. Banks are yet to create innovative models to serve SMEs with sufficient and timely credit at the
right price. In general, the level of dissatisfaction is higher on pricing and product range. A further
analysis highlights that the dissatisfaction on pricing is higher for the private sector banks while
dissatisfaction on product range is higher for the public sector ones. As the yields in large corporate
banking falls with further deepening of wholesale debt markets, the banking industry in India will find
cost–effective ways to serve the SME customers where yields are quite high. Exhibit 1l highlights the top
3 new expectations of business customers in the next decade, as per our recent survey. The SMEs hope
to get the basics — good relationship management, fast credit decisions and a complete product range
all at one place.
Investment banking will grow over ten–fold:
Investment banking will be among the fastest growing segments in the banking industry rising from 4
percent to7 percent of the entire corporate banking revenue pool. The larger corporate customers expect
to demand higher support for international expansion and mergers and acquisitions over next decade as
shown in Exhibit 1l. Further, as the wholesale debt markets deepen, the larger corporates would avail of
advisory and capital market services from banks to
access capital markets. The revenue pool will shift from traditional corporate banking to investment
banking and advisory. Banks with international presence stand to benefit
10. Infrastructure financing to hit over Rs 20 trillion on commercial banks books:
As India continues to rely on private funding for infrastructure development, infrastructure will occupy a
larger share of the balance sheets. Half of the debt finance for infrastructure today comes from banks. As
illustrated in Exhibit 1m, by 2020 banks would have accumulated infrastructure assets worth Rs 20–25
trillion on their books. This would touch 12–15 percent of the total advances. Infrastructure loans coupled
with home loans would together account for about 25–30 percent of the total advances of the banking
industry. This would be the limit to which banks will be comfortable takinglong term assets on their books.
Even as the asset liability mismatch issues are resolved by IIFCL and the government, the real challenge
for banks would be to develop skills to undertake the risks of long gestation infrastructure projects and
manage concentration risk in infrastructure
14. A new banking landscape for New India

Defining contours of New India
There are seven key themes which would define the Indian economy and Indian banking sector in the
days to come. These are: demography,urbanization,digitization,industrialization,education,inclusion and
global integration
a) Demography
Much has been talked about the demographic dividend that India possesses. At its current pace of growth,
the Indian population is predicted to exceed China by 2025. Further, while China’s working-age population
may peak around 2015 and shrink for a decade and a half thereafter, 68% of India population would be
within the working age range (15–64) until 2030. Life expectancy of the Indian population is also slated to
increase to about 70 years by 2030. While on the one hand the numbers present sustained opportunity for
the banks in terms of new stream of customers, it also presents challenges. These challenges are in the
form of diverse behavior patterns that customers in different age groups display. The banks would need to
continuously foretell the customers’ preferences and focus their strategies on meeting them proactively.
Urbanisation
India is also witnessing a growing trend of urbanisation. By 2030, urban population is estimated to rise to
631mn recording an annual increase of 2.6% as against an annual rise of 1.1% in the overall population.
This would mean that 41.8 % of the population would be living in urban agglomerations as against 31%
today. While even at that percentage, the urban population would be far lower than the global average at
50% presently; this would open up huge business opportunities for the banks for creation of public
infrastructure, housing, consumption, education needs of customers and so on.
Digitization
Digitization is another area which is being pursued relentlessly by the new Government. There is massive
focus on enhancing internet penetration in the country through accelerated
broadband connectivity. The internet penetration has seen a sharp growth over the last year, however, the
extent of internet penetration at 20% pales in comparison to other developing countries like China (46%),
Brazil (53%) and Russia (59%); let alone the developed nations like US, UK and Japan where the number
is in excess of 85%. In these low numbers lie the inherent opportunities for the banking sector. As the
number of internet users in the country grows, the banks would be able to better utilize this medium as a
delivery channel. On the other hand, the mobile penetration in the country is significantly high at around
930.20 mn and beckons as an opportunity to be tapped.
Industrialization
The new Government’s ‘Make in India’ pitch also touches the right cords and efforts are afoot to increase
the presently stagnant share of manufacturing in GDP to around 25–30 % by 2025 from 15% at present. If
that materializes, it would mean addition of 90 million domestic jobs and attendant corporate and retail
business opportunities.
Education
Likewise, there is tremendous scope of improving the level of education in the country by strategic focus
on the four Es i.e. Expansion, Equity and Inclusion, Excellence & Employability. It would entail significant
changes in consumer awareness, needs, demands and expectations.
Financial inclusion
The launch of the PMJDY scheme with a focus on linking each household with a bank account has
received extremely positive response. At last count, the number of accounts opened under the scheme
had reached 12.14 crore. I don’t need to emphasize the avenues that this scheme has opened for the
bankers. Moreover, it is just a stepping stone. Major part of the work has to commence now.
Global integration
One, the potential exclusion of Russia from the SWIFT payment system and the other about withdrawal
from correspondent banking relationships in 30 jurisdictions by three of the world’s biggest banks.
Ostensibly, the motivation for these banks to sever their ties with the lenders in developing nations has
been to limit the risk of being hit by regulatory sanctions on account of breaches, money laundering and
terrorist finance. Events such as these, though having their origin in specific jurisdictions, have the
potential to significantly impact the business and finance elsewhere in the globe.
Under the circumstances, it would be important for the banks to keep track of emerging trends and be
prepared not only to negotiate through the imminent challenges, but simultaneously be ready to latch on to
the opportunities that present themselves.
Key actors/acts in the new banking landscape
Customers, employees, owners and regulators comprise the key stakeholders in the banking system.
In the emerging landscape, the banks would have to contend with a set of customers who are more
educated, better informed and well-networked. The banks may probably be forced to hard sell their
products and services using a variety of media across the physical and the virtual world. As the complexity
of the products/services demanded by the customers increases, the banks would have to not only focus
on upgradation of skillsets of their employees but also on their retention. Also the new competition would
potentially pull down the ROEs that the owners currently enjoy rendering it difficult to persuade future
investors to put in more capital in the banks. In case of public sector banks, the ownership structure itself
may change with Government bringing down its stake in these banks. They would, thus, also join the race
to seek private capital.
As we have witnessed, the regulators across the globe have been particularly very severe on failings of the
regulated entities on the consumer protection, money laundering and fair market conduct front. This
regulatory activism is evident in the frequency and quantum of penalties levied on banks worldwide. Post
crisis, the banks in US and Europe alone have been forced to cough up approximately $230 bn in penalties
and legal cost so far. Next two years are likely to see another $70 bn being forked out by the banks for the
same reasons. These are staggering numbers. We have also seen some enforcement actions in our
jurisdiction but these are pretty benign in comparison. Believe me; Indian regulators have been relatively
more tolerant thus far. Some of you who have overseas operations are well aware of the tough stance that
the host regulators adopt. Banks would need to gear up to face stricter regulatory regime.
The new banking landscape would impact the processes currently in vogue in the sector.
Competition and consolidation
Competition and consolidation in the sector is an impending development that the banks would have to
contend with sooner rather than later. Two new private sector banks should start operating within this
calendar year. Further, the small finance banks and payments banks might mark their presence, may be,
later in the year or by early next year and so. There could be consolidation and mergers between the
existing market players. No doubt, the pie is big enough to accommodate new players and there is plenty
of opportunity for the well-organised and mainstream regulated players to wean away the customers from
unregulated shadow banking entities. But, the existing players can afford to stay in denial at their own
peril. We have seen competition giving a tough run to the monopoly players. It has happened in the
aviation sector, the telecom sector and there is no reason why it would not happen in the banking sector.
RBI has been indicating about the possibilities of the bank licensing process being put on tap or
introducing more varieties of differentiated banks. Also, there is a healthy appetite from the foreign banks
to enter this country.
The entry of new competitors alone would not mean dramatic changes soon. Banking is a business of
scale which the new players cannot build overnight. New banks would start small and scale up over a
period of time. Not only would there be a competition for business but also for talent. The processes would
be forced to be more efficient.
Technology
Growing mobile and internet penetration has opened new avenues for the entrepreneurs. This is reflected
in the way the new age customer transacts her business. If all traditional businesses have been impacted
by technology, banking could not have remained unaffected. As a flip-side to its well-documented
advantages in terms of efficiency and effectiveness of service delivery, technology has also fast tracked
the process of customer alienation- first in the form of ATMs and then in the form of internet and mobile
banking. In this sense, banks have become faceless entities. This transition calls for a change in the way
the banks interact with and retain their customers.
Risk Management
Risk Management in banks is of the same vintage as the banks themselves. The banks are in the
business of taking risks and hence they need to have a risk management framework in place. It’s been
more than a decade and a half since RBI first released the risk management guidelines for banks in India.
But, risk management has been pursued in our banking system more under compliance compulsions and
has not been dovetailed in the banks’ businesses processes as much as they ought to have been. As the
complexity in the financial world grows, the banks would need to carefully consider and set their risk
appetite after duly evaluating their capital level as also the skillsets of the officials entrusted with the
management of risks.
The defining elements of the new India would have far-reaching impact on each of the actors and the acts
in the new banking landscape. These elements would interplay and provide shape to the new banking
order. It would be interesting to pick up these 7 contours, 4 actors and 3 acts and interplay them to build
probable business scenarios
Few Qs seeking As
The banking profession and the bankers would need to find answers to ensure their relevance
in the emerging landscape.
(i) Can there be a possibility of account number portability on similar lines as mobile
number portability? So, if an individual is not happy with the service received at one bank, he can possibly
opt for shifting his banking relationship, lock, stock and barrel to another bank. Of course, there could be
issues around loan contracts etc. but there is no reason to believe that such challenges cannot be
surmounted and pave the way for a massive disruption in the way banking is conducted today.
How long can the banks continue increasing their retail loan portfolio? Unless some means to pool and
distribute these loans to other investors in the market is created, the retail lending pipeline can get
chocked quite quickly.
How is crowd funding going to impact lending business of the banks in future? The amount of funds
raised by crowd funding platforms worldwide has increased progressively from $ 1.5 bn in 2011 to $ 2.7
Bn in 2012 and further to $ 5.1 bn in 2013. I hear some of you say it is egligible in volume. The pace of
growth however, is quite fast and combined with the peer-to- peer lending business this could create
disruptions, at least for some of the players who operate in the same segment.
If Mobile Banking were to succeed, would plastic money still be needed? Basically there are two
questions rolled in one. First, whether mobile banking can succeed and if that is the case what
implications would it have for the future of ATMs and the debit cards that have been issued by banks?
There is justifiably a growing need for reducing the reliance placed on cash by the system and hence, if
more and more people moved to mobile/internet based payments, the plastic cards and the investments
made thus far, would be rendered useless unless put to more imaginative uses.
What IFRS implementation would mean for the banking system? IFRS accounting could potentially
overstate assets or overstate capital position. The question is how prudential regulation would exist
alongside IFRS? Proposed impairment calculations under IFRS, accounting for interest income on
Effective Interest Rate basis and presence of multiple systems for operations and accounting of different
portfolios would mean that IT systems would have to be upgraded/realigned for IFRS migration. Banks
would also need to overcome challenges around converging policies for financial accounting and tax
accounting for preparation of financial statements. The banks would need to train their staff in various
departments like credit, and treasury, etc. for acquiring proficiency in IFRS accounting.
Would the large corporates continue to borrow from the banks? Of late, the global markets, particularly
the emerging market economies, have been flush with funds flowing in on account of variants of QEs
launched by the Central Banks in the Advanced Economies. Many large corporate houses have been able
to access funds at very cheap rates without needing to reach out to banks. The sustained deflationary
trends in the Euro Area and Japan portend further bouts of QEs which can adversely impact the lending
business of banks in the emerging markets. Further, the large corporates in developed countries normally
access financial markets directly for their funding requirements rather than commercial banks. Hence,
even while this time-specific event of QEs might fade away, as Indian economy and the financial markets
mature, more and more large corporates could start bypassing banks for their funding
requirements.
(vii) Would the pain from the loans restructured earlier return to haunt the banks? My
understanding is that the prolonged global economic slowdown might have thrown off the projections
made earlier at the time of restructuring the advances in the immediate aftermath of the crisis. As the
moratorium period comes to a close, the banks would need to take a hard look at the techno-commercial
viability of these projects and take the losses wherever the viability seems in jeopardy. Timely decisions,
including for recall/recovery of the loan, wherever the financial prospects are unviable, would be critical.
15. Banking renaissance –Inclusion, Innovation & Implementation

Evolution of banking
Banking, in the form that we know today, might have evolved during the 17th century. However, even in
ancient Mesopotamia, all the modern banking practices such as deposits, interest, loans and letters of
credit seem to have existed. The practice of safe-keeping and savings also seem to have been in
existence in the temple of Babylon as early as 2000 B.C. Closer home, Kautilya, in his Arthashastra
written in about 300 B.C., has also mentioned about the existence of powerful guilds of merchant bankers
who received deposits, and advanced loans and issued hundis (letters of transfer). In the modern times,
an experienced Scottish goldsmith, William Paterson, is credited with the idea of setting up a national
bank in Britain in 1688, which gave birth to the Bank of England. The modern day banking, in its simplest
form, is meant to facilitate financial intermediation between the savers and the borrowers. It also seeks to
act as a safe place to store money and earn some return in the process, as also a place to seek simple
financial solutions to individual problems. The advent of technology in modern times has heralded three
distinct phases in banking:
Computerization of back office processes during the 1980s,
Facilitating higher customer convenience during the 1990s and
Enabling lifestyle/life stage banking during the 2000s.
Thus, over time, the banks have witnessed significant changes in their outlook and have emerged as
financial supermarkets offering a range of complex financial products and services on a round the clock
basis, duly customized to the needs of their customers through multiple delivery channels.
RBI, as the regulator of banks in India, has increasingly deregulated the sector and has allowed the
market players to develop products and services best suited to their customers. As a result, both in terms
of products & services and delivery channels, there has not been any dearth of innovations. On the
product front, the innovations have led to emergence of complex offerings like swaps, derivatives and
securitization, while on the other hand, the delivery channel is no more limited to brick and mortar
branches, but has spread to modern, technology-driven channels like ATMs, mobile, internet and the
social media, besides the Business Correspondent model. Thus, over the years, there has been
tremendous amount of progress and innovations in the sector. However, these developments have,
simultaneously, raised certain pertinent questions:
Whom have these innovations benefited?
Are these product offerings demand driven?
Have the banks addressed the “suitability and appropriateness” question?
Have the charges for various services been made transparent and non-discriminatory?
Why banks are still a place where ordinary mortals fear to tread?
 Why has a large section of the society remained financially excluded despite sincere efforts of the
regulator as well as the policy makers?
Why is financial inclusion necessary?
The ILO Declaration of Philadelphia in 1944 proclaimed that “Poverty anywhere is a threat to prosperity
everywhere.” It is universally agreed now that Financial Inclusion helps build domestic savings, bolster
household, domestic and financial sector resilience and stimulate business and entrepreneurial activity,
while exclusion leads to increasing inequality, impediments to growth and development. Thus, financial
inclusion is an important tool for poverty alleviation as it not only connects individuals to the formal
financial system, but also inculcates savings habit among them. Hence, Financial Inclusion or inclusive
banking is a precursor for inclusive and sustainable economic growth.
Financial exclusion: dimension of the problem
An accusation that has come to be levied against the banking sector in the aftermath of the Financial
Crisis is that it has failed to be “inclusive”. It is only the degree of exclusion that varies between different
jurisdictions. The Financial Inclusion Action Plan (FIAP) developed by the G20 Global Partnership for
Financial Inclusion mentions that the universal financial inclusion initiative requires bringing the 2.5 billion
people (or about half the working age population) currently excluded, into the formal financial system.
That brings us to the question how inclusive is the Indian financial system? Census 2011 gives us some
answers. Out of 24.67 crore households in the country, only about 14.48 crore or 58.70 per cent
households had access to banking services. Further, of the 16.78 crore rural households only about 9.14
crore or 54.46 per cent households were availing of banking services. But that is only one aspect of the
financial exclusion story. The statistics on number of individuals or households that are credit-linked
makes for an even more gloomy reading.
Initial efforts at financial inclusion
Having recognised early the social and economic imperatives of broader financial inclusion, both
Government and the Reserve Bank have pursued this goal over the last several decades, but with
limited success. Starting with the nationalization of banks, priority sector lending requirements,
launching of Lead Bank Scheme, establishment of Regional Rural Banks (RRBs), Service Area
Approach, Self- Help Group-Bank Linkage Program - all these innovative programs were launched with
the aim of taking banking services to the masses. Starting in 1990s, however, the focus shifted to
strengthening financial institutions as part of financial sector reforms. Despite all the above efforts, the
extent of financial exclusion has remained staggering.
Why did these efforts fail?
The target driven approach to social banking could be counted as one of the main reasons for the failure
of these efforts as these initiatives could never become part of the business strategies of banks. The
banks were more interested in somehow trying to meet the lending targets, mostly at subsidized rates of
interest, or with subsidy from the Government under various governments directed schemes. The banks
never treated social banking as a viable and profitable business proposition. They always worked under
the presumption that the poor can neither pay normal interest rates nor could they earn enough without
subsidies; while in reality the poor continued to pay exorbitant interest rates to informal sources of
finance. For any activity to become sustainable and scalable it has to be viable. Regrettably, there has
never been a concerted effort on the part of the banking system to identify specific business
opportunities within these groups and to develop viable business models to realize them. I would like to
reiterate our firm belief that banking for poor is viable and scalable only on commercial lines, of course,
without an exploitative intent.
Reform era setback
During the period starting mid 1980s and till about 2005, the regulatory focus shifted to consolidation and
profitability of banks. Since social initiatives, as argued earlier, were not integrated with business plans
and were thought of as non-viable, they were the first casualties. A number of rural branches were closed
down or merged or were shifted to semi-urban areas as they were considered unviable.
Excessive reliance on public sector banks
The thrust of social initiatives has always been on the public sector banks while the private sector banks
and foreign banks have not been given adequate social obligations. Besides, too many authorities
involved in pursuing financial inclusion also, at times, resulted in dissipation of structured and planned
efforts.
Absence of technology
In the absence of appropriate enabling technology, reaching far flung areas of the country without a brick
and mortar structure, proved to be a difficult and expensive ordeal.
What has changed now?
In the last few years, it has been realized that for financial inclusion to become a reality, there has to be a
sustainable business and delivery model. Further, availability of technology as an enabler has now
created avenues for developing cost effective solutions for the mammoth task of providing banking
services to six lakh plus villages in the country. The lessons learnt from the initial attempts at promoting
financial inclusion have also proved to be vital inputs in recalibrating our financial inclusion strategy.
RBI’s approach to financial inclusion
The failure to achieve meaningful progress in financial inclusion forced the regulators and policy makers to
have a rethink on the approach. It began with defining what Financial Inclusion actually meant and where
should the energies be focused. RBI has defined Financial Inclusion as “the process of ensuring access to
appropriate financial products and services needed by all sections of the society in general and vulnerable
groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and
transparent manner by regulated, mainstream institutional players”. Thus, financial inclusion has two fold
objectives: To connect the excluded with the formal banking system in order to help them gain an
understanding of the financial services available and equipping them with the confidence to make
informed financial decisions.
Providing door step banking services to all the six lakh villages and meeting their life cycle financial needs
through appropriate savings, credit, remittance and insurance products.
Planned and structured approach
RBI has been following a planned and structured approach to address the twin issues of demand and
supply of financial services. The efforts have been aimed at creating an enabling environment for the
banks. Wide-ranging strategies from a relaxation of regulatory guidelines to provision of new products and
supportive measures have been adopted to achieve sustainable and scalable Financial Inclusion.
Bank- led model & leveraging technology
RBI has advocated a bank-led model for financial inclusion with thrust on leveraging technology. RBI
firmly believe that the success of FI initiatives greatly depends on technology which would enable
emergence of cost efficient delivery models. Though we have advocated the use of technology, we are
agnostic to the platform to be used for pursuing financial inclusion objectives. Banks have been accorded
the freedom to adopt solutions which can be easily scaled up and customized as per their requirements.
Recent innovations under financial inclusion
RBI has not been found wanting insofar as experimenting with innovative solutions to further the cause of
financial inclusion is concerned. However, we have always believed that innovation does not mean
developing complex solutions to simple problems. Also, innovation need not always involve cutting edge
technology. Hence, some of the innovative practices we have encouraged banks to follow, merely involves
making small adaptations and a change in mindset. Let me explain some of these initiatives.
a) Business correspondent / business facilitator model
Beginning January 2006, Reserve Bank has permitted banks to utilise the services of nongovernmental
organizations (NGOs), micro-finance institutions (other than Non-Banking Financial Companies) and other
civil society organisations as intermediaries in providing financial and banking services through the use of
Business Facilitator and Business Correspondent (BC) models with an objective of solving the list mile
connectivity issue. Banks were encouraged to connect the BC network with their Core Banking Solutions
(CBS) and also to develop offline solutions to overcome the network connectivity issues experienced in
some areas. As the uptime of the equipments was of paramount importance, the banks were advised to
ensure that equipment and technology used by BCs are of high standards. Interoperability of BCs at the
retail outlets or sub agents of BCs has also been permitted, provided the transactions were carried out on-
line, on CBS. The list of entities that can be appointed as BCs has also been expanded substantially over
time.
2 Simplified branch authorisation
RBI has considerably relaxed the branch opening norms for banks whereby they do not require prior RBI
permission for opening branches in centres with population less than 1 lakh. To further step up the
opening of branches in unbanked centres, banks were mandated to open at least 25 per cent of their
new branches in unbanked rural centres. Banks have also been advised to consider frontloading
(prioritizing) the opening of branches in unbanked rural centres over a three year cycle co-terminus with
their Financial Inclusion Plans. Combination of branch and BC structure to deliver financial
Inclusion- ICT based accounts – through BCs
RBI has been advocating a combination of Brick and Mortar structure and the BC network to extend
financial inclusion, especially in geographically dispersed areas. In order to provide efficient and cost-
effective banking services in the unbanked and remote corners of the country, RBI directed commercial
banks to provide ICT based banking services – through BCs. These ICT enabled banking services have
CBS connectivity to provide all banking services including deposit and withdrawal of money in the
financially excluded regions. The use of smart cards, hand held devices / POS machines along with bio-
metric authentication facilitates digitization of Financial Inclusion process.
Opening of basic saving bank deposit accounts (no-frills accounts)
On the products side, banks were directed to make available Basic Savings Bank Deposit Accounts
(BSBDAs) for all individuals with zero minimum balance and facility of ATM card/Debit card, effectively
making opening of a basic savings account a fundamental right for every eligible Indian citizen. Further,
banks were also advised to provide in-built overdrafts in such
basic savings accounts so as to meet the emergency credit needs of the customer and prevent them from
having to approach money lenders in distress situations. The provision for entrepreneurial credit has also
been simplified in the form of KCC for farm sector households and GCC for non-farm sector households.
Relaxed KYC norms
One of the major constraints faced by the people in getting linked to the formal financial system was the
strict Know Your Customer (KYC) norms prescribed for opening bank accounts. To facilitate easy opening
of accounts, especially for small customers, the KYC guidelines have been simplified to the extent that
these accounts can be opened by way of a self-certification in the presence of bank officials. Further, to
leverage upon the UIDAI initiative, RBI has allowed “Aadhaar”, to be used as one of the eligible
documents for meeting the KYC requirements for opening a bank account. Very recently, the RBI has also
allowed banks to use the E-Aadhaar facility provided by UIDAI for KYC purposes.
Pricing of advances freed
Banks have been provided the freedom to decide the pricing of loans given to customers with a view to
ensuring the economic viability of banks’ Financial Inclusion initiatives.
Financial literacy as a facilitator of financial inclusion
As financial markets are becoming increasingly complex with serious problems of information
asymmetry, the need for financial literacy and education has become even more acute. Besides, there
is a general lack of awareness among the financially excluded population about the benefits of being
connected to the formal financial system. This highlights the importance of the task of promoting
financial literacy, which faces numerous challenges in a country like India, on account of wide disparities
in literacy levels, social/ economic development, widespread use of regional languages, etc.
Recognizing the importance of financial literacy as the stepping stone towards financial inclusion,
Reserve Bank has taken several steps in recent times for promoting financial literacy. “Project Financial
Literacy” aims at disseminating information regarding the central bank and general banking concepts to
various target groups (which includes school and college-going children and the rural/urban poor).
Implementation: issues and challenges
a) Believing in financial Inclusion as a viable business
There is still a widespread belief that if the poor have to be provided financial services, it must be done in
a subsidized manner or as an act of charity. And this belief has kept the poor bereft of these services
while keeping the regime of rationing, queuing and patronage alive. Contrary to common perception,
financial inclusion is a potentially viable business proposition because of the huge untapped market that it
seeks to bring into the fold of banking services. Financial Inclusion, prima facie, needs to be viewed as
“money at the bottom of the pyramid” and in order to tap this opportunity, banks would need to have in
place an appropriate business and
delivery model in line with their business strategy and comparative advantage. If the banks start believing
in this business, they would be able to innovate and, in the process, start reaping the benefits of
economies of scale. This will ultimately create an environment of competitiveness amongst banks which
will benefit the unbanked population.
Monitoring performance
Along with the implementation efforts, the monitoring of the performance to access the impact is also very
crucial. The impact assessment helps in initiating policies and removing barriers to Financial Inclusion. We
have encouraged banks to adopt a structured and planned approach to financial inclusion with
commitment at the highest levels, through preparation of Board approved Financial Inclusion Plans (FIPs).
A structured and comprehensive monitoring mechanism for evaluating banks’ performance vis-à-vis their
targets has also been put in place.
Leveraging the banking network for extending social benefits: direct benefit transfer
The introduction of direct benefit transfer by validating the identity of the beneficiary through Aadhaar will
help facilitate delivery of social welfare benefits by direct credit to the bank accounts of beneficiaries. The
government, in future, has plans of routing all social security payments through the banking network using
the Aadhaar based platform as a unique financial address for transferring financial benefits to the
accounts of beneficiaries. Besides providing timely delivery of benefits at the door step of beneficiaries, it
would save Government the administrative cost involved in delivering cash to the intended beneficiaries
and help minimize the chances of leakages in the system. Banks must initiate steps to proactively open
bank accounts for all eligible individuals and seed these accounts with Aadhaar numbers for ensuring
smooth flow of the social security benefits through the banking channel.
Pradhan Mantri Jan Dhan Yojana (PMJDY)
Pradhan Mantri Jan Dhan Yojana has been announced recently to give a further push to Financial
Inclusion initiatives in India. The scheme has been launched with the objectives of providing universal
access to banking facilities, providing basic banking accounts with overdraft facility and RuPay Debit card
to all households, conducting financial literacy programs, creation of credit guarantee fund, micro-
insurance and unorganized sector pension schemes. The objectives are expected to be achieved in two
phases over a period of four years up to August 2018. Under the scheme, technological innovations like
RuPay card and mobile banking are also being made use of. Banks are also permitted to avail of RBI’s
scheme for subsidy on rural ATMs and UIDAI’s scheme for subsidy on micro ATMs to augment their
resources at the village level.
Way forward
Banks’ business models for financial inclusion should be designed to be at least self-supporting in the
initial phase and profit-making in the long run, with an unwavering focus on affordability. The banks need
to think and act differently and make themselves more flexible so as to meet
even the smallest requirements of the rural population. Banks need to move from a cost centric model to a
revenue generating model by offering a bouquet of deposit, credit and other products and services. The
products and services should be designed in such a way that it suits the needs of people in unbanked
rural areas.
BC model
There are multiple challenges being faced while implementing BC model. Sustainability and scalability of
the BC model is essential. There are issues around BCs’ cash management services and remuneration to
be paid to them. There is a need to have a close look at the problems constraining the model and to
develop practical solutions that help in realizing the full potential of this channel. More and more innovative
products will have to be introduced which would benefit both banks as well as the rural people and at the
same time make the BC model more viable.
Differentiated banking
RBI is set to create a framework for licensing small banks and payments banks. These differentiated
banks would be expected to serve niche interests and to meet credit and remittance needs of small
businesses, unorganized sector, low income households, farmers and migrant work force. This aims at
allowing a wider pool of entrants into banking to further Financial Inclusion.
PMJDY
The objective of Financial Inclusion as defined by us is very much in sync with the objectives sought to be
achieved under the PMJDY. We are fully committed to the implementation of the scheme and are trying to
ensure that the efforts of RBI converge with the work under the PMJDY so that the common objective of
financial inclusion is achieved. Further, the idea is to enable more transactions in these accounts and
providing more credit products, which will not only help rural people to avail of credit at comparatively
lower rates of interest but, at the same time, also make the financial inclusion process viable for banks.
With implementation of PMJDY, it is expected that the beneficiaries of social security will get the direct
credit of their entitlements without any leakage. However, for successful achievement of the same, it is to
be ensured that there is timely and accurate listing of beneficiaries.
Conclusion
Financial Inclusion cannot be achieved without the active and collaborative involvement of all
stakeholders like RBI, other financial regulators, banks, governments, NGOs, civil societies, media, etc.
Good intentions always need to be supported by concerted action for achieving goals. The support of
policymakers, regulators, governments, IT solution providers and public at large would be essential to
bring about a decisive metamorphosis in Indian banking and making it inclusive.
Finally, though Innovation is desirable, excess of the same could also mean higher cost and time overruns. It is
important to strike a balance between no innovation and excess innovation. Innovation need not always be
revolutionary. Enough on the financial inclusion front could be achieved even by thinking “inside the box”, that is,
by focusing on doing the basics right.
16. Banks in India – challenges and opportunities
Re-orientation of the Indian banking structure

As the economy expands, a greater quantum of resources will be needed for supporting the growth process.
The Indian banking sector also needs to catch up the likely acceleration in the credit to GDP ratio as the
economy expands. To support the economic growth as envisaged in the 12th Five Year Plan, the banking
business needs to expand significantly to an estimated
288 trillion by 2020 from about 115 trillion in 2012. Given this, there is a need for reorienting
the banking structure to make it more dynamic and flexible, while ensuring safety and systemic stability.
There is enormous scope for increasing the size and capacity of the banking structure. Accordingly, the
Reserve Bank came out with a set of guidelines for licensing of new banks in the private sector in February
2013. The process of licensing culminated with the granting of “in-principle” approval to two applicants who
would set up new banks in the private sector within a period of 18 months.
While announcing the decision to grant “in-principle” approval to the two applicants, the Reserve Bank
indicated that going forward, it would use the learning experience from this licensing exercise to revise the
guidelines appropriately and move to grant licences more regularly on “tap” basis. Further, Reserve Bank
would work on a policy of having various categories of “differentiated” bank licences which will allow a
wider pool of entrants into banking leading to greater banking penetration and more competitive
environment. Reserve Bank has, accordingly, been working on the relevant guidelines for licensing
payment banks and small banks.
Eventually, over the years, as visualized in the Discussion Paper, the reoriented the banking structure
may comprise four tiers. The first tier may consist of three or four large universal Indian banks with
domestic and international presence along with branches of foreign banks in India. The second tier is
likely to comprise several mid-sized banking institutions including niche banks like Payment Banks with
economy-wide presence. The third tier may encompass old private sector banks, Regional Rural Banks,
and multi state Urban Cooperative Banks. The fourth tier may embrace many small privately owned local
banks and cooperative banks.
Basel III implementation
The implementation of Basel III framework will throw various challenges for banks. In particular, the
adoption of Basel III capital requirements by Indian banks would push down their return on equity (RoE) to
an extent. Investors have a wider choice and the stocks of the manufacturing sector may be preferred to
banking sector stocks and, as such, it may perhaps be difficult to convince the investor community to
invest in Indian banks in the short-term. It is, however, expected that by looking at the benefits of
implementation of Basel III capital requirements by way of increasing resilience of the banking system,
investors will get adjusted to the new reality. This issue also needs to be seen in a historical perspective to
understand the fact that Indian banks have successfully transited in the past from the regime of no
regulatory requirement for capital to progressively tighter capital requirements and it would be logical to
expect that Indian banks would be able to navigate the current phase as well. Nevertheless, it needs to be
recognized that while moderation of growth in RoE is inevitable, the key to cushion this impact is to
optimise capital and augment efficiency.
On June 9, 2014, the Reserve Bank issued guidelines for the implementation of the Liquidity Converge
Ratio (LCR), which is a part of the Basel III framework on Liquidity Standards. In India, the LCR will be
introduced in a phased manner starting with a minimum requirement of 60 per cent from January 1, 2015
and reaching minimum 100 per cent on January 1, 2019. Further, Government securities in excess of
minimum SLR requirements and the Government securities within the mandated SLR requirement to the
extent allowed by the Reserve Bank under Marginal Standing Facility (MSF) are permitted to be treated
as Level 1 assets for the computation of LCR. Adoption of liquidity standards under Basel III may induce
changes in funding preferences of the Indian banks reflecting the fact that availability of and access to
quality liquid assets may be a challenge going forward when the LCR requirement increases
incrementally.
Capital mobilisation
In the process of phased adoption of Basel III capital norms, Indian banks in general have a relatively
comfortable capital adequacy position to begin with. Rising required amount of capital going forward would
be, however, a challenge, to which I turn now. The Reserve Bank issued final guidelines on implementation
of Basel III capital regulations on May 2, 2012. The guidelines became effective from April 1, 2013 in
phases and will be fully implemented as on March 31, 2019. Though there are various estimates about the
additional capital mobilization by the PSBs arising out of the phased implementation of Basel III capital
requirements, one thing is clear that the required magnitude of capital in the run up to the full
implementation will
be substantial. During the last four years, the Government has infused 586 billion in the PSBs. The
Government has made a provision of 112 billion in the interim budget for 2014–15. PSBs hold more than
70 per cent of the banking assets. Therefore, capital infusion from the Government of this order may not
be sufficient. It is also important to note that there has been over reliance on the Government to infuse
equity despite headroom available for the management of the banks to raise equity from markets. There
have not been concerted efforts made by PSBs to shore up their equity capital base from the markets,
keeping in view the Basel III capital adequacy requirements. Their internal generation of capital has
suffered mainly due to sharp deterioration in the asset quality possibly due to /adverse selection of assets.
The growing pressure on asset quality of PSBs and the threat of rating downgrades will further add
pressure on the equity of banks. Further, there would be further requirement of capital based on
supervisory review and evaluation process under Basel Pillar II framework.
With higher additional capital requirements, as discussed above, recapitalisation of PSBs could
exert significant stress on the government’s fiscal position. There are, however, several potential options
available to meet the challenges of mobilization of additional capital. These would include:
Divestment of Government’s shares in PSBs. Given the present level of government shareholding in these
banks which ranges from 58 per cent to 89 per cent, there is substantial ground for raising equity from the
market without diluting the public sector character;
The roles and responsibilities of the Boards of PSBs could be reviewed. The effectiveness of the Board
and senior management has a moderating effect on the risk profiles, and consequently, overall capital
requirements in a bank. The Government, being the owner of the PSBs, could address the governance
aspects concerning PSBs;
In addition to the public and rights issues, banks have other routes available to raise equity in the form of
qualified institutions’ placement (QIP) and ESOP. Boards of PSBs need to explore all the feasible options
to raise equity capital.
Providing tax incentive to investors’ on investments in banks’ Tier 1 bonds like tax exemption of interest
income(in part or in full) with a view to promoting and deepening the market for these bonds may be useful
at this stage;
PSBs may issue non-voting equity shares to the public thereby while the Government can hold less than
51 per cent of the total equity shares, it can still maintain at least 51 per cent voting rights of the total
voting equity; Similarly, the option of issuance of differential voting equity could also be considered.
These issuances will allow the Government to maintain their voting rights at the desired level even
though there may be a dilution in the economic interest, i.e., in terms dividend income to the
Government;
The Government’s stake in PSBs can be diluted below 51 per cent in conjunction with certain protective
rights given to the Government by amending the respective statutes governing PSBs;
In this connection, the proposals of the Committee to Review Governance of Boards of Banks in India
(Nayak Committee) to transfer the Government’s shares in PSBs to an investment company viz., Bank
Investment Company (BIC), reduce Government stakes in PSBs to less than 50 percent and provide more
autonomy and professionalism to PSBs which are expected to improve the returns on equity and attract
more capital from the market apart from reducing provision requirements, etc. are worth serious
consideration; and
As regards distressed banks in private sector, Nayak Committee has also recommended that private
equity funds, including sovereign wealth funds be permitted to take a controlling stake of 40 percent.
Asset quality
During the quarter ended December 2013, banks collectively held loan provisions of about Rupees one
lakh crores, an increase of 13 percent over the year, indicating that loan asset quality of banks in India
deteriorated considerably The trend of y-o-y growth in gross nonperforming advances (GNPA) outstripping
the y-o-y growth of advances, that started from the quarter ended September 2011, continues although
the gap in the growth rates is narrowed5. The PSBs continued to register the highest level of stressed
advances at 11.3 per cent of the total advances as at end March 2014, followed by the old private bank at
5.8 per cent. Though agriculture sector showed the highest GNPA ratio the industry sector showed
distinctly high level of restructured standard advances, resulting in the stressed advances of the industry
sector reaching 15.6 per cent followed by the services at 7.9 per cent as at December 2013.
There are five sub-sectors, namely, infrastructure {which includes power generation, telecommunications,
roads, ports, airports, railways (other than Indian Railways) and others infrastructure}, iron and steel,
textiles, mining (including coal) and aviation services had significantly higher level of stress and thus these
sub-sectors/segments were identified as “stressed” sectors in the banks’ lending portfolios. The share of
these five stressed sub-sectors to the total advances of the SCBs is around 24 per cent. Infrastructure has
the highest share at 14.7 per cent in the total advances. Among the bank-groups, these five sub-sectors
have the highest share at 27.3 per cent in the case of PSBs.
It is widely accepted that the economic slowdown has affected the asset quality of banks adversely though
the impact is not similar across bank groups. Sector-wise and their size-wise analysis of asset quality
shows that the GNPA ratio of PSBs across the sectors and their size are significantly higher than the other
bank-groups. How do we face up to the challenge of deteriorating asset quality of banks? Though analysts
have often pointed out that the poor asset quality of the banks, to a great extent, could be attributed to the
not so encouraging macro-economic situation, it is expected that the implementation of the new initiatives
by the Central Government would address these issues effectively. Skeptics, though may still point out at
factors, such as, the threat of “El Nino” which could result in poor monsoon, global developments, such as,
quantitative easing, etc. and geopolitical risks, could threaten the performance of banks in India. It is also
true that even when general economic outlook is healthy, the asset quality of banks could still suffer due to
inadequacies in credit management. There are no short cuts for proper credit appraisals and monitoring.
Recognising early warning signals and taking timely measures to take care of the weaknesses observed
are very important.
The Reserve Bank, on January 30, 2014, has issued a “Framework to Revitalise the Distressed Assets in
the Economy”, wherein banks would recognise at an early stage the stress in their assets and take prompt
steps towards resolution/ recovery of distressed assets and detailed guidelines in this regard were issued
on February 26, 2014. The Framework has identified certain structural impediments in the way of smooth
resolution/recovery of stressed assets of
banks and suggested steps, such as, revamping the SARFAESI Act, revitalizing DRTs, etc. and
rejuvenating Asset Reconstruction Companies, are also being mooted.
The Reserve Bank of India has set up the Central Repository of Information on Large Credits (CRILC) to
collect, store and disseminate data on all borrowers’ credit exposures including Special Mention
Accounts (SMA 0, 1 & 2) with aggregate fund-based and non-fund based exposure of `50 million and
above. The CRILC has started disseminating information on large credit which will reduce credit
information asymmetry and improve informed credit decision making by banks. Banks will be able to
know large common exposures and build-up of leverage in the system. Banks will have access to asset
classification of individual large exposures by different banks. Banks are required to activate the Joint
Lenders Forum for initiating corrective actions when a lender reports a borrower as SMA2 to CRILC. We
have engaged with banks to avoid delay in submission of data and ensure quality and integrity of data. It
is expected that once it stabilizes, the CRILC framework would exert moral pressure/discipline on large
borrowers to repay dues in time lest their names appear in SMA2 report and bank managements would
be better equipped to assess the health of their high value credit portfolio for initiating timely action.
Governance
As mentioned earlier, Nayak Committee has made some major observations regarding governance
aspects of banks in India, especially that of PSBs. According to the Committee, there is a need to upgrade
the quality of board deliberation in PSBs to provide greater strategic focus. Further, there are seven
themes which appear critical to their medium-term strengths comprising Business Strategy, Financial
Reports and their Integrity, Risk, Compliance, Customer Protection, Financial Inclusion and Human
Resources. All other items for discussion should be brought to the Boards by exception and should
typically be discussed in committees of boards. It is added that, among these seven themes identified for
detailed board scrutiny, predominant emphasis needs to be provided to Business Strategy and Risk
dimensions. Further, the Committee is of the view that as the quality of board deliberations is sensitive to
the skills and independence of board members, it is imperative to upgrade these skills in boards of PSBs
by reconfiguring the entire appointments process. Otherwise it is unlikely that these boards will be
empowered and effective. For this, the Government has to move towards establishing fully empowered
boards in PSBs, solely entrusted with the governance and oversight of the management of the banks. The
proposed BIC, which is expected to hold the shares of the Government in PSBs, should commence the
process of professionalising and empowering bank boards by reconstituting them and this in turn would
help to improve the corporate governance in a big way. As per the recommendations of the Committee,
eventually in phase III, all ownership functions would be transferred by BIC to the bank boards. The
appointments of independent bank directors and whole-time directors (including the CEO) would become
the responsibility of bank boards. Equally important from PSBs point of view would be the quality of the
top management particularly from the points of view of experience, expertise & continuity. While
professionalization and effectiveness of boards of PSBs emerged as a major
challenge, it is no less as issue with many private sector banks, say for example, when there is domination
of prominent shareholders/CEOs. Private sector banks also need to focus on the skill-set and profile of
their top management and the board of directors.
Risk management system in banks
The design of risk management functions should be based on size, complexity of business and the quality
of MIS. The banks should have the necessary skill set available or develop it through proper in-house
capacity building. Banks, therefore, will need to refine and re-orient their risk management skills for
enterprise-wide risk management. In addition, banks need to have in place a fair and differentiated risk
pricing of products and services since capital comes at a cost. This involves costing, a quantitative
assessment of revenue streams from each product and service and an efficient transfer-pricing
mechanism that would determine capital allocation. Generally it is observed that some banks put the risk
management architecture in place to meet the regulatory requirements without using the risk inputs for
taking business decisions. The risk is not properly priced for various products. The most challenging part
is the integrity and reliability of data. It must be appreciated that Risk Based Supervision (RBS) under
which all the banks will be covered by the Reserve Bank over a period of time (28 banks were under RBS
last year) is highly data intensive. The risk profile of a bank, its rating, and most importantly, the
computation of supervisory capital which are the outputs of RBS are determined on the basis of data and
other qualitative information furnished by the banks. It may be remembered that supervisory findings also
go towards formulation of regulatory guidelines and other macroeconomic policies. It is, therefore, the
responsibility of the top managements/Boards of the banks to ensure that this area is given utmost
attention.
HR management
This is an area where most of our banks, especially the PSBs, are found lacking. In their eagerness to
expand their core business they tend to forget the relevance of human expertise which drives their
business in a sustainable manner. The complexities of modern banking and the dependence on IT makes
it all the more important why the banks should have requisite manpower with right amount of knowledge
and experience at appropriate places. Many of the present day ills in Indian banks, e.g., weak appraisal
standards, not being able to pick up the early warning signals in problem accounts which leads to
fraudulent transactions or accounts becoming NPA, recurring customer grievances, etc. can be ascribed
to skill gaps in the manpower of the banks. Near vacuum in the senior management over the next few
years, lack of expertise in critical areas like IT, risk management, credit appraisal and treasury operations,
absence of succession planning for middle and senior management positions, attracting, retaining and
nurturing fresh talent, ad hoc responses to capacity building and poor performance management system
are some of the major HR challenges staring the PSBs. The proposal of universal and differentiated bank
licenses being available on tap will make it tougher for PSBs to retain whatever skilled manpower is
available with them. In respect of private sector banks, the problem in many cases relates to the work
culture focussing unduly on achieving unrealistic targets by all means. This implies certain aversion
towards employment in such banks and could have serious reputation risk implications for them.
Challenges from the payment systems perspective Standardisation and capacity build-up
While any development in offering electronic services is welcome, stand-alone systems not only work in
silos but also fragment the market to some extent. Hence, as the payments eco-system matures, inter-
operability becomes essential, for which standardization in processes and procedures is a pre-requisite.
This not only facilitates uniformity in transaction handling but also enables uniform customer experiences.
A related point is that of ensuring that systems are not just adequate to meet present needs but also the
growing volumes. Hence, even as the Reserve Bank is building capacity in the systems operated by it (for
instance, the RTGS or NEFT), it is equally important for banks to review and upgrade their own
infrastructure as well in tune with their policy and expected growth in business.
Partnerships with non-banks
Even as we have adopted a bank led model for achieving the goal of financial inclusion, opportunities
have been given to the non-banks to involve themselves in payments area – whether it is through the
BC, White Label ATMS (WLAs) or pre-paid card routes. In many of these areas, non-banks need to
work in close coordination with banks. It is imperative that banks also see the potential for synergetic
growth by partnering with these non-banks and leveraging on their strengths so as to reap efficiency
gains for both the entities; a case in point is bank-MNO partnership for expanding mobile banking
space. We have seen instances of such partnership, particularly with MNOs acting as BCs. Similar
developments should occur in other areas too. A word of caution is, however, essential – banks cannot
abdicate their responsibilities towards customers, in ensuring safe and secure services, particularly in
scenarios where a large part of the activities involved in payments are outsourced. In some context, we
have also observed concentration in a few service providers and banks should take cognizance of this.
Safety and security of payment transactions
Last but not the least is the consideration towards safety and security of payment transactions. This goes a
long way in influencing customer behavior in the choice of payment methods. While the Reserve Bank has
mandated many requirements to strengthen security and enhance risk mitigation standards for the
electronic transactions, it is essential that these are implemented not only in letter but also in spirit. Further,
with the increased volume of transactions, the need for Straight Through Processing (STP) becomes
essential. Hence, while catering to large volumes, certain procedural changes would need to be made. For
example, there is the requirement under NEFT and RTGS where the credit is afforded to the beneficiary
customer’s account solely on the basis of the account number given in the remittance request by the
sender. While the intention behind this policy is to facilitate easier handling of growing volumes at banks
through STP, the risk-based approach to handle customer grievance should not be lost sight of and banks
should also seek to proactively address of the payee and redress customer
issues emanating from such electronic transactions. Customer as well as frontline staff awareness and
education is crucial in ensuring not only acceptability of the payment products but also their assurance in
terms of safety and security.
17. Danger posed by shadow banking systems to the global financial System
– the Indian case
What is shadow banking?
Shadow banking is a universal phenomenon, although it takes on different forms. In advanced economies
where the financial system is more matured, the form of shadow banking is more of risk transformation
through securitization; while in the economically backward economies where financial market is still in a
developing stage, the activities are more of supplementary to banking activities. However, in both the
structures, shadow banking operates outside the regular banking system and financial intermediation
activities are undertaken with less transparency and regulation than the conventional banking. In a sense,
shadow banks are like icebergs – more deeply spread than what they seem to be.
In the context of developing economies, shadow banks play a gainful role in credit delivery and financial
inclusion as they can facilitate credit availability to certain sectors that might otherwise have difficulty in
access to credit. They play both a substitute and complementary role for commercial banks as they are
able to map the financing needs of the borrowers with the financing provision where the formal banking
systems are confronted with regulatory constraints and/or where the formal banking system's
requirements are onerous for the clients to comply with.
The term “shadow bank” was coined by Paul McCulley in 2007, by and large, in the context of US non-
bank financial institutions engaging in maturity transformations (use of short-term deposits to finance long-
term loans). However, a formal touch to the institutions of shadow banking was given by the Financial
Stability Board1, which defined ‘shadow banking’ as the “credit intermediation involving entities and
activities (fully or partially) outside the regular banking system”. Shadow banking activities, thus, include
credit intermediation (any kind of lending activity where the saver does not lend directly to the borrower,
and at least one intermediary is involved), and liquidity transformation (investing in illiquid assets while
acquiring funding through more liquid liabilities) & maturity transformation (use of short-term liabilities to
fund investment in long-term assets) that take place outside the regulated banking system. Focusing on
the pre-requisites for sustenance of shadow banking, Claessens and Ratnovski (2014) have described
shadow banking as all financial activities, barring traditional banking, which require a private or public
backstop (in the form of franchise value of a bank or insurance company, or in the form of a Government
guarantee) to operate.
In the last two to three decades, growing innovations in the financial sector, changes in regulatory
framework and growing competition with non-bank entities caused banks to shift a part of their activities
outside the regulatory framework. This contributed to the growth of
shadow banks. As a result, shadow banking activities have evolved over time in response to newer set of
regulation and supervisory guidelines and spread in the domains where the scope for regulatory arbitrage
was higher. It emerged not only as an avenue for exploitingregulatory arbitrage but also in response to
market demand for innovative financial instruments that could mitigate risks and yield higher returns.
The recent global financial crisis brought to fore the need for monitoring and regulating the activities of
shadow banking. There is, nevertheless, a concern that the forthcoming implementation of Basel III, which
has more stringent capital and liquidity requirements for the banks, might further push the banks to shift
part of their activities outside of the regulated environment and therefore increase shadow banking
activities.
Size of shadow banks
One cannot precisely gauge the size of shadow banking as the activities lack transparency. According to
the FSB report (2013), size of global shadow system expanded to US$ 71 trillion2 in 2012. In 2012, the
assets of other financial intermediaries, which undertake non-bank financial intermediation, accounted for
about 24 per cent of total financial assets, about half of banking system assets and 117 per cent of GDP
of the above-said 25 jurisdictions. The largest system of non- bank financial intermediation in 2012 was
found in the USA, which had assets size of US$ 26 trillion, followed by the euro area (US$ 22 trillion), the
UK (US$ 9 trillion) and Japan (US$ 4 trillion) . The size of shadow banking in a large number of emerging
market economies (EMEs) was found to have increased in 2012, nevertheless, the share of non-bank
financial intermediation remained relatively smaller at less than 20 per cent of GDP. As per the report, for
a number of EMEs, non -bank financial intermediation remains relatively small as compared to the level of
GDP. In India, Russia, Argentina, Turkey, Indonesia, and Saudi Arabia the amount of non-bank financial
activity remained below 20 per cent of GDP at the end of 2012. However, the sector was growing rapidly
in some of these jurisdictions.
How are shadow banks dissimilar to banks?
Shadow banks, like conventional banks undertake various intermediation activities akin to banks, but
they are fundamentally distinct from commercial banks in various respects. First, unlike commercial
banks, which by dint of being depository institutions can create money, shadow banks cannot create
money. Second, unlike the banks, which are comprehensively and tightly regulated, the regulation of
shadow banks is not that extensive and their business operations lack transparency. Third, while
commercial banks, by and large, derive funds through mobilization of public deposits, shadow banks
raise funds, by and large, through market-based instruments such as commercial paper, debentures, or
other structured credit instruments. Fourth, the liabilities of the shadow banks are not insured, while
commercial banks’ deposits, in general, enjoy Government guarantee to a limited extent. Fifth, in the
times of distress, unlike banks, which have direct access to central bank liquidity, shadow banks do not
have such recourse.
While there may be stark differences in the way the shadow banks operate as compared to banks,
sometimes there is only a thin line separating the two. For instance a regulated bank may float a Special
Purpose Vehicle (SPV) to hold some specific assets, with a view at removing them from its balance sheet.
Regulation of shadow bank activities
While the role of the shadow banking generated apparent economic efficiencies
through financial innovations, the crisis demonstrated that shadow banking created new channels of
contagion and systemic risk transmission between traditional banks and the capital markets. Therefore,
globally a need was felt to bring such unregulated entities under the regulatory architecture. United
States of America passed the Dodd-Frank Act in 2010 that strengthened the arms of Federal Reserve to
regulate all institutions of systemic importance. In order to put a control on the burgeoning shadow
banking activities, the European Union has also put in place some measures, which inter alia include
prudential rules concerning securitisation, regulation of credit rating agencies, etc. Further, at the
request of G-20 countries, at international level, FSB has been working towards strengthening the
oversight and regulation of the shadow banking system so that the risks emanating from them may be
mitigated. Various other countries, including India are working towards improving the regulatory
framework so as to curb the shadow banking activities, which pose a risk to financial stability.
Challenges posed by shadow banks
Though the focus of regulation on shadow banking activities emerged in the wake of their alleged role in
the recent global crisis, shadow banking system is not a new development. Even in the late 1950s and
early 1960s, concerns emanating from the growth of non-bank financial intermediaries had been
highlighted [Thorn (1957); Hogan (1960)]. Thorn (1957) had advocated same degree of control over credit
expansion by the NBFIs as that of the banks. Hogan (1960) found that from late 1930s to 1950s, while the
role of banking system in Australia was declining, that of the financial intermediaries was rising and he
called for controlling the liquidity of the non-banking sector.
The biggest challenge for the regulators is to gauge the magnitude of shadow banking as this landscape is
continually evolving by arbitraging the gaps in the regulatory framework that otherwise seek to control
them. Furthermore, unlike the banking sector, which have a very good statistical coverage, consistent
database on shadow banking is not available given the heterogeneous nature of shadow banking entities,
instruments and activities.
Some of the challenges posed by the shadow banks to the global economy and economies, in general,
are as follows:
 Financial stability and systemic risk concerns
Across various economies, regulatory arbitrage was used to create shadow banking entities. In many
instances, banks themselves composed part of the shadow banking chain by floating a specialized
subsidiary to carry out shadow banking activities. Banks also invested in financial products issued by other
shadow banking entities. Since shadow bank entities have no access to central bank funding or safety
nets like deposit insurance, they remain vulnerable to shocks. Given the huge size of shadow bank
activities and their inter-linkages with other entities of the financial sector, any shock in the shadow
banking segment can get amplified, giving rise to systemic risk concern. The capacity of shadow banks to
precipitate systemic crisis was manifested in the recent global financial crisis.
 Regulatory arbitrage spread across geographical jurisdictions
Different legal and regulatory frameworks across geographical jurisdictions also pose a significant
handicap in curbing the shadow banking activities, which are spread across borders. For instance, high
taxation in some jurisdictions sometimes generates tax avoidance strategies by financial firms. Tax haven
countries with their eye on attracting foreign capital and creation of jobs in their economies keep their tax
rates low. Firms in high taxation countries restructure their financial activity by shifting some high tax
activities to low tax countries. This, at times, generates large and significant hot money flows, which itself,
is a source of instability for both set of countries from where it outflows to where it flows in.
This, at times, has an adverse effect on financial stability, especially at a time when the whole
global economy is far more integrated than ever.  Challenges in the conduct of monetary policy
Opaqueness of its structure, size, operations and inter-linkages of shadow banks with commercial banks
and other arms of the financial sector might distort the information content of monetary policy indicators
and thereby undermine the conduct of monetary policy. For instance, a Central Bank might lose control
over the credit aggregate (as these entities broadly remain outside the regulatory purview), which might
weaken the monetary policy transmission through credit channel. This concern was highlighted even in
the 1950s. Thorn (1957) advocated some form of control over credit abilities of the non-bank financial
intermediaries for the successful implementation of monetary policy as these entities remain immune to
direct central bank control. Hogan (1960) had also advocated controlling the liquidity of the non-banking
sector through a flexible interest rate policy that could influence the behavior of the NBFIs in Australia.
Shrestha (2007) found that growing level of intermediation activities of the non-bank financial
intermediaries (NBFIs) causes a shift in deposits from banks to non-banks in South-East Asian Countries.
He observed that since the deposits of the NBFIs are not included in the monetary
aggregates, the conduct of monetary policy gets undermined for regimes, which follow monetary targeting
framework.
A Deutsche Bundesbank study (2014) contended that the growing activities of shadow banks might
weaken the transmission of monetary policy measures via commercial banks (through interest rate and
bank credit channel), but, on the contrary, the asset prices channel may become effective in the monetary
policy transmission process. An expansionary monetary policy might fuel asset prices, which, in turn,
might increase the leverage of the shadow banks, expand their balance sheets, reduce their risk premium
and thereby increase lending to nonfinancial sector and finally the level of real activity3.
 Procyclicity and amplification of business cycles
Shadow banking activities, which broadly remain less regulated, have been reported to act pro-cyclically,
which might amplify financial and economic cycles. Their leverage would rise during booms (as they face
little problem in arranging funds) as assets price rise and margin/ haircuts on secured lending remain low.
On the contrary, during the downturn phase (as the funding becomes difficult) as asset prices fall and
margins/ haircuts on secured loan become tighter, shadow bank get compelled to undertake deleveraging.
Pro-cyclicality of shadow banks may also get exacerbated owing to their interconnectedness with the
banks. FSB (2012) observed that inter-connectedness of the shadow banks with the banks might
aggravate the pro-cyclical build-up of leverage and thereby heighten the risks of asset price bubbles,
especially when the investment assets of the two systems are correlated. This pro-cyclicality in the
financial system might amplify financial and business cycles. High pro-cyclicality of the shadow banking
sector has implications for the real sector, which might also get affected adversely as funding by the
shadow banks to the real economy during the economic downturn might take a hit.
Shadow banking and Indian economy
The type of entities which are called shadow banks elsewhere are known in India as the Non-Banking
Finance Companies (NBFCs). Are they in fact shadow banks? No, because
these institutions have been under the regulatory structure of the Reserve Bank of India, right from 1963
i.e. 50 full years before many in the world are thinking of doing so!
Evolution of regulation of NBFCs in India
In the wake of failure of several banks in the late 1950s and early 1960s in India, large number of ordinary
depositors lost their money. This led to the formation of the Deposit Insurance Corporation by the Reserve
Bank, to provide the necessary safety net for the bank depositors. The Reserve Bank did then note that
the deposit taking activities were undertaken by non-banking companies also. Though they were not
systemically as important as the banks, the
Reserve Bank initiated regulating them, as they had the potential to cause pain to their depositors.
Later in 1996, in the wake of the failure of a big NBFC, the Reserve Bank tightened the regulatory
structure over the NBFCs, with rigorous registration requirements, enhanced reporting and supervision.
Reserve Bank also decided that no more NBFC will be permitted to raise deposits from the public. Later
when the NBFCs sourced their funding heavily from the banking system, thereby raising systemic risk
issues, sensing that it can cause financial instability, the Reserve Bank brought asset side prudential
regulations onto the NBFCs.
NBFCs of India
The “NBFCs” of India include not just the finance companies, but also a wider group of companies that
are engaged in investment, insurance, chit fund, nidhi, merchant banking, stock broking, alternative
investments etc. as their principal business. NBFCs being financial intermediaries are playing a
supplementary role to banks. NBFCs especially those catering to the urban and rural poor, namely
NBFC-MFIs and Asset Finance Companies have a complimentary role in the financial inclusion agenda
of the country. Further, some of the big NBFCs viz; infrastructure finance companies are engaged in
lending exclusively to the infrastructure sector, and some are into factoring business, thereby giving fillip
to the growth and development of the respective sector of their operations. In short, NBFCs bring the
much needed diversity to the financial sector.
LIABILITIES ASSETS
Profile of NBFCs
The total number of NBFCs as on March 31, 2014 are 12,029 of which deposit taking NBFCs are 241 and
non-deposit taking NBFCs with asset size of Z 100 crore and above are 465, non-deposit taking NBFCs
with asset size between Z 50 crore and Z 100 crore are 314 and those with asset size less than Z 50 crore
are 11009. As on March 31, 2014, the average leverage ratio (outside liabilities to owned fund) of the
NBFCs- ND-SI stood at 2.94, return on assets (net profit as a percentage of total assets) stood at 2.3%,
Return on equity (net profit as a percentage of equity) stood at 9.22% and the gross NPA as a percentage
of total credit exposure (aggregate level) stood at 2.8%.
Asset liability composition:
Liabilities* of the NBFC sector: Owned funds (23% of total liabilities), debentures (32%), bank
borrowings (21%), deposit (1%), borrowings from Financial Institutions (1%), Inter-corporate borrowings
(2%), Commercial Paper (3%), other borrowings (12%), and current liabilities & provisions (5%).
Assets*: Loans & advances (73% of total assets), investments (16%), cash and bank balances
(3%), other current assets (7%) and other assets (1%).
*The data pertains to only reported deposit taking NBFCs and those non-deposit taking NBFCs with asset
size of ₹ 100 crore and above. All figures are as on end March, 2014.
The dangers and the regulatory challenges
The growing size and interconnectedness of the NBFCs in India also raise concerns on financial stability.
Reserve Bank’s endeavour in this context has been to streamline NBFC regulation, address the risks
posed by them to financial stability, address depositors’ and customers’ interests, address regulatory
arbitrage and help the sector grow in a healthy and efficient manner. Some of the regulatory measures
include identifying systemically important non-deposit taking NBFCs as those with asset size of ₹ 100
crore and above and bringing them under stricter prudential norms (CRAR and exposure norms), issuing
guidelines on Fair Practices Code, aligning the guidelines on restructuring and securitization with that of
banks, permitting NBFCs-ND-SI to issue perpetual debt instruments, etc.
Just as the shadow banks (i.e. the NBFCs) in India are of a different genre, the dangers posed by them
are also of different genre. Consequently, the regulatory challenges that we face today are different which
are as follows:
First, there are law related challenges viz. i. there are a number of companies that are registered as
finance companies, but are not regulated by the Reserve Bank, ii. there are unincorporated bodies who
undertake financial activities and remain unregulated, iii. there are incorporated companies and
unincorporated entities illegally accepting deposits, iv. there are entities who camouflage deposits in some
other names and thus illegally accepting deposits. The law as it stands today is inadequate to deal with
these issues. In order to correct these and
initiate action against violations, we need to bring in suitable amendments to the statutory provisions.
Reserve Bank is working with the government for such improvements in the law.
Secondly, as the entities, especially the unincorporated ones, can sprung in any nook and corner of the
country and can operate with impunity unnoticed, but endangering their customers interest, we need
arrangements and structured for effective market intelligence gathering. The Reserve Bank is restructuring
its organisational setup, especially in its regional offices, for gathering market intelligence.
Thirdly, empowering law and gathering intelligence by themselves are not sufficient. Enforcement of the
law is a challenge. This is primarily because of the various agencies involved in regulating the non-
banking financial activities of entities. Right from the central government ministries like finance and
corporate affairs, agencies like CBI and FIU-IND, regulatory agencies like the Reserve Bank, SEBI, the
Registrar of Companies, the state government agencies like the police and others, all have to share
information and coordinate and cooperate to bring in an effective, timely and unified enforcement of the
law. The Reserve Bank's State Level Coordination Committees (SLCC) are being strengthened and a
National level Coordination Committee is also being considered.
Fourthly, the international requirement is that the shadow banks be brought under tighter regulations. G-
20 has already expressed it as a mission to be achieved by 2015. In our case, bringing them under
regulation is not the issue, as they already are. The challenge for us is how differentially or how closely we
should regulate the NBFCs?
Conclusion
To summarise, the shadow banks in India (i.e. the NBFCs) are of a different type; they have been under
regulation for more than 50 years; they subserve the economy by playing a complimentary and
supplementary role to mainstream banks and also in furthering financial inclusion. Yet, they do pose
dangers, but of different variety; it primarily relates to consumer protection. It is the constant endeavour of
Reserve Bank to enable prudential growth of the sector, keeping in view the multiple objectives of financial
stability, consumer and depositor protection, and need for more players in the financial market, addressing
regulatory arbitrage concerns while not forgetting the uniqueness of NBFC sector.
18. Designing banking regulation in aspiring economies– the challenges

