Banking Basics & Retail

8/9/2019 Banking Basics & Retail

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BANKING REGULATION

OBJECTIVES

Constitution and objectives of RBI,

Functions of RBI as the regulator of the Indian

banking system,

Monetary tools of RBI and effect thereof on banks

Priority sector advances-their composition and

rationale, and

Regulations on bank lending


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RBI The banking system in India is regulated by the RBI, the

central banking authority in the country in keeping withthe Reserve Bank of India Act, 1934 and BankingRegulation Act, 1949.

RBI is a state-owned institution under the Reserve Bank

(Transfer of Public Ownership) of India Act, 1948, set upin 1934, nationalised after independence, To generate, maintain and promote confidence and trust of the

public in the financial/banking system.

To protect investors interests through adequate/ timely

disclosure by the institutions and access to revenue informationby the investors.

To ensure that the financial markets are both fair and efficient.

To ensure that the participants measure up to the rules of themarket place.


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The main objectives of the RBI are contained in the preamble of the

RBI Act, 1934.It reads "Whereas it is expedient to constitute a ReserveBank for India to regulate the issue of bank notes and keeping ofreserves with a view to securing monetary stability in (India) andgenerally to operate the currency and credit system of the country to itsadvantage". The main objectives of the RBI are outlined below:

The most important objective of the RBI is promoting growth andmaintaining price stability.

Maintaining monetary stability so that the business and economic life can

deliver welfare gains of a mixed economy. Maintaining financial stability and ensuring the sound health of financialinstitutions so that economic units can conduct their business withconfidence.

Maintaining a stable payments' system, so that financial transactions canbe safely and efficiently executed.

Ensuring that credit allocation by the financial system broadly reflects thenational economic priorities and social concerns.

Regulation of the overall volume of money and credit in the economy toensure a reasonable degree of price stability.

Promotion of the development of financial markets and systems to enableitself to operate/regulate efficiently.

Ensure orderly conditions are maintained in the foreign exchange marketand the exchange rate is not subject to excess volatility.


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REGULATORY RESTRICTIONS

ON BANK LENDING: RBI directives or Banking Regulation Act, 1949(BRA) lays down the following regulatory restrictions on lending by

banks:

(l) No advance or loan can be granted against the security of the bank's own shares or partly paid shares of acompany.

(Il) No bank can hold shares in a company:

(a)As pledge or mortgagee in excess of the limit of 3096of the paid-up Capital of that company, or 3096of theBank's paid-up capital and Reserves, whichever is less. (Sec.19 (ii) of BRA)

(b) No advance can be granted to a company in the management of which the Managing Director or a Manager ofthe Bank is interested. (Sec. 19(i ii) of BRA).

(III) Bank's aggregate investment in shares, Certificate of Deposit (CDs), bonds etc. should not exceed the l imit of596of a bank's total advances outstanding as at as the end of the previous year.

(iv) No bank should grant loans against: a. Certificate of Deposits (CDs)

b. Fixed Deposits (FDs) issued by other banks

c. Money Market Mutual Funds (MMMF)

(v) Banks should adhere to the RBI guidelines relating to the level of credit, margin and interest rate etc, for loansagainst the security of commodities covered by Selective Credit Control directives of RBI.

(Vl) No loan should be granted by banks to:

The bank's directors or firms in which a director is interested as a partner/manager / employee/ guarantor (certain exemptionsallowed)

Relatives of other bank's directors ('relatives' as defined by RBI) - Such loans can be sanctioned by higher authorities or the bank'sBoard as per RBI guidelines.

(VII) Banks should not sanction a new or additional facility to borrowers appearing in RBI's list of "WilfulDefaulters" for a period of 5 years from the date of publication of the list by RBI.


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BANK-CUSTOMER

RELATIONSHIP DEFINITION: CUSTOMER

Not defined by law

For a person to be a customer the following

requisites are essential: A bank account-savings, current or fixed deposit in

his name

The dealing between the banker and the customermust be of the nature of banking business.

