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Encl. ISVKM”S NMIMS UNIVERSITY

Management Program for ExecutivesCAPSTONE PROJECT – Format for Submission of Project Proposal

Name of Student: Nikesh Ganesh Malhotra

Roll Number: 21 Div: ___________________________

Programme: TCS e-serve PGDBA (Batch 3)

Title of Project: Indian banking industry with different individual investment and tax planning

Name of Faculty Guide: Dr. Chandan Dasgupta

PROJECT PROPOSAL:

1. Introduction: Banking Indepth Knowledge

2. Literature/Library review: __________________________________________________________________________________________________________________________

_____________________________________________________

3. Purpose and Objectives of Study: As Banking industry is very big my objective of studying this topic is to know; what are Indian Banking industry into? How Banking industry work? How they manage it? How it help investors?

4. Parameters of Study:

5. Nature of Field Work: Banking (Finance)

6. Target dates for further work _______________________________________________________________________________________________________________________

______________________________________________________

SIGNATURE

STUDENT___________________ FACULTY GUIDE ______________

DATE:

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Encl. II

SVKM’s NMIMS University

Management Program for Executives

(Certificate to be signed by the Guide under whom the candidate has

worked)

Certified that the project titled Indian banking industry with different

individual investment and tax planning presented by Nikesh Ganesh

Malhotra Roll no. 21 represents his/her original work which was carried

out by him/her at the SVKM’S NMIMS University under my guidance and

supervision during the period from March 2010 to October 2010.

Name of guide: Dr. Chandan Dasgupta

Signature of guide: ______________________________

Date: _________________________________________

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Preface

I took this project, when i saw that every individual thinking for safe investment. The First thing that comes to everyone’s mind is Banking. Banking makes everyone feels that their money is safe, their work is so smooth that no one even come to know that what is going with their investments.

Banking is growing in such a way that we can see a bank at every foot step. It’s the innovation that made them special. Their thinking what are current requirement of every individual. Before 20 years no one even thought about it. Their facilities, thinking out of the box, helping culture make everyone feel special.

I started thinking of this project when i made my first visit to bank it was about 7 years ago. I been there to open a saving account. As i was new to this, they made me so comfortable even that I m a regular visitor, they helped me to understand their products and services as per current market. From that day i thought I have to get into this to understand how the bank work?, What is behind all this how they make profit?, how they make use of investment made by investor?, what are their rules and regulations?, how they manage risk? how they are growing and many others.

While working on this project i came to understand that Banking is not at all easy task, it require effort, patience, specialization, innovation, helping culture and many other things.

I would like to thank my professors Dr. Chandas Dasgupta for providing me their valuable guidance and for taking keen interest in my project. I would like to thank my Mother:- Shobha Ganesh Malhotra to understand various investment details. I would like to thank my Brother:- Nilesh Ganesh Malhotra to understand Credit Card information services indepth knowledge. I would like to thanks my Sister: Nisha Ganesh Malhotra who has helped me to understand what and how loan services work, their procedures, and others.

Last but not least I thank such banks like HDFC Bank, State Bank of India, Citibank, ICICI Bank, IDBI Bank, Janakalyan Sahakari Bank ltd. were i opened my first bank account and my first Fixed Deposit. These branches had co-operated me in my project. They had made this project a great valuable event for me.

I m thanking once again to all of them who has given me their valuable time and their precious information which made this project a “DREAM PROJECT” for me.

NIKESH GANESH MALHOTRA

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INDIAN BANKING INDUSTRY WITH DIFFERENT

INDIVIDUAL INVESTMENT AND TAX PLANNING

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CONTENTS

Introduction

Indian Banking Industry

Different types of Banks in India

Growth of Indian Banking industry

Services provided by Indian Banking Industry

Innovation in Banks

Risk Management

Competition in Indian Banking Industry

Types of Individual Investment in Indian Banking Industry

Tax saving plans provided on Investments

Case Study

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Chapter 1

INTRODUCTION

“A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities. “

Introduction

Banks are a fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow).Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current sets of global standards are called Basel II. The most recent trend has been the advance of universal banks, which attempt to offer their customers the full spectrum of financial services under the one roof.

The oldest bank still in existence is “Monte dei Paschi di Siena”, headquartered in Siena, Italy, which has been operating continuously since 1472.

The Banking environment today is changing fast. The changing customer demographics demands to create a differentiated application based on scalable technology, improved service and banking convenience. Higher penetration of technology and increase in global literacy levels has set up the expectations of the customer higher than never before. Increasing use of modern technology has further enhanced reach and accessibility.

The market today gives us a challenge to provide multiple and innovative contemporary services to the customer through a consolidated window as so to ensure that the bank’s customer gets “Uniformity and Consistency” of service delivery across time and at every touch point across all channels. The pace of innovation is accelerating and security threat has become prime of all electronic transactions. High cost structure rendering mass-market servicing is prohibitively expensive.

Present day tech-savvy bankers are now more looking at reduction in their operating costs by adopting scalable and secure technology thereby reducing the response time to their customers so as to improve their client base and economies of scale.

The solution lies to market demands and challenges lies in innovation of new offering with minimum dependence on branches – a multi-channel bank and to eliminate the disadvantage of an inadequate branch network. Generation of leads to cross sell and creating additional revenues with utmost customer satisfaction has become focal point worldwide for the success of a Bank.

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Banking

What is a Bank?

A bank is defined as a commercial institution licensed as a receiver of deposits and giver of loans – both short and long term.

Section 5(1) (b) of the Banking Regulation Act, 1949 defines banking as, “the accepting for the purpose of lending or investment, of deposits from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”

Section 5(1) (c) defines a banking company as, “any company which transacts the business of banking in India.”

Banking involves therefore:

The borrowing, raising or taking up of money;

The lending or advancing of money either with or without security;

The drawing, making, accepting, discounting buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrip’s and other instruments and securities whether transferable or negotiable or not;

The granting and issuing of letters of credit, travelers’ cheques and circulars notes;

The buying and selling of foreign exchange including bank notes;

The buying and selling of bullion and specie;

The acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, bonds, obligations, securities and investments of all kinds;

The purchasing and selling of bonds, scrip’s or other forms of securities on behalf of constituents or others, the negotiating of loans and advances;

The receiving of all kinds of bonds or valuables on deposit or for safe custody or otherwise;

The providing of safe deposit vaults;

The collecting and transmitting of money and securities;

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Carrying on and transacting every kind of guarantee and indemnity business;Managing, selling and realizing any property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

Acting as agents for any government or local authority or any other person or persons;

Contracting for public or private loans and negotiating and issuing the same;

The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, municipal and advances;

The receiving of all kinds of bonds or valuables on deposit or for safe custody or otherwise;

The providing of safe deposit vaults;

The collecting and transmitting of money and securities;

Carrying on and transacting every kind of guarantee and indemnity business;

Managing, selling and realizing any property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

Acting as agents for any government or local authority or any other person or persons;

Contracting for public or private loans and negotiating and issuing the same;

The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;

Undertaking and executing trusts;

Undertaking the administration of estates as executor, trustee or otherwise;

Establishing, supporting and aiding institutions funds, trusts etc. for the benefit of its present employees and granting money for charitable purposes;

Acquiring, constructing and maintaining any building for its own purpose;

Selling, improving, managing, developing, exchanging, leasing, mortgaging or disposing its property;

Doing all such things that are incidental or conducive to the promotion or advancement of its business;

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Doing all other business specified by the Central Government as the lawful business of a banking company. Leasing and factoring has been specified as permissible for banks by the Central Government.

Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totalled $66.3bn in 2009, up 12% on the previous year.

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Chapter 2

INDIAN BANKING INDUSTRY

Introduction

The History of banking in India dates back to the early half of the 18th century. 3 Presidency Banks that were established in the country namely the Bank of Hindustan, Bank of Madras and Bank of Bombay can also be referred to as some of the oldest banking institutions in the country. The State Bank of India that was earlier known as the Bank of Bengal is also one of the oldest in the genre.

Functioning of a bank

Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise."

Early History

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

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The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

Years Number of banksthat failed

Authorised capital(Rs. Lakhs)

Paid-up Capital(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

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In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July 1969.