Banking regulation in Emerging Market Economies (EMEs)
An emerging market economy (EME) is an economy that has some characteristics of a developed
economy but is not yet a developed economy; it has aspirations to be a developed economy one day; it
has certain distinct characteristics and differs from developed economies in multifarious ways. An EME is
as an economy with low to middle per capita income with dominance of the proportion of the global
population. EMEs are typically classified as emerging because of the relatively recent initiatives at
development and reforms and beginning to open up their markets and “emerge” on to the global scene.
EMEs are expected to be fast-growing economies; the need for, as also the level of savings, investments,
both domestic and foreign, consumptions and rate of growth are all expected to be higher and much faster
due to the smaller base effect.
Accordingly, the EMEs have their specific economic and developmental needs and agenda. The global
banking regulatory standards, or for that matter, the regulatory framework for any other financial sector
segment is designed more to suit the needs and the level of development in the advanced economies. The
fundamental reason for this is their dominant presence and role in the global standard setting fora as also
the more advanced stages of their financial sector development including the higher level of complexity,
variety and sophistication of financial products and services innovated /offered in these economies.
However, the existing financial intermediaries and the available financial products and services in the
EMEs often fall grossly short of meeting the requirements of higher and faster growth, savings, investments
etc. Moreover, the requirements of funding infrastructure and social sectors, as also the real sector, are
unprecedented, particularly in view of the serious constraints on funding, muted investor and international
confidence, under developed condition of the social and public institutions, lower levels of appropriate skills,
specialisation and expertise, etc. The risks and volatility emerging from the foregoing are equally large and
often alien to the EME milieu. That is why the regulatory standards, often designed keeping in view the
ground realities in the advanced economies, may not also always be a perfect fit for the emerging
economies and the EMEs use national discretion in this respect while at the same time making sincere
attempts at aligning their regulatory framework with the global best practices.
Shift towards macro prudential regulation
The reform process did not cease with the second phase of reforms but remained a progressive ongoing
practice in the Indian banking system. The most significant among these and much applauded in the
aftermath of the financial crisis have been the macroprudential policies. Globally, the financial crisis brought
to the fore, only recently, the concept of macro prudential regulation of the financial system. However, in
India along with the measures detailed in the foregoing paras, there was a gradual shift towards macro
prudential financial regulation
early as 2004 itself. The Reserve Bank made use of the countercyclical policies since 2004 as a toolkit for
addressing systemic risk and ensuring financial stability though it had used them sporadically even earlier.
The instruments used to address the time dimension of the systemic risk have been time varying risk
weights and provisioning norms on standard assets for certain specific sectors wherein excessive credit
growth, in conjunction with sharp rise in asset prices, has caused apprehension of potential build-up of
systemic risk and asset bubbles. In the process, the policies have “leaned” against the wind and have
had the desired effect of moderating the credit boom in the specified sectors both through signaling
effect and affecting the cost of credit.
As regards the cross sectional dimension of the systemic risk which deals with the interconnectedness
issues, various measures have been undertaken such as, prudential limits on aggregate interbank
liabilities; restricting the access of uncollateralized funding markets only to banks and PDs and
stipulating caps on lending and borrowing; restricting the banks’ investments in the capital instruments
of other banks; stipulation on banks’ exposure to NBFCs and MFs and close monitoring of systemically
important NBFCs and financial conglomerates; restrictions on unbridled innovation in financial products;
enhancing transparency and addressing risks in OTC transactions by operationalizing reporting
platforms and CCP arrangements.
Current approach to banking regulation and reforms and the challenges involved
Given these realities, the needs for the financial sector reforms and regulatory development in India do not
necessarily converge with those felt in the developed nations. Risks emanating from the EME financial
sector are also diametrically different from those emerging from those in the advanced economies. In the
emerging economies, it is the limited spread of the financial sector as well as the constrained and or
underdeveloped / lower capacity in terms of the products, services and institutions that subject these
economies to various financial risks, as against the advanced economies where the risks emanate from
the sheer scale and volumes of financial transactions, size, connectivity and systemic importance of the
financial institutions, sophistication and complexity of the financial products and services etc.
The need for the financial development and regulatory reform remains as strong as ever in emerging
markets. Instead of innovating complex and sophisticated products and instruments or setting up financial
behemoths, the EMEs require to focus more on the fundamental financial sector elements such as
financial stability, strengthening and creating sound banking systems, widening the scope and reach of the
formal financial system and services, expanding financial inclusion and enhancing financial literacy,
improving monetary policy transmission as also developing and deepening the financial markets (such as
corporate bond markets and
basic currency derivatives) and making them more liquid, etc. As such the financial development and
regulation has to be aligned to these specific needs of the emerging market economy financial system.
One of the most critical aspects of reforms in the Indian financial sector, was the deliberate strategy of
‘cautious gradualism’ so that the pace of reforms remained specific to the nature of the Indian financial
system in terms of its maturity, absorptive capacity and the stage of development and was neither too fast
or abrupt to disrupt the very structure of the financial system nor too slow as not to have a meaningful
impact This approach encompassed small and steady doses of reform push, coupled with a close and
continuous monitoring of impact and preparedness for taking mid-course correction, if required. The
reform measures in the banking sector were coordinated with those in other areas and evenwithin the
banking sector, the measures were well sequenced, with an unwavering focus on stability.
On the one hand, while, since the early years of 2000, the Reserve Bank has embarked on a dedicated
effort at reconciling its guidelines with the Basel Accords and chosen to be more conservative on many of
the prudential norms in comparison to the global standards, it has also retained its national discretion on
some of the regulatory aspects so as not to disrupt and instead encourage the flow of credit to sectors
crucial for growth. Some such divergences, whether sub-equivalent or super-equivalent, are discussed
below:
Capital requirement and leverage ratio
RBI implemented Basel III requirements w.e.f. April 1, 2013. Under Basel III too in India, the minimum
capital requirements has been retained at 9% of Risk Weighted Assets as against Basel III requirements
of 8%. Leverage Ratio requirement is proposed to be at 4.5 % as against Basel III proposal of 3%. In
India, the real sector is predominantly dependent on the banking sector for credit needs. Any disruption
in provision of credit supply from banks may be catastrophic for the economy. Further, the extant external
credit ratings provided by the credit rating agencies to bank loans which determine the risk weight and
capital for those exposures under the Basel II Standardised Approach for credit risk, suffer from various
gaps and weaknesses. In view of the forgoing, it is desirable to reduce probability of bank failures by
having additional capital. The Basel Committee for Banking Supervision (BCBS) provides flexibility to
national regulators to prescribe higher minimum capital requirements. Several other jurisdictions (e.g.
Singapore, China, South Africa, Brazil, Australia etc.) have also prescribed higher capital requirements
than 8% of the risk weighted assets. Incidentally, the Reserve Bank has prescribed higher capital
requirements even under Basle II.
However, capital and leverage ratio prescriptions at levels higher than the global standards can have
constraining effect on the supply of adequate credit from banks to the productive sectors which in turn,
can adversely impact growth to some extent raising questions of trade-off between growth and banking
stability. Further, questions have been raised about requiring
banks to mobilise additional capital, given the huge capital needs and a lackluster capital market. This
compels us to take a balanced view about continuing with the additional requirements to ensure banking
resilience by having adequate cushion towards identified weaknesses and the practical difficulties the
banks face.
Exposure norms – the group borrower limits
Exposure norms for banks in India are as follows: for a single borrower, it is 15 per cent of the bank’s
capital funds and for borrowers belonging to a group, 40 per cent of the bank’s capital funds. The present
guidelines also allow banks to exceed the norm with respect to a single borrower and group borrower by
an additional 10 per cent and 15 per cent respectively, for extension of credit to infrastructure projects and
in exceptional circumstances. Apart from this, there are specific prudential norms for bank finance to
NBFCs, call money / notice money borrowing and lending and inter-bank liabilities, etc. BCBS in the
Standards published on Supervisory framework for measuring and controlling large exposures’ (the BCBS
Standards) in April 2014 have stipulated that the sum of all the exposure values of a bank to a single
counterparty or to a group of connected counterparties must, at all times, not be higher than 25% of the
bank’s available eligible capital base. As per the Standards, the eligible capital base is also revised to the
effective amount of Tier 1 capital only.
In India, our effort has been to harmonise our guidelines with the international best practices and
converge the same with the global prudential norms/standards. However, India, being an emerging
economy with limited sources of funds to finance the growth process, relatively smaller capital base of
the Indian banks as also fewer number of corporate groups which can take up big ticket infrastructure
and manufacturing projects and sudden growth in their size, has certain typical compulsions to meet.
Funding requirement for development of the infrastructure sector in India is huge. During the 12th five
year plan, starting in the current year, this requirement is estimated to be approximately $1 trillion or Rs
61 lakh crore. Currently, a huge chunk of this financing responsibility is borne by the banks. The banking
sector exposure to the infrastructure sector has grown from 3.61% of total bank credit as on March 2003
to approx 15.09 percent of the total bank advances as on March 2014. 1 The group borrower limit in India
is substantially larger in our country than the international norms due to the developmental needs of the
country. Keeping the group borrower limit at the level of single borrower limit, that too related to Tier I
than the total capital will severely constrain the availability of bank finance (which is the major source of
finance in India) to these corporate groups and the infrastructure sector and thus hamper the growth of
the economy. Stricter group exposure limits would also leave surplus lendable resources with banks
which may result in adverse selection. At the same time, high exposures to specific businesses or
business groups impairs stability and results in excessive concentration of credit. Thus, while we are
aware of the need to reduce the group borrower limit, we have to take a considered view as to what
extent and how smoothly this can be brought down going forward without adversely impacting the growth
prospects of the economy.
Liquidity standards – treatment of the SLR holdings
a) During the early “liquidity phase” of the financial crisis that began in 2007, globally many banks faced
unprecedented difficulties despite adequate capital levels. The Basel Committee on Banking Supervision
(BCBS) recognized that such difficulties were due to lapses in basic principles of liquidity risk
management. In response, as the foundation of its liquidity framework, the BCBS in 2008 published
Principles for Sound Liquidity Risk Management and Supervision (“Sound Principles”), which provide
detailed guidance on the risk management and supervision of funding liquidity risk. To complement these
principles, the BCBS further strengthened its liquidity framework by developing two minimum standards for
funding liquidity, viz., the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to achieve
two separate but complementary objectives. While the LCR’s objective is to promote short-term resilience
of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a
significant stress scenario lasting for one month, the NSFR is aimed at promoting resilience over a
relatively longer time horizon (one year) by creating additional incentives for banks to fund their activities
with more stable sources of funding on an ongoing basis.
b) Following the issue of final standards by BCBS, the Reserve Bank of India issued its final guidelines on
‘Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards’ on June
9, 2014. The RBI’s guidelines have taken into account the range of HQLAs available in Indian financial
markets and their liquidity vis-à-vis the liquidity instruments prescribed in the BCBS standard. The balance
sheets of Indian banks have adequate liquid assets due to the CRR and SLR requirements of 4% and
22% respectively of a bank’s NDTL. Any additional HQLA requirement on banks over and above CRR and
SLR may reduce banks’ capacity to meet the growing credit needs of the economy. It also reduces
competitiveness of banks in India vis-a-vis their international counterparts. Keeping this aspect in view,
Government securities to the extent of 2 per cent of NDTL i.e. those currently allowed under marginal
standing facility (MSF), have been allowed to be included as Level 1 HQLAs in India. Further, eligible
common equity shares with 50% haircut have been allowed to be included as a Level 2B HQLAs in RBI
guidelines.
Counter cyclical capital buffer
In the aftermath of the financial crisis in 2008, BCBS published Guidance for national authorities operating
countercyclical capital buffer (CCCB) to propose a framework for dampening excess cyclicality of
minimum regulatory capital requirements with the aim of maintaining the flow of credit from banks to the
real sector in economic downturns with the capital accumulated in good times. Moreover, in good times,
while the banks will be required to shore up capital, they may be restrained from extending indiscriminate
credit. In Indian context, its implementation may have to be well calibrated by recognising structural
changes in banking system due to financial deepening and the need for separating the structural factors
from cyclical factors. Accordingly, it has been envisaged that while the credit-to-GDP gap shall be used for
empirical
analysis to facilitate CCCB decision, other indicators like Gross Non-Performing Assets’ (GNPA) growth,
Industrial Outlook Survey, Credit to Deposit Ratio, etc., will also be considered in India.
Accounting norms and IFRS implementation
Some of our prudential guidelines on key areas such as investment classification and valuation norms,
impairment recognition and loan loss provisioning as well as securitisation are indeed at variance with
international accounting norms. However, these guidelines were framed keeping the Indian financial
system in perspective. Some of them are more conservative than international practices. For instance, we
do not allow the recognition of unrealized gains in investment portfolios while requiring that unrealized
losses be provided for. Similarly, we require banks to provide for standard assets even where there are no
signs of impairment. While these have served us well, as our financial system develops we may have to
harmonise our guidelines with international requirements.
At their summit in London in 2009, the G 20 leaders called on “the accounting standard setters to work
urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a
single set of high-quality global accounting standards”. The International Accounting Standards Board
(IASB) has now replaced IAS 39 with IFRS 9 with a view to reduce complexity and improve convergence.
With India having made a commitment to converge to IFRS and the Finance Minister’s Budget
announcement of the mandatory preparation of financial statements by companies (other than banks,
insurance and NBFCs) on the basis of IFRS converged Indian Accounting Standards (Ind AS) from FY
2016–17 onwards, the RBI is in advanced stages of finalization of a roadmap for banks and NBFCs in
consultation with various stakeholders. The main challenges for Indian banks would be system changes,
implementation of an expected loss impairment model and skilling human resources. Issues also arise on
account of the interaction of the regulatory and accounting frameworks. For instance, apart from the
complexities of an expected loss model, transitioning from an incurred loss to an expected loss model
may also potentially adversely affect capital adequacy. Similarly, the introduction of a fair value through
other comprehensive income (FVOCI) category coupled with the removal of the regulatory filters under
Basel III may also potentially introduce volatility in the capital. In order to address implementation issues
and facilitate a smoother transition, the RBI has set up a Working Group comprising professionals with
experience in IFRS implementation, bankers and RBI staff engaged in regulation and supervision.”
KYC and AML standards
The international standards for KYC/AML/CFT are set by the Financial Action Task Force (FATF) and the
Reserve Bank issues KYC/AML/CFT guidelines mainly on the lines of FATF recommendations. However,
irrespective of the FATF recommendations covering many areas, the Reserve Bank issues instructions to
banks only if there are enabling provisions in Prevention of Money Laundering Act/Rules 2002. Thus, for
example, Recommendation 17 of FATF provides for third party verification of KYC, subject to certain
conditions. In India, we had not allowed it until enabling provisions were brought in the PML Rules by the
Government in August 2013. Similarly, in terms of Recommendation 12 of FATF, banks/FIs are required
to take reasonable measures to determine whether a customer or beneficial owner is a domestic Politically
Exposed Person (PEP) and if so are required to take certain enhanced customer due diligence
procedures, etc. Since the Government has not taken a decision in this regard/incorporated this in
PML/Rules, RBI has not instructed banks/FIs to follow the FATF recommendation.
Conclusion
To conclude, designing banking regulations for an aspiring economy has to carefully factor difficult
realities and calibrate its policies. While on some the regulations have to conform to international
standards, norms and best practices, on certain other issues the regulations will have to be designed
using national discretion and consciously be different from such standards and norms. Enlightened self
interest will have to be the guide post. In the Indian context, our past experience of and learnings from
such deviations are our additional guide posts. Reserve Bank is ever conscious of this position
19. Emerging contours of regulation and supervision in the Indian banking sector
Five pillars of RBI’s developmental measures

Those of you closely following Reserve Bank of India’s policies would have noticed that over the past few
quarters our developmental measures have been focused on five key areas. These are:
Strengthening the monetary policy framework
Strengthening banking structure through new entrants, branch expansion, encouraging new varieties of
banks and moving foreign banks into better regulated organisational forms
Broadening and deepening financial markets and increasing their liquidity and resilience so that they can
help allocate and absorb the risks entailed in financing India’s growth
Expanding access to finance to small and medium enterprises, the unorganised sector, the poor and
underserved areas of the country through technology, new business practices, and new organisational
structures
Improving the system’s ability to deal with corporate distress and financial institution distress by
strengthening real and financial restructuring as well as debt recovery While RBI’s developmental and
regulatory policies continue to evolve around this five pillared approach, current efforts, in specific, are
directed at certain important initiatives. These include strengthening and harmonisation of regulatory
guidelines for non-bank finance companies, rationalising the priority sector lending guidelines, measures
for strengthening the fraud risk management system and resolution of fraud cases in commercial banks,
designing a charter of customers’ rights, developing a framework for resolution of financial firms under
distress and catalysing the state level coordination committee structure for better regulation, supervision
and monitoring of the activities of firms indulging in promoting Ponzi schemes. Thus, on the whole, RBI’s
regulatory and supervisory resources are directed at fostering a competitive, vibrant and sound financial
system for meeting the financing needs of a growing economy.
2 Issues in regulation/supervision
Let me now turn to the issues and challenges in the regulation /supervision of banks in India. As finance
professionals, you are well aware that the performance of banks is inextricably linked to the performance
of the economy, more so in India where the financial sector is heavily dominated by the banks. Following
the Global Financial Crisis, the standard setters have been working overtime on fixing the regulatory
loopholes which allowed the financial sector to underestimate and underprice risks. Regulatory reforms
agenda in the banking sector, also called the “Basel III” reforms are aimed at improving the banking
sector’s ability to absorb shocks arising from financial and economic stress; improving the risk
management and governance framework and on strengthening the banks’ transparency and disclosure
standards. Steps have also been taken to address the concerns around macro-prudential or system
wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these
risks over time.
Efforts have been initiated to end the moral hazards associated with “Too-Big-to-Fail” by requiring the
global systemically important banks (G-SIBs) to hold higher loss absorbency capital and to improve
resolvability upon failure. Focus has also been on strengthening the supervisory effectiveness and
disclosure standards. Reserve Bank is committed to carry forward banking sector reforms by adapting the
best international practices to country-specific requirements while being mindful that growth dynamics in
Emerging Market Economies (EMEs) are different and there is a thin line between prudent regulation and
excessive regulation.
Risk based supervision
In the domestic context, a significant shift has happened in the approach to supervision of commercial
banks in the form of risk based supervision. At the core of supervisory monitoring under RBS is an
assessment of the quality of a bank’s procedures for evaluating, monitoring and managing risk, and of the
bank’s internal models for determining economic capital. The success of the risk based supervision
approach is incumbent upon quality and integrity of data, skill levels and competency across the banks
and regulators and above all, an orientation of the top management of the bank towards risk-oriented
business activities and oversight function. I will touch upon some of these issues in the course of my
address. Let me now turn specifically to some of the recent regulatory/supervisory measures initiated by
the RBI:
No discussion on the Indian banking system these days is complete without a discussion on the asset
quality of the banking sector as well as the capital requirement of the public sector banks. Hence these
are the first two issues which I would dwell upon.
Asset quality
The slowdown of the Indian economy in recent times has had its impact on the asset quality of the banks.
The overall banking system in India is, however, quite stable and resilient though there are some specific
areas which pose challenge to the regulators and supervisors and need continuous monitoring. The level
of gross non-performing advances (GNPAs) as a percentage of total gross advances for the entire
banking system is at an elevated level of around 4 per cent while the net non-performing advances
(NNPAs) as a percentage of total net advances is around 2.2 per cent. The level of distressed assets is
not uniform across bank groups. PSBs as a group, exhibit much larger GNPA and NNPA levels. While on
an isolated basis, the asset quality is not very distressing, if we were to add the portfolio of restructured
assets to the GNPA numbers this surely raises concerns.
In line with the fifth pillar mentioned above, various steps have been taken by RBI to ensure improvement
in the system’s ability to deal with corporate and financial institution distress. For effective NPA
Management and to enable speedier and prompt recovery, RBI has set out Guidelines on “Early
Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders:
Framework for Revitalising Distressed Assets in the Economy. Detailed Guidelines on formation of Joint
Lenders’ Forum (JLF), Corrective Action Plan (CAP), “Refinancing of Project Loans”, “Sale of NPAs by
Banks” and other regulatory measures were issued to banks, emphasizing inter-alia, the need to ensure
that the banking system recognises financial distress early, takes prompt steps to resolve it through
rectification, restructuring or recovery thereby ensuring that interests of lenders and investors are
protected by setting in motion a corrective action plan which incentivizes early identification of problem
cases, timely restructuring of accounts considered to be viable, and taking prompt steps for recovery or
sale of unviable accounts. At the same time, the guidelines provide for punitive actions on lenders in the
form of accelerated provisioning norms if they fail to report the status of distressed accounts to Central
Repository of Information on Large Credits (CRILC) or if JLFs are not convened within the stipulated
timeframe etc.
The CRILC has been created within RBI to collect, store and disseminate data on all borrowers’ credit
exposures including Special Mention Accounts (SMA 0, 1 & 2) having aggregate fund-based and non-fund
based exposure of Rs. 50 million and above. The repository is expected to help in tracking and reviewing
exposures/impairment of such large borrowers more effectively across banking institutions as also NBFCs
so that timely remedial measures can be taken.
A point that I wish to highlight here is that “Restructuring” per se is not necessarily a forbidden word. It is a
legitimate financial activity practiced the world over to help the borrowers tide over short term problems.
Policy and administrative reforms would establish that such forbearance was appropriate to preserve
economic value in the system. It may get further help from easing commodity prices and growth returning
in some parts of the globe. Our concern on restructuring is more around the fairness of the process. It
should address the problem, not merely postpone it. Hence, RBI has set out clear guidelines that a
second round of restructuring would lead to automatic classification of the asset as non-performing and
call for a higher provisioning requirement.
Capital adequacy of banks
There have been numerous discussions on the need and ability of the Indian banks to raise additional
capital to support their business, going forward. I would not say that the concerns raised in this regard are
entirely misplaced, especially for the public sector banks. The need to shore up capital adequacy would
arise on account of pulls from several directions. These include need for higher provisioning requirements
due to deterioration in asset quality, phased implementation of Basel III Capital norms, capital required to
cover additional risk areas under the risk based supervision framework as also the need to expand the
business and meet the likelihood of higher credit demand going forward. Let me tell you that at present,
the
capital position of Indian banks is comfortable with all of them meeting the extant regulatory requirement
comfortably. The capital to risk weighted assets ratio (CRAR) for Indian banks under Basel III as at end
March 2014 stood at a comfortable level of 12.9 per cent. While the ratio for the PSBs was lower at
around 11.38 per cent, the ratio in case of private sector and the foreign banks was in excess of 16 per
cent. Going ahead, the capital position of the banks, especially the PSBs, is likely to come under some
strain, both in terms of quantity and quality. To meet minimum capital requirements, capital buffers,
domestically systemically important banks (DSIBs) surcharge and impact of increased stressed assets,
the Government’s contribution to the equity up to March 31, 2019, would have to be to the tune of two
lakh forty thousand crore rupees at the existing level of its shareholding in respective public sector banks.
This requirement is independent of the risk based capital requirements which the banks might need
under the RBS process. It is, however, important to note that this requirement may come down if, going
forward, the asset quality improves on account of higher growth and consequently, higher internal
retention. Notwithstanding the room available to the banks to meet the Basel III timeline, the banks have
to look to generate more internal capital. With the emphasis on fiscal consolidation by the GOI, the
leeway earlier available to the PSBs to approach the Govt. for additional capital will be limited and hence,
one of the options for the Government could be to reduce its stake in some of the PSBs which presently
ranges from 56.26 per cent to 88.63 per cent.
Total loss-absorbing capacity (TLAC) for global systemic banks
Let me now come to a related issue which is being debated by the standard setting bodies. You might
have already read in the newspapers a couple of days back about the proposals being set out by the
Financial Stability Board (FSB) to lay down a new minimum standard for “total loss-absorbing capacity”
(TLAC) for the G-SIBs. The TLAC standards are meant to provide confidence to home and host
authorities that the G-SIBs do have sufficient capacity to absorb losses, both before and during resolution
and simultaneously enable resolution authorities to implement a resolution strategy which would minimise
any impact on financial stability and ensure the continuity of critical economic functions.
While the TLAC regulations are meant to be applicable to G-SIBs, we would surely see such regulations
find their way into the domestic regulations across jurisdictions over time. We have already seen
regulations on the higher loss absorbency capital requirement and resolution regime for G-SIBs slowly
being made applicable for the D-SIBs and hence, it can well be assumed that the international
community would want the TLAC regulations to be made applicable to the D-SIBs in all jurisdictions as
well as banks with overseas presence. We have expressed our reservations on the likely spillover
impact of the TLAC proposals on the banks in the emerging markets economies (EMEs) with delirious
impact for economic growth in EMEs and emphasised the need for ab initio addressing of the concerns
of the EMEs during the consultation process. We have also emphasised that ownership of the banks
should also have a bearing upon such requirements.
Unhedged forex exposures
You would all probably recall the significant volatility experienced in currency markets around the globe,
and more so, in the EMEs, at the mere mention of an exit from accommodative monetary policy by the
FED Chairman, during May last year. Actual tapering of asset purchase programme by the FED and the
recent announcement of a complete exit from the quantitative easing programme that has been in
existence since 2008 has not had a very adverse impact on the rupee. However, notwithstanding the
recent measures and policy buffers created since last year, it is highly likely that any reversal in the
interest rate trend in the US would lead to flight of capital to the so-called “source” countries, in the
process, putting pressure on the domestic currency of the EMEs.
The wild gyrations in the forex market has the potential to inflict significant stress in the books of Indian
companies who have borrowed abroad as was evident during the financial crisis. This stress eventually
hampers their debt repayment capability to the domestic lenders as well. It is precisely with this
consideration that RBI has been advocatinga curb on the increasing tendency of the corporates to
dollarize their debts without adequate mitigation.
Our inspection of banks’ books has highlighted need for the banks to have more robust policies for risk
mitigation on account of un-hedged foreign currency exposure of corporate entities. Inadequacies of data
further complicate the impact assessment of such exposures across the banking system. The banks have
been advised to factor in this risk into their policies/ pricing decision and also devise means for sharing of
information on such exposures amongst themselves. Regulatory guidelines have also been since issued
outlining the capital and provisioning requirements for exposure to entities with significant unhedged forex
exposures.
Corporate governance
Another area which is a major challenge, especially in the PSBs, is corporate governance. Some of the
recent headline events have shown the PSBs in poor light. As a regulator and supervisor of banks, RBI
has been putting a lot of emphasis on this aspect. The P J Nayak Committee appointed by RBI to review
“Governance of Boards of Banks in India” has made certain significant recommendations like splitting the
post of Chairman and Managing Director at PSBs, giving fixed five-year tenures for these posts,
professionalising the Boards of PSBs, etc. RBI is constantly engaging with the Government for the early
implementation of the Committee’s recommendations. A related concern is the impending vacuum likely to
be created in the public sector banks, especially in the middle management level, due to large-scale
retirement of officers in next 2–3 years. On our part, we have been sensitizing the bank managements to
address the likely talent deficit that they would have to encounter more so on account of entry of new
banks in the private sector space in the near term.
Positives for the banking sector
The performance of the Indian banks pretty much mirrors the performance of the Indian economy. The
piling up of distressed assets and consequent drop in profitability is, thus, largely a fallout of poor
macroeconomic environment- both domestic and global. Going forward, a sharp uptick in “investment” led
as also “consumption” led demand is expected in the economy. The banking sector, the corporates and
the administration have to cater to the diverse needs of two broader constituencies in the country i.e.
“India” and “Bharat”. Towards this end, they might have to adopt different strategies. However, there is no
denying the fact that a whole host of opportunities are likely to emerge for the Indian banks in future.
Economic recovery
The Indian economy is poised for a gradual recovery. As growth picks up, domestic supply bottlenecks
ease and the stalled projects come back on stream again, the outlook for both manufacturing and services
sectors would brighten. With a stable Government at the Centre, pace of economic reforms in the areas of
industry, services, international trade, labour markets, public sector management, financial markets and
competition are likely to improve further, which would help improve commercial activity levels and
productivity, thereby help enhance the growth potential. As the economy recovers, investment demand
and the need for credit will pick up which would boost banks’ performance and, to a great extent, address
the issues of asset quality and internal generation of capital.
Government’s focus on infrastructure
Attempts to de-clog the infrastructural bottlenecks through accelerated clearances and setting up of smart
cities are likely to open up new avenues for banks. In order to make it easier for the banks to extend long
term loans to infrastructure sector with flexible structuring to absorb potential adverse impacts, RBI has
already issued enabling guidelines. This will mitigate the asset-liability management (ALM) problems
faced by banks in extending project loans to infrastructure and core industry sectors, and also ease the
process of raising long-term resources for project loans to infrastructure and affordable housing sectors.
Retail demand
The impending turnaround in the Indian economy has the potential to provide a big leg-up to the
domestic demand. India’s demographic pattern suggests that the domestic consumption demand would
continue to grow for a foreseeable future. In the absence of corporate demand, many of the banks have
been crowding in the retail space trying to capitalise on demand for housing, two-wheelers and four-
wheelers, white goods and so on. This, however, raises concerns on credit absorption level in the
sector. Though, the segment has until now experienced moderate levels of impairment, going forward,
the banks would need to put in place systems and processes to ensure adequate origination &
monitoring standards and stand guard against formation of asset bubbles. Here again, the big potential
would lie in the “greater India” where banking penetration has hitherto been inadequate. Meeting the
funding needs for the life-cycle demand of this segment would be a sustainable business avenue for
banks in the coming years.
MSME sector
MSME sector plays a pivotal role in generating employment, increasing cross-border trade and fostering
the spirit of entrepreneurship. In fact, it is being increasingly recognized by the policy makers that if India
has to regain its high growth trajectory, it needs a vibrant MSME sector.
Quite often, the sector complains about not having to only contend with higher cost of borrowing but also a
lack of availability of timely credit. In this context, let me make a couple of points. The interest rate on
lending are no longer administered and are left to market forces, the only caveat being that the lending
has to happen above the base rate. Second and more importantly, it needs to be realised that the
alternate cost of borrowing for the sector would be much higher than the median rate of 12–14 % which
the MSME borrowers currently pay. On our part, we have advised the banks to take into account the
incentives available to them under the Credit Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE) scheme and assign zero risk weight for capital adequacy purpose for the portion of the loan
guaranteed by the CGTMSE for such MSE borrowers.
There are also issues around the unavailability of credit rating for first time MSME borrowers. In this
context, the banks have been advised to formulate Board approved policy and start using credit scoring
models in their evaluation of the loan proposals of MSE borrowers which works on the principles of
attributes of similar borrowers rather than on past or future financials.
Further, the underlying objective of the proposed issuance of small finance banks licenses is to facilitate
provision of credit to small and hitherto credit starved sections of the society, which has been relying on
informal finance channels.
Differential licensing of banks
RBI has announced licensing of two new banks in the private sector. Simultaneously, issuance of
guidelines for differentiated licences for small finance banks and payment banks are in the final stages.
Possibility of continuous or “on-tap” licensing, setting up of wholesale banks and conversion of large urban
co-operative banks into commercial banks were detailed in our consultation paper issued earlier.
Discussions on these ideas are currently underway and a detailed road map of the necessary reforms and
regulations for freeing entry and making the licensing process more frequent will be issued in due course.
While these possibilities encourage much optimism, they are simultaneously likely to place strain on our
supervisory resources, which we are internally trying to strengthen and optimize. As these banks are likely
to cater to small and relatively uninformed borrowers, protection of consumer interest would also pose a
big challenge.
20. Talent Management in Banks
Talent Management is very important. The core issues regarding talent management remain the same
across boundaries.There are challenges from the changing landscape in the banking space in terms of the
opportunities and threats. The opportunity in this part of the globe (Asia Pacific) is that the growth engine
has been strong notwithstanding some moderation in the recent past. In the medium to long term, the
growth will remain intact. In fact, these regions are the growth drivers of the global economy, having huge
wealth generation, income generation etc.
The BCG 2014 report has mentioned that except Japan, Asia Pacific was the fastest growing region
worldwide during last year. Private wealth of this region had increased by about 30%. Massive wealth
creation is taking place which is why one needs to look at this region. Banks need to play a critical role in
this growth momentum process. Banking and finance should play a complementary role in the growth
process. This is therefore an opportunity for the banks, with demographic advantages, to play a major
role. Except Japan and Singapore, the other countries in the Asia Pacific region have a demographic
advantage both in terms of numbers and the quality of the people. There are wide ranges of customer
segmentation in this region - young Asia and old Asia (with a lot of savings). At the same time, banking
penetration has been low in many parts of Asia, with many customers at the bottom of the pyramid. Some
of these people may just be above the poverty line, but they are not very sophisticated, not financially
secure or tech savvy but nevertheless, wish to access the formal financial system.
At the same time, there is a huge upsurge in the middle class. A study by E&Y says that the middle class
in India would grow at a steady rate over the next decade and reach 200 million by 2020 and 475 million
by 2030. In this class, there is a wide spectrum of customer segmentation with unique needs. Banks
therefore will need to organise and deliver the banking products to suit the different segments.
Another issue is with reference to partners. The banking sector has evolved. There are and there will be
multiple partners namely, technological service providers, corporate BCs-who facilitate branchless banking,
telecom companies who assist in mobile banking etc. Handling different partners is both an opportunity as well
as a challenge.
Competition is both an opportunity and a threat. The talent pool is limited. Hence, competition for recruiting
talent from the same talent pool from banks, BPOs, consumer industries, retail sector etc will be fierce. There
will also be intense competition to attract the best talent within the banks. This competition will be :
between banks and non banking institutions;
Within banks - among local banks, regional banks and multinational banks.
Today there exists a 'Trust Deficit Syndrome'. Post the global financial crisis, there were quite a few
reverberations and reactions. One of them is the bias against the bankers. The bias against the bankers was
because of the incentive structure- whether they are putting the real effort or not, if they are putting the sector
in jeopardy by not really focussing on the core issues, whether they have crossed the line of suitability and
appropriateness, mis-selling products, over exposure to complex derivative structures etc. These actions
were delinked from their ethical moorings. Thus, there is an imperative need to ponder over the reasons for
this type of ethical degradation. When talking of ethical degradation, what immediately comes to mind are the
regulatory issues in banks in the US - the fines being levied for deviations. This problem persists not only in
advanced countries but all over the world as well.
The trust deficit syndrome did not exist earlier. In the past there were four important persons in a district
namely the District Collector, Superintendent of Police, School Head Master and the agent of State Bank of
India (branch manager). In the heydays, after the green revolution, when branches were set up across villages,
the branch manager was called to settle legal disputes. This indicated the implicit trust on the bankers. Things
have however changed now. There is a trust deficit. The actions of certain bankers in both the public sector
and private sector have been responsible for this trust deficit. Private sector banks set too unrealistic targets
without taking into consideration whether the skills and capabilities are available, and also jeopardising the
work life balance of their employees. Since these cannot be sustained a trust deficit syndrome has arisen. As
per the CFA Institute Trust Survey - only 50% indicated trust in banks.
Technology is both an opportunity and a threat. We need banking as a utility but may no longer require a
bank to provide the utility; for instance, mobile banking. It may translate into 'banking without banks'. India
is a pioneer in mobile banking. Although experts feel that we should move to mobile banking, it is
necessary to understand that mobile banking is not only about remittances but also involves savings and
hence mobile banking is related to bank accounts. There are two related threats when we talk about
banking without banks. One pertains to the changing behaviour of the customer about where and how to
shop for financial services and products and the other is the proliferation of alternatives to banks.
Another issue which has assumed significant importance is the rise of the social media platforms. A
survey report (Capgemini analysis) says that the social media users will increase from 1.97 billion to
2.55 billion by 2017. The growth in the Asia Pacific Region will be higher than the world average of 10%.
Social networking has increased tremendously as was proved by the recent elections in India. The use
of social media in elections is now a case study for management institutes in India and abroad. So,
social media is both an opportunity and a threat. The threat is people can avoid intermediation of banks
and the opportunity of banks will be to leverage the social network.
Regulatory reforms have happened at a fast pace. Due to this and technology being available, data
analytics, data handling and data mining have assumed added importance. Hence, here also, technology
is both an opportunity and a threat.
All this boils down to how one manages talent to take advantage of all the opportunities and mitigate
threats in an effective and efficient manner. HR or HCM (Human Capital Management) broadly
encompasses -
What types of staff are needed? Approach to hiring, manner of training, how to deal with performance
management? How to ensure that personnel management conforms to regulatory prescriptions?
Talent Management is a structured process for attracting, developing, retaining, deploying human
resources with the right aptitude and skill sets and make them future ready. The old KSA model of
capacity building (Knowledge, Skill and Attitude) is applicable here, with the addition of aptitude which is
very valid in the context of talent management. It is thus a continuous process. Broadly from the
organisation point of view, Talent Management involves co-ordinating the following dimensions
namely :
Recruiting the right set of people, developing them, retaining them, employee development and
engagement through formal and informal learning processes (as undertaken by IIBF in a big way in India),
identifying high potential employees, developing leadership skills etc.
Focus of Talent Management is that one needs SMART (let me call this smart 1) persons; people - who are
Skilled, Meticulous, Adaptive (willing to work in any environment), Responsible and Trust worthy (Reliable)
in terms of customer service and they should be Team players. As Michael Jordan, the famous basket ball
player was quoted as saying that 'talent wins games but teamwork and intelligence wins championships'.
The younger generation is easily bored, restless, want to solve problems quickly, detest bureaucratic
bottlenecks, do not tolerate delays, and cannot be taken in fancy titles and positions, unless one gives
good quality work to their satisfaction. It is therefore necessary to keep these aspects in mind while
managing talent since banking has moved from 3-6-3 banking to 24*7 banking.
The banking sector in India has been largely resilient though the crisis of 2008-09 and are ahead in terms
of prudential norms which enabled the Indian banks to weather the crisis. However of late, problems are
creeping in - weak appraisals, poor asset quality, frauds, increase in customer grievances, poor risk
management, inadequate understanding and leveraging of IT resources, manpower shortages, etc. The
fallout of not having adequate talent / organisation structure is that one creates a vast network of
intermediaries - good, bad or ugly. Either they can coexist or may need to be banished. If they are to
coexist, codes of conduct should be laid down, or own structures should be created so that one does not
depend on these intermediaries. These are challenges being faced by Indian banks now.
The public sector banks in particular did not recruit personnel for a fairly long time. Owing to this, large
scale retirements have already started to happen. There is a serious crunch of leadership in several areas
like Risk Management, IT, credit appraisal, etc. There are hardly any leaders in pipeline. In many
organisations, people have moved fast and are not mature enough to handle these tasks. Here enters the
SMART 2 persons - leaders - who can Strategise things, Meticulous planners, Articulate and advocate
changes required, Result oriented, tough Team builders. These basically relate to the middle and the top
management. We need to ponder, what is the time spent by the top management / board in people process
- recruitment, grooming, building capacities, aligning the needs, etc. Not much time has been devoted in
the Indian context especially in the public sector. In many successful companies, CEOs spend a major part
of their time in people management and not on sales, products or advertising.
 Talent Management is not the job of HR alone but also of the top management. More focused attention
from the top is required. The Khandelwal and Gopalakrishna committees have highlighted the HR issues
in public sector banks, capacity building in banks and non banks, enhancement of HRM practices,
creation of the post of chief learning officer in banks, focussing on learning and strategy for addressing
issues. There should also be a centre of excellence for leadership development. This is critical as it
enables to develop leaders.
21. Should Technology players be allowed to trigger more central role in

Banking? What important boundary conditions should be kept in mind?
Banking technology: A look back in time the Early Days
During the 1970s and 80s, banks developed technology systems using mainframe based applications. As
banks began targeting new markets overseas, they developed IT systems in‑house or modified the
software locally, creating dedicated maintenance teams. Modern banking creates a system overload.
During this period, customers banked through branches, ATMs and telephones. As newer channels like
the Internet and mobile phones emerged and became popular, banks began offering sophisticated
products and customized services catering to new customer needs. As a result, they repeatedly
patched old, legacy systems, rendering them incredibly rigid, expensive and difficult to maintain. Most
legacy systems are now unable to scale up to the ever-increasing business and transaction volumes
prevalent today, and are struggling to meet banks’ evolving business needs.
With costs spiraling as banks employ hundreds of people simply to maintain and update their systems,
they become stuck in a technology quagmire, unable to move forward and innovate.
Technology Today: Synonymous with Banking
Technology today has become synonymous with banking and Indian banks have put in place a fairly
strong infrastructure to leverage its benefits. IT has made a visible difference in the functioning of banks
and conduct of banking operations. Banks have benefitted immensely due to scaling up of business and
growth in volumes, the journey has been beneficial for the customers too, with improvement in customer
service quality. While for larger banks the IT capital expense to total IT expense ratio has stabilized to
approximately 18%, smaller banks are increasing their capital expenditure to acquire IT infrastructure, with
approximately 54% capital expenditure. Most banks have also put up a robust mechanism for governance
and management of IT assets with board level committees and alignment of functional and technical
teams for IT implementation.
In the future banks will have to focus on two major aspects – delivering customer satisfaction and driving
business optimization. Banks today have built up significant database about the customer –
demographics, transactions and behavioral data. However the key is to derive information from this data
to deliver business impact. Information and technology will have to be separated with substantial focus on
information. Banks will need to have a significant level of integration of data warehouses and analytical
capability both in terms of people and tools to face this challenge. In addition banks will also need to have
a robust customer life cycle management program to effectively utilize the information.
The second significant challenge is driving business optimization which broadly deals with highest level of
revenues or returns given a particular level of resources. Specifically in terms of IT resources it would
mean, given the level of IT resources have the revenues or returns achieved the maximum achievable
levels. Banks will need to define metrics for performance of IT assets starting with -
Productivity measures like Return on Investment (RoI) and marginal RoI] to
Efficiency measures like cycle time, response time, utilization and
Performance effectiveness measures like coverage, outcome, quality, satisfaction etc.
In achieving these objectives banks will have to integrate people, processes and technology to deliver
superior customer service. Banks will have to focus on acquiring and retaining adequately skilled
manpower. Banks should also pay enough attention to reengineering their business processes to move to
the next level of growth and effectiveness as economic enterprises. Thus IT players will play a central role
in baking of tomorrow owing to many reasons discussed herein the paper.
IT for Financial Inclusion
Leveraging technology is helping build economies of scale and bringing down transaction costs. In
addition the governments’ support in terms of electronic transfer of benefits is also adding to viability of
the initiatives. The financial inclusion initiatives of banks have gathered sufficient traction with
approximately 41% growth in no-frill accounts opened, 97% growth in BC and BC agents and 9% growth
in SHGs linked. There is also a substantial growth of 64% in no-frill balance outstanding. While a large
part of the technology investments in FI is being done by the BC service providers, banks have also
invested substantially in expanding transaction handling capability of the IT infrastructure.
With the business models more or less stabilized, banks have made tremendous progress in terms of no-
frill accounts opened. As on March 2013 approximately 97.53 million no-frill accounts had been opened,
an addition of approximately 30 million accounts for the year
The enrollment of BCs has grown significantly with approximately 1.5 lac BC/BCAs enrolled, while the
linkage of SHGs grew at a slower pace of approximately 9% (on a larger base) with 2.3 million SHGs
credit linked. Other than these predominant models banks are also deploying other models like mobile
vans, kiosks and ultra small branches.
Direct Benefit Transfer (DBT)
 DBT is expected to add to the viability of FI initiatives by providing the banks with a good amount of float
and while multiple challenges remain in terms of operationalizing the scheme; these are expected to be
smoothened out as the operations mature. The direct benefit transfer was launched on January 1, 2013
and currently covers schemes like National Child Labour Project, Student scholarship and LPG subsidy.
Mobile Banking
Despite this rise in m-banking transactions in India, banks are yet to fully exploit this technology even for
their existing customers. The current penetration is low compared to the number of bank accounts and the
vast mobile subscriber base of more than 900 million. Some of the reasons for which consumers are not
adopting mobile banking include the lack of adoption of mobile as a channel for banking , limitations of
services on mobile banking, non-replication of mobile banking services in varied languages in India etc.
Most mobile banking applications are designed for smart phones, which also limits the customer base, but
with the introduction of USSD-based applications, this may change in coming years. NPCI are taking
initiatives to develop solutions across the mobile banking space to reduce the burden on ATMs and other
channels. Following are some initiatives taken:-
IMPS – An emerging, convenient remittance system
An IMPS is a mobile based remittance system which is inter-bank in nature and is owned and operated by
the National Payment Corporation of India (NPCI). IMPS facilitate access to bank accounts and transfer of
funds through mobile phones.
NUUP :National Unified USSD Platform (NUUP), launched by National Payments Corporation of India
(NPCI) and offered a service which would take banking services to every common man in this country.
The service was launched in November 2012. The service would allow every banking customer to access
banking services with a single number across all banks – irrespective of the telecom service provider,
mobile handset make or region.
M-KCC- Mobile based Kisan Credit Card
The smart card linked, mobile based and Aadhaar enabled KCC, popularly known as m-
KCC, was launched in July 2012 and is seen as an example of harnessing the latest technology for user
friendly applications for Financial Inclusion of farmers.
Electronic Payments
The Indian payment system, which is primarily cash dominant, is now at a faster pace transforming from
paper to electronic. The share of electronic payments in non-cash payments has shown an upward trend.
The electronic payment system primarily comprises Real Time
Gross Settlement (RTGS), Electronic clearing services (ECS), credit and debit payments and electronic
fund transfers (EFTs) / National Electronic Funds Transfer (NEFT). India is currently the 13th largest non-
cash payments market in the world, but has the potential to grow significantly. Electronic payment
volumes have been growing by more than 10% a year as Reserve Bank of India (RBI) and National
Payments Corporation of India (NPCI) continue to drive infrastructure improvements and development of
regulations for cost effective and efficient electronic payment instruments (
Key Trends/Opportunities for Electronic payments
C2G (Consumer to Government) & G2C (Government to Consumer) Payments remain the focus area for
the regulator and government alike, both to drive inclusion and increase efficiencies in payment
processing and collections.
One of the recent initiatives taken by the regulators has been the decision to permit nonbank entities to
launch the White Label ATMs (WLAs), thereby increasing ATM penetration across the country. The
sponsor bank will be responsible for cash management and customer grievance redressal. WLA is set to
boost electronic payments with penetration in rural and semi urban areas.
The e-commerce and m-commerce platforms are poised for a big stride in coming years. To promote
electronic payments for mass audiences, NPCI has launched RuPay PaySecure
solution for RuPay cardholders to make online payments for various services such as
reservations, booking, ticketing, shopping, utility bill payments etc. in a secured manner.
With financial inclusion gaining pace and the number of bank accounts increasing at a sustained pace, the
number of transactions is likely to increase further as citizens start using the banking channel as well as
the payment and settlement infrastructure. This ‘bottom and the middle of the pyramid’ presents a large
untapped market.
Unstructured supplementary services data (USSD) that is being attempted for fund transfer through IMPS
across mobile network operators (MNOs) by NPCI will help in penetrating the untapped segment and
boost electronic payments.
National Automated Clearing House
National Automated Clearing House (NACH) operated by NPCI is similar to the ECS payment service
enabling pan-India processing of bulk payments and receipts. The system has just been operationalized
towards the end of December 2012. It also has the capacity to electronically manage Debit mandates and
holds great promise for substituting the cheque system.
Aadhaar Enabled Payments System
Aadhaar Enabled Payments System (AEPS) is a bank led model which allows online interoperable
financial inclusion transactions at PoS (MicroATM) through the Business Correspondent of any bank
using the Aadhaar authentication.
Creation of 24 X 7 Remittance systems

NPCI plans to set-up a 24 X 7 real time remittance system which would be available to customers through
retail and alternate facilities round the clock for making payments or transferring payments both inside and
outside India. This new system will be known as “India Money Line (IML) System” and would replace the
current NEFT payment in India.
Customers will be able to use this new system to make remittances through Internet, Mobile, Point of Sale
(POS), ATM etc
Customer Management and Business Intelligence - from CRM to Customer Experience
Engineering
The past 2 decades has seen global financial institutions invest heavily in large CRM projects – however,
most of these monolithic CRM projects were characterized by inside out thinking and IT driven – thus
doomed to sub optimal ROI. In parallel customers have – with increasing rapidity – moved on and
embraced the newer age technologies like web, mobility and of course social media. Thus the power
shifted from the bank to customers – who now collaborated, commented and consolidated their
product/brand choice even before stepping into the branch. Hyper competition in various industries
(including banking) led to an increasingly demanding customer on one side and mature market driven
organizations which were aware that with brand differentiation tending to zero – Customer Experience
was now the new brand / differentiator.
IT for business optimization
Optimization typically seeks to assign values to a set of variables that leads to an optimal value of a
function. It seeks to find an alternative with the most cost effective or highest achievable performance
under the given constraints. IT assets and resources in the near future will have to answer the question
whether they are delivering optimal level of performance, given the estimated Rs. 18-20,000 crore worth of
IT capital expenditure over the last 12-13 years. While it is difficult to measure the direct impact, banks will
have to think of ways of defining and tracking performance metrics. The metrics will have to start with
measuring productivity of IT assets such as Return on Investment (RoI) and marginal RoI to efficiency
measures (like cycle time, response time, utilization) and performance effectiveness measures (like
coverage, outcome, quality, satisfaction etc).
Looking ahead – Boundary Conditions
IT today has become integral to the business of banking; it is difficult to envision one without the other.
However as with other resources it has costs attached to it and with substantial investments in IT
infrastructure business leaders will have to seek answers to –
Whether the infrastructure is being used optimally?
The overall and marginal value that IT delivers in terms of business impact, be it growth or profitability
or any other parameter, will become increasingly important.
Technology should be customer centric to derive optimal benefits and banks will have to equally focus on
customer retention and increasing share of wallet rather than only acquisition.
For most of banking customers going back to their primary bank for any other new relationship is a major
challenge. This is due to the insufficiency of CRM and BI solutions. Data integration of customer
interaction through multiple channels is still not available to front end branch personnel.
With increased use technology also comes increased risk of security breaches. Banks will have to on
their toes with real time alert systems and governance policies to manage the threats for early detection
and damage control.
In addition banks will also need to focus on operational performance improvement including training,
workflow automations and business process re-engineering to simplify process flows for increased return
from technology.
The future IT vision and strategy of banks will have to balance value delivered to the firm. It will need to be
aligned to the strategic objectives of the firm and be accountable for the delivering desired value.
22. KEY ISSUES FOR DISCUSSION – BANKING INDUSTRIES

I. Consolidation
The question of restructuring the Indian banking industry has been a bone of contention for both the
Government of India as well as the Reserve Bank of India. At present the Indian banking industry is highly
fragmented in terms of size, competitiveness and other structural features which in turn reduce its
operational efficiency and distribution efficiency.
The motives of consolidation have depended on firm characteristics such as size or organizational structure
across segments, or even across lines of business within a segment.
Indian banking sector has remained safeguarded at number of occasions from the crisis in the financial
markets, be it the 1997 Asian Crisis or be the recent Sub Prime Crisis because of negligible exposure of
the Indian banks and strong regulatory mechanism.
In Indian banking sector mergers in the post reform period has been generally market driven, to protect
the interest of depositors and to strengthen the banking sector.
Thus the Indian approach to merger has been different from many EMEs, wherein the Governments were
actively involved in the consolidation process because of financial crisis and viability of banking sector.
Motives for consolidation in Indian Banking
As suggested by Narasimhan Committee Report II, “M & A” Government & RBI have to monitor the
process carefully.
The Narasimhan Committee has recommended a three-tier banking structure with 2 or 3 large banks of
international character, 8 or 10 national banks and a few large local area banks.
The committee recommended that Mergers should ideally be among the listed entities, so that they can
offer scope to indicate post-merger market parameters like “market capitalization” after merger, etc.
The reasons for consolidation in India are the following:
Basel Norms:
Basel III requires banks to meet tougher and higher capital adequacy norms such as capital allocation
towards operational risk, in addition to credit and market risks.
Firstly, many Indian banks, especially public sector banks, cooperative banks and regional rural banks are
unprepared for this implementation due to capital inadequacy.
Fragmented Size
At the end of last fiscal, India had a total of 173 commercial banks, which included 169 scheduled
commercial banks and four non-scheduled commercial banks. Excluding the regional rural banks, there
were 87 scheduled commercial banks in the country as on 31 March 2012.
This included about 27 from the public sector and 20 the domestic private sector banks. As on 31 March
2012, a total of 41 foreign banks operating in India, while another 46 overseas banks had their respective
representative offices in the country.
To Attain Global Competitiveness:
Indian banks are not able to compete globally in terms of fund mobilisation, credit disbursal, investment
and rendering of financial services. The main reason behind it is the size of the industry.
Only 23 Indian banks had any overseas presence at the end of last fiscal. Also, none of the Indian banks
figure among even the top-50 banks globally in terms of either valuation or size, measured by equity and
reserves.
Mergers and Synergies: By marrying the banks by choice will lead to many synergies like cost reduction,
risk management capabilities, human resource development, diversification and enhancement of
shareholder value.
Cost cutting:
Many branches and ATMs of various banks are flocked in the same areas leading to enormous outlay on
premises, manpower and maintenance facilities.
According to Reserve Bank of India estimates, while there has been a perceptible improvement in the
relative productivity levels of India’s banking sector on various parameters such as operating expenses
ratio, the country still lags behind peers from Asia and the developed world.
For instance, in case of ratio of operating cost to assets, China (0.80 per cent), Malaysia (1.27 per cent)
and Korea (1.05 per cent) have much lower ratios as compared to the Indian position of 1.65 per cent.
The Indian banking sector’s net interest margin (NIM) at 2.70 per cent is also higher than that the
comparable ratio in many other countries.
To Enhance Risk Management:
Larger size improves the risk bearing capacity of a bank and strengthens its balance sheet. As per the
study by Hannan and Pilloff, 2006 the merger also helps the banks to reduce the bankruptcy risk if the
merger is carried over in a controlled manner.
Geographical Spread:
Banks can diversify the risk of concentrated lending through mergers. They can also have a greater
market access thereby widening the deposit base.
Alignment of technology:
The technology infrastructure, system platforms (Finnacle, Bank links etc), network architecture, database
vendors and IT-enabled synergies (customer service, payroll, back office operations, risk management,
etc). Most of the public sector banks are at similar technology platform and consolidation will not be
hindrance for them.
II.Shift to the Holding Company Model
Financial stability and soundness of the bank and risks associated with investments in subsidiaries should
be segregated and outlined for stakeholders to make an informed decision. The global financial crisis
clearly shows the pitfalls of over-leverage.
A holding company is a parent company that owns enough voting equity stock in a subsidiary to dictate
policy and make management decisions. This is generally done through influence of the company's
board of directors. This doesn't mean that the holding company owns all of the subsidiary's stock, or
even a majority of it. However, holding companies that control 80% or more of the subsidiary's voting
stock gain the benefits of tax consolidation, which include tax-free dividends for the parent company and
the ability to share operating losses.
Basel norms are a set of international banking regulations formulated by the Basel committee on bank
supervision, which set out the minimum capital requirements to sustain banks the world over. Under Basel
III accord, banks have to maintain Tier-one capital (equity and reserves) at 7 per cent of risk weighted
assets (RWA) and a capital conservation bugger of 2.5 per cent of RWA.
The recommendations allow the financial holding company (FHC) to list and raise capital both at FHC and
at the subsidiary level, which should provide sufficient flexibility at both levels to access long-term capital.
The working group comprised representation from large financial groups and regulators.
A separate new Act for regulation of financial holding companies would be enacted and the amendments
would also be simultaneously made to other statutes/Acts governing public sector banks, Companies Act
and others, wherever necessary. Alternatively, in order to avoid separate legislation for amending all
individual Acts, the provisions of the new Act for FHCs should have the effect of amending all the relevant
provisions of individual Acts and have over-riding powers over other Acts in case of any conflict. The new
FHC regulatory framework would also formalize a consolidated supervision mechanism through
memorandum of understanding between regulators.
The FHC should be well diversified and subject to strict ownership and governance norms. The ownership
restrictions could be applied either at the level of their FHCs or at the entity level, depending on whether
the promoters intend to maintain majority control in the subsidiaries wherever it is permissible as per
law.There should also be limits on cross-holding between FHCs on one hand and banks, NBFCs, and
other financial institutions outside the group on the other. Cross-holding among the entities within the
FHC group may be subjected to intra-group transactions and exposure norms.
Transition of PSBs can be effected either by the government shareholding being transferred to FHC that
will be listed while the banking subsidiary may be unlisted or by the government continuing to hold shares
directly in the bank while the holding of private shareholders are transferred to FHC. In the first case, the
government would have to support the capital requirements of the banking and the non-banking
subsidiaries while in the second case, it would support only the banking subsidiary.
However, in the second case, the objective of FHC would be diluted as it would not hold controlling stake
in the bank. The issues and options might take a while to be sorted out and for a clearer picture to
emerge. Given the swift developments in the financial sector, the report is prudent.
III. RBI Draft Guidelines on Capital and Provisioning Requirements for exposures to Corporate
having unchanged Foreign Currency exposure
The Reserve Bank of India will introduce incremental provisioning and capital requirements for bank
exposures to Corporate with unhedged foreign currency exposures. Corporates, which do not hedge their
foreign currency exposures, can incur significant losses due to exchange rate movements. These losses
may reduce their capacity to service the loans taken from the banking system and, thereby, affect the
health of the banking system.
For likely loss of 15-30 per cent, the incremental provisioning over and above the existing standard
provisioning will be 20 basis points; for loss of 30-50 per cent, it will be 40 bps; for loss of 50-75 per cent,
the provisioning will be 60 bps and above 75 per cent, it will be 80 bps.
There's no provisioning for loss up to 15 per cent. Besides, for a loss of 75 per cent and above, there's a
25 per cent increase in risk weight, Reserve Bank said in its draft guidelines.
The extent of unhedged foreign currency exposures of the Corporate continues to be significant and
increases the probability of default in an environment of high currency volatility. It has, therefore, been
decided to introduce incremental provisioning and capital requirements for bank exposures to
Corporates having unhedged foreign currency exposures. For calculating the incremental provisioning
and capital requirements, the following methodology may be followed:
a. Ascertain the amount of Unhedged Foreign Currency Exposure (UFCE): UFCE pertains to total
unhedged exposure of the Corporate and is not limited to unhedged portion of bank’s exposure
to the Corporate. Banks may obtain this information separately from the Corporate under certification by
statutory auditors on a quarterly basis. UFCE in currencies other than USD may be converted to USD at
market rates and total amount of UFCE may be computed in USD. For the purpose of UFCE, banks may
exclude natural hedge1 available to the Corporate. The amount UFCE will represent the portion of foreign
currency exposure which is not hedged using derivatives.
Estimate the extent of likely loss: The loss to the Corporate in case of movement in USD-INR exchange
rate may be calculated using the annualised volatilities. For this purpose, largest annual volatility seen in
the USD-INR rates during the period of last ten years may be taken as the movement of the USD-INR rate
in the adverse direction.
Estimate the riskiness of unhedged position: Once the loss figure is calculated, it may be compared with
the annual EBID as per the latest quarterly results certified by statutory auditors. This loss may be
computed as a percentage of EBID. Higher this percentage, higher will be the susceptibility of the
Corporate to adverse exchange rate movements. Therefore, as a prudential measure, all exposures to
these Corporates (whether in foreign currency or in INR) would attract incremental capital and provisioning
requirements (i.e., over and above the present requirements) as under:
Likely Loss/EBID (%) Incremental Provisioning Incremental Capital
Requirement on the total credit Requirement
exposures over and above extant
standard asset provisioning
Upto 15 per cent 0 0

More than 15 per cent and
upto 30 per cent 20bps 0


25 per cent increase in

More than 75 per cent4 80 bps the risk weight
Banks should calculate the incremental provisioning and capital requirements at least on a quarterly basis.
During periods of high USD-INR volatility, the calculations may be done at monthly intervals.
Banks can reduce their risk either by reducing the exposure to these borrowers or by encouraging these
borrowers to reduce their currency mismatches by hedging foreign currency
exposures. Banks should also assess their loan pricing policies to ensure that they adequately reflect
overall credit risks. Implementation of these requirements will be dependent on a robust MIS for getting
sufficient information and data on a regular basis from the Corporate customers. Further, banks should
also ensure that the risk of unhedged foreign currency exposure may be effectively built in their internal
credit rating system.
A few observations, on the draft, being:
Para RBI Guidelines Remarks
2 a. Unhedged Foreign Currency Exposure - For calculating natural hedge only
Banks may exclude natural hedge existing uncovered receivables are
available to the Corporate. considered whereas likely future exports are not
Foreign considered. This will be unfair for
currency exposure may be treated as the Corporate with likely net export
naturally hedged if the revenues.
Corporate is
having uncovered receivables to cover its
foreign currency
What will exposure
constitute as UFCE? For very long term Forex liability,
especially longer than 5 years, currency swap markets is
very illiquid with wide bid offers. Further, several FX
loans get pre-paid through internal sources, etc. Given
these FX Swap market dynamics many Corporate follow
dynamic hedging, 12mth. to 3 year rolling swaps.
Principal only swaps, coupon-only swaps, hedging
strategy, using FX optionsand Long-term
Forwards. These hedging techniques may
prove to be efficient to overcome
illiquidity in longer-tenor FX swaps.
For Forex loans taken by offshore Situations and cases will be specific, and
subsidiaries guaranteed by Indian parent will need to factor the probability of
Corporate? guarantees being invoked.
2b The extent of likely loss may In the year of extreme volatility in a ten year window; this
be calculated using the largest annualized may lead to overestimation.
USD-INR volatility over last 10 years.
2b The Volatilities are calculatedonly for Few of the Corporates have taken loans in other
USD-INR currencies which may be volatile than USD-INR
5 Banks may disclosetheir policies to
manage currency induced credit risk.
The draft also says banks can reduce their risk either by reducing the exposure to these borrowers or by
encouraging them to reduce their currency mismatches by hedging foreign currency exposures.
IV. Dynamic Provisioning Norms for Banks
The linkage between the financial system and the business cycle has been the subject of much
investigation. Recently, much concern has been expressed about the perceived excessive cyclicality of
banks lending which seems to exacerbate the business cycle.
This pattern is recognized to be more important for banks than for other sectors since banks provide
demand deposits (the largest part of the money supply) and credit supply. Furthermore, banks are used
by the central bank as its primary channel for transmitting monetary policy.
The procyclicality of bank lending behavior may create a number of potential problems, including
worsening the business cycle, increasing systemic risks and misallocating lending resources.
Consequently, all factors which amplify the cyclicality of lending may represent risks to both the
macroeconomy and the financial stability.
Provisioning rules and the capital requirement are interdependent. Indeed, the conceptual framework of
credit risk management supposes that expected losses have to be covered by loan loss provisions while
unexpected losses have to be covered by bank capital. However, bank capital and provisioning do not
affect bank lending through the same channel. The capital adequacy constraint explicitly links the
expansion of bank lending with bank capital. Provisioning rules operate through its effect on bank profit
since loan loss reserves are charged against earnings.
Hence, if the current credit risk is apparently low and underestimated, the bank’s incentive to grant new
loans is reinforced since lending costs are understated. Moreover, the bank can retain higher earnings to
expand its capital (and then its lending) since loan loss provisions are low. Conversely, if a bank is
excessively pessimistic and/or its capital requirement is binding, it can sharply reduce lending. Credit risk
management, i.e. management of loan loss provisions and bank capital, could therefore explain changes
in a bank’s lending behavior over the business cycle.
Under the changed scenario Dynamic Provisioning emerged as a tool to reduce such procyclicality in the
banks. The policy makers learned lessons of reducing pro-cyclicality in the banking system with the help
of dynamic provisioning from countries like Colombia, Peru, Spain and UK which have introduced dynamic
system of provisioning to guard their banking system against sharp increase in credit risk.
A brief sketch of current system of provisioning by Indian Banks

At present banks in India broadly make three types of provisioning, namely General Provisioning for
standard assets at the rate prescribed by RBI, Specific Provisioning for NPAs and Floating
Provisioning based on subjective judgment by the bank management for expected losses. The most
important provisioning made against loan losses is the Specific Provisioning (SP) which is being
made ex-post as per RBI guidelines.
Under the current accounting model for recognizing credit losses, provision is made for loan only on the
happening of an event that puts in doubt the recoverability of loan with interest in full. Further, provisions
are made for the losses recognized as of the balance sheet date. The method as per historic cost
accounting method is referred to as ‘Incurred loss model’. The present policy is found to have the following
drawbacks:
The rate of provision for standard assets is not based on any scientific analysis or credit loss history of
banks.
Not all banks do make floating provisions. Those banks that make it do at their own will and not based on
any predetermined rules.
The provisioning framework does not have any countercyclical or cycle smoothening elements.
RBI realized the above issues with the extant provisioning norms in Indian banking system and hence
issued a discussion paper on Dynamic Provisioning in line with Spanish model with suitable modifications.
Concepts and principles
Dynamic provisioning is a technique that allows banks to build up loan loss provisions when their profits
are growing to draw on these provisions during an economic downturn. There are several variants of
dynamic provisioning. However, the underlying principle behind dynamic provisioning is that provisions
should be set in line with estimates of long-run, or through-thecycle expected losses. This will help in
breaking pro-cyclicality and creating countercyclical provision buffers. Dynamic provisioning builds on this
and can be generally expressed as:
Dynamic provision = Expected loss provision – Specific provision, or
Dynamic provisions = Through-the-cycle loss ratio * Flow of new loans – Flow of specific
Provision, where specific provisions correspond to realized or incurred losses, or simply put:
Dynamic provisions = Expected loss provisions – Incurred loss provisions. -- (1)
A close look at the formula shows that during good times dynamic provisions are positive and add to loss
provisions as realized or incurred losses, that is, specific provisions are lower than their through-the-cycle
estimates. During bad times, the opposite takes place and negative dynamic provisions deplete the loss
provision buffer. Therefore, provisioning, instead of becoming pro-cyclical, becomes countercyclical.
Improvements in credit risk models have supported the concept of expected losses and unexpected
losses. From a conceptual point of view, loan loss provisions should cover expected losses while capital
provides an adequate buffer for unexpected losses. The internal rating based (IRB) model approach under
Basel II credit risk capital computation gave a fillip to the expected loss based provisioning and
unexpected loss based capitalization.
The provisioning framework suggested by RBI has two components are:
Specific provisions and Dynamic provisions.
While specific provisions would be as per the RBI guidelines on NPA provisioning, dynamic provisions
would be the difference between the long run “average expected loss” of the portfolio for one year and
specific provisions made during the year. Thus, this will ensure that every year the charge to profit and
loss account on account of specific provisions and dynamic provisions is maintained at a level of expected
losses.
Dynamic provisions are created only when the specific provisions are lesser than the expected losses.
The framework thus ensures that at any point of time, provisioning equivalent to expected losses should
be made. Thus, the objective of the dynamic provisioning framework is to smoothen the impact of incurred
losses on the profit and loss account through the cycle, and not to provide general provisioning cushion for
expected losses. That is the essence of Indian dynamic provision framework.
Impact of Dynamic Provisioning on Indian banks
It will help in earlier recognition of loan losses based on “expected losses” could have potentially reduced
the cyclical impacts of the recent crisis.
Dynamic provisions are created only when the specific provisions are lesser than the expected losses.
The framework thus ensures that at any point of time, provisioning equivalent to expected losses should
be made.
The objective of the dynamic provisioning framework is to smoothen the impact of incurred losses on the
profit and loss account through the cycle, and not to provide general provisioning cushion for expected
losses.
Loss given default (LGD) used in the calculation of expected loss is based on downturn LGD (instead of
normal LGD) as used in the internal ratings-based approach for credit risk (IRB) of Basel II which will give
more accurate provisions.
Dynamic or expected loan loss provisioning can contribute to financial stability by recognizing the losses
early in the cycle at the time of loan origination by building up buffers in good times that can be used in
bad times, thereby limiting the consequences during a downturn.
23. Leadership Issues in Indian Banking