A customer of a bank may be a natural person orlegal entity e.g. a firm, company, a corporation, anassociation, a society, a Government department.


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DIFFERENT FORMS OF

RELATIONSHIP 1. Relationship as Debtor and Creditor (bankers

relationship is reversed as soon as thecustomers account is overdrawn).

2. Relationship as Trustee and beneficiary-customer deposits cheques, securities and othervaluables for safe custody.

3. Bankers as agents-buying and selling ofsecurities, collection of cheques and mailingpayment of dues on behalf of his customers.


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BANKERS OBLIGATIONS

To honour the cheques of its customers, under

section 31 of Negotiable Instruments Act, 1881.

Exceptions:

Garnishee Order

IT Order

Bankers Liability:

-Towards monetary loss suffered by the customer

-Towards loss of credit or reputation in the market


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To maintain secrecy of account according to Section 13 of the

Banking Companies Act, 1970 except under certain legallypermissible compulsions or circumstances as follows:

Undersection 133 of income-tax Act,1961,

underthecompanies act. 1956, section 235 or237 forgovt.

by orderofthecourtunderthe Bankers Bookevidence Act,1891.

Under the Reserve Bank of India act,1934 for credit information for mutualexchange.

Under the banking regulation act, 1949 (account not operated for more than10 yrs)

Under the Gift Tax Act, 1958

Disclosure to Police under section 94 of criminal procedure code.

Under the forex regulation act, 1973

Under the Industrial Development Bank of India Act, 1964(credit info)

With express or implied consent of the customer By the banker to protect his own interest

Bankers reference

To disclose in public interest


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Bankers Rights

Right of General Lien (right to retain securities of thedebtor or sell it until the debt is repaid)

Special features of Bankers lien The banker cannot exercise this right if the goods and securities

have been entrusted as a trustee or an agent of the customer orif they are entrusted for some special purpose.

It is an implied pledge since banker has the right to sell.

This is as per Indian Contract Act.

This can be exercised only on singly owned goods/securities.

As per section 171 of Indian contract act, a banker can retain thesame goods for any other debt due to him.

This right cannot be exercised on safe custody deposits withbank as a bailee or trustee and on documents (eg, b.o.e orshares) deposited for special purpose or securities left with thebanker negligently or on money deposited in the bank.


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Right to set-off

A bank has a right of set-off between two or moreaccounts maintained by a customer- by adjusting thedebit balance in one account with the credit balance inthe other account.

Conditions The funds must be in the same right and mustprima faciebelongto the customer.

There should be no agreement between the bank and customerto exclude the right of set-off.

The right to combine accounts can only be exercised in respectof debts that are due and crystallized, and not in respect of debtsthat are contingent and not yet due.

The banker may exercise this right at his discretion.

In case of garnishee order, the banker can exercise this rightbefore and later surrender the remaining amount.


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Right to charge interest, incidental

charges etc. Banks can charge rate of interest on

loans/overdraft and of commission for

collection of instruments or other servicesas per terms agreed by the customer while

granting the facilities. In the absence of

any agreement, the bank would be entitled

to charge interest/ commission as percustomary practice prevailing for the

facilities/ services in question.


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TERMINATION OF BANK-

CUSTOMER RELATIONSHIP Voluntary termination

Termination by law

Death ofcustomer Bankruptcy of a customer/liquidation of a

Company

Garnishee Order

Insanity ofthecustomer(section 11of theIndian Contract Act, 1872 )


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NEGOTIABLE INSTRUMENTS

relating to promissory note, bill of exchange and

cheque and therefore it deals with only these

three kinds of negotiable instruments. These

negotiable instruments have certain commonfeatures and any instrument that possesses

these features may be considered to be a

negotiable instrument (e.g. bank drafts,

government promissory notes). Negotiable Instruments Act, 1881, govern the,

negotiable instruments and related matters.