Nationalisation

The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b). By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. Indira Gandhi, Prime Minister of India had issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation and Globalization

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions. In March 2006, the Reserve Bank of India allowed Warburg

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Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Vision of Banks in India

The banking scenario in India has already gained all the momentum, with the domestic and international banks gathering pace. The focus of all banks in India has shifted their approach to 'cost', determined by revenue minus profit. This means that all the resources should be used efficiently to better the productivity and ensure a win-win situation. To survive in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed at higher profit maximization.

Focus of banks in India

The banking industry is slated for growth in future with a more qualitative rather than quantitative approach. The total assets of all scheduled commercial banks by end-March 2010 is projected to touch Rs 40,90,000 crore. This is going to comprise around 65% of GDP at current market prices as compared to 67% in 2002-03. The bank's assets are estimated to grow at an annual composite rate of growth of 13.4% during the rest of the decade as against 16.7% between 1994-95 and 2002-03.Barring the asset side, on the liability perspective, there will be huge additions to the capital base and reserves. People will rely more on borrowed funds, pace of deposit growth slowing down side by side. However, advances and investments would not see a healthy growth rate.

Consolidation of Banks in India

Would the banking industry in India get opened up for more international competition? India would see a large number of global banks controlling huge stakes of the banking entities in the country. The overseas banking units would bring along with it capital, technology, and management skills. This would lead to higher competition in the banking frontier and ensure greater efficiency. The FDI norms in the banking sector would give more leverage to the Indian banks. Thus, a consolidation phase in the banking industry in India is expected in the near future with mergers and acquisitions gathering more pace. One might also see mergers between public sector banks or public sector banks and private banks. Credit cards, insurance are the next best strategic places where alliances can be formed.

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Chapter 3

DIFFERENT TYPES OF BANKS IN INDIA

Introduction

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 49,000 ATMs. To know about the types of banks in India, it is necessary that we first comprehend the banking system so as to be able to distinguish about its various types.

The following list contains a list of different types of banks in India:-

Central Bank:

Reserve Bank of India (RBI)

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Public Sector Banks (Nationalised banks):

NO. BANKS NO. BANKS

1 State Bank of India (SBI) 15 Syndicate Bank

2 State Bank of Bikaner & Jaipur 16 UCO Bank

3 State Bank of Hyderabad 17 Allahabad Bank

4 State Bank of Indore 18 Andhra Bank

5 State Bank of Mysore 19 Bank of Baroda 

6 State Bank of Patiala 20 Bank of Maharashtra

7 State Bank of Saurashtra 21 Dena Bank

8 State Bank of Travancore 22 Oriental Bank of Commerce

9 Bank of India 23 Punjab & Sind Bank

10 Canara Bank 24 Union Bank of India

11 Central Bank of India 25 United Bank of India

12 Corporation bank 26 Vijaya Bank

13 Indian Bank 27 IDBI Bank

14 Indian overseas bank

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Private Sector Banks:

NO. BANKS NO.

BANKS

1 HDFC Bank 17 Karnataka Bank Limited

2 ICICI Bank 18 Karur Vysya Bank

3 Federal Bank 19 Kotak Mahindra Bank 

4 ING Vysya Bank 20 Lakshmi Vilas Bank

5 Axis Bank (formerly UTI Bank) 21 Nainital Bank

6 Yes Bank 22 Ratnakar Bank

7 Bank of Rajasthan 23 SBI Commercial and International Bank

8 Bharat Overseas Bank 24 South Indian Bank

9 Catholic Syrian Bank 25 Amazing Mercantile Bank 

10 Centurion Bank of Punjab 26 Punjab National Bank

11 City Union Bank 27 Rupee Bank

12 Development Credit Bank 28 Saraswat Bank

13 Dhanalakshmi Bank 29 Tamilnad Mercantile Bank

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14 Ganesh Bank of Kurundwad  30 Thane Janata Sahakari Bank

15 IndusInd Bank 31 Bassein Catholic Bank

16 Jammu & Kashmir Bank

Foreign Banks:

NO.

BANKS NO. BANKS

1 ABN AMRO 17 Bank of Ceylon

2 BNP Paribas 18 Bank of Nova Scotia

3 Citibank India 19 Bank of Tokyo Mitsubishi UFJ

4 HSBC (Hongkong & Shanghai Banking Corporation)

20 Calyon Bank

5 JPMorgan Chase Bank 21 ChinaTrust Commercial Bank

6 Bank of America 22 DBS Bank

7 Standard Chartered Bank 23 Krung Thai Bank

8 Barclays Bank 24 Mashreq Bank

9 Deutsche Bank 25 Mizuho Corporate Bank

10 Royal Bank of Scotland 26 Oman International Bank

11 Abu Dhabi Commercial Bank Ltd 27 Cho Hung Bank

12 American Express Bank 28 Société Générale

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13 Antwerp Diamond Bank 29 State Bank of Mauritius

14 Arab Bangladesh Bank 30 Scotia

15 Bank International Indonesia 31 Taib Bank

16 Bank of Bahrain & Kuwait

Central Bank (Reserve Bank of India)

All types of Banks in India are regulated and the activities monitored by a standard bank called the Reserve Bank of India that stands at the apex of the banking structure. It is also called the Central Bank, as major banking decisions are taken at this level. The other types of banks in India are placed below this bank in the hierarchy.

Scheduled Commercial Bank in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

The banks included in this schedule list should fulfill two conditions.

The paid capital and collected funds of bank should not be less than Rs. 5 lac.

Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities.

Such bank becomes eligible for debts/loans on bank rate from the RBI

Such bank automatically acquires the membership of clearing house.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches.The scheduled commercial banks in India comprise of State bank of India and its associates, nationalised banks, foreign banks, private sector banks, Co-operative banks and regional rural banks.

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Non Scheduled Bank

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Public sector banks in India

All government owned banks fall in this variety. Besides the Reserve Bank of India, the State Bank of India and its associate banks and about 20 nationalized banks, all comprises of the public sector banks. Many of the regional rural banks that are funded by the government banks can also be clubbed in this genre.

Private sector banks in India

A new wave in the banking industry came about with the private sector banks in India. With policies on liberalization being generously taken up, these private banks were established in the country that also contributed heavily towards the growth of the economy and also offering numerous services to its customers.

Foreign Banks in India

Foreign Banks are not new phenomena in Indian bank in system. However, Globalization and economic policies implemented in late 1980s encouraged many international banks to open their shops here. At most all the international banks are operating in India. Foreign Banks in India have brought the latest technology and new banking practices. Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allow them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely.

Cooperative banks in India

With the aim to specifically cater to the rural population, the cooperative banks in India were set up through the country. Issues like agricultural credit and the likes are taken care of by these banks.

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Chapter 4

GROWTH OF INDIAN BANKING INDUSTRY

Introduction

The world’s second largest populated country, India, is the apple of the eye for the world now. Banking sector has remained the backbone of Indian economy. The world economies are seeing it as their potential market. This has been going on since quite some time now, ever since 1991 reforms of liberalization, globalization and privatization. After the reformative measures of 1991, this industry has been undergoing major changes. Advent of hi-tech communication and information technology has facilitated growth in Internet banking, ATM Network, Electronic transfer of funds and quick dissemination of information between different branches.

According to researches carried out by the Reserve Bank of India (RBI), on an all India basis, 59 per cent of the adult population in the country has bank accounts and 41 per cent don’t. In rural areas, the coverage of banks is 39 per cent, against 60 per cent in urban areas. There is only one bank for a population of13000. India is well positioned to become the fourth-largest economy in the world by 2025. GDP (Gross Domestic Product) growth rate 7-8 percent a year will be sustainable going forward if key enabling factors have been put in place. One of the enablers of robust economy growth is a banking sector that is able to adequately and efficiently meet the needs of a growing economy. The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As

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far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry. The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent.

In the annual international ranking conducted by UK-based Brand Finance Plc, 20 Indian banks have been included in the Brand Finance® Global Banking 500. In fact, the State Bank of India (SBI) has become the first Indian bank to be ranked among the Top 50 banks in the world, capturing the 36th rank, as per the Brand Finance study. The brand value of SBI increased from US$ 1.5 billion in 2009 to US$ 4.6 billion in 2010. ICICI Bank also made it to the Top 100 list with a brand value of US$ 2.2 billion. The total brand value of the 20 Indian banks featured in the list stood at US$ 13 billion. Meanwhile, loan disbursement from scheduled commercial banks which included regional rural banks as well posted a growth of 16.04 per cent by March 12, 2010, on a year-on-year basis, as per the latest data released by RBI. The RBI had earlier predicted that the credit growth during 2009-10 would be around 16 per cent.