Indian Banking is in grip of issues like superannuation of Experienced Staff, mass induction of new
employees, Financial Inclusion, deteriorating quality of Assets. There is thus a huge responsibility on, and
opportunity for, the Indian banking sector going ahead.
In a fast changing business landscape, Indian public sector banks have to rapidly build the necessary
capabilities to address the imminent business challenges. One of the most fundamental building blocks of
organisation capability is ‘leadership’.
Leaders in the banking industry have to recognize and meet the expectations of customers, shareholders,
analysts, regulators, government and society at large. In this scenario, it is critical for leaders of banks to
have a clear understanding of their vision, values and purpose along with the environmental imperatives
that confront their organizations.
A crisis of leadership in the global banking industry was glaringly evident in the recent financial crisis.
Many large institutions failed to transform the unfolding events into strategic opportunities.
In the aftermath of the crisis, Indian banks too are faced with unprecedented challenges. The economic
landscape has deteriorated, the regulatory frameworks are fast changing and there is immense pressure
from competing stakeholders to deliver on conflicting objectives.
Path to High ROI from technology
With today’s technology investments more focused on ROI, banks need to ensure that their investments in
technology pay off over a period of time. Technology is useless if it doesn’t bring competitive advantage
and value.
Since the 1990s, the banking sector in India has seen greater emphasis being placed on technology and
innovation. Banks began to use technology initially with a view to take care of their internal requirements
pertaining to book keeping, balancing and for transactions processing; the all-pervasive face of
Information Technology soon enabled banks to provide better quality of services at greater speed. Internet
banking and mobile banking have made it possible for customers to access banking services literally and
virtually from anywhere and anytime. The biggest barriers, time and distance, to access banking services
were crossed by leveraging technology. The sector has also moved rapidly towards universal banking and
electronic transactions, which changed the way banking is done, during the last decade or so.
Take the case of payment systems. Till 1990s, one could make payments in this country through two
predominant means - cash and cheque. Today, a tech-savvy customer is empowered to choose a
desired service from slew of products- card payments, NEFT transfer, RTGS transfer, ECS/NECS
payments, mobile payments etc. Further, after using any of these payment methods, the first instrument
he turns to is his mobile phone for confirmatory messages, a feature unique to India. What would you
imagine as the future scenario? Consider this: "the future of payments is the elimination of POS terminals
and checkout lines that require an associate in a store to scan and bag purchases item by item. The
most frictionless solution is not a smart phone but a collection of sensor networks that automatically
identify the buyer, scan the items to be purchased, and process payments without human intervention.
No lines, no taps, no swipes, no associates, no cash registers. Just wireless sensors and networks that
automatically process transactions, manage inventory, etc. Our grand kids won’t be carrying a wallet
even if it’s digital. Biometric factoring is not that far away. You’ve heard of fingerprinting and retina scans.
The distance between pupils is unique even between twins. You’ll be able to walk into a store that knows
how much you have available *if you’ve made that information available+, what you usually spend based
on which a personalised deal is offered. Your pre-set rules and the store’s pre-set rules will negotiate,
and the store will offer you a set of options. The impact of social commerce is also evident, so much so
that one could expect to get discounts and other rewards based on your influence on friends’ purchases"
.
To restate the future scenario more directly, in the next few years, there will be substantial challenges for
the banking industry. Customers will become increasingly individualistic and, at the same time, more
discerning in their relationships with banks.
Ubiquitous information and the power of social media inputs will result in customers comparing offerings
across the market; evaluating the service levels of different banks and also demanding transactions
increasingly on their own terms - a mimic of the corporate sector. This may well signal the sunset phase of
the hitherto traditional segmentation approaches and 'go-to market' techniques. There would be dramatic
changes in the levels of competition in the retail banking space with the predicted entry of non banks.
Banks, may have to look at opportunities particularly with respect to harnessing product, service and
process innovation to serve customers better, and to create a niche in an increasingly crowded market
place.
Assessing ROI on Technology
If IT is to rule our lives, how do we measure whether IT has delivered? IT has certainly enabled banks to
increase its business multiple times with less of man power. But is this sufficient? What has been the
customer experience? Do banks study the customer satisfaction levels after a new product is offered? Are
there tools or techniques available to measure the impact of IT?
The Total Cost -When the total cost – short- and long-term – is unclear, it can put a bank’s ROI at risk.
Evaluating the total cost of ownership includes both quantitative and qualitative attributes. Quantitative
costs include known hardware and software investments. Qualitative costs include increased support
center calls due to errors or restricted access, inability to support new services, costs for upgrades. Those
costs then need to be measured against quantitative savings (e.g., lower staff, equipment, maintenance,
programming costs) and qualitative benefits that permanently accrue as a savings to the bank. This
includes scalability to support growth, full access to data, enhanced efficiencies across channels,
reductions in staff and competitive capabilities, such as the ability to create unique products "on the fly" for
a specific customer or as a quick response to current business trends.
Hidden Costs -Sometimes banks fail to consider potential hidden costs. For example, consider hardware
requirements in other areas of the bank like the back office or the teller line, and determine if the vendor
requires hardware upgrades or fees for future software upgrades. Ask the vendor to provide a baseline
minimum for its software up front and to be clear about upgrade requirements. Banks should also question
vendors about costs that may not be in their proposal and contracts. For example, charges for the right of
entry to certain data or for system inquiries can lead to unexpected per-use fees or custom programming.
Its best if every field of data is immediately, freely available. Ask for clear itemizations of all costs
(including one-time, monthly and per-use fees), and quotes for custom services. If the vendor has
provided everything up front, initial billings should closely match their proposal.
Path to High ROI from technology
Though IT is increasingly becoming an invaluable and powerful tool in driving development, supporting
growth, promoting innovation, and enhancing competitiveness in the banking context in India, there are
several potential areas where technology can deliver better.
Financial Inclusion: Technology plays a major role in financial inclusion, a sustainable banking theme very
relevant to a country like India that has a large unbanked population. For example, handheld devices,
used by bank agents to draw people living in remote areas into the banking fold, run on technology.
Internet and mobile technologies are trying to reach out to the population starved of banking services as
well. Financial institutions are also joining forces with network operators in providing access to mobile
based payment services even to those who do not have bank accounts. These product and channel
innovations require robust and scalable ICT platforms.
Innovation: Today, banking is becoming increasingly complex and banks which fail to use technology to
take their services to the common man and tap the potential of the rural sector will stand to lose.
Ultimately, technology would be the key enabler and differentiator in accomplishing this objective. When
we look at technology, the scope for innovation is immense – in the field of financial inclusion itself, right
from biometric based systems to mobile based to simple Interactive Voice Response based applications.
But it cannot be a one-size-fits-all approach. This however, does not reduce the importance of
standardisation and interoperability which would result in higher efficiency and more choices. Further,
many initiatives using technology would be impossible to pursue without the active participation and
support of several stakeholders. Thus the need of the hour is collaborative innovation.
Data Integrity: The policy and decision-making processes are becoming more information intensive,
therefore, it is imperative to ensure quality of data and its timely submission by banks not only to the
regulator but to the banks’ managements as well. This area requires more attention, given that data
quality may have an impact on the reputation of banks besides posing other risks. You would appreciate
that accurate data is a sine-qua non for improving the quality of MIS and an effective Decision Support
System (DSS). By adopting an automated process for submission of returns, the banks would be able to
submit accurate and timely data without any manual intervention to the regulator. Inter alia, this process
would also assist the banks in terms of improved timelines, enhanced data quality, improved efficiency of
processes.
Cost of Transactions: Technology has been helping in delivering affordable financial services with greater
efficiency without compromising on levels of safety, security and reliability. Perhaps the most significant
contribution of technology has been in attempting to bring down the cost of financial services by using
economies of scale.
Technology has also been used in removing geographical barriers and reaching out to the unbanked - the
poor are unreached but not unreachable. The use of electronic payment modes to disburse the
governments social benefit transfers illustrates this point. Technology should be used in such a manner
that you have a diversified product range to bridge the supply gap at the same time keeping in view the
customers convenience in mind.
Channel Security: To compete successfully in today’s tough market place, financial institutions need to
retain the trust of their customers –a trust which relies not only on their capacity to deliver good value
services, but also on their ability to protect people, assets, premises and the highly sensitive data they
hold. There is always an element of hidden fear as far as IT based operations are concerned, the fear of
the unknown. Banks need to ensure that the best of controls and security measures are in place.
Customer education is the key to customer trust.
IT and Business alignment: Alignment can be described as the timely and appropriate application of IT
in harmony with business objectives, strategies and requirements. Alignment occurs when the
respective strategies are interwoven in such a way that the right things are done to deliver greater value
to the organisation. After all, a successful alignment is a two way relationship, a give and take between
IT and business. Though IT has the capability to reduce costs, standardise processes, the benefits of
successful IT-business alignment are beyond these i.e. increased efficiency of implementation &
integration, reduced cycle time, increased enterprise agility and the ultimate benefit of improving the
bottom line. Until recently IT played a docile role in business planning. It is now time for banks to move
over from being merely an implementation tool to shaping business strategy. The principal difficulty is
that there are few instances of business oriented IT strategies as most are focussed on technology
products of one shape or another. This makes it all the more challenging to align the IT and business
strategies.
Combating Cyber Crime: In a networked world, there are no real safe harbours—like a ship which can be
attacked by pirates anywhere, a service delivery offering on the network is generally available to everyone
else on the network; in some cases this may well be the gateway for entry to the bank’s main systems as
well. Cyber security is a collective concern that is comprehensive in scope—the Internet has no national
boundaries. Whereas security is typically regulated at the government level, cyber security is national,
international, public and private in character- all in the same context. Today, there are Government
initiatives aimed at enhancing cyber security which is complemented by cyber risk management and
security provided by private entities that manage and operate most ICT infrastructure. Such security
cannot be adequately assured by market forces or regulation; rather, it requires a novel mix of solutions
involving a range of stakeholders working both in their own domains and in concert. No single strategy, set
of governance arrangements, or operational practices
will be right for every country. Cyber security issues now top the list of risks to watch. While such
importance is ascribed for cyber security in general, banks, as prime targets of financial fraud and crime,
need to be extra vigilant as far as cyber security is concerned and this needs to be ingrained in each and
every offering made available using IT.
Governance in IT: Is IT governance all about IT? A consistent IT Governance policy provides institutions
with tools which ensure that IT investment drives business to meet its goals. IT Governance depends
strongly on corporate governance and the overall corporate strategy, which means that IT strategy and
IT processes should be in consonance with business goals. In other words, it means that IT Governance
provides tools to manage IT structures and processes in order to appropriately support business
strategy. Implementing IT Governance in banks can be very challenging. For addressing the structural
inadequacies in the areas of IT governance -information, data, information security- there is an
imperative need to have synergy among these areas. Adoption of a structured IT Governance
framework would enable banks to manage their businesses in a manner that would bring about benefits
to their customers as also facilitate the growth of banks in this fiercely competitive world. Banks’
investments in IT are most fruitful when they match technology strategy with business strategy,
implement systems in a disciplined way, and balance value creation with increased IT capabilities.
Human capital - development of knowledge and talent marketplace-Though the face of banking industry
has undergone a sea change in the years that have gone by, you would agree with one characteristic of
the industry that has remained unchanged is people. The banks succeed or fail depending on the quality
of their workforce talent at every level—the front lines, middle management and executive leadership.
Banks should look at workforce talent as the primary engine for sustained, competitive advantage and for
creating a workforce in which people at every level are capable of contributing with high levels of
performance leveraging on technology. It's about creating a IT culture of excellence. It is the HR teams
that will give banks the competitive advantage in the years to come.
Analytics - to drive up customer confidence-The power of predictive analytics is undisputable. It has made
deep inroads into several industries and is now doing the same in banking. So, what's new? Haven't banks
- the producers and consumers of more data than most other industries, been mining it since ages? Yes,
but data mining and analytics aren't the same thing. To cut a long story short, the latest analytics solutions
have the ability to process petabytes of data into predictive insights, in near real time. This means that in
theory, banks can derive key insights into the outcome of an action, even as they execute it. In practical
terms, this could mean the difference between stopping fraud in mid-transaction or raising the alarm after
the deed is done. Now banks should be looking at leveraging predictive analytics to acquire and retain
customers,manage campaigns and improve cross sales. They also have the opportunity to refine
customer understanding to a different level, with the help of analytics, which would improve customer
centricity.
Go Cloud but with caution-he rapid emergence of cloud computing is transforming the way financial
institutions think about how they consume their IT resources. The Cloud is here to stay. We all know it but
are worried whether or not to acknowledge it. This is because we are worried about the security and data
integrity in the Cloud. Cloud computing, which in the most basic of terms, offers unlimited computing
resource as a service on a pay-per-use basis, is proven to directly translate to less upfront capital expense
and reduced IT overheads, offering a cost-effective, simple alternative to accessing enterprise-level IT
without the associated costs. But world over, financial sector is treading with caution in adopting this
technology. Indian financial sector needs to be conscious of this reality, at least until such time, the
industry evolves Indian standards for cloud computing.
Manage Mobile-The mobile revolution has created a sort of new world order. It has the potential to change
the way banks do business. It is up to the banks to take cue. While banks are embracing the mobile
channel -- and continuing to support the old standby of online banking -- they are not integrating the
technologies used to build e-banking solutions. Also as more people conduct their banking on mobile
devices, these devices also will become the growing focus of hackers and fraudsters, who are always on
the hunt for ripe targets. Banks can work on two areas within the mobile channel7: fraud prevention and
marketing to customers. In fact, world over mobile banking already is playing a role in reducing fraud in a
variety of ways -- ranging from simple transaction and security alerts to mobile authentication for bank
transfers.
The evolution of alternate banking channels, such as ATMs, Internet Banking, Mobile Banking, Contact
Centers POS, kiosks, and social media has created new challenges in effectively managing the multiple
channel along with managing customer preferences and expectations
This requires an effective multi channel Strategy that is geared towards “Customer Centricity” and Lifetime
Customer Experience Management –beyond what a traditional channel strategy delivers.
An effective multi-channel strategy for banks needs to address the customer servicing mechanism as well
as achieve an assured ROI.
The Cohesive Multi-channel Framework can enable banks to achieve:
Up to 20% Improvement in ROI on Channel investments
Up to 25% Reduction in Channel on-boarding time and Time-to-market
20 - 25% Increase in leads Improvement in conversion ratio
Up to 10% Increase in revenues via multi-channel platform
Challenges in Channel Management
Changing customer preferences
Aging technology in banks
Emerging channels
Channel profitability
New channel adoption and time-to-market
Right balance between self-service and traditional Channels
The key to a successful channel strategy is to achieve an apt balance between business and customer
needs. Banks need to assess the key factors in creating the right channel mix that can provide a
convenient, consistent and personalized banking experience seamlessly across all channels.
A cohesive multi-channel system should integrate with the banking platform to address all components of
the entire lifecycle of customer experience management.
Banks should provide a consistent experience across all channels and an ability to seamlessly move
between channels within a customer case/interaction – an ability which is possible only if channels are
connected to deliver collaboration. This collaboration is important for monetizing customer and channel
interactions to further enhance ROI.
The Right Mix-A successful multi-channel strategy needs to consider the following to formulate the right
mix: Customer demographics/segments and customer preferences
Simple vs. complex transactions, and correspondingly putting them into appropriate channels (which is
profitable to banks as well as convenient to customers)
Traditional channels vs. self-service channels
Demographics and Customer Preferences -Demographic trends play a key role in a bank’s multi-channel
strategy. An increase in younger generation customer segments is having a significant impact on the
bank’s channel strategy and is providing an opportunity for revenue growth. Banks have realized that
younger customers need more help in managing finances. They need advice about how to manage their
day-to-day finances, funding for education and important events, getting out of debt and saving for the
future. Gen X and Gen Y customers are more familiar with mobile technology, smart phones and social
networking and expect their banks to address their financial needs through these devices. As a result,
banks need to evaluate and consider providing the right service and channel propositions for each
customer segment. Simple vs. Complex Transactions -Up to 40 percent of branch transactions are simple
in nature; these transactions consume branch bandwidth and prevent branches from focusing on more
profitable, high margin transactions/customer interactions. While complex transactions like mortgages and
investments can be retained at the branch, banks need to shift simple transactions to their self-service and
remote channels which can help improve channel efficiency and bring down cost per transaction. Banks
need to undertake analysis of their existing customer transactions to get better insight and promote these
transactions to appropriate channels (self-service/ remote channels).The idea is to get the right
transactions into the right channels rather than the customers themselves.
Traditional Channels Vs Technology Channels- The branch will continue to act as the core channel for
managing customer relationships.
Few pointers for doing an ‘agility check’ of the existing channel system:
Can the bank seamlessly on-board a new channel(time–to–aboard)?
Does the bank have the right (agile) technology backbone to embrace and support emerging channels
and drive growth in near future?
Does the underlying channel technology allow for rapid channel deployment and go-to-market?
Collaborative technology environment is one of the key success factors for banks to monetize their
channel system. Banks should create a culture and system for an enterprisewide collaborative platform,
which will enable cross-channel interactions by sharing leads and customer insights, create a knowledge
base to reduce the learning curve and deliver consistent service. The primary focus should be to reach
and serve the customer via multiple channels within the same customer service lifecycle based on their
preferences at the time of interaction. A collaborative channel system will drive more cross-sell and up-sell
activities, thereby driving more sales revenue. The end goal should be to provide superior and consistent
service, irrespective of the channel. A well-developed multi-channel offering can provide improved brand
promise and loyalty.
Integrated CRM -To be able to generate leads from several departments within a bank, an integrated
CRM system becomes essential for making your channels profitable. More qualified leads translate to
more sales activity and revenue. An integrated sales, marketing and customer service environment
provides a competitive edge for banks to effectively reach and serve its customers.
A ‘Connected’ and ‘Collaborative’ multi-channel platform, enabled by integrated CRM and big data
analytics will provide banks with the much needed competitive advantage and gear them towards
profitability. Fundamentally, banks needs to articulate a clear vision, build enabling culture, monitor
execution if they are to make meaningful progress in building a truly integrated and collaborative multi-
channel delivery and customer service network.
Whether it’s helping to better understand customer profitability, deliver products in innovative ways or
manage the spiralling data requirements as a result of new regulation, technology is emerging as both a
key enabler and differentiator. As the role of technology evolves more into mainstream banking, banks will
need to think about technology expenditure in a different way. Instead of being a cost to manage down, it
should be seen more as an investment to support growth and new business development, only to stay
ahead of the curve in the competitive world. Ultimately, the proof of technology adoption is in the
improvement of services to customers – across all economic, social and geographical sectors.
Recently Ficci-KPMG carried out study covering the aggregate data of 1,375 leaders across industries.
KPMG and CII tried to create the leadership profile of Indian public sector banks in terms of six
competencies on a five point progressive leadership scale.
Cultivating leadership competencies around stakeholders, customers, operations, talent, change and
strategy are essential for PSUs to address their key business priorities, says the Ficci-KPMG research on
PSUs with a focus on banking, profiles the leadership landscape across top executives.
The findings suggest that the leaders in the public sector including banks demonstrate most of the
leadership competencies between Level-2 (Seasoned) and Level-3 (Advanced).
In addition to the above, it was also observed that the leaders currently are not able to demonstrate some
critical behaviour traits which may significantly risk the chances of the public sector banks to deliver on
key business imperatives.
How to Enhance Leadership

In the short-term, organisations can focus on enhancing leadership competencies through providing
relevant trainings, suggesting and providing relevant books/ journals, assigning short-term assignments,
etc.
In the long-term, organisations can use interventions like job change/ rotation, special/ extended current
assignments, coaching, mentoring, university and professional learning programmess, etc.
The Critical Factor
According to Nishchae Suri, Partner & Head of People and Change Practice, KPMG in India,
“Organisation capabilities serve as the DNA for stakeholder value creation. Leadership competencies are
a key ingredient of organisational capability and are essential in driving success through processes,
technology, structure and the workforce."
Attracting, hiring, developing and retaining the best available talent and nurturing them to become the
future leaders is a critical factor, which will pave the way for the Indian banking industry to achieve a world
class level. Existing ways of leadership development in our PSUs need to be aligned and strengthened. A
dynamic business environment and competition from the private sector demands that PSU banks adopt
cutting edge learning interventions. Such
game changing initiatives will structurally support PSU banks develop a leadership pipeline competent to
meet their short term and long term needs.
Increasingly public sector banks are becoming sensitive to changing customer needs and improved ways
of satisfying these needs. This could require significant investment in R&D and innovation. Also with cost
optimization emerging as a new theme in the current hyper competitive market scenario, public sector
banks need to adapt their existing operating models and cost structures.
Many public sector banks traditionally operated in a protected business environment. However, post
issuance of new licenses, not many banks enjoy such benefits. Thus, there is a need to make internal
work culture of organisations as dynamic and performance oriented as the external business environment.
The study discovered that the average of all the leadership competencies is between intermediate and
seasoned levels in PSU banks. All the competencies, except stakeholder leadership, are between
intermediate and seasoned levels. Even though the public sector leaders demonstrate relatively high
levels of stakeholder leadership; the same may not be enough, given the exceptionally high number of
stakeholders they need to manage.
24. Leveraging Technology for Business Development in Bank
1 Enhancing Enterprise Knowledge: IT plays an important role in enhancing enterprise knowledge

through improved channels and contents - two important ingredients of knowledge organization, another
being culture.
Channels, Contents and Culture
The first channel is the public website. The second channel is the Data warehouse which stores the data
relating to various sectors of the economy, equipped with powerful search tools and business analytics
facilitating ease of use. This also provides the non-confidential data for the benefit of the general public,
which includes researchers, analysts, banks and others in the form of Data Base on Indian Economy
(DBIE). The third channel is the Enterprise Knowledge Portal (EKP) for knowledge diffusion. The portal
houses the internal circulars, references, and useful developments pertaining to various functional areas.
Data Quality and Data Standards.
It is pertinent that uniform data reporting standards are put in place. Use of uniform reporting standards for
data collection process will effectively reduce the reporting burden, ease validation, and improve overall
efficiency. To ensure smooth flow of quality data in a timely manner to the users, it is essential that:
Uniform data reporting standards are developed
Data flow is automated from the source systems of banks to their MIS server
Data is submitted to the Reserve Bank in an automated manner without any manual intervention.
Effective MIS for Decision Support System (DSS)
The process of collection of data from the source systems to be totally automated with the help of
appropriate Extract, Transform and Load (ETL) tools. Over a period of time, it should be possible to move
towards near real time aggregate information.
By using Business Intelligence (BI) tools, the internal users at various levels to be provided interfaces for
extracting key information and doing further analysis on the information.
For tracking trends and identifying outliers, appropriate dashboards to be built and made available on
desktops.
2 IT as a Strategic Resource: Technology is moving at a very fast pace and adoption cycles are short.
Therefore, it is becoming difficult to keep pace with the rate of advancement. Quick adoption of
developments in the field of IT is a challenge and a key component is the role which human capital will
play in this regard. The steps to be taken in this direction are given below:
Creation of Dedicated Pool of Human Resources
There is an urgent need to train people across several levels to bridge the gap between the technological
skill-sets required and skilled manpower available. There is also a need to ensure continuity for human
capital by creating a dedicated pool of trained IT professionals with suitable aptitude. Towards this, a
roster of dedicated resources in the following areas may be prepared:
Infrastructure management
IT project management
Process engineering
Data / information management
Data warehousing and data mining
Business continuity
Information security management
Business Intelligence and analytics
The following steps are required for creation and maintenance of such a dedicated pool of resources:
Identifying potential employees with relevant IT competencies
Providing appropriate training on a continuous basis
Monitoring performance and re-orienting to specific tasks
Preparing career paths and succession plans
Sharing the common pool across the Bank
Evolution of Centre of Excellence (CoE)
To overcome the issues related to rapid technology obsolescence as also scarcity of technical skill sets, it
is desirable to develop a Centre of Excellence (CoE) which would become a strategic resource for the
banking sector. In this regard, IDRBT is assuming a greater role in evolving as a Centre of Excellence and
to function as a laboratory for all research and development activity in the banking sector and for
achieving, inter-alia, the following objectives:
Impact analysis of IT deployment vis-à-vis operations and processes
Benchmarking IT solutions
Disaster management and contingency planning design
Specific business problems where IT deployment is considered
Be a research hub and learning centre for all banking-centric solutions
Be a nodal centre for design and development of standards for IT applications, services, governance and
products relevant to banking industry
Support innovation in developing IT ecosystems
3 Integrated IT Environment
Implementation of IT based systems has quite often followed an islandic approach, whereby individual
systems have been implemented to take care of a particular requirement or a felt need. The trend to
migrate towards holistic systems is of recent origin. Such a move has distinct advantages from efficiency
and management perspectives as well. It is, thus, of paramount importance to migrate towards the
implementation of holistic systems by ensuring that the synergistic effects of integration are tapped for use
in the IT environment as delineated below.
Enterprise Architecture
The buzz word in the current IT environment is enterprise architecture which refers to achieving
flexibility in designing systems and integrating legacy systems. It refers to an enterprise-wide, integrated
set of components that incorporate strategic business thinking, and the technical infrastructure that
promotes information sharing across the organization. In order to derive more benefits from the existing
systems, Bank should move towards deploying enterprise architecture to drive business adaptability,
improve focus on organisational goals, reduce complexity of existing IT systems, improve agility of new
IT systems and ensure a closer alignment between IT deliverables and business requirements.
Adoption of new systems is done keeping in view the enterprise wide paradigm to ensure consistent
enterprise wide architecture.
It is necessary to keep track of technology changes and to develop response processes. The process for
infrastructure management should also support innovation and include maintenance of IT ecosystems.
Adoption of new cutting edge technologies should remain a primary focus while acting as an enabler to
business objectives. New technologies and concepts may be explored to ascertain if they add substantial
business benefits.
Business Process Re-engineering (BPR)
BPR is integral to leverage manpower and technology for increasing efficiency. By adopting a systematic
approach to designing, prioritising, managing, controlling and monitoring business processes, competitive
performance standards and operational excellence can be achieved. BPR should go hand-in-hand with
adoption of technological solutions. It should herald the implementation of radical changes in business
process to achieve breakthrough results. Technology is to be used for improving the existing processes
and procedures, speeding up the service delivery and improving the control mechanism. New business
processes are to be built using Information Technology.
4 IT in Financial Sector
The Reserve Bank has successfully navigated the financial sector to safe shores based on information
availability and judgement. Technology infrastructure played a key role in enabling timely availability and
access to vital information in the fast evolving macro space. The Reserve Bank has also guided the
banking system (mostly PSU banks) in adoption of technology. In the first phase, banks computerised
their labour intensive back office operations to reduce costs and improve housekeeping. In the second
phase, banks focussed on enhancing customer convenience to gain competitive advantage. In the third
phase, which is presently in progress, banks have implemented Core Banking Solutions (CBS) combining
both front office and back office. This phase marked a paradigm shift in more senses than one and branch
customers are now bank customers as they can access their accounts from any branch for defined
purposes. CBS offered new opportunities for information management, for better customer service and
improved risk management.
However, one of the shortcomings that has been observed is a disconnect between the Information (I) and
Technology (T). Owing to this, banks have not been able to reap the benefits of the technology revolution
in terms of cost reduction of small value transactions, improved customer services and effective flow of
information within the banks and to the regulator. Although banks have deployed technology for
transaction processing, the same has not been explored extensively for analytical processing.
Extensive use of technology has brought about upgrades in general banking environment for all
stakeholders. The Reserve Bank has played a role of a catalyst in this path and has been providing
guidelines with due focus on security, safety, assurance and business continuity. In this background, the
role of IT in banking sector needs to be revisited with focus on the following:
Introducing technologies that balance 3 Cs – Cost, Control and Customer Service
Implementing data warehouse and business intelligence that meets all internal MIS requirements as well
as the information needs of the regulator
Adoption of technology-based strategies for financial inclusion
Usage of analytics for improvement of Customer Relationship Management (CRM), risk management and
fraud detection / prevention
IT based solutions entail operational risks, for which banks have to put in place appropriate control
mechanisms and mitigation techniques. As solutions become more technology dependent, business
continuity plans and DR drills assume greater importance. With financial stability as an important target,
the Reserve Bank assigns importance to mitigate IT related risks in the banking sector.
5 Augment Green Credentials
Leveraging on the benefits of lower-power, more energy-efficient devices and architecture can lead to
tangible savings in energy costs and help to lend build "green" credentials to IT. Shifting to more efficient
products and practices can allow for more equipment to fit within an energy footprint, or to fit into a
previously filled centre. IT can enable many green initiatives. Converting to online and mobile banking
helps the environment. To manage carbon footprints and achieve the objective of becoming environmental
friendly, it is important to implement Workflow Management Systems (WMS) using the concept of 'less
paper office'.
25. Main recommendations in the IT Vision document 2011-17

Focus for RBI
Transforming itself into an information intensive knowledge organisation
Harnessing human resource potential, migration to enterprise architecture for IT systems
Adopting appropriate business process re-engineering
Conforming to internationally accepted standards and usage of business intelligence from data warehouse
for optimal Management Information Systems (MIS) with effective Decision Support Systems (DSS)
Improving IT governance, effective project management, evolving well defined information policies as well
as information security frameworks, better vendor management and outsourcing practices
Reviewing of IT processes for better alignment between business objectives and IT.
Focus for Banks
The Vision Document sets priorities for commercial banks to move forward from their core banking
solutions to enhanced use of IT in areas like MIS, regulatory reporting, overall risk management, financial
inclusion and customer relationship management. It also dwells on possible operational risks arising out of
adopting technology in the banking sector which could affect financial stability and emphasises the need
for internal controls, risk mitigation systems, fraud detection / prevention and business continuity plans.
Although banks have deployed technology for transaction processing, analytical processing by banks is
still in a nascent stage. The Report urges banks to work towards reaping benefits of technology in terms of
cost reduction of small value transactions, improved customer services and effective flow of information
within the banks and to the regulator.
26. Guidelines for Licensing of Small Finance Banks in the Private Sector
The Reserve Bank of India released the Guidelines for Licensing of Small Finance Banks in the Private
Sector.Key features of the Small Finance Bank guidelines are:
i) Objectives:
The objectives of setting up of small finance banks will be to further financial inclusion by (a) provision of
savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and
small industries; and other unorganised sector entities, through high technology-low cost operations.
ii) Eligible promoters: Resident individuals/professionals with 10 years of experience in banking and
finance; and companies and societies owned and controlled by residents will be eligible to set up small
finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and
Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small
finance banks. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of
professional experience or of running their businesses for at least a period of five years in order to be
eligible to promote small finance banks.
iii) Scope of activities :
The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and
lending to unserved and underserved sections including small business units, small and marginal farmers,
micro and small industries and unorganised sector entities.
There will not be any restriction in the area of operations of small finance banks.
iv) Capital requirement: The minimum paid-up equity capital for small finance banks shall be Rs. 100
crore.
v) Promoter's contribution: The promoter's minimum initial contribution to the paid-up equity capital of
such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12
years from the date of commencement of business of the bank.
vi) Foreign shareholding: The foreign shareholding in the small finance bank would be as per the
Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
vii) Prudential norms :
The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to
existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory
provisions.
The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to
the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.
viii) Transition path: If the small finance bank aspires to transit into a universal bank, such transition will
not be automatic, but would be subject to fulfilling minimum paid-up capital / net worth requirement as
applicable to universal banks; its satisfactory track record of performance as a small finance bank and the
outcome of the Reserve Bank’s due diligence exercise.
ix) Procedure for application: In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949,
applications shall be submitted in the prescribed form (Form III) to the Chief General Manager,
Department of Banking Regulation, Reserve Bank of India,the 13 should furnish the business plan and
other requisite information as indicated. Applications will be accepted till the close of business as on
January 16, 2015. After experience gained in dealing with small finance banks, applications will be
received on a continuous basis. However, these guidelines are subject to periodic review and revision.
x) Procedure for RBI decisions :
An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered
accountants, finance professionals, etc., will evaluate the applications.
The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank.
The Reserve Bank’s decision in this regard will be final.
The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.
The names of applicants for bank licences will be placed on the Reserve Bank’s website.
Floor, Central Office Building, Mumbai – 400 001. In addition, the applicants
Background
It may be recalled that in the Union Budget 2014-2015 presented on July 10, 2014, the Hon’ble Finance
Minister announced that:
“After making suitable changes to current framework, a structure will be put in place for continuous
authorization of universal banks in the private sector in the current financial year. RBI will create a
framework for licensing small banks and other differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of
small businesses, unorganized sector, low income households, farmers and migrant work force”.
Accordingly, the draft guidelines for licensing of small banks in the private sector were formulated and
released for public comments by RBI on July 17, 2014.
27. RBI Guidelines for Licensing of Payments Banks
The Reserve Bank of India (RBI) released the Guidelines for Licensing of Payments Banks. Key features
of the Payments Banks guidelines are:
Objectives:
The objectives of setting up of payments banks will be to further financial inclusion
by providing (i) small savings accounts and (ii) payments/remittance services to
migrant labour workforce, low income households, small businesses, other unorganised sector entities
and other users.
Eligible promoters :
Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals /
professionals; Non-Banking Finance
Companies (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-
market chains, companies, real sector cooperatives; that are owned and controlled by residents; and
public sector entities may apply to set up payments banks.
A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up
a payments bank. However, scheduled commercial bank can take equity stake in a payments bank to the
extent permitted under Section 19 (2) of the Banking Regulation
Act, 1949.
Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience
or running their businesses for at least a period of five years in order to be eligible to promote payments
banks.
Scope of activities :
 Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum
balance of Rs. 100,000 per individual customer.
 Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.  Payments and
remittance services through various channels.
 BC of another bank, subject to the Reserve Bank guidelines on BCs.
 Distribution of non-risk sharing simple financial products like mutual fund units and insurance products,
etc.
Deployment of funds :
The payments bank cannot undertake lending activities.
Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside
demand and time liabilities, it will be 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 :
The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.
The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities
should not exceed 33.33 times its net worth (paid-up capital and reserves).
Promoter's contribution: The promoter's minimum initial contribution to the paid-up equity capital of such
payments bank shall at least be 40 per cent for the first five years from the commencement of its
business.
Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign
Direct Investment (FDI) policy for private sector banks as amended from time to time.
Other conditions :
The operations of the bank should be fully networked and technology driven from the beginning,
conforming to generally accepted standards and norms.
The bank should have a high powered Customer Grievances Cell to handle customer complaints.
Procedure for application: In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949,
applications shall be submitted in the prescribed form (Form III) to the Chief General Manager,
Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai –
400 001. In addition, the applicants should furnish the business plan and other requisite information as
indicated. Applications will be accepted till the close of business as on January 16, 2015. After experience
gained in dealing with payments banks, applications will be received on a continuous basis. However,
these guidelines are subject to periodic review and revision.
Procedure for RBI decisions:
An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered
accountants, finance professionals, etc., will evaluate the applications.
i The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank.
The Reserve Bank’s decision in this regard will be final The validity of the in-principle approval issued by
the Reserve Bank will be eighteen months.
ii The names of applicants for bank licences will be placed on the Reserve Bank website.
Background
It may be recalled that in the Union Budget 2014-2015 presented on July 10, 2014, the Hon’ble Finance
Minister announced that:
“After making suitable changes to current framework, a structure will be put in place for continuous
authorization of universal banks in the private sector in the current financial year. RBI will create a
framework for licensing small banks and other differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of
small businesses, unorganized sector, low income households, farmers and migrant work force”.
Accordingly, the Reserve Bank formulated and released for public comments draft guidelines for licensing
of payments banks in the private sector on July 17, 2014.
28. RBI - Framework for dealing with Domestic Systemically Important Banks (D-SIBs)
The Reserve Bank of India released on its website, the Framework for dealing with Domestic Systemically
Important Banks (D-SIBs).
During the recent global financial crisis, it was observed that problems faced by certain large and highly
interconnected financial institutions hampered the orderly functioning of the financial system, which in turn,
negatively impacted the real economy. Government intervention was considered necessary in many
jurisdictions to ensure financial stability. Cost of public sector intervention and consequential increase in
moral hazard require that future regulatory policies should aim at reducing the probability of failure of
Systemically Important Banks (SIBs) and the impact of the failure of these banks.
In October 2010, the Financial Stability Board (FSB) recommended that all member countries needed to
have in place a framework to reduce risks attributable to Systemically Important Financial Institutions
(SIFIs) in their jurisdictions. The Basel Committee on Banking Supervision (BCBS) came out with a
framework in November 2011 for identifying the Global Systemically Important Banks (G-SIBs) and the
magnitude of additional loss absorbency capital requirements applicable to these GSIBs. The BCBS
further required all member countries to have a regulatory framework to deal with Domestic Systemically
Important Banks (D-SIBs).
The Framework released today discusses the methodology to be adopted by RBI for identifying the D-
SIBs and additional regulatory / supervisory policies which D-SIBs would be subjected to. The assessment
methodology adopted by RBI is primarily based on the BCBS methodology for identifying the G-SIBs with
suitable modifications to capture domestic importance of a bank. The indicators which would be used for
assessment are: size, interconnectedness, substitutability and complexity. Based on the sample of banks
chosen for computation of their systemic importance, a relative composite systemic importance score of
the banks will be computed. RBI will determine a cut-off score beyond which banks will be considered as
D-SIBs. Based on their systemic importance scores in ascending order, banks will be plotted into four
different buckets and will be required to have additional Common
Equity Tier 1 capital requirement ranging from 0.20% to 0.80% of risk weighted assets, depending upon
the bucket they are plotted into. Based on the data as on March 31, 2013, it is expected that about 4 to 6
banks may be designated as D-SIBs under various buckets. D-SIBs will also be subjected to differentiated
supervisory requirements and higher intensity of supervision based on the risks they pose to the financial
system. The computation of systemic importance scores will be carried out at yearly intervals. The names
of the banks classified as D-SIBs will be disclosed in the month of August every year starting from 2015.
Background
The draft framework for dealing with D-SIBs was placed on the Reserve Bank’s website on December
2, 2013 for views and comments. While finalising the framework for dealing with D-SIBs, views and
comments received on the draft framework have been taken into account. It was announced in the
First Bi-monthly Monetary Policy Statement issued on April 1, 2014 that based on the
comments/feedback received on the draft framework for dealing with D-SIBs, the final framework will
be issued by end-May 2014.
29. RBI - Report of the Committee on Capacity Building in Banks and non-Banks
The Reserve Bank of India released, the Report of the Committee on Capacity Building in banks and non-
banks [Chairman: Shri G Gopalakrishna, former Executive Director, Reserve Bank of India and currently
Director, Centre for Advanced Financial Research and Learning (CAFRAL)].
The above Committee was constituted by the Reserve Bank with the objective of implementing non-
legislative recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) relating to
capacity building in banks and non-banks, streamlining training intervention and suggesting changes
thereto in view of ever increasing challenges in banking and non-banking sectors. The objectives also
included evolving an appropriate certification mechanism in the realm of training, where feasible,
examining possible incentives for undertaking such certification and covering all stages of hierarchy-from
the lowest rung to the Board level executives.
The ambit of the Committee’s report is essentially human resource intervention that would be required for
improving the efficacy and efficiency of personnel employed at various levels by banks and non-banking
financial companies regulated by the Reserve Bank.
The Committee made exhaustive recommendations after examination of feedback received from the
banking industry, inputs from member-experts, academicians and various training/consulting institutions.
The key recommendations of the Report include and pertain to:
approach to capacity building in banks and non-banks enhancing Human Resources Management
practices creation of position of “Chief Learning Officer” in banks and concept of return on learning
strategies for addressing issues of replacement / replenishment of talent in banks process and steps for
skill development training strategy and need for expert trainers to help build capacities coaching and
mentoring including mentoring programme for Top Management of banks entry point qualifications at
recruitment stage, development of competency standards and certification/accreditation in various areas
of training conducting a common Banking Aptitude Test (BAT) at entry levels.
qualifications for generalists and specialists
e-learning as an important constituent for building capacity and imparting training
training/learning Infrastructure oriented to banking
proposal for setting up a Centre of Excellence for Leadership Development in banking sector
fostering research on skill development in banking sector and evolving a monitoring framework for
capacity development in banking sector
creation of skills registry for the banking sector
30. BASE RATE – REVISED GUIDELINES : MCLR

At present, banks are following different methodologies in computing their Base Rate – on the basis of
average cost of funds, marginal cost of funds or blended cost of funds (liabilities). In April 2015, RBI had
stated that in order to improve the efficiency of monetary policy transmission, the Reserve Bank will
encourage banks to move in a time-
bound manner tomarginal-cost-of-funds-based
determination of their Base Rate’. Accordingly, RBI has issued guidelines (December 17, 2015) on
computing interest rates on advances based on the marginal cost of funds. The guidelines come into
effect from April 1, 2016. Apart from helping improve the transmission of policy rates into the lending rates
of banks, these measures are expected to improve transparency in the methodology followed by banks for
determining interest rates on advances. The guidelines are also expected to ensure availability of bank
credit at interest rates which are fair to the borrowers as well as the banks. Further, marginal cost pricing
of loans will help the banks become more competitive and enhance their long run value and contribution to
economic growth. RBI has issued following guidelines for pricing advances by banks:
a) Internal Benchmark
i. All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to
the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such
purposes.
ii. The MCLR will comprise of: (a) Marginal cost of funds; (b) Negative carry on account of CRR; (c)
Operating costs;
(d) Tenor premium.
iii. Marginal Cost of funds: The marginal cost of funds will comprise of Marginal cost of borrowings and
return on net worth. The detailed methodology for computing marginal cost of funds is given below.
iv. Negative Carry on CRR: Negative carry on the mandatory CRR which arises due to return on CRR
balances being nil, will be calculated as under: Required CRR x (marginal cost) / (1- CRR). The marginal
cost of funds arrived at (iii) above will be used for arriving at negative carry on CRR.
v. Operating Costs: All operating costs associated with providing the loan product including cost of raising
funds will be included under this head. It should be ensured that the costs of providing those services
which are separately recovered by way of service charges do not form part of this component.
vi. Tenor premium: These costs arise from loan commitments with longer tenor. The change in tenor
premium should not be borrower specific or loan class specific. In other words, the tenor premium will be
uniform for all types of loans for a given residual tenor.
vii. Since MCLR will be a tenor linked benchmark, banks shall arrive at the MCLR of a particular maturity
by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on
account of CRR and Operating costs.
viii. Accordingly, banks shall publish the internal benchmark for the following maturities: (a) overnight
MCLR; (b) one-month MCLR; (c) three-month MCLR; (d) six month MCLR;
(e) One year MCLR. In addition to the above, banks have the option of publishing MCLR of any other
longer maturity
) Spread:
i. Banks should have a Board approved policy delineating the components of spread charged to a
customer. The policy shall include principles:
a. To determine the quantum of each component of spread.
b. To determine the range of spread for a given category of borrower / type of loan.
c. To delegate powers in respect of loan pricing.
ii. Components of Spread: For the sake of uniformity in these components, all banks shall adopt the
following broad components of spread:
a. Business strategy: The component will be arrived at taking into consideration the business strategy,
market competition, embedded options in the loan product, market liquidity of the loan etc.
b. Credit risk premium: The credit risk premium charged to the customer representing the default risk arising
from loan sanctioned should be arrived at based on an appropriate credit risk rating/scoring model and
after taking into consideration customer relationship, expected losses, collaterals, etc.
iii. The spread charged to an existing borrower should not be increased except on account of deterioration
in the credit risk profile of the customer. Any such decision regarding change in spread on account of
change in credit risk profile should be supported by a full-fledged risk profile review of the customer. This
stipulation is, however, not applicable to loans under consortium / multiple banking arrangements.
c) Interest Rates on Loans
i. Actual lending rates will be determined by adding the components of spread to the MCLR. Accordingly,
there will be no lending below the MCLR of a particular maturity for all loans linked to that benchmark
ii. The reference benchmark rate used for pricing the loans should form part of the terms of the loan
contract.
d) Exemptions from MCLR
i. Loans covered by schemes specially formulated by Government of India wherein banks have to charge
interest rates as per the scheme, are exempted from being linked to MCLR as the benchmark for determining
interest rate.
ii. Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the
rectification/restructuring package, are exempted from being linked to MCLR as the benchmark for
determining interest rate.
iii. Loans granted under various refinance schemes formulated by Government of India or any Government
Undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent
refinance is available are exempted from being linked to MCLR as the benchmark for determining
interest rate. Interest rate charged on the part not covered under refinance should adhere to the MCLR
guidelines.
iv. The following categories of loans can be priced without being linked to MCLR as the benchmark for
determining interest rate:
(a) Advances to banks’ depositors against their own deposits.
(b) Advances to banks’ own employees including retired employees.
(c) Advances granted to the Chief Executive Officer / Whole Time Directors.
(d) Loans linked to a market determined external benchmark.
(e) Fixed rate loans granted by banks. However, in case of hybrid loans where the interest rates are partly
fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.
e) Review of MCLR
i. Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different
maturities every month on a pre-announced date with the approval of the Board or any other committee to
which powers have been delegated.
ii. However, banks which do not have adequate systems to carry out the review of MCLR on a monthly
basis, may review their rates once a quarter on a pre-announced date for the first one year i.e. upto March
31, 2017. Thereafter, such banks should adopt the monthly review of MCLR as mentioned in (i) above.
f) Reset of interest rates
i. Banks may specify interest reset dates on their floating rate loans. Banks will have the option to offer
loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of
review of MCLR.
ii. The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the day the loan is sanctioned
will be applicable till the next reset date, irrespective of the changes in the benchmark during the
interim.
iii. The periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the
terms of the loan contract.
g) Treatment of interest rates linked to Base Rate charged to existing borrowers
i. Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the
case may be.
ii. Banks will continue to review and publish Base Rate as hitherto.
iii. Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate
(MCLR) linked loan at mutually acceptable terms. However, this should not be treated as a foreclosure of
existing facility.
h) Time frame for implementation: In order to give sufficient time to all the banks to move to the MCLR
based pricing, the effective date of these guidelines is April 1, 2016.
Calculation of Marginal cost of Funds
1. Marginal cost of Borrowing = (Rates offered on a particular type of deposit on the date of review/
rates at which funds raised) x Balance outstanding as on the previous day of review as a percentage of
total funds (other than equity)
2. Weightage of Marginal cost of borrowings: Marginal cost of borrowing shall have a weightage of 92% of
Marginal Cost of Funds while return on net worth will have the balance weightage of 8%.
3. Guidelines relating to Balance outstanding or Interest Rate on various type of deposits or borrowings
for calculation of Marginal cost of borrowings are given below:
1. Deposits
a. Current Deposits: The core portion of current deposits identified based on the guidelines on Asset
Liability Management issued vide circular dated October 24 2007 should be reckoned for arriving at
the balance outstanding.
b. Savings Deposits: The core portion of savings deposits identified based on the guidelines on Asset
Liability Management issued vide circular dated October 24, 2007 should be reckoned for arriving at
the balance outstanding.
c. Term deposits (Fixed Rate): Term deposits of various maturities including those on which differential
interest rates are payable should be included.
d. Term deposits (Floating Rate): The rate should be arrived at based on the prevailing external
benchmark rate on the date of review.
e. Foreign currency deposits: Foreign currency deposits, to the extent deployed for lending in rupees,
should be included in computing marginal cost of funds. The swap cost and hedge cost of such
deposits should be reckoned for computing marginal cost.
2 Borrowings
a. Short term Rupee Borrowings: Interest payable on each type of short term borrowing will be arrived
at using the average rates at which such short term borrowings were raised in the last one month.
For example, Interest on borrowings from RBI under LAF will be the average interest rate at which
a bank has borrowed from RBI under LAF during the last one month.
b. Long term Rupee Borrowings: (i) Option 1: Interest payable on each type of long term borrowing will be
arrived at using the average rates at which such long term borrowings were raised; (ii) Option2: The
appropriate benchmark yield for bank bonds published by FIMMDA for valuation purposes will be used
as the proxy rate for calculating marginal cost.
c. Foreign Currency Borrowings including HO borrowings by foreign banks (other than those forming part
of
Tier-I capital):Foreign currency borrowings, to the
extent deployed for lending in rupees, should be included in computing marginal cost of funds. The all-
in-cost of raising foreign currency borrowings including swap cost and hedge cost would be reckoned
for computing marginal cost of funds.
B Return on net worth:
1. Amount of common equity Tier 1 capital required to be maintained for Risk Weighted Assets as per
extant capital adequacy norms shall be included for computing marginal cost of funds. Since currently,
the common equity Tier 1 capital is (5.5% +2.5%) 8% of RWA, the weightage given for this component
in the marginal cost of funds will be 8%.
2. In case of newly set up banks (either domestic or foreign banks operating as branches in India) where
lending operations are mainly financed by capital, the weightage for this component may be higher ie in
proportion to the extent of capital deployed for lending. This dispensation will be available for a period
of three years from the date of commencing operations.
3. The cost of equity will be the minimum desired rate of return on equity computed as a mark-up over the
risk free rate. Banks could follow any pricing model such as Capital Asset Pricing Model (CAPM) to
arrive at the cost of capital. This rate can be reviewed annually.
C. Marginal cost of funds = 92% x Marginal cost of borrowings + 8% x Return on net worth
31. INTEREST EQUALISATION SCHEME PRE AND POST SHIPMENT RUPEE EXPORT CREDIT
The Government of India has announced the Interest Equalisation Scheme (earlier called Interest
Subvention Scheme) on Pre and Post Shipment Rupee Export Credit to eligible exporters. The scheme is
effective from April 1, 2015. Salient features of the scheme are given below:
(a) The rate of interest equalisation would be 3 percent and will be available on Pre Shipment Rupee
Export Credit and Post Shipment Rupee Export Credit.
(b) The scheme would be applicable w.e.f 01.04.2015 for 5 years. Government, however, reserves the
right to modify/amend the Scheme at any time.
(c) The scheme will be available to all exports under 416 tariff lines [at ITC (HS) code of 4 digit] and
exports made by Micro, Small & Medium Enterprises (MSMEs) across all ITC(HS) codes.
(d) Scheme would not be available to merchant exporters.
(e) Banks are required to completely pass on the benefit of interest equalisation, as applicable, to the
eligible exporters upfront and submit the claims to RBI for reimbursement, duly certified by the external
auditor.
(f) The scheme would be funded from the funds available with Department of Commerce under non-plan
during 2015 16 and the restructured scheme would be funded from plan side from 2016-17 onwards.
(g) Ministry of Commerce and Industry will place funds in advance with RBI for a requirement of one
month and reimbursement would be made on a monthly basis through a revolving fund system.
All eligible exports under the scheme would have to meet the criteria of minimum processing for the goods
to be called as Originating from India. Rules of Origin (Non-Preferential) criteria are as under: (I) Goods are
to be manufactured by the exporting entity as per the definition of “Manufacture” in Paragraph 9.31 of FTP;
and (II) If imported inputs (Duty Paid or Duty Free) have been used for the production of export product, the
export product can be considered to be originating in India (Non Preferential) only if the imported inputs
undergo the processing/ operations that exceed the following: (i) simple operations consisting of removal of
dust, sifting or screening, sorting, classifying, matching (including the making-up of sets of articles),
washing, painting, cutting; (ii) changes of packing and breaking up and assembly of consignments; (iii)
simple cutting, slicing and repacking or placing in bottles, flasks, bags, boxes, fixing on cards or boards,
and all other simple packing operations; (iv) operations to ensure the preservation of products in good
condition during transport and storage (such as drying, freezing, keeping in brine, ventilation, spreading
out, chilling, placing in salt, sulphur dioxide or other aqueous solutions, removal of damaged parts, and like
operations); (v) affixing of marks, labels or other like distinguishing signs on products or their packaging;
(vi) simple mixing of products ; (vii) simple assembly of parts of products to constitute a complete product;
(viii) disassembly; (ix) slaughter which means the mere killing of animals; and (x) mere dilution with water or
another substance that does not materially alter the characteristics of the products. Telecom product
exports would, after notification of the guidelines by the Department of Telecommunications, however, be
subject to minimum value addition as notified by Department of Telecommunications, to be eligible under
the scheme
(h) A study may be initiated on the impact of the scheme on export promotion on completion of 3 years of
the operation of the scheme through one of the IIMs.
(i) RBI shall send a monthly report to Deptt of Commerce/DGFT indicating reimbursement made
commodity wise/bank wise, as per the prescribed format. Financial implication of the scheme: is
estimated to be in the range of Rs. 2500 crore to Rs. 2700 crore per year. Funds to the tune of Rs.
1625 crore under Non-plan Head of account are available under Demand of Grants for 2015 2016, to
be made available to RBI during 2015-16.
Likely beneficiaries: The scheme covers mostly labour intensive and employment generating sectors
like processed agriculture/ food items, handicrafts, handmade carpet (including silk),
handloom products, coir and coir manufactures, jute raw and yarn and other jute manufactures,
readymade garments and made ups, fabrics of all types, toys, sports goods, paper and stationary,
Cosmetics and Toiletries, Leather Goods and footwear, Ceramics and Allied Products, Glass and
Glassware, Medical and Scientific Instruments, Optical Frames, Lenses, Sunglasses Etc., Auto
Components/Parts, Bicycle & Parts, Articles of Iron or Steel (Notified lines), Misc. Articles of base metals
(Notified lines), Industrial Machinery, Electrical and Engineering items, 1C Engine, Machine tools, Parts
(Notified lines), Electrical Machinery and Equipment (Notified lines), Telecom Instruments (Notified lines)
and all items manufactured by SMEs.
2. Operational procedure for claiming reimbursement:
A. Procedure for passing on the benefit of interest equalisation to exporters: For the period April 1, 2015
to November 30, 2015, banks shall identify the eligible exporters and credit their accounts with the eligible
amount of interest equalisation. From the month of December 2015 onwards, banks shall reduce the
interest rate charged to the eligible exporters by the rate of interest equalisation provided by Govt. The
interest equalisation benefit will be available from the date of disbursement up to the date of repayment or
up to the date beyond which the outstanding export credit becomes overdue. However, the interest
equalisation will be available to the eligible exporters only during the period the scheme is in force.
B. Procedure for claiming reimbursement of interest equalisation benefit already passed on to eligible
exporters: The sector-wise consolidated reimbursement claim for the period April 1, 2015 to November 30,
2015 for the amount of interest equalisation already passed on to eligible exporters should be submitted to
RBI by December 15, 2015. The sector-wise consolidated monthly reimbursement claim for interest
equalisation for the period December 2015 onwards should be submitted in original within 15 days from
the end of the respective month in the prescribed format accompanied by an External Auditor’s Certificate.
The reimbursement of interest equalisation claim will be made when the funds are received from
Government.
32. GOLD MONETISATION SCHEME, 2015
1.1 Objective: GMS, which modifies the existing 'Gold Deposit Scheme' (GDS) and 'Gold Metal Loan
Scheme (GML), is intended to mobilise gold held by households and institutions of the country and
facilitate its use for productive purposes, and in the long run, to reduce country's reliance on the import
of gold.
1.2. Implemented by: All Scheduled Commercial Banks excluding RRBs will be eligible to implement the
Scheme.
1.3 Definitions:
Collection and Purity Testing Centre (CPTC) - The collection and assaying centres certified by the
Bureau of Indian Standards (BIS) and notified by the Central Government for the purpose of handling
gold deposited and redeemed under GMS.
Gold Deposit Account — An account opened with a designated bank under the Scheme and
denominated in grams of gold.
Medium and Long Term Government Deposit (MLTGD) The deposit of gold made under the GMS with a
designated bank in the account of the Central Government for a medium term period of 5-7 years or a
long term period of 12-15 years or for such period as may be decided from time to time by the Central
Government.
Nominated bank — A Scheduled Commercial Bank authorized by RBI to import gold.
Refiners — The refineries accredited by the National Accreditation Board for Testing and Calibration
Laboratories(NABL) and notified by the Central Government for the purpose of handling gold deposited
and redeemed under GMS.
Short Term Bank Deposit (STBD) - The deposit of gold made under the GMS with a designated bank for
a short term period of 1-3 years.
Revamped Gold Deposit Scheme (R-GDS)
2.1 Basic features
2.1.1 General
i. This scheme will replace the existing Gold Deposit Scheme, 1999. However, the deposits
outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless these are
withdrawn by the depositors prematurely as per existing instructions.
ii. All designated banks will be eligible to implement the scheme.
iii. The principal and interest of the deposit under the scheme shall be denominated in gold.
iv. Persons eligible to make a deposit - Resident Indians
(Individuals, HUFs, Trusts includingMutual
Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can
make deposits under the scheme. Joint deposits of two or more eligible depositors are also allowed
under the scheme and the deposit in such case shall be credited to the joint deposit account opened in
the name of such depositors. The existing rules regarding joint operation of bank deposit accounts
including nominations will be applicable to these gold deposits.
v. All deposits under the scheme shall be made at the CPTC. However, at their discretion, banks may
accept the deposit of gold at the designated branches, especially from the larger depositors.
Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited
into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank's
designated branch, as the case may be, whichever is earlier
vi. During the period commencing from the date of receipt of gold by the CPTC or the designated
branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold
accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe
custody held by the designated bank.
vii. On the day the gold deposited under the scheme starts accruing interest, the designated banks shall
translate the gold liabilities and assets in Indian Rupees by crossing the London AM fixing for Gold /
USD rate with the Rupee-US Dollar reference rate announced by RBI on that day. The prevalent custom
duty for import of gold will be added to the above value to arrive at the final value of gold. This approach
will also be followed for valuation of gold at any subsequent valuation dates and for the conversion of
gold into Indian Rupees under the Scheme.
viii. Reporting — The designated banks need to submit a monthly report on GMS to the RBI in the
prescribed format.
2.1.2 Acceptance of deposits: The minimum deposit at any one time shall be raw gold (bars, coins,
jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no
maximum limit for deposit under the scheme. All transactions under the scheme with the designated
bank shall be in gold of 995 fineness. All gold deposits under the scheme, whether tendered at the
CPTC or the designated branches, shall be assayed at CPTC. However, the designated banks are free
not to subject the standard good delivery gold accepted directly at branches to fire assaying at the
CPTC.
2.2 Types of deposits
There shall be two different gold deposit schemes as under: 2.2.1 Short Term Bank Deposit (STBD)
i. All provisions of para 2.1 above shall apply to this deposit.
ii. The deposit will be made with the designated banks for a short term period of 1-3 years (with a roll
over in multiples of one year) and will be treated as their on-balance sheet liability.
iii. The deposit will attract CRR and SLR requirements as per applicable instructions of RBI from the
date of credit of the amount to the deposit account. However, the stock of gold held by banks in their
books will be an eligible asset for meeting the SLR requirement.
iv. The designated banks may, at their discretion, allow whole or part premature withdrawal of the
deposit subject to such minimum lock-in period and penalties, if any, as may be determined by them.
v. The designated banks are free to fix the interest rates on these deposits. The interest shall be
credited in the deposit accounts on the respective due dates and will be withdrawable periodically or at
maturity as per the terms of the deposit.
vi. Redemption of principal and interest at maturity will, at the option of the depositor be either in Indian
Rupee equivalent of the deposited gold and accrued interest based on the price of gold prevailing at
the time of redemption, or in gold. The option in this regard shall be made in writing by the depositor
at the time of making the deposit and shall be irrevocable. However, any premature redemption shall
be in Indian Rupee equivalent or gold at the discretion of the designated bank.
3.2.2 Medium and Long Term Government Deposit (MLTGD
i. All provisions of guidelines at para 2.1 above will apply to this deposit.
ii. The deposit under this category will be accepted by the designated banks on behalf of the Central
Government. The receipts issued by the CPTC and the deposit certificate issued by the designated
banks shall state this clearly.
iii. This deposit will not be reflected in the balance sheet of the designated banks. It will be the liability
of Central Government and the designated banks will hold this gold deposit on behalf of Central
Government until it is transferred to such person as may be determined by the Central Government.
iv. The deposit can be made for a medium term period of 5-7 years or a long term period of 12-15
years or for such period as may be decided from time to time by the Central Government. The
designated banks may allow whole or part premature withdrawal of the deposit subject to such
minimum lock-in period and penalties, if any, as determined by the Central Government.
v. Redemption of the deposit including interest accrued will be only in Indian Rupee equivalent of the
value of the gold and accumulated interest as per the price of gold prevailing at the time of
redemption.
vi. The gold received under MLTGD will be auctioned by the agencies notified by Government and the
sale proceeds will be credited to Government's account held with RBI.
vii. Reserve Bank of India will maintain the Gold Deposit Accounts denominated in gold in the name of
the designated banks that will in turn hold sub-accounts of individual depositors.
viii. The details of auctioning and the accounting procedure will be notified by Government of India. 2.3
Opening of gold deposit accounts
i. The opening of gold deposit accounts shall be subject to the same rules with regard to customer
identification as are applicable to any other deposit account. Depositors who do not already have any
other account with the designated bank, shall open a gold deposit account with the designated banks
with zero balance at any time prior to tendering gold at the CPTC after complying with KYC norms as
prescribed by Reserve Bank of India.
ii. The designated banks will credit the STBD or MLTGD, as the case may be, with the amount of 995
fineness gold as indicated in the advice received from CPTC, after 30 days of receipt of gold at the
CPTC, regardless of whether the depositor submits the receipt for issuance of the deposit certificate or
not.
2.4 Collection and Purity Testing Centres
i. The Central Government will notify a list of BIS certified CPTCs under the Scheme.
ii. The designated banks will be free to select and authorize the CPTCs out of the list notified by the
Central Government for handling gold as their agents based on their assessment of the credit
worthiness of these centres.
iii. Each designated bank authorizing a CPTC to collect deposit of gold on its behalf shall ensure that its
name is included in the list of such banks displayed by the CPTC.
iv. The schedule of fees charged by the CPTCs shall be displayed at a prominent place at the centre.
Before tendering the raw gold to a CPTC, the depositor shall indicate the name of the designated bank
with whom he would like to place the deposit.
v. After assaying the gold, the CPTC will issue a receipt signed by authorised signatories of the centre
showing the standard gold of 995 fineness on behalf of the designated bank indicated by the depositor.
Simultaneously, the CPTC will also send an advice to the designated bank regarding the acceptance of
deposit.
vi. The 995 fineness equivalent amount of gold as determined by the CPTC will be final and any
difference in quantity or quality found after issuance of the receipt by the CPTC including at the level of
the refinery due to refinement or any other reason shall be settled among the three parties viz., the
CPTC, the refiner and the designated bank in accordance with the terms of the tripartite agreement.
vii. The depositor shall produce the receipt showing the 995 fineness equivalent amount of gold issued by
the CPTC to the designated bank branch, either in person or through post.
viii. On submission of the deposit receipt by the depositor, the designated bank shall issue the final deposit
certificate on the same day or 30 days after the date of the tendering of gold at the CPTC, whichever is
later.
ix. T h e assaying process at the CPTC is described separately. 2.5
Transfer of gold to the Refiners
i. The designated banks will be free to select the refiners based on their assessment regarding the
credibility of these entities.
ii. The CPTCs will transfer the gold to the refiners as per the terms and conditions set out in the tripartite
agreement.
iii. The refined gold may, at the option of the designated bank, be kept in the vaults maintained by the
refiners or at the branch itself.
iv. For the services provided by the refiners, the designated banks will pay a fee as decided mutually.
v. The refiners shall not collect any charge from the depositor.
2.6 Tripartite agreement between the designated banks, refiners and CPTCs: Every designated bank
shall enter into a legally binding tripartite agreement with the refiners and CPTCs with whom they tie up
under the Scheme. The agreement shall clearly lay down the details regarding payment of fees, services
to be provided, standards of service, the details of the arrangement regarding movement of gold and
rights and obligations of all the three parties in connection with the operation of the Scheme.
2.7 Utilization of gold mobilized under GMS:
2.7.1 Gold accepted under STBD: The designated banks may sell the gold to MMTC for minting India
Gold Coins (IGC), to jewellers and to other designated banks participating in GMS; or lend the gold
under the GML scheme to MMTC for minting India Gold Coins (IGC) and to jewellers.
2.7.2 Gold accepted under MLTGD: Gold deposited under MLTGD will be auctioned by MMTC or any
other agency authorized by the Central Government and the sale proceeds credited to the Central
Government's account with RBI. The entities participating in the auction may include RBI, MMTC, banks
and any other entities notified by the Central Government in this regard. Gold purchased by designated
bank under the auction may be utilized by them for any purposes indicated at para 2.7.1 above.
2.8 Risk management: The designated banks are allowed to access the International Exchanges, London
Bullion Market Association or make use of Over-the-counter contracts to hedge exposures to bullion
prices subject to the guidelines issued by RBI. The designated banks should put in place suitable risk
management mechanisms including appropriate limits to manage the risk arising from gold price
movements in respect of their net exposure to gold.
2.9 Oversight over the CPTCs and Refineries: The Central Government, in consultation with BIS, NABL,
RBI and IBA, may put in place appropriate supervisory mechanism over the CPTCs and the refiners so
as to ensure observance of the standards set out for these centres by Government (BIS and NABL). The
Central Government may take appropriate action including levy of penalties against the non-compliant
CPTCs and refiners. The Central Government may also put in place appropriate grievance redress
mechanism regarding any depositor’s complaints against the CPTCs. The complaints against the
designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption
of deposits, payment of interest will be handled first by the bank’s grievance redress process and then
by the Banking Ombudsman of RBI.
GMS – Linked Gold Metal Loan (GML) Scheme
3.1.1 General: The gold mobilized under STBD may be provided to the jewellers as GML. The
designated banks can also purchase the gold auctioned under MLTGD and extend GML to the
jewellers. The jewellers will receive the physical delivery of gold either from the refiners or from the
designated bank, depending on the place where the refined gold is stored. The existing Gold (Metal)
Loan (GML) Scheme operated by nominated banks will continue in parallel with GMS-linked GML
scheme. All prudential guidelines for the existing GML Scheme will also be applicable to the new
Scheme. The designated banks other than the nominated banks shall be eligible to import gold only for
redemption of the gold deposits mobilised under the STBD.
3.1.2 Interest to be charged: Banks are free to determine the interest rate to be charged on GMS-linked
GML.
3.1.3 Tenor: The tenor of GMS-linked GML will be the same as under the extant GML scheme.
3.1.4 Assaying process at the CPTCs: The fees to be charged by a CPTC shall be informed to the
customer before doing the XRF test.
3.1.5 There will be a BIS certified protocol of operations and processes at all stages of purity verification
and deposit of gold which are as under:
i. XRF machine-test and weighing of all articles shall be done in the presence of the customer and will
be recorded by CCTV Camera.
ii. After XRF test, the customer will be given the option to disagree with the preliminary test or withdraw
the tendered gold or he will give his consent for melting and fire assay test.
iii. On receipt of the customer consent, the gold ornaments
will be cleaned of its dirt, studs, meena etc. and thereafter, the purity of the tendered gold will be
ascertained through a fire assay test in the presence of the customer.
iv. In case the customer agrees with the result of the fire
v. assay test, he will exercise his option to deposit the gold with the bank and in that case the fee
charged by the centre will be paid by the bank. However, in case of any disagreement with the fire
assay result, the customer will be given the option to take back the melted gold after paying a nominal
fee to the centre
vi. In case the customer exercises the option to deposit the gold, he will be provided a certificate by the
CPTC certifying the weight of the gold tendered in equivalence of 995 fineness of gold.
vii. On receipt of this certificate from the customer, the bank will credit the equivalent quantity of Standard
gold of 995 fineness in to the depositor’s account.
viii. Simultaneously, the CPTC has also to inform the bank about the details of the deposit made by the
customer.
33. SOVEREIGN GOLD BONDS, 2015-16
The Union Finance Minister had announced in Union Budget 2015-16 about developing a financial asset,
Sovereign Gold Bond, as an alternative to purchasing metal gold. Now, Government of India, vide
notification dated October 30, 2015, has decided to issue Sovereign Gold Bonds, 2015 with effect from
November 05, 2015 to November 20, 2015. The terms and conditions of the issuance of the Bonds shall
be as follows:
1. Issuance: Bonds will be issued by Reserve Bank India on behalf of the Government of India.
2. Eligibility for Investment: The Bonds under this Scheme may be held by a person resident in India,
being an individual, in his capacity as such individual, or on behalf of minor child, or jointly with any other
individual. "Person resident in India" will have same meaning as given in FEMA, 1999.
3. Form of Security: The Bonds shall be issued in the form of Government of India Stock. The investors
will be issued a Stock/ Holding Certificate. The Bonds shall be eligible for conversion into de-mat form.
4. Frequency: The Bonds will be issued in tranches. Each tranche will be kept open for a period to be
notified. The issuance date will also be specified in the notification. For the present issue, date of
issuance shall be November 26, 2015. The investors can apply for the Bonds in receiving offices from
November 05, 2015 to November 20, 2015. The issuance can be closed by Government of India earlier
than November 20, 2015 with a prior notice.
5. Denomination: The Bonds shall be denominated in units of one gram of gold and multiples thereof.
6. Minimum size: Minimum permissible investment will be 2 units (i.e. 2 grams of gold).
7. Maximum limit: The maximum amount subscribed by an entity will not be more than 500 grams per
person per fiscal year (April-March). A self-declaration to this effect will be obtained.
8. Joint holder: In case of joint holding, the investment limit of 500 grams will be applied to the first
applicant only
9. Issue Price: Price of the Bonds shall be fixed in Indian Rupees on the basis of the previous week's
(Monday - Friday) simple average closing price for gold of 999 purity, published by the India Bullion and
Jewellers Association Ltd. (IBJA).
10. Interest: The Bonds shall bear interest at the rate of 2.75 per cent (fixed rate) per annum on the
amount of initial investment. Interest shall be paid in half-yearly rests and the last interest shall be
payable on maturity along with the principal.
Receiving Offices: Bonds will be sold through banks and designated Post Offices, as may be notified,
either directly or through agents. Scheduled commercial banks (excluding RRBs) and designated Post
Offices (as may be notified) are authorized to receive applications for the Bonds either directly or through
agents
11. Payment Options: Payment shall be accepted in Indian Rupees through Cash or Demand Drafts or
Cheque or Electronic banking.
12. Redemption: The Bonds shall be repayable on the expiration of eight years from the date of issue.
Premature redemption of the Bond is allowed from fifth year of the date of issue on the interest payment
dates. The redemption price shall be fixed in Indian Rupees on the basis of the previous week's (Monday
- Friday) simple average closing price for gold of 999 purity, published by IBJA.
13. Repayment: The receiving office shall inform the investor of the date of maturity of the Bonds, one
month before its maturity.
14. Eligibility for Statutory Liquidity Ratio (SLR): The investment in the Bonds shall be eligible for SLR.
15. Loan against Bonds: The Bonds may be used as collateral for loans. The Loan to Value ratio will be
as applicable to ordinary gold loan mandated by the RBI from time to time. The lien on the Bonds shall
be marked in the depository by the authorized banks.
16. Tax Treatment: Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act,
1961. Capital gains tax treatment will be the same as that for physical gold.
17. Applications: Subscription for the Bonds may be made in the prescribed application form A stating
clearly the grams of gold and the full name and address of the applicant. The receiving office shall issue
an acknowledgment receipt to the applicant.
18. Nomination: Nomination and its cancellation shall be made in Form 'D' and Form `E', respectively,
as per provisions of the Government Securities Act, 2006.
19. Transferability: The Bonds shall be transferable by execution of an Instrument of transfer
20. Tradability in Bonds: The Bonds shall be tradable on exchanges/NDS-OM from a date to be notified by
RBI.
21. Commission for distribution: Commission for distribution shall be paid at the rate of rupee one per
hundred of the total subscription received by the receiving offices on the applications received and
receiving offices shall share at least 50% of the commission so received with the agents or subagents for
the business procured through them.
22. KYC Documentation: Know-your-customer (KYC) norms will be the same as that for purchase of
physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.
34. INTEREST SUBVENTION SCHEME