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Features of NI A negotiable instrument can be transferred by delivery or byendorsement and delivery, depending on whether it is payable to

the bearer or order. On such a transfer, title in the instrumentpasses from the transferor to the transferee, without any otherancillary document or notice of the transfer. However,transferability of the instrument may be restricted by the maker orholder by crossing it as 'Account Payee

A negotiable instrument confers an absolute and valid title on thetransferee who takes it in 'good faith, for value and without noticeof the defect in the title of the transferor'. Such a transferee isknown as 'holder in due course' in law and he will get a better titlethan the transferor.

The holder of negotiable instrument can sue in his own name andcan recover the amount of the instrument from the party liable topay thereon as there is a right of action attached to the instrumentitself.


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Promissory Notes

According to (section 4 of NI Act). -"Apromissory Note is an instrument in writing (notbeing a bank note or a currency note) containing

an unconditional undertaking, signed by themaker, to pay a certain sum of money only to, orto the order of, a certain person, or to the bearerof the instrument.

Example :"I promise to pay B or order Rs.1000or "Mr. B, I owe you Rs. 1000/-.

A promissory note should be certain andunconditional.


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Bill of Exchange - "A bill exchange is an instrument in writingcontaining an unconditional order, signed by the maker, directinga certain person to pay a certain sum of money only to, or to theorder of, a certain person or to the bearer of the instrument(Section 5 of NI Act).

Types-Demand bill is payable immediately on presentment tothe drawee. Usance bill is presented twice to the drawee - firstfor acceptance, and thereafter for payment on the due date.

It has three parties drawer (seller), drawee (buyer) and payee(beneficiary).

Instead of paying cash, the drawee (buyer) undertakes to pay tothe payee, or to his order, a specified sum on demand (i.e.

demand billon presentment of the bill), or on a 'specified futuredate (i.e.usance bill after acceptance).

The drawee of a bill is not liable until he accepts the bill.

The date of payment must be certain or ascertainable .


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Cheques

A cheque is a bill of exchange drawn on a specified banker and notexpressed to be payable otherwise than on demand". (Section 6 ofNI Act).

FEATURES

The drawer is the account holder signing the cheque; drawee is

always the bank (branch where the account holder maintains hisaccount ) and the payee is the beneficiary who will receive theamount mentioned in the cheque.

In written format

Form of cheque

Drawers signature

Date ofcheque Amount on cheque


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Common Features of NI

Instrument has to be in writing.

The instrument must contain an unconditional promise or undertaking.

The promise must relate to paying a certain sum of money i.e. includesfuture interest, is payable at an indicated rate of exchange, or the

instrument provides that on default of payment of an installment, thebalance unpaid shall become due.

The date of payment must be certain.

The payee must be a certain person either singly or jointly with othercertain person(s).

The instrument must bear the signature of the drawer.

The instrument must be delivered to the person for whom it is meant,after having been drawn and signed by the drawer /promissory.

Stamping of the instrument (promissory note or bill of exchange) asper the Stamp Act of the concerned State, is necessary


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Other NI

1. Bankers Drafts-A demand draft is always drawn, payable to order.

It is a payment order issued by one branch of a bank upon otherbranch, instructing the drawee branch to pay the specified sum ofmoney to the specified person or to his order

2. Traveller's Cheques-It is in the form of pay order drawn by the

issuing bank/ organisation on itself. They are made payable to theorder of a payee (name left blank at the time of the issue and filledup by the holder while encashing the cheques).

3. Dividend/Interest Warrants -A dividend/interest warrant is used forpayment of a dividend interest by a company / organization to aperson holding shares/bond, through a bank. The warrant can alsobe crossed to prevent misuse. Most of such warrants have the

validity period printed on top (it is usually3 months from the date ofissue). However, this does not alter their character as a cheque.


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Crossing of cheques

1.General Crossing as per section

123A cheque or bankdraft may be crossed by the drawer / issuer and holder by

simply drawing on its face, two parallel transverse lines, withor without the words 'not negotiable' or 'and company' or'account payee'.