Following the financial crisis, new deposits have gravitated towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit also, nationalised banks hold the highest share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased since April 2009 and touched US$ 47.8 billion on March 2010, as per the RBI's June 2010 bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts.

Foreign exchange reserves were up by US$ 1.69 billion to US$ 272.783 billion, for the week ending June 11, on account of revaluation gains. June 21, 2010.

Major Developments

The Monetary Authority of Singapore (MAS) has provided qualified full banking (QFB) privileges to ICICI Bank for its branch operations in Singapore. Currently, only SBI had QFB privileges

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in country. The Indian operations of Standard Chartered reported a profit of above US$ 1 billion for the first time. The bank posted a profit before tax (PAT) of US$ 1.06 billion in the calendar year 2009, as compared to US$ 891 million in 2008.Punjab National Bank (PNB) plans to expand its international operations by foraying into Indonesia and South Africa. The bank is also planning to increase its share in the international business operations to 7 per cent in the next three years.

The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months ended December 2008. Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4 million on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, over the corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net profit at US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$ 128.05 million for the same quarter in the previous year.

Government Initiatives

The government plans to invest US$ 3.63 billion into public sector banks to aid them for maintaining their capital adequacy ratio (CAR), as per the Union Budget presented by the Union Finance Minister in February 2010. Out of the total allocation, US$ 2.1 billion would be used for recapitalisation of the public sector banks during April-June 2010 and US$ 1.5 billion will be invested during the rest of 2010-11. The RBI has allowed banks to make changes in the repayment schedules or drawdown without prior approval from the central bank. However, such a change could be made on the condition that the average maturity of the loan should remain the same. The move is expected to make external commercial borrowing (ECB) transactions easier. Transactions both through automatic and approval routes can take advantage of this change. Now, without the prior approval of RBI, Indian companies may borrow up to US$ 500 million in a year.

Further, RBI also allowed domestic scheduled commercial banks to open up their branches in Tier III to Tier VI regions that have population of up to 49,999 without the prior permission of the central bank. Banks such as PNB and UCO Bank are planning to take advantage of this initiative and would open around 440 and 89 branches, respectively, in such regions. In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of NECS. NECS was introduced in September 2008 for centralised processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS.

The repo rate and the reverse repo rate were increased by 25 basis points each in mid-March 2010.

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The Monetary Policy Statement 2010-11, dated April 20, 2010, specifies the following monetary measures:

The repo rate is now at 5.75 percent and the reverse repo rate at 4.50 percent

The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.

Meanwhile, outstanding bank credit in the 15 days up to January 29, 2010 rose by US$ 4.32 billion, pointing to a revival in credit growth. This is the highest year-on-year growth recorded since August 14, 2009. Furthermore, the outstanding bank credit in the 15 days up to February 12, 2010, rose by US$ 4.87 billion to US$ 658.24 billion, according to data from the Reserve of Bank of India (RBI), marking a 15.07 per cent year-on-year growth in credit.

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Chapter 5

SERVICES AND PRODUCTS PROVIDED BY INDIAN BANKING INDUSTRY

Introduction

With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.

With stiff competition and advancement of technology, the services provided by banks has become more easy and convenient. Banking covers so many services that it is difficult to define it. However, these basic services have always been recognized as the hallmark of the genuine banker. These are.

The receipt of the customer’s deposits The collection of his cheques drawn on other banks The payment of the customer’s cheques drawn on himself

Services and Products in Banking

Bank Accounts

Savings Account:

You can keep your savings in this account and earn interest on the money. You can still access the money if you need to use it. You will usually get an ATM or Debit Card to use for transactions on this account.

Cheque or Current Account:

You will get a cheque book and will be able to pay bills with cheques. Cheque accounts usually pay less interest than savings accounts, and have higher bank charges. You will be charged for each cheque that you use, so do not write out cheques for every little thing. If you have a cheque account you can apply for an overdraft. An overdraft is like a personal loan. It allows you to draw more money from your account than you actually have, so that you go into a negative balance. Overdrafts have high interest rates, so it is better to avoid them.

Notice Deposit Accounts:

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You must deposit a minimum amount to open a notice account, and you will have to give 32 or 60 days notice if you want to draw from the account. These are good accounts for short-term saving because you can't just draw the money out easily and you earn high interest.

Fixed Deposit Accounts:

These accounts also need a minimum opening balance. You will only be able to withdraw the money after a fixed period, usually 12 or 24 months. You will earn high interest, which makes this a good medium-term savings account.

Society or Group Accounts:

These accounts are designed for large groups of people who are saving money together, like stokvels.

Home Loan Account (Mortgage Bond):

This is money the bank lends you to buy or improve on your property. You pay it back over many years, usually 20, and pay high interest to the bank.

Loans

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants.

Types of loans

Secured

Unsecured

Demand

Secured:

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. A subsidized loan is a loan that will not gain interest before you begin to pay it. It is known to be used at multiple colleges. A unsubsidized loan is a loan that gains interest the day of disbursement.

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A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

Unsecured

Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

credit card debt

personal loans

bank overdrafts

credit facilities or lines of credit

corporate bonds (may be secured or unsecured)

Demand

Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.

Money Transfer

Remit money to India - the Reference resource for Safe, Quick, Easy and Affordable ways to send money to India from across the world. Transferring money worldwide today has become easy as long as one can understand the complex process it involves.

Types of Money Transfer

Real Time Gross Settlement (RTGS)

NEFT-Customers Facilitation Centres

Real Time Gross Settlement (RTGS): RTGS is a payment system in which both processing and final settlement of fund transfer instructions take place on real time basis. It is a gross settlement system where fund-transfers are settled individually, i.e. without netting debits against credits. RTGS effects final settlement continuously and the settlements are immediate, final and irrevocable. Each Bank branch participating in the RTGS is identified by a unique Indian Financial System Code (IFSC). With

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the advancement of the Technological changes in the Banking industry the RTGS introduction has become a boom in settling the Interbank funds instantaneously. The Customer can avail this facility and make instantaneous transfer of funds to beneficiary`s account Karnataka Bank became a member of Real Time Gross Settlement (RTGS) System from 16th July 2004 and has been settling Inter-Bank transactions in Mumbai since then. MoneyQuick services can be accessed by customers which uses RTGS service. This MoneyQuick facility provides INTERBANK funds transfer.

The minimum amount for Interbank funds transfer facility for customers under MoneyQuick is fixed at Rs. 1,00,000 (Rupees One Lakh only). Service Charges for outward customer transactions - Rs.1 lakh to Rs.5 lakh is Rs.25/- and for Above Rs.5 lakh is Rs.50/- per transaction plus service tax. Service Charges for Inward customer transactions - FREE.

NEFT-Customers Facilitation Centres:-

Western Union Money Transfer (WUMT): Western Union Financial Services International has a legacy of public trust built through more than 150 years of extra ordinary continuous service. This international money transfer system facilitates quick, secure, reliable and convenient transfer of funds all over the world. Neither the sender nor the receiver has to have a Bank account with us and the receiver pays no fee. The person who remits you the money will fill in a prescribed form giving details of beneficiary and deposit the money along with the requisite service charges (fee) at its agent abroad. The remitter will give one Test Question and its answer for identification of beneficiary. The remitter then gets a receipt with Money Transfer Control Number (MTCN) which he will inform to you as the beneficiary of the transfer. The amount so deposited will be available to you within 10 seconds.

Credit and Debit Cards

Credit Card:

Credit Card is “post paid” or “pay later” card that draws from a credit line-money made available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid full by the end of the period, one is charged interest. A credit card is nothing but a very small card containing a means of identification, such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder. These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. The bank charges the customer a small amount for these services. The card holder need not have to carry money/cash with him when he travels or goes for purchasing. Credit cards have found wide spread acceptance in the ‘metros’ and big cities. Credit cards are joining popularity for online payments. The major players in the Credit Card market are the foreign banks and some big public sector banks like SBI and Bank of Baroda. India at present has about 3 million credit cards in circulation.