Government of India has approved the implementation of the Interest Subvention Scheme for the year
2015-16 for short term crop loans upto Rs 3.00 lakhs with the following stipulations (August 13, 2015):
i) Interest subvention @ 2% per annum will be made available to the Public Sector Banks (PSBs) and
the Private Sector Scheduled Commercial Banks (in respect of loans given by their rural and semi-urban
branches) on their own funds used for short-term crop loans up to Rs.3,00,000/- (Rs. three lakhs) per
farmer provided the lending institutions make available short term credit at the ground level at 7% per
annum to the farmers. This 2% interest subvention will be calculated on the crop loan amount from the
date of its disbursement/drawal up to the date of actual repayment of the crop loan by the farmer or up to
the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one
year.
ii) Additional interest subvention @3% per annum will be available to the farmers repaying the loan
promptly from the date of disbursement of the crop loan up to the actual date of repayment or up to the
due date fixed by the bank for repayment of crop loan, whichever is earlier, subject to a maximum
period of one year from the date of disbursement. This also implies that the farmers paying promptly
would get short term crop loans @4% per annum during the year 2015-16. This benefit would not
accrue to those farmers who repay after one year of availing of such loans.
iii) In order to discourage distress sale by farmers and to encourage them to store their produce in
warehouses against warehouse receipts, the benefit of interest subvention will be available to small and
marginal farmers having Kisan Credit Card for a further period of up to six months post-harvest on the
same rate as available to crop loan against negotiable warehouse receipt for keeping their produce in
warehouses.
iv) To provide relief to farmers affected by natural calamities, the interest subvention of 2% will continue
to be available to banks for the first year on the restructured amount. Such restructured loans may attract
normal rate of interest from the second year onwards as per the policy laid down by the RBI.
v) In respect of 2% interest subvention, banks are required to submit their claims on a half-yearly basis
as at September 30, 2015 and March 31, 2016, of which, the latter needs to be accompanied by the
Statutory Auditor's certificate certifying the claims for subvention for the entire year ended March 31,
2016 as true and correct. Any remaining claim pertaining to the disbursements made during the year
2015-16 and not included in the claim for March 31, 2016, may be consolidated separately and marked
as an 'Additional Claim' duly audited by the Statutory Auditors certifying the correctness. In respect of the
3% additional subvention, banks may submit their onetime consolidated claims pertaining to the
disbursements made during the entire year 2015-16 latest by April 30, 2017, duly audited by the
Statutory Auditors certifying the correctness.
Flow of credit to Micro and Small Enterprises (MSEs) Micro and small units are more prone to facing
financial difficulties during their Life Cycle than large enterprises / corporates when the business
conditions turn adverse. Absence of timely support at such a juncture could lead to the unit turning sick
and many a time irreversibly. RBI had advised banks to put in place Board approved policy on lending to
MSEs, adopting an appropriate system of timely and adequate credit delivery to borrowers in the MSE
segment within the broad prudential regulations of RBI including extending financial help to the viable /
stressed MSE borrowers by way of adequate ad-hoc and standby limits which support the MSE units
during adverse business conditions as also when their credit requirements go up. RBI has now again
advised (August 27, 2015) banks that their lending policies for MSEs are streamlined and made flexible in
order to empower the officials concerned to take quick decisions on credit delivery to MSEs and may
consider the following guidelines:
i) Standby Credit Facility: Banks may, as part of their lending policy to MSEs, consider providing a
'standby credit facility', while funding capital expenditure, to fund unforseen increases in capital
expenditure. Further, at the discretion of banks, such 'standby credit facility' may also be sanctioned to
fund periodic capital expenditure. The objective of such 'standby credit facility' would be, among others,
to extend credit speedily so that the capital asset creation is not delayed and commercial production can
commence at the earliest.
ii) Working Capital Limits — In terms of extant guidelines, banks are allowed to determine working
capital requirements according to their assessment of the borrowers and their credit needs. Banks may
also incorporate, in their lending policy to MSEs, a policy for fixing a separate additional limit, at the time
of sanction / renewal of working capital limits, specifically for meeting the temporary rise in working
capital requirements arising mainly due to unforeseen / seasonal increase in demand for products
produced by them. Such limits may be released primarily, where there is a sufficient evidence of increase
in the demand for products produced by MSEs. Banks may also sanction ad-hoc limits subject to the
extant prudential norms, to be regularised not later than three months from the date of sanction.
iii) Review of Regular Working Capital Limits — At present, banks review working capital limits at least
once in a year based on audited financial statements. However, audited financial statements of MSE units
would ordinarily be available with a time lag, post-closing of the financial year. In such cases and where
banks are convinced that changes in the demand pattern of MSE borrowers require a mid-term review,
they may do so. Such mid-term reviews may be based on an assessment of sales performance of the
MSEs since last review without waiting for audited financial statements. However, such mid-term reviews
shall be revalidated during the subsequent regular review based on audited financial statements.
Timelines for Credit Decisions — Timely credit is critical to the growth of a healthy MSE sector. Banks
should have a Credit Proposal Tracking System (CPTS) with a view to closely track the applications
and ensure speedy disposal. Further, as per 'Guidelines on Fair Practices Code for Lenders', the time
frame within which loan applications up to Rs.2 lakh will be disposed of should be indicated at the time
of acceptance of loan applications. Banks should clearly delineate the procedure for disposal of loan
proposals, with appropriate timelines, and institute a suitable monitoring mechanism for reviewing
applications pending beyond the specified period, without any compromise on due diligence
requirements. Banks are also required to make suitable disclosures on the timelines for conveying credit
decisions through their websites, notice-boards, product literature, etc.
35. MONETARY POLICY STATEMENT : 2016-17 (FIRST BI-MONTHLY)

The Reserve Bank of India, in its First Bi-Monthly Monetary Policy Review for FY 2016-17, has shifted
its stance on liquidity in the banking system, from keeping it in a certain amount of deficit (about one
per cent of net demand and time deposit liabilities) to one of keeping it close to zero (or ‘neutrality’).
Moving from a one per cent deficit to about neutral means an additional Rs 80,000 to 90,000 crore.
A rate cut is consistent with the RBI's approach to ease rates, based on inflation and growth dynamics.
In addition, the framework announced by RBI to improve liquidity conditions are welcome and these
measures are expected to significantly enhance the effectiveness of rate cuts and aid in transmission.
TARGETS:
*The Monetary Policy has pegged 2016-17 growth forecast at 7.6%.
*The Policy expects Inflation at around 5%.
MONETARY & LIQUIDITY MEASURES:
Following are the revised Monetary and Liquidity Measures.
 CASH RESERVE RATIO: Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.00 per
cent of their net demand and time liabilities (NDTL). However, RBI has reduced the minimum daily
maintenance of the Cash Reserve Ratio from 95% of the requirement to 90% effective from the fortnight
beginning April 16, 2016.
 SLR: As per the time frame the Statutory Liquidity Ratio of scheduled commercial banks reduced by
25 basis points to 21.25% as on 2nd April 2016. Further, SLR to be reduced by 25 basis points on 9th July
2016, 25 basis points on 1st Oct 2016, and another 25 basis points on 1st Jan 2017 to reach to 20.5%.
 REPO RATE: The policy Repo rate under the liquidity adjustment facility (LAF) reduced by 25 basis
points from 6.75 per cent to 6.5 per cent w.e.f. 5th April, 2016.
Further, RBI has decided to narrow the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps
by reducing the MSF rate by 75 bps & increasing the reverse repo rate by 25 bps, with a view to
ensuring finer alignment of the weighted average call rate (WACR) with the repo rate;
 REVERSE REPO RATE: The Reverse repo rate determined with a spread of 50 bps points below the
repo rate, stands at 6.0% w.e.f. 5th April, 2016.
 MARGINAL STANDING FACILITY (MSF): The MSF rate (an emergency funding window) stands at
7% w.e.f. 5th April, 2016.
 BANK RATE: The Bank Rate stands decreased to 7% w.e.f. 5th April, 2016. With these changes, the
MSF rate and the Bank Rate are recalibrated to 50 basis points above the repo rate.
 TERM REPOS: To continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL
and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through
auctions. Further, RBI has decided to continue with daily one-day term repos and reverse repos to
smooth liquidity.
ASSESSMENT
GLOBAL ECONOMY: The global economic activity has been quiescent. Perceptions of downside
risks to recovery in some advanced economies (AEs) at the beginning of 2016 have eased, while
major emerging market economies (EMEs) continue to contend with weak growth and still elevated
inflation amidst tighter financial conditions. World trade remains subdued due to falling import demand
from EMEs.
DOMESTIC ECONOMY:
 Agriculture:
 Gross value added (GVA) in agriculture and allied activities moderated in H2 of 2015-16, pulled
down by the contraction due to the year-on-year decline in kharif production.
 Turning to Q4, second advance estimates of the Ministry of Agriculture indicate that despite acutely
low reservoir levels and a deficient north-east monsoon, rabi foodgrains production increased over its
level a year ago – mainly in wheat and pulses.
 On the other hand, fertiliser production has picked up and horticulture as well as allied activities have
remained resilient.
 Industry:
 Value added in industry accelerated in H2, led by manufacturing which benefited from the sustained
softness in input costs.
 By contrast, industrial production remained flat with manufacturing output shrinking since November.
Robust
expansion in coal output has buoyed both mining activity and electricity generation and stemmed the
weakening of industrial output. However, capital goods production fell into deep contraction since
November, even after excluding lumpy and volatile items like rubber insulated cable.
 With improved perceptions on overall economic conditions and income, the Reserve Bank’s
Consumer Confidence Survey
of March 2016 shows marginal improvement in consumer sentiments. The Reserve Bank’s industrial
outlook survey suggests that business expectations for Q1 of 2016-17 continue to be positive.
 Services Sector:
 Services sector activity expanded steadily through the year, with trade, hotels, transport,
communication and public administration, defence and related services turning out to be the main
drivers in H2.
 The construction sector continues to be overburdened by unsold inventory in the residential space,
although commercial
real estate is being boosted by demand from information technology (IT) and IT-enabled services. Road
construction has accelerated, including in terms of new awards.
 Retail Inflation:
 Retail inflation measured by the consumer price index (CPI) dropped sharply in February after rising
for six consecutive
months due to a larger than anticipated decline in vegetable prices, helped by prices of pulses starting
to come off the surge that began in August, and effective supply management that helped limit cereal
price increases.
 Inflation in the fuel group moderated across electricity, kerosene, cooking gas and firewood, the latter
easing pressures on rural inflation.
 CPI Inflation:
 CPI inflation excluding food and fuel edged up mainly under housing, education, personal care and
transport and communication, suggesting capacity constraints in the services sector.
 Excluding petrol and diesel from this category, inflation stayed elevated and persistent at or above 5
per cent, indicating a possible resistance level for further downward movements in the headline.
 Liquidity Conditions:
 Liquidity conditions, which had tightened since mid-December, were stretched further by the
larger-than-usual
accumulation of cash balances by the Government, unusually heightened and persistent demand for
currency, a pick-up in bank credit and flatter deposit mobilisation at this time relative to past years.
 The Reserve Bank undertook liquidity operations to quell these pressures and supplemented normal
operations with large amounts of liquidity injected through fine-tuning variable rate repo auctions in
tenors ranging between overnight and 56 days.
 The average daily liquidity injection (including variable rate overnight and term repos) increased from
1,345 billion in January to 1,935 billion in March. Besides, durable liquidity was also provided through
open market operations (OMOs) of the order of 514 billion and 375 billion through buy-back operations in
February and March. The Reserve Bank also started conducting reverse repo and MSF operations to
enable the frictionless functioning of the payment and settlement system.
DEVELOPMENTAL AND REGULATORY POLICIES
 Liquidity Framework for Monetary Policy Operations:
 Liquidity management is driven by two objectives: first, the need to supply or withdraw short term
liquidity from the market so as to accommodate seasonal and frictional liquidity needs such as the
build-up of Government balances and demand for cash; and second, the need to supply durable
liquidity in the economy so as to facilitate growth, while ensuring that the monetary policy stance is
supported.
 The first objective of meeting short term liquidity needs has been accomplished through the provision
of liquidity by the Reserve Bank under its regular facilities - variable rate 14-day/7 day repo auctions
equivalent to 0.75 per cent of banking system NDTL, supplemented by daily overnight fixed rate repos
(at the repo rate) equivalent to 0.25 per cent of bank-wise NDTL.
 The Reserve Bank aims to meet the second objective by modulating net foreign assets (NFA) and net
domestic assets (NDA) growth over the course of the year, broadly consistent with the demand for
liquid assets to meet transaction needs of the economy. This will ensure adequate availability of
durable liquidity, regardless of short term seasonal and frictional fluctuations.
BANKING STRUCTURE:
 Revision of Regulatory Framework:
 The Basel Committee on Banking Supervision (BCBS) has issued final standards on the standardised
approach for measuring counterparty credit risk (SA-CCR), a revised framework for the capital treatment
of bank exposures to central counterparties (CCPs) and final rules on revised Pillar 3 disclosure
requirements. These standards will be implemented by January 1, 2017 by BCBS member jurisdictions.
 The Reserve Bank will also undertake revision of the guidelines on the securitisation framework in the
light of the BCBS revisions to the securitisation framework which is to be implemented by January
2018.
 Rationalisation of Branch Authorisation Policy:
With a view to facilitating financial inclusion and providing flexibility on the choice of delivery channel, it is
proposed to redefine branches and permissible methods of outreach keeping in mind the various
attributes of the banks and the types of services that are sought to be provided.
 Differentiated Licensing of Banks:
In addition to recently licensed differentiated banks such as payments banks and small finance banks,
the Reserve Bank will explore the possibilities of licensing other differentiated banks such as custodian
banks and banks concentrating on whole-sale and long-term financing.
 Margin Requirements for Over the Counter Derivatives: In March 2015, the BCBS and the
International Organisation of Securities Commissions (IOSCO) finalised a framework on margin
requirements for non-centrally cleared derivatives. A consultative paper outlining the Reserve Bank’s
approach to implementation of these requirements will be issued by end-April 2016 with a target of
finalising the framework by end-July 2016.
 Countercyclical Capital Buffers (CCCB): On the basis of a review and empirical testing of CCCB
indicators, RBI has decided that it is not necessary to activate CCCB at this point in time.
 Supervisory Enforcement Framework: For improved supervisory framework the framework, which
meets the principles of natural justice and global standards of transparency, predictability,
standardisation, consistency, severity and timeliness of action, will be formalised by June 2016.
 Cyber Risks - Supervisory Assessment of Preparedness of Banks:
 To strengthen the information security preparedness of banks as well as to assess the effectiveness
of IT adoption by banks, RBI plans to cover major banks in 2016-17 and all banks from 2017-18.
 The Reserve Bank has constituted an Expert Panel (Chairperson: Smt. Meena Hemachandra) on IT
Examination and Cyber Security to provide broad guidance on its approach.
 Technology Support to Urban Cooperative Banks (UCBs): RBI has been decided to prescribe
standards and benchmarks for CBS in UCBs and provide financial assistance and technical support
through the Institute for Development and Research in Banking Technology (IDRBT). The initial set-up
cost in this regard will be borne by the RBI while the recurring cost will be borne by the UCBs.
FINANCIAL MARKETS:
 Introduction of Money Market Futures:
 The Working Group on Enhancing Liquidity in the Government Securities and Interest Rate
Derivatives (Chairman: Shri R. Gandhi) had recommended introduction of interest rate futures based on
the overnight call money borrowing rate.
 RBI has decided to allow futures on an appropriate money market rate. The contract specifications
will be decided in consultation with market participants and the Securities and Exchange Board of India
(SEBI) by end-September 2016.
 Easier Market Access to Gilt Account Holders:
 With a view to easing the process of investment by gilt account holders, it will be made incumbent on
custodians to provide all gilt account holders access to the NDS-OM web facility to enable them to trade
directly on the platform.
 A similar facility is also proposed to be extended to foreign portfolio investors (FPIs).
 Broadening Market Participation - Electronic Trading Platforms:
 In order to broaden participation in OTC derivatives and to provide a safe trading environment, RBI
has proposed to put in place a policy framework for authorisation of electronic platforms with linkage to
an approved central counterparty for settlement.
 The framework will also cover forex platforms to facilitate hedging by small and retail customers.
 Tripartite Repo in Government Securities Market:
 The Working Group on Enhancing Liquidity in the Government Securities and Interest Rate
Derivatives (Chairman: Shri R. Gandhi) had recommended introduction of tripartite repo to develop a
term repo market.
 In this context, RBI has decided to undertake a comprehensive review of collateralised money market
segments, including introduction of tripartite repo, in consultation with market participants. The review
will be placed on the Reserve Bank’s website by September 2016 for wider feedback.
 Review of Guidelines for Commercial Paper (CP):
 With a spurt in the issuance of CPs, market participants and the Fixed Income Money Market and
Derivatives Association (FIMMDA) have expressed the need for greater transparency and better
dissemination of information.
 Accordingly, RBI has proposed to undertake a comprehensive review of guidelines with the objective
of strengthening disclosure requirements by issuers of CPs, reviewing the role of issuing and paying
agents (IPAs) and putting in place an information dissemination mechanism.
 ˜ Guidelines for Accounting of Repo/Reverse Repo Transactions:
It is proposed to align the accounting norms to be followed by market participants for repo/reverse repo
transactions under the liquidity adjustment facility (LAF) and the marginal standing facility (MSF) with
the accounting guidelines prescribed for market repo transactions.
˜ Easing of Restrictions on Plain Vanilla Forex Options:
 Currently, plain vanilla currency options require adherence to stringent suitability and appropriateness
norms although they are considered a generic product, while forward contracts are exempt from the
same.
 It is proposed to bring plain vanilla forex options bought by bank clients at par with forex forwards on
regulatory requirements.
˜ Forex Benchmark-RBI Reference Rate:
As recommended by the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar), RBI
has decided to move over to a process of determining the reference rate based on actual market
transactions on volume weighted basis with effect from May 2, 2016.
˜ NRIs to Participate in the Exchange Traded Currency Derivatives (ETCD) Market:
RBI has decided to permit NRIs to participate in the ETCDs, subject to limits and other conditions that
are stipulated by the exchanges recognised by the SEBI. Guidelines in this regard will be issued by the
Reserve Bank in consultation with the SEBI .
˜ Initiatives for Start-ups:
 In the Sixth Bi-Monthly Monetary Policy Statement for 2015 16, the Reserve Bank had highlighted the
steps being taken with respect to the Government’s initiatives to promote ease of doing business for
start-ups.
 Guidelines/clarifications have already been issued in areas such as online submission of Form A2 for
outward remittances up to certain thresholds, issue of shares without cash payments and acceptance of
payments by the Indian start-ups on behalf of their overseas subsidiaries.
 In addition, guidelines in respect of deferred payment through escrow / indemnity arrangement for
transfer of shares, enabling investment by foreign venture capital investors (FVCIs) in startups and
overseas investment operations for start-ups will be issued soon in consultation with the Government.
 Furthermore, the simplification of process for dealing with delayed reporting of FDI transactions and
provisions for an enabling external commercial borrowing regime for start-ups are being examined by
the Government and the Reserve Bank.
NBFCs, FINANCIAL INCLUSION AND PAYMENT AND SETTLEMENT:
˜ Simplification of Process of Registration of New Non-banking Financial Companies (NBFCs):
In order to make the process of registration of new NBFCs smoother and hassle free, RBI has decided
to simplify and rationalise the process of registering new NBFCs. The new application forms will be
simpler and the number of documents required to be submitted will be reduced to a minimum.
Peer to Peer Lending (P2P):
P2P lending has shown accelerated growth over the last one year and the contours of regulating P2P
lending will be decided in consultation with the SEBI.
˜Strengthening Business Correspondent Infrastructure: The BC model offers significant scope for
further strengthening. Accordingly, the following initiatives are proposed:
i) In order to ensure the competence of BCs and to promote quality delivery of financial services, a
graded certification / training programme for BCs is proposed to be introduced. This would enable BCs
with a good track record and advanced training to be entrusted with more complex tasks such as
handling/delivery of financial products that go beyond deposit and remittance.
ii) In order to have a tracking system of BCs, RBI has proposed to create a registry covering all BCs,
both existing and new. The registration will be online and will capture basic details including location of
fixed point BCs, nature of operations and the like. This database will be updated on a quarterly basis
and the IBA will be requested to put in place a registry of BC agents in consultation with all
stakeholders.
˜ Micro, Small and Medium Enterprises (MSMEs):
The Reserve Bank will shortly lay down a framework for accreditation of credit counsellors who can act
as facilitators for entrepreneurs to access the formal financial system with greater ease and flexibility.
Credit counsellors will also assist MSMEs in preparing project reports in a professional manner which
would, in turn, help banks make more informed credit decisions.
˜ Payment and Settlement Systems in India – Vision 2018:
 The Reserve Bank will publish Vision 2018 for the payment and settlement systems in the country by
end-April 2016. Vision 2018 will continue to focus on migrating to a ‘less-cash’ and more digital society.
 This would be complemented by enhanced supervision of payment system operators, improvement in
customer grievance redressal mechanisms and for the strengthening of the payments infrastructure.
36. INDRADHANUSH PLAN FOR REVAMP OF PUBLIC SECTOR BANKS
The Public Sector Banks (PSBs) play a vital role in India's economy. In the past few years, because of
a variety of legacy issues including the delay caused in various approvals as well as land acquisition
etc., and also because of low global and domestic demand, many large projects have stalled. Public
Sector Banks which have got predominant share of infrastructure financing have been sorely affected. It
has resulted in lower profitability for PSBs, mainly due to provisioning for the restructured projects as
well as for gross NPAs. The government has announced a seven-pronged strategy, called
Indradhanush, to tackle challenges in the banking sector.
The comprehensive framework for improving public PSBs performance is based on seven prongs —
appointments, bank board bureau, capitalisation, de-stressing PSBs, empowerment, framework of
accountability and governance reforms. The seven-point reform plan includes:
A) Appointments:
(a) The Government decided to separate the post of Chairman and Managing Director. The CEO will
get the designation of MD & CEO and there would be another person who would be appointed as non-
Executive Chairman of PSBs.
(b) The selection process for both these positions has been transparent and meritocratic. The entire
process of selection for MD & CEO was revamped. Private sector candidates were also allowed to apply
for the position of MD & CEO of the five top banks i.e. Punjab National Bank, Bank of Baroda, Bank of
India, IDBI Bank and Canara Bank. Three stage screening was done for the MD's position culminating
into final interview by three different panels. Two CEO & MD out of 5 banks are from the private sector
for the first time. Earlier, the chairmen of state-owned lenders came only from the public sector. The
process of selection of Non-official / Independent Directors has been revamped and made transparent.
B) Bank Board Bureau: The BBB will be a body of eminent professionals and officials, which will
replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive
Chairman of PSBs. They will also constantly engage with the Board of Directors of all the PSBs to
formulate appropriate strategies for their growth and development. The structure of the BBB is going to
be as follows; the BBB will comprise of a Chairman and six more members of which three will be
officials and three experts (of which two would necessarily be from the banking sector). The members
will be selected in the next six months and the BBB will start functioning from the 01st April, 2016.
C) Capitalization: Excluding the internal profit generation which is going to be available to PSBs (based
on the estimate of average profit of the last three years), the capital requirement of extra capital for the
next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. This estimate is based on credit
growth rate of 12% for the current year and 12 to 15% for the next three years depending on the size of
the bank and their growth ability. The emphasis on PSBs financing will reduce over the years by
development of vibrant corporate debt market and by greater participation of Private Sector Banks. Out of
the total requirement, the Government of India proposes to make available Rs.70,000 crores out of
budgetary allocations for four years as per the figures given below:
(i) Financial Year 2015 -16 - Rs. 25,000 crore
(ii) Financial Year 2016-17 - Rs. 25,000 crore
(iii) Financial Year 2017-18 - Rs. 10,000 crore
(iv) Financial Year 2018-19 - Rs. 10,000 crore
PSB's market valuations will improve significantly due to (i) far reaching governance reforms; (ii) tight
NPA management and risk controls; (iii) significant operating improvements; and (iv) capital allocation
from the government. Improved valuations coupled with value unlocking from non-core assets as well
as improvements in capital productivity, will enable PSBs to raise the remaining Rs. 1,10,000 crore
from the market.
In the Supplementary Demand passed by parliament recently, an amount of Rs.12,000 crore has already
been provided, in addition to Rs.7,940 crores already provided in the budget of FY 2015-16. The
remaining Rs.5,000 crore would be provided in the second Supplementary later this year. This Rs.25,000
crore will be allocated as under:
(a) Tranche 1: About 40% of this amount will be given to those banks which require support, and every
single PSB will be brought to the level of at least 7.5% by Financial Year 2016;
(b) Tranche 2: 40% capital will be allocated to the top six big banks viz. SBI, BOB, BOI, PNB, Canara
Bank, and IDBI Bank in order to strengthen them to play a vital role in the economy.
(c) Tranche 3: The remaining portion of 20% will be allocated to the banks based on their performance
during the three quarters in the current year judged on the basis of certain performance. Eight banks
which did not get any money in first two tranche will get preference. The specific capital allocation for
each Bank is worked out as follows:
State Bank of India Rs 5531c cr; Bank of India Rs 2455 cr; I.D.B.I. Rs 2229 cr; Bank of Baroda Rs 1786
cr; Punjab National Bank Rs 1732 cr; Canara Bank Rs 947 cr; Indian Overseas Bank Rs 2009 cr; Union
Bank of India Rs 1080; Corporation Bank Rs 857 cr; Andhra Bank Rs 378 cr; Bank of Maharashtra Rs
394 cr; Allahabad Bank Rs 283 cr; Dena Bank Rs 407 cr; Total Rs 20088cr.
D) a) De-stressing PSBs: The infrastructure sector and core sector have been the major recipient of
PSBs' funding during the past decades. But due to several factors, projects are increasingly
stalled/stressed thus leading to NPA burden on banks. The major reasons affecting projects relating to
power, steel and road sectors were delay in obtaining permits / approvals from various governmental
and regulatory agencies, and land acquisition, delaying Commercial Operation Date (COD); lack of
availability of fuel, both coal and gas; cancellation of coal blocks; closure of Iron Ore mines affecting
project viability; lack of transmission capacity; limited off-take of power by Discoms given their reducing
purchasing capacity; funding gap faced by limited capacity of promoters to raise additional equity and
reluctance on part of banks to increase their exposure given the high leverage ratio; inability of banks to
restructure projects even when found viable due to regulatory constraints. In case of steel sector the
prevailing market conditions, viz. global over-capacity coupled with reduction in demand led to
substantial reduction in global prices, and softening in domestic prices added to the woes. The Govt
has taken various steps in this regard including (i) Project Monitoring Group (Cab. Sect.) / Respective
Ministries will pursue with concerned agencies to facilitate issue of pending approval/permits
expeditiously; (ii) Pending policy decisions to facilitate project implementation/operation would be taken
up by respective Ministries/Departments; (iii)Ministry of Coal/PNG will evolve policies to address long-
term availability of fuel for these projects; (iv)Respective Discoms will be provided hand-holding towards
enabling early reforms; (v) Promoters will be asked to bring in additional equity in an attempt to address
the worsening leverage ratio of these projects. Wherever the promoters are unable to meet this
requirement, the Banks would consider viable options for substitution or taking over management
control; (vi)The possibility of changing the extant duty regime without adversely impacting the
downstream user industry would be considered by the Government. The decision to increase import
duty on steel has already been taken; (vii) RBI has been requested to consider the proposal of the
Banks for granting further flexibility in restructuring of existing loans wherever the Banks find viability.
D) b) Strengthening Risk Control measures and NPA Disclosures: Steps taken include —
(i). RBI guidelines for "Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair
Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy" suggesting various
steps for quicker recognition and resolution of stressed assets;
(ii) Creation of a Central Repository of Information on Large Credits (CRILC) by RBI to collect, store,
and disseminate credit data to banks on credit exposures of Rs. 5 crore and above;
(iii) Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and sale of assets;
(iv) Flexible Structuring of Loan Term Project Loans to Infrastructure and Core Industries;
(v) Identification of Wilful Default/Non-Cooperative Borrowers and higher provisioning in case of fresh
loan to such a borrower;
(vi) Tightening of norms for Asset Reconstruction Companies where the minimum investment in
Security Receipts should be 15% which was earlier 5%. This step will increase the cash stake of ARCs
in the assets purchased by them. Further, by having more cash up front, the banks will have better
incentive to clean their balance sheet;
(vii) Establishment of six New DRTs at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri,
Hyderabad to speed up the recovery of bad loans of the banking sector.
E) Empowerment: No interference from Government and Banks are encouraged to take their decision
independently keeping the commercial interest of the organisation in mind.
Banks have been asked to build robust Grievances Redressal Mechanism for customers as well as
staff so that concerns of the affected are addressed effectively in time bound manner.
The government will strive to make it easier for PSBs to hire. While there will be greater flexibility in
hiring, banks will not be able to go for direct campus placements from IITs or IIMs due to legal hurdles.
They will be empowered to make middle-level appointments. Banks are already free to hire on
contractual basis.
F) Framework of Accountability: A new framework of Key Performance Indicators (KPIs) to be measured
for performance of PSBs is being announced. It is divided into four sections totaling up to 100 marks. 25
marks each are allotted to indicators relating to efficiency of capital use and diversification of
business/processes and 15 marks each are allotted for specific indicators under the category of NPA
management and financial inclusion. The remaining 20 marks are reserved for measurement of
qualitative criteria which includes strategic initiatives taken to improve asset quality, efforts made to
conserve capital, HR initiatives and improvement in external credit rating. The qualitative performance
would be assessed based on a presentation to be made by banks to a committee chaired by Secretary,
Department of Financial Services.
Operating performance evaluated through the KPI framework will be linked to the performance bonus
to be paid to the MD & CEOs of banks by the Government. The quantum of performance bonus is also
proposed to be revised shortly to make it more attractive.
Govt is also considering ESOPs for top management of PSBs.
Secondly, vigilance process is being streamlined for quick action for major frauds including connivance
of staff. Under the new guidelines, a timeframe of six months, red flagging of accounts, constitution of a
Risk Management Group (RMG) in banks to monitor pre-sanction and disbursement, nodal officer for
filing complaints with CBI, provisioning in four quarters and creation of Central Fraud Registry have been
laid down. PSBs directed to make CVO as the nodal officer for fraud exceeding Rs 50 crore, in
consortium lending the lead bank will file the FIR for all banks and CBI has designated one officer for
reviewing and monitoring progress of bank's fraud cases.
G) Governance Reforms: The process of governance reforms started with "Gyan Sangam. Various
steps have been taken to empower Bank's Boards. Continuing with this year's Gyan Sangam, next
Gyan Sangam will be held between 14-16.01.2016 to discuss strategy with top level officials. Further,
scheme of ESOPs for top management is under formulation.
Comments: Indradhanush can be a game-changer. Its focus on capital efficiency rather than business
growth marks a paradigm shift. Indradhanush proposals can help PSBs effectively deal with the malaise
of non-performing assets (NPAs). Indradhanush makes a realistic assessment of the capital needs of
public sector banks. Indradhanush takes cognisance of both internal and external factors that influence
the performance of PSBs. The clear timeline given for the setting up of a Bank Board Bureau and the
announcement inducting professionals as non-executive chairmen will eventually drive qualitative
changes in governance, strategy formulation, capital efficiency, and human resource practices. Allowing
bonus and stock options for senior management will make PSBs competitive and go a long way in
attracting right talent.
37. CONCURRENT AUDIT SYSTEM IN COMMERCIAL BANKS

The concurrent audit system in banks is regarded as part of a bank's early warning system to ensure
timely detection of irregularities and lapses, which also helps in preventing fraudulent transactions at
branches. In view of the changes in banks’ organizational structure, business models, use of technology
(implementation of Core Banking Solution), etc., RBI has revised (July 16, 2015) guidelines on
'concurrent audit system in commercial banks' as given below. The bank should, once in a year, review
the effectiveness of the system and take necessary measures to correct the lacunae in the
implementation of the Programme.
Revised Guidelines for Concurrent Audit System in Commercial Banks
(A)Scope of concurrent audit: Concurrent audit attempts to shorten the interval between a transaction
and its examination by an independent person. A concurrent auditor may not sit in judgement of the
decisions taken by a branch manager or an authorised official. This is beyond the scope of concurrent
audit. However, the audit will necessarily have to see whether the transactions or decisions are within
the policy parameters laid down by the Head Office, they do not violate the instructions or policy
prescriptions of the RBI, and that they are within the delegated authority.
(B) Coverage of business/branches: While selecting the branches for concurrent Audit, the risk profile of
the branches needs to be considered. The branches with high risk are to be subjected to concurrent
audit irrespective of their business size. Further, all specialized branches viz., Agri, SME, Corporate,
Retail Assets, Portfolio Management, Treasury, Forex, Back Office, etc., may be covered under
concurrent audit. Certain areas where risk has reduced on account of computerization, implementation of
core banking system may be excluded from the purview of concurrent audit. Concurrent audit at
branches should cover at least 50% of the advances and 50% of deposits of a bank. The following
branches, business activities/verticals of a bank may be subject to concurrent audit: Branches rated as
high risk or above in the last Risk Based Internal Audit (RBIA) or serious deficiencies found in Internal
Audit; All specialized branches like Large Corporate, Mid Corporate, exceptionally large/very large
branches (ELBs/VLBs), SME; All Centralised Processing Units like Loan Processing Units (LPUs),
service branches, centralized account opening divisions, etc.; Any specialized activities such as wealth
management, portfolio management services, Card Products Division, etc.; Data Centres;
Treasury/branches handling foreign exchange business, investment banking, etc. and bigger overseas
branches; Critical Head Office Departments.
Types of activities to be covered: The scope of concurrent audit should be wide enough/focused to cover
certain fraud - prone areas such as handling of cash, deposits, advances, foreign exchange business, off-
balance sheet items, credit-card business, internet banking, etc. The detailed scope of the concurrent
audit should be clearly and uniformly determined for the bank as a whole by the bank's Inspection and
Audit Department in consultation with the bank's Audit Committee of the Board of Directors (ACB). In
determining the scope, importance should be given to checking high-risk transactions having large
financial implications as opposed to transactions involving small amounts. While the detailed scope of
concurrent audit may be determined and approved by ACB, certain minimum items of coverage as
given below should be included. In addition to the above, the items where RBI has specifically advised
the banks to be covered under concurrent audit, may also be part of the checklist of the concurrent
auditor.
(C)Appointment of Auditors and Accountability: The option to consider whether concurrent audit should
be done by bank's own staff or external auditors (which may include retired staff of its own bank) is left
to the discretion of individual banks. In case the bank has engaged its own officials, they should be
experienced, well trained and sufficiently senior. The staff engaged in concurrent audit must be
independent of the Branch where concurrent audit is conducted. Appointment of an external audit firm
may be initially for one year and extended upto three years, after which an auditor could be shifted to
another branch subject to satisfactory performance.
(D) Facilities
for effective Concurrent Audit: Banks arrange for an initial and periodical familiarisation
process both for the bank's own staff when entrusted with the concurrent audit and for the external
auditors appointed for the purpose. All relevant internal guidelines/circulars/important references as
well as relevant circulars issued by RBI/SEBI and other regulating bodies should be made available to
the concurrent auditors on an on-going basis. Where adequate space is not available, concurrent
auditors can commence work immediately after the close of banking hours.
(E)Remuneration: Terms of appointment of the external firms of Chartered Accountants for the
concurrent audit and their remuneration may be fixed by banks at their discretion keeping in view
various factors such as coverage of areas, quality of work expected, number of people required for the
job, number of hours to be spent on the job, etc.
Reporting Systems: (i) The bank may devise a reporting system and periodicity of various check list items
as per its sensitivity; (ii) Minor irregularities pointed out by the concurrent auditors are to be rectified on
the spot. Serious irregularities should be straightaway reported to the Controlling Offices/Head Offices for
immediate action; (iii) There should be zone/area-wise reporting of the findings of the concurrent audit to
ACB and an annual appraisal/report of the audit system should be placed before the ACB; (iv) Whenever
fraudulent transactions are detected, they should immediately be reported to Inspection & Audit
Department (Head Office) as also to the Chief Vigilance Officer as well as Branch Managers concerned
(unless the branch manager is involved); (v) There should be proper reporting of the findings of the
concurrent auditors. For this purpose, each bank should prepare a structured format. The major
deficiencies/aberrations noticed during audit should be highlighted in a special note and given
immediately to the bank's branch controlling offices. A quarterly review containing important features
brought out during concurrent audits should be placed before the ACB; (vi) Follow-up action on the
concurrent audit reports should be given high priority by the Controlling Office/Inspection and Audit
Department and rectification of the features done without any loss of time. (vii) Banks should (a) review
the selection of auditors; (b) initiate and operate a system for appraisal of the performance of concurrent
auditors; (c) ensure that the work of concurrent auditors is properly documented; (d) be responsible for
the follow-up on audit reports and the presentation of the quarterly review to the ACB
38. FINANCIAL FRAUDS – PREVENTION

(Edited excerpts from Speech delivered by Shri R. Gandhi, Deputy Governor on June 26, 2015 at New
Delhi)
What is Fraud: There is no universally accepted definition for the term ‘fraud’. Fraud is a generic term
embracing all the multifarious means which human ingenuity can devise and are resorted to by one
individual to gain an advantage over another by false suggestions or by suppression of the truth.
Section 25 of the Indian Penal Code (IPC) states that a “person is said to do a thing fraudulently if he
does that thing with intent to defraud but not otherwise.” IPC also does not specifically define what a
fraud is; but certain offences like cheating, concealment, forgery, counterfeiting, mis-appropriation,
breach of trust and falsification of accounts involve elements of fraud in their commission. Type of
Frauds in banks: The bank frauds are primarily deposit related, advances related and services related.
Of these, the deposit related frauds which used to be big in number though not in size, have been on
the wane, thanks to the improvements in cheque and payment processing, usage of technology and
tightening the provisions of the Negotiable Instruments Act. The advances related frauds continue to be
the major concern for banks, especially because of their size and far reaching implications to their
financial soundness and integrity. A special variety of frauds, which are increasing in number and in
terms of speed, are the cyber frauds. Yet another special type relates to trade or documentary credit
related, special because of cross border implications.
Bankers' Response to Frauds: The systemic response of banks to frauds include withdrawal from
lending, being risk averse, losing confidence in documentary credit, excessive collateralisation or
documentation, demands on personal guarantees, collapse of need based lending systems like MPBF,
Tandon and Chore Committee norms, etc. These are in addition to the bankers' efforts to recoup the
losses through higher interest rates and charges.
Root Cause of Financial Frauds & Three KY Principles: The root cause of financial frauds is failure to
Know Its Somebody – i.e. failure to Know Its Customer, or failure to Know Its Employee, or failure to
Know Its Partner / Vendor. The First KY - Know Your Customer (KYC): Besides obtaining various
documents from an account holder as prescribed under KYC, banks should make an effort to ‘know the
customer’ in the real sense - his background, his stated activities / profession, what his signature style
of operation is or digital foot print is, in case of online transactions, etc. The observation of his pattern of
transactions will let the bank draw up a customer profile. Once this is established any exception to the
norms can raise a red flag and tracked or confirmed with the customer. Banks should become adept in
pattern recognition and do discreet investigations on the suppliers / buyers to check if they are in the
same line of business or are bogus entities. Banks need to invest in data analytics and also intelligence
gathering to make fraud detection as near to real time as possible. On a bank level, each bank should
segment its customers based on their risk profile and transaction patterns and develop appropriate
response systems for exceptional patterns noticed and fortify systemic level controls. Since the
business landscape is generally dynamic, banks need to revisit their fraud risk management systems
from time to time.
The Second KY – Know Your Employee (KYE): Several frauds are insider jobs; or at least with the
abetment of insiders. Bankers are generally people of integrity. Still, banks have to take extra care to
have continuous vigil on their staff. Background checking for antecedents, checks and balances,
periodic rotations, vigilance assessments, internal audits, etc. techniques will have to be employed to
know the employees better and as preventive measures. The Third KY – Know Your Partner: Modern
day banking necessitates that a bank join hands with partners, agents, vendors. Outsourcing peripheral
and several operational activities involves deploying and trusting somebody else’s employees. Varied
activities as diverse as cash logistics to IT and data management are being entrusted to third parties.
Banking Correspondents and Banking Facilitators are emerging as another set of persons closely
associated with a bank. If frauds are to be prevented effectively, banks have to know their partners.
Steps taken by RBI:
1. Information Sharing: Reserve Bank has advised for information sharing among banks. Banks have
been advised to assign Unique Customer Identity Numbers (UCIN). Database on credit information,
centralized registry for recording security interests Central Registry of Securitisation, Asset
Reconstruction and Security Interest (CERSAI), centralized know your customer registry, Central
Repository of Information on Large Credits (CRILC), etc have been established or being built to share
information among the bankers. A Central Fraud Registry is also being planned. Besides, with List of
Wilful Defaulters, the banks get not only cautioned about the fraudsters, they can also bring in certain
deterrent action against them.
2. The new framework to deal with Frauds:
(a) Avoiding Delay: There are a lot of delays in detecting a fraud and in quite a few large value frauds,
the time taken was more than five years. Further to this initial delay, in case it was a consortium or
multiple banking facility, the divergent opinion among the financing bankers on whether an account was
a fraud or not also contributed to further delays. RBI has prescribed time limits within which certain
actions like investigating for fraud should be completed and a decision on whether an account is indeed
a fraud or not is made. Similarly the delays and divergent stands taken by banks in a consortium or
multiple banking arrangements have also been tackled by spelling out time lines for actions like
informing other banks of a Red Flagged Account, commissioning a forensic audit and arriving at a
consensus/majority decisions, etc. The fraudster borrowers will not be able to avail bank finance for five
years after full repayment of the dues. This is of course in addition to the criminal complaints to be filed
with police or CBI.
(b) Appraisal: The best way to prevent loan frauds is to tone up the appraisal process. A good
appraisal does not mean only analysing the financial statements and projections submitted by the
potential borrowers. It requires going beyond the given and independently gathering intelligence on the
potential borrower. This requires accessing public databases, news reports on any adverse
governmental action like raids, etc. A good appraisal should also take into account problems brewing in
the industry, in the promoters’ group, etc.
Monitoring: Monitoring plays a vital role in identifying potential frauds. RBI has put in place a system of
identifying Red Flagged Accounts based on Early Warning Signals. A red flagged account is one where
a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning signals.
The presence of these signals should trigger a detailed investigation into the RFA
FRAMEWORK FOR DEALING WITH LOAN FRAUDS The issues relating to prevention, early detection
and reporting of frauds has been looked into by an Internal Working Group (IWG) of the RBI and based on
its recommendations, RBI has prepared (May 7, 2015) a framework for fraud risk management in banks
which is given below:
1. Objective of the framework: To direct the focus of banks on the aspects relating to prevention, early
detection, prompt reporting to the RBI (for system level aggregation, monitoring & dissemination) and the
investigative agencies (for instituting criminal proceedings against the fraudulent borrowers) and timely
initiation of the staff accountability proceedings (for determining negligence or connivance, if any) while
ensuring that the normal conduct of business of the banks and their risk taking ability is not adversely
impacted and no new and onerous responsibilities are placed on the banks.
2.0 Early Warning Signals (EWS) and Red Flagged Accounts 2.1 A Red Flagged Account (RFA) is one
where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning
Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a
weakness or wrong doing which may ultimately turn out to be fraudulent. A bank cannot afford to ignore
such EWS but must instead use them as a trigger to launch a detailed investigation into a RFA.
2.2 An illustrative list of some EWS is given at the end of this paper. Banks may choose to adopt or adapt
the relevant signals from this list and also include other alerts/signals based on their experience, client
profile and business models. The EWS so compiled by a bank would form the basis for classifying an
account as a RFA.
2.3 The threshold for EWS and RFA is an exposure of Rs.500 million or more at the level of a bank
irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). All
accounts beyond Rs.500 million classified as RFA or ‘Frauds’ must also be reported on the CRILC data
platform together with the dates on which the accounts were classified as such. The CRILC data
platform is being enhanced to provide this capability by June 1, 2015.
2.4 The modalities for monitoring of loan frauds below Rs.500 million threshold is left to the discretion of
banks. However, banks may continue to report all identified accounts to CFMC, RBI as per the existing
cut-offs.
2.5 The tracking of EWS in loan accounts should not be seen as an additional task but must be
integrated with the credit monitoring process in the bank so that it becomes a continuous activity and also
acts as a trigger for any possible credit impairment in the loan accounts, given the interplay between
credit risks and fraud risks. In respect of large accounts it is necessary that banks undertake a detailed
study of the Annual Report as a whole and not merely of the financial statements, noting particularly the
Board Report and the Managements’ Discussion and Analysis Statement as also the details of related
party transactions in the notes to accounts. The officer responsible for the operations in the account, by
whatever designation called, should be sensitised to observe and report any manifestation of the EWS
promptly to the Fraud Monitoring Group (FMG) or any other group constituted by the bank for the
purpose immediately. To ensure that the exercise remains meaningful, such officers may be held
responsible for non-reporting or delays in reporting 2.6 The FMG should report the details of loan
accounts of Rs.500 million and above in which EWS are observed, together with the decision to classify
them as RFAs or otherwise to the CMD/CEO every month.
2.7 A report on the RFA accounts may be put up to the Special Committee of the Board for monitoring and
follow-up of Frauds (SCBF) providing, inter alia, a synopsis of the remedial action taken together with their
current status.
3.0 Early Detection and Reporting
3.1 At present the detection of frauds takes an unusually long time. Banks tend to report an account as
fraud only when they exhaust the chances of further recovery. Among other things, delays in reporting of
frauds also delays the alerting of other banks about the modus operandi through caution advices by RBI
that may result in similar frauds being perpetrated elsewhere. More importantly, it delays action against
the unscrupulous borrowers by the law enforcement agencies which impact the recoverability aspects to
a great degree and also increases the loss arising out of the fraud.
3.2 The most effective way of preventing frauds in loan accounts is for banks to have a robust appraisal
and an effective credit monitoring mechanism during the entire life-cycle of the loan account. Any
weakness that may have escaped attention at the appraisal stage can often be mitigated in case the post
disbursement monitoring remains effective. In order to strengthen the monitoring processes, based on an
analysis of the collective experience of the banks, inclusion of the following checks / investigations during
the different stages of the loan life-cycle may be carried out:
3.2.1 Pre-sanction: As part of the credit process, the checks being applied during the stage of pre-sanction
may consist of the Risk Management Group (RMG) or any other appropriate group of the bank collecting
independent information and market intelligence on the potential borrowers from the public domain on
their track record, involvement in legal disputes, raids conducted on their businesses, if any, strictures
passed against them by Government agencies, validation of submitted information/data from other
sources like the ROC, gleaning from the defaulters list of RBI/other Government agencies, etc., which
could be used as an input by the sanctioning authority. Banks may keep the record of such pre-sanction
checks as part of the sanction documentation.
3.2.2 Disbursement: Checks by RMG during the disbursement stage may focus on the adherence to the
terms and conditions of sanction, rationale for allowing dilution of these terms and conditions, level at
which such dilutions were allowed, etc. The dilutions should strictly conform to the broad framework laid
down by the Board in this regard. As a matter of good practice, the sanctioning authority may specify
certain terms and conditions as ‘core’ which should not be diluted. The RMG may immediately flag the
non-adherence of core stipulations to the sanctioning authority.
3.2.3 Annual review: While the continuous monitoring of an account through the tracking of EWS is
important, banks also need to be vigilant from the fraud perspective at the time of annual review of
accounts. Among other things, the aspects of diversion of funds in an account, adequacy of stock vis-a-vis
stock statements, stress in group accounts, etc., must also be commented upon at the time of review.
Besides, the RMG should have capability to track market developments relating to the major clients of the
bank and provide inputs to the credit officers. This would involve collecting information from the grapevine,
following up stock market movements, subscribing to a press clipping service, monitoring databases on a
continuous basis and not confining the exercise only to the borrowing entity but to the group as a whole.
3.3 Staff empowerment: Employees should be encouraged to report fraudulent activity in an account,
along with the reasons in support of their views, to the appropriately constituted authority, under the
Whistle Blower Policy of the bank, who may institute a scrutiny through the FMG. The FMG may ‘hear’ the
concerned employee in order to obtain necessary clarifications. Protection should be available to such
employees under the whistle blower policy of the bank so that the fear of victimisation does not act as a
deterrent. 3.4 Role of Auditors: During the course of the audit, auditors may come across instances where
the transactions in the account or the documents point to the possibility of fraudulent transactions in the
account. In such a situation, the auditor may immediately bring it to the notice of the top management and
if necessary to the Audit Committee of the Board (ACB) for appropriate action.
3.5 Incentive for Prompt Reporting: In case of accounts classified as ‘fraud’, banks are required to make
provisions to the full extent immediately, irrespective of the value of security. However, in case a bank is
unable to make the entire provision in one go, it may now do so over four quarters provided there is no
delay in reporting. In case of delays, the banks under Multiple Banking Arrangements (MBA) or member
banks in the consortium are required to make the provision in one go. Delay, would mean that the fraud
was not flashed to CFMC, RBI or reported on the CRILC platform, RBI within a period of one week from
its (i) classification as a fraud through the RFA route which has a maximum time line of six months or (ii)
detection/declaration as a fraud ab initio by the bank as hitherto. The CRILC platform will accept the RFA
and Fraud categories shortly.
4.0 Bank as a sole lender
4.1 In cases where the bank is the sole lender, the FMG will take a call on whether an account in which
EWS are observed should be classified as a RFA or not. This exercise should be completed as soon as
possible and in any case within a month of the EWS being noticed. In case the account is classified as a
RFA, the FMG will stipulate the nature and level of further investigations or remedial measures necessary
to protect the bank’s interest within a stipulated time which cannot exceed six months.
4.2 The bank may use external auditors, including forensic experts or an internal team for investigations
before taking a final view on the RFA. At the end of this time line, which cannot be more than six months,
banks would either lift the RFA status or classify the account as a fraud.
4.3 A report on the RFA accounts may be put up to the SCBF with the observations/decision of the FMG.
The report may list the EWS/irregularities observed in the account and provide a synopsis of the
investigations ordered / remedial action proposed by the FMG together with their current status.
5.0 Lending under Consortium or Multiple Banking Arrangements (MBA)
5.1 As per extant guidelines, all the banks which have financed a borrower under MBA should take co-
ordinated action, based on a commonly agreed strategy, for legal / criminal actions and the bank which
classifies or declares a fraud should report the same to CFMC, RBI within the deadlines specified by RBI.
5.2 In case of consortium arrangements, individual banks must conduct their own due diligence before
taking any credit exposure and also independently monitor the end use of funds rather than depend fully
on the consortium leader. However, as regards monitoring of Escrow Accounts, the details may be
worked out by the consortium and duly documented so that accountability can be fixed easily at a later
stage. Besides, any major concerns from the fraud perspective noticed at the time of annual reviews or
through the tracking of early warning signals should be shared with other consortium / multiple banking
lenders immediately as hitherto.
5.3 The initial decision to classify any standard or NPA account as RFA or Fraud will be at the individual
bank level and it would be the responsibility of this bank to report the RFA or Fraud status of the account
on the CRILC platform so that other banks are alerted. Thereafter, within 15 days, the bank which has red
flagged the account or detected the fraud would ask the consortium leader or the largest lender under
MBA to convene a meeting of the JLF to discuss the issue. The meeting of the JLF so requisitioned must
be convened within 15 days of such a request being received. In case there is a broad agreement, the
account would be classified as a fraud; else based on the majority rule of agreement amongst banks with
at least 60% share in the total lending, the account would be red flagged by all the banks and subjected to
a forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA. All
banks, as part of the consortium or multiple banking arrangement, would share the costs and provide the
necessary support for such an investigation.
5.4 The forensic audit must be completed within a maximum period of three months from the date of the
JLF meeting authorizing the audit. Within 15 days of the completion of the forensic audit, the JLF will
reconvene and decide on the status of the account, either by consensus or the majority rule as specified
above. In case the decision is to classify the account as a fraud, the RFA status would change to Fraud
in all banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides,
within 15 days of the RBI reporting, the bank commissioning/ initiating the forensic audit would lodge a
complaint with the CBI on behalf of all banks in the consortium/MBA.
5.5 The overall time allowed for the entire exercise to be completed is six months from the date when the
first member bank reported the account as RFA or Fraud on the CRILC platform.
6.0 Staff Accountability
6.1 As in the case of accounts categorised as NPAs, banks must initiate and complete a staff
accountability exercise within six months from the date of classification as a Fraud. Wherever felt
necessary or warranted, the role of sanctioning official(s) may also be covered under this exercise. The
completion of the staff accountability exercise for frauds and the action taken may be placed before the
SCBF and intimated to the RBI at quarterly intervals.
6.2 Banks may bifurcate all fraud cases into vigilance and non-vigilance. Only vigilance cases should be
referred to the investigative authorities. Non-vigilance cases may be investigated and dealt with at the
bank level within a period of six month
6.3 In cases involving very senior executives of the bank, the Board / ACB/ SCBF may initiate the process
of fixing staff accountability.
6.4 Staff accountability should not be held up on account of the case being filed with law enforcement
agencies. Both the criminal and domestic enquiry should be conducted simultaneously.
7.0 Filing Complaints with Law Enforcement Agencies
7.1 Banks are required to lodge the complaint with the law enforcement agencies immediately on
detection of fraud. There should ideally not be any delay in filing of the complaints with the law
enforcement agencies since delays may result in the loss of relevant ‘relied upon’ documents, non-
availability of witnesses, absconding of borrowers and also the money trail getting cold in addition to asset
stripping by the fraudulent borrower.
7.2 Banks should establish a nodal point / officer for filing all complaints with the CBI on behalf of the
bank and serve as the single point for coordination and redressal of infirmities in the complaints. The
Government is also considering a central point for receiving complaints/FIRs from banks in the CBI.
7.3 The complaint lodged by the bank with the law enforcement agencies should be drafted properly and
invariably be vetted by a legal officer. Cheating, misappropriation of funds, diversion of funds etc., by
borrowers automatically constitute the basis for classifying an account as a fraudulent one. Therefore,
banks may invariably classify such accounts as frauds and report the same to RBI/CBI/Police.
8.0 Penal measures for fraudulent borrowers
8.1 In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent
borrower including the promoter director(s) and other whole time directors of the company insofar as
raising of funds from the banking system or from the capital markets by companies with which they are
associated is concerned, etc. In particular, borrowers who have defaulted and have also committed a
fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks,
Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period
of five years from the date of full payment of the defrauded amount. After this period, it is for individual
institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-
whole time directors (like nominee directors and independent directors) only in rarest of cases based on
conclusive proof of their complicity.
8.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts.
8.3 No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate
that the criminal complaint will be continued.
9.0 Central Fraud Registry
9.1 The Reserve Bank is in the process of designing a Central Fraud Registry, a centralised searchable
database, which can be accessed by banks. The CBI and the Central Economic Intelligence Bureau
(CEIB) have also expressed interest in sharing their own databases with the banks.
Early Warning signals which should alert the bank officials about some wrongdoings in the loan accounts
1. Default in payment to the banks/ sundry debtors and other statutory bodies, etc., bouncing of the high
value cheques
2. Raid by Income tax /sales tax/ central excise duty officials
3. Frequent change in the scope of the project to be undertaken by the borrower
4. Under insured or over insured inventory
5. Invoices devoid of TAN and other details
6. Dispute on title of the collateral securities
7. Costing of the project which is in wide variance with standard cost of installation of the project
8. Funds coming from other banks to liquidate the outstanding loan amount
9. Foreign bills remaining outstanding for a long time and tendency for bills to remain overdue
10. Onerous clause in issue of BG/LC/standby letters of credit
11. In merchanting trade, import leg not revealed to the bank
12. Request received from the borrower to postpone the inspection of the godown for flimsy reasons
13. Delay observed in payment of outstanding dues Financing the unit far away from the branch
14. Claims not acknowledged as debt high
15. Frequent invocation of BGs and devolvement of LCs Funding of the interest by sanctioning additional
facilities
16. Same collateral charged to a number of lenders Concealment of certain vital documents like master
agreement, insurance coverage
17. Floating front / associate companies by investing borrowed money
18. Reduction in the stake of promoter / director Resignation of the key personnel and frequent changes in
the management
19. Substantial increase in unbilled revenue year after year. Large number of transactions with inter-
connected companies and large outstanding from such companies. Significant movements in
inventory, disproportionately higher than the growth in turnover.
20. Significant movements in receivables, disproportionately higher than the growth in turnover
and/or increase in ageing of the receivables. Disproportionate increase in other current assets.
Significant increase in working capital borrowing as percentage of turnover.
21. Critical issues highlighted in the stock audit report. Increase in Fixed Assets, without corresponding
increase in turnover (when project is implemented). Increase in borrowings, despite huge cash and
cash equivalents in the borrower’s balance sheet.
22. Liabilities appearing in ROC search report, not reported by the borrower in its annual report.
23. Substantial related party transactions.
24. Material discrepancies in the annual report.
25. Significant inconsistencies within the annual report (between various sections).
26. Poor disclosure of materially adverse information and no qualification by the statutory auditors.
27. Frequent change in accounting period and/or accounting policies.
28. Frequent request for general purpose loans.
29. Movement of an account from one bank to another. Frequent ad hoc sanctions.
30. Not routing of sales proceeds through bank
31. LCs issued for local trade / related party transactions High value RTGS payment to unrelated parties.
Heavy cash withdrawal in loan accounts.
32. Non submission of original bills.
39. LIBERALISED REMITTANCE SCHEME (LRS) FOR RESIDENT INDIVIDUALS (JUNE 1, 2015)
RBI has revised the LRS scheme for resident individuals. The details of the revised scheme are given
below:
Remittance facilities for individuals - LRS: AD banks may now allow remittances by a resident individual
up to USD 250,000 per financial year for any permitted current or capital account transaction or a
combination of both. If an individual has already remitted any amount under the LRS, then the applicable
limit for such an individual would be reduced from the present limit of USD 250,000 for the financial year
by the amount already remitted. For emigration, expenses in connection with medical treatment abroad
and studies abroad, individuals may avail of exchange facility for an amount in excess of the overall limit
prescribed under the LRS, if it is so required by a country of emigration, medical institute offering
treatment or the university respectively.
Permissible capital account transactions by an individual under LRS:
i) opening of foreign currency account abroad with a bank;
ii) purchase of property abroad;
iii)making investments abroad;
iv) setting up Wholly owned subsidiaries and Joint Ventures abroad;
v) extending loans including loans in Indian Rupees to Nonresident Indians (NRIs) who are relatives as
defined in Companies Act, 2013.
Current account transaction by an individual under LRS:
1. Private visits to any country (except Nepal and Bhutan)
2. Gift or donation.
3. Going abroad for employment
4. Emigration
5. Maintenance of close relatives abroad
6. Travel for business, or attending a conference or
specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for
accompanying as attendant to a patient going abroad for medical treatment/ check-up.
7. Expenses in connection with medical treatment abroad
8. Studies abroad
9. Any other current account transaction
Release of exchange in addition to LRS: All the facilities (including private/business visits) for release of
exchange/remittances for current account transactions available to resident individuals shall now be
subsumed under the overall limit of USD 250,000 and there will not be any further sub limits.
Gift in Indian Rupees by resident individuals to NRI relatives: shall also be subsumed under the LRS limit.
Purpose for which LRS cannot be used: The Scheme cannot be made use for making remittances for any
prohibited or illegal activities such as margin trading, lottery, etc.
Remittance Procedure: The resident individual seeking to make the remittances should furnish an
application cum declaration in the prescribed format to the AD/ full fledged money changer (FFMC)
concerned regarding the purpose of the remittances and declaration to the effect that the funds belong to
the remitter and will not be used for the prohibited purposes. Resident individuals can also purchase
foreign exchange from a full fledged money changer (FFMC) for private/business visits. Foreign exchange
thus purchased from an FFMC should also be reckoned within the overall LRS limit USD 250,000 and
declared accordingly in the application-cum-declaration form submitted to the AD bank. While allowing the
facility to resident individuals, Authorised Persons, including AD Category II and FFMCs, are required to
ensure that the "Know Your Customer" guidelines and the Anti-Money Laundering Rules in force have
been complied with while allowing the transactions. Requirements to be complied with by the Ads
1. Banks should not extend any kind of funded and non-funded facilities to resident individuals to facilitate
capital account remittances under the Scheme.
2. The applicants should have maintained the bank account with the bank for a minimum period of one
year prior to the remittance for capital account transactions. If the applicant seeking to make the
remittances is a new customer of the bank, Authorised Dealers should carry out due diligence on the
operations and maintenance of the account.
3. No part of the foreign exchange of USD 250,000 shall be used for remittance directly or indirectly to
countries notified as non-cooperative countries and territories by the Financial Action Task Force (FATF)
from time to time and communicated by the Reserve Bank of India to all concerned.
Reporting of the transactions: Authorised Dealers may arrange to furnish on a monthly basis information
on the number of applicants and total amount remitted under LRS to RBI through Online Return Filing
System (ORFS) only. Remittance by persons other than individuals: A person other than an individual may
also avail of foreign exchange facility, mutatis mutandis, within the limit prescribed under the said
Liberalised Remittance Scheme for the purposes mentioned herein above.
Facilities for persons other than individuals: Persons other than individuals can make remittances for -
1. Donations for educational institutions up to one per cent of their foreign exchange earnings during the
previous three financial years or USD 5,000,000, whichever is less, for- creation of Chairs in reputed
educational institutes, contribution to funds (not being an investment fund) promoted by educational
institutes; and contribution to a technical institution or body or association in the field of activity of the
donor Company.
2. Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India
up to USD 25,000 or five percent of the inward remittance whichever is more.
3. Remittances up to USD 10,000,000 per project for any consultancy services in respect of
infrastructure projects and USD 1,000,000 per project, for other consultancy services procured from
outside India.
4. Remittances up to five per cent of investment brought into India or USD 100,000 whichever is higher,
by an entity in India by way of reimbursement of pre-incorporation expenses.
Remittance of Salary: For a person who is resident but not permanently resident in India and is a citizen
of a foreign State other than Pakistan; or is a citizen of India, who is on deputation to the office or branch
of a foreign company or subsidiary or joint venture in India of such foreign company, may make
remittance up to his net salary (after deduction of taxes, contribution to provident fund and other
deductions). For the purpose of this item, a person resident in India on account of his employment or
deputation of a specified duration (irrespective of length thereof) or for a specific job or assignments, the
duration of which does not exceed three years, is a resident but not permanently resident
40. PRIORITY SECTOR LENDING- NEW GUIDELINES

RBI revised the priority sector lending guidelines with effect from April 23, 2015 on the basis of
recommendations of an Internal Working Group (IWG) headed by Ms Lily Vadera. The salient features of
the guidelines are as under:-
(i) Categories of the priority sector: Medium Enterprises, Social Infrastructure and Renewable Energy
will form part of priority sector, in addition to the existing categories.
(ii) Agriculture: The distinction between direct and indirect agriculture is dispensed with.
(iii) Small and Marginal Farmers: A target of 8 percent of ANBC or CEOBE, whichever is higher, has
been prescribed for Small and Marginal Farmers within agriculture.
(iv) Micro Enterprises: A target of 7.5% of ANBC or CEOBE, whichever is higher, has been prescribed for
Micro Enterprises.
(v) Weaker Section: There is no change in the target of 10% of ANBC or CEOBE, whichever is higher.
(vi) Target for Foreign Banks: Foreign Banks with 20 branches and above already have priority sector
targets and sub-targets for Agriculture and Weaker Sections, which are to be achieved by March 31, 2018.
Foreign banks with less than 20 branches will move to Total Priority Sector Target of 40% of ANBC or
CEOBE, whichever is higher, on par with other banks by 2019-20.
(vii) Bank loans to food and agro processing units will form part of Agriculture.
(viii) Export credit: Export credit upto 32% of ANBC or CEOBE, whichever is higher, will be eligible as part
of priority sector for foreign banks with less than 20 branches. For other banks, the incremental export
credit over corresponding date of the preceding year will be reckoned upto 2 percent of ANBC or CEOBE,
whichever is higher.
(ix) The loan limits for housing loans and MFI loans qualifying under priority sector have been revised.
(x) The priority sector non-achievement will be assessed on quarterly average basis at the end of the
respective year from 2016-17 onwards, instead of annual basis as at present.
(xi) The revised guidelines are operational with effect from 23 April 2015.
Categories under priority sector