2.Special Crossing as per section 124 A special crossingconsists of an addition of the name of a banker across theface of a cheque with or without two parallel transverse lines.This means that a specially crossed cheque has to be routedthrough an account with the named bank.

3.Not Negotiable crossing- These cheques are transferablebut the holder does not get better title. This is done to protectthe interest of the true owner of the cheque.

4.Account payee crossing- This is made to credit theamount to the account of the payee only and nobody else.These cheques can be endorsed further but it shall beineffective.

5. Double Crossing- done by the banker to whom the chq isspecially crossed, may cross the chq to another banker.


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Crossing-imp points

Crossing can be made by the holder or by the banker who can againcross it to another banker(called double crossing) as per section125.

The paying banker is liable to the true owner of the cheque as persection 129 if the banker does not follow the directions given by the

drawer through the crossing. He also looses the statutory protectiongranted to him under section 128 as such payment is not deemed tobe payment in due course.

The paying banker is also liable to the drawer if he fails to makepayment as per the drawers directions or gives credit to the wrongperson.

In case the paying banker is not able to make out the crossing which

may be erased, he is discharged of his liablity.


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Endorsement of Cheques

An instrument can be negotiated by: Delivery in case of bearer cheques(section 47)

Endorsement and delivery in case of order cheques (section 48)

What is endorsement

Acc to section 15, when the maker signs on the back or face of thecheque for the purpose of negotiation, he is said to haveendorsed the same and is called endorser.

Effect of endorsement- The endorsee acquires property orinterest in the instrument as its holder.

He can take action against all parties whose names appear on theinstrument.

An endorsee does not lose his right of action by death of theoriginal payee/endorser.

Title to a negotiable instrument can be obtaibed through genuineendorsemebt only and not on a forged instrrument.


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Method of Endorsement Following are the main requirements of endorsement:

Signature of the endorser with/without adding any words.

The endorser should spell his name in the same way as itappears on the chq/bill as its payee. No suffixes or prefixesshould be included.

Endorsement to be made by the payee or by all the payeesjointly. A stranger cannot endorse an instrument, unless he is aholder in due course.

Endorsement to be made for the entire amount and not for a partof the amount of the instrument.

An illiterate person can endorse the NI by putting his left hand

thumb impression in the presence of witness who also signs andwrites his address.


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Types of endorsement

(a) Blankendorsement:When the endorser signs only his name on the backof the instrument, it is termed as a blank endorsement. Such an endorsedinstrument is payable only to the bearer, even though it may have beenoriginally drawn as payable to the order. After such endorsement, theinstrument can be negotiated by mere delivery without any furtherendorsement required.

(b) Specialendorsementorendorsement in full:When the endorser'ssignature is accompanied by instructions to pay the amount to/to the orderof a named person, it is termed as a special endorsement. The person towhom the money is payable is known as endorsee. That endorsee canfurther endorse the instrument in favour of another person specificallyinstructing to pay to that certain person.

(c) Restrictiveendorsement:When further negotiation of the instrument, isprohibited. (E.g. the instrument is endorsed as "pay A only") it is termed asrestrictive endorsement. Such an endorsement takes away the negotiabilityof the instrument, as A cannot negotiate it further. A can, however, transferit to an agent for collection.


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Important provisions of NI act 1881

regarding negotiable instruments act Section 8- defines the Holder of a NI.He is the payee or

endorsee of a negotiable instrument who is entitled topossess it. He has a good title to the instrument.

Section 9- explains the Holder in Due course . "anyperson who for consideration became the possessor of apromissory note, bill of exchange, or cheque if payableto bearer, or the payee or endorsee thereof, if payable toorder, before the amount mentioned therein became

payable, and without having sufficient cause to believethat any defect existed in the title of the person fromwhom he derived his title. The two things important areconsideration and no knowledge of any defect.


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Important provisions of NI act 1881

regarding negotiable instruments act Section 10- defines payment in due course. For

this the required conditions are:

i)Payment should be as per the tenor of the

instrument.

ii) Payment must be made in good faith.