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Debit Cards:

Debit Card is a “prepaid” or “pay now” card with some stored value. Debit Cards quickly debit or subtract money from one’s savings account, or if one were taking out cash. Every time a person uses the card, the merchant who in turn can get the money transferred to his account from the bank of the buyers, by debiting an exact amount of purchase from the card. To get a debit card along with a Personal Identification Number (PIN). When he makes a purchase, he enters this number on the shop’s PIN pad. When the card is swiped through the electronic terminal, it dials the acquiring bank system – either Master Card or Visa that validates the PIN and finds out from the issuing bank whether to accept or decline the transaction. The customer never overspread because the amount spent is debited immediately from the customer’s account. So, for the debit card to work, one must already have the money in the account to cover the transaction. There is no grace period for a debit card purchase. Some debit cards have monthly or per transaction fees. Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use one’s own money at the time of sale, so they are often easier than credit cards to obtain. The major limitation of Debit Card is that currently only some 3000-4000 shops country wide accepts it. Also, a person can’t operate it in case the telephone lines are down.

Lockers

A locker is a small, usually narrow storage compartment. They are commonly found in dedicated cabinets, very often in large numbers, in various public places such as locker rooms, work places, schools, transport centres, and the like. They vary in size, purpose, construction, and security. Bank lockers may be known as one of the safest ways to protect your lifetime savings. Storing too much jewellery and valuables in the house at times becomes a security issue and an impediment in case of natural calamities.

Guidelines on allotment of Bank Safe Deposit Lockers

Based on the Committee on Procedures and Performance Audit on Public Services (CPPAPS) recommendations for easy operation of lockers, Reserve Bank of India has issued on 17th April 2007, the following guidelines for the benefit of bank customers.

Allotment of Lockers

Linking of Allotment of Lockers to placement of Fixed Deposits: The Committee on Procedures and Performance Audit of Public Services (CPPAPS) observed that linking the lockers facility with placement of fixed or any other deposit beyond what is specifically permitted is a restrictive practice and should be prohibited forthwith. We concur with the Committee's observations and advise banks to refrain from such restrictive practices.

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Fixed Deposit as Security for Lockers: Banks may face situations where the locker-hirer neither operates the locker nor pays rent. To ensure prompt payment of locker rent, banks may at the time of allotment, obtain a Fixed Deposit which would cover 3 years rent and the charges for breaking open the locker in case of an eventuality. However, banks should not insist on such Fixed Deposit from the existing locker-hirers.

Wait List of Lockers: Branches should maintain a wait list for the purpose of allotment of lockers and ensure transparency in allotment of lockers. All applications received for allotment of locker should be acknowledged and given a wait list number.

Banks are also advised to give a copy of the agreement regarding operation of the locker to the locker-hirer at the time of allotment of the locker.

Banks have been advised by RBI to give wide publicity and provide guidance to locker-hirers / depositors of safe custody articles on the benefits of the nomination facility and the survivorship clause. Illustratively, it should be highlighted in the publicity material that in the event of the death of one of the joint account holders, the right to the contents of the locker or the articles under safe custody does not automatically devolve on the surviving joint deposit account holder, unless there is a survivorship clause. Banks have also been advised to ensure that identification Code of the bank / branch is embossed on all the locker keys with a view to facilitate Authorities in identifying the ownership of the locker keys

Charges

The RBI format for locker charges are as follows:

For Metro/Urban Areas:

Type A – 1000 (for 1 year) / 1950 (for 2 years) / 2900 (3 years)

Type B – 1000 (1 year) / 1950 (2 years) / 2900 (3 years)

Type C – 2500 (1 year) / 4900 (2 years) / 7300 (3 years)

Note:

Locker charges are normally collected per annum basis. Charges are paid in advance and the charges depend on the size of the locker and the centre in which the branch is located. It is the duty of the bank to notify the existing customers about the increase in the rates well before the renewal date so that they are in a position to consider whether to continue with locker at the increased rates.

Services provided to NRIs

Living abroad no longer means staying away from your loved ones back home. With NRI Banking Services on a rise, keeping in touch with your family in India is easy, convenient and quick.

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Many Indians living in foreign countries like US, UK, Canada, etc. benefit from these NRI Services. These banking services are useful to make investments & remittance. Also, many NRI's opt for these services to avail of loans, bill payment facilities, etc. Almost all the Indian Banks provide services to the NRIs. The Bank of India NRI system is quite vast.

Non-Resident (Ordinary) Account – NRO Account:-

The Non-Resident Ordinary Accounts (NRO) can be in the form of Savings, Current or Fixed Deposits in Indian Rupees. However, in this account the funds are non - repatriable.

Type of Account

The accounts may be maintained in the form of savings or current or term deposit accounts. The accounts can also be opened jointly by non-residents with their close relatives resident in India and operations thereon by the resident account holders can be made freely. If an account is used only for the personal or business needs of the resident account holder, it may be opened jointly even with a person who is not a close relative but this needs prior permission of the Reserve Bank. Interest earned on balances in NRO Accounts is not exempt from Indian Income-tax instead Income-tax (at present @ 20%) is deducted at source i.e. at the time of payment of interest by the bank. Balance held in NRO Account can neither be repatriated nor any remittance in foreign currency is allowed without prior approval of Reserve Bank.

Operation of the Account

There are not many restrictions on the operation of this account and a number of credit and debit transactions can be made after filling up Form A4. The following credit transactions can be made:

Proceeds of remittances received in any permitted form through normal banking channels.

Proceeds of foreign currency notes/traveller cheques tendered by the account holder during his temporary visit to India.

Remittance by way of transfer from rupees accounts of non-resident banks.

Legitimate dues in rupees of the account holder in India.

Certain credits to the accounts such as proceeds of foreign inward remittances, dividend and interest earned on shares/securities acquired with the Reserve Bank’s permission (wherever necessary) and held in India by the account holder, sale proceeds/maturity proceeds of shares/securities, surrender value of life insurance policies of the account holder and proceeds of cheques for small amounts upto specified limits can be made by banks without the Reserve Bank’ permission.

Following debit transactions can also be made after filling Form A4

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All local payments in rupees.

Debits for investment and credits representing sale proceeds of investments may also be permitted by banks.

Withdrawals from these accounts can be freely made for local disbursements as well as for investments in Units of UTI, Government securities and National Plan/Savings Certificates, without prior approval of the Reserve Bank.

Non-Resident (External) Rupee Account – NRE Account:-

The Non-Resident External Accounts (NRE) can be in the form of Savings, Current or Fixed Deposits in Indian Rupees. Persons of Indian nationality or origin resident abroad may open, with authorised banks in India, Non-resident (External) Accounts (NRE Accounts), designated in rupees. These accounts can be maintained in the form of savings, current or term deposit accounts. Opening of NRE Accounts jointly in the names of two or more non residents is permitted provided all the account holders are persons of Indian nationality or origin. For opening these accounts, the funds are required to be remitted to India through

Proceeds of foreign exchange remittances from abroad through banking channels in an approved manner.

Proceeds of foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India.

Transfer from an existing Non-Resident (External) FCNR account of the same person.

The account holder has to furnish an undertaking on the account opening form that he would promptly send intimation to his bank if and when he returns to India for permanent residence.

Proceeds of remittance arranged by the account holder through banking channels from any country can be credited to this account. Similarly, income from the account holder’s investment from the funds in the account can be credited to it, except in cases where the investments are permitted on non-repatriable basis. Remittances from the account to the country of residence of the account holder or any other country are freely allowed. Authorised dealers may allow operations on NRE Accounts by persons resident in India in terms of Powers of Attorney (Annexure 14.5) or other appropriate authority granted in their favour of non-resident account holders, provided the powers are restricted to withdrawals for local payments.

Type of Account

All types of accounts i.e. current, savings and term deposit etc. can be opened under Non-Resident (External) Accounts Scheme. A Non-resident can open joint account with other non-resident provided all the account holders are persons of Indian nationality or origin. Opening of a joint account

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by a non-resident person with a person resident in India is not permitted under NR (E) Scheme. Non-resident account can grant power of attorney or such other authority to residents in India for operating their NR (E) Accounts in India. Such authority is however, restricted to withdrawals for local payments only. The resident power of attorney holder cannot repatriate funds held in accounts outside India under any circumstances or make payment of gifts on behalf of the account holder.