1. Agriculture
2. Micro, Small and Medium Enterprises
3. Export Credit
4. Education
5. Housing
6. Social Infrastructure
7. Renewable Energy
8. Others
Targets /Sub-targets for Priority sector Domestic scheduled commercial banks and Foreign
banks with 20 branches and above
Total Priority Sector: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-
Balance Sheet Exposure (CEOBE), whichever is higher.
Agriculture: 18% of ANBC or CEOBE, whichever is higher. Small and Marginal Farmers: Within the 18%
target for agriculture, target for Small and Marginal Farmers will be 8% of ANBC or CEOBE, whichever is
higher. This target to be achieved in a phased manner i.e., 7% by March 2016 and 8% by March 2017
Micro Enterprises: 7.5% of ANBC or CEOBE, whichever is higher to be achieved in a phased manner i.e.
7% by March 2016 and 7.5% by March 2017.
Advances to Weaker Sections: 10% of ANBC or CEOBE, whichever is higher.
Achievement of Targets by foreign banks: Foreign banks with 20 branches and above have to achieve the
Total Priority Sector Target, Agriculture Target, Weaker Section Target within a maximum period of five
years starting from April 1, 2013 and ending on March 31, 2018. The sub-target for Small and Marginal
farmers and for Micro enterprises would be made applicable post 2018 after a review in 2017.
Foreign banks with less than 20 branches
Total Priority Sector: 40% of ANBC or CEOBE, whichever is higher to be achieved in a phased manner by
March 2012 – (32% by 2015-16, 34% by 2016-17, 36% by 2017-18, 38% by 2018-19, 40% by 2019-20.
The additional priority sector lending target of 2% of ANBC each year from 2016-17 to 2019-20 to be
achieved by lending to sectors other than exports. The sub targets, if to be made applicable post 2020,
would be decided in due course.
Computation of Adjusted Net Bank Credit (ANBC
Bank Credit in India [Item No.VI of Form ‘A’ under Section 42 (2) of the RBI Act, 1934]. I
Bills Rediscounted with RBI and other approved Financial Institutions II
Net Bank Credit (NBC) - For the purpose of priority sector computation only III (I-II)
Bonds/debentures in Non-SLR categories under HTM category+ other investments
eligible to be treated as priority sector +Outstanding Deposits under RIDF and other
eligible funds with NABARD, NHB and SIDBI on account of priority sector shortfall + IV
outstanding PSLCs
Eligible amount for exemptions on issuance of long-term bonds for infrastructure and
affordable housing V
Eligible advances extended in India against the incremental FCNR (B)/NRE deposits,
qualifying for exemption from CRR/SLR requirements. VI
ANBC III+IV-VVI
For calculation of Credit Equivalent Amount of Off-Balance Sheet Exposures, banks to follow Master
Circular on Exposure Norms.
Description of the eligible categories under PS 1. Agriculture
There will not be any distinction between direct and indirect agriculture. Lending to agriculture sector has
been redefined to include (i) Farm Credit (which will include short-term crop loans and medium/long-term
credit to farmers) (ii) Agriculture Infrastructure and (iii) Ancillary Activities.
1.1 Farm credit
A. Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e.
groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged
in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and
sericulture. This will include:
1. Crop loans to farmers, including traditional/ nontraditional plantations and horticulture, and allied
activities
2. Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of
agricultural implements and machinery, loans for irrigation and other developmental activities
undertaken in the farm, and developmental loans for allied activities.)
3. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting,
grading and transporting of their own farm produce.
4. Loans to farmers up to Rs 50 lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months.
5. Loans to distressed farmers indebted to non-institutional lenders.
6. Loans to farmers under the Kisan Credit Card Scheme.
7. Loans to small and marginal farmers for purchase of land for agricultural purposes.
B. Loans to corporate farmers, farmers' producer organizations/companies of individual farmers,
partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz.,
dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of Rs 2
crore per borrower. This will include loans as per categories listed at A(i, ii, iii and iv)
1.2. Agriculture infrastructure
1. Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including
cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective
of their location.
2. Soil conservation and watershed development.
3. Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer,
and vermi composting.
For the above loans, an aggregate sanctioned limit of Rs 100 crore per borrower from the banking system,
will apply.
1.3.Ancillary activities
1. Loans up to Rs 5 crore to co-operative societies of farmers for disposing of the produce of members.
2. Loans for setting up of Agriclinics and Agribusiness Centres.
3. Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs 100 crore per
borrower from the banking system.
4. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and
Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture.
5. Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified
in paragraph IX of this circular
6. Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sector
shortfall.
For computing 7% / 8% target, Small and Marginal Farmers will include the following:-
10. Farmers with landholding of up to 1 hectare are considered as Marginal Farmers. Farmers with a
landholding of more than 1 hectare and upto 2 hectares are considered as Small Farmers
2. Landless agricultural labourers, tenant farmers, oral lessees and share-croppers.
3. Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual Small and
Marginal farmers directly engaged in Agriculture and Allied Activities, provided banks maintain
disaggregated data of such loans.
4. Loans to farmers' producer companies of individual farmers, and co-operatives of farmers directly
engaged in Agriculture and Allied Activities, where the membership of Small and Marginal Farmers is
not less than 75 per cent by number and whose land-holding share is also not less than 75 per cent of
the total landholding.
11. Micro, Small and Medium Enterprises (MSMEs)
2.1. The limits for investment in plant and machinery/equipment for manufacturing / service enterprise, as
notified by Ministry of Micro, Small and Medium Enterprises, vide S.O.1642(E) dated September 9, 2006
are as under:-
Manufacturing Sector
Investment in plant and
Enterprises
machinery
Does not exceed twenty five lakh rupees
Micro Enterprises
More than twenty five lakh rupees but does not exceed five crore
Small Enterprises rupees
More than five crore rupees but does not exceed ten crore rupees
Medium Enterprises
Service Sector
Enterprises Investment in equipment
Micro Enterprises Does not exceed ten lakh rupees
More than ten lakh rupees but does not exceed two crore rupees
Small Enterprises
More than two crore rupees but does not exceed five crore rupees
Medium Enterprises
Eligibility of enterprises for PS classification:
Manufacturing Enterprises: Bank loan to Micro, Small and Medium Enterprises irrespective of amount of
loan.
Service Enterprises: Bank loans up to Rs 5 crore per unit to Micro and Small Enterprises and Rs 10 crore
to Medium Enterprises engaged in providing or rendering of services.
Khadi and Village Industries Sector (KVI): All loans to units in the KVI sector will be eligible for
classification as Micro enterprise under the sub-target of 7 percent /7.5 percent prescribed for Micro
Enterprises under priority sector.
Other Finance to MSMEs
1. Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing
of outputs of artisans, village and cottage industries.
2. Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage
industries.
3. Loans sanctioned by banks to MFIs for on-lending to MSME sector
4. Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card,
Swarojgar Credit Card, and Weaver’s Card etc. catering to the non-farm entrepreneurial credit needs
of individuals)
5. Outstanding deposits with SIDBI on account of priority sector shortfall.
Sub categorization of Micro enterprises: The earlier sub-categorization within the definition of micro
enterprises (i.e. investment up to Rs 10 lac in plant and machinery and up to Rs 4 lakh in equipment) has
been dispensed with.
Continuation of MSME status: The MSME units will continue to enjoy the priority sector lending status up
to three years after they grow out of the MSME category concerned.
3. Export Credit
Domestic banks: Incremental export credit over corresponding date of the preceding year, up to 2% of
ANBC or CEOBE, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit of ₹25
crore per borrower to units having turnover of up to ₹100 crore. For foreign banks with 20 or more
branches in India, this will be effective from April 1, 2017.
Foreign banks with less than 20 branches: Export credit will be allowed up to 32 percent of ANBC or
CEOBE, whichever is higher.
5. Education
Loans to individuals for educational purposes including vocational courses upto Rs 10 lakh irrespective of
the sanctioned amount will be considered as eligible for priority sector. Now even for education abroad
loans up to Rs 10 lakh will be eligible for coverage under priority sector.
6. Housing
1. Loan for purchase/construction of a dwelling unit per family: up to Rs 28 lakh in metropolitan centres
(with population of ten lakh and above) and loans up to Rs 20 lakh in other centres provided the
overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs
35 lakh and Rs 25 lakh respectively. The housing loans to banks’ own employees will be excluded.
Housing loans backed by long term bonds which are exempt from ANBC should either be included as
loans to individuals up to Rs 28 lakh in metropolitan centres and Rs 20 lakh in other centres under
priority sector or take benefit of exemption from ANBC, but not both.
2. Loans for repairs to damaged dwelling units: up to Rs 5 lakh in metropolitan centres and up to Rs 2
lakh in other centres.
3. Bank loans to any governmental agency for construction of dwelling units or for slum clearance and
rehabilitation of slum dwellers subject to a ceiling of Rs 10 lakh per dwelling unit.
4. Housing projects for EWS or LIG: Loans for housing projects exclusively for the purpose of
construction of houses for economically weaker sections and low income groups, the total cost of
which does not exceed Rs 10 lakh per dwelling unit. For the purpose of identifying the economically
weaker sections and low income groups, the family income limit of Rs 2 lakh per annum, irrespective
of the location, is prescribed.
Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-
lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum
clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of Rs 10 lakh per
borrower. The eligibility under priority sector loans to HFCs is restricted to 5% of the individual bank’s
total priority sector lending. The maturity of bank loans should be co-terminus with average maturity of
loans extended by HFCs.
5. Outstanding deposits with NHB on account of priority sector shortfall.
6. Social infrastructure
Bank loans up to a limit of Rs 5 crore per borrower for building social infrastructure for activities namely
schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres.
7. Renewable Energy
Bank loans up to a limit of Rs 15 crore to borrowers for purposes like solar based power generators,
biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based
public utilities viz. street lighting systems, and remote village electrification. For individual households,
the loan limit will be Rs 10 lakh per borrower.
8. Others
1. Loans not exceeding Rs 50,000/- per borrower provided directly by banks to individuals and their
SHG/JLG, provided the individual borrower’s household annual income in rural areas does not
exceed Rs 100,000/- and for non-rural areas it does not exceed Rs 1,60,000/-.
2. Loans to distressed persons [other than farmers) not exceeding Rs 100,000/- per borrower to prepay
their debt to non-institutional lenders.
3. Overdrafts extended by banks upto Rs 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY)
accounts provided the borrowers household annual income does not exceed Rs 100,000/- for rural
areas and Rs 1,60,000/- for non-rural areas.
4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the
specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the
beneficiaries of these organisations.
IV. Weaker Sections
1. Small and Marginal Farmers
2. Artisans, village and cottage industries where individual credit limits do not exceed Rs 1 lakh
3. 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)
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Self Help Groups
7. Distressed farmers indebted to non-institutional lenders
8. Distressed persons other than farmers, with loan amount not exceeding Rs 1 lakh per borrower to
prepay their debt to non-institutional lenders
9. Individual women beneficiaries up to Rs 1 lakh per borrower
10. Persons with disabilities
11. Overdrafts upto Rs 5,000/- under Pradhan Mantri JanDhanYojana (PMJDY) accounts, provided the
borrowers’ household annual income does not exceed Rs 100,000/- for rural areas and Rs
1,60,000/- for non-rural areas
7. Minority communities as may be notified by Government of India from time to time
Investments eligible for classification as PS
1. Investments by banks in securitised assets: (i) Investments by banks in securitised assets, representing
loans to various categories of priority sector, except 'others' category, provided (a) the securitised assets
are originated by banks and financial institutions and are eligible to be classified as priority sector
advances prior to securitization; (b) the all inclusive interest charged to the ultimate borrower by the
originating entity should not exceed the Base Rate of the investing bank plus 8% p.a.
(ii) Investments by banks in securitised assets originated by NBFCs, where the underlying assets are
loans against gold jewellery, are not eligible for priority sector status.
2. Transfer of Assets through Direct Assignment /Outright purchases:
(i) Assignments/Outright purchases of pool of assets by banks representing loans under various
categories of priority sector, except the 'others' category, provided: (a) the assets are originated by
banks and financial institutions which are eligible to be classified as priority sector advances; (b) the
eligible loan assets so purchased should not be disposed of other than by way of repayment; (c) the
all inclusive interest charged to the ultimate borrower by the originating entity should not exceed the
Base Rate of the purchasing bank plus 8% p.a.
(ii) When the banks undertake outright purchase of loan assets from banks/ financial institutions to be
classified under priority sector, they must report the nominal amount actually disbursed to end priority
sector borrowers and not the premium embedded amount paid to the sellers.
(iii) Purchase/ assignment/investment transactions undertaken by banks with NBFCs, where the
underlying assets are loans against gold jewellery, are not eligible for priority sector status.
3. Inter Bank Participation Certificates: (IBPCs) bought by banks, on a risk sharing basis,
4. Priority Sector Lending Certificates: The outstanding priority sector lending certificates bought by the
banks.
Monitoring of Priority Sector Lending targets To ensure continuous flow of credit to priority sector,
the monitoring will be on ‘quarterly’ basis instead of annual basis. The data on priority sector advances
have to be furnished by banks at quarterly and annual intervals.
Non-achievement of Priority Sector targets
Scheduled Commercial Banks having any shortfall in lending to priority sector shall be allocated amounts
for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other
Funds with NABARD/NHB/SIDBI, as decided by RBI from time to time. For the year 2015-16, the shortfall
in achieving priority sector target/sub-targets will be assessed based on the position as on March 31,
2016. From financial year 2016-17 onwards, the achievement will be arrived at the end of financial year
based on the average of priority sector target /sub-target achievement as at the end of each quarter. The
interest rates on banks’ contribution to RIDF or any other Funds, tenure of deposits, etc. shall be fixed by
RBI. The misclassifications reported by the Reserve Bank’s Department of Banking Supervision would be
adjusted/ reduced from the achievement of that year, to which the amount of declassification/
misclassification pertains, for allocation to various funds in subsequent years. Non-achievement of priority
sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals
for various purposes
Common guidelines for priority sector loans
1. Rate of interest: As per directives issued by RBI.
2. Service charges: No loan related and adhoc service charges/inspection charges on priority sector
loans up to Rs 25,000.
3. Receipt, Sanction/Rejection/Disbursement Register: A register/ electronic record should be maintained
by the bank, wherein the date of receipt, sanction/rejection/disbursement with
reasons thereof, etc., should be recorded.
4. Issue of Acknowledgement of Loan Applications: Banks should provide acknowledgement for loan
applications received under priority sector loans. Bank Boards should prescribe a time limit within
which the bank communicates its decision in writing to the applicants.
Bank loans to MFIs for on-lending
(a) Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs / JLGs will be
eligible for categorisation as priority sector advance under respective categories viz., Agriculture, Micro,
Small and Medium Enterprises, and 'Others', as indirect finance, provided not less than 85% of total
assets of MFI (other than cash, balances with banks and financial institutions, government securities and
money market instruments) are in the nature of “qualifying assets”. Aggregate amount of loan, extended
for income generating activity, should be not less than 50% of the total loans given by MFIs.
(b) A “qualifying asset” shall mean a loan disbursed by MFI, which satisfies the following criteria:
(i) The loan is to be extended to a borrower whose household annual income in rural areas does not
exceed Rs 1,00,000/- while for non-rural areas it should not exceed Rs 1,60,000/-.
(ii) Loan does not exceed Rs 60,000/- in the first cycle and Rs 100,000/- in the subsequent cycles.
(iii) Total indebtedness of the borrower does not exceed Rs 1,00,000/-.
(iv) Tenure of loan is not less than 24 months when loan amount exceeds Rs 15,000/- with right to
borrower of prepayment without penalty.
(v) The loan is without collateral.
(vi) Loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower.
(c) Caps on margin and interest rate
(i) Margin cap: The margin cap should not exceed 10% for MFIs having loan portfolio exceeding Rs 100
crore and 12% for others. The interest cost is to be calculated on average fortnightly balances of
outstanding borrowings and interest income is to be calculated on average fortnightly balances of
outstanding loan portfolio of qualifying assets.
(ii) Interest cap on individual loans: Interest rate on individual loans will be the average Base Rate of five
largest commercial banks by assets multiplied by 2.75% or cost of funds plus margin cap, whichever is
less. The average of the Base Rate shall be advised by Reserve Bank of India.
(iii) Components are to be included in pricing of loans viz., (a) a processing fee not exceeding 1% of the
gross loan amount, (b) interest charge and (c) the insurance premium.
The processing fee is not to be included in the margin cap or the interest cap. Only the actual cost of
insurance i.e. actual cost of group insurance for life, health and livestock for borrower and spouse can be
recovered; administrative charges may be recovered as per IRDA guidelines. There should not be any
penalty for delayed payment. No Security Deposit/ Margin are to be taken
41. IFSC BANKING UNITS (IBU) BY INDIAN BANKS

RBI has formulated a scheme for the setting up of International Financial Services Centre (IFSC)
Banking Units (IBUs) by banks in IFSCs as per Foreign Exchange Management (International Financial
Services Centre) Regulations, 2015. Government of India has already announced setting up of an IFSC
in Gujarat namely Gujarat International Finance Tec-City (GIFT) in Gandhinagar, Gujarat. The details of
the scheme are given below:
Eligibility criteria: Indian banks viz. banks in the public sector and the private sector authorised to deal in
foreign exchange will be eligible to set up IBUs. Each eligible bank can establish only one IBU in each
IFSC.
Licensing: Eligible banks are required to obtain prior permission of RBI for opening an IBU under
Section 23 (1)(a) of the B R Act. For most regulatory purposes, an IBU will be treated on par with a
foreign branch of an Indian bank.
Capital: The parent bank will provide a minimum capital of US$ 20 million or equivalent in any foreign
currency to its IBU. The IBU should maintain the minimum prescribed regulatory capital on an on-going
basis.
Reserve requirements: The liabilities of the IBU are exempt from both CRR and SLR requirements of
RBI.
Resources and deployment: The sources for raising funds, including borrowing in foreign currency, will
be persons not resident in India and deployment of the funds can be with both persons resident in India
as well as persons not resident in India.
Permissible activities of IBUs: The IBUs will be permitted to engage in the form of business mentioned
in Section 6(1) of the BR Act as given below:
1. Transactions with non-resident entities other than individual / retail customers / HNIs.
2. All transactions of IBUs shall be in currency other than INR.
3. IBUs can deal with the Wholly Owned Subsidiaries / Joint Ventures of Indian companies registered
abroad.
4. IBUs can have liabilities including borrowing in foreign currency only with original maturity period
greater than one year. They can however raise short term liabilities from banks subject to limits as
may be prescribed by RBI.
5. IBUs are not allowed to open any current or savings accounts.
6. IBUs cannot issue bearer instruments or cheques. All payment transactions must be undertaken via
bank transfers.
7. IBUs can undertake factoring / forfaiting of export receivables.
8. IBUs can undertake transactions in all types of derivatives and structured products with the prior
approval of their Board of Directors.
Prudential regulations:
1. All prudential norms applicable to overseas branches of Indian banks would apply to IBUs. IBUs
would follow the 90 days' payment delinquency norm for income recognition, asset classification and
provisioning.
The IBUs would adopt liquidity and interest rate risk management policies prescribed by RBI in
respect of overseas branches of Indian banks and function within the overall risk management and
ALM framework of the bank.
2. The bank's board would set comprehensive overnight limits for each currency for these Units,
which would be separate from the open position limit of the parent bank.
Anti-Money Laundering measures: The IBUs will scrupulously follow KYC, Combating of Financing of
Terrorism (CFT) and other anti-money laundering instructions issued by RBI. IBUs cannot undertake
cash transactions.
Regulation and Supervision: The IBUs will be regulated and supervised by the Reserve Bank of India.
Reporting requirements: The IBUs will furnish information relating to their operations as prescribed by
RBI. These may take the form of offsite reporting, audited financial statements for IBUs, etc.
Ring fencing the activities of IFSC Banking Units: The IBUs would operate and maintain balance sheet
only in foreign currency and will not deal in Indian Rupees except for having a Special Rupee account
out of convertible fund to defray their administrative and statutory expenses. Such
operations/transactions of these units in INR would be through the Authorised Dealers (distinct from
IBU) which would be subject to the extant Foreign Exchange regulations. IBUs are not allowed to
participate in the domestic call, notice, term, fore; money and other onshore markets and domestic
payment systems.
The IBUs will be required to maintain separate nostro accounts with correspondent banks which would
be distinct from nostro accounts maintained by other branches of the same bank.
Priority sector lending: The loans and advances of IBUs would not be reckoned as part of the Net
Bank Credit of the parent bank for computing priority sector lending obligations.
Deposit insurance: Deposits of IBUs will not be covered by deposit insurance.
Lender of Last Resort (LOLR): No liquidity support or LOLR support will be available to IBUs from RBI.
IBU by foreign banks already having a presence in India: Only foreign banks already having presence in
India will be eligible to set up IBUs. This shall not be treated as a normal branch expansion plan in India
and therefore, specific permission from the home country regulator for setting up of an IBU will be
required. Each of the eligible banks will be permitted to establish only one IBU in each IFSC. The terms
and conditions and regulatory requirements as applicable to domestic banks will apply to foreign banks
also
42. RELIEF MEASURES BY BAN KS IN AREAS AFFECTED BY NATURAL CALAMITIES

1. Natural Calamity: In terms of National Disaster Management Framework, there are 12 types of natural
calamities viz. cyclone, drought, earthquake, fire, flood, tsunami, hailstorm, landslide, avalanche, cloud
burst, pest attack and cold wave/frost (added in August 2012). Of these 12 calamities, for 4 calamities
i.e. drought, hailstorms, pest attack and cold wave/frost, the Ministry of Agriculture is the nodal ministry
while for remaining 8 calamities Ministry of Home Affairs is required to make appropriate
arrangements. A slew of measures for relief are undertaken by the Sovereign (Central/State
Government) to provide relief to the affected persons which include, inter alia, provision for the input
subsidies and financial assistance to marginal, small and other farmers.
2. Bank's contribution in providing relief relates to rescheduling of existing loans and sanctioning of fresh
loans as per the emerging requirements of the borrowers. Banks may also like to take some other
facilitating measures like reducing/waiving their penal charges, etc. While each bank may have its own
approach to deal with these situations, RBI has issued guidelines relating to four aspects viz.
Institutional Framework, Restructuring of Existing Loans, Providing Fresh Loans and Other Ancillary
Relief Measures.
3. Institutional Framework:
Establishing Policy/Procedures for dealing with Natural Calamities: All the branches of commercial banks
and their Regional and Zonal Offices should have a set of standing instructions spelling out the action that
the branches will have to initiate in the calamity affected areas immediately after the requisite declaration
by the district/ state authorities.
Discretionary Powers to Divisional / Zonal Manager of banks: Divisional/ Zonal Managers of commercial
banks should be vested with discretionary powers so that they do not have to seek fresh approvals from
their Central Offices to the line of action agreed to by the District/ State Level Bankers' Committees.
Discretionary powers would relate to adoption of scales of finance, extension of loan periods, sanction
of new loans keeping in view the total liability of the borrower (i.e. arising out of the old loan where the
assets financed are damaged or lost on account of natural calamity as well as the new loan for
creation/repair of such assets), margin, security, etc.
Meetings of State Level Bankers' Committee/District Consultative Committee: In case the calamity covers
entire State/ larger part of a State, the convener of the State Level Bankers' Committee will convene a
meeting immediately to evolve a coordinated action plan for implementation of the relief programme in
collaboration with the State Government authorities. In case the calamity has affected only a small part of
the State/few districts, the conveners of the District Consultative Committees of the affected districts
should convene a meeting immediately.
Declaration of Natural Calamity: Declaration of natural calamities is in the domain of the Sovereign
(Central/State Governments). These declarations/certificates are called by different names such as
Annewari, Paisewari, Girdawari, etc. in different States. However, the common factor to extend relief
measures is that the crop loss assessed should be 50% or more
Distinction between Drought and Other Calamities:
Drought : The 'Manual for Drought Management' released by the Ministry of Agriculture, has covered
certain guidelines for the State Governments on the adoption of scientific technology and various
parameters/indexes like data of rainfall, crop area sown, vegetation index, moisture adequacy index, to
assess the situation. The State Governments may either adopt the procedures indicated in the Manual for
Drought Management and based on the various parameters/indexes indicated therein, decide on the
declaration of drought or conduct Crop Cutting Experiments as prescribed in the National Agriculture
Insurance Programme, and declare the 'Annewari' indicating the crop-wise percentage loss in the
certificates issued.
Other Calamities: The loss should be assessed through crop cutting experiments clearly indicating that the
crop loss in the particular area/taluka/mandal/block has been 50% or more to trigger reschedulement of
loans from banks. In case of extreme situations such as wide-spread floods, etc, the matter be deliberated
at SLBC/DCC meetings where the concerned Government functionary/District Collector may explain the
reasons for not estimating 'Annewari' through crop cutting experiments and that the decision to provide
relief for the affected populace needs to be taken based on the eye estimate/visual impressions.
In both the cases, however, DCCs/SLBC have to satisfy that the crop loss has been 50% or more.
4. Restructuring/Rescheduling of Existing Loans
Agriculture Loans - Short-term Production Credit (Crop Loans): All short-term loans, except those which
are overdue at the time of occurrence of natural calamity, should be eligible for restructuring. The principal
amount of the short-term loan as well as interest due for repayment in the year of occurrence of natural
calamity may be converted into term loan. Generally, the restructured period for repayment may be 3 to 5
years. However, where the damage is very severe, banks may, extend the period of repayment ranging up
to 7 years and may be prolonged up to a maximum period of 10 years in consultation with the Task Force/
SLBC. In all cases of restructuring, moratorium period of at least one year should be considered. Further,
the banks should not insist for additional collateral security for such restructured loans.
Agriculture Loans - Long term (Investment) Credit: In case of Natural Calamities where only crop for that
year is damaged and productive assets are not damaged, the banks may reschdeule the payment of
installment during the year of natural calamity and extend the loan period by one year. However, the
installments defaulted wilfully in earlier years will not be eligible for rescheduling. The banks may also
have to postpone payment of interest by borrowers. In case of Natural Calamities where the productive
assets are partially or totally damaged and borrowers are in need of a new loan, the rescheduling by way
of extension of loan period may be determined on the basis of overall repaying capacity of the borrower
vis-a-vis his total liability (old term loan, restructured crop loan, if any and the fresh crop/term loan being
given) less the subsidies received from the Government agencies, compensation available under the
insurance schemes, etc. While the total repayment period for the restructured/fresh term loan will differ
on case-to-case basis, generally it should not exceed a period of 10 years
Other Loans: SLBC/DCC will take a view depending on the severity of the calamity as to whether a
general reschedulement of all other loans (i.e. besides the agriculture loans as indicated above) such as
loans granted for allied activities and loans given to rural artisans, traders, micro/small industrial units is
required. In such cases, recovery of all the loans be postponed by the specified period, and banks should
assess the requirement of the individual borrowers and depending on the nature of his account,
repayment capacity and the need for the fresh loans, appropriate decisions may be taken by the individual
banks.
Asset Classification: a) The restructured portion of the short term as well as long-term loans may be treated
as current dues and need not be classified as NPA. The asset classification of these fresh term loans
would thereafter be governed by the revised terms and conditions. However, banks are required to make
higher provisions for such restructured standard advances as prescribed by RBI. b) The asset classification
of the remaining amount due, which have not been restructured, will continue to be governed by the
original terms and conditions. c) Additional finance, if any, may be treated as “standard asset” and its future
asset classification will be governed by the terms and conditions of its sanction. The benefit of asset
classification of the restructured accounts as on the date of natural calamity will be available only if the
restructuring is completed within a period of three months from the date of natural calamity. The accounts
that are restructured for the second time or more on account of natural calamities would retain the same
asset classification category on restructuring and would not be treated as second restructuring.
Utilisation of Insurance Proceeds: While restructuring the loans in the areas affected by natural
calamities, banks should also take into account the insurance proceeds, if any, receivable from the
Insurance Company and adjust these proceeds to ‘restructured accounts’. However, it should be done
in cases where fresh loans have been granted to the borrowers.
7. Sanctioning of Fresh Loans
1. Once the decisions on the rescheduling of loans is taken by SLBC/DCC, pending such conversion of
short-term loans, banks may grant fresh crop loans to the affected farmers which will be based on the
scale of finance for the particular crop and the cultivation area;
2. Banks may also provide assistance for long term loans for repair of existing economic assets or
acquisition of new assets;
3. Banks may also grant consumption loans up to Rs. 10,000/- to existing borrowers without any
collateral. The limit may, however, be enhanced beyond Rs. 10,000/- at the discretion of the bank;
4. Credit should not be denied for want of personal guarantees or additional fresh security. The fresh
loan may be granted even if the value of security (existing as well as the asset to be acquired from the
new loan) is less than the loan amount;
The conversion facility of crop loan to term loan should not be denied on the ground of his inability to
furnish land as security. If the borrower has already taken a term loan against mortgage/charge on land, a
second charge for the converted term loan may be created. Banks should not insist on third party
guarantees for providing conversion facilities
5. Where land is taken as security, in the absence of original title records, a certificate issued by the
Revenue Department officials may be accepted for financing farmers who have lost proof of their titles
i.e. in the form of deeds, as also the registration certificates issued to registered share-croppers;
6. Margin requirements may be waived or the grants/ subsidy given by the concerned State Government
may be considered as margin.
Rate of Interest: In respect of current dues in default, no penal interest will be charged. The banks should
also suitably defer the compounding of interest charges. Banks may not levy any penal interest and
consider waiving penal interest, if any, already charged in regard to the loans converted/rescheduled.
7. Other Ancillary Relief Measures
Know Your Customer Norms – Relaxations: Where the affected persons are not able to provide
standard identification documents, branches may open small accounts where the balance in the account
does not exceed Rs. 50,000/- or the amount of relief granted (if higher ) and the total credit in the
account does not exceed Rs. 1,00,000/- or the amount of relief granted, (if higher) in a year.
Providing access to Bank Accounts: In areas where the bank branches are affected by natural calamity
and are unable to function normally, banks may operate from temporary premises. For continuing the
temporary premises beyond 30 days, specific approval may be obtained from the concerned regional
office(RO) of RBI. Banks may also render banking services to the affected areas by setting up satellite
offices, extension counters or mobile banking facilities under intimation to RBI.
Others: Banks may consider waiving ATM fees, increasing ATM withdrawal limits; waiving overdraft fees;
waiving early withdrawal penalties on time deposits; waiving late fee for credit card/other loan installment
payments and giving option to credit card holders to convert their outstanding balance to EMIs repayable
in 1 or 2 years. Besides, all charges debited to the farm loan account other than the normal interest may
be waived considering the hardship caused to farmers.
8. Applicability of the guidelines in the case of riots and disturbances: Whenever RBI advises the
banks to extend rehabilitation assistance to the riot/ disturbance affected persons, the aforesaid guidelines
may broadly be followed by banks for the purpose. However, only genuine persons, duly identified by the
State Administration as having been affected by the riots/ disturbances, should be provided assistance.
With a view to ensuring quick relief to the affected persons, RBI has decided that the District Collector,
on occurrence of the riots/ disturbances, may ask the Lead Bank Officer to convene a meeting of the
DCC, and submit a report to the DCC on the extent of damage caused to life and property in the area
affected by riots/disturbances. If the DCC is satisfied that there has been extensive loss to life and
property on account of the riots/ disturbances, the relief as per the above guidelines may be extended to
the people affected by the riots/ disturbances. In certain cases, where there are no District Consultative
Committees, the District Collector may request the convener of the State Level Bankers’ Committee of
the State to convene a meeting of the bankers to consider extension of relief to the affected persons.
43. RECAPITALISATION OF PUBLIC SECTOR BANKS

CONCEPT OF BANK RECAPITALISATION:
 Recapitalisation involves providing the bank with new capital, i.e. government agreeing to buy
new shares or granting loans to the banks. The main objective is to improve the banks’ liquidity
position.
 A combination of factors over the past several years has contributed to a massive buildup of
non-performing assets (NPAs) for banks and a significant reason for this burden is the
massive exposures that these banks took to the infrastructure projects under the Public Private
Partnership (PPP) model. As a result of this burden, the banks are reluctant to take on any
more risk. This has resulted in a sharp slowdown in commercial credit growth over the past
year, at a time when the economy is showing some signs of recovery.
 The withdrawal of regulatory forbearance on restructuring, and high slippages from
restructured assets has lead to a rise in NPAs in the June quarter for large banks forcing them
to report steep fall in quarterly earnings.
 A recent report by rating agency Crisil has stated that gross non-performing assets of Indian
banks are likely to rise by Rs. 60,000 crore to Rs 4 lakh crore this fiscal. As proportion of
assets, gross NPAs may increase by 20 basis points to 4.5 per cent by FY2016. The gross
NPAs for PSBs was 5.17 per cent at the end of last fiscal. The stressed assets ratio (gross
non-performing assets plus restructured standard advances to gross advances) for the system
as a whole rose to 10.9 per cent at the end of March 2015 compared with 10 per cent a year
back. This means that nearly 7.05 lakh crore worth of bank loans now fall in the stressed
category, up from Rs 5.91 lakh crore last year.
 Public sector banks have amassed bad loans at a faster pace than their privately owned
peers, raising concerns about their ability to meet tougher global regulatory capital
requirements as compliance with Basel III capital adequacy norms will require banks to
enhance their equity capital by very large amounts if they are to sustain even a moderate
growth in deposits and credit.
 The Government has stated that the public sector banks are adequately capitalized and are
meeting all the Basel III and RBI norms. However, it wants to adequately capitalize all the
banks to keep a safe buffer over and above the minimum norms of Basel III and needs Rs. 1.8
lakh crore in extra capital for the next four years up to FY 2019.
 The recapitalisation move is intended to provide relief to India's public sector banks as they
are not even able to grow their balance sheet because of lack of capital.
CURRENT GUIDELINES ON RECAPITALISATION:
 The Government has sought approval for an additional allotment of Rs.12,110 crore from the
Parliament to be used for the recapitalisation of public sector banks. Initially, the government
had made some allocations to bolster capital reserves of the state-run banks to the tune of
Rs.7,940 crore in the recent budget which was deemed to be inadequate, something that even
the Reserve Bank of India had acknowledged.
 As part of the bank recapitalization plan, Finance Minister agreed with a plea by the Reserve
Bank of India to infuse Rs.25,000 crore each in the current and next fiscal year and presented a
supplementary demand in Parliament to provide for Rs.12,000 crore towards bank
recapitalization. The remaining Rs.5,000 crore would be provided in the second supplementary
later this year. The Rs.25,000 crore capital this year will be allocated through three tranches.
 About 40 per cent of this amount will be given to those banks which require support, and every
single public sector bank will be brought to the level of at least 7.5 per cent (core capital) by
financial year 2016. In the second tranche, 40 per cent of capital will be allocated to State Bank
of India, Bank of Baroda, Bank of India, Punjab National Bank, Canara Bank and IDBI Bank.
The remaining portion of 20 per cent will be allocated to the banks based on their performance
during the three quarters in the current year.
 The Government has also laid out a roadmap for infusing Rs.70,000 crore in public sector
banks over four years and the proposal to give greater autonomy to the banks while making
them accountable is also proposed.
 As per Finance Minister, the capital would be raised by the banks without diluting public sector
characteristics in them. So, the government stake in the banks would remain over 51 per cent
while the public will be allowed to invest directly in these banks which currently they hold
indirectly and this will help banks to expand and thereby increase the whole process of financial
inclusion.
The country's top six banks - State Bank of India, Bank of Baroda, Punjab National Bank, Bank of
India, Canara Bank and IDBI will get Rs.10,262 crore, which represents 40 percent of the total $4
billion that the government plans to spend this fiscal year
44. DEALING WITH LOAN FRAUDS

Keeping in view the growing concern for the rising trend in loan related frauds in the financial
sector and based on the recommendations of an Internal Working Group (IWG) which looked into
the issues relating to prevention, early detection and reporting of frauds in banks, the Reserve
Bank has formulated a ‘Framework for fraud risk management in banks’ effective from May 7,
2015.
The broad guidelines of the Framework include:
 OBJECTIVES:
In the context of increasing incidence of frauds in general and in loan portfolios in particular,
objective of this framework was:
a) To direct the focus of banks on the aspects relating to prevention, early detection, prompt
reporting to the Reserve Bank (for system level aggregation, monitoring and dissemination) and
the investigative agencies (for instituting criminal proceedings against the fraudulent borrowers),
and
b)Timely initiation of the staff accountability proceedings (for determining negligence or
connivance, if any) while ensuring that the normal conduct of business of the banks and their risk
taking ability is not adversely impacted and no new and onerous responsibilities are placed on
the banks.
 TIME LINES: In order to achieve the objectives, the
framework seeks to stipulate time lines with the action incumbent on a bank. The time
lines/stage wise actions in the loan life-cycle are expected to compress the total time taken by a
bank to identify a fraud and aid more effective action by the law enforcement agencies. The early
detection of fraud and the necessary corrective action are important to reduce the quantum of
loss which the continuance of the fraud may entail. The Government is separately looking into the
issues of more timely and coordinated action by the law enforcement agencies.
 EARLY WARNING SIGNALS AND RED FLAGGED ACCOUNTS:
1. The concept of a Red Flagged Account (RFA) was introduced in the current framework as an
important step in fraud risk control. An RFA is one where suspicion of fraudulent activity is thrown up
by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should
immediately put the bank on alert regarding weakness or wrong doing which may ultimately turn out to
be fraudulent.
2. A bank must use EWS as a trigger to launch a detailed investigation into the RFA. The EWS so
compiled by a bank would form the basis for classifying an account as an RFA. The threshold for
EWS and RFA is an exposure of 1500 million or more at the level of a bank irrespective of the
lending arrangement (whether solo banking, multiple banking or consortium).
3. The tracking of EWS in loan accounts must be integrated with the credit monitoring process in the
bank so that it becomes a continuous activity and also acts as a trigger for any possible credit
impairment in the loan accounts, given the interplay between credit risks and fraud risks.
4. The officer responsible for the operations in the account should be sensitised to observe and report
any manifestation of the EWS promptly to the Fraud Monitoring Group (FMG) or any other group
constituted by the bank for the purpose immediately. To ensure that the exercise remains meaningful,
such officers may be held responsible for non-reporting or delays in reporting.
5. A report on the RFA accounts may be put up to the Special Committee of the Board for monitoring and
follow-up of Frauds (SCBF) providing, among other things, a synopsis of the remedial action taken
together with their current status
 EARLY DETECTION AND REPORTING:
The most effective way of preventing frauds in loan accounts is for banks to have a robust
appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan
account, namely,
1) Pre-sanction: As part of the credit process, the checks being applied during the stage of pre-
sanction may consist of the Risk Management Group (RMG) or any other appropriate group of
the bank collecting independent information and market intelligence on the potential borrowers
from the public domain on their track record, involvement in legal disputes, raids conducted on
their businesses, if any, strictures passed against them by Govt. agencies, validation of submitted
information/data from other sources like the ROC, gleaning from the defaulters list of RBI / other
Government agencies, etc., which could be used as an input by the sanctioning authority. Banks
may keep the record of such pre-sanction checks as part of the sanction documentation.
2) Disbursement: Checks by RMG during the disbursement stage may focus on the adherence
to the terms and conditions of sanction, rationale for allowing dilution of these terms and
conditions, level at which such dilutions were allowed, etc. The dilutions should strictly conform to
the broad framework laid down by the Board in this regard. As a matter of good practice, the
sanctioning authority may specify certain terms and conditions as ‘core’ which should not be
diluted. The RMG may immediately flag the non-adherence of core stipulations to the sanctioning
authority.
3) Annual review: While the continuous monitoring of an account through the tracking of EWS
is important, banks also need to be vigilant from the fraud perspective at the time of annual
review of accounts. Among other things, the aspects of diversion of funds in an account,
adequacy of stock vis-a-vis stock statements, stress in group accounts, etc., must also be
commented upon at the time of review.
4Besides, the RMG should have capability to track market developments relating to the major
clients of the bank and provide inputs to the credit officers. This would involve collecting
information from the grapevine, following up stock market movements, subscribing to a press
clipping service, monitoring databases on a continuous basis and not confining the exercise only
to the borrowing entity but to the group as a whole.
3) Staff empowerment: Employees should be encouraged to report fraudulent activity in an
account, along with the reasons in support of their views, to the appropriately constituted
authority, under the Whistle Blower Policy of the bank, who may institute a scrutiny through the
FMG. The FMG may ‘hear’ the concerned employee in order to obtain necessary clarifications.
Protection should be available to such employees under the whistle blower policy of the bank so
that the fear of victimisation does not act as a deterrent.
4) Role of Auditors: During the course of the audit, auditors may come across instances where
the transactions in the account or the documents point to the possibility of fraudulent transactions
in the account. In such a situation, the auditor may immediately bring it to the notice of the top
management and if necessary to the Audit Committee of the Board (ACB) for appropriate action.
Incentive for Prompt Reporting: In case of accounts classified as ‘fraud’, banks are required to make
provisions to the full extent immediately, irrespective of the value of security. However, in case a bank is
unable to make the entire provision in one go, it may now do so over four quarters provided there is no
delay in reporting. In case of delays, the banks under Multiple Banking Arrangements (MBA) or member
banks in the consortium are required to make the provision in one go as per the extant guidelines DELAY
for the purpose of reporting, would mean that the fraud was not flashed to CFMC, RBI or reported on
the CRILC platform, RBI within a period of one week from its classification as a fraud through the RFA
route which has a maximum time line of six months or detection / declaration as a fraud ab initio by the
bank.
BANK AS A SOLE LENDER:
1. In cases where the bank is the sole lender, the FMG will take a call on whether an account in which
EWS are observed should be classified as a RFA or not. This exercise should be completed as soon
as possible and in any case within a month of the EWS being noticed. In case the account is classified
as a RFA, the FMG will stipulate the nature and level of further investigations or remedial measures
necessary to protect the bank’s interest within a stipulated time which cannot exceed six months.
2. The bank may use external auditors, including forensic experts or an internal team for investigations
before taking a final view on the RFA. At the end of this time line, which cannot be more than six
months, banks would either lift the RFA status or classify the account as a fraud.
3. A report on the RFA accounts may be put up to the SCBF with the observations/decision of the FMG.
The report may list the EWS/irregularities observed in the account and provide a synopsis of the
investigations ordered / remedial action proposed by the FMG together with their current status.
 LENDING UNDER CONSORTIUM OR MULTIPLE BANKING ARRANGEMENTS (MBA):
1. The extant guidelines provide that all the banks which have financed a borrower under MBA should
take co-ordinated action, based on a commonly agreed strategy, for legal / criminal actions and the
bank which classifies or declares a fraud should report the same to CFMC, RBI within the deadlines
specified.
2. In case of consortium arrangements, individual banks must conduct their own due diligence before
taking any credit exposure and also independently monitor the end use of funds rather than depend
fully on the consortium leader. However, as regards monitoring of Escrow Accounts, the details may
be worked out by the consortium and duly documented so that accountability can be fixed easily at a
later stage. Besides, any major concerns from the fraud perspective noticed at the time of annual
reviews or through the tracking of early warning signals should be shared with other consortium /
multiple banking lenders immediately.
3. The initial decision to classify any standard or NPA account as RFA or Fraud will be at the individual
bank level and it would be the responsibility of this bank to report the RFA or Fraud status of the
account on the CRILC platform so that other banks are alerted.
4. Thereafter, within 15 days, the bank which has red flagged the account or detected the fraud would
ask the consortium leader or the largest lender under MBA to convene a meeting of the JLF to
discuss the issue. The meeting of the JLF so requisitioned must be convened within 15 days of such
a request being received.\
5. In case there is a broad agreement, the account would be classified as a fraud; else based on the
majority rule of agreement amongst banks with atleast 60% share in the total lending, the account
would be red flagged by all the banks and subjected to a forensic audit commissioned or initiated by
the consortium leader or the largest lender under MBA. All banks, as part of the consortium or
multiple banking arrangement, would share the costs and provide the necessary support for such an
investigation.
6. The forensic audit must be completed within a maximum period of three months from the date of the
JLF meeting authorizing the audit. Within 15 days of the completion of The forensic audit, the JLF will
reconvene and decide on the status of the account, either by consensus or the majority rule as
specified above. In case the decision is to classify the account as a fraud, the RFA status would
change to Fraud in all banks and reported to RBI and on the CRILC platform within a week of the said
decision. Besides, within 15 days of the RBI reporting, the bank commissioning/ initiating the forensic
audit would lodge a complaint with the CBI on behalf of all banks in the consortium/MBA.
7. It may be noted that the overall time allowed for the entire exercise to be completed is six months from
the date when the first member bank reported the account as RFA or Fraud on the CRILC platform.
 STAFF ACCOUNTABILITY:
1. As in the case of accounts categorised as NPAs, banks must initiate and complete a staff
accountability exercise within six months from the date of classification as a Fraud. Wherever felt
necessary or warranted, the role of sanctioning officials may also be covered under this exercise. The
completion of the staff accountability exercise for frauds and the action taken may be placed before
the SCBF and intimated to the RBI at quarterly intervals as hitherto.
2. Banks may bifurcate all fraud cases into vigilance and non-vigilance. Only vigilance cases should be
referred to the investigative authorities. Non-vigilance cases may be investigated and dealt with at the
bank level within a period of six months.
3. In cases involving very senior executives of the bank, the Board / ACB / SCBF may initiate the process
of fixing staff accountability.
4. Staff accountability should not be held up on account of the case being filed with law enforcement
agencies. Both the criminal and domestic enquiry should be conducted simultaneously.
 FILING COMPLAINTS WITH LAW ENFORCEMENT
 AGENCIES:
1. Banks are required to lodge the complaint with the law enforcement agencies immediately on
detection of fraud. There should ideally not be any delay in filing of the complaints with the law
enforcement agencies since delays may result in the loss of relevant ‘relied upon’ documents, non-
availability of witnesses, absconding of borrowers and also the money trail getting cold in addition to
asset stripping by the fraudulent borrower.
2. It is observed that banks do not have a focal point for filing CBI / Police complaints. This results in a
non-uniform approach to complaint filing by banks and the investigative agency has to deal with
dispersed levels of authorities in banks. This is among the most important reasons for delay in
conversion of complaints to FIRs. It is, therefore, enjoined on banks to establish a nodal point / officer
for filing all complaints with the CBI on behalf of the bank and serve as the single point for coordination
and redressal of infirmities in the complaints. The Government is also considering a central point for
receiving complaints/FIRs from banks in the CBI.
3. The complaint lodged by the bank with the law enforcement agencies should be drafted properly and
invariably be vetted by a legal officer. It is also observed that banks sometimes file complaints with
CBI / Police on the grounds of cheating, misappropriation of funds, diversion of funds etc., by
borrowers without classifying the accounts as fraud and/or reporting the accounts as fraud to RBI.
Since such grounds automatically constitute the basis for classifying an account as a fraudulent one,
banks may invariably classify such accounts as frauds and report the same to RBI
The current structure for filing of complaints with the police and CBI is as follows:
STRUCTURE FOR FILING POLICE / CBI COMPLAINTS
Agency to
Amount involved in the whom
CATEGORY Remarks
Fraud complaint be
PRIVATE lodged
Rs.1 lakh and above State Police
SECTOR /
FOREIGN Rs.10,000 & above State Police
BANKS if committed by staff
Rs.1 crore and SFIO In addition to

above State
Police
PUBLIC
SECTOR Below Rs.3 crore State Police
BANKS Rs.3 crore and CBI Anti Corruption Branch of CBI
above and up to Rs. 25 crore (where staff involvement is prima
facie evident)
Economic Offences
Wing of CBI
(Where staff
involvement is prima
More than Rs. 25 CBI Bankingfacie not evident)
Security and
crore Fraud Cell (BSFC) of CBI
(irrespective of the
involvement of a public servant)
PENAL MEASURES FOR FRAUDULENT BORROWERS:

1. In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent
borrower including the promoter directors and other whole time directors of the company insofar as
raising of funds from the banking system or from the capital markets by companies with which they
are associated is concerned, etc.
2. In particular, borrowers who have defaulted and have also committed a fraud in the account would be
debarred from availing bank finance from Banks, Development Financial Institutions, Govt. owned
NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment of the
defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to
such a borrower. The penal provisions would apply to non-whole time directors (like nominee
directors and independent directors) only in rarest of cases based on conclusive proof of their
complicity.
3. No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts.
4. No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate
that the criminal complaint will be continued.
 CENTRAL FRAUD REGISTRY:
1. Presently there is no single database which the lenders can access to get all the important details of
previous frauds reported by banks. The creation of such database at RBI will make available more
information to banks at the time of start of a banking relationship, extension of credit facilities or at any
time during the operation of an account. The Reserve Bank is in the process of designing a Central
Fraud Registry, a centralised searchable database, which can be accessed by banks. The CBI and the
Central Economic Intelligence Bureau (CEIB) have also expressed interest in sharing their own
databases with the banks. More information in this regard would follow once the structure is finalized
 Some Early Warning signals which should alert the bank officials about some wrongdoings in
the loan accounts which may turn out to be fraudulent.
 Default in payment to the banks / sundry debtors and other statutory bodies, etc., bouncing of the high
value cheques.
 Raid by Income tax / sales tax / central excise duty officials.
 Frequent change in the scope of the project to be undertaken by the borrower.
 Under insured or over insured inventory.
 Invoices devoid of TAN and other details.
 Dispute on title of the collateral securities.
 Costing of the project which is in wide variance with standard cost of installation of the project.
 Funds coming from other banks to liquidate the outstanding loan amount.
 Foreign bills remaining outstanding for a long time and tendency for bills to remain overdue.
 Onerous clause in issue of BG / LC / standby letters of credit
 In merchanting trade, import leg not revealed to the bank.
 Request received from the borrower to postpone the inspection of the godown for flimsy reasons.
 Delay observed in payment of outstanding dues.
 Financing the unit far away from the branch.
 Claims not acknowledged as debt high.
 Frequent invocation of BGs and devolvement of LCs.
 Funding of the interest by sanctioning additional facilities.
 Same collateral charged to a number of lenders.
 Concealment of certain vital documents like master agreement, insurance coverage.
 Floating front / associate companies by investing borrowed money.
 Reduction in the stake of promoter / director.
 Resignation of the key personnel and frequent changes in the management.
 Substantial increase in unbilled revenue year after year.
 Large number of transactions with inter-connected companies and large outstanding from such
companies.
 Significant movements in inventory, disproportionately higher than the growth in turnover.
 Significant movements in receivables, disproportionately higher than the growth in turnover and/or
increase in ageing of the receivables.
 Disproportionate increase in other current assets.
 Significant increase in working capital borrowing as percentage of turnover.
 Critical issues highlighted in the stock audit report.
 Increase in Fixed Assets, without corresponding increase in turnover (when project is implemented).
 Increase in borrowings, despite huge cash and cash equivalents in the borrower’s balance sheet.
 Liabilities appearing in ROC search report, not reported by the borrower in its annual report.
 Substantial related party transactions.
 Material discrepancies in the annual report.
 Significant inconsistencies within the annual report.
 Poor disclosure of materially adverse information and no qualification by the statutory auditors.
 Frequent change in accounting period and/accounting policies.
 Frequent request for general purpose loans.
 Movement of an account from one bank to another.
 Frequent ad hoc sanctions.
 Not routing of sales proceeds through bank.
 LCs issued for local trade / related party transactions
 High value RTGS payment to unrelated parties.
 Heavy cash withdrawal in loan accounts.
Non submission of original bills
45.BANKS INTO INSURANCE BUSINESS

BACKGROUND: With the objective of increasing insurance penetration using the entire network
of bank branches, the Finance Minister in the Budget speech 2013-14, announced that banks will
be permitted to act as insurance brokers. Consequent to the announcement, IRDA formulated the
IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013 to enable banks to take up
the business of insurance broking departmentally.
REVISED GUIDELINES:
 As per RBI, banks may undertake insurance business by setting up a subsidiary / joint venture,
as well as undertake insurance broking / insurance agency / either departmentally or through a
subsidiary subject to the stipulated conditions.
 However, if a bank or its group entities, including subsidiaries, undertake insurance distribution
through either broking or corporate agency mode, the bank / other group entities would not be
permitted to undertake insurance distribution activities, i.e only one entity in the group can
undertake insurance distribution by either one of the two modes mentioned above.
In terms of IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010,
no bank is presently eligible to conduct insurance referral business.
i) BANKS SETTING UP A SUBSIDIARY / JV FOR UNDERTAKING INSURANCE BUSINESS
WITH RISK PARTICIPATION:
 Banks are not allowed to undertake insurance business with risk participation departmentally
and may do so only through a subsidiary / JV set up for the purpose.
Eligibility Criteria: Banks which satisfy the eligibility criteria ( as on March 31 of the previous
year) may approach RBI to set up a subsidiary / joint venture company for undertaking insurance
business with risk participation:
a)The net worth of the bank should not be less than Rs.1000 cr; b)The CRAR of the bank should
not be less than 10 per cent; c)The level of net NPA should be not more than 3 percent. d)The
bank should have made a net profit for the last three
continuous years;
e)The track record of the performance of the subsidiaries, if any, of the concerned bank should
be satisfactory.
 The RBI approval would factor in regulatory and supervisory comfort on various aspects of the
bank’s functioning such as corporate governance, risk management, etc.
 A subsidiary of a bank and another bank will not normally be allowed to contribute to the equity
of the insurance company on risk participation basis.
 Banks have to ensure that risks involved in insurance business do not get transferred to the
bank & that the banking business does not get contaminated by any risks which may arise from
insurance business. There should be an ‘arms length’ relationship between the bank and the
insurance outfit.
ii) BANKS UNDERTAKING INSURANCE BROKING / CORPORATE AGENCY THROUGH A
SUBSIDIARY / JV:
Eligibility Criteria: Banks require prior approval of RBI for setting up a subsidiary / JV. Banks
desirous of setting up a subsidiary for undertaking insurance broking / corporate agency and
which satisfy the eligibility criteria (as on March 31 of the previous year) may approach RBI for
approval.
a)The net worth of the bank should not be less than Rs.500 crore after investing in the equity of
such company;
b)The CRAR of the bank should not be less than 10 per cent; c)The level of net NPA should be
not more than 3 per cent. d)The bank should have made a net profit for the last three
continuous years;
e) The track record of the performance of the subsidiaries, if any, of the concerned bank should
be satisfactory.
RBI approval would also factor in regulatory and supervisory comfort on various aspects of the
bank’s functioning such as corporate governance, risk management, Etc.
iii) BANKS UNDERTAKING CORPORATE AGENCY FUNCTIONS / BROKING FUNCTIONS
DEPARTMENTALLY:
 Banks need not obtain prior approval of the RBI to act as corporate agents on fee basis,
without risk participation. Banks may undertake insurance agency or broking business
departmentally and / or through subsidiary, subject to following:
i) Board Approved Policy: A comprehensive Board approved policy regarding undertaking
insurance distribution, whether under the agency or the broking model should be formulated and
services should be offered to customers in accordance with this policy. The policy will also
encompass issues of customer appropriateness and suitability as well as grievance redressal. As
IRDA Guidelines do not permit group entities to take up both corporate agency and broking in the
same group even through separate entities, banks or their group entities may undertake either
insurance broking or corporate agency business.
ii) Compliance with IRDA Guidelines: The IRDA guidelines be complied with banks
undertaking these activities. The deposit to be maintained by an insurance broker as per the
IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013, as amended from time to
time, should be maintained with a scheduled commercial bank other than itself.
iii) Ensuring Customer Appropriateness and Suitability:
a) All employees dealing with insurance agency / broking business should possess the
qualification prescribed by IRDA.
b) There should be a system of assessment of the suitability of products for customers. Pure risk
term products with no investment or growth components that are simple and easy for the
customer to understand will be deemed universally suitable products. More complex products
with investment components will require the bank to necessarily undertake a customer need
assessment prior to sale. Banks to ensure that there is a standardized system of assessing the
needs of the customer and that initiation / transactional and approval.
c) Banks should treat their customers fairly, honestly and transparently.
iv) Prohibition on Payment of Commission/Incentive directly to Bank Staff: There should be
no violation either of Section 10(1)(ii) of the BR Act, 1949 or the guidelines issued by IRDA in
payment of commissions / brokerage / incentives.
v) Adherence to KYC Guidelines: The instructions / guidelines on KYC/AML/CFT applicable to
banks, issued by RBI from time to time, may be adhered to, in respect of customers (both
existing and walk-in) to whom the services of insurance broking / agency are being provided.
vi) Transparency and Disclosures: The bank should not follow any restrictive practices of
forcing a customer to either opt for products of a specific insurance company or link sale of such
products to any banking product. Further, the details of fees / brokerage received in respect of
insurance broking / agency business undertaken by them should be disclosed in the ‘Notes to
Accounts’ to their Balance Sheet.
vii) Customer Grievance Redressal Mechanism:
A robust internal grievance redressal mechanism should be put in place along with a Board
approved customer compensation policy for resolving issues related to services offered.
46. GYAN SANGAM - I

For reforms in India’s banking sector which is hit by bad loans and the economic slowdown, Bank
chiefs will submit their recommendations to Prime Minister at the two-day Gyan Sangam
‘Bankers’ Retreat’ in Pune. The conclave is being organised by NIBM, CAFRAL (Centre for
Advanced Financial Research and Learning) and the department of financial services in the
ministry of finance. Experts including consulting firm McKinsey will aid bankers in formulating
strategies. Besides the financial sector, chairmen, managing directors and executive directors of
public sector banks (PSBs) chairmen of insurance companies and financial institutions, top
finance ministry officials, RBI Governor Raghuram Rajan, Deputy Governors and chairpersons of
insurance regulator IRDA and Pension Fund Regulatory Authority will also participate to
brainstorm on the way forward.
+The Government has already short-listed the reform agenda. The six selected issues are:
achieving universal financial inclusion; leveraging technology & digital to improve cost efficiency;
fostering profitable priority sector lending; effective risk profiling and recovery mechanism;
building a robust people motivation strategy for public sector banks; and consolidation &
restructuring of PSBs for better efficiency, governance and capital efficiency. +The Bankers’
Retreat is taking place at a time when gross NPAs have touched 4.45%of advances, the number
willful defaulters are rising, profitability of PSU banks is under pressure, big projects worth Rs 18
lakh cr have stalled & credit offtake has remained sluggish.
GOVT. TO DILUTE STAKE IN PSBS TO 52%

The Government has moved ahead with crucial financial sector reforms including permitting
banks to raise as much as Rs 1.60 lakh crore from the markets to enhance their capital base and
also approving the long pending Insurance Laws (Amendment) Bill, 2008.
+ Public sector banks (PSBs) have been permitted to dilute government holding to 52 per cent in
phases in order to raise funds to meet Basel III capital adequacy norms.
+ The quantum of capital support needed by banks is huge, which cannot be funded by
budgetary support alone. Banks have been asked to broadbase retail shareholding while going in
for the fund raising.
+ Out of 27 PSBs, the government controls 22 though majority shareholding while SBI is the
majority stakeholder in the remaining five banks. If the PSBs are permitted to bring down
government holding to 52 per cent in a phased manner, they can raise up to Rs.1,60,825 crore
from the market.
47. JOINT LENDERS' FORUM (JLF) & CORRECTIVE ACTION PLAN (CAP)
RBI has decided (September 24, 2015) to introduce the following changes/additions in the framework:
1. Joint Lenders' Forum Empowered Group (JLF — EG): Sometimes Boards of the banks find it difficult
to approve the decisions taken by JLF as the JLFs do not have senior level representations from the
participating lenders. Although RBI has not explicitly prescribed the level of representation in its
guidelines, banks are expected to depute sufficiently empowered senior level officials for deliberations
and decisions in the meetings of JLF. Further, JLF will finalise the CAP and the same will be placed
before an Empowered Group (EG) of lenders, which will be tasked to approve the
rectification/restructuring packages under CAPs. The JLF-EG shall have the following composition: (a)
A representative each of SBI and ICICI Bank as standing members; (b) A representative each of the top
three lenders to the borrower. If SBI or ICICI Bank is among the top three lenders to the borrower, then
a representative of the fourth largest or a representative each of the fourth and the fifth largest lenders
as the case may be; (c) A representative each of the two largest banks in terms of advances who do not
have any exposure to the borrower. The participation in the JLF-EG shall not be less than the rank of
an Executive Director in a PSB or equivalent. The JLF convening bank will convene the JLF-EG and
provide the secretarial support to it.
2. Restructuring of Doubtful accounts under JLF: As per extant guidelines, while generally no account
classified as doubtful should be considered by the JLF for restructuring, in cases where a small portion
of debt is doubtful i.e. the account is standard/sub-standard in the books of at least 90% of creditors (by
value), the account may then be considered under JLF for restructuring. Now, RBI has decided that a
JLF may decide on restructuring of an account classified as 'doubtful' in the books of one or more
lenders similar to that of SMA2 and sub-standard assets, if the account has been assessed as viable
under the TEV and the JLF-EG concurs with the assessment and approves the proposal.
Disagreement on restructuring as CAP and Exit Option: As per extant guidelines, banks, irrespective of
whether they are within or outside the minimum 75 per cent and 60 per cent, can exercise the exit option
for providing additional finance only by way of arranging their share of additional finance to be provided by
a new or existing creditor. However, sometimes disagreement arises among lenders on deciding the CAP
on rectification or restructuring, resulting in delay in initiating timely corrective action. Although co-
operation among lenders for deciding a CAP by consensus is desirable for timely turn-around of a viable
account, it is also important to enable all lenders to have an independent view on the viability of account
and consequent participation in rectification or restructuring of accounts, without allowing them to free ride
on efforts made by others. Therefore, RBI has decided that dissenting lenders who do not want to
participate in the rectification or restructuring of the account as CAP, which may or may not involve
additional financing, will have an option to exit their exposure completely by selling their exposure to a
new or existing lender(s) within the prescribed timeline for implementation of the agreed CAP. The exiting
lender will not have the option to continue with their existing exposure and simultaneously not agreeing for
rectification or restructuring as CAP. The new lender to whom the exiting lender sells its stake may not
be required to commit any additional finance, if the agreed CAP involves additional finance. In such
cases, if the new lender chooses to not to participate in additional finance, the share of additional finance
pertaining to the exiting lender will be met by the existing lenders on a pro-rata basis.
4. Duration of application of extant penal provisions (5% in case of Standard account and accelerated
provision in case of NPAs): As per extant guidelines, penal provisions are applicable under certain
cases. While the duration of such penal provision has been specified in case of an escrow account
maintaining bank which does not appropriate proceeds of repayment by the borrower among the lenders
as per agreed terms resulting into down gradation of asset classification of the account in books of other
lenders, the duration has not been prescribed in other cases. Now, RBI has advised that the penal
provisions in the other cases will be applicable for the following durations:
(i) Banks fail to report SMA status of the accounts to CRILC or resort to methods with the intent to
conceal the actual status of the accounts or evergreen the account;
(ii) Lenders who have agreed to the restructuring decision under the CAP by JLF and are signatories to
the ICA and DCA, but change their stance later on, or delay/refuse to implement the package;
(iii) Lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame: In
these three cases, from the date of imposition of penal provision as advised by RBI Inspection/Statutory
Auditor till one year or rectification of defect, whichever is later.
(iv) Accelerated provision for existing loans/exposures of banks to companies having director/s (other than
nominee directors of government/financial institutions brought on board at the time of distress), whose
name/s appear more than once in the list of wilful defaulters: From the date of notification as wilful
defaulter in the list of wilful defaulters till the removal of the name from the list.
5. Strategic Debt Restructuring (SDR) Scheme: In cases of failure of rectification or restructuring as a
CAP as decided by JLF, JLF will have the option to initiate SDR to effect change of management of the
borrower company subject to compliance with certain conditions.
48. STRATEGIC DEBT RESTRUCTURING SCHEME

As per extant guidelines of RBI on "Framework for Revitalising Distressed Assets in the Economy —
Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)", JLF/Corporate Debt
Restructuring Cell (CDR) may consider the following options when a loan is restructured -
(a) Possibility of transferring equity of the company by promoters to the lenders to compensate for their
sacrifices;
(b) Promoters infusing more equity into their companies; (c) Transfer of the promoters' holdings to a
security trustee or an escrow arrangement till turnaround of company. In case, borrower companies are
not able to come out of stress due to operational/ managerial inefficiencies despite substantial sacrifices
made by the lending banks, change of ownership will be a preferred option. Henceforth, the Joint Lenders'
Forum (JLF) should actively consider such change in ownership. With a view to ensuring more stake of
promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of
ownership in accounts which fail to achieve the projected viability milestones, RBI has allowed (June 8,
2015) banks to undertake a 'Strategic Debt Restructuring (SDR)' by converting loan dues to equity shares,
which will have the following features:
1. At the time of initial restructuring, the JLF must incorporate, in the terms and conditions, an option to
convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event
the borrower is not able to achieve the viability milestones and/or adhere to 'critical conditions' as
stipulated in the restructuring package. This should be supported by necessary approvals/authorisations
from the borrower company, as required under extant laws/regulations. Restructuring of loans without the
said approvals/ authorisations for SDR is not permitted. If the borrower is not able to achieve the viability
milestones and/or adhere to the 'critical conditions', the JLF must review the account and examine
whether the account will be viable by effecting a change in ownership. If found viable under such
examination, the JLF may decide on whether to invoke the SDR, i.e. convert the whole or part of the loan
and interest outstanding into equity shares in the borrower company, so as to acquire majority
shareholding in the company;
2. The decision on invoking the SDR by converting the whole or part of the loan into equity shares should
be taken by the JLF within 30 days from the review of the account and should be approved by minimum of
75% of creditors by value and 60% of creditors by number.
3. After the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares.
But banks should also comply with limits laid down under section 19(2) of B R Act.
4. The JLF must approve the SDR conversion package within 90 days from the date of deciding to
undertake SDR;
5. The conversion of debt into equity as approved under the SDR should be completed within a period of
90 days from the date of approval of the SDR package by the JLF. For accounts which have been referred
by the JLF to CDR Cell for restructuring, JLF may decide to undertake the SDR either directly or under the
CDR Cell;
The invocation of SDR will not be treated as restructuring for the purpose of asset classification and
provisioning NORMS.
6, On completion of conversion of debt to equity, the existing asset classification of the account, as on
the reference date, will continue for a period of 18 months from the reference date. Thereafter, the
asset classification will be as per the extant IRAC norms.
8. JLF and lenders should divest their holdings in the equity of the company as soon as possible. On
divestment of banks' holding in favour of a 'new promoter', the asset classification of the account may
be upgraded to 'Standard'. However, the quantum of provision held by the bank against the said
account as on the date of divestment, which shall not be less than what was held as at the 'reference
date', shall not be reversed. On divestment of their holdings to a 'new promoter', banks may refinance
the existing debt of the company considering the changed risk profile of the company without treating
the exercise as `restructuring'.
9. Banks may reverse the provision held against the said account only when all the outstanding
loan/facilities in the account perform satisfactorily during the 'specified period' i.e. principal and interest
on all facilities in the account are serviced as per terms of payment during that period. In case, however,
satisfactory performance during the specified period is not evidenced, the asset classification of the
restructured account would be governed by the the extant IRAC norms as per the repayment schedule
that existed as on the reference date, assuming that 'stand-still' / above upgrade in asset classification
had not been given. However, where the bank exits the account completely, i.e. no longer has any
exposure to the borrower, the provision may be reversed/absorbed as on the date of exit;
10. The asset classification benefit provided at the above paragraph is subject to the following conditions:
(a) The 'new promoter' should not be a person/entity/subsidiary/associate etc. (domestic as well as
overseas), from the existing promoter/promoter group;
(b) The new promoters should have acquired at least 51 per cent of the paid up equity capital of the
borrower company. If the new promoter is a non-resident, and in sectors where the ceiling on foreign
investment is less than 51 per cent, the new promoter should own at least 26 per cent of the paid up
equity capital or up to applicable foreign investment limit, whichever is higher, provided banks are
satisfied that with this equity stake the new non-resident promoter controls the management of the
company.
11. Conversion price of the equity
(i) Conversion of outstanding debt (principal as well as unpaid interest) into equity instruments should be
at a FAIR Value’ which will not exceed the lowest of the following, subject to the floor of ‘Face Value’
(restriction under section 53 of the Companies Act, 2013):
(a) Market value (for listed companies): Average of the closing prices of the instrument on a recognized
stock exchange during the ten trading days preceding the ‘reference date’ indicated at (ii) below;
(b) Break-up value: Book value per share to be calculated from the company's latest audited balance
sheet (without considering 'revaluation reserves', if any) adjusted for cash flows and financials post the
earlier restructuring; the balance sheet should not be more than a year old. In case the latest balance
sheet is not available this break-up value shall be Re.1.
(ii) The above Fair Value will be decided at a ‘reference date’ which is the date of JLF’s decision to
undertake SDR.
(iii) Exemptions: The above pricing formula under Strategic Debt Restructuring Scheme has been
exempted from the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure
Requirements) Regulations, 2009. Further, in the case of listed companies, the acquiring lender on
account of conversion of debt into equity under SDR will also be exempted from the obligation to make
an open offer. Banks should adhere to all the prescribed conditions by SEBI in this regard.
(iv) Exemption from regulatory ceilings: Acquisition of shares due to such conversion will be exempted
from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para-Banking activities
and intra-group exposure. However, this will require reporting to RBI (reporting to DBS, CO every month
along with the regular DSB Return on Asset Quality) and disclosure by banks in the Notes to Accounts in
Annual Financial Statements. Equity shares of entities acquired by the banks under SDR shall be
assigned a 150% risk weight for a period of 18 months from the ‘reference date’. After 18 months from
the ‘reference date’, these shares shall be assigned risk weights as per the extant capital adequacy
regulations.
(v) Exemption from Mark to Market: Equity shares acquired and held by banks under the scheme shall
be exempt from the requirement of periodic mark-to-market for the 18 month period.
(vi) Exemption from associate relationship: Conversion of debt into equity in an enterprise by a bank
may result in the bank holding more than 20% of voting power, which will normally result in an investor-
associate relationship under applicable accounting standards. However, as the lender acquires such
voting power in the borrower entity in satisfaction of its advances under the SDR, and the rights
exercised by the lenders are more protective in nature and not participative, such investment may not be
treated as investment in associate.
49. WILFUL DEFAULTERS