(iii) Payment must be made without negligence.

(iv) Payment must be made to a person inpossession of the instrument and there should

be no apparent suspicious circumstances.


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Liabilities and duties of the paying

banker Paying banker can make payment to the bearer without liability under sec. 78 withoutverifying his title.

He is discharged from any liability in case of order cheques if it is payment in duecourse.

If the signature of drawer is forged but the payment is done in due course, and it wasdue to negligence of the drawer, the drawer has to bear the loss.

The paying banker gets statutory protection under sec 89 if there is material alterationbut they are not visible even after utmost care and caution.

Under sec 85(1), the paying banker gets statutory protection if the endorsementmade by the payee is forged on a order cheque provided the endorsement is a valid/regular endorsement.

Under sec 85(2) he gets protection for bearer cheques with endorsement in full orblank. In case of stolen cheques too, the banker gets protection. He need not verifythe endorsement.

He gets protection in case of general/special crossing if payment is done in duecourse.

The payment should not be done in case of stop payment made by the drawer, thelatters death, insolvency, liquidation ,insanity, notice assignment, garnishee, breachof trust.


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Collecting Banker

A collecting banker collects cheques and other instruments of credit of his customereither as a

- Holder for value ( in case of immediate credit)- An agent of the customer.

Liability- He is liable to the true owner of the cheque for which he can recover thefunds from the from the last endorser, bear the loss himself or sue all previous

parties. He cannot interfere with the rights of the true owner of the cheque. Statutory protection- Under sec 131 the banker gets protection if he collects thecrossed cheque or draft in good faith and without negligence provided the chq iscrossed, payment has been recd for his customer, and he has acted as an agent ofthe customer, payment has been recd in due course. This is not allowed in case ofbills of exchange.

Duties- the banker has to present the cheque within reasonable time, should exercisedue care and diligence and serve notice of dishonour in case of dishonouredcheques.

aa


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RBIs instructions

Immediate credit for outstation cheques upto 5000/-

No interest to be charged between dt of credit ofoutstation chq and its return in case of bouncedcheques.

Not to allow interest on amount in case chq getsdishonoured.

To charge interest at normal rate in case of dishonourfrom the date of dishonour till reimbursement of money ismade to the bank.

To pay interest for delay in collection of o/s chequesdrawn on state capitals beyond 10 days and beyond 14days in case of cheques drawn at other places.


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Working Capital finance methods

Projected Turnover method-used when w/c requirementis less than 2 crores. The w/c requirement is assessedas 25 % of the projected turnover,out of which the bankfinances 20% of the turnover as w/c loan. Also

applicable in case of SSIs and exporters for loan upto 5crores.

Maximum permissible bank finance- (when w/c limit is >2 crores). Banks will finance the higher of 25% ofworking capital gap (TCA-CL) and projected Net working

capital (TCA-CL-bank borrowings). This is givenrecommended by Tandon Committee.


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Lending Rates

Upto 2 lacs- Upto PLR (max rate)

Above 2 lacs- free (can be below PLRalso).


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Working capital loans

For WCR limit above 5 cr-min 5% requirement should be met withBill finance.

For WC limit above 10 cr- banks may persuade them to go in for theLoan System by offering an incentive in the form of lower rate ofinterest on the 'loan component' as compared to the 'cash credit

component' Banks are allowed to fix separate lending rates for 'loan component'and 'cash credit component'.

The loan component , may be renewed/rolled over at the request ofthe borrower

Regarding working capital, long term funds should be used tofinance CAs and bank borrowings to be reduced progressively.

The loan component should comprise more permanent req anddemand cash credit portion to take care of fluctuating req. Thiswould bring financial discipline.


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Some Regulations regarding loans

Loans/ advances granted to individuals against the security of shares,debentures and PSU bonds should not exceed Rs.10 lakh and Rs.20 lakh, ifthe securities are held in physical form and dematerialized formrespectively.

Banks should not finance more than 40% of the cost of project in case of

construction activities apart from housing .