Account can also be opened by an eligible non-resident Indian during his temporary visit to India, against tender of foreign currency traveler cheques/currency notes, provided the bank is satisfied that the prospective account holder has not ceased to be a non-resident. The amount so tendered would be endorsed on the Currency Declaration Form CDF where applicable, before crediting the rupee equivalent to the account.

Operation of NRE Accounts

There are certain restrictions on operation of NR (E) accounts and Form A2 / Form A4 is to be completed for little transaction. These forms may be completed either by the resident party to the transaction or by the bank after obtaining necessary information from the resident party account holder. The undernoted transactions of debits/credits are permitted in NR (E) accounts:

Credits in the account

Transaction where Form A4 is not to be completed.

Transfer from FCNR accounts of the same accounts holder.

Interest accruing on balances in Non-resident (External) or FCNR accounts of the account holder.

Transactions where Form A4 is to be completed.

Proceeds of foreign exchange remittances, drafts, personal cheques etc. in the name of the account holder.

Proceeds of foreign currency travellers cheques, drafts and personal cheques drawn by account holder on a foreign currency account maintained abroad by him deposited by account holder during his temporary visit to India, provided authorised dealer is satisfied that the account holder is still normally resident abroad, the travellers cheques/drafts are standing in the name of account holder and have not been endorsed in his favour and in the case of travellers cheques, they are discharged by the account holder in the presence of the bank officials.

(iii)  Proceeds of foreign currency/bank notes tendered by account holder during his temporary visits to India, provided these are tendered to the authorised dealer in person by the account holder himself and the authorised dealer is satisfied that the account holder is still normally resident outside India.

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Debits in the account

Transactions where Form A4 is not be completed.

All local payments except for the purpose of investment.

Transfer to any other NR (E) of FCNR account of the same person.

Transfer to NR (E) accounts of persons other than the account holder for bona file personal purpose.

Transactions where Form A4 is required to be completed.

Payments for permissible investments by the account holder.

Payments towards purchase price of immovable property by account holder. However, if the account holder is not an Indian national, declaration to Reserve Bank of India for acquisition of property under section 31 of Foreign Exchange Regulation Act, 1973 is to be obtained.

Any other transaction if covered under general or special permission granted by Reserve Bank.

Transaction required to be reported on Form A2

Remittance abroad.

Sale of foreign currency traveller cheques etc. to account holder himself or his dependants provided that they hold a ticket showing journey date which should not be later than thirty days from the date of sale.

All other transactions of credit/debit to these accounts not covered under the above provisions required prior approval of Reserve Bank. Form A4 is to be completed in duplicate in such cases and forwarded to Reserve Bank through the bank with whom the account is maintained. The transactions will be put through the account only after a copy of Form A4 duly approved by Reserve Bank is received back.

Advantages of NRE Account

Non-residents can enjoy the following advantages by maintaining NRE Accounts:

Term deposits for one year and above made by non-residents carry interest at rates higher than those available to residents in India.

The interest on deposits and any other income accruing on the balance in the accounts are free of Indian Income-tax.

The balances in the accounts are free of Wealth-tax.

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Gifts to close relatives in India from out of balances in the accounts are free of Gift-tax, when gifted before 1st October, 1998, thereafter there is no gift tax in India.

The entire credit balance (inclusive of interest earned thereon) can be repatriated outside India at any time without reference to the Reserve Bank.

Local disbursement from the accounts can be made freely.

Purchases of Units of Unit Trust of India (UTI), Central and State Government Securities and National Plan/Savings Certificates can be made freely from the balances in these accounts.

Sale proceeds/maturity proceeds/repurchase price of Units of UTI, securities or certificates originally purchased out of the funds in the account can be freely credited to these accounts by banks, without reference to the Reserve Bank.

Account holders are supplied special series of cheques forms for operations on these accounts.

Account holders can avail of loans/overdrafts from banks against security of fixed deposits in their NRE accounts.

Disadvantages of NR(E) Accounts

NR (E) accounts are opened in Indian rupees and all foreign exchange remittances received for credit of those accounts are first converted to Indian rupees at the buying rates by the banks. Any withdrawal in foreign currency will be permitted by the bank by converting Indian rupees in the account to foreign currency at the selling rate. This conversion loss is to be borne by the account holder.

Exchange rates are subject to fluctuation on day to day basis and Indian rupee has depreciated against all major foreign currencies in recent past. Balances held in Indian rupees in NR (E) accounts are thus exposed to exchange fluctuation risk.

Non-Resident (Foreign Currency) Account – FCNR Account:-

The Foreign Currency Non-Resident Accounts (FCNR) is a Fixed Deposit account and they are maintained only in currencies like US Dollars, GBP, DM, Euro and Yen. Non-Resident Indians can open accounts under this scheme. The account should be opened by the non-resident account holder himself and not by the holder of power of attorney in India. These deposits can be maintained in 5 designated currencies i.e. U.S. Dollar (USD), Pound Sterling (GBP) and Euro, Australian Dollar (AUD) & Canadian Dollar (CAD). These accounts can only be maintained in the form of terms deposits for maturities of minimum 1 year to maximum 5 years. These deposits can be opened with funds remitted from abroad in convertible foreign currency through normal banking channel, which are of repatriable nature in terms of general or special permission granted by Reserve Bank of India.These accounts can be

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maintained with our branches, which are authorised for handling foreign exchange business. (List of branches authorised for handling foreign exchange business linked at the end).

Funds for opening accounts under PNB Global Foreign Currency Deposit Scheme or for credit to such accounts should be received from: -

o Remittance from outside India or

o Traveller Cheques/Currency Notes tendered on visit to India.

International Postal Orders cannot be accepted for opening or credit to FCNR accounts.-

Transfer of funds from existing NRE/FCNR accounts. If remittance is received in any currency other than USD, GBP, Euro, AUD & CAD, it will be converted into one of the designated currencies of remitter’s choice at the risk & cost of the depositor. Rupee balances in the existing NRE accounts can also be converted into one of the designated currencies at the prevailing TT selling rate of that currency for opening of account or for credit to such accounts.

Advantages of FCNR (B) Deposits

o Principal alongwith interest freely repatriable in the currency of your choice.

o No Exchange Risk as the deposit is maintained in foreign currency.

o Loans/overdrafts in rupees can be availed by NRI depositors or 3rd parties against the

security of these deposits. However, loans in foreign currency against FCNR (B) deposits in India can be availed outside India through our correspondent Banks.

o No Wealth Tax & Income Tax is applicable on these deposits.

o Gifts made to close resident relatives are free from Gift Tax.

o Facility for automatic renewal of deposits on maturity and safe custody of Deposit Receipt is

also available.

Payment of Interest

Interest on FCNR (B) deposits is being paid on the basis of 360 days to a year. However, depositor is eligible to earn interest applicable for a period of one year if the deposit has completed a period of 365 days. For deposits upto one year, interest at the applicable rate will be paid without any compounding effect. In respect of deposits for more than one year, interest can be paid at intervals of 180 days each and thereafter for remaining actual number of days. However, depositor will have the option to receive the interest on maturity with compounding effect in case of deposits of over one year.

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Private banking

Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a non-incorporated banking institution. At the moment, India's share is quite nascent. Worldwide, we serve a lot of Indian billionaires, but on the domestic side, it is still a growth market. Five years from now, India will probably contribute about 10 per cent in terms of overall profitability of private banking. The Asian contribution will be 40 per cent, compared to around 26-27 per cent now.

Banking Automation Channels

Proxy Banking

ATM

Mobile/ Phone Banking/SMS Banking

Internet Banking/E-Banking

Automation is key

Automation is the basic thing that banks need to have in place. It involves a combination of centralized networks, operations, and a core banking application. Automation enables banks to offer 24x7x365 service using lesser manpower. No doubt, innovations like telebanking and automated teller machines (ATMs) have considerably put customers at ease in the recent past. But with net banking the customer will be able to transact with the help of a mouse and his visits to the neighborhood bank will become a thing of the past. With Computerization and networking of bank branches in the country, most banks today are in a position to capture and consolidate financial data about a customer. Financial data is typically a summary of the loans granted, savings and fixed accounts held by the customer, credit card facilities availed. More so, their IT systems also record operational data, such as the number of times a customer has visited the bank branch in the last month, the number of ATM transactions he has undertaken in the same time period. Private and foreign banks also analyse each customer’s financial behaviour, in terms of average balances maintained, number of cheques used each month, number of cheques dishonoured and many other things such as regular payment of loan installments, credit card payments and so on.