1. Introduction: Pursuant to the instructions of the Central Vigilance Commission for collection of
information on wilful defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting banks
and FIs, a scheme was framed by RBI with effect from 1st April 1999 under which the banks and notified
All India Financial Institutions were required to submit to RBI the details of the wilful defaulters.
Accordingly, banks and FIs started reporting all cases of wilful defaults, on a quarterly basis. It covered
all nonperforming borrowal accounts with outstandings (funded facilities and such non-funded facilities
which are converted into funded facilities) aggregating Rs.25 lakhs and above identified as wilful default
by a Committee of higher functionaries headed by the Executive Director and consisting of two
GMs/DGMs. Banks/FIs were advised that they should examine all cases of wilful defaults of Rs 1.00
crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud
by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were
advised that they report wilful defaults to other participating/financing banks also. Cases of wilful defaults
at overseas branches are required to be reported if such disclosure is permitted under the laws of the
host country.
2. Definition of wilful default: A "wilful default" would be deemed to have occurred if any of the following
events is noted:-
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has
the capacity to honour the said obligations.
(b) Diversion of Funds: The unit has defaulted in meeting its payment / repayment obligations to the
lender and has not utilised the finance from the lender for the specific purposes for which finance was
availed of but has diverted the funds for other purposes. Diversion of funds include any one of the
undernoted occurrences: (a) utilisation of short-term working capital funds for long-term purposes not in
conformity with the terms of sanction; (b) deploying borrowed funds for purposes / activities or creation
of assets other than those for which the loan was sanctioned;
(c) transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever
modalities; (d) routing of funds through any bank other than the lender bank or members of
consortium without prior permission of the lender; (e) investment in other companies by way of
acquiring equities / debt instruments without approval of lenders; (f) shortfall in deployment of funds
vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.
(d) (c) Siphoning of Funds: The unit has defaulted in meeting its payment / repayment obligations to
the lender and has siphoned off the funds so that the funds have not been utilised for the specific
purpose for which finance was availed of, nor are the funds available with the unit in the form of other
assets. Siphoning of funds, should be construed to occur if any funds borrowed from banks / FIs are
utilised for purposes un-related to the operations of the borrower, to the detriment of the financial health
of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of
funds would have to be a judgement of the lenders based on objective facts and circumstances of the
case The unit has defaulted in meeting its payment / repayment obligations to the lender and has also
disposed off or removed the movable fixed assets or immovable property given by him or it for the
purpose of securing a term loan without the knowledge of the bank/lender.
The identification of the wilful default should be made keeping in view the track record of the borrowers
and should not be decided on the basis of isolated transactions/incidents. The default to be categorised
as wilful must be intentional, deliberate and calculated. The term ‘lender’ covers all banks/FIs to which
any amount is due, provided it is arising on account of any banking transaction, including off balance
sheet transactions such as derivatives, guarantee and Letter of Credit. The term ‘unit’ shall include
individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In
case of business enterprises (other than companies), banks/FIs may also report the names of those
persons who are in charge and responsible for the management of the affairs of the business enterprise.
3 Guarantees furnished by individuals, group companies & non-group companies: While dealing with
wilful default of a single borrowing company in a Group, the banks /FIs should consider the track record
of the individual company, with reference to its repayment performance to its lenders. However, in cases
where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units
are not honoured when invoked by the banks /FIs, such Group companies should also be reckoned as
wilful defaulters. In case, individuals (not being directors of the company) or non-group corporate, who
are guarantors for the loan given to Company, refuses to comply with the demand made by the
creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would
also be treated as a wilful defaulter. Banks/FIs may ensure that this position is made known to all
prospective guarantors at the time of accepting guarantees.
4 Cut-off limits: Keeping in view the present limit of Rs. 25 lakh fixed by the Central Vigilance Commission
for reporting of cases of wilful default by the banks/FIs to RBI, any wilful defaulter with an outstanding
balance of Rs. 25 lakh or more, would attract the penal measures stipulated below. This limit of Rs. 25
lakh may also be applied for the purpose of taking cognisance of the instances of 'siphoning' / 'diversion'
of funds.
5 Penal measures:
a) No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In
addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning /
diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be
debarred from institutional finance from the scheduled commercial banks, Development Financial
Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a
period of 5 years from the date the name of the wilful defaulter is published in the list of wilful
defaulters by the RBI.
The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of
dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful
defaulters, wherever necessary
c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management
of the wilfully defaulting borrower unit.
In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful
defaulters (non-suit filed accounts) and list of wilful defaulters (suit filed accounts) are forwarded to SEBI
by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively.
6 Reporting to RBI / Credit Information Companies:
6.1 Reporting to RBI: Earlier, banks were submitting the following data to RBI: (i) Defaulting borrowers
(non-suit filed accounts) of Rs. 1 crore and above on a half-yearly basis, and(ii) Wilful Defaulters (non-suit
filed accounts) of Rs. 25 lakhs and above on a quarterly basis.
6.2 Reporting to CIC: Further, banks were submitting to Credit Information Companies (CICs) the
following information: (i) Quarterly list of suit filed accounts of Rs.1 crore and above, classified as doubtful
or loss, and (ii) List of suit filed accounts of wilful defaulters of Rs.25 lakhs and above, on a quarterly
basis.
6.3 Revised Guidelines: On the recommendations of a Committee to Recommend Data Format for
Furnishing of Credit Information to Credit Information Companies (Chairman: Shri Aditya Puri), RBI has
advised that banks/FIs should furnish the data in respect of wilful defaulters(non-suit filed accounts) of
Rs. 25 lakhs and above for the quarter ending December 31, 2014 and the data on defaulters(non-suit
filed accounts) of Rs. 1 crore and above for the half year ending December 31, 2014 to CICs and not to
RBI. After December 31, 2014, banks/FIs may continue to furnish data in respect of defaulters/wilful
defaulters (both in respect of suit filed and non suit filed) to CICs on a monthly or a more frequent basis.
This would enable such information to be available to the banks/FIs on a near real time basis. However,
banks need not report cases where (i) outstanding amount falls below Rs.25 lakh and (ii) in respect of
cases where banks have agreed for a compromise settlement and the borrower has fully paid the
compromised amount.
7. Mechanism for identification of Wilful Defaulters: The evidence of wilful default on the part of the
borrowing company and its promoter/whole-time director at the relevant time should be examined by a
Committee headed by an Executive Director and consisting of two other senior officers of the rank of
GM/DGM. The Order of the Committee should be reviewed by another Committee headed by the
Chairman / CEO and MD and consisting, in addition, of two independent directors of the Bank and the
Order shall become final only after it is confirmed by the said Review Committee.
End-use of Funds: In cases of project financing, the banks / FIs seek to ensure end use of funds by,
inter alia, obtaining certification from the Chartered Accountants for the purpose. In case of short-term
corporate / clean loans, such an approach ought to be supplemented by 'due diligence' on the part of
lenders themselves, and to the extent possible, such loans should be limited to only those borrowers
whose integrity and reliability are above board. The banks and FIs, therefore, should not depend entirely
on the certificates issued by the Chartered Accountants but strengthen their internal controls and the
credit risk management system to enhance the quality of their loan portfolio. The following are some of
the illustrative measures that could be taken by the lenders for monitoring and ensuring end-use of
funds
(a) Meaningful scrutiny of quarterly progress reports / operating statements / balance sheets of the
borrowers; (b) Regular inspection of borrowers’ assets charged to the lenders as security; (c) Periodical
scrutiny of borrowers’ books of accounts and the no-lien accounts maintained with other banks; (d)
Periodical visits to the assisted units; (e) System of periodical stock audit, in case of working capital
finance; (f) Periodical comprehensive management audit of the ‘Credit’ function of the lenders, so as to
identify the systemic-weaknesses in the credit-administration.
9 Role of auditors: In case any falsification of accounts on the part of the borrowers is observed by the
banks / FIs, and if it is observed that the auditors were negligent or deficient in conducting the audit, they
should lodge a formal complaint against the auditors of the borrowers with the Institute of Chartered
Accountants of India (ICAI). The complaints may also be forwarded to the RBI and IBA for records. IBA
would circulate the names of the CA firms against whom many complaints have been received amongst
all banks who should consider this aspect before assigning any work to them. RBI would also share such
information with other financial sector regulators/Ministry of Corporate Affairs (MCA) / Comptroller and
Auditor General (CAG). If the lenders desire a specific certification from the borrowers’ auditors regarding
diversion / siphoning of funds by the borrower, the lender should award a separate mandate to the
auditors for the purpose. To ensure proper end-use of funds and preventing diversion/siphoning of funds
by the borrowers, banks could consider engaging their own auditors for such specific certification purpose
without relying on certification given by borrower’s auditors.
10. Criminal Action against Wilful Defaulters: Banks / FIs should closely monitor the end-use of funds and
obtain certificates from borrowers certifying that the funds are utilised for the purpose for which they were
obtained. In case of wrong certification by the borrowers, banks / FIs may consider appropriate legal
proceedings, including criminal action wherever necessary, against the borrowers.
50. Non-Cooperative Borrowers
A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in
timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues
by not providing necessary information sought, denying access to assets financed / collateral securities,
obstructing sale of securities, etc. The cut off limit for classifying borrowers as noncooperative would be
those borrowers having aggregate fund-based and non-fund based facilities of Rs.50 million (Rs 5 crore)
from the concerned bank/FI. A non-cooperative borrower will include, besides the company, its
promoters and directors (excluding independent directors and directors nominated by the Government
and the lending institutions). The decision to classify the borrower as non-cooperative borrower should
be entrusted to a Committee headed by an Executive Director and consisting of two other senior officers
of the rank of General Managers/ Deputy General Managers. The order of the Committee should be
reviewed by another Committee headed by the Chairman / CEO and MD and consisting, in addition, of
two independent directors of the Bank/FI and the order shall become final only after it is confirmed by
the said Review Committee. Banks/FIs should report information on their non-cooperative borrowers to
CRILC under CRILC-Main (Quarterly Submission) return within 21 days from the close of the relevant
quarter
51. REVITALISING DISTRESSED ASSETS

As a part of continuous assessment of the effectiveness of the guidelines issued on Distressed
Assets, and also based on the feedbacks received from banks, the RBI has reviewed the
framework and has decided to introduce the following changes/additions in the framework to
make it more effective.
A) JOINT LENDERS' FORUM EMPOWERED GROUP:
Banks had represented to RBI that sometimes Boards of the banks find it difficult to approve the
decisions taken by JLF as the JLFs do not have senior level representations from the
participating lenders. In this regard, it has been clarified that, although RBI has not explicitly
prescribed the level of representation in its guidelines, banks are expected to depute sufficiently
empowered senior level officials for deliberations and decisions in the meetings of JLF.
Nevertheless, RBI has decided that JLF will finalise the CAP and the same will be placed before
an Empowered Group (EG) of lenders, which will be tasked to approve the rectification /
restructuring packages under CAPs.
The JLF-EG shall have the following composition:
a) A representative each of SBI and ICICI Bank as standing members;
b)A representative each of the top three lenders to the borrower. If SBI or ICICI Bank is among
the top three lenders to the borrower, then a representative of the fourth largest or a
representative each of the fourth and the fifth largest lenders as the case may be;
c) A representative each of the two largest banks in terms of
advances who do not have any exposure to the borrower; and d)The participation in the JLF-EG
shall not be less than the rank
of an Executive Director in a PSB or equivalent.
The JLF convening bank will convene the JLF-Empowered Group and provide the secretarial
support to it.
B) RESTRUCTURING OF DOUBTFUL A/Cs UNDER JLF: As per the extant guidelines, while
generally no account classified as doubtful should be considered by the JLF for restructuring, in
cases where a small portion of debt is doubtful i.e., the account is standard/sub-standard in the
books of at least 90% of creditors (by value), the account may then be considered under JLF for
restructuring.
In partial modification of the above, RBI has decided that a JLF may decide on restructuring of
an account classified as 'doubtful' in the books of one or more lenders similar to that of SMA2
and sub-standard assets, if the account has been assessed as viable under the TEV and the
JLF- Empowered Group concurs with the assessment and approves the proposal.
C) DISAGREEMENT ON RESTRUCTURING AS CAP AND EXIT OPTION: As per the extant
guidelines, banks, irrespective of whether they are within or outside the minimum 75% and 60%,
can exercise the exit option for providing additional finance only by way of arranging their share
of additional finance to be provided by a new or existing creditor.
It has been brought to the notice of RBI that sometimes disagreement arises among lenders on
deciding the CAP on rectification or restructuring, resulting in delay in initiating timely corrective
action. Although co-operation among lenders for deciding a CAP by consensus is desirable for
timely turn-around of a viable account, it is also important to enable all lenders to have an
independent view on the viability of account and consequent participation in rectification or
restructuring of accounts, without allowing them to free ride on efforts made by others
In view of the same, RBI has decided that dissenting lenders who do not want to participate in the
rectification or restructuring of the account as CAP, which may or may not involve additional
financing, will have an option to exit their exposure completely by selling their exposure to a new
or existing lender(s) within the prescribed timeline for implementation of the agreed CAP. The
exiting lender will not have the option to continue with their existing exposure and simultaneously
not agreeing for rectification or restructuring as CAP. The new lender to whom the exiting lender
sells its stake may not be required to commit any additional finance, if the agreed CAP involves
additional finance. In such cases, if the new lender chooses to not to participate in additional
finance, the share of additional finance pertaining to the exiting lender will be met by the existing
lenders on a pro-rata basis.
D) DURATION OF APPLICATION OF EXTANT PENAL PROVISIONS: As per the extant
guidelines, penal provisions of 5% in case of Standard account and accelerated provision in case
of NPAs are applicable. While the duration of such penal provision has been specified in case of
an escrow account maintaining bank which does not appropriate proceeds of repayment by the
borrower among the lenders as per agreed terms resulting into down gradation of asset
classification of the account in books of other lenders, the duration has not been prescribed in
other cases.
In view of the above, banks are advised that the penal provisions in the other cases under
the Framework will be applicable for the following durations:
REASON FOR PENAL PROVISION DURATION
i ) Banks fail to report SMA status of the a/cs to CRILC or resort to From the date of imposition of
methods with the intent to conceal the actual status of the penal provision as advised by
accounts or evergreen the a/c. RBI Inspection /
i i ) Lenders who have agreed to the Statutory
restructuring decision under the CAP by JLF and are signatories Auditor till one
to the ICA and DCA, but change their stance later on, or delay / year or
refuse to implement the package. rectification of defect,
i i Lenders
i ) fail to convene the JLF or fail to agree upon a common which
CAP within the stipulated time frame. ever is later.
i vAccelerated
) provision for existing loans / exposures of banks to From the date of notification
companies having director/s (other than nominee directors as wilful defaulter in the list of
of government / financial institutions wilful defaulters till the
brought on board at the time of distress), whose name/s appear removal of the name from the
more than once in the list of wilful defaulters. list.
E) STRATEGIC DEBT RESTRUCTURING SCHEME: With reference to the provisions on

'Strategic Debt Restructuring', RBI has advised that in cases of failure of rectification or
restructuring as a CAP as decided by JLF, JLF will have the option to initiate SDR to effect
change of management of the borrower company subject to compliance with conditions of the
extant guidelines.
DEBT RESTRUCTURING SCHEME
 At the time of divestment of their holdings to a ‘new promoter’, banks may refinance the
existing debt of the company considering the changed risk profile of the company without treating
the exercise as ‘restructuring’ subject to banks making provision for any diminution in fair value of
the existing debt on account of the refinance.
 Banks may reverse the provision held against the said account only when all the outstanding
loan/facilities in the account perform satisfactorily during the ‘specified period’, i.e. principal and
interest on all facilities in the account are serviced as per terms of payment during that period. In
case, however, satisfactory performance during the specified period is not evidenced, the asset
classification of the restructured account would be governed by the extant IRAC norms as per the
repayment schedule that existed as on the reference date assuming that ‘stand-still’ / above
upgrade in asset classification had not been given. However, in cases where the bank exits the
account completely, i.e. no longer has any exposure to the borrower, the provision may be
reversed / absorbed as on the date of exit;
13) The asset classification benefit provided above, is subject to the following conditions:
a)The ‘new promoter’ should not be a person / entity / subsidiary / associate etc. (domestic as
well as overseas), from the existing promoter/promoter group. Banks should clearly establish
that the acquirer does not belong to the existing promoter group; and
b)The new promoters should have acquired at least 51 per cent of the paid up equity capital of
the borrower company. If the new promoter is a non-resident, and in sectors where the ceiling on
foreign investment is less than 51 per cent, the new promoter should own at least 26 per cent of
the paid up equity capital or up to applicable foreign investment limit, whichever is higher,
provided banks are satisfied that with this equity stake the new non-resident promoter controls
the management of the company.
 The conversion price of the equity shall be determined as per the guidelines given
below:
i) Conversion of outstanding debt (principal as well as unpaid
interest) into equity instruments should be at a ‘Fair Value’ which
will not exceed the lowest of the following, subject to the floor of
‘Face Value’ (restriction under Section 53 of the Co Act, 2013):
a)Market value (for listed companies): Average of the closing prices of the instrument on a
recognized stock exchange during the ten trading days preceding the ‘reference date’.
b)Break-up value: Book value per share to be calculated from the company's latest audited
balance sheet (without considering 'revaluation reserves', if any) adjusted for cash flows and
financials post the earlier restructuring; the balance sheet should not be more than a year old. In
case the latest balance sheet is not available, this break-up value shall be Re.1.
(ii) The above Fair Value will be decided at a ‘reference date’ which is the date of JLF’s decision
to undertake SDR.
The above pricing formula under Strategic Debt Restructuring Scheme has been exempted from
the Securities and Exchange Board of India (SEBI) guidelines. However, Banks should adhere to
all other prescribed conditions by SEBI in this regard.
In addition to conversion of debt into equity under SDR, banks may also convert their debt into
equity at the time of restructuring of credit facilities under the extant restructuring guidelines.
However, exemption from regulations of SEBI, shall be subject to adhering to the guidelines
stipulated by RBI.
 Acquisition of shares due to such conversion will be exempted from regulatory
ceilings/restrictions on Capital Market Exposures, investment in Para-Banking activities and
intra-group exposure. However, this will require reporting to RBI -reporting to DBS, every month
along with the regular DSB Return on Asset Quality, and disclosure by banks in the Notes to
Accounts in Annual Financial Statements. Equity shares of entities acquired by the banks under
SDR shall be assigned a 150% risk weight for a period of 18 months from the ‘reference date’
After 18 months from the ‘reference date’, these shares shall be assigned risk weights as per the
extant capital adequacy regulations.
 Equity shares acquired and held by banks under the scheme shall be exempt from the
requirement of periodic mark-to-market for the 18 month period.
Conversion of debt into equity in an enterprise by a bank may result in the bank holding more
than 20% of voting power, which will normally result in an investor-associate relationship under
applicable accounting standards. However, as the lender acquires such voting power in the
borrower entity in satisfaction of its advances under the SDR, and the rights exercised by the
lenders are more protective in nature and not participative, such investment may not be treated
as investment in associate
52. DEBT RESTRUCTURING SCHEME

The Reserve Bank of India’s (RBI) has announced new Strategic Debt Restructuring Scheme
(SDRS) which allows banks to convert their outstanding loans into equity in a company if even
restructuring has not helped. This will serve as a deterrent to big companies and wilful defaulters.
EXTANT GUIDELINES:
 As per the extant guidelines on on Framework of Revitalising Distressed Assets in the
Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP), a
change of management was envisaged as a part of restructuring of stressed assets. The
general principle of restructuring should be that the shareholders bear the first loss rather than
the debt holders. With this principle in view and also to ensure more ‘skin in the game’ of
promoters, JLF / Corporate Debt Restructuring Cell (CDR) may consider the following options
when a loan is restructured:
a) Possibility of transferring equity of the company by promoters to the lenders to compensate for
their sacrifices;
b) Promoters infusing more equity into their companies;
c) Transfer of the promoters’ holdings to a security trustee or an escrow arrangement till
turnaround of the company. This will enable a change in management control, should lenders
favour it.
 The RBI has observed that in many cases of restructuring of accounts, borrower companies
are not able to come out of stress due to operational / managerial inefficiencies despite
substantial sacrifices made by the lending banks. In such cases, change of ownership will be a
preferred option. Henceforth, the Joint Lenders’ Forum (JLF) should actively consider such
change in ownership under the extant guidelines.
 Further as per the extant guidelines, both under JLF and CDR mechanism, the restructuring
package should also stipulate the timeline during which certain viability milestones (e.g.
improvement in certain financial ratios after a period of time, say, 6 months or 1 year and so on)
would be achieved. The JLF must periodically review the account for achievement / non-
achievement of milestones and should consider initiating suitable measures including recovery
measures as deemed appropriate.
REVISED GUIDELINES:
With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks
with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the
projected viability milestones, banks may, at their discretion, undertake a ‘Strategic Debt
Restructuring (SDR)’ by converting loan dues to equity shares.
ACT OF GRATITUDE
It was time for the monsoon rains to began, and a very old man was digging holes in his garden.
‘What are you doing?’ his neighbor asked.
‘Planting mango trees,’ was the reply.
‘Do you expect to eat mangoes from those trees?’
‘No, I won’t live long enough for that. But others will. It occurred to me the other day that all my
life I have enjoyed mangoes planted by other people. This is my way of showing them my
gratitude’
MAIN FEATURES OF SDRS:
1) At the time of initial restructuring, the JLF must incorporate, in the terms and conditions
attached to the restructured loans agreed with the borrower, an option to convert the entire
loan (including unpaid interest), or part thereof, into shares in the company in the event the
borrower is not able to achieve the viability milestones and/or adhere to ‘critical conditions’
as stipulated in the restructuring package. This should be supported by necessary approvals
/ authorisations (including special resolution by the shareholders) from the borrower
company, as required under extant laws / regulations, to enable the lenders to exercise the
said option effectively. Restructuring of loans without the said approvals / authorisations for
SDR is not permitted. If the borrower is not able to achieve the viability milestones and/or
adhere to the ‘critical conditions’ referred to above, the JLF must immediately review the
account and examine whether the account will be viable by effecting a change in ownership.
If found viable under such examination, the JLF may decide on whether to invoke the SDR,
i.e. convert the whole or part of the loan and interest outstanding into equity shares in the
borrower company, so as to acquire majority shareholding in the company;
2) Provisions of the SDR would also be applicable to the accounts which have been
restructured before the issue of revised guidelines provided that the necessary enabling
clauses, are included in the agreement between the banks and borrower;
3) The decision on invoking the SDR by converting the whole or part of the loan into equity
shares should be taken by the JLF as early as possible but within 30 days from the above
review of the account. Such decision should be well documented and approved by the
majority of the JLF members (minimum of 75% of creditors by value and 60% of creditors by
number);
4) In order to achieve the change in ownership, the lenders under the JLF should collectively
become the majority shareholder by conversion of their dues from the borrower into equity.
However the conversion by JLF lenders of their outstanding debt (principal as well as unpaid
interest) into equity instruments shall be subject to the member banks’ respective total
holdings in shares of the Co conforming to the statutory limit in terms of Sec 19(2) of B.R.
Act, 1949;
5) Post the conversion, all lenders under the JLF must collectively hold 51% or more of the
equity shares issued by the company;
6) The share price for such conversion of debt into equity will be determined as per the
method given by RBI.
7) The banks should include necessary covenants in all loan agreements, including
restructuring, supported by necessary approvals / authorisations (including special resolution
by the shareholders) from the borrower company, as required under extant laws/regulations,
to enable invocation of SDR in applicable cases;
8) The JLF must approve the SDR conversion package within 90 days from the date of
deciding to undertake SDR. The conversion of debt into equity as approved under the SDR
should be completed within a period of 90 days from the date of approval of the SDR
package by the JLF. For accounts which have been referred by the JLF to CDR Cell for
restructuring, JLF may decide to undertake the SDR either directly or under the CDR Cell;
9) The invocation of SDR will not be treated as restructuring for the purpose of asset
classification and provisioning norms;
10) On completion of conversion of debt to equity as approved under SDR, the existing asset
classification of the account, as on the reference date, will continue for a period of 18
months from the reference date. Thereafter, the asset classification will be as per the extant
IRAC norms, assuming the aforesaid ‘stand-still’ in asset classification had not been given.
11) Banks should ensure compliance with the provisions of Section 6 of B.R. Act and JLF
should closely monitor the performance of the company and consider appointing suitable
professional management to run the affairs of the company;
12) JLF and lenders should divest their holdings in the equity of the company as soon as
possible. On divestment of banks’ holding in favour of a ‘new promoter’, the asset
classification of the account may be upgraded to ‘Standard’. However, the quantum of
provision held by the bank against the said account as on the date of divestment, which shall
not be less than what was held as at the ‘reference date’, shall not be reversed.
53. REPORT OF THE COMMITTEE ON MEDIUM-TERM PATH ON FINANCIAL INCLUSION
RBI had constituted a Committee headed by Shri Deepak Mohanty on Medium-term Path on Financial
Inclusion. The Committee set a much wider vision of financial inclusion as “‘convenient’ access to a basket
of basic formal financial products and services that should include savings, remittance, credit,
government-supported insurance and pension products to small and marginal farmers and low-income
households at reasonable cost with adequate protection progressively supplemented by social cash
transfers, besides increasing the access of small and marginal enterprises to formal finance with a greater
reliance on technology to cut costs and improve service delivery, such that by 2021, over 90 per cent of
the hitherto underserved sections of society become active stakeholders in economic progress
empowered by formal finance. Salient recommendations of the Committee are given below:
1. Banks have to make special efforts to step up account
opening for females, and the Government may consider a deposit scheme for the girl child – Sukanya
Shiksha - as a welfare measure.
2. Given the predominance of individual account holdings (94 per cent of total credit accounts), a unique
biometric identifier such as Aadhaar should be linked to each individual credit account and the
information shared with credit information companies to enhance the stability of the credit system and
improve access.
3. To improve ‘last mile’ service delivery and to translate financial access into enhanced convenience and
usage, a low-cost solution should be developed by utilisation of the mobile banking facility for
maximum possible G2P payments.
4. In order to increase formal credit supply to all agrarian segments, digitisation of land records is the way
forward. This should be backed by an Aadhaar-linked mechanism for Credit Eligibility Certificates to
facilitate credit flow to actual cultivators.
5. To phase out the agricultural interest subvention scheme and ploughing the subsidy amount into an
affordable technology aided universal crop insurance scheme for marginal and small farmers for all
crops with a monetary ceiling of Rs.200,000 at a nominal premium to end agrarian distress.
6. A scheme of ‘Gold KCC’ (kisan credit card) with higher flexibility for borrowers with prompt repayment
records.
7. Encourage multiple guarantee agencies to provide credit guarantees in niche areas for micro and small
enterprises (MSEs), and explore possibilities for counter guarantee and re-insurance.
8. Introduction of a system of unique identification for all MSME borrowers and sharing of such
information with credit bureaus and establishing a system of professional credit
intermediaries/advisors for MSMEs to help both the sector banks in credit assessment.
9. To step up financing of the MSE Sector a framework for movable collateral registry may be introduced.
10. Commercial banks may be enabled to open specialised interest-free windows with simple products like
demand deposits, agency and participation certificates on the liability side and cost-plus financing and
deferred payment, deferred delivery contracts on the asset side.
An eco-system comprising multiple models should be encouraged with will foster partnerships amongst
national full-service banks, regional banks of various types, NBFCs, semi-formal financial institutions, as
well as the newly-licensed payments banks and small finance banks.
11. Banks’ business model to integrate Business Correspondents (BCs) with appropriate monitoring by
designated link branches and greater mix of fixed location BC outlets to win the confidence of the
common person. Introduction of a system of online registration of BCs, their training and monitoring
their activity including delinquency, and entrusting more complex financial products such as credit to
trained BCs with good track record.
12. A geographical information system (GIS) to map all banking access points.
13. To step up the self help group (SHG)-bank linkage programme (SBLP) initiated by NABARD with the
help of concerned stakeholders including government agencies as a livelihood model.
14. Corporates should be encouraged to nurture SHGs as part of Corporate Social Responsibility (CSR)
initiatives.
15. Provision of credit history of all SHG members by linking with individual Aadhaar numbers to check
over-indebtedness
16. To restore tax-exempt status for securitisation vehicles for efficient risk transfer.
17. More ATMs in rural and semi-urban centres, interoperability of micro ATMs and use of application-
based mobiles as point- of- sale (PoS) for creating more touch points for customers.
18. National Payments Corporation of India (NPCI) to develop a multi-lingual mobile application for
customers who use non-smart phones, especially for users of national unified USSD platform (NUUP).
19. Permit a small-value cash-out with adequate KYC along for non-bank prepaid payment instruments
(PPIs) to incentivise usage.
20. To allow PPI interoperability for non-banks.
21. Levying a surcharge on credit card transactions by merchant establishments should not be allowed.
22. Banks to complete the task of linking of deposit accounts with Aadhaar in a time bound manner so as
to create the necessary eco-system for social cash transfer.
23. Financial Literacy Centre (FLC) network to be strengthened to deliver basic financial literacy at the
ground level. Banks to identify lead literacy officers to be trained by the Reserve Bank in its College of
Agricultural Banking (CAB) who in turn could train the people manning the FLCs.
24. RBI to commission periodic dipstick surveys across states to ascertain the extent of financial literacy.
25. All regulated entities should be required to put in place a technology-based platform for SMS
acknowledgement and disposal of customer complaints.
As a part of second generation reforms, the government can replace the current agricultural input
subsidies on fertilisers, power and irrigation by a direct income transfer scheme
54. ATAL PENSION YOJANA (APY)

1. Introduction: To address the longevity risks among the workers in unorganised sector and to
encourage the workers in unorganised sector to voluntarily save for their retirement, who constitute 88%
of the total labour force of 47.29 crore as per the 66th Round of NSSO Survey of 2011 12, but do not
have any formal pension provision, the Government had started the Swavalamban Scheme in 2010 11.
However, coverage under Swavalamban Scheme is inadequate mainly due to lack of guaranteed
pension benefits at the age of 60. The APY would be introduced from 1st June, 2015.
2. Focus of APY: The APY will be focussed on all citizens in the unorganised sector, who join the
National Pension System (NPS) administered by the Pension Fund Regulatory and Development
Authority (PFRDA). Under the APY, guaranteed minimum pension of Rs. 1,000/-, 2,000/-, 3,000/-, 4,000
and 5,000/- per month will be given at the age of 60 years depending on the contributions by the
subscribers.
3. Benefit in joining APY scheme & Govt contribution: In APY, Central Government will co-contribute 50%
of the total contribution or Rs. 1,000/- per annum, whichever is lower, to the eligible APY account holders
who join the scheme during the period 1st June, 2015 to 31st December, 2015. The Government co
contribution will be given for 5 years from FY 2015-16 to 2019-20. Government co-contribution is available
to persons who are not covered by any Statutory Social Security Schemes and are not income tax payers.
The scheme will continue after 31st Dec 2015 but Government Co-contribution will not be available. The
Government co-contribution is payable to eligible PRANs by PFRDA after receiving the confirmation from
Central Record Keeping Agency at such periodicity as may be decided by PFRDA.
4. Other social security schemes beneficiaries not eligible to receive Government co-contribution under
APY: Beneficiaries who are covered under statutory social security schemes are not eligible to receive
Government co-contribution. For example, members of the Social Security Schemes under the following
enactments would not be eligible to receive Government co-contribution:
i. Employees’ Provident Fund & Miscellaneous Provision Act, 1952.
ii. The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948.
iii. Assam Tea PlantationProvident Fund and Miscellaneous Provision, 1955.
iv. Seamens’ Provident Fund Act, 1966.
v. Jammu Kashmir Employees’ Provident Fund & Miscellaneous Provision Act, 1961.
vi. Any other statutory social security scheme.
5. Eligibility for APY: Any Citizen of India can join APY scheme. The following are the eligibility criteria:
1. The age of the subscriber should be between 18 - 40 years.
2. He / She should have a savings bank account/ open a savings bank account. APY account cannot be
opened without saving bank account with a bank.
The prospective applicant should be in possession of mobile number and its details are to be furnished to
the bank during registration
3. A subscriber can open only one APY account and it is unique.
6. Age of joining and contribution period: The minimum age of joining APY is 18 years and maximum age is
40 years. The age of exit and start of pension would be 60 years. Therefore, minimum period of
contribution by the subscriber under APY would be 20 years or more.
7. Procedure for opening APY Account: The eligible person should approach the bank branch where
individual’s savings bank account is held, fill up the APY registration form, provide Aadhaar/Mobile Number
and ensure keeping the required balance in the savings bank account for transfer of monthly contribution.
It is mandatory to provide nominee details in APY account. The spouse details are also mandatory
wherever applicable. Their aadhaar details are also to be provided.
8. Mode of contribution to APY: All the contributions are to be remitted monthly through auto-debit facility
from savings bank account of the subscriber.
9. Enrolment and Subscriber Payment: All bank account holders under the eligible category may join APY
with auto debit facility to accounts, leading to reduction in contribution collection charges. Due dates for
monthly contribution payment is arrived based on the deposit of first contribution amount. It is not
mandatory to provide Aadhaar number for opening APY account. However,
for enrolment, Aadhaar would be the primary KYC document for identification of beneficiaries, spouse
and nominees to avoid pension rights and entitlement related disputes in the long-term.
10. Forfeiture of Govt contribution: In case of repeated defaults for specified period, the account is liable for
foreclosure and the GoI co-contributions, if any shall be forfeited. Also any false declaration about his/her
eligibility for benefits under this scheme for whatsoever reason, the entire government contribution shall be
forfeited along with the penal interest. Each subscriber will be provided with an acknowledgement slip after
joining APY which would invariably record the guaranteed pension amount, due date of contribution
payment, PRAN etc.
11. Subscription: The subscribers are required to opt for a monthly pension from Rs. 1000 - Rs. 5000. The
subscribers can opt to decrease or increase pension amount during the course of accumulation phase, as
per the available monthly pension amounts. However, the switching option shall be provided once in year
during the month of April.
12. Enrolment agencies: All Points of Presence (Service Providers) and Aggregators under Swavalamban
Scheme would enrol subscribers through architecture of National Pension System. The banks, as POP or
aggregators, may employ BCs/Existing non- banking aggregators, micro insurance agents, and mutual
fund agents as enablers for operational activities. The banks may share the incentives received by them
from PFRDA/Government, as deemed appropriate.
Operational Framework of APY: It is Government of India Scheme, which is administered by the Pension
Fund Regulatory and Development Authority. The Institutional Architecture of NPS would be utilised to enrol
subscribers under APY. The offer document of APY including the account opening form would be formulated
by PFRDa
14. Funding of APY: Government would provide (i) fixed pension guarantee for the subscribers; (ii) would
co-contribute 50% of the total contribution or Rs. 1000 per annum, whichever is lower, to eligible
subscribers; and (iii) would also reimburse the promotional and development activities including incentive
to the contribution collection agencies to encourage people to join the APY.
15. Migration of existing subscribers of Swavalamban Scheme to APY: All the registered subscribers
under Swavalamban Yojana aged between 18-40 yrs will be automatically migrated to APY with an option
to opt out. Those subscribers may also approach the nearest authorised bank branch for shifting their
Swavalamban account into APY with PRAN details. However, the benefit of five years of government Co-
contribution under APY would not exceed 5 years for all subscribers. This would imply that if, as a
Swavalamban beneficiary, he has received the benefit of government Co-Contribution of 1 year, then the
Government co-contribution under APY would be available only 4 years and so on. Existing Swavalamban
beneficiaries opting out from the proposed APY will be given Government co-contribution till 2016-17, if
eligible, and the NPS Swavalamban continued till such people attained the age of exit under that scheme.
The Swavalamban subscribers who are beyond the age of 40 and do not wish to continue may opt out the
Swavalamban scheme by complete withdrawal of entire amount in lump sum, or may prefer to continue till
60 years to be eligible for annuities there under.
16. Penalty for default: The individual subscribers shall have an option to make the contribution on a
monthly basis. Subscriber should ensure that the Bank account to be funded enough for auto debit of
contribution amount. Non-maintenance of required balance in the savings bank account for contribution on
the specified date will be considered as default. Banks shall collect additional amount for delayed
payments, such amount will vary from minimum Rs. 1 per month to Rs 10/- per month as shown below:
1. Rs. 1 per month for contribution upto Rs. 100 per month.
2. Rs. 2 per month for contribution upto Rs. 101 to 500/- per month.
3. Rs. 5 per month for contribution between Rs 501/- to 1000/- per month.
4. Rs. 10 per month for contribution beyond Rs 1001/- per month.
17. Discontinuation of payments of contribution amount shall lead to following:

1. After 6 months account will be frozen.
2. After 12 months account will be deactivated.
3. After 24 months account will be closed.
The fixed amount of interest/penalty will remain as part of the pension corpus of the subscriber.
18. Operation of additional amount for delayed payments: APY module will raise demand on the due date
and continue to raise demand till the amount is recovered from the subscriber’s account. The due date for
recovery of monthly contribution may be treated as the first day /or any other day during the calendar
month for each subscriber. Bank can recover amount any day till the last day of the month. It will imply that
contribution are recovered as and when funds are available any point during the month. Monthly
contribution will be recovered on FIFO basis- earliest due instalment will be recovered first along with the
fixed amount of charges as mentioned above. More than one monthly contribution can be recovered in
month subject to availability of the funds. Monthly contribution will be recovered along with the monthly
fixed due amount, if any. In all cases, the contribution is to be recovered along with the fixed charges.
This will be banks’ internal process. The due amount will be recovered as and when funds are available
in the account.
19. Investment of the contributions under APY: The amount collected under APY are managed by Pension
Funds appointed by PFRDA as per the investment pattern specified by the Government. The subscriber
has no option to choose either the investment pattern or Pension Fund.
20. Continuous Information Alerts to Subscribers: Periodical information to the subscribers regarding
balance in the account, contribution credits etc. will be intimated to APY subscribers by way of SMS alerts.
The subscribers will have the option to change the non – financial details like nominee’s name, address,
phone number etc whenever required. All subscribers under APY remain connected on their mobile so
that timely SMS alerts can be provided to them at the time of making their subscription, auto debit of their
accounts and the balance in their accounts. The Subscriber will also be receiving physical Statement of
Account.
21. Withdrawal procedure from APY:

A.On attaining the age of 60 years: The exit from APY is permitted at the age with 100% annuitisation of
pension wealth. Upon completion of 60 years, the subscribers will submit the request to the associated
bank for drawing the guaranteed monthly pension. On exit, pension would be available to the subscriber.
B.In case of death of the Subscriber due to any cause: In case of death of subscriber pension would be
available to the spouse and on the death of both of them (subscriber and spouse), the pension corpus
would be returned to his nominee.
C. Exit Before the age of 60 Years: The Exit before age 60 would be permitted only in exceptional
circumstances, i.e., in the event of the death of beneficiary or terminal disease.
22. Age of Joining, Contribution Levels, Fixed Monthly Pension and Return of Corpus to the nominee of
subscribers:
Age of Years of Indicative Monthly Indicative
Joining Contribution Monthly Pension Return of
Contribution to the Corpusto
(in Rs.) subscribers the
and his nominee of
spouse (in the
18 42 42 1000 1.7 Lakh
20 40 50 1000 1.7 Lakh
25 35 76 1000 1.7 Lakh
30 30 116 1000 1.7 Lakh
35 25 181 1000 1.7 Lakh
40 20 291 1000 1.7 Lakh
55. PRADHAN MANTRI SURAKSHA BIMA YOJANA

Nature of the scheme: The scheme will be a one year cover Personal Accident Insurance Scheme,
renewable from year to year, offering protection against death or disability due to accident.
Benefits under the scheme:
Death Rs 2 lakh
Total and irrecoverable loss of both eyes or loss of use of both hands or feet Rs. 2 Lakh
or loss of sight of one eye and loss of use of hand or foot
Total and irrecoverable loss of sight of one eye or loss of use of one hand or Rs. 1 Lakh
foot
Premium payable: Rs.12/- per annum per member.
Payment of Premium: The premium will be deducted from the account holder’s savings bank account
through ‘auto debit’ facility in one installment, on or before 1st June of each annual coverage period
under the scheme. However, in cases where auto debit takes place after 1st June, the cover shall
commence from the first day of the month following the auto debit. Members may also give one-time
mandate for auto-debit every year till the scheme is in force. Participating banks will deduct the
premium amount in the same month when the auto debit option is given, preferably in May of every
year, and remit the amount due to the Insurance Company in that month itself.
Administration of the Scheme: The scheme would be offered / administered through the Public Sector
General Insurance Companies (PSGICs) and other General Insurance companies willing to offer the
product with necessary approvals on similar terms, in collaboration with participating Banks.
Participating banks will be free to engage any such general insurance company for implementing the
scheme for their subscribers.
Eligibility: All savings bank account holders aged between 18 years (completed) and 70 years (age
nearer birthday) who give their consent to join / enable auto-debit, as per the above modality, will be
enrolled into the scheme. In case of multiple saving bank accounts held by an individual in one or
different banks, the person would be eligible to join the scheme through one savings bank account only.
Aadhar would be the primary KYC for the bank account.
Enrolment period and modality: The cover shall be for the one year period stretching from 1st June to
31st May for which option to join / pay by auto-debit from the designated savings bank account on the
prescribed forms will be required to be given by 31st May of every year, extendable up to 31st August
2015 in the initial year. Initially on launch, the period for joining may be extended by Govt. of India for
another three months, i.e. up to 30th of November, 2015. Joining subsequently on payment of full annual
premium may be possible on specified terms. Subscribers who wish to continue beyond the first year will
be expected to give their consent for auto-debit before each successive May 31st for successive years.
Delayed renewal subsequent to this date may be possible on payment of full annual premium. Eligible
individuals who fail to join the scheme in the initial year can join in subsequent years on payment of
premium through auto-debit. New eligible entrants in future years can also join accordingly. Individuals
who exit the scheme at any point may re-join the scheme in future years by paying the annual premium
Master policy holder: Participating Banks will be the Master policy holders. A simple and subscriber
friendly administration & claim settlement process shall be finalized by PSGICs / chosen insurance
company in consultation with the participating bank.
Termination of the accident cover assurance: The accident cover of the member shall terminate / be
restricted accordingly on any of the following events: (i) On attaining age 70 years (age neared birth
day); (ii) Closure of account with the Bank or insufficiency of balance to keep the insurance in force; (iii)
In case a member is covered through more than one account and premium is received by the insurance
company inadvertently, insurance cover will be restricted to one account and the premium shall be
liable to be forfeited; iv) If the insurance cover is ceased due to any technical reasons such as
insufficient balance on due date or due to any administrative issues, the same can be reinstated on
receipt of full annual premium, subject to conditions that may be laid down. During this period, the risk
cover will be suspended and reinstatement of risk cover will be at the sole discretion of Insurance
Company.
Role of the insurance company and the Bank:
The scheme will be administered by Public Sector General Insurance Companies (PSGICs) or any other
General Insurance company which is willing to offer such a product in partnership with a bank /banks.
1. It will be the responsibility of the participating bank to recover the appropriate annual premium in
one installment, as per the option, from the account holders on or before the due date through
‘auto-debit’ process and transfer the amount due to the insurance company.
2. Enrollment form / Auto-debit authorization / Consent cum Declaration form in the prescribed
proforma shall be obtained, as required, and retained by the participating bank. In case of claim,
PSGIC / insurance company may seek submission of the same. PSGIC / Insurance Company also
reserve the right to call for these documents at any point of time. The acknowledgement slip may be
made into an acknowledgement slip-cum-certificate of insurance.
Appropriation of the premium:
1. Insurance Premium to PSGIC / other insurance company: Rs.10/- per annum per member;
2. Reimbursement of Expenses to BC/Micro/Corporate /Agent : Rs.1/- per annum per member;
3. Reimbursement of Administrative expenses to participating Bank: Rs.1/- per annum per member.
Additional cover: This cover will be in addition to cover under any other insurance scheme the
subscriber may be covered.
Commencement: The proposed date of commencement of the scheme will be 1st June 2015.The next
Annual renewal date shall be each successive 1st of June in subsequent years.
56. PM JEEVAN JYOTI BIMA YOJANA

OBJECTIVE:
 The scheme would be offered / administered through LIC or other Life Insurance companies
willing to offer the product on similar terms on the choice of the Bank / RRB / Co-operative
Bank concerned.
 The main objective of this scheme is to go a long way in improving insurance awareness and
insurance penetration / density in the country.
 The scheme will be a one year cover, renewable from year to year, Insurance Scheme offering
life insurance cover for death due to any reason.
 Participating banks will be free to engage any such life insurance company for implementing
the scheme for their subscribers.
ELIGIBILITY:
 Available to people in the age group of 18 to 50 and having a bank account.
 People who join the scheme before completing 50 years can, however, continue to have the
risk of life cover up to the age of 55 years subject to payment of premium.
 Terms of Risk Coverage: A person has to opt for the scheme every year. He can also prefer
to give a long-term option of continuing, in which case his account will be auto-debited every
year by the bank.
 Risk Coverage: Rs.2 Lakh in case of death for any reason.
 Scope of coverage: All savings bank account holders in the age 18 to 50 years in
participating banks will be entitled to join. In case of multiple saving bank accounts held by an
individual in one or different banks, the person would be eligible to join the scheme through
one savings bank account only. Aadhar would be the primary KYC for the bank account.
ELIGIBILITY CONDITIONS:
a) The savings bank account holders of the participating banks aged between 18 years
(completed) and 50 years (age nearer birthday) who give their consent to join / enable auto-
debit, as per the above modality, will be enrolled into the scheme.
b) Individuals who join after the initial enrollment period extending up to 31st August 2015 or
30th November 2015, as the case may be, will be required to give a self certification of good
health and that he / she does not suffer from any of the critical illness.
PREMIUM:
 The premium is Rs.330 per annum. It will be auto-debited in one instalment.
 Appropriation of Premium:
a)Insurance Premium to LIC / insurance company : Rs.289/- p.a. per member
b)Reimbursement of Expenses to BC / Micro / Corporate / Agent: Rs.30/- per annum per
member.
c)Reimbursement of Administrative expenses to participating Bank: Rs.11/- per annum per
member.
ENROLMENT PERIOD:
a)Initially the cover will have a period of one year from 1st June 2015 to 31st May 2016.
b)Late enrollment for prospective cover will be possible up to 31st August 2015, which may be
extended by Govt. of India for another three months, i.e. up to 30th of November, 2015.
c)Those joining subsequently may be able to do so with payment of full annual premium for
prospective cover, with submission of a self-certificate of good health.
d)Individuals who exit the scheme at any point may re-join the scheme in future years by
submitting a declaration of good health.
e)Delayed enrollment with payment of full annual premium for prospective cover may be possible
with submission of a self certificate of good health.
f) In future years, new entrants into the eligible category or currently eligible individuals who did
not join earlier or discontinued their subscription shall be able to join while the scheme is
continuing, subject to submission of self-certificate of good health.
OTHER MISCELLENEOUS
 One should not be insured under Pradhan Mantri Suraksha Bima Yojana under any other
Savings Bank Account. In case the same is found to exist, premium shall stand forfeited and
no claims would be paid.
 Nominee name is to be given at the time of subscription along with relationship. In case the
nominee is a minor or any person who is unsound, then the name of the guardian is also
should be given.
 Intentional self injury, suicide or attempted suicide whilst under the influence of intoxication
liquor or drugs, any loss arising from an act made in breach of law with or without criminal
intent will be ineligible.
 Coverage under PMJJBY will be terminated in case of insufficient bank balance to pay the
annual premium and also on attaining the age of 55 years.
Government Contribution:
a) Various other Ministries can co-contribute premium for various categories of their
beneficiaries out of their budget or out of Public Welfare Fund created in this budget out of
unclaimed money. This will be decided separately during the year.
b) Common Publicity Expenditure will be borne by Government. Master Policy Holder:
Participating Banks will be the Master policy holders. A simple and subscriber friendly
administration & claim settlement process shall be finalized by LIC / other insurance
company in consultation with the participating bank. BENEFITS: Sum Assured of
Rs.2,00,000 on death of the Insured member for any reason is payable to the Nominee. No
claim is admissible for deaths during the first 45 days from the entry date, except for cases of
death due to accident.
Termination of assurance: The assurance on the life of the member shall terminate on any of
the following events and no benefit will become payable there under:
a) On attaining age 55 years (age near birth day) subject to annual renewal up to that date
(entry, however, will not be possible beyond age of 50 years).
b) Closure of account with the Bank or insufficiency of balance to keep the insurance in force.
c) In case a member is covered under PMJJBY with LIC of India / other company through more
than one account and premium is received by LIC / other company inadvertently, insurance
cover will be restricted to Rs.2 Lakh and the premium shall be liable to be forfeited.
d) If the insurance cover is ceased due to any technical reasons such as insufficient balance on
due date or due to any administrative issues, the same can be reinstated on receipt of full
annual premium and a satisfactory statement of good health.
Participating Banks shall remit the premium to insurance companies in case of regular enrolment
on or before 30th of June every year and in other cases in the same month when received.
57. SUKANYA SAMRIDDHI SCHEME
Sukanya Samriddhi Account is a special deposit account under the Sukanya Samriddhi Yojana
(Girl Child Prosperity Scheme) launched by the Prime Minister of India on 22nd Jan. 2015, with
the aim of improving the welfare of female children in India.
The scheme is considered as a part of the government’s initiative to increase the percentage of
domestic savings, which has reduced from 38% of the GDP in 2008 to 30% in 2013. This scheme
will encourage parents to save for the education and future of their girl child.
OBJECTIVES:
‘Sukanya Samriddhi Account Scheme’, a small savings scheme as a part of the ‘Beti Bachao Beti
Padhao’ (BBB) operation. This Scheme has got tax-free status on interest income and withdrawal
in the Budget and it will encourage parents to save for the education and future of their girl child.
Through Sukanya Samriddhi Account, Govt is trying to give a social message that Marriage or
Education of a Girl Child is not a financial burden if parents plan well in advance.
FEATURES OF SCHEME:
Opening and Operation of Account: A legal Guardian/Natural Guardian can open account in
the name of Girl Child. Only one account is allowed per girl child. Parents can open this account
for a maximum of two children. In case of twins or triplets, this facility will be extended to the third
child. Account can be opened in post offices or authorized bank branches.
Age: The maximum age limit of the girl child for opening this account is 10 years. This year, a
one-year relaxation has also been given. The account will be opened and operated by the
guardian of a girl child till the girl child, in whose name the account has been opened, attains the
age of 10 years. On attaining age of 10 years, the girl child may herself operate the account.
Minimum and Maximum amount of Deposits: The account may be opened with an initial
deposit of Rs. 1,000/- and thereafter any amount in multiple of Rs. 100/- can be deposited. The
minimum deposit for a financial year is Rs. 1,000/- and maximum Rs. 1.5 lakh. Deposits in an
account can be made till completion of fourteen years, from the date of opening of the account.
Interest Rate: For 2015-16, the government would be paying 9.2% pa interest.
Tax: A contribution of up to Rs. 1.5 lakh qualifies for income tax deduction under Section 80C of
Income Tax Act. All payments to the beneficiaries including interest payment on deposit will also
be fully exempted.
Comparison with PPF: The interest rate on public provident fund (PPF) is also announced every
year. For 2015-16, the government will pay 8.7 per cent. PPF also enjoys tax-free status on
interest income and withdrawal. Another small savings scheme National Savings Certificate
(NSC) however does not enjoy tax-free status on interest income.
Documents Required for Opening an Account:
 Birth Certificate of the girl child.
 Address and photo identity proof (PAN Card, Voter ID, Aadhar Card) of the guardian. Maturity:
The account can be closed after the girl child in whose name the account was opened completes
the age of 21. If account is not closed after maturity, the balance will continue to earn interest as
specified for the scheme from time to time.
Withdrawal: Up to 50% of the accumulated amount can be withdrawn after the account holder
turns 18.
Transferability and Penalty: The account may be transferred anywhere in India if the girl child
shifts to a place other than the city or locality where the account stands. An account where
minimum amount has not been deposited in a particular year will attract a fine of Rs. 50/- per
year.
OTHER IMPORTANT ASPECTS:
a) This scheme is not available for NRI’s as it is small savings scheme.
b) Under this scheme, deposit can be made for 14 years from the date of account opening.
Account will mature only after 21 years. From 15th to 21st year of account opening, no deposit
can be made but only interest will be credited.
c) Another condition of maturity is marriage. In case, the account holder gets married between
18 year to 21 year of age, then account will mature automatically at the time of marriage.
d) If the money is not withdrawn from the account after the maturity then also the account holder
will continue to receive the interest till the account is closed voluntarily.
e) Variable contribution between Rs.1,000/- and Rs.1.5 Lakh is allowed. It implies that the
account holder can deposit any amount of her choice in the account during financial year.
Contribution is not fixed. On maturity, the balance including interest outstanding in the account
shall be payable to the account holder on production of withdrawal slip along with passbook
58. FINANCIAL INCLUSION FUND

BACKGROUND: The Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund
(FITF) was constituted in the year 2007-08 for a period of five years with a corpus of Rs.500
crore each to be contributed by Government of India, RBI and NABARD in the ratio of 40:40:20.
The guidelines for these two funds were framed by the Govt. In April 2012, RBI decided to fund
FIF by transferring the interest differential in excess of 0.5% on RIDF and STCRC deposits on
account of shortfall in priority sector lending.
REVISED GUIDELINES: Keeping in view the various developments over the years, GOI has
merged the FIF and FITF to form a single Financial Inclusion Fund. The RBI has finalised the
new scope of activities and guidelines for utilisation of the new FIF in consultation with GOI. The
new FIF will be administered by the reconstituted Advisory Board constituted by GOI and will be
maintained by NABARD.
CONSTITUTION OF THE FUND:
ÄAfter the completion of the initial five years, the Govt. has merged both the Financial Inclusion
Fund & Financial Inclusion Technology Fund into a single Fund viz. Financial Inclusion Fund
(FIF).
ÄThe overall corpus of the new FIF will be Rs.2,000 crore. Contribution to FIF would be from the
‘interest differential’ in excess of 0.5% on RIDF and STCRC deposits on account of shortfall in
priority sector lending kept with NABARD by banks.
ÄAll the assets and liabilities of the erstwhile FITF as well as prior commitments from FITF for
projects already sanctioned, which falls within the scope of the erstwhile funds, will be transferred
to/reimbursed from FIF.
ÄThe Fund shall be in operation for another three years or till such period as may be decided by
RBI and Govt. of India.
OBJECTIVE OF FIF:
Ä The objectives of the FIF shall be to support ‘developmental and promotional activities’
including creating of FI infrastructure across the country, capacity building of stakeholders,
creation of awareness to address demand side issues, enhanced investment in Green
Information and Communication Technology (ICT) solution, research and transfer of technology,
increased technological absorption capacity of financial service providers/users with a view to
securing greater financial inclusion. The fund shall not be utilized for normal business / banking
activities.
Ä RBI has always advocated the policy of considering financial inclusion as a business
proposition. It has, therefore, encouraged banks to see cost involved in the FI effort as a long
term investment which would help banks in broadening its base for future business expansion. At
the same time RBI has also realized the need for intervention from the regulatory and
government side which would help creating an eco-system that would support banks investment
in this area. It is with this objective in mind that the creation and continuation of the FIF is
justified.
Ä Based on the policy announcements of RBI, banks have in a big way adopted the ICT-BC
model as a mode for expanding banking operations in the unbanked areas. While the ICT-BC
model is a low cost business model in comparison with the traditional model i.e. the brick &
mortar model for providing banking services, there is still a significant investment required to be
done for further facilitating investments from banks and other financial institutions.
Ä During the past five years, banks have invested heavily in creating an infrastructure, which has
resulted in a large number of business correspondents being appointed for expanding banking in
the unbanked areas and a large number of basic bank accounts being opened for first time
customers of banks. However, these accounts are yet to see any significant transactions
happening and banks have also not started making any significant profits from the investments.
This has lead to many instances of attritions of BCs citing lack of business opportunities and
sufficient income. Some of the issues that are hampering scaling up of the BC model include
infrastructure issues like lack of proper connectivity, lack of training facilities for BCs, evolution of
an appropriate business model, etc. The objective of new FIF is towards addressing these key
concerns which would help scaling of our FI efforts
ELIGIBLE ACTIVITIES/PURPOSES:
Ä Support for funding the setting up and operational cost for running Financial Inclusion &
Literacy Centers. The setting up of such Centers are in sync with the objective of GoI for setting
up Financial Literacy Centers upto the block level under the PMJDY. The cost of technical
manpower employed by banks for running the Financial Inclusion & Literacy Centres (as banks
have manpower shortages) will be funded from the fund. The scope of activities to be carried out
by these centers would be as follows:
a) Providing financial literacy training to all individuals/households of the area.
b) Providing counseling services for opening of bank accounts and for operating banking and
other financial products and services.
c) Providing training to BCs about various banking & other financial products and services and
also for training them in use of technological devices so as to ensure smooth servicing of
customers.
d) Redressal of customer grievances by attending to customer complaints, if necessary, by
taking up with banks and other institutions.
Ä Setting up of Standard Interactive Financial Literacy Kiosks in Gram Panchayats and any other
financial literacy efforts under taken by banks in excluded areas.
Ä Support to NABARD & Banks for running of Business & Skill Development Centers including R-
SETIs (to the extent not provided by State Governments) which will help in imparting skill sets
necessary for undertaking income generating activities and for providing forward linkages for
marketing activities. Grant will be in the form of one time capital cost and working capital for
undertaking skill development activities for a maximum period of 3 years. NABARD and Banks
will have the discretion to enter into partnerships with other entities like Corporates, NGOs, etc.
involved in the running of such Centers, however, proposal for seeking funding support from the
FIF will be entertained only from Banks or NABARD.
Ä Support to pilot projects for development of innovative products, processes and prototypes for
financial inclusion. Proposals for such products and prototypes will have to be submitted through
any of the implementing banks.
Ä Financial assistance to authorised agencies for conduct of surveys for evaluating the progress
under financial inclusion;
Ä Sharing the cost of Government projects in connection with laying of last mile fibre optic
network, funding of other technological or infrastructure related projects involved in improving or
creating network connectivity, etc; in excluded areas.
ELIGIBLE INSTITUTIONS:
Ä Financial Institutions, like Commercial Banks, Regional Rural Banks, Cooperative Banks and
NABARD.
Ä Eligible institutions with whom banks can work for seeking support from the FIF, are NGOs;
SHGs; Farmer’s Clubs, Functional Cooperatives, IT enabled rural outlets of corporate entities;
Well functioning Panchayats; Rural Multipurpose kiosks / Village Knowledge Centres; Common
Services Centres (CSCs) established by Service Centre Agencies (SCAs) under the National e-
Governance Plan (NeGP); Primary Agricultural Societies (PACs)
59. FINANCIAL INCLUSION & PMJDY

Financial inclusion or inclusive financing is the delivery of financial products, at affordable costs to
sections of disadvantaged and low-income segments of society.
As per United Nations, the goal of financial inclusion is, to ensure access to a full range of fmancial
services, at a reasonable cost, to ensure continuity and certainty of investment.
India : RBI set up the Rangarajan Committee in 2004 to look into financial inclusion. Financial inclusion
first featured in 2005 & Mangalam became the first village in India where all households were provided
banking facilities. RBI initiatives for financial inclusion:
1. Opening of basic saving bank deposit accounts;
2. Relaxation in KYC norms for small deposit accounts;
3. Allowing engaging business correspondents;
4. Effective use of information and communications technology (ICT), to provide doorstep banking
services
5. Implementation of electronic benefit transfer (EBT) by leveraging ICT-based banking
6. Issue of general credit cards
7. Simplified branch authorization for tier III to tier VI centres (population of less than 50,000) under
general permission
RBI Roadmap for Financial Inclusion Under RBI's earlier roadmap (Sep 2010) banks opened
banking outlets in 74,199 (99.7%) villages by March 2012.
New roadmap : To take financial inclusion to the next stage of providing universal coverage and
facilitating Electronic Benefit Transfer, banks were advised to draw up FIP for 2013-16 and disaggregate
the Flips to the controlling office and branch level. On RBI advice State Level Bankers' Committees
prepared a roadmap covering all unbanked villages of population less than 2000 and notionally allot these
villages to banks for providing banking services, in a time-bound manner (Aug 15, 2015) to provide with at
least one banking outlet.
Sampoorn Vitteeya Samaveshan (SVS) in Mission Mode (Comprehensive Financial Inclusion) SVS was
launched by Govt. of India, on Aug 15, 2014. SVS comprises 6 pillars:
1. Universal access to banking facilities — To be achieved by adopting sub-service area approach (i.e. each bank
to have min one fixed point banking outlet to cater to 1000-1500 households). Places without brick and
mortar branches to be covered by deployment of fully enabled business correspondents. Suggested
remuneration for last mile BC agent to be Rs.5000.
2. Financial literacy program : Preparing the people for financial planning and availing credit by
revamping the Financial Literacy & Credit Counseling (FLCC).
3. Providing basic banking account: Such accounts to be opened with zero balance and ATM / Debit
/ Rupay card and linked to Aadhaar number. Overdraft of Rs.5000 to be provided on. completion of
financial literacy training. OD will be secured by guarantee of Credit Guarantee Fund. Rate of interest will
be base rate + 3%. Out of this, 1% will be fee for Guarantee cover and 1% towards, BC fee.
4. Micro credit availability and creation of Credit Guarantee Fund for coverage of defaults in such
accounts : CGF will have initial corpus of Rs.1000 cr to be funded by Financial Inclusion Fund with
NABARD.
S. Micro insurance: IRDA has created a special insurance policies (micro-insurance policy) for weaker
section with a life insurance cover of Rs.50000.
6. Unorganised sector pension scheme on the pattern of Swaviamban by March 2017.
Phased implementation : In the first phase (201415) focus will be on providing universal access to
banking facilities. The 2nd phase (2015-18) will include financial literacy, micro credit availability, creation
of credit guarantee fund and micro Insurance.
Pradhan Mantri Jan Dhan Yojna (PMJDY) PMJDY was launched on Aug 28, 2014. The
implementation has two phases.
1. Aug 15, 2014 to Aug 14, 2015
2. Aug 15, 2015 to Aug 14, 2018
The major shift is that the households in rural as well as urban area, are being targeted instead of village
only targeted in earlier program.
Features of Phase-1 :
(i) Universal access to banking facilities for all households across the country through a bank branch or
a fixed point business correspondent (BC) within a reasonable distance.
(ii) To cover all households with at least one Basic Saving Account.
Account will get Ru Pay Debit Card with inbuilt accident insurance cover of Rs.1 lac. A/c opened up to Jan
26, 2015 will get life insurance of Rs.30000. Other accounts will get life cover in 2nd phase. A fee of 50p
for each transaction would be charged for the debit card.
Further, an overdraft facility up to Rs.5000 will be permitted to Aadhaar enabled accounts after
satisfactory operation for 6 months.
(iii) Financial literacy program which aims to take financial literary up to village level.
The Mission also envisages expansion of direct benefit transfer (DBT) under various govt. schemes
through bank a/cof beneficiaries,
(iv) The Issuance of Kissan Credit Card as Ru Pay Kissan Card Is also proposed to be covered under
the scheme.
Features of Phase 11:
(I) Providing micro-Insurance to the people.
(II) Unorganised sector pension schemes like Swavalamban through the Business Correspondents.
The mission is expected to be Mera Khata Bhagya Vidhaata (My Account - the Creator of Good Fortune
60. RISK MANAGEMENT

Banks mobilize and deploy funds and in this process, they get exposed to different kinds of risks. Risk
can be defined as the potential loss from a banking transaction (in the form of a loan, or investment in
securities or any other kind of transaction undertaken by the bank for itself or for customers), which a
bank can suffer due to variety of reasons.
Process of credit risk management
The process of risk management, broadly comprise the following functions:
 Risk identification,
 Risk measurement or quantification,
 Risk control or risk mitigation,
 Monitoring and reviewing.
Risk in Banking Business
Banking business can be sub-grouped in 8 categories as per Basel II guidelines. To understand the risk
associated with these, the business lines can be regrouped . as (1) Banking Book (2) Trading book
(trading portfolio) and (3) Off balance sheet exposures. Risk to the Banking book: The banking book, for
the purpose of risk management, includes all types of loans, deposits & borrowings due to commercial
and retail banking transactions.'
The banking book is exposed to (a) liquidity risk, (b) interest rate risk, (c) operational risk and (d)credit
risk. Risk to the Trading book: The trading book, for the purpose of risk management, includes
marketable assets i.e. investments both for SLR and non-SIR purpose in govt. securities and other
securities. These are generally held as fixed income securities, equities, foreign exchange assets etc.
The trading book Is exposed to market risk including liquidation risk, credit risk and default risk.
Different Types of Banking Risk
The banks are exposed to (1) Liquidity risk (2) Interest rate risk (3) Market risk (4) Credit risk (default
risk) and (5) Operational risk. These risks can be further broken up in various other types of risk as
under:
1. Liquidity risk
This is the risk arising from funding of long term assets by short term. liabilities or funding short term
assets by long term liabilities.
Funding liquidity risk: Inability to obtain funds to meet cash flow obligation when these arise.(Payment of
a term deposit which was used to fund a term loan and a TL which has not matured as yet, fully).
Funding risk : The risk arises from need to replace net outflows due to unantidpated withdrawal or non-
renewal of deposits.
Time risk : This risk arises from need to compensate for non-receipts of expected inflows of
funds i.e. performing assets turning into nonperforming assets due to which recovery has not come and
deposit that funded that loan is to be returned.
Call risk : This risk arises due to crystallization of contingent liabilities.
2. Interest rate risk
This is the risk arising from adverse movement of interest rates during the period when the asset or
liability was held by the bank. This risk affects the net interest margin or market value of equity.
Gap or mismatch risk: It arises from mismatch from holding assets and liabilities and off balance sheet
items with different maturities. For example, an asset maturing in 4 years, funded from a liabilities
maturing in 2 years' period.
Yield curve risk : In a floating interest rate situation, banks may adopt two or more benchmark
rates for different instruments. Different assets based on these different benchmark rates, may not yield
a parallel return (as there may be variations in the yield of the benchmark).
Hence their yield curve would be different. For example, if a deposit is raised on a floating rate linked to
91 days
treasury bill and another deposit is raised on a floating rate linked to 382 days, the cost to the bank may
be different for these two deposits.
Basis risk : The interest rates on different assets or liabilities may change in different magnitude which is
called basis risk. For example in a declining interest rate scenario, the rate of interest on assets may be
declining in a different magnitude than the interest rate on the corresponding liability, which may create
variation in net interest Income.
Embedded option risk : When a liability or asset is contracted (i.e. a deposit is obtained or a loan is
given) with a call option for a customer (i.e. option to obtain payment of deposit before maturity or make
payment of the Loan before becoming due), it may give rise to embedded option risk. It may affect the
net interest margin.
(e) Reinvestment risk: When bank gets back the repayment of a loan or an investment, there is
uncertainty about the interest rate at which the cash inflow can be reinvested. Any mismatch in cash
flows exposes the bank to variation in net interest income.
(1) Net interest position risk: When market interest declines and a bank has more earning assets than
paying liabilities, the bank is exposed to reduction in NII, which is called net interest position risk.
3. Market risk or price risk
It is the risk that arises due to adverse movement of value of the investments / trading portfolio, during
the period when the securities are held by a bank. The price risk arises if investment is sold pre-maturity.
Foreign Exchange risk When rate of different currencies fluctuate and lead to possible loss to the bank,
this is called a forex risk.
Market liquidity risk: When bank is not able to conclude a large transaction in a particular instrument
around the current market price (say bank could not sell a share at a higher price which could have been
done but for poor market liquidity this could not be done), this is called, market liquidity risk.
4. Default risk or credit risk
The risk to a bank when there is possibility of default by the counter party (say a borrower) to meet its
obligation. Credit risk is prevalent in case of loans.
Counter-party risk : Counter party risk is a variant of credit risk. It arises due to non-performance of the
trading partners due to their counterparty's refusal or inability to perform. It is basically related to trading
activity rather than credit activity.
Country risk: When non-performance by a counter party is due to restrictions imposed by the country of
the counter party (non-performance due to external factors).
S. Operational risk
It is the risk that arises due to failed internal processes, people or systems or from external events. It
includes a no. of risk such as fraud risk, communication risk, documentation risk, competence risk,
model risk, cultural risk, external events risk, legal risk, regulatory risk, compliance risk, system risk. etc.
It does not include strategic risk or reputation risk.
Transaction risk It arises from fraud or failed business processes or inability to maintain business
continuity and manage information.
Compliance risk: It is the risk of legal or regulatory sanction or financial loss or reputation loss that a
bank may suffer as a result of bank's failure to comply with applicable laws or regulations.
6. Other risks :
These may include strategic risk or reputation risk.
Strategic risk : Arises due to adverse business decision, improper implementation of decisions etc. (b)
Reputation risk: It is the risk that arises from negative public opinion. It can expose an institution to
litigation, financial loss or decline in customer base.
61. INDIA VISION 2020

India Vision 2020, is a master plan to transform India into a developed country by 2020. This idea was the
brainchild of former President of India Dr. A.P.J. Abdul Kalam. The planning commission constituted a
committee on Vision 2020 for India in June 2000, under the chairmanship of Dr. S.P. Gupta, member of
planning commission. This initiative brought together over 30 experts from different fields.
IMPORTANT ISSUES: The Report of the committee examines many important issues, but the ones that stand
out most powerfully are employment and education. The document also examines issues related to Population
growth, Food production, Health, Transport & Communication, Water conservation, Peace, security and
governance. It gives projections of India in 2020, in business and in the best case scenario in various important
sectors.
NODAL POINTS OF INDIAN PROSPERITY:
 Peace, Security & National Unity: Physical security both from external and internal threats.
 Food & National Security: A vibrant highly productive commercial farm sector.
 Jobs for All: A constitutional commitment to ensure the right of all citizens to a sustainable livelihood that will
provide them with the purchasing power needed to freely cast their economic votes in the market place. With
2% annual employment generation rate, 20 crore new employment opportunities to be created by 2020.
 Knowledge: It focuses on 100 percent literacy - 100% registration of the children (age group 6-14) in
schools, school education and vocational training for all new entrants to the workforce, adult education
programs, continued investment in science and technology.
 Health: Expansion of the infrastructure for public health and medical care.
 Technology & Infrastructure: Continuous expansion of the physical infrastructure, communication,
application of computers, successful integration of India with world economy.
 Good Governance: Expected annual growth rate to be 9% - per capita income to get doubled by
2020; 1.35 billion population of the country to have better living conditions by 2020.
BASIS OF VISION FOR BANKS:
Indian Banking Industry is governed by the policies and priorities of the Government, directives of the Reserve
Bank of India and Banking Regulation Act 1949. Banking activities are guided by economic and social
conditions of the masses. Vision Statement has been prepared on scientific principles by logically evaluating
and interpreting the present and future economic environment and social conditions.
PRESENT STATUS OF ECONOMIC SCENARIO: India's population as per 2011 census was 121 billion.
Age Group of Population Percentage
25 50
26-35 15
36-35 29.5
Above 66 5.5
 Around 75 percent of the population is dependent on agriculture and allied activities.

 A very low percentage of people in rural and urban area are in the annual income bracket of less
than INR 50,000 and have a bank account. (Urban 34.1 percent, Rural 26.8 percent -Total 28.3
percent).
 Only 5.2 percent villages have a bank branch and 46 percent people do not have a bank account.
 The indebtedness of people in the annual income bracket of less than INR 50,000 is as under:
a) Banks 13.0. percent. b) Money lenders 34.9 percent. c) Other Institutional & Non- Institutional 52.1
percent.
s1,
 Total number of Kisan Credit cards issued by banks were 196 million (as on 31 March, 2012).
 According to TRAI, India wireless users will increase to 1.25 billion by 2015 and Broadband users
will increase to 100 million. Total number of subscriber which include both wireless and wired
subscribers are 826.25 millions.
ESTIMATES OF PLANNING COMMISSION:
 The population of India will be over 1.3 million, out of which 40% will be urban, highly educated,
healthier and prosperous.
 Share of agriculture in GDP will be a nominal 6 percent.
 Exports will constitute 35 percent of GDP as against 15 percent at present.
 The people of India will be better educated, healthier and more prosperous than at any time in our long
history.
 The largest number of new jobs will be created by small and medium enterprises (SMEs).
 Mobile telecommunications and the Internet will set the contours of technological progress over the next
two decades.
During the next 20 years, the aged population in India will nearly double, placing much greater demand
on the infrastructure of hospitals and nursing homes, while at the same time shifting the profile of health
disorders from problems of the young to those of the aged.
The World Bank estimates the India will be the fourth largest economy in the world by 2020.
ESTIMATES OF MCKiNSEY GLOBAL INSTITUTE:
As per the report of McKinsey Global Institute, income of house holders would rapidly rise due to
economic growth. India would be one of world's largest consumer markets by 2025. Consumption will
increase at an aggregate rate of 7.3 percent annually over the next 20 years. Demand for skilled
professional would continue to rise. Employment opportunities for young educated workers would rise.
FUTURE LANDSCAPE OF INDIAN BANKING:
Cm the basis of the economic scenario, banks and financial institutions are bound to play important
role in the next decade in Indian economy,
a) Rural Development: Rising productivity and rapid diversification into value-added crops would
spur another 'Green Revolution in Indian agriculture with the active participation of commercial
banks, other financial institutions and NABARD.
b) Financial Inclusion: As financial access is a necessary condition for sustaining equitable growth, the
Reserve Bank of India is stressing on 'Financial Inclusion' as 'Fortune lies at the bottom of the
Pyramid.' RBI has launched a financial inclusion drive targeting one district in each state for 100
percent financial inclusion.
Scope:
o Banks have to increase geographic coverage for increasing access to their services.
is For the conveniences of illiterate rural masses, banks are also opening new biometric ATMs. The
biometric facility will enable user identification with the help of thumb irnpression or imprint of the
palm.
o The Reserve Bank 'has encouraged banks to use IT-enabled financial inclusion by leveraging on the
smart cards/mobile technology.
 NABARD and SIDBI would provide refinance facilities on easier terms to
commercial banks. Stricter Control Regime:
 Since banks would be get t ing more oper at ional f reedom due t o der egulat ion, the
Reser ve Bank would cer tainly t ig ht en it s super visor y and m onit or ing contr ol on
banks. 0 Risk based super vision and off sit e super vision will be the key f act ors of
super vision.
 KYC & Anti Money Laundering norms would be made more stringent.
 Stringent Capital Adequacy and Prudential Norms would be
implemented. Changes that may Take Place:
e To increase revenue, government may introduce Stamp duty on cheques/payment instructions
ssued by corporate.
o The electronic form of cheques would gradually replace paper form of cheques.
 Rate of premium on deposit insurance would be linked with the risk factor of a bank.
e Deposit Insurance would be INR 5 lacs (as recommended by Shri M. Damodaran
Committee) the limit of insured amount in respect of banks with low / least risk factor
would be enhanced. Capitalization of Public Sector Banks:

Opening of financial sector under VVTO guidelines would result into the entry of global banks in
India. They would bring capital, technology and management skills.
 It is estimated that there would be a need for injecting more capital into the Indian banking sector
(Rs.100,000 to 200,000 crore) over the next 3-5 year for supporting higher growth.
 For the year 2012-13, the budget proposes to provide Rs. 15,888 crore for capitalisation of Public
Sector Banks, Regional Rural Banks and other financial institutions including NABARD. The
Government is also examining the possibility of creating a financial holding company which wili raise
resources to meet the capital requirements of PSBs.
Organisational Change:
 Structure of banks would undergo drastic change in the next decade.
 There would be more amalgamation of associate banks of State Bank with the State Bank.
 Mergers would not only be between private banks but would also be between public sector banks
and private banks, between public sector bdriks and non-banking finance companies.
Pyramid structure of management would be replaced by a flat structure.
Business Prospects:
 Technology would further revolutionise business strategy and would render flow
of information. 9 Technology would take care of present system of preparing
business plan.
 The most significant challenges before banks would be in maintaining rigorous credit standards and
to face increased competition for new and existing clients.
Since globalization has opened floodgates of opportunities for corporates, overseas business of banks,
exports business of banks would get a further boost, as export would constitute 35 percent of GDP.
Composition of Staff Strength:
o Merger would also result in excess staff. The impact would be negated on account of mass
retirement during the next 3-4 years and implementation of voluntary retirement scheme.
 Banks would be going for lateral recruitment of technical, specialized and managerial staff to man key
positions.
 Work culture. work ethics and ethos would undergo complete change.
 There would be proper and vigorous knowledge assessment in the selection of the top positions.
The present system of 'whom you know' would be replaced by 'what you know'.
 As things stand today performance appraisals in public sector banks suffer from lack of objectivity.
This needs to be rectified so that the meritorious are given their due.
 Employees would be able to log onto virtual training centres of the bank any time of the day for up-
gradation of their knowledge and skill.
 The present system of Human Resource Management would be drastically changed. Though
nepotisms and favoritism would continue in the banking industry still talents will be spotted,
recognized and rewarded.
 During the next decade and decades to come, banks would be the key movers in the
Indian economy. CONCLUSION:
Our future depends not on what will happen to us, but on what we decide to become and on the will to
create it. For India, realising the Vision 2020, is not an end in itself, but rather an essential condition for
allowing the spirit of this country to emerge and flourish. The vision statement of India 2020, may not
fulfill all these criteria to our full satisfaction, but it can serve as a useful starting point and foundation
for contemplating future possibilities and our destiny as a nation.
62. Framework for Revival & Rehabilitation of Micro, Small & Medium Enterprises
Ministry of Micro, Small and Medium Enterprises, Government of India, on May 29, 2015 notified the
‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’. After making it compatible
with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining
to Advances’ RBI circulated the revised Framework on March 17, 2016, to be made operative by banks not later
than June 30, 2016. It supersedes earlier framework dated 01.11.2012.
Amount ceiling : The revival and rehabilitation of MSMEs having loan up to Rs.25 crore will be in terms of
these instructions and restructuring of loan accounts with exposure of above Rs.25 crore will be governed by
the extant guidelines on Corporate Debt Restructuring (CDR) / Joint Lenders’ Forum (JLF) mechanism.
Framework for Revival and Rehabilitation of Micro,Small and Medium Enterprises
1. Eligibility: The provisions are applicable to MSMEs having loan limits up to Rs.25 crore, including accounts
under consortium or multiple banking arrangement (MBA).
2. Identification of incipient stress :
1. Identification by banks – Banks should identify incipient stress by creating 3 sub-categories under the
Special Mention Account (SMA) category based on early warning signals, i.e.: SMA-0 : Principal or
interest payment overdue for >30 days SMA-1: Principal/interest overdue between 31-60 days SMA-2 :
Principal or interest overdue between 61-90 days
2. Reference : The branch maintaining the account should forward the stressed a/c with aggregate loan
above Rs.10 lakh to Committee within 5 working days for a suitable Corrective Action Plan (CAP).
Forwarding the a/c to the Committee will be mandatory for accounts reported as SMA-2.
3. As regards accounts with aggregate loan up to Rs.10 lakh identified as SMA-2, the a/c should be examined for
CAP by branch itself under authority of branch manager / such other official as decided by bank. The cases,
where the branch decided the option of recovery under CAP instead of rectification or restructuring, should be
referred to the Committee for their concurrence.
4. Identification by Borrower - A borrower may voluntarily initiate proceedings, if it apprehends failure of
business or inability or likely inability to pay debts or there is erosion in the net worth due to accumulated
losses to the extent of 50% of its net worth during the previous accounting year, by making an application to
the branch or directly to the Committee. When such request is received, the account with aggregate loan
above Rs.10 lakh should be referred to the Committee. The Committee should convene its meeting at the
earliest but not later than 5 working days to examine the account for a suitable CAP. The accounts with
aggregate loan up to Rs.10 lakh may be dealt with by the branch manager / designated official for a suitable
CAP.
3. Committees for Stressed MSM Enterprises:
1. Banks shall constitute a Committee at each District where they are present or at Division level or Regional
Office level, depending upon the number of MSME units financed. These Committees will be Standing
Committees and will resolve the reported stress of MSME accounts of the branches falling under their
jurisdiction.
For MSME borrowers having credit facilities under a consortium of banks or multiple banking arrangement
(MBA), the consortium leader, or the bank having the largest exposure to the borrower under MBA, as the case
may be, shall refer the case to its Committee, if the account is reported as stressed either by the borrower
or any of the lenders. This Committee will also coordinate between the different lenders.
The Composition of the Committee shall be as under:
(a) The Regional or Zonal Head of the Convener Bank, shall be the Chairperson of the Committee;
(b) Officer-in-charge of MSME Credit Department of the convener bank at the regional or zonal office level, shall
be the member and convener of the Committee;
(c) One independent external expert with expertise in MSME related matters to be nominated by bank.
(d) One representative from concerned State Govt. or a retired executive of another bank of rank of AGM
and above.
(e) In case of a/c under consortium or MBA, senior representatives of all banks / lenders having exposure to the
borrower.
4.The decisions of the Committee will be by simple majority (Chairperson shall have the casting vote, in
case of a tie). For under consortium / MBA, lenders should sign an Inter-Creditor Agreement (ICA) on the
lines of (JLF) Agreement.
5. All eligible stressed MSMEs shall have access to the Committee for resolving the stress in these
accounts.
4. Application to Committee for a Corrective Action Plan
1. Any lender on identifying an MSME account as SMA-2 or suitable for consideration under the Framework or
on receipt of an application from the stressed enterprise, shall forward the cases having aggregate loan above
Rs.10 lakh to the Committee for immediate convening of meeting and deciding on a CAP. Stressed enterprises
having aggregate loan limits above Rs.10 lakh can also directly file an application for CAP to the Committee or to
the largest lender for onward submission under advice to all its lenders. IBA may prescribe suitable application
formats for this purpose.
2. Where an application is filed by a bank / lender and admitted by the Committee, it shall notify the concerned
enterprise about such application within 5 working days and require the enterprise to respond to the application
or make a representation. If the enterprise does not respond, Committee may proceed ex-parte.
3. On receipt of information of liabilities, Committee may send notice to statutory creditors disclosed by
borrower, informing them about the application and permit them to make a representation before the Committee
within 15 working days of receipt of such notice. The information is required for determining the total liability
and not for payments of the same by the lenders.
4. Within 30 days of convening its first meeting for a specific enterprise, the Committee shall take a decision on
the option and notify the enterprise about decision, within 5 working days.
5. If the CAP envisages restructuring, the Committee shall conduct the detailed Techno-Economic Viability
(TEV) study and finalise the terms of restructuring within 20 working days (for accounts having aggregate
exposure up to Rs.10 crore) and within 30 working days (for accounts having aggregate exposure above
Rs.10 crore and up to Rs.25 crore) and notify the enterprise about such terms, within 5 working days.
6. On finalisation of the terms of CAP, the implementation shall be completed by the bank within 30 days (if CAP
is Rectification) and within 90 days (if CAP is restructuring). If recovery is considered as CAP, recovery
measures should be initiated at the earliest.
5. Corrective Action Plan by the Committee
1. While Techno-Economic viability of each account is to be decided by the concerned lender/s before
considering restructuring as CAPs, for accounts with aggregate exposure of Rs.10 crore and above, the
Committee should conduct a detailed Techno-Economic Viability study before finalising the CAP.
2. The options under CAP by the Committee may include:
(a) Rectification:– Obtaining a commitment from the borrower to regularise the account or providing
need based additional finance which should be repaid or regularised within a maximum period of 6
months.
(b) Restructuring:– Consider the possibility of restructuring the account, if it is prima facie viable and
the borrower is not a wilful defaulter.
(c) Recovery:– If option (a) and (b) are not feasible, due recovery process may be resorted to, including
legal and other recovery options.
Majority criteria : The decisions agreed upon by a majority of creditors (75% by value and 50% by number)
in the Committee would be considered as the basis for proceeding with the restructuring of the account and
will be binding on all lenders.
Time-lines : In case of non-availability of information on statutory dues of the borrower, the Committee may
take additional time up to 30 days for deciding CAP and preparing the restructuring package.
Additional Finance
1. Additional finance should be matched by contribution by promoters which should not be less than the
proportion at the time of original sanction of loans. Additional funding will have priority in repayment over
repayment of existing debts. Failure to perform : If the account fails to perform as per the agreed terms
under these options, the Committee shall initiate recovery.
10. Restructuring by the Committee
1. Eligibility : (a) Cases shall be taken up by the Committee for Standard, Special Mention Account or Sub-
Standard by one or more lenders of the Committee.
(b) Committee may consider restructuring, if account is doubtful with one or two but it is Standard or Sub-
Standard with majority of other lenders (by value).
(c) Wilful defaulters, Frauds and Malfeasance cases are ineligible for restructuring.
2. Viability : The viability shall be determined based on viability benchmarks on Debt Equity Ratio, Debt
Service Coverage Ratio, Liquidity or Current Ratio, etc.
3. Conditions : The restructuring package shall stipulate the timeline during which certain viability
milestones such as improvement in certain financial ratios after a period of 6 months may be achieved.
Prudential Norms on Asset Classification and Provisioning
The extant asset classification and provisioning norms will be applicable.
Review : If the Committee decides that recovery action is to be initiated, such enterprise may request for a
review of the decision within 10 working days from the date of receipt of the decision. A review application
shall be decided by the Committee within 30 days from the date of filing and if as a consequence of such
review, the Committee decides to pursue a fresh corrective action plan, it may do so.
SMA-0 Signs of Stress
Illustrative list of signs of stress for categorising an account as SMA-0:
1. Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control
statements or (b) credit monitoring or financial statements or (c) non-renewal of facilities based on audited
financials.
2. Actual sales / operating profits falling short of projections accepted for sanction by 40% or more; or a
single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of Drawing
Power by 20% or more after a stock audit; or evidence of diversion of funds for unapproved purpose; or drop
in internal risk rating by 2 or more notches in a single review.
3. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of
non-availability of balance/DP in the account or return of 3 or more bills / cheques discounted or sent under
collection by the borrower.
4. Devolvement of DPG instalments or LCs or invocation of BGs and its non-payment within 30 days.
5. 3rd request for extension of time for creation of securities or for compliance with any other terms and
conditions of sanction.
6. Increase in frequency of overdrafts in current accounts.
7. The borrower reporting stress in the business and financials.
8. Promoter pledging/selling their shares in borrower company due to financial stress
63. Start UP: India Scheme

The Start-up India initiative was launched on Jan 16, 2016 as an action plan for developing an ecosystem to
promote and nurture entrepreneurship in India. This is based on an action plan aimed at promoting bank
financing for start-up ventures and encourage startups with jobs creation.
Start up entity : To be categorized such Entity, following requirements need to be fulfilled:
1. The entity should be a company, partnership or limited liability partnership.
2. It should be
(a) in existence at least for 5 years,
(b) its turnover should not be above Rs.25 cr and it should not be formed by splitting up or
reconstruction of existing entities.
(c) The entity should aim to develop and commercialise, a new product or service or process or a significantly
improved existing product or service or process, that will create or add value for customers. Products, services or
process, which do not have potential for commercialisation or is undifferentiated or have no or limited incremental
value are not eligible. Certification : To be considered eligible as startup, the entity should be supported by a
recommendation with regard to innovative nature of business, in a format specified by DIPP, from an Incubator
recognized by Govt.
Funding :
1. Rs 10,000 crore fund: Govt. will develop a fund with an initial corpus of Rs 2,500 crore (total corpus of Rs
10,000 crore over 4 years) to support upcoming start-up enterprises. LIC of India will play a major role in
developing this corpus. A committee of private professionals selected from start-up industry will manage it.
2. National Credit Guarantee Trust Company : NCGTC is being set up with a budget of Rs 500 crore per year
for the next 4 years to support the flow of funds to start-ups.
3. The loans are available from Rs.10 lac to Rs.1 cr under the scheme.
Advantages :
1. Income Tax exemption is available for 3 years after certification by Inter-Ministerial Board.
2. Self certification : Start-ups will adopt self-certification to reduce regulatory liabilities for payment of
gratuity, labour contract, provident fund management, water pollution acts.
3. In patent costs, it can claim an 80% rebate.
4. Govt. is launching a Mobile App and a portal that will allow companies to register in a day.
5. An All-India Hub will be created as a single contact point to help the entrepreneurs to exchange
knowledge and access financial aid.
6. Startups in manufacturing sector exempted from the criteria of prior ‘experience/ turnover’ without any
relaxation in quality standards or technical parameters in public procurement.
GOVT. SET OUT DEFINITION OF START UP: The Government has set out the definition of “Startup” to
ensure that only deserving companies draw the benefits of its “Startup India Action Plan” and to create a
conducive environment for Startup India. As per Govt. notification, Startup Companies would be required to
have equity funding of at least 20% by any incubation, angel or private equity fund. Such companies would fall
under the category of startups up to five years from the date of incorporation as log as their turnover does not
exceed Rs.25 Crore. The process of recognizing a startup would be done through a mobile application/portal.
Stand Up India Scheme
Union Cabinet approved the Scheme on January 06, 2016.
Objective : To promote entrepreneurship among SC/ST and Women entrepreneurs for benefiting atleast
2.5 lakh borrowers within 36 months from the launch of the Scheme.
Methodology : To facilitate at least two such projects per bank branch, on an average, one for each
category of entrepreneur.
Important provisions of the scheme
Refinance window through Small Industries Development Bank of India (SIDBI) with an initial amount of
Rs. 10,000 crore. Handholding support at the pre-loan stage and during operations including increasing
their familiarity with factoring services, registration with online platforms and e-market places as well as
sessions on best practices and problem solving.To leverage the institutional credit structure to reach out to
these under-served sectors of the population by facilitating bank loans repayable up to 7 years and
between Rs.10 lakh to Rs.100 lakh for greenfield enterprises in the non-farm sector.
The loans would be appropriately secured and backed by a credit guarantee through a credit guarantee
scheme for which Department of Financial Services would be the settler and National Credit Guarantee
Trustee Company Ltd. (NCGTC) would be the operating agency.
Margin money of the composite loan would be up to 25%. Convergence with State schemes is
expected to reduce the actual requirement of margin money for a number of borrowers.
Interest Subsidy on Educational Loans for Other/Economically Backward Classes
Scheme name : Dr Ambedkar Central Sector Scheme of Interest Subsidy on Educational Loans for
Overseas Studies for Other Backward Classes (OBCs) and Economically Backward Classes (EBCs)
Objective : To provide interest subsidy to meritorious students belonging to the Other Backward Classes
and Economically Backward Classes to provide better opportunities for higher education abroad and
enhance their employability.
Scope : It is a Central Sector Scheme to provide interest subsidy for students belonging to the OBCs and
EBCs on the interest payable for the period of moratorium.
Conditions for Interest Subsidy
1. The interest Subsidy shall be linked with the existing Educational Loan Scheme of Indian Banks
Association (IBA) and restricted to students enrolled for course at Masters, M.Phil and Ph.D level.
2. The interest subsidy shall be available to the eligible students only once (not be available to students
who discontinued the course or who are expelled).
3. The benefits shall not be given if he gives up Indian citizenship during the tenure of the loan.
4. The nodal bank will maintain a separate account and records relating to the funds received from the
Ministry and these will be subject to inspection/audit by the officers of the Ministry, or any other agency
designated by the Ministry and CEtAG.
5. The Scheme will be evaluated at regular intervals.
Eligibility :
1. The students should have secured admission in the approved courses at Masters, M.Phil or Ph.D
levels abroad for the approved courses.
2. He/She should have availed loan from a scheduled bank under the Education Loan Scheme of the
Indian Banks Association (IBA) for the purpose.
3. For the candidate applying under the OBC category, OBC Caste certificate in the prescribed Performa
must be taken by the Banks.
Income Ceiling
1. For OBC candidates, total income from all sources of the employed candidate or his/her
parents/guardians in case of unemployed candidate shall not exceed Rs.3.00 lakh per annum.
2. For EBC candidates, total income of the employed candidate or his/her parents/guardians in case of
unemployed candidate shall not exceed Rs.1.00 lakh p.a.
3. Income certificate produced by the student for availing Educational Loan viz. ITR/Form 16/Audited
Accounts/ Income certificate issued by the authority of State Government/UT Administration is acceptable
to determining Income ceiling.
Recommendatory Committee
1. Recommendatory Committee headed by Joint Secretary in-charge of Backward Classes Division with
representatives of Finance Division, representative of Nodal Bank and concerned Director/Deputy
Secretary as convener will examine and recommend the applications for award of interest subsidy on
quarterly basis. 2. Out of the total outlay in a year, a minimum of 50% amount will be earmarked for
Interest Subsidy to the girl candidates.
Rate of Interest Subsidy
Under the scheme, interest payable by the students availing the education loans, for the period of
moratorium (i.e. course period, plus one year or six months after getting job, whichever is earlier) as
prescribed under the Education Loan Scheme of the IBA, shall be borne by the Government of India.
1. The candidate will bear the Principal installments and interest after moratorium period.
Implementing Agencies The Scheme will be implemented by the Nodal Bank as per MoU between the
Banks and the Ministry of Social Justice Et Empowerment.
Administrative Expenses :A provision not exceeding 2% of the annual budget allocation for the
scheme will be made to meet the administrative and allied costs.
Monitoring and Transparency
1. The Ministry of Social Justice and Empowerment shall monitor the performance of the scheme.
2.The Nodal Bank will be required to furnish quarterly financial and physical progress reports to the Ministry.
64. Monetary Policy Committee (MPC)

The Finance Bill 2016 proposes to amend RBI Act 1934 to make provision for creation of MPC. The
important provisions are summarized as under:
1. Objective : MPC shall determine the Policy Rate required to achieve the inflation target and its
decision shall be binding on RBI.
2. Composition of MPC : Central Govt. can constitute Monetary Policy Committee of the RBI consisting
of the following :
(a) the Governor of RBI — Chairperson, ex officio;
(b) Deputy Governor (RBI), incharge of Monetary Policy— Member, ex officio;
(c) One officer of RBI (nominated by Central Board)—Member, ex officio;
(d) 3 persons to be appointed by Central Govt.— Members.
Central Govt. appointed members : These are to be appointed on recommendations of Search-cum-
Selection Committee consisting Cabinet Secretary, RBI Governor etc. (term :4 years). These members
should not:
(i) have completed age of 70 years on the date of appointment as Member;
(ii) be Member of any Board or Committee of the Bank;
(iii) be an employee of the Bank;
(iv) be a public servant as defined under section 21 of Indian Penal Code;
(v) be a Member of Parliament or any State Legislature;
(vi) has been at any time, adjudged as an insolvent;
(vii) have been convicted of an offence which is punishable with an imprisonment for a term of one
hundred and eighty days or more;
Such member may resign by giving a written notice of not less than six weeks. Central Govt. may remove
from office any Member of MPC. Secretariat : RBI shall appoint a Secretary to MPC for secretariat
support. Information to members : RBI shall provide all information to the Members of MPC that may be
relevant to achieve the inflation target.
Meetings of MPC : (1) RBI shall organise at least 4 meetings of MPC in a year. The meeting schedule for
a year shall be published by RBI at least one week before the first meeting in that year.
(2) The quorum for a meeting of the Monetary Policy Committee shall be 4 Members, at
least one of whom shall be the Governor and in his absence, the Deputy Governor who
is the Member of the Monetary Policy Committee.
(3) The meetings shall be presided over by the Governor.
(4) Each Member shall have one vote.
Decision by way of voting : All questions which come up before MPC shall be decided by a majority of
votes by the Members present and voting, and in the event of an equality of votes, the Governor shall
have a second or casting vote. Each Member shall write a statement specifying the reasons for voting in
favour of, or against the proposed resolution. Minutes of meeting : RBI shall publish, on the 14th day
after every meeting, the minutes of the proceedings of the meeting.
Inflation target : (1) The Central Government shall, in consultation with RBI, shall determine the inflation
target in terms of the Consumer Price Index, once in every five years.
(2) The Central Government shall, upon such determination, notify the inflation target in the Official
Gazette.
Publishing of MPR : RBI shall, once in every 6 months, publish a document to be called the Monetary
Policy Report (MPR), explaining
(a) the sources of inflation; and
(b) the forecasts of inflation for the period between 8 to 18 months from the date of publication of the
document.
National Credit Guarantee Trust Company Ltd
Subsequent to the Central Budget announcements to set up various credit guarantee funds, a common
trustee company in the name and style of National Credit Guarantee Trustee Company Ltd was set up by
the Department of Financial Services, Ministry of Finance, Government of India to act as a common
trustee company to manage and operate various credit guarantee trust funds. It was incorporated under
the Indian Companies Act, 1956 on March 28, 2014 with a paid-up capital of Rs.10 crore, with its
registered office in New Delhi. Presently it provides following:
1) Credit Guarantee Fund for Skill Development (CGFSD) : Guarantees for Skill Development Loans by
the member banks of IBA up to Rs.1.5 lakh extended without collateral or third-party guarantee. The fund
has a Target of 10-20 lakh loans to be guaranteed in a year.
2) Credit Guarantee Fund for Education loans (CGFEL) : Guarantees for Education Loans by the member
banks of IBA up to Rs.7.5 lakh extended without collateral or third-party guarantee. It has a Target of 10
lakh loans to be guaranteed in a year.
3) Credit Guarantee Fund for Factoring (CGFF) : Guarantees for domestic factored debts of MSMEs.
Credit Guarantee Fund Scheme for Education Loans (CGFSEL) Loan Limit : The maximum loan limit is
Rs 7.5 lakh without any collateral security and third party guarantee. Interest Rate : The Interest Rate
charged by MLI should be maximum up to 2% p.a. over the Base Rate. Margin : Upto Rs. 4 lakh Nil. Above
Rs. 4 lakh: Studies in India 5% Studies Abroad 15%
Education Loan eligible under the Scheme:
(i) The Fund shall cover education loans by MLI to an eligible borrower as per IBA scheme, sanctioned
on or after date of notification of scheme.
(ii) MLI applies for guarantee cover for education loans disbursed in the quarter April-June, July-
September,
October-December and January-March prior to expiry of the following quarter viz. July-September, October-
December, January-March and April-June, respectively.
(iii) as on the material date, (a) there are no overdues in respect of the account to the lending institutions
and/or the loan has not been classified as a Non-Performing Asset (NPA) in the books of the lending
institution, and/or (b) the activity of the borrower for which the credit facility was granted has not ceased;
Education Loans not eligible :
i. Loan for which risks are additionally covered by Government or by any general insurer or any other person
or association of persons carrying on the business of insurance, guarantee or indemnity, to the extent they
are so covered.
ii. Any Education loan which has been sanctioned by the lending institution with interest rate of more than
2% over the Base Rate of the lending institutions in cases where Base Rate is applicable.
Responsibilities of lending institution under the scheme:
i. MLI shall evaluate and sanction Education Loan in accordance with the IBA Model Educational Loan
Scheme for pursuing higher studies in India / abroad and conduct the account(s) with normal banking
prudence and due diligence.
ii. MLI shall ensure linkage of every education loan with Aadhar number and register the borrower’s/co-
borrower’s name with an appropriate credit information bureau.
Guarantee Fee:
i. MLI shall pay Annual Guarantee Fee (AGF) of 0.50% p.a. of the outstanding amount as on the date of
application of guarantee cover, upfront to the Fund within 30 days from the date of Credit Guarantee Demand
Advice Note of guarantee fee. All subsequent AGFs would be calculated on the basis of the outstanding loan
amount as at the beginning of the Financial Year.
The demand on MLIs for the AGF would be raised upon approval of guarantee cover. The guarantee start
date would be the date on which proceeds of the AGF are credited to Trust’s Bank account. AGF shall be
paid by the MLI within 30 days i.e. on or before April 30, of every year.
ii. In the event of any error or discrepancy or shortfall being found in the computation of the amounts or
in the calculation of the guarantee fee, such deficiency / shortfall shall be paid by the eligible lending
institution to the Fund together with interest on such amount at a rate of 4% over and above the Bank
Rate. Guarantee cover :
The Fund shall provide guarantee cover to the extent of 75% of the amount in default.
Invocation of guarantee
(i) The lending institution may invoke the guarantee within one year from date of NPA, if NPA is after lock-
in period or within one year of lock-in period, if NPA is within lock-in period ii. NCGTC shall pay 75% of
the guaranteed amount on preferring of eligible claim by the lending institution, within 30 days. NCGTC
shall pay to the lending institution interest on the eligible claim amount at the prevailing Bank Rate for the
period of delay beyond 30 days. The balance 25% of the guaranteed amount will be paid after obtaining a
certificate from the MLI that all avenues for recovering the amount have been exhausted. On a claim
being paid, NCGTC / the Fund shall be deemed to have been discharged from all its liabilities on account
of the guarantee in force in respect of the borrower concerned.
65. PRADHAN MANTRI FASAL BIMA YOJANA ( PMFBY)

INTRODUCTION: The Prime Minister of India has launched a new crop insurance scheme called Pradhan
Mantri Fasal Bima Yojana (PMFBY) which will be administered under the Ministry of Agriculture and
Farmers’ Welfare, Government of India. This scheme would replace the existing schemes of National
Agricultural Insurance Scheme (NAIS) & Modified National Agricultural Insurance Scheme (MNAIS) from
Kharif 2016.
 PMFBY will provide a comprehensive insurance cover against failure of the crop thus helping in
stabilizing the income of the farmers and encourage them for adoption of innovative practices.
 The Scheme can cover all Food & Oilseeds crops and Annual Commercial/Horticultural Crops for
which past yield data is available and for which requisite number of Crop Cutting Experiments (CCEs)
will be conducted being a part of the General Crop Estimation Survey (GCES).
BACKGROUND:
 A major portion of Indian citizens, mostly in rural areas depends on agriculture and farming. Worst case
scenario is that the entire crop gets damaged and the cultivators have to go through heavy losses.
 Most farmers take loans for buying agricultural seeds, fertilizers, irrigation facilities, pesticides and
other agricultural machineries for cultivation of crops. But sometimes unavoidable natural disasters like
drought, floods, fire, pest attack, etc. strike and destroy the crop yield. Then farmers choose the path of
suicide as they become unable to cope up with the burden of debt.
 As per reports of Home Ministry, cases of near about 3000 farmers’ suicide have been registered in
India, in the last three years itself.
PREMIUM: PMFBY would be available to the farmers at very low rates of premium.
 Rabi Crop: Maximum upto 1.5%;
 Kharif Food crops, Pulses and Oilseeds: Upto 2%;
 Annual Horticulture/ Commercial Crops: Upto 5%.
# The difference between premium and the rate of Insurance charges payable by farmers shall be shared
equally by the Centre and State.
WBCIS:
 The Weather Based Crop Insurance Scheme (WBCIS) has also been modified and the premium
payable by the farmers along with its administrative provisions and operationalisation process have
been brought on par with PMFBY.
 In addition, a Unified Package Insurance Scheme (UPIS) has also been approved for implementation
on pilot basis in 45 districts of the country to cover other assets / activities like machinery, life, accident,
house, student-safety and crops etc. of farmers.
OTHER HIGHLIGHTS:
 The scheme is compulsory for loanee farmers availing Seasonal Agricultural Operational (SAO) Loans
/ Kisan Credit Card (KCC) holders for the notified crops in notified areas and 100% coverage of loanee
farmers in notified areas growing notified crops is required to be done by all concerned bank branches.
 This scheme is voluntary for non-loanee farmers, but there is a prerequisite in the scheme that they
should have an account to
be eligible for coverage. The seasonality discipline shall be same for loanee and non-loanee farmers.
 This scheme would provide insurance cover for all stages of the crop cycle including post-harvest risks
in specified instances.
 The scheme will be implemented by AIC and other empanelled private general insurance companies.
Selection of Implementing Agency (IA) will be done by the concerned State Government through bidding.
 The existing State Level Co-ordination Committee on Crop Insurance (SLCCCI), Sub-Committee to
SLCCCI , District Level Monitoring Committee (DLMC) shall be responsible for proper management of the
Scheme.
 The Scheme shall be implemented on an ‘Area Approach basis’. The Loss assessment for crop losses
due to non-preventable natural risks will be on Area approach.
 The unit of insurance shall be Village/Village Panchayat level for major crops and for other crops it may
be a unit of size above the level of Village/Village Panchayat.
 In case majority of insured crops of a notified area are prevented from sowing / planting due to adverse
weather conditions then such insured crops will be eligible for indemnity claims upto maximum of 25% of
the sum-insured.
 Losses due to localized perils (Hailstorm, landslide & inundation) and Post-Harvest losses due to
specified perils, (Cyclone / Cyclonic rain & Unseasonal rains) shall be assessed at the affected insured
field of the individual insured farmer.
 Three levels of Indemnity, viz., 70%, 80% and 90% corresponding to crop Risk in the areas shall be
available for all crops.
 The Threshold Yield (TY) shall be the benchmark yield level at which Insurance protection shall be
given to all the insured farmers in an Insurance Unit. Threshold of the notified crop will be moving
average of the yield of last seven years excluding yield upto two notified calamity years multiplied by
Indemnity level.
 In case of smaller States, the whole State shall be assigned to one IA (2-3 for comparatively big
States). Selection of IA may be made for at least 3 years.
 Crop Cutting Experiments (CCE) shall be undertaken per unit area /per crop, on a sliding scale.
Improved Technology like Remote sensing, Drone etc will be utilised for estimation of yield losses.
 State governments should use Smart phone apps for video/image capturing CCEs process and
transmission thereof with CCE data on a real time basis for timely, reliable and transparent estimation of
yield data. The cost of using technology etc. for conduct of CCEs etc will be shared between Central
Govt. and State/U.T. Govts. on 50:50 basis.
 There will be a provision of on account claims in case of adverse seasonal conditions during crop
season viz. floods, prolonged dry spells, severe drought, and unseasonal rains.
 On account payment upto 25% of likely claims will be provided, if the expected yield during the season
is likely to be less than 50% of normal yield. The claim amount will be credited electronically to the
individual Insured Bank Account.
 The structure of farmer’s premium under WBCIS will be at par with the proposed PMFBY.
 A Crop Insurance Portal www.agri-insurance.gov.in has been operationalised by GOI for effective
administration of the Crop Insurance Programme.
66. MONEY BILL
OBJECTIVES:
 The Aadhaar (Targeted Delivery of Financial & Other Subsidies, Benefits & Services) Bill, 2016 to
provide Aadhaar statutory backing and making it the mainstay of the government’s Direct Benefit Transfer
(DBT) programme for subsidies has been passed in the Parliament as a Money Bill. The bill is central to
the ambitious financial inclusion programme of the government.
 The Bill intends to provide for targeted delivery of subsidies and services to individuals residing in India
by assigning them unique identity numbers called Aadhaar numbers. The targeted subsidy through
Aadhar cards of LPG consumers had resulted in over Rs 15,000 crore of savings at the Centre. Four
states which had started PDS delivery by a similar exercise on a pilot basis, had saved more than Rs
2,300 crore.
 The focus is primarily on the usage of money belonging to Consolidated Fund of India of either the
Centre or states.
IMPORTANCE OF THE BILL:
 The bill will provide for good governance, efficient, transparent and targeted delivery of subsidies,
benefits and services, the expenditure for which is incurred from the Consolidated Fund of India by
assigning unique identity numbers to individuals residing in India.
 The Bill will also enable the government to set up a statutory authority for the Aadhaar card scheme.
This will permit banks to use the Aadhaar number as identification for customers, which will help them
weed out fake Jan Dhan accounts.
 As most of the government’s social security schemes and digital initiatives are critically dependent on
use of Aadhaar unique identity number, it forms the cornerstone of India’s move towards a cashless
economy.
 Giving statutory backing to Aadhaar and making it mandatory for those who want the benefit of any form
of government subsidy or advantage is important. Therefore, wherever the funds of the government or
state governments come in, they can make it compulsory for an individual to have this identification so that
the most deserving man and family gets the benefit.
 Aadhaar will help those who are excluded from the government’s social security schemes like street
dwellers because of lack of a valid identity. Its universal usage in DBT will help cut costs and reduce
leakages.
DEFINITION OF MONEY BILL:
Under Article 110(1) of the Constitution, a Bill is deemed to be a Money Bill if it contains only provisions
dealing with all or any of the following matters:
a) The imposition, abolition, remission, alteration or regulation of any tax;
b) Regulation of borrowing by the government;
c) Custody of the Consolidated Fund or Contingency Fund of India, and payments into or withdrawals
from these Funds;
d) Appropriation of moneys out of the Consolidated Fund of India;
e) Declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the
increasing of the amount of any such expenditure;
f) Receipt of money on account of the Consolidated Fund of India or the public account of India or the
custody or issue of such money or the audit of the accounts of the Union or of a State; or
g)Any matter incidental to any of the matters specified in sub-clauses (a) to (f).
SALIENT FEATURES OF THE BILL:
 For anyone to get an Aadhaar number the details that need to be submitted include:
a) Biometric (photograph, finger print, iris scan), and
b) Demographic (name, date of birth, address) information. The Aadhaar number will be used to verify
the identity of a person receiving a subsidy or a service.
 If a person does not have an Aadhaar number, the government will ask him to apply for it. Otherwise,
the person will be given an alternative means of identification.
 Any public or private entity can accept the Aadhaar number as a proof of identity of the Aadhaar
number holder, for any purpose. However, the number is not a proof of citizenship or domicile.
SAFEGUARDS IN PLACE:
 It is the UID authority that will authenticate the Aadhaar number of an individual, if an entity makes
such a request. A requesting entity (an agency or person that wants to authenticate information of a
person) has to obtain the consent of an individual before collecting his information. The agency can
use the disclosed information only for purposes for which the individual has given consent.
 The UID authority is not permitted to share an individual’s biometric information such as finger print,
iris scan and other biological attributes.
 Further, these details will be used only for Aadhaar enrolment and authentication, and for no other
purpose.
 The authority shall record the entity requesting verification of a person’s identity, the time of request
and the response received by the entity.
EXCEPTIONS FOR INFORMATION SHARING:
As per Section 33 of the Bill there are two cases when information may be revealed:
a) In the interest of national security, a joint secretary in the central government may issue a direction
for revealing,
i. Aadhaar number,
ii. Biometric information (iris scan, finger print and other biological attributes specified by regulations),
iii. Demographic information, and
iv. Photograph.
Such a decision will be reviewed by an oversight committee (comprising Cabinet Secretary, Secretaries
of Legal Affairs and Electronics & Information Technology) & will be valid for 6 months.
b) On the order of a court, (i) an individual’s Aadhaar number, (ii) photograph, & (iii) demographic
information, may be revealed.
Offences and Punishments for Violations:
 A person may be punished with imprisonment up to three years and minimum fine of Rs.10 lakh for
unauthorized access to the centralised data-base, including revealing any information stored in it.
 If a requesting entity and an enrolling agency fail to comply with rules, they shall be punished with
imprisonment up to one year or a fine up to Rs.10,000 or Rs.1 lakh (in case of a company), or with
both.
67. PEER –TO-PEER LENDING (P2P)
CONCEPT:
 Peer-to-Peer lending is a form of crowd-funding which can be defined as the use of an online platform that
matches lenders with borrowers in order to provide unsecured loans. Sometimes abbreviated P2P lending, it
involves lending of money to individuals or businesses particularly through online services. It may also be
termed as Social Lending or Marketplace Lending.
 P2P is a method of debt financing that enables individuals to borrow and lend money without the use of an
official financial institution as an intermediary. Peerto-peer lending removes the middleman from the
process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
INTERNATIONAL EXPERIENCE:
Peer-to-Peer lending, though an uncommon concept in India, has been around in the international
markets since a decade. The various international countries having experience of P2P lending is listed as
follows:
 UK: The first country to offer P2P loans in the world. Zopa, founded in February 2005, has issued loans
in the amount of 500 million GBP and is currently the largest UK peer-to-peer lender with over 500,000
customers.
 USA: P2P lending industry in US started in February 2006 with the launch of Prosper, followed by
Lending Club and many more. As of June 2012, Lending Club is the largest peer-to-peer lender in US
based upon issued loan volume and revenue, followed by Prosper.
 China: P2P lending sprung into existence in China only after the Internet and e-commerce took off in the
country in the 2000s. The most prominent among them are CreditEase, Lufax, Tuandai, China Rapid
Finance and DianRong.
INDIAN CONTEXT:
 With a view to regulate the nascent peer-to-peer market in the country, the Reserve Bank of India came
out with a consultation paper that aims to classify P2P as an NBFC, with a minimum capital requirement of
Rs 2 crore. RBI wants to create a platform that will operate only as an intermediary and that no entity other
than a company can undertake this activity. The RBI has placed the Consultation Paper on Peer-to-Peer
Lending, for seeking comments/views.
 According to RBI, considering the present stage of development, the platform could be registered only
as an intermediary, which means the role of the platform would be limited to bringing the borrower and
lender together without the lending and borrowing getting reflected in the balance sheet.
The Consultation paper outlines the pros and cons of regulating the sector and proposes a suitable
framework for regulating this activity, which includes minimum capital, permitted activity, governance
requirements, fair practices code for customer dealing and data security.
CHARACTERISTICS:
 Peer-to-Peer Lending, also termed as Marketplace Lending or Social Lending is not any of the three
traditional types of financial institutions namely deposit takers, investors, insurers. However, it is sometimes
categorized as an alternative financial service. Typical characteristics of Peer-to-Peer lending are:
 It is usually conducted for profit.
 No necessary common bond or prior relationship between lenders and
 borrowers. Intermediation by a peer-to-peer lending company. Transactions take place online.
Lenders may often choose which borrowers to invest in, if the P2P platform offers that facility.
 The loans can be unsecured or secured and are not normally protected by government insurance but
there can be protection funds available also.
 Loans are securities that can be transferred to others, either for debt collection or profit, though not
all P2P platforms provide transfer facilities or free pricing choices and costs can be very high, tens of
percent of the amount sold, or nil.
SERVICES OFFERED:
 Most peer-to-peer intermediaries provide the following services:
 Online investment platform to enable borrowers to attract lenders and investors to identify and
purchase loans that meet their investment criteria.
 Development of credit models for loan approvals and pricing.
 Verifying borrower identity, bank account, employment and income.
 Performing borrower credit checks and filtering out the unqualified borrowers.
 Processing payments from borrowers and forwarding those payments to the lenders who invested in
the loan. Servicing loans, providing customer service to borrowers and attempting to collect payments
from borrowers who are delinquent or in default. Legal compliance and reporting.
 Finding new lenders and borrowers (marketing).
OTHER DETAILS:
 Beneficiary of loans: Can either be an individual or a business requiring a loan.
 Lender: The lender can also be a natural or a legal person.
 Payment of fee: Fee is paid to the platform by both the lender as well as the borrower. A one-time
fee on funded loans from borrowers is collected and a loan servicing fee is charged to investors or
borrowers (either a fixed amount annually or a percentage of the loan amount).
 Type of loans: Peer-to-Peer loans are unsecured personal loans where most of large loans are lent
to businesses. Secured loans are sometimes offered by using luxury assets such as jewellery,
watches, vintage cars, fine art, buildings, aircraft and other business assets as collateral. They are
made to an individual, company or charity. Other forms of peer-to-peer lending include student loans,
commercial and real estate loans, payday loans, as well as secured business loans, leasing and
factoring.
 Interest rates: The interest rates can be set by lenders who compete for the lowest rate on the
reverse auction model, or fixed by the intermediary company on the basis of an analysis of the
borrower's credit.
ADVANTAGES AND DISADVANTAGES:
 Peer-to-Peer lending platform offers the following benefits to investors:
 Unlike banks, the borrowers are not asked for a set of documents. Instead information is taken from
them and is then cross-verifed with Aadhaar, voter ID, PAN, utility bill payment details, etc.
 Banks lend other people’s money, however in P2P lending, borrower lends his own money, assumes
the risk and gets the reward.
 Since the peer-to-peer lending companies offer these services entirely online, they can run with
lower overheads and provide the service more cheaply than traditional financial institutions.
 As a result, lenders often earn higher returns compared to savings and investment products offered
by banks, while borrowers can borrow money at lower interest rates.
 Compared to stock markets, peer-to-peer lending tends to have both less volatility & less liquidity. For
investors interested in socially conscious investing, peer-to-peer lending offers the possibility of
supporting the attempts of individuals to break free from high-rate debt, assist persons engaged in
occupations or activities that are deemed moral and positive to the community, and avoid investment
in persons employed in industries deemed immoral or detrimental to community.
 Unlike depositing money in banks, peer-to-peer lenders can choose themselves whether to lend their
money to safer borrowers with lower interest rates or to riskier borrowers with higher returns.
 Despite the numerous advantages, peer-to-peer lending is not free from disadvantages and
risks. The major disadvantages are:
 The lender has very little assurance that the borrower, who traditional financial intermediaries may
have rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the
lending system employed, in order to compensate lenders for the risk that they are taking, the amount
of interest charged for Peer-to-Peer loans may be higher than traditional prime loans.
 Dealing with peer-to-peer lending is connected with the problem of ownership. The person who owns
the loans and how that ownership is transferred between the originator of the loan (the person-to-
person lending company) and the individual lender cannot be clearly distinguished.
 Limited operating history of P2P lending platforms.
 Dependency of P2P lending platforms on low interest rates to stimulate high transaction volumes.
 P2P lending platforms are not obligated to make any payments to investors if borrowers do not make
payments on the underlying loans.
 LEGAL REGULATION: At present, there is no clear regulatory framework in India governing the
functioning of the Peer-to-Peer lending platforms.
68. PANAMA PAPERS

INTRODUCTION:
 The Panama Papers are a set of 11.5 million confidential documents detailing information about more
than 2,14,000 offshore companies compiled by the Panamanian corporate service provider Mossack
Fonseca. The firm had leaked the papers to the International Consortium of Investigative Journalists to
expose the offshore holdings and hidden financial dealings of some of the world's most familiar names.
 The documents illustrate how wealthy individuals, including public officials, hide assets from public
scrutiny. While the use of offshore business entities is not illegal in the jurisdictions in which they are
registered, during their investigation, reporters found that some of the shell corporations may have
been used for illegal purposes, including fraud, drug trafficking, and tax evasion.
 Even as the world's wealthiest and most powerful nations have engaged in increasingly complex and
intensive efforts at international co-operation to smooth the wheels of global commerce, they have
wilfully chosen to allow the wealthiest members of Western society to shield their financial assets from
taxation by taking advantage of shell companies and tax havens.
 Tax havens are used to hide away taxable wealth in places where there are banking systems designed
for the very purpose of providing a tax sanctuary. Account holders use intermediaries and banks to
hide the capital within bogus companies, effectively hiding both the money and the account owners’
identities. While the use of tax havens and offshore banking is not illegal, the system does have
loopholes that can be exploited to allow some wealthy people to cheat the system and prevent paying
taxes.
BACKGROUND:
 The Panama Papers focussed an uncomfortable light on the small Central American republic, home to
3.9 million people. Panama considered as a tax haven is known for its factory-like production of
offshore companies and offshore bank accounts for its worldwide clientele.
 Offshore bank accounts are located outside a client’s country of resident, usually in ‘tax haven’
territories chosen because of financial and legal advantages. They can be used to squirrel money away
from the oversight of national banking systems, evading regulatory oversight or tax obligations. A
jurisdiction is typically considered an offshore financial center, less formally known as a tax haven,
when its banking infrastructure:
a) Primarily provides services to people or businesses who are not its own residents.
b) Requires little or no disclosure of information when doing business.
c) Offers low taxes.
 Mossack Fonseca is a firm which specializes in helping foreigners set up international shell companies
to protect their financial assets. Its services to its clients include incorporating and operating shell
companies in friendly jurisdictions on their behalf. They create ‘complex shell company structures’ that,
while legal, also allow the firm's clients to operate behind an often impenetrable wall of secrecy. The
leaked papers detail some of their intricate, multilevel, and multi-national corporate structures.
 THE LEAK:
Over a year ago, an anonymous source contacted the Süddeutsche Zeitung (SZ) and submitted encrypted
internal documents from Mossack Fonseca. In the months that followed, the number of documents
continued to grow far beyond the original leak. Ultimately, SZ acquired about 2.6 terabytes of data, making
the leak the biggest that journalists had ever worked with.
 The data leaked proves how a global industry led by major banks, legal firms, and asset management
companies secretly manages the estates of the world’s rich and famous from politicians, FIFA officials,
fraudsters and drug smugglers, to celebrities and professional athletes. The data primarily comprises e-
mails, pdf files, photo files, and excerpts of an internal Mossack Fonseca database. It covers a period
spanning from the 1970s to the spring of 2016.
PEOPLE UNDER SCRUTINY:
a) The journalists compiled lists of important politicians, international criminals, and well-known
professional athletes, among others. The digital processing made it possible to then search the leak for
the names on these lists. The ‘party donations scandal’ list contained 130 names, and the UN
sanctions list more than 600. In just a few minutes, the powerful search algorithm compared the lists
with the 11.5 million documents.
b) Popular Indian celebrities Amitabh Bachchan and Aishwarya Rai Bachchan are listed in the papers.
Also listed are real estate developer and DLF CEO K.P.Singh, Sameer Gehlaut of the Indiabulls group,
and Gautam Adani's elder brother Vinod Adani. Indian politicians on the list include Shishir Bajoria from
West Bengal and Anurag Kejriwal, former chief of the Delhi Lok Satta Party. All over the world, many
leaders, politicians and public officials have been exposed.
c) The Organization for Economic Cooperation and Development has called for a meeting of senior tax
officials in Paris to discuss the Panama Papers. Members of the Joint International Tax Shelter
Information and Collaboration (JITSIC) will take part in the meeting that presents tax administrations
with a first opportunity to act on the considerable body of information revealed by the 'Panama Papers'.
The European Union will come up with a list of tax havens over the next six months to impose sanctions
on those who help people and companies hide revenue that could be taxed within the European Union.
69. PRIORITY SECTOR LENDING CERTIFICATES

OBJECTIVES: The Reserve Bank of India has introduced Priority Sector Lending Certificates
(PSLCs), on the lines of carbon credit trading, wherein banks can earn premium for exceeding targets.
This will enable banks to meet their Priority Sector lending target and sub-targets by purchase of these
instruments in the event of shortfall and at the same time incentivise the surplus banks, thereby
enhancing lending to the categories under priority sector.
PSLCs will provide a market-driven incentive for efficiency and enable banks to sell their surplus lending
and thus earning a premium for their efficiency/geographical spread.
˜ NATURE OF THE INSTRUMENTS: The seller will be selling fulfillment of priority sector
obligation and the buyer would be buying the same. There will be no transfer of risks or loan assets.
˜ MODALITIES: The PSLCs will be traded through the CBS portal (e-Kuber) of RBI.
˜ SELLERS/BUYERS: Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area
Banks (LABs), Small Finance Banks (when they become operational) and Urban Cooperative Banks
who have originated PSL eligible category loans subject to such regulations as may be issued by the
Bank.
˜ TYPES OF PSLCs: There would be four kinds of PSLCs:
i) PSLC Agriculture: Counting for achievement towards the total agriculture lending target.
ii) PSLC SF/MF: Counting for achievement towards the sub-target for lending to Small and Marginal
Farmers.
iii) PSLC Micro Enterprises: Counting for achievement towards the sub target for lending to Micro
Enterprises.
iv) PSLC General: Counting for achievement towards the overall priority sector target.
˜ Priority Sector comprises several categories, including Agriculture and Micro Enterprises. In addition to
the overall target and sectoral targets for lending to agriculture and micro enterprises, banks are required
to achieve specified sub-target for lending to Small and Marginal Farmers. Accordingly, to avoid
computational issues in assessing the achievement/shortfall of PSL targets, RBI has advised that the
above four types of certificates will represent specific loans and count for specific sub-targets / targets as
indicated hereunder:
S.No.
REPRESENTING COUNTING FOR
Type of
PSLC – Agriculture All eligibleAgriculture loans except Achievement of agriculture
loansto SF/MF for which separate target and overall
certificates are available. PSL target.
PSLC – SF/MF All eligible loans to Achievement of SF/MF
small/marginal farmers. sub-target,agriculture
target and overall
PSL target.
PSLC – Micro All PSL Loans to Micro Enterprises. Achievement of micro-
Enterprises enterprise sub-target and
overall PSL target.
PSLC – General The residualpriority sector loans i.e. Achievement of
other than loansto agriculture and overall PSL target.
micro enterprisesfor which separate
certificates are available.
Thus, a bank having shortfall in achievement of any sub-target (e.g. SF/MF, Micro), will have to buy the
specific PSLC to achieve the target. However, if a bank is having shortfall in achievement of the overall
target only, as applicable to it, may buy any of the available PSLCs.
˜ COMPUTATION OF PSL ACHIEVEMENT: A bank’s PSL achievement would be computed as the sum
of outstanding priority sector loans, and the net nominal value of the PSLCs issued and purchased. Such
computation will be done separately where sub targets are prescribed as on the reporting date.
˜ AMOUNT ELIGIBLE FOR ISSUE: Normally PSLCs will be issued against the underlying assets.
However, with the objective of developing a strong and vibrant market for PSLCs, a bank is permitted
to issue PSLCs upto 50 percent of previous year’s PSL achievement without having the underlying in
its books. However, as on the reporting date, the bank must have met the priority sector target by way
of the sum of outstanding priority sector lending portfolio and net of PSLCs issued and purchased. To
the extent of shortfall in the achievement of target, banks may be required to invest in RIDF/other
funds as hitherto.
˜ CREDIT RISK: There will be no transfer of credit risk on the underlying as there is no transfer of
tangible assets or cash flow. ˜
EXPIRY DATE: All PSLCs will expire by March 31st and will not be valid beyond the reporting date
(March 31st), irrespective of the date it was first sold.
˜SETTLEMENT: The settlement of funds will be done through the platform as explained in the e-Kuber
portal.
˜ VALUE AND FEE: The nominal value of PSLC would represent the equivalent of the PSL that
would get deducted from the PSL portfolio of the seller and added to the PSL portfolio of the buyer.
The buyer would pay a fee to the seller which will be market determined.
˜ LOT SIZE: The PSLCs would have a standard lot size of 1 25 lakh and multiples thereof.
˜ ACCOUNTING: The fee paid for purchase of the PSLC would be treated as an ‘Expense’ and the fee
received for the sale of PSLCs would be treated as ‘Miscellaneous Income’.
˜ DISCLOSURES: Both seller and buyer shall report the amount of PSLCs (category-wise) sold and
purchased during the year in the ‘Disclosures to the Balance Sheet’.
˜ ILLUSTRATIONS:
1) Bank A may sell PSLCs with a nominal value of 1100 crores to Bank B on July 15, 2016. Bank B will
reckon 1 100 crore towards its priority sector achievement as on the reporting dates of September 30,
2016, December 31, 2016 & March 31, 2017, while Bank A will subtract the same from its achievement
figures for the respective reporting dates. The PSLC will expire by March 31, 2017.
2) Bank C may buy 1 100 crore PSLC on March 30, 2017 from Bank D. Bank D will subtract 1 100 crore
from its PSL reporting on March 31, 2017 while Bank C will reckon the same towards its achievement.
The PSLC will expire by March 31, 2017.
70. GYAN SANGAM-II

Two days’ “Retreat for Banks and Financial Institutions” called “1T w *PT” “Gyan Sangam” was held on 4th and 5th
March 2016 at State Bank Academy, Gurgaon (Haryana). It is a forum where the highest officials from public
sector banks, the government and the Reserve Bank of India, met to discuss issues facing the sector.
GYAN SANGAM-ISSUES DISCUSSED
1. Centre may offer more to PSBs – BL
· The Centre is willing to give more than the Rs.25,000 crore specified in the Budget for recapitalizing PSBs.
Minister of State for Finance Jayant Sinha said, adding that the RBI had also done its bits by tweaking norms
and easing the capitalization norms of banks.
· With stressed assets of scheduled commercial banks at an estimated Rs.8 lakh crore, Sinha said that
though the Centre had strengthened measures for its resolution, it is the Insolvency Code, once passed in
Parliament that would have a big impact.
· “Stressed assets of scheduled commercial banks are at about Rs.8 lakh crore as against the total loan book
of Rs.69 lakh crore. We will continue to work with those numbers to see how we can further expedite and
strengthen the recovery process,” said Sinha, who was speaking at the second annual Gyan Sangam – a
retreat of heads of public sector financial institutions, the Finance Ministry and the RBI.
· Financial Services Secretary Anjuly Chib Duggal said steps to strengthen the legal framework for recovery
by banks are on the anvil. “They may be announced on Saturday,” she said.
· In 2016-17, allocation of capital to public sector banks would be based on three aspects. “Whether all banks
are meeting their capital adequacy norms, performance of banks and dynamic discussions on their credit
growth,” Sinha said. RBI Governor Raghuram Rajan also addressed the heads of public sector financial
institutions.
2. Six or more anchor banks likely to lead consolidation-Hindu
· The government will identify six to ten public sector banks which will drive the consolidation
process among the state-owned banks, according to bankers.
· Called the anchor banks, they will be identified by October 31, 2016, the bankers told.
· Large lenders like SBI, BoB, PNB and Canara Bank could become the anchor banks, they said. The
government will set up an expert panel for the consolidation process.
· The Bank Board Bureau headed by former Comptroller and Auditor General (CAG) Mr Vinod Rai, which
was recently formed to select chief executives and board members of public sector banks, will also help in
the consolidation process.
3. The Finance Minister Shri Jaitley said that as part of strategy for consolidation of banks, an Experts’ Group
would be constituted immediately to look into all the issues related to same. Briefing the media after
conclusion of the Second Edition of two day ‘Gyan Sangam’ in Gurgaon, Shri Jaitley said that in order to
expedite the process of recovery, need to amend the Debt Recovery Tribunal (DRT) Act and SARFESI Act
was felt during the course of discussions in Retreat and Department of Financial Services (DFS) is looking
into the same.
4. "The debt recovery tribunal will likely be streamlined to shift its processes online and an effort will be taken to
compress the period taken to decide on a case in DRT," Minister of State for Finance Jayant Sinha said.
5. The FM, however, said that the government would consider all suggestions that banks had made and added
that while no decision on any proposals has been taken, the government was actively looking into forming a
bank consolidation committee and tweak laws such as the SARFAESI and with respect to the debt recovery
tribunal.
71. REAL ESTATE REGULATORY BILL

Real estate contributes nine per cent to the national GDP and the Bill’s passage was seen as crucial
to ensuring better regulatory oversight and orderly growth in the industry.
10 THINGS YOU SHOULD KNOW ABOUT IT
1) It establishes the State Real Estate Regulatory Authority for that particular state as the government body to
be approached for redressal of grievances against any builder. This will happen once every state ratifies this
Act and establishes a state authority on the lines set up in the law.
2) This law vests authority on the real estate regulator to govern both residential and commercial real
estate transactions.
3) This Act obliges the developer to park 70% of the project funds in a dedicated bank account. This will ensure that
developers are not able to invest in numerous new projects with the proceeds of the booking money for one
project, thus delaying completion and handover to consumers.
4) This law makes it mandatory for developers to post all information on issues such as project plan, layout,
government approvals, land title status, sub contractors to the project, schedule for completion with the
State Real Estate Regulatory Authority (RERA) and then in effect pass this information on to the
consumers.
5) The current practice of selling on the basis of ambiguous super built-up area for a real estate
project will come to a stop as this law makes it illegal. Carpet area has been clearly defined in the
law.
6) Currently, if a project is delayed, then the developer does not suffer in any way. Now, the law ensures that any
delay in project completion will make the developer liable to pay the same interest as the EMI being paid by the
consumer to the bank back to the consumer.
7) The maximum jail term for a developer who violates the order of the appellate tribunal of the RERA
is three years with or without a fine.
8) The buyer can contact the developer in writing within one year of taking possession to demand after sales
service if any deficiency in the project is noticed.
9) The developer cannot make any changes to the plan that had been sold without the written
consent of the buyer. This puts paid to a common and unpopular practice by developers to
increase the cost of projects.
10) Lastly, every project measuring more than 500 square metres or more than eight apartments will
have to be registered with the RERA.
72. NEW BANKRUPTCY CODE
The Bankruptcy Law Reforms Commission (BLRC) headed by former Law Secretary T.K.
Viswanathan has submitted its final report, including a draft `Insolvency and Bankruptcy
Code‘ (IBC). The bill aims to bring in a modern framework to deal with bankruptcy and
insolvency of a variety of economic players, including individuals, but excluding financial
firms. It seeks to replace the legislation currently in force, including century-old laws
governing personal insolvency.  India ranks an abysmal 136 out of 189 countries in
―resolving insolvency‖ in the Doing Business 2016 report - on average, secured creditors in
India recover 25.7 cents for every dollar of credit from an insolvent firm at the end of
insolvency proceedings, which take 4.3 years to conclude. This is in contrast to the OECD
countries of 72.3 cents and 1.7 years.
CONCEPT: The word Bankruptcy is derived from Italian `banca rotta‘, meaning `broken
bank‘, which may stem from a custom of breaking a moneychanger's bench or counter to
signify his insolvency, or which may be only a figure of speech.
Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes
to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated
by the debtor.
Bankruptcy is not the only legal status that an insolvent person or other entity may have,
and the term bankruptcy is therefore not a synonym for insolvency. In some countries,
including the United Kingdom, bankruptcy is limited to individuals, and other forms of
insolvency proceedings (such as liquidation and administration) are applied to companies. In
the US, bankruptcy is applied more broadly to formal insolvency proceedings.
INDIA‟S STATUS ON BANKRUPTCY LAW: India does not have a clear law on corporate
bankruptcy even though individual bankruptcy laws have been in existence since 1874. The
current law in force was enacted in 1920 called the Provincial Insolvency Act. The legal
definitions of the terms bankruptcy, insolvency, liquidation and dissolution are contested in
the Indian legal system. There is no regulation or statute legislated upon bankruptcy which
denotes a condition of inability to meet a demand of a creditor as is common in many other
jurisdictions. Winding up of companies is in the jurisdiction of the courts which can take a
decade even after the company has actually been declared insolvent. On the other hand,
supervisory restructuring at the behest of the Board of Industrial and Financial
Reconstruction is generally undertaken using receivership by a public entity. Personal
insolvency falls in the concurrent list of the Constitution allowing both the Central and State
governments to legislate on that subject.
NEED OF BANKRUPTCY LAW IN INDIA: In the Budget 2015-16 presented to the

Parliament, the Finance Minister stated that the bankruptcy law reforms, that brings about
legal certainty and speed, has been identified as a key priority for improving the ease of
doing business. Further, he stated that SICA (Sick Industrial Companies Act) & BIFR
(Bureau for Industrial and Financial Reconstruction) have failed in achieving these
objectives. The Govt. will bring a comprehensive Bankruptcy Code in fiscal 2015-16, that
will meet global standards & provide necessary judicial capacity.
The failure of businesses impacts employees, shareholders, lenders, and the broader
economy. In a country like India particularly, because of delays in making decisions on the
viability of businesses, tactics employed by company promoters to delay reorganization or
attempts to sell
off assets, changes of management, or litigation that goes on and on the drag on new
business units, jobs, income generation & economic growth can be significant.
 Under India‘s current bankruptcy laws, individuals can go to jail for failing to repay just
`500/-. India does have some laws - including one on Securitisation and Enforcement of
Security - and other mechanisms, like Corporate Debt Restructuring or CDR, to address the
problem of insolvency of firms. But the fact is some of these laws, such as the Sick
Industrial Companies Act or SICA, have not worked because of inefficient enforcement and
court delays.
 According to Dr. Raghuram Rajan, Governor, RBI, a crucial aspect of the bankruptcy
code is protection for unsecured creditors. Bringing such investors under the law would
give them more confidence to lend to long-term projects such as building roads, ports and
power plants.
 Companies in India now can only get help if they‘ve been operating for at least five
years. They are declared ―sick" only if they‘ve accumulated losses exceeding net worth,
and identified as ailing if they lose 50 percent of its value or fail to repay debts for three
consecutive quarters.
 The new law will tackle this by providing information on creditworthiness at the touch
of a button. Experts brought in to revive or wind up an ailing company would be strictly
regulated to avoid malpractices, such as support for management that‘s out to defraud
creditors or deny employees their rights.
 As per HSBC Holdings Plc estimates, about half of India‘s 575 stalled projects are stuck
due to policy related issues. Formalizing an effective bankruptcy code, setting up tribunals
to tackle financial distress and recover debt are therefore among critical reforms needed.
 As per the World Bank data, creditors in India recover about 25.7 cents in the dollar in
the 4.3 years that it takes to resolve insolvency. In contrast, creditors in USA recover
80.4 cents in the U.S. after less than half that time. The inability to collect on dues has
also locked up funds at banks, with stressed assets at the highest level in more than a
decade.
 At present, although banks have the power under the Sarfaesi Act to take possession of
assets of a defaulter if demand to pay up dues were not met for two months, such
recovery is often challenged in debt recovery tribunals. The tribunal decisions are also
subsequently appealed against at high courts, delaying the rescue as well as winding up
of unviable companies.
 Also, the revival and winding up proceedings under the Board for Industrial & Financial
Reconstruction (BIFR) provided for by Sick Industrial Companies Act is fraught with
delays, with promoters of defaulting companies often seen to be using the protection
under this scheme to avoid making payments.
 PROPOSAL TO IMPLEMENT NEW BANKRUPTCY CODE AND ITS IMPLICATIONS:

 A new bankruptcy code to hasten pace of liquidation in stress cases has been proposed
in India too. A government panel has sought the overhaul of the bankruptcy framework to
allow the speedy winding up of failed businesses to protect shareholders and lenders,
aiming to modernise an outdated system that drags out closure proceedings.
 The National Democratic Alliance (NDA) government is likely to propose amendments
to six laws towards bringing in the new bankruptcy code for companies, partnerships and
individuals. Besides, the Government will also repeal two pre-Independence laws – the
Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920
dealing with personal insolvency cases so that the new Insolvency and Bankruptcy Bill,
when enacted, could provide a comprehensive corporate rescue framework.
 Amending the Companies Act regarding selection of members of the proposed National
Company Law Tribunal (NCLT) and subsuming the relevant provisions of three other laws
 Sarfaesi Act, The Recovery of Debt Due to Banks and Financial Institutions Act, & The
High Courts Act - in the bankruptcy code are on the cards.
 At present, rights of both the borrowers and the lenders are protected under separate
laws and are adjudicated by different authorities, giving rise to conflicting judgments and
delays in reviving and liquidating non-viable companies.
 The Bankruptcy Law Reform Commission headed by former law secretary TK

Viswanathan has suggested a timeline of 180 days - extendable by 90 days and a new
regulator to oversee the process. It has also laid down a clear and speedy system for
early identification of financial distress and revival of Co. and also to deal with applications
for resolving cases of insolvency or bankruptcy.
 The commission has recommended new institutions and structures for a fresh regime
that will encourage entrepreneurship and foster a startup culture. The government has
indicated it will move a Bill in the winter session of Parliament to give effect to the
recommendations, addressing one of the key issues that has kept India low on the ease of
doing business rankings. The timelines are on par with international norms for insolvency
resolution.
 During this period, the management of the distressed firm or debtor could be placed in
the hands of a resolution professional - a new class of professionals equipped to deal with
such cases, who would be supervised by a proposed new regulator. The proposal also
envisages them getting into talks to revive firms, and work out a repayment plan.
 A Debt Recovery Tribunal will be the adjudicating authority over both individuals and
unlimited liability partnership firms. The National Company Law Tribunal will be the
adjudicating authority with jurisdiction over companies with limited liability.
 The bankruptcy code proposed by the Viswanathan panel also recommended a six-
month moratorium on debt recovery action by lenders, during which, the company would
be run by a tribunal appointed receiver. Under the existing law, the automatic stay on
loan recovery starts from the day a sick company registers with the BIFR and continues
during the pendency of the revival process.
 One of the first steps the government is going ahead with is changing the eligibility and
the selection process of members of the NCLT outlined in the Companies Act, 2013, which
did not get the Supreme Court sanction. NCLT would be the sole body, besides the
proposed NCLT Appellate Tribunal, adjudicating on corporate revival, restructure,
liquidation and amalgamation processes once they come into force.
 Having a unified structured and robust bankruptcy law will protect the rights of
borrowers and lenders, clarify the risks associated with lending, foster predictability, and
make debt collection through insolvency proceedings more certain, thereby facilitating
credit lending. This will lead to an increase in the flow of capital in the economy.
 An efficient and swift insolvency regime ensures greater availability of credit or funds
for businesses by freeing up capital, and is thought to boost innovation and productivity.
 REFORMS FOR FINANCIAL SECTOR INSOLVENCIES:

 The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the
creation of a resolution corporation to monitor financial firms, and intervene before they
go bust. The aim is to either close firms that can‘t be revived or change their
management to protect investors or depositors. This is important because the failure of
large banks or institutions imposes costs on taxpayers in the form of bailouts or capital
infusion. The proposal is to promote the DICGC as resolution corporation.
 The proposals include information utilities that will collect, authenticate and
disseminate financial information from listed companies. An Insolvency Adjudicating
Authority will hear cases by or against debtors. The Debt Recovery Tribunal should be the
adjudicating authority with jurisdiction over individuals and unlimited liability partnership
firms.
 The National Company Law Tribunal (NCLT) should be the adjudicating authority with
jurisdiction over companies and limited liability entities.
 The draft bill has consolidated existing rules relating to insolvency of companies,
limited liability entities, unlimited liability partnerships and individuals, all of which are
currently scattered across a number of laws, into a single legislation. According to the
draft bill, during the transition phase, the Centre will exercise all regulatory powers until
the agency is established. The panel's report suggests that an insolvency resolution plan
prepared by a resolution professional has to be approved by a majority of 75% of the
voting share of financial creditors. As part of the insolvency resolution process, creditors
and debtors will engage in negotiations to arrive at agreeable repayment plans.
 The draft proposes that any proceeding pending before the Appellate Authority for
Industrial and Financial Reconstruction (AAIFR) or the Board for Industrial and Financial
Reconstruction (BIFR) before the new law goes into force should stand abated or stopped.
However, a company in respect of which such proceeding stands abated may make a
reference to Adjudicating Authority within 180 days from the commencement of this law.
73. BASEL & RISK MANAGEMENT

Banks occupy the pride of place in any financial system by virtue of the significant role they
play in spurring economic growth by undertaking maturity transformation and support ing
the crit ical payment systems.
The specificity of banks, the volat ility of financial markets, increased competition and
diversificat ion, however, expose banks torisks and challenges. The protect ion of
depositors‘ interests and ensuring financial stability are two of the major drivers for
putting in place an effective system of supervision of banks.
An effective supervisory system is critical for prevent ing bank failures by ensuring the
safety and soundness of banks.
Reserve Bank of India is ent rusted with the responsibility of supervising the Indian
banking system under various provisions of the Banking Regulat ion Act , 1949 and RBI
Act,1934.
Subsequent to the economic liberalizat ion since the 90s which also manifested in greater
operat ional autonomy for banks and Financial Inst itut ions, RBI‘s approaches to supervision
of banks has also gradually shifted from a more intrusive micro-level intervention towards
prudential regulation and supervision in line with the internat ional best pract ices.
Need for risk management
The substantial losses incurred by a number of banking institutions in the early 1990s
recession experienced globally, triggered the need to manage risks faced by them in a
proactive manner.
Failure of large financial institutions and banks during the various recessionary periods can be
accounted to their failure to recognize and mitigate risks inherent to their business model.
The formation of a global financial market increased the sophistication of transactions
undertaken and called for better mitigation of risks.
With the growing failures due to lack of dynamic oversight, there was felt a need to have a
intermediary layer between the business units and audit function. This has sharpened the
independence of risk management and has led to a broad concept of ‗three lines of defense‘
were the business unit, risk management function and the audit function exercise the lines
of control independently
The introduction of the Basel Capital Accord in 1988 strengthened risk management
framework. More recently, the development of the Basel II Capital Framework has been an
important catalyst. Evident improvement occurred across all aspects of risk management –
its governance, risk management frameworks, risk identification and measurement, and risk
modeling.
What Risk Management is....
A Risk Management program aids in:
 A structured approach to protecting the downside of wanted and unwanted risks
 Promoting a proactive learning and information exchange about the risks across
businesses
 Identifying vulnerable areas, prioritizing risks and proactively managing them
 Understanding the tolerance limits for losses
 A method to shift focus from "cost/benefit" to "risk/reward"
 Enhancing resilience and risk coping capacities
 It is integral to managing business.
What Risk Management is not!!

Risk Management is not...
 a guarantee to avoid all future losses
 limited to compliance and disclosure requirements
 a method to eliminate all risks
 a substitute for internal controls to detect fraud and malfeasance
 just about calculations and measuring risk
 a rigid set of rules that must be followed under all circumstances
 It is not the same year after year....it evolves
Evolution of Risk and Capital Guidelines for Banks – Globally Before 1988 & Before
Basel
No standardisation of measures
 Ratios employed: ratios of capital-total deposits/ assets, and leverage ratio
CAMELS approach widely adopted with 6 parameters (capital adequacy, liquidity, asset
quality) to assess financial stability
1988 – 1996 & 1988 Basel I
Basel I guidelines introduced
 Central focus is on credit risk
 International standardisation with common definition of Capital and standiardisation of
measures
1996 – 2004 & 1996: Basel I modified
Basel I norms modified to include Market Risk
The amendment covered market risks arising from banks‘ open positions in foreign
exchange, traded debt securities, traded equities, commodities and options
2004 – 2009
2004: New Capital Adequacy framework Basel II guidelines issued
 Introduced capital requirement for operational risk management
Guidelines for supervisory review process and market discipline issued 2009 - 2010
2009: Basel II framework modified
Changes to capital requirements for complex and illiquid credit products certain complex
securitizations and exposures to off-balance sheet vehicles proposed
After 2010
2010: Basel III Guidelines issued
Basel III strengthens bank capital requirements and introduces new regulatory
requirements on liquidity management and leverage
 Basel III and Liquidity guidelines issued by RBI .
What is Capital Adequacy Ratio as per BASEL?
It is the ratio of capital (in Form of Tier I + Tier II capital)to risk weighted assets of the
Bank.
BASEL II : Pillar 1
Capital Adequacy Ratio = Regulatory Capital Fund / Risk Weighted Assets ( On & Off B/S) >
=9%
Total Risk weighted assets : 1/9% * ( Capital required for market risk + Operational Risk +
Credit risk )
Guidelines on Implementation of Basel III Capital Regulations in India
The Basel Committee on Banking Supervision (BCBS) issued a comprehensive reform
package entitled ―Basel III: A global regulatory framework for more resilient banks and
banking systems‖ in December 2010, with the objective to improve the banking sector‘s
ability to absorb shocks arising from financial and economic stress, whatever the source,
thus reducing the risk of spillover from the financial sector to the real economy.
The reform package relating to capital regulation, together with the enhancements to
Basel II framework and amendments to market risk
framework issued by BCBS in July 2009, will amend certain provisions of the existing Basel
II framework, in addition to introducing some new concepts and requirements.
BASEL III
Three pillars of BASEL III
1. Minimum Capital Requirement

2. Supervisory Review
3. Market Discipline
Composition of Regulatory Capital
Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio
(CRAR) of 9% on an on-going basis (other than capital conservation buffer and
countercyclical capital buffer etc.). The Reserve Bank will take into account the relevant risk
factors and the internal capital adequacy assessments of each bank to ensure that the
capital held by a bank is commensurate with the bank‘s overall risk profile. This would
include, among others, the effectiveness of the bank‘s risk management systems in
identifying, assessing / measuring, monitoring and managing various risks including interest
rate risk in the banking book, liquidity risk, concentration risk and residual risk. Accordingly,
the Reserve Bank will consider prescribing a higher level of minimum capital ratio for each
bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk
management systems. Further, in terms of the Pillar 2 requirements, banks are expected to
operate at a level well above the minimum requirement. A bank should compute Basel III
capital ratios in the following manner:
Common Equity Tier 1 Capital
Common Equity Tier 1 capital ratio =
Credit Risk RWA* + Market Risk RWA + Operational Risk RWA
Tier 1 capital ratio = Eligible Tier 1 Capital
Credit Risk RWA* + Market Risk RWA + Operational Risk RWA
Total Capital (CRAR#) = Eligible Total Capital

Credit Risk RWA + Market Risk RWA + Operational Risk RWA
* RWA = Risk weighted Assets;
# Capital to Risk Weighted Asset Ratio
Elements of Regulatory capital and the criteria for their inclusion in the definition of
regulatory capital
Components of capital : Total regulatory capital will consist of the sum of the
following categories:
i. Tier 1 Capital ( going –concern capital )
a. Common Equity Tier 1
b. Additional Tier 1
ii. Tier 2 Capital ( going –concern capital)
Components of Capital
Regulatory Capital As % of RWA
i Minimum Common Equity Tier 1 ratio 5.5
ii Capital conservation buffer (comprised of Common Equity) 2.5
iii Minimum Common Equity Tier 1 ratio plus 8.0
capital conservation buffer [(i)+(ii)]
iv Additional Tier 1 Capital 1.5
v Minimum Tier 1 capital ratio [(i) +(iv)] 7.0
vi Tier 2 capital 2.0
vii Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0
viii Minimum Total Capital Ratio plus capital conservation buffer 11.5
[(vii)+(ii)]
Common Equity Tier 1 Capital Common Equity - Indian Banks
A. Elements of Common Equity Tier 1 Capital:
 Common shares (paid-up equity capital) issued by the bank which meet the criteria
for classification as common shares for regulatory purposes .
Additional
 Stock surplus Tier 1 (share premium) resulting from the issue of common
shares;
 Statutory reserves;
 Capital reserves representing surplus arising out of sale proceeds of assets;
 Other disclosed free reserves, if any;
 Balance in Profit & Loss Account at the end of the previous financial year;
 Banks may reckon the profits in current financial year for CRAR calculation on a
quarterly basis provided the incremental provisions made for non-performing assets
at the end of any of the four quarters of the previous financial year have not deviated
more than 25% from the average of the four quarters.
 Revaluation reserves at a discount of 55% ( subject to certain condition )
 Foreign currency translation reserve arising due to transalation of financial
statements of their foreign operations in terms of accounting standard ( AS ) 11 as
CET 1 capital at a discount of 25 % ( subject to certain condition)
DTAs which relate to timing differences (other than those related to accumulated losses)
may, instead of full deduction from CET1 capital, be recognised in the CET1 capital up to
10% of a bank‘s CET1 capital, at the discretion of banks. Further, the limited recognition
of DTAs as above along with limited recognition of significant investments in the common
shares of unconsolidated financial (i.e. banking, financial and insurance) entities taken
together must not exceed 15% of the CET1 capital,
Criteria for Classification as Common Shares for Regulatory Purposes: Common
Equity is recognised as the highest quality component of capital and is the primary form of
funding which ensures that a bank remains solvent.
Additional Tier 1 Capital
Additional Tier 1 Capital - Indian Banks A. Elements of Additional Tier 1 Capital :
 Perpetual Non-Cumulative Preference Shares (PNCPS), which comply with the

regulatory requirements.
 Stock surplus (share premium) resulting from the issue of instruments
included in Additional Tier 1 capital;
 Debt capital instruments eligible for inclusion in Additional Tier 1 capital, which
comply with the regulatory requirements.
 Any other type of instrument generally notified by the Reserve Bank from time to
time for inclusion in Additional Tier 1 capital;
 While calculating capital adequacy at the consolidated level, Additional Tier 1

instruments issued by consolidated subsidiaries of the bank and held by third parties
which meet the criteria for inclusion in Additional Tier 1 capital and
 Less: Regulatory adjustments / deductions applied in the calculation of Additional
Tier 1 capital [i.e. to be deducted from the sum of items (i) to (v)].
Elements of Tier 2 Capital : Under Basel III, there will be a single set of criteria governing
all Tier 2 debt capital instruments.
Tier 2 Capital - Indian Banks
A. Elements of Tier 2 Capital
(i) General Provisions and Loss Reserves
a. Provisions or loan-loss reserves held against future, presently unidentified
losses,
which are freely available to meet losses which subsequently materialize, will qualify
for inclusion within Tier 2 capital. Accordingly, General Provisions on Standard Assets,
Floating Provisions, incremental provisions in respect of unhedged foreign currency
exposures, Provisions held for Country Exposures, Investment Reserve Account,
excess provisions which arise on account of sale of NPAs and ‗countercyclical
provisioning buffer‘ will qualify for inclusion in Tier 2 capital. However, these items
together will be admitted as Tier 2 capital up to a maximum of 1.25% of the total
credit risk-weighted assets under the standardized approach. Under Internal Ratings
Based (IRB) approach, where the total expected loss amount is less than total eligible
provisions, banks may recognise the difference as Tier 2 capital up to a maximum of
0.6% of credit-risk weighted assets calculated under the IRB approach.
b. Provisions ascribed to identified deterioration of particular assets or loan
liabilities, whether individual or grouped should be excluded. Accordingly, for
instance, specific provisions on NPAs, both at individual account or at portfolio level,
provisions in lieu of diminution in the fair value of assets in the case of restructured
advances, provisions against depreciation in the value of investments will be
excluded.
(ii) Debt Capital Instruments issued by the banks;
(iii) Preference Share Capital Instruments [Perpetual Cumulative Preference Shares
(PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable
Cumulative Preference Shares (RCPS)] issued by the banks;
(iv) Stock surplus (share premium) resulting from the issue of instruments included
in Tier 2 capital;
(v) While calculating capital adequacy at the consolidated level, Tier 2 capital
instruments issued by consolidated subsidiaries of the bank and held by third parties
which meet the criteria for inclusion in Tier 2 capital .
(vi) Any other type of instrument generally notified by the Reserve Bank from time to
time for inclusion in Tier 2 capital; and
(vii) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2
capital [i.e. to be deducted from the sum of items (i) to (vii)].
Capital Conservation Buffer
The capital conservation buffer (CCB) is designed to ensure that banks build up capital
buffers during normal times (i.e. outside periods of stress) which can be drawn down as
losses are incurred during a stressed period. The requirement is based on simple capital
conservation rules designed to avoid breaches of minimum capital requirements.
Outside the period of stress, banks should hold buffers of capital above the regulatory
minimum. When buffers have been drawn down, one way banks should look to rebuild
them is through reducing discretionary distributions of earnings. This could include
reducing dividend payments, share buybacks and staff bonus payments. Banks may
also choose to raise new capital from the market as an alternative to conserving
internally generated capital. However, if a bank decides to make payments in excess
of the constraints imposed as explained above, the bank, with the prior approval of
RBI, would have to use the option of raising capital from the market equal to the
amount above the constraint which it wishes to distribute.
In the absence of raising capital from the market, the share of earnings retained by
banks for the purpose of rebuilding their capital buffers should increase the nearer their
actual capital levels are to the minimum capital requirement. It will not be appropriate
for banks which have depleted their capital buffers to use future predictions of recovery
as justification for maintaining generous distributions to shareholders, other capital
providers and employees. It is also not acceptable for banks which have depleted their
capital buffers to try and use the distribution of capital as a way to signal their financial
strength. Not only is this irresponsible from the perspective of an individual bank, putting
shareholders' interests above depositors, it may also encourage other banks to follow
suit. As a consequence, banks in aggregate can end up increasing distributions at the
exact point in time when they should be conserving earnings.
The capital conservation buffer can be drawn down only when a bank faces a systemic
or idiosyncratic stress. A bank should not choose in normal times to operate in the
buffer range simply to compete with other banks and win market share. This aspect
would be specifically looked into by Reserve Bank of India during the Supervisory
Review and Evaluation Process. If, at any time, a bank is found to have allowed its
capital conservation buffer to fall in normal times, particularly by increasing its risk
weighted assets without a commensurate increase in the Common Equity Tier 1 Ratio
(although adhering to the restrictions on distributions), this would be viewed seriously.
In addition, such a bank will be required to bring the buffer to the desired level within a
time limit prescribed by Reserve Bank of India. The banks which draw down their capital
conservation buffer during a stressed period should also have a definite plan to
replenish the buffer as part of its Internal Capital Adequacy Assessment Process and
strive to bring the buffer to the desired level within a time limit agreed to with Reserve
Bank of India during the Supervisory Review and Evaluation Process.
The framework of capital conservation buffer will strengthen the ability of banks to
withstand adverse economic environment conditions, will help increase banking sector
resilience both going into a downturn, and provide the mechanism for rebuilding capital
during the early stages of economic recovery. Thus, by retaining a greater proportion of
earnings during a downturn, banks will be able to help ensure that capital remains
available to support the ongoing business operations / lending activities during the period
of stress. Therefore, this framework is expected to help reduce pro-cyclicality.
Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common
Equity Tier 1 capital, above the regulatory minimum capital requirement of 9%. Capital
distribution constraints will be imposed on a bank when capital level falls within this range.
However, they will be able to conduct business as normal when their capital levels fall into
the conservation range as they experience losses. Therefore, the constraints imposed are
related to the distributions only and are not related to the operations of banks. The
distribution constraints imposed on banks when their capital levels fall into the range
increase as the banks‘ capital levels approach the minimum requirements.
Countercyclical Capital Buffer
The aim of the Countercyclical Capital Buffer (CCCB) regime is twofold. Firstly, it requires
banks to build up a buffer of capital in good times which may be used to maintain flow of
credit to the real sector in difficult times. Secondly, it achieves the broader macro-prudential
goal of restricting the banking sector from indiscriminate lending in the periods of excess
credit growth that have often been associated with the building up of system-wide risk.
The CCCB may be maintained in the form of Common Equity Tier 1 (CET 1) capital only, and
the amount of the CCCB may vary from 0 to 2.5% of total risk weighted assets (RWA) of the
banks
The CCCB decision would normally be pre-announced with a lead time of 4 quarters.
However, depending on the CCCB indicators, the banks may be advised to build up requisite
buffer in a shorter span of time.
The credit-to-GDP gap shall be the main indicator in the CCCB framework in India.
However, it shall not be the only reference point and shall be used in conjunction with GNPA
growth. The Reserve Bank of India shall also look at other supplementary indicators for
CCCB decision such as incremental C-D ratio for a moving period of three years (along with
its correlation with credit-to-GDP gap and GNPA growth), Industry Outlook (IO) assessment
index (along with its correlation with GNPA growth) and interest coverage ratio (along with
its correlation with credit-to-GDP gap). While taking the final decision on CCCB, the Reserve
Bank of India may use its discretion to use all or some of the indicators along with the
creditto-GDP gap.
Basel III Capital regulations
As per the extant regulations on ‗Basel III Capital Regulations‘ treatment of certain balance
sheet items on banks‘ capital, differs from what is prescribed by the Basel Committee on
Banking Supervision (BCBS). It has also been represented to the Reserve Bank that the
current framework places on the banks in India the need to raise more capital than would be
required had the Basel rules been applied as they are.
The Reserve Bank has reviewed the position in this regard and it has been decided to align,
to some extent, the current regulations on treatment of these balance sheet items, for the
purpose of regulatory capital, with the BCBS guidelines. Accordingly RBI has decided as
detailed herein below:
1.Treatment Of Revaluation Reserves:
Revaluation reserves arising out of change in the carrying amount of a bank‘s property
consequent upon its revaluation may, at the discretion of banks, be reckoned as CET1
capital at a discount of 55%, instead of as Tier 2 capital under extant regulations, subject to
meeting the following conditions:
a) Bank is able to sell the property readily at its own will and there is no legal impediment
in selling the property;
b) The revaluation reserves are shown under Schedule 2: Reserves & Surplus in the
Balance Sheet of the bank;
c) Revaluations are realistic, in accordance with Indian Accounting Standards.
d) Valuations are obtained, from two independent valuers, at least once in every 3 years;
where the value of the property has been substantially impaired by any event, these are to
be immediately revalued and appropriately factored into capital adequacy computations;
e) The external auditors of the bank have not expressed a qualified opinion on the
revaluation of the property;
The instructions on valuation of properties and other specific requirements as per extant
guidelines on ‗Valuation of Properties - Empanelment of Valuers‘ are strictly adhered to.
II) Treatment Of Foreign Currency Translation Reserve (FCTR):
Banks may, at their discretion, reckon foreign currency translation reserve arising due to
translation of financial statements of their foreign operations in terms of Accounting
Standard (AS) 11 as CET1 capital at a discount of 25% subject to meeting the following
conditions:
The FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the
bank;
The external auditors of the bank have not expressed a qualified opinion on the FCTR.
III) Treatment of Deferred Tax Assets (DTAS):
Deferred tax assets (DTAs) associated with accumulated losses and other such assets should
be deducted in full from CET1 capital.
a) DTAs which relate to timing differences (other than those related to accumulated
losses) may, instead of full deduction from CET1 capital, be recognised in the CET1 capital
up to 10% of a bank‘s CET1 capital, at the discretion of banks.
b) Further, the limited recognition of DTAs as above along with limited recognition of
significant investments in the common shares of unconsolidated financial (i.e. banking,
financial and insurance) entities taken together must not exceed 15% of the CET1
capital, calculated after all regulatory adjustments. However, banks shall ensure that
the CET1 capital arrived at after application of 15% limit should in no case result in
recognising any item more than the 10% limit applicable individually.
The amount of DTAs which are to be deducted from CET1 capital may be netted with
associated deferred tax liabilities (DTLs) provided that:
a) Both the DTAs and DTLs relate to taxes levied by the same taxation authority and
offsetting is permitted by the relevant taxation authority;
b) b)The DTLs permitted to be netted against DTAs must exclude amounts that have been
netted against the deduction of goodwill, intangibles and defined benefit pension assets;
and
c) The DTLs must be allocated on a pro rata basis between DTAs subject to deduction
from CET1 capital as above.
d) The amount of DTAs which is not deducted from CET1 capital will be risk weighted at
250% as in the case of significant investments in common shares not deducted from
bank‘s CET1 capital.
74. LIQUIDITY COVERAGE RATIO ( LCR )
In the backdrop of the global financial crisis that started in 2007, the Basel Committee on
Banking Supervision (BCBS) proposed certain reforms to strengthen global capital and
liquidity regulations with the objective of promoting a more resilient banking sector. In this
regard, the Basel III rules text on liquidity - "Basel III : International framework for liquidity
risk measurement, standards and monitoring" was issued in December 2010 which
presented the details of global regulatory standards on liquidity. Two minimum standards
viz. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for funding liquidity
were prescribed by the Basel Committee for achieving two separate but complementary
objectives.
The LCR promotes short-term resilience of banks to potential liquidity disruptions by
ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute
stress scenario lasting for 30 days. The NSFR promotes resilience over longer-term time
horizons by requiring banks to fund their activities with more stable sources of funding on an
ongoing basis.
The LCR standard aims to ensure that a bank maintains an adequate level of unencumbered
High Quality Liquid Assets (HQLAs) that can be converted into cash to meet its liquidity
needs for a 30 calendar day time horizon under a significantly severe liquidity stress
scenario specified by supervisors. At a minimum, the stock of liquid assets should enable the
bank to survive until day 30 of the stress scenario, by which time it is assumed that
appropriate corrective actions can be taken.
LCR = STOCK OF HIGH QUALITY LIQUID ASSETS (HQLA) / TOTAL NET CASH OUTFLOWS
OVER THE NEXT 30 CALENDAR DAYS
Bank with excess SLR at an advantage: Banks having government securities above what is
mandated will find it easy to meet the new Liquidity Coverage Ratio (LCR) norms of the
Reserve Bank of India. Banks are required to invest in government papers at least 21.5% of
their net demand and time liabilities, termed the statutory liquidity ratio SLR. Based on
BASEL recommendation central bank prescribed that banks needed to maintain a 60% LCR
from January 1, 2015, to be increased in a phased manner to 100% by January 1, 2019.
Bankers said lenders with a higher SLR and stronger CASA deposits will find it easier to
maintain the ratio. Banks with a lower proportion of these low-cost deposits are likely to get
impacted on net interest margin.
The LCR requirement would be binding on banks from January 1, 2015; with a view to
provide a transition time for banks, the requirement would be minimum 60% for the
calendar year 2015 i.e. with effect from January 1, 2015, and rise in equal steps to reach
the minimum required level of 100% on January 1, 2019, as per the time-line given below
January 1 January 1 January 1 January 1 January 1

2015 2016 2017 2018 2019
Minimum 60% 70% 80% 90% 100%
LCR
75. SPECIAL MENTION ACCOUNTS
RBI has implemented the new framework on stressed accounts. The thrust is on
identification of the stress in the accounts due to financial as well as non financial
parameters. While financial parameters are overdues in the account due to non recovery
of interest and / or principal / instalments, the scope of non financial parameters have
been widened. RBI has stipulated three types of SMA categories
Under SMA -0, RBI has identified the following areas.

1. Delay of 90 days or more in
a) Submission of stock statement/ other stipulated operating control statements such as
QOS, HOS and ABS.
b) Credit monitoring or financial statements or
c) Non renewal of facilities based on audited financials.
3.
a) Actual sales / operating profits falling short of projections accepted for loan sanction by
40% or more.
b) A single event of non co-operation / prevention from conduct of stock audits by Banks
c) Reduction of Drawing Power (DP) by 20% or more after a stock audit
d) Evidence of diversion of funds for unapproved purpose.
e) Drop in internal risk rating by 2 or more notches in a single review.
3.
a) Return of 3 or more cheques (or electronic debit instructions ) issued by borrowers in
30 days, on grounds of non availability of balance / DP in the account.
b) Return of 3 or more bills/ cheques discounted or sent under collection by the borrower.
4. Devolvement of Deferred Payment Guarantee (DPG) instalments or Letters of Credit
(LCs) or invocation of Bank Guarantees (BGs) and its non payment within 30 days.
5. Third request for extension of time either for creation or perfection of securities as against
time specified in original sanction terms or for compliance with any other terms and
conditions of sanction.
6. Increase in frequency of overdrafts in current accounts.
7.The borrower reporting stress in the business and financials.
8.Promoter(s) pledging/ selling their shares in the borrower Company due to financial stress.
 RBI has set up a Central Repository of Information on Large Credits (CRILC) to collect,
store and disseminate credit data to lenders. The credit information on all the
borrowers having aggregate fund based and nonfund based exposure of T5 Crore and
above and the details of all Current Accounts of the customers with outstanding
balance (debit or credit) of T1 Crore and above are also to be furnished to CRILC. As
soon as an account is reported to CRILC as SMA-2, a Joint Lenders Forum (JLF) shall
be formed mandatorily, if the aggregate fund based and non-fund based exposure of
lenders to the account is 100 crore and above. However, it is possible that a borrower
may request the lenders, with substantiated grounds, for formation of a JLF on account
of imminent stress. When such a request is received by a lender, the account shall be
reported to CRILC as SMA-0. Further, the lenders shall also form the JLF immediately if
the Aggregating exposure is 100 crore and above.JLF finalize the Corrective Action
Plan (CAP) and place it before empowered group of lenders ,which will be tasked to
approve the rectification/restructuring under CAP.Generally restructuring cases taken
up by JLF only in respect of standard, SMA or sub standard by one or more lenders of
the JLF.
 If account is assessed viable in TEV study and JLF-EG concurs with the assessment
,JLF may decide on restructuring of an account classified as doubtful in the books of
one or more lenders similar to SMA-2 and substandard assets
 Dissenting lender who do not want to participate in restructuring of accounts as CAP
(with or without finance), have option to exit by selling its exposure to existing
lender(s). Such dissenting lender cannot continue with existing exposure and
simultaneously not agreeing for restructuring as CAP.
 The new lender may not be required to commit additional finance. In such cases
additional finance pertaining to additional Banker will be met by existing lenders on a
pro rata basis.
 If Escrow maintaining Bank, does not appropriate proceeds of repayment among the
lenders ,in such case escrow maintaining bank will attract asset classification which is
lowest among
lending member bank and corresponding ( accelerated) provisioning requirement.Such
accelerated provisioning will be for a period of one year from effective date of
provisioning or till rectification of the error whichever is later.
 Penal provision in following cases will be applicable for one year from date of
imposition or rectification of defect ,whichever is later
 Intent to conceal the actual status or evergreen account or failure to report SMA
status to CRILC
 Lenders, who have agreed to JLF decision and are signatories to ICA and DCA, but
change their stance later on, or delay/refuse to implement the package.
 Lenders fail to convene JLF or agree upon a common CAP within stipulated time
frame.
 Accelerated provisioning for loans to companies having director/s, whose name
appears in the list of willful defaulters.
 Strategic Debt Restructuring ( SDR ) Scheme :JLF will have the option to initiate SDR
to effect change of management of borrower in case of failure of rectification or
restructuring as CAP.
76. BANKING CODES AND STANDARDS BOARD OF INDIA
In November 2003, RBI constituted the Committee on Procedures and Performance Audit of
Public Services under the Chairmanship of Shri S. S. Tarapore (former Deputy Governor
RBI) to address the issues relating to availability of adequate Banking Services to common
man. The mandate to the Committee included identification of factors that inhibited the
attainment of best customer services and suggesting steps to improve the quality of banking
services to individual customers. The Committee felt that in an effort to continuously
upgrade the package of services that banks offered to their customers there was a need of
benchmarking of such services. After in depth study at the grass root level the Committee
concluded that there was an institutional gap for measuring the performance of banks
against a bench mark reflecting the best practices (Code and Standards). Therefore, the
Committee recommended setting up of the Banking Codes and Standards Board of India
broadly on the lines of Banking Codes and Standards Board functioning in U.K.
 Among the existing institutional structures, the Scheme of Banking Ombudsman, which
has been functioning for quite some time, does not look into systemic issues with a
view to enforcing a prescribed quality of service. Ideally, such a function should be
performed by a Self Regulatory Organisation (SRO) but in view of the existing
framework of the banking sector in India, it was felt that an independent, autonomous
Board will be best suited for the function. Therefore, Dr. Y.V. Reddy, Governor, Reserve
Bank of India, in his Monetary Policy Statement (April 2005) announced setting up of
the banking Codes and standards Board of India in order to ensure that comprehensive
code of conduct for fair treatment of customers was evolved and adhered to.
 The Banking Codes and Standards Board of India has been registered as a separate
society under the Societies Registration Act, 1860. Therefore, it would function as an
independent and autonomous body.
 The Banking Codes and Standards Board of India is not a Department of the RBI.
Reserve Bank has agreed to lend it financial support for a limited period. It is an
independent banking industry watch dog to ensure that the consumer of banking
services get what they are promised by the banks.
 To ensure that the Board really functions as an autonomous and independent
watchdog of the industry, the Reserve Bank also decided to extend financial support to
the Board by way of meeting its full expenses for the first five years. This was to
enable the Board to reach its economic critical mass that will make it truly independent
in its functioning and take a view on any bank without its existence coming under any
threat. On its part, RBI would derive supervisory comfort in case of banks which are
members of the Board. In substance, the Board has been set up to ensure that
common man as a consumer of financial services from the banking Industry is in a no
way at a disadvantageous position and really gets what it has been promised
Relationship between RBI and BCSBI
The Board has been set up as an independent and autonomous organization. But it is
strongly supported by RBI as RBI would bear the financial cost of this institution in the initial
period of five years in the best interests of the entire banking system and more particularly
the interests of the common person as customer. Although the membership of BCSBI is
optional, RBI is expected to have more intensive oversight on banks that do not become
members of BCSBI.
Functions of BCSBI
The initiative to establish the Board is driven by the banks themselves as this would lead to
the empowerment of their customers for a higher level of satisfaction with regard to the
services offered, through a significant and enduring improvement in customer services.
Internationally, such codes are developed by associations of bankers as self-regulatory
exercises. The IBA and the BCSBI have drawn up the voluntary codes in general terms and
the codes will be followed by detailed Guidance Notes on each of the code.
The adherence to the codes by banks will be monitored by BCSBI. The central task of the
Board would, therefore, be to ensure that the subscriber banks file detailed compliance
reports to the Board on observance of voluntary codes and that they are followed
rigorously.
If, after a thorough assessment the Board is still not satisfied with the compliance, the
Board could contemplate sanctions which may include the following :
1. Follow "Name & Shame" policy. That is publication by the Board of the bank's name
and details of the breach;
2. Inclusion of details of the breach in the Board's Annual Report;
3. Issue of instructions to banks on remedial action;
4. Warning or reprimand;
5. Public censure; and
6. Cancellation of registration with the Board.
While provisions for penal action exist, the basic approach of BCSBI is to take collaborative
remedial action rather than through penal measures.
Of the 79 scheduled commercial banks, 70 banks have enrolled as members of the BCSBI
and have voluntarily adopted the 'Code of Bank's Commitment to Customers'.
BCSBI has 2 codes : Codes of Bank's Commitment to customers (2014) & Codes of
Bank's commitment to Micro and Small Enterprises(2015)
Apart from Hindi & English these Codes are available in 10 regional languages viz. Assam,
Bengali, Gujarati, Kannada, Malayalam, Marathi, Punjabi, Tamil, Telugu and Urudu.
AIMS AND OBJECTIVES OF BCSBI
1. To plan, evolve, prepare, develop, promote and publish voluntary comprehensive

Codes and standards for Banks, providing for fair treatment to their customers.
2. To function as an independent and autonomous watch dog to monitor and to
ensure that the Banking Codes and Standards voluntarily adopted by Banks are
adhered to, in true spirit
3. To conduct and undertake research of the Codes and Standards currently in vogue
in and outside India.
4. . To enter into covenants with on observations of the Codes and Standards and for
that purpose to train employees of Banks about the Banking Codes.
Based on the overall score of the banks, a rating has been awarded from out of 4
categories. These ratings are placed by BCSBI in Public Domain.
Score 85 and above 1 High level compliance
Score 70 to less than 85 2 Above average level of compliance
Score 60 to less than 70 3 Average level of compliance
Score below 60 4 Below average level of compliance
77. 5/25 SCHEME OF RBI5/25 SCHEME OF RBI
 This is a scheme introduced by RBI in July 2014 relating to Structuring of Long Term
Project loans to Infrastructure and core Industries.
 During the last decade, commercial banks have become the primary source of long
term debt financing to projects in infrastructure and core industries. Infrastructure and
core industries projects are characterized by long gestation periods and large capital
investments. The long maturities of such project loans consist of the initial construction
period and the economic life of the asset /underlying concession period (usually 25-30
years). In order to ensure stress free repayment of such long gestation loans, their
repayment tenor should bear some correspondence to the period when cash flows are
generated by the asset.
 Banks were representing to RBI that they are unable to provide such long tenor
financing owing to asset-liability mismatch issues. To overcome the asset liability
mismatch, they invariably restrict their finance to a maximum period of 12-15 years.
After factoring in the initial construction period and repayment moratorium, the
repayment of the bank loan is compressed to a shorter period of 10-12 years (with
resultant higher loan installments), which not only strains the viability of the project,
but also constrains the ability of promoters to generate fresh equity out of internal
generation for further investments. It might also lead to levying higher user charges in
the case of infrastructure projects in order to ensure that greater cash flows are
generated to service the loans. As a result of these factors, some of the long term
projects have been experiencing stress in servicing the project loan.
 With a view to overcoming these problems, banks have requested that they may be
allowed to fix longer amortization period for loans to projects in infrastructure and core
industries sectors, say 25 years, based on the economic life or concession period of the
project, with periodic refinancing, say every 5 years.
 Against this backdrop, in the Union Budget 2014-15, the Hon‘ble Finance Minster
announced that:
 ―Long term financing for infrastructure has been a major constraint in encouraging
larger private sector participation in this sector. On the asset side, banks will be
encouraged to extend long term loans to infrastructure sector with flexible structuring
to absorb potential adverse contingencies, sometimes known as the 5/25 structure. On
the liability side, banks will be permitted to raise long term funds for lending to
infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and
Priority Sector Lending (PSL).‖
 On this RBI has the following in respect of projects in infrastructure and core industries
  Allowing longer tenor of the loan say 25 years (within the useful life / concession
period of the project) with periodic refinancing (Refinancing Debt Facility) of balance
debt, the tenor of which could be fixed at the time of each refinancing, within the
overall amortization period.
 This would mean that the bank, while assessing the viability of the project, would be
allowed to accept the project as a viable project where the average debt service
coverage ratio (DSCR) and other financial and non-financial parameters are acceptable
over a longer amortization period of say 25 years, but provide funding (Initial Debt
Facility) for only, say, 5 years with refinancing of balance debt being allowed by
existing or new banks (Refinancing Debt Facility) or even through bonds; and
 The refinancing (Refinancing Debt Facility) after each of these 5 years would be of the
reduced amounts determined as per the Original Amortization Schedule.
79. MAKE IN INDIA

Make in India is an initiative of the GOI to encourage MNCs as well as domestic,
companies to manufacture their products in India. It was launched by PM on 25th
September 2014.
India would emerge, after initiation of the program in 2015, as the top destination globally
for FDI, surpassing China as well as the USA.
The major objective behind the initiative is to focus on job creation and skill enhancement
in 25 sectors of the economy. The initiative also aims at high quality standards and
minimizing the impact on the environment. The initiative hopes to attract capital and
technological investment in India.
Sectors : 25 major 'Make in India' focus areas:

Automobiles, Automobile Components, Aviation, Biotechnology, Chemicals, Construction,
Defence manufacturing, Electrical Machinery, Electronic systems, Food Processing, IT and
BPM, Leather, Media and Entertainment, Mining, Oil and Gas, Pharmaceuticals, Ports and
Shipping, Railways, Renewable Energy, Roads and Highways, Space, Textiles and Garments,
Thermal Power, Tourism and Hospitality, Wellness.
Government has allowed 100% FDI in all sectors except Space (74%), Defence (49%) and
News Media (26%)
National Manufacturing: GOI aim:
 To increase manufacturing sector growth to 12-14% per annum over the medium
term.
 To increase the share of manufacturing in the country‘s Gross Domestic Product from
16% to 25% by 2022.
 To create 100 million additional jobs by 2022 in manufacturing sector.
 To create appropriate skill sets among rural migrants and the urban poor for inclusive
growth.
 To increase the domestic value addition and technological depth in manufacturing.
 To enhance the global competitiveness of the Indian manufacturing sector.
 To ensure sustainability of growth, particularly with regard to environment.
80. UNION BUDGET : 2016-17
The Finance Minister presented the Union Budget 2016-17 which can be summed up as pragmatic,
wide-ranging and inclusive giving priority to fiscal discipline. On the fiscal math, the deficit target has
been set at -3.9 percent of GDP, deviating modestly from the roadmap's target of -3.6 percent.
Affirming that the economy is right on track, the Finance Minister has earmarked more money for health,
literacy, roads and infrastructure with minor rebate for small taxpayers while focusing on rural economy
with a promise to double the income of farmers in five years.
ACHIEVEMENTS SO FAR:
 Growth of Economy accelerated to 7.6% in 2015-16.
 CPI inflation has come down to 5.4%.
 India hailed as a ‘bright spot’ amidst a slowing global economy by IMF.
 Robust growth achieved despite very unfavourable global conditions and two consecutive years
shortfall in monsoon by 13%.
 The Current Account deficit has declined from 18.4 billion US dollars in the first half of last year to 14.4
billion this year. It is projected to be 1.4% of GDP at the end of this year. Foreign exchange reserves
touched highest ever level of about 350 billion US dollars.
th
 Despite increased devolution to States by 55% as a result of the 14 Finance Commission award, plan
expenditure increased at RE stage in 2015-16, in contrast to earlier years.
CHALLENGES IN 2016-17:
. The risks of further global slowdown and turbulence are mounting. This complicates the task of
economic management for India. It has three serious implications for the economy.
 Firstly the economy must strengthen the firewalls against these risks by ensuring macro-economic
stability and prudent fiscal management.
 Secondly, since foreign markets are weak, the economy must rely on domestic demand and Indian
markets to ensure that India’s growth does not slow down.
 Thirdly, the economy must continue with the pace of economic reforms and policy initiatives to
change the lives of our people for the better.
th
 Additional fiscal burden due to 7 Central Pay Commission recommendations and OROP.
ROADMAP & PRIORITIES:
The Finance Minister has unveiled a Rs.19.78 lakh crore budget for the fiscal year 2016-17, which is
10.8% higher than Rs.17,65,436 crore, revised estimates for previous year.
As per the Budget, the Government to focus on:
 Ensuring macro-economic stability and prudent fiscal management.
 Boosting on domestic demand.
 Continuing with the pace of economic reforms and policy initiatives to change the lives of our people
for the better.
 Focus on Vulnerable sections through:
 Pradhan Mantri Fasal Bima Yojana.
 New health insurance scheme to protect against hospitalisation expenditure.
Facility of cooking gas connection for BPL families.
HIGHLIGHTS OF THE BUDGET AGRICULTURE AND FARMERS’

WELFARE:
 Allocation for Agriculture and Farmers’ welfare is Rs.35,984 crore.
 ‘Pradhan Mantri Krishi Sinchai Yojana’ to be implemented in mission mode. 28.5 lakh hectares will
be brought under irrigation.
 Implementation of 89 irrigation projects under Accelerated Irrigation Benefits Programme (AIBP), will
be fast tracked.
 A dedicated Long Term Irrigation Fund will be created in NABARD with an initial corpus of about Rs.
20,000 crore.
 Programme for sustainable management of ground water resources with an estimated cost of Rs.
6,000 cr. will be implemented through multilateral funding.
 5 lakh farm ponds and dug wells in rain fed areas and 10 lakh compost pits for production of organic
manure will be taken up under MGNREGA.
 Soil Health Card scheme will cover all 14 crore farm holdings by March 2017.
 2,000 model retail outlets of Fertilizer companies will be provided with soil and seed testing facilities
during the next three years.
 Promote organic farming through ‘Parmparagat Krishi Vikas Yojana’ and 'Organic Value Chain
Development in North East Region'.
 Unified Agricultural Marketing e-Platform to provide a common e-market platform for wholesale
markets.
 Allocation under Pradhan Mantri Gram Sadak Yojana increased to Rs.19,000 crore. It will connect
remaining 65,000 eligible habitations by 2019.
 To reduce the burden of loan repayment on farmers, a provision of Rs.15,000 crore has been made
in the BE 2016-17 towards interest subvention.
 Allocation under Prime Minister Fasal Bima Yojana Rs.5,500 crore.
 Rs. 850 crore for four dairying projects - ‘Pashudhan Sanjivani’, ‘Nakul Swasthya Patra’, ‘E-Pashudhan
Haat’ and National Genomic Centre for indigenous breeds.
RURAL SECTOR:
 Allocation for rural sector – Rs. 87,765 crore.
 Rs. 2.87 lakh crore will be given as Grant in Aid to Gram Panchayats and Municipalities as per the
recommendations of the 14th Finance Commission.
 Every block under drought and rural distress will be taken up as an intensive Block under the Deen
Dayal Antyodaya Mission.
 A sum of Rs. 38,500 crore allocated for MGNREGS.
 300 Rurban Clusters will be developed under the Shyama Prasad Mukherjee Rurban Mission.
st
 100% village electrification by 1 May, 2018.
 National Land Record Modernisation Programme has been revamped.
 New scheme Rashtriya Gram Swaraj Abhiyan proposed with allocation of Rs.655 crore.
SOCIAL SECTOR INCLUDING HEALTH CARE:
 Allocation for social sector including education and health care Rs.1,51,581 crore.
 Rs.2,000 crore allocated for initial cost of providing LPG connections to BPL families.
 New health protection scheme will provide health cover up to Rs. 1 lakh per family. For senior
citizens an additional top-up package up to Rs.30,000 will be provided.
 3,000 Stores under Prime Minister’s Jan Aushadhi Yojana will be opened during 2016-17.
 ‘National Dialysis Services Programme’ to be started under National Health Mission through PPP
mode.
 ‘Stand Up India Scheme’ to facilitate at least two projects per bank branch. This will benefit at least
2.5 lakh entrepreneurs.
 Allocation of Rs.100 crore each for celebrating the Birth Centenary of Pandit Deen Dayal Upadhyay
and the 350th Birth Anniversary of Guru Gobind Singh.
EDUCATION, SKILLS AND JOB CREATION:
 62 new Navodaya Vidyalayas will be opened.
 Sarva Shiksha Abhiyan to increase focus on quality of education.
 Regulatory architecture to be provided to 10 public and 10 private institutions to emerge as world-
class Teaching and Research Institutions.
 Higher Education Financing Agency to be set-up with initial capital base of Rs.1,000 Crores.
 Digital Depository for School Leaving Certificates, College Degrees, Academic
Awards and Mark sheets to be set-up.
SKILL DEVELOPMENT:
 Allocation for skill development- Rs.1804. crore.
 1500 Multi Skill Training Institutes to be set-up.
 National Board for Skill Development Certification to be setup in partnership with the industry and
academia.
 Entrepreneurship Education and Training through Massive Open Online Courses.
JOB CREATION:
 GoI will pay contribution of 8.33% for of all new employees enrolling in EPFO for the first three years of
their employment. Budget provision of Rs.1000 crore has been made for this scheme.
 Deduction under Section 80JJAA of the Income Tax Act will be available to all assesses who are
subject to statutory audit under the Act.
 100 Model Career Centres to operational by the end of 2016 17 under National Career Service.
 Model Shops and Establishments Bill to be circulated to States.
INFRASTRUCTURE AND INVESTMENT:
 Total investment in the road sector, including PMGSY allocation, would be Rs. 97,000 crore during
2016-17.
 Approval of nearly 10,000 kms of National Highways in 2016-17.
 Allocation of Rs.55,000 crore in the Budget for Roads. Additional Rs.15,000 cr. to be raised by NHAI
through bonds.
 Total outlay for infrastructure fixed around Rs. 2,21,246 crore.
 Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger
segment.
 Action plan for revival of unserved and underserved airports to be drawn up in partnership with State
Governments.
 Comprehensive plan, spanning next 15 to 20 years, to augment the investment in nuclear power
generation to be drawn up.
 Steps to re-vitalise PPPs:
 Public Utility (Resolution of Disputes) Bill will be introduced during 2016-17.
 Guidelines for renegotiation of PPP Concession Agreements will be issued.
 New credit rating system for infrastructure projects to be introduced.
 100% FDI to be allowed through FIPB route in marketing of food products produced and manufactured
in India.
FINANCIAL SECTOR REFORMS:
 A comprehensive Code on Resolution of Financial Firms to be introduced.
 Statutory basis for a Monetary Policy framework and a Monetary Policy Committee through the Finance
Bill 2016.
 A Financial Data Management Centre to be set up.
 RBI to facilitate retail participation in Government securities.
 New derivative products will be developed by SEBI in the Commodity Derivatives market.
 Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake
in the ARC and permit non institutional investors to invest in Securitization Receipts.
 Comprehensive Central Legislation to be bought to deal with the menace of illicit deposit taking
schemes.
 Increasing members and benches of the Securities Appellate Tribunal.
 Allocation of Rs.25,000 crore towards Recapitalisation of Public Sector Banks.
 Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs.1,80,000 crore.
General Insurance Companies owned by the Government to be listed in the stock exchanges
EASE OF DOING BUSINESS:

 A Task Force has been constituted for rationalisation of human resources in various Ministries.
 Comprehensive review and rationalisation of Autonomous Bodies.
 Bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar
framework.
 To introduce DBT on pilot basis for fertilizer.
 Automation facilities will be provided in 3 lakh fair price shops by March 2017.
 Amendments in Companies Act to improve enabling environment for start-ups.
 Price Stabilisation Fund with a corpus of Rs.900 crore to help maintain stable prices of Pulses.
 “Ek Bharat Shreshtha Bharat” programme will be launched to link States and Districts in an annual
programme that connects people through exchanges in areas of language, trade, culture, travel and
tourism.
FISCAL DISCIPLINE:
 Fiscal deficit in RE 2015-16 and BE 2016-17 retained at 3.9% and 3.5%.
 Revenue Deficit target from 2.8% to 2.5% in RE 2015-16.
 Total expenditure projected at Rs. 19.78 lakh crore.
 Plan expenditure pegged at Rs. 5.50 lakh crore under Plan, indicating an increase of 15.3%.
 Non-Plan expenditure kept at Rs. 14.28 lakh crores.
 Special emphasis to sectors such as agriculture, irrigation, social sector including health, women and
child development, welfare of Scheduled Castes and Scheduled Tribes, minorities and infrastructure.
 Mobilisation of additional finances to the extent of Rs. 31,300 crore by NHAI, PFC, REC, IREDA,
NABARD and Inland Water Authority by raising Bonds.
 Plan / Non-Plan classification to be done away with from 2017-18.
 Every new scheme sanctioned will have a sunset date and outcome review.
 Rationalised and restructured more than 1500 Central Plan Schemes into about 300 Central Sector and
30 Centrally Sponsored Schemes.
 Committee to review the implementation of the FRBM Act.
 Raise the ceiling of tax rebate under section 87A from Rs.2000 to Rs.5000 to lessen tax burden on
individuals with income upto Rs.5 lakhs.
 Increase the limit of deduction of rent paid under section 80GG from Rs.24000 per annum to Rs.60000,
to provide relief to those who live in rented houses.
BOOST EMPLOYMENT AND GROWTH:
 Increase the turnover limit under Presumptive taxation scheme under section 44AD of the Income Tax
Act to Rs. 2 crores to bring big relief to a large number of assesses in the MSME category.
 Extend the presumptive taxation scheme with profit deemed to be 50% to professionals with gross
receipts up to Rs.50 lac.
 Accelerated depreciation wherever provided in IT Act will be limited to maximum 40% from 1.4.2017
 Benefit of section 10AA to new SEZ units will be available to those units which commence activity
before 31-3-2020.
 The weighted deduction under section 35CCD for skill development will continue up to 1-4-2020.
New manufacturing companies incorporated on or after 1-3 2016 to be given an option to be taxed at
25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and
do not avail of investment allowance and accelerated depreciation
 LOWER the corporate tax rate for the next financial year for relatively small enterprises i.e., companies
with turnover not exceeding Rs.5 crore (in the financial year ending March 2015), to 29% plus surcharge
and cess.
 100% deduction of profits for 3 out of 5 years for startups setup during April, 2016 to March, 2019.
MAT will apply in such cases.
 10% rate of tax on income from worldwide exploitation of patents developed and registered in India by a
resident.
 Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to
be reduced from three to two years.
 Non-banking financial companies shall be eligible for deduction to the extent of 5% of its income in
respect of provision for bad and doubtful debts.
 Determination of residency of foreign company on the basis of Place of Effective Management (POEM)
is proposed to be deferred by one year.
 Commitment to implement General Anti Avoidance Rules (GAAR) from 1-4-2017.
 Exemption of service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya
Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill Development &
Entrepreneurship.
 Exemption of Service tax on general insurance services provided under ‘Niramaya’ Health Insurance
Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disability.
MOVING TOWARDS A PENSIONED SOCIETY:
 Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National
Pension Scheme (NPS). Annuity fund which goes to legal heir will not be taxable.
 In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40%
of corpus to be tax free will apply in respect of corpus created out of contributions made on or from
1.4.2016.
 Limit for contribution of employer in recognized Provident and Superannuation Fund of Rs.1.5 lakh per
annum for taking tax benefit. Exemption from service tax for Annuity services provided by NPS and
Services provided by EPFO to employees.
 Reduce service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of premium paid
in certain cases.
PROMOTING AFFORDABLE HOUSING:
 100% deduction for profits to an undertaking in housing project for flats upto 30 sq. metres in four metro
cities and 60 sq. metres in other cities, approved during June 2016 to March 2019 and completed in
three years. MAT to apply.
 Deduction for additional interest of Rs. 50,000 per annum for loans up to Rs. 35 lakh sanctioned in
2016-17 for first time home buyers, where house cost does not exceed Rs.50 lakh.
 Exemption from service tax on construction of affordable houses up to 60 square metres under any
scheme of the Central or State Government including PPP Schemes.
 Extend excise duty exemption, presently available to Concrete Mix manufactured at site for use in
construction work to Ready Mix Concrete.
RESOURCE MOBILIZATION FOR AGRICULTURE, RURAL ECONOMY AND CLEAN
ENVIRONMENT:
Additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving
dividend in excess of Rs.10 lakh per annuM
 Surcharge to be raised from 12% to 15% on persons, other than companies, firms and cooperative
societies having income above of Rs.1 crore.
 Tax to be deducted at source at the rate of 1% on purchase of luxury cars exceeding value of Rs. 10
lakh and purchase of goods and services in cash exceeding Rs. 2 lakh.
 Securities Transaction tax in case of ‘Options’ is proposed to be increased from .017% to .05%.
 Equalization levy of 6% of gross amount for payment made to non-residents exceeding Rs.1 lakh a year
in case of B2B transactions.
 Krishi Kalyan Cess, @ 0.5% on all taxable services, w.e.f. 1st June 2016. Proceeds would be
exclusively used for financing initiatives for improvement of agriculture and welfare of farmers. Input tax
credit of this cess will be available for payment of this cess.
 Infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and
4% on other higher engine capacity vehicles and SUVs. No credit of this cess will be available nor credit
of any other tax or duty be utilized for paying this cess.
 Excise duty of ‘1% without input tax credit or 12.5% with input tax credit’ on articles of jewellery
[excluding silver jewellery, other than studded with diamonds and some other precious stones], with a
higher exemption and eligibility limits of Rs. 6 crores and Rs. 12 crores respectively.
 Excise on readymade garments with retail price of Rs. 1000 or more raised to 2% without input tax
credit or 12.5% with input tax credit.
 ‘Clean Energy Cess’ levied on coal, lignite and peat renamed to ‘Clean Environment Cess’ and rate
increased from Rs.200 per tonne to Rs.400 per tonne.
 Excise duties on various tobacco products other than beedi raised by about 10 to 15%.
PROVIDING CERTAINITY IN TAXATION:
 Domestic taxpayers can declare undisclosed income or such income represented in the form of any
asset by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the
undisclosed income. Declarants will have immunity from prosecution.
 Surcharge levied at 7.5% of undisclosed income will be called Krishi Kalyan surcharge to be used for
agriculture and rural economy.
 New Dispute Resolution Scheme to be introduced. No penalty in respect of cases with disputed tax up
to Rs.10 lakh. Cases with disputed tax exceeding Rs. 10 lakh to be subjected to 25% of the minimum of
the imposable penalty. Any pending appeal against a penalty order can also be settled by paying 25%
of the minimum of the imposable penalty and tax interest on quantum addition.
 Penalty rates to be 50% of tax in case of underreporting of income and 200% of tax where there is
misreporting of facts.
 Disallowance will be limited to 1% of the average monthly value of investments yielding exempt
income, but not exceeding the actual expenditure claimed under rule 8D of Section 14-A of Income Tax
Act.
 Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.
 Mandatory for the assessing officer to grant stay of demand once the assesse pays 15% of the disputed
demand, while the appeal is pending before Commissioner of Income-tax (Appeals).
 Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from Rs.15 lakhs to
Rs.50 lakhs.
11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT)
RATIONALIZATION OF TAXES:
 13 cesses, levied by various Ministries in which revenue collection is less than Rs. 50 crore in a year
to be abolished.
 For non-residents providing alternative documents to PAN card, higher TDS not to apply.
 Revision of return extended to Central Excise assesses.
 Additional options to banking companies and financial institutions, including NBFCs for reversal of
input tax credits with respect to non-taxable services.
 Customs Act to provide for deferred payment of customs duties for Customs Single Window Project
to be implemented at major ports and airports starting from beginning of next financial year.
TECHNOLOGY FOR ACCOUNTABILITY:
 Expansion in the scope of e-assessments to all assessees in 7 mega cities in the coming years.
 Interest at the rate of 9% p.a against normal rate of 6% p.a for delay in giving effect to Appellate order
beyond ninety days.
‘e-Sahyog’ to be ex:panded to reduce compliance cost, especially for small taxpayers
81. INDIAN ACCOUNTING STANDARD (IND AS)
IMPLEMENTATION
˜ The Ministry of Corporate Affairs (MCA), Government of India has notified the Companies (Indian
Accounting Standards) Rules, 2015. The MCA has outlined the roadmap for implementation of
International Financial Reporting Standards (IFRS) converged Indian Accounting Standards for banks,
non-banking financial companies, select All India Term Lending and Refinancing Institutions and
insurance entities. Currently, 39 new Ind ASs have been notified.
˜ The basic objective of Accounting Standards is to remove variations in the treatment of several
accounting aspects and to bring about standardization in presentation. The Accounting Standards intend
to harmonize the diverse accounting policies followed in the preparation and presentation of financial
statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison.
˜ The RBI has advised that scheduled commercial banks (excluding RRBs) shall follow the Indian
Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015, in
the following manner:
A) Banks shall comply with the Indian Accounting Standards (Ind AS) for financial statements for
accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending
March 31, 2018 or thereafter. Ind AS shall be applicable to both standalone financial statements and
consolidated financial statements. “Comparatives” shall mean comparative figures for the preceding
accounting period.
B) Banks shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS
earlier.
˜ The RBI has also advised Banks to take note of the Press Release dated January 18, 2016 issued by
the MCA which states that notwithstanding the roadmap for companies, the holding, subsidiary, joint
venture or associate companies of banks shall be required to prepare Ind AS based financial statements
for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending
March 31, 2018 and thereafter.
˜ Ind AS implementation is likely to significantly impact the financial reporting systems and processes
and, as such, these changes need to be planned, managed, tested and executed in advance of the
implementation date.
˜ Banks have been advised to set up a Steering Committee headed by an official of the rank of an
Executive Director (or equivalent) comprising members from cross-functional areas of the bank to
immediately initiate the implementation process.
˜ The Audit Committee of the Board shall oversee the progress of the Ind AS implementation process
and report to the Board at quarterly intervals.
The critical issues which need to be factored in the Ind AS implementation plan include the
following:
a) Ind AS Technical Requirements: Diagnostic analysis of differences between the current accounting
framework and Ind AS, significant accounting policy decisions impacting financials, drafting
accounting policies, preparation of disclosures, documentation, preparation of proforma Ind AS
financial statements, timing the changeover to Ind AS, and dry-run of accounting systems and end-to-
end reporting process before the actual conversion.
b) Systems and Processes: Evaluate system changes assessment of processes requiring changes,
issues having significant impact on information systems (including IT systems), and develop /
strengthen data capture system, where required.
c) Business Impact: Profit planning and budgeting, taxation, capital planning, and impact on capital
adequacy.
d) People: Evaluation of resources: Adequate and fully dedicated internal staff for implementation,
comprehensive training strategy and program.
e) Project Management: Managing the entire process-holistic approach to planning and execution by
ensuring that all linkages are established between accounting, systems, people and business,
besides effective communication strategies to stakeholders.
˜ Banks shall assess the impact of the Ind AS implementation on their financial position including the
adequacy of capital, taking into account the Basel III capital requirements and place quarterly progress
reports to their Boards. Banks also need to be in preparedness to submit proforma Ind AS financial
statements to the Reserve Bank from the half-year ended September 30, 2016, onwards.
˜ The Reserve Bank shall also take steps to facilitate the implementation process. To begin with, from
April 2016, the RBI shall hold periodic meetings with banks in this regard.
˜ Banks shall disclose in the Annual Report, the strategy for Ind AS implementation, including the
progress made in this regard. These disclosures shall be made from the financial year 2016-17 until
implementation.
˜ The Boards of the banks shall have the ultimate responsibility in determining the Ind AS direction
and strategy and in overseeing the development and execution of the Ind AS implementation plan.
˜ The directions contained herein are issued under Section 35A of the Banking Regulation Act, 1949
and banks shall ensure strict compliance of the same.
APPLICABILITY FOR COMPANIES:
˜The application of Ind AS is based on the listing status and net worth of a Company. Ind AS will first
apply to companies with a net worth equal to or exceeding 500 crore INR beginning 1 April 2016.
˜ This will also require comparative Ind AS information for the period of 1 April 2015 to 31 March 2016.
Listed companies as well as others having a net worth equal to or exceeding 250 crore INR will follow 1
April 2017 onwards.
˜ Ind AS will also apply to subsidiaries, joint ventures, associates as well as holding companies of the
entities covered by the roadmap.
WISH YOU ALL THE BEST

Drishti Interview 2016

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BANKING MADE SIMPLE

(Insight into Current Banking Scenario)

( A Very useful book on Current Topics of Day to Day

Sanjay Kumar Trivedy (Divisional Manager )

Place : Nagpur SANJAY KUMAR TRIVEDY

2 Economic Outlook for Southeast Asia, China & India 2015 7

3 Indian Economic Survey 2015-16 7

4 SWOT Analysis of Indian Economy 11

5 Foreign Trade Policy 2015-20 12

6 Good and Service Tax 15

30 Base Rate – Revised Guidelines 74

2. Economic Outlook for Southeast Asia, China & India 2015

3. Indian Economic Survey 2015-16

4. SWOT ANALYSIS OF INDIAN ECONOMY

6. GOODS AND SERVICES TAX (GST)

9. BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND

10. FINANCIAL BENCHMARK INDIA PVT LTD

11. IMPACT OF GREECE CRISIS ON INDIAN ECONOMY

12. The New Development Bank (NDB)

13. Indian Banking 2020 : Opportunities and Challenges

“The Next Billion” will be the largest segment:

14. A new banking landscape for New India

15. Banking renaissance –Inclusion, Innovation & Implementation

Re-orientation of the Indian banking structure

18. Designing banking regulation in aspiring economies– the challenges

Five pillars of RBI’s developmental measures

21. Should Technology players be allowed to trigger more central role in

Creation of 24 X 7 Remittance systems

22. KEY ISSUES FOR DISCUSSION – BANKING INDUSTRIES

Upto 15 per cent 0 0

More than 30 per cent and

More than 50 per cent and

25 per cent increase in

A brief sketch of current system of provisioning by Indian Banks

23. Leadership Issues in Indian Banking

How to Enhance Leadership

24. Leveraging Technology for Business Development in Bank

1 Enhancing Enterprise Knowledge: IT plays an important role in enhancing enterprise knowledge

25. Main recommendations in the IT Vision document 2011-17

27. RBI Guidelines for Licensing of Payments Banks

30. BASE RATE – REVISED GUIDELINES : MCLR

34. INTEREST SUBVENTION SCHEME

35. MONETARY POLICY STATEMENT : 2016-17 (FIRST BI-MONTHLY)

36. INDRADHANUSH PLAN FOR REVAMP OF PUBLIC SECTOR BANKS

37. CONCURRENT AUDIT SYSTEM IN COMMERCIAL BANKS

38. FINANCIAL FRAUDS – PREVENTION

40. PRIORITY SECTOR LENDING- NEW GUIDELINES

Categories under priority sector

41. IFSC BANKING UNITS (IBU) BY INDIAN BANKS

42. RELIEF MEASURES BY BAN KS IN AREAS AFFECTED BY NATURAL CALAMITIES

43. RECAPITALISATION OF PUBLIC SECTOR BANKS

44. DEALING WITH LOAN FRAUDS

Rs.1 crore and SFIO In addition to

PENAL MEASURES FOR FRAUDULENT BORROWERS:

45.BANKS INTO INSURANCE BUSINESS

46. GYAN SANGAM - I

GOVT. TO DILUTE STAKE IN PSBS TO 52%

48. STRATEGIC DEBT RESTRUCTURING SCHEME

49. WILFUL DEFAULTERS

51. REVITALISING DISTRESSED ASSETS

E) STRATEGIC DEBT RESTRUCTURING SCHEME: With reference to the provisions on

52. DEBT RESTRUCTURING SCHEME