No finance should be extended for infrastructural activities and constructionof buildings meant purely for govt/semi govt offices including municipal andpanchayat offices.

Loan to priority sector should be atleast 40% of net bank credit(32% for

foreign banks).

Total agricultural advances should be atleast 18% of net bank credit.


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Non-fund based credit-off balance

sheet liability Letters of Credit.A Letter of Credit (LC) is an arrangement wherebya bank (Issuing bank), at the request of a customer (buyer or openerof LC), undertakes to pay to a named beneficiary (seller) by aspecified date, against presentment of the specified documents, thevalue of the goods/ service. LC norms are governed by UniformCustoms and practices of documentary credit by InternationalCustoms Code-600

Guarantee-The bank issues the required guarantee on behalf of theobligor, after making a proper assessment of his financial standingand ability to fulfill his part of the contract. The bank may alsodemand some tangible security or cash deposit to fallback upon inthe event of enforcement of the guarantee by the beneficiary.

Guarantees may be of different kinds - Financial guarantee,performance guarantee, and deferred payment guarantee -depending on the nature of the contract between the applicant andthe beneficiary


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DIFFERENT METHODS OF

CHARGING OF SECURITIES.

1.Pledge- The pledger pledges the security to the pledge by ensuring transfer ofpossession of goods with the intention that the goods will form the security for a debtor performance of a promise. The right of title of goods remains with the pledgor. Thetransfer of goods can be actual or constructive.

If the goods or documents are kept with the borrower instead of the lender, in goodfaith, the pledge is executed against a Trust receipt.

The pledgee sells the goods in case of default of payment of advance afterreasonable notice. The sale is done through respectable commission agents orbrokers. The surplus if any, is refunded to the pledgor and goods repaid when theloan is repaid.

Documents required- Agreement of pledge

2.Hypothecation- The possession of goods remains with the borrower. This is basicallygiven to those borrowers who are not in a position to part with the possession of thegoods. A drawing limit is sanctioned by the banker which is the value of stockshypothecated less stipulated margins. Bankers should watch the turnover in the

account as it indicates as to how the borrowers business is doing. Book debtsoutstanding upto six months, are also hypothecated by borrowers on hypothecationbasis and these debts are directly collected by the debtors. A margin of 25-30% ismaintained on the debts. Suitable precautions should be taken by bankers againstdouble financing of bills.

Documents required- Agreement of hypothecation. The hypothecation agreementshould contain a clause authorizing the banker to convert the hypothecation into apledge so that the goods can be taken in banks possession in case of default.


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3.Mortgages- It is the transfer of interest in specific immovable property for securing

the payment advanced like buildings, land and machinery. They are basically of 2types:

Simple Mortgage- The mortgagor keeps possession of the property but in case ofdefault, the mortgagee will sell off the security, with the intervention of the court anduse the proceeds of sale. The property cannot be sold without the intervention of thecourt.

Document required- Mortgage deed

The mortgage deed is executed by the mortgagor in favour of the mortgagee andcontains the details of the property to be mortgaged and the terms and conditions ofthe mortgage.

Equitable Mortgage- The mortgagor This can be created inBombay,Calcutta and Madras and in certain other places notified from timeto time by any State Government in its Official Gazette. The borrowerdelivers original documents of title to immovable property to a creditor, withintent to create a security. The title deeds consist of original sale deed/sale

certificates and lease deeds. No legal document is required to be executed by the borrower. The bankerrecords the details of the property ,its location,names of depositors of title-deeds, ensures that there are no encumbrances on the property and thatthe mortgage is a continuing security for the advance. He also records theamount of advance, the rate of interest and the terms of repayment.


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4.Lien- It is the right of the creditor to retain the goods and securities in hispossession, belonging to the debtor, until the debt due is paid. No agreement isrequired. Two necessary conditions required before a right of lien :

1.The creditor should possess the goods and securities over which the lien isexercised.