Types of Banking Automation Channels:-

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Proxy Banking :- Indian villages were miles away from mutual funds, insurance and even equity trading. Thanks to Internet Kiosk and the ATM duo which has made it possible for rural India. This kiosk has been set up by ICICI Bank in partnership with network n-Logue Communications in remote villages of Southern part of the country. This is known as Proxy Banking. With the help of fibre optic cables, this kiosk works on wireless in local loop technology.

Reasons for setting-up of Proxy Banking:-

58% of rural households still do not have bank accounts.

Only 21% of rural households have access to credit from a formal source.

70% of marginal farmers do not have deposit account.

87% households have no formal credit.

Only 1% rural househlods rely on a loan from a financial intermediary. · The loans take between 24 to 33 weeks to get sanctioned.

Consumers bribe officials to get loans approved which varies between 10 and 20 per cent of the loan amount.

Branch banking in rurals is a loss-making.

Benefits to rurals

Small loans given for buying buffaloes.

Loans for setting up a tea shop.

Life and non-life insurance provided.

Weather insurance given to farmers.

Insurance policies sold to farmers like groundnut, castor, soya, paddy crop, etc.

The Proxy Banking is an innovative approach to rural lending and will add to the government's expanding base of kisan credit cards and the good old guidelines for agricultural lending.

ATM (Automated Teller Machine):-

The introduction of ATM’s has given the customers the facility of round the clock banking. The ATM’s are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks are closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password. ATM’s are currently becoming popular in India that enables the customer to withdraw their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or deposit funds, check account balances, transfer funds and

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check statement information. The advantages of ATM’s are many. It increases existing business and generates new business. It allows the customers.

To transfer money to and from accounts.

To view account information.

To order cash.

To receive cash.

Advantages of ATM’s:

To the Customers 29

o ATM’s provide 24 hrs, 7 days and 365 days a year service.

o Service is quick and efficient

o Privacy in transaction

o Wider flexibility in place and time of withdrawals.

o The transaction is completely secure – you need to key in Personal Identification Number

(Unique number for every customer).

To Banks

o Alternative to extend banking hours.

o Crowding at bank counters considerably reduced.

o Alternative to new branches and to reduce operating expenses.

o Relieves bank employees to focus an more analytical and innovative work.

o Increased market penetration.

ATM’s can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash. The ATM services provided first by the foreign banks like Barclays Bank, Citibank, Grind lays bank and now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the form of “SWADHAN”. Over the past year upto 44 banks in 30 Mumbai, Vashi and Thane, have became a part of “SWADHAN” a system of shared payments networks, introduced by the Indian Bank Association (IBA).

Benefits

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Free with your Bank Account: Obtaining a debit card is easy. If you qualify to open a bank account, you usually get a debit card, if your bank offers the service.

No background check: When you are applying for a debit card, the bank does not need to look into your credit history. All you need is the documentation to open a bank account, and money in your bank when you use your debit card.

Convenience: A Debit card frees you from carrying a lot of cash or a chequebook. In case, you are an international traveller, you don't need to stock up on Traveller's Cheque or cash. You can use your debit card to withdraw cash from over 500,000 ATMs around the world in over 100 countries. You can withdraw in the local currency of the country you are in; limited only by the money you have back home in your account, and your Business Travel Quota (BTQ) limit availability.

Fair Exchange: If you return merchandise or cancel services paid for with a Debit card, the transaction is treated as if it were made with cash or a check. Customers usually get cash back for off-line purchases; for on-line transactions, the amount is credited to your account.

Drawback

Unlike a credit card, debit card transactions are on a "pay now" basis.

Charges of ATM

Recently, the Reserve Bank of India (RBI), the country's central bank, had issued a directive to all commercial banks to abolish ATM service charges inter alia. With effect from 01 April 2009, customers of any licensed commercial bank could use the ATMs of other banks without paying a reciprocal service charge. Earlier, banks charged between INR 10 and INR 35 per reciprocal transaction. However, banks can still surcharge for items such as credit card ATM cash advances and at foreign ATMs. In addition, RBI imposes significant foreign exchange restrictions on the use of Indian debit VISA/MasterCard abroad. For example, Indian debit VISA cards are routinely marked "Valid in India and Nepal only" due to the country's restrictive foreign exchange reserve policy. Again, recently the same directive of free mutual ATM usage was reverted to 5 free such transactions per month; beyond which a cap of INR 20/- has been fixed.

Mobile/ Phone Banking/SMS Banking

"The account that travels with you". This is needed in today's fast business environment with unending deadlines for fulfillment and loads of appointments to meed and meetings to attend. With mobile banking facilities, one can bank from anywhere, at anytime and in any condition or anyhow. The system is either through SMS or through WAP. (Check out for SMS Banking under different head). Mobile Banking is the hottest area of development in the banking sector and is expected to replace the credit/debit card system in future. In past two years, mobile banking users has increased three times if we compare the use of either debit card or credit card. Moveover 85-90% mobile users do not own credit

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cards. Mobile banking uses the same infrastructure like the ATM solution. But it is extremely easy and inexpensive to implement. It reduces the cost of operation for bankers in comparison to the use of ATMs. Using compact HTML and WAP technologies, the following operations can be conducted through advanced mobile phones which can is further viewed on channels such as the Internet via the Channel Manager.

Bill payments

Fund transfers

Check balances

And many more which is also available in SMS Banking

Phone Banking

Phone Banking has quickly become as common in banking as branches and ATM's. In today’s competitive banking environment consumers expect banks to offer the convenience of at-home telephone banking; and, if one bank doesn’t offer it, someone else will.

Through Phone banking the following transaction can be accessed.

Check your account balance.

Check the last 5 transactions in your account.

Enquire on the cheque status.

Have a mini statement (last 9 transactions) faxed across to you.

Request for a cheque book / Account statement.

Enquire on your fixed deposits / TDS.

Open a Fixed deposit.

Request for Demand Draft / Managers Cheque.

Transfer funds amongst your linked accounts.

Pay utility and Bank Credit Card bills.

Do a stop cheque payment.

Report loss of your ATM / Debit Card.

Product information.

Enquire on the Interest / Exchange rates.

SMS Banking

Businesses are in move. So is to be your money. You may have to thank the banks which are providing banking at the send-of-your-sms. The technology is at its highest level to move your money while you are on the move. If you are having non-WAP enabled mobile handset, you can use the facility of SMS services. The following operations can be easily used by the service provider:

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Balance enquiry

Last three transactions

Cheque payment status

Cheque book request

Statement request

Demat - Free Balance Holding

Demat - Last two Transactions

Bill Payment

The SMS facility brings peace of mind to customers and opens doors to many more technological possibilities and innovative services. It is very similar to how an ATM works. To use ATM, a card is necessary and to use SMS service, a mobile phone is needed. In both the cases, secret number is necessary to access.SMS banking is also very much safe. First, one authenticates the mobile number with the authentications key. Second, the customer uses secret Mobile Personal Identification Number (MPIN).A new concept has been developed by Bank of Punjab Ltd. They call it "Mobile Wallet". With the support of this technology, a customer can make payment and receive payment of account of buy/sell (merchants) through SMS.

In this system, a buyer sends a message for buying and the bank in return sends a message confirming the purchase both to the merchant as well as to the buyer. Debit card number is the key field which is used for the authenticity of the customer.

The processes of the service are simplified as under:

Customer has to send "REG(one space)(Account Number)(one space)(Debit Card Number)" as an SMS to bank's mobile number 9810999992 for registration. For e.g. "REG 06SB11052122 5047531105000109109" Bank will confirm the registration with the return message.

After that customer will visit nearest branch to collect the service brochure and get it filled.

Registration will be a onetime process. Once registered, customer would be able to buy things from any of the registered merchant of the bank.

Customer need to send "PAY (one space) (merchant code) (one space) (amount) (one space) (Debit card number)" as an SMS on bank's mobile number 9810999992. For e.g. for making a payment of Rs. 56.16 to merchant BOPSTC from card no. 5047531105000109109, Send the following message "PAY BOPSTC 56.16 5047531105000109109"

The transaction will be validated online and immediately funds will be transferred from customer account to merchant account.

Bank would send transaction confirmation as an message to both merchant and customer (buyer).

An SMS report will be sent to both merchant & buyer everyday stating the total number of transaction & total amount of transaction made during previous one day.

Charges

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Some banks collect charges in case the customer does not maintain the average quarterly balance stipulated for that account or for a service that is not listed as a free service available through phone banking. For instance, some banks charge for recording stop payment instructions received through phone banking channel.

The service CHARGES for use of Mobile and SMS BANKING facility as decided by Bank from time to time.

Internet Banking/E-Banking

With cybercafes and kiosks springing up in different cities access to the Net is going to be easy. Internet banking (also referred as e banking) is the latest in this series of technological wonders in the recent past involving use of Internet for delivery of banking products & services. Even the Morgan Stanley Dean Witter Internet research emphasised that Web is more important for retail financial services than for many other industries. Internet banking is changing the banking industry and is having the major effects on banking relationships. Internet Banking assumes a special and sophisticated significance. With Internet Banking, your bank travels with you around the world. You have on-line, real-time access. We call it 24*7*.365 banking. Banking is now no longer confined to the branches were one has to approach the branch in person, to withdraw cash or deposit a cheque or request a statement of accounts. In true Internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. Providing Internet banking is increasingly becoming a "need to have" than a "nice to have" service. The net banking, thus, now is more of a norm rather than an exception in many developed countries due to the fact that it is the cheapest way of providing banking services. Service CHARGES and Fees. Self Service Banking Service CHARGES and Fees.

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Chapter 6

INNOVATION IN BANK

Introduction

Innovation drives organizations to grow, prosper and transform in sync with the changes in the environment, both internal and external. Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance and regulation. A liberalized and globalize financial infrastructure has provided an additional impetus to this gigantic effort.

The pervasive influence of information technology has revolutionalized banking. Transaction costs have crumbled and handling of astronomical number of transactions in no time has become a reality. Internationally, the number brick and mortar structure has been rapidly yielding ground to click and order electronic banking with a plethora of new products. Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as a time tested way of targeting and serving clients, have readily embraced Customer Relationship Management (CRM), with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM has, therefore, become the new mantra in customer service management, which is both relationship based and information intensive.

Risk management is no longer a mere regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the core of banking. We now see the evolution of many novel deferral products like credit derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant product innovation, is a very useful credit risk management tool that enhances liquidity and market efficiency. Securitization is yet another example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.

Some recent innovations in Indian banking

Tandon can, however, usefully cast an eye at one way of shopping without revealing his credit card number. HDFC Bank’s ‘Net Safe’ card is a one-time use card with a limit that’s specified, taken from Tendon’s credit or debit card. Even if Tandon fails to utilize the full amount within 24 hours of creating the card, the card simply dies and the unspent amount in the temporary card reverts to his original credit or debit card.Welcome to one of the myriad ways in which bankers have been trying to innovate. They’re bringing ATMs, cash and even foreign exchange to their customers’ doorsteps. Indeed, innovation has become the hottest banking game in town. Want to buy a house but don’t want to go through the hassles of haggling with brokers and the mounds of paperwork? Not to worry. Your bank will tackle all this. It’s ready to come every step of the way for you to buy a house. Standard Chartered,

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for instance, has property advisors to guide a customer through the entire process of selecting and buying a house. They also lend a hand with the cumbersome documentation formalities and the registration. Don’t fret if you’ve already bought your house or car – you can do other things with both. You can leverage your new house or car these days with banks like ICICI Bank and Stanchart ready to extend loans against either, till it’s about five years old. Loans are available to all car owners for almost all brands of cars manufactured in India that are up to five years old.

Still, innovation is more evident in retail banking. True, all banks offer pretty much the same suite of asset and liability products. But it’s the small tweaking here and there that makes all the difference. Take, for example, the once staid deposits. Some bank accounts combine a savings deposit account with a fixed deposit. A sweep-in account, as it is called, works like this: the account will have a cut-off, say, Rs 25,000; any amount over and above that gets automatically transferred to a fixed deposit which will earn the customer a clean 2 per cent more than the returns that a savings account gives. Last month, Kotak Mahindra Bank introduced a variant of the sweep-in account. If the balance tops Rs 1.5 lakh, the excess runs into Kotak’s liquid mutual fund. “Even if the money is there only for the weekend, a liquid fund can earn you a clean 4.5 per cent per annum,” points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. That’s not a small gain considering that your current account does not pay you any interest. And if, meanwhile, you want to buy a big-ticket home theatre system, the minute you swipe your card the invested sum will return to your account. There’s plenty of innovation on home loans. ABN Amro sent the home mortgage market afire with its 6 per cent home loan offering last year. The product offers a 6 per cent interest rate for two years after which the interest rate is reset in tune with the prevailing market rate. All the other big home loan players slashed their rates after this was announced. Look too at the home saver product and its variants from Citibank, HSBC and Stanchart. The interest rate on the loan is determined by the balance you maintain in the savings account with the bank. The home builder can maintain a higher balance in his or her savings account and bring down the interest rate on the home loan. The rate is calculated on a daily basis on the net loan amount. Stanchart claims that since the launch of its home saver product in April 2002, close to 40 per cent of its customers have chosen it. Says Vishu Ramachandran, regional head, consumer banking, Standard Chartered: “We believe that there are several ways to innovate and create value in the process, even in developed product areas.” Banks are also attempting to reach out to residents of metropolitan cities where people are pressed for time (what with long commuting hours, traffic jams and both spouses working), beyond conventional banking hours. ICICI Bank, for example, introduced eight to eight banking hours, seven days of the week, in major cities. Not to be outdone, some of the other private banks have also done this too. HDFC Bank even has a 24-hour branch at Mumbai’s international airport.

Several banks are even bringing ATMs to customer doorsteps. ICICI Bank, State Bank of India and Bank of India now have mobile ATMs or vans that go along a particular route in a city and are stationed at strategic locations for a few hours every day. This saves the bank infrastructure costs since it has one mobile ATM instead of multiple stationary ones. That’s not all. Even money is delivered to customers at home. Kotak Mahindra Bank, a late entrant into private banking, delivers cash at the

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doorstep. A customer can withdraw a minimum of Rs 5,000 and up to a maximum of Rs 2 lakh and get the money at home. And, mind you, Kotak is not alone. The list of banks offering a similar service includes Citibank, Stanchart, ABN Amro and HDFC Bank. HDFC Bank brings even foreign exchange, whether travellers cheques or cash, to your doorstep courtesy its tie-up with Travelex India. All one has to do is call up the branch or HDFC Bank’s phone banking number. The bank’s country head, retail, Neeraj Swaroop, believes that continuous innovation will always make a difference, with customer needs changing day by day. “Innovation will never become less important for us,” he says.

HDFC Bank has pioneered other innovations. Take point of sale (POS) terminals, a prerequisite in any store or restaurant worth its name in the country. Earlier this year, it tied up with Reliance Infocomm to offer mobile POS terminals. Although this might sound a tad too fancy today, there could soon be a day when you can swipe your card to pay your cabby, the pizza home delivery boy and even for the groceries from the local kirana store. But internet banking and shopping have been slow starters, given the low computer penetration in the country but banks are going all out to get the customer online. Not only is electronic fund transfer between banks across cities possible through internet banking today but banks also offer other features that benefit the customer. HDFC Bank, for instance, has an option called ‘One View’ on its internet banking site which provides customers a comprehensive view of their investments and fund movements. Customers can look at their accounts in six different banks on one screen. These include HDFC Bank accounts and demat accounts, ICICI Bank, Citibank, HSBC and Standard Chartered Bank accounts, apart from details of Citibank credit card dues and so on.

Banks are also innovating on the company and treasury operations fronts. In corporate loans, plain loans are passe. Mumbai inter-bank offered rate (MIBOR)-linked and commercial paper-linked interest rates on loans are common. MIBOR is a reference rate arrived at every day at 4 pm by Reuters. It is the weighted average rate of call money business transacted by 22 institutions, including banks, primary dealers and financial institutions. The State Bank of India was the first to usher in MIBOR-linked loans for top companies. Soon enough, other banks followed. ICICI Bank carried out the world’s first ever securitization of a micro finance portfolio last year. The bank securitized Rs 4.2 crore for Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course, realize that innovation gives them only a first mover advantage until their rivals catch up. But then, they can console themselves. Isn’t imitation the best form of flattery?

Changes in Loan Lending Rates

Till the early 1990s, deposit and lending rates were mostly administered by RBI. In the early 1990s, RBI started deregulating deposit rates and lending rates. The process of rationalization culminated in almost complete deregulation of lending rates in October 1994. The freeing up of lending rates of scheduled commercial banks for credit limits of over Rs. 2 lakh along with the introduction of PLR system in 1994 was a major step in this direction aimed at ensuring competitive loan pricing. But in February 1997 Banks allowed to prescribe separate PLRs and spreads over PLRs, both for loan and cash credit components and in October 1997 For term loans of 3 years and above, separate Prime Term Lending Rates (PTLRs) were required to be announced by banks. In April 1998 PLR converted as a

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ceiling rate on loans up to Rs.2 lakh. In April 1999 Tenor-linked Prime Lending Rates (TPLRs) introduced. According to this system, banks could operate different PLRs for different maturities, provided the transparency and uniformity of treatment that were envisaged under the PLR system continued to be maintained.

The system of BPLR introduced in 2003 was expected to serve as a benchmark rate for banks' pricing of their loan products so as to ensure that it truly reflected the actual cost. The BPLR was seen as a reference rate and was to be computed taking into consideration (i) cost of funds; (ii) operational expenses; and (ii) a minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin. At the same time banks were asked to discontinue the practice of tenor linked PLR but were allowed flexibility in pricing floating rate loans and advances using market benchmarks and time varying spread in an objective and transparent manner. Also, interest rates on a number of loans and advances such as advances for acquiring residential properties and purchase of consumer durables could be determined without reference to BPLR.

In July 2010 new lending rates come in to existence that is Base Rate This rate is the minimum rate for lending to the bank’s most credit worthy customer. Base rate would be the new benchmark of pricing of loan products by the banks. The actual rate will depend upon the base rate plus borrower specific charges, which will include product specific operating costs, credit-risk premium, and tenure premium. The bank cannot lend below this rate (with an exception to DRI advances, loans to banks employees, loans to bank’s depositors against their own deposits, albeit with the subvention of the central bank).

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Chapter 7

RISK MANAGEMENT

Introduction

‘Risk’ is the possibility of something unpleasant happening or the chance of encountering loss or harm. Risk provides the basis for opportunity. Risk arises from uncertainty of importance, while unimportant uncertainty does not give rise to risk. Therefore for risk to exist, the person or organization evaluating risk must place some level of importance to the uncertainty being assessed... The terms risk and exposure have subtle differences in their meaning. Risk refers to the probability of loss, while exposure is the possibility of loss, although they are often used interchangeably. Risk arises as a result of exposure. Risk management is the identification of any potential risk, the evaluation of the level of importance associated with the risk, and the identification of what, if any, action will be taken to reduce or eliminate the risk

Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compeled to encounter various types of financial and non-financial risks. Risks and uncertainties form an integral part of banking which by nature entails taking risks. Foremost thing is to understand the risks run by the bank and to ensure that the risks are properly confronted, effectively controlled and rightly managed. Each transaction that the bank undertakes changes the risk profile of the bank. The extent of calculations that need to be performed to understand the impact of each such risk on the transactions of the bank makes it nearly impossible to continuously update the risk calculations. Hence, providing real time risk information is one of the key challenges of risk management exercise. Till recently all the activities of banks were regulated and hence operational environment was not conducive to risk taking. Better insight, sharp intuition and longer experience were adequate to manage the limited risks.

Business is the art of extracting money from other’s pocket, sans resorting to violence. But profiting in business without exposing to risk is like trying to live without being born. Everyone knows that risk taking is failure prone as otherwise it would be treated as sure taking. Hence risk is inherent in any walk of life in general and in financial sectors in particular. The essential functions of risk management are to identify, measure and more importantly monitor the profile of the bank. While Non-Performing Assets are the legacy of the past in the present, Risk Management system is the pro-active action in the present for the future. Managing risk is nothing but managing the change before the risk manages. While new avenues for the bank has opened up they have brought with them new risks as well, which the banks will have to handle and overcome.

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Types of Risks

When we use the term “Risk”, we all mean financial risk or uncertainty of financial loss. If we consider risk in terms of probability of occurrence frequently, we measure risk on a scale, with certainty of occurrence at one end and certainty of non-occurrence at the other end. Risk is the greatest where the probability of occurrence or non-occurrence is equal. As per the Reserve Bank of India guidelines issued in Oct. 1999,

There are three main categories of risks:-

Credit Risk

Market Risk

Operational Risk

To manage Credit Risk, Market Risk and Operational Risk and its various components, are also discussed in detail. Another has also mentioned relevant points of Basel’s New Capital Accord’ and role of capital adequacy, Risk Aggregation & Capital Allocation and Risk Based Supervision (RBS), in managing risks in banking sector. Risk is the potentiality that both the expected and unexpected events may have an adverse impact on the bank’s capital or earnings. The expected loss is to be borne by the borrower and hence is taken care of by adequately pricing the products through risk premium and reserves created out of the earnings. It is the amount expected to be lost due to changes in credit quality resulting in default. Whereas, the unexpected loss on account of the individual exposure and the whole portfolio in entirely is to be borne by the bank itself and hence is to be taken care of by the capital. Thus, the expected losses are covered by reserves/provisions and the unexpected losses require capital allocation. Hence the need for sufficient Capital Adequacy Ratio is felt. Each type of risks is measured

RISK CREDIT RISK

OPERATION RISK

MARKET RISK

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to determine both the expected and unexpected losses using VaR (Value at Risk) or worst-case type analytical model.

Credit Risk

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystalisation of credit risk to the bank.These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default. Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize bank’s risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. Credit risk consists of primarily two components, viz Quantity of risk, which is nothing but the outstanding loan balance as on the date of default and the quality of risk, viz, the severity of loss defined by both Probability of Default as reduced by the recoveries that could be made in the event of default. Thus credit risk is a combined outcome of Default Risk and Exposure Risk. The element of Credit Risk is Portfolio risk comprising Concentration Risk as well as Intrinsic Risk and Transaction Risk comprising migration/down gradation risk as well as Default Risk. At the transaction level, credit ratings are useful measures of evaluating credit risk that is prevalent across the entire organization where treasury and credit functions are handled. Portfolio analysis help in identifying concentration of credit risk, default/migration statistics, recovery data, etc.

Tools of Credit Risk Management.

Exposure Ceilings: Prudential Limit is linked to Capital Funds – say 15% for individual borrower entity, 40% for a group with additional 10% for infrastructure projects undertaken by the group, Threshold limit is fixed at a level lower than Prudential Exposure; Substantial Exposure, which is the sum total of the exposures beyond threshold limit should not exceed 600% to 800% of the Capital Funds of the bank (i.e. six to eight times).

Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation of powers, Higher delegated powers for better-rated customers; discriminatory time schedule for review/renewal, Hurdle rates and Bench marks for fresh exposures and periodicity for renewal based on risk rating, etc are formulated.

Risk Rating Model: Set up comprehensive risk scoring system on a six to nine point scale. Clearly define rating thresholds and review the ratings periodically preferably at half yearly intervals. Rating migration is to be mapped to estimate the expected loss.

Risk based scientific pricing: Link loan pricing to expected loss. High-risk category borrowers are to be priced high. Build historical data on default losses. Allocate capital to absorb the unexpected loss. Adopt the RAROC framework.

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Portfolio Management The need for credit portfolio management emanates from the necessity to optimize the benefits associated with diversification and to reduce the potential adverse impact of concentration of exposures to a particular borrower, sector or industry. Stipulate quantitative ceiling on aggregate exposure on specific rating categories, distribution of borrowers in various industry, business group and conduct rapid portfolio reviews.

Loan Review Mechanism This should be done independent of credit operations. It is also referred as Credit Audit covering review of sanction process, compliance status, review of risk rating, pick up of warning signals and recommendation of corrective action with the objective of improving credit quality. It should target all loans above