2. The owner must have a lawful debt due or obligation towards the creditor.

The right of lien does not give the creditor any power to sell the relative goods orsecurities retained. Lien can be General or Particular:

General Lien-

The creditor has a right to retain goods and securities against not only a particular

debt but in respect of the general balance due by the borrower.

Particular Lien-

The creditor has a right to retain goods against the particular debt only

BANKERS LIEN

The bankers lien is more than a general lien: it is an implied pledge, The banker canexercise all the rights of a pledge in case of a bankers lien. After giving a reasonable

notice, the banker can sell the goods and securities retained.The banker has a general lien on cheques and bills deposited for collection orpending discount and securities deposited to secure a specific loan but left in hishands after the loan has been repaid.The bankers general lien doe not extend tosecurities deposited with him for a specific purpose inconsistent with the lien.


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Non Performing Assets

Banks assets are classified as:

(i) Performing or Standard assets: These are represented by borrower accounts which areregular in repayment of stipulated installments and interest or in order and the bank is able torealize interest thereon as and when it becomes due.

(ii) Non-Performing Assets (NPA): If a borrower account (term loan/cash/credit/overdraft/billspurchase or discount) remains irregular or out of order during a period prescribed by theregulatory authority (RBI) it is classified as "Non-Performing Asset'. The prescribed period is one

quarter (or 90 days) since 1-4-2004(as against two quarters prior to 1-4-2004). Thus, if a cashcredit account remains irregular (outstanding being more than the drawing power), or if thestipulated installment of principal/ interest remains unpaid in a term loan account for a quarter ormore, the account is treated as Non-performing.

RBI has advised banks to categorize the Non-Performing Assets in 3 sub-groups (each havingspecific prescribed provisions) as follows:

(a) Sub-standard Asset: It is an account that continues being an NPA for a period of less than orequal to 12 months after it gets classified as one. Provision is made for 10% of the securedportion and 20% of the unsecured portion of the outstanding.

(b) Doubtful Asset: It remains in the Sub-standard category for a period of 12 months.Provisioning is made at 100% of the unsecured portion of the outstanding and at oror of thesecured portion up to 1 year, 1-3years and over 3 years respectively.

(c) Loss Asset: If the realizable value of the security falls to less than 10% of the outstanding,such an account shall be classified as 'loss asset'. These are considered as irrecoverable andtherefore the bank makes 100% provision or writes off these loans.


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Provisioning Norms

Doubtful Assets: Period for which the advance has remained in the doubtful category

Upto 1 year 20%

1 to 3 years 30%

More than 3 years 100%

Sub-standard Assets: 10% on total outstanding. Unsecuredexposures which become sub-standard attract 20% on totaloutstandinf\g.

Standard Assets: .4% to 1% as contingent provisions againststandard assets.

Loss Assets: either the asset is 100% written off or 100% provisionis made in the balance sheet.


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NPA Management

Preventive Measures

Monitoring the drawings from the account

Following up with the borrowers.

Visiting the borrower's factory

Obtaining quarterly financial

statements/projections, analyzing and tallying

them with the operations in the accounts. Renewing/reviewing the facilities


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Corrective measures: Recovery of the dues by effective follow-up with the borrowers/ guarantors

Legal enforcement or foreclosure of the securities charged to the bank. Theguarantors can also be proceeded against legally for recovery of the bank's dues.

Compromise with the borrower by reducing some portion of interest or principal due,against the borrower's cash payment, or promise to pay the agreed sum. The balanceoutstanding in the account is written off against the provisions made.

Rehabilitation of the unit: the bank grants a package of financial assistance, subjectto the borrower agreeing to certain terms involving some additional stake of theborrower and adhering to a strict discipline and control by the bank.

Write-off of 'loss assets': Such accounts that remain NPA for a prolonged periodwithout any prospect of recovery from the available security because of its absenceor meager value or its non-enforceability, are written off from the bank-books againstthe provisions made. The write-off results in cleaning the 'loss assets' from the bank'sbalance sheet and reducing the NPAs that are irrecoverable.

Banking Basics & Retail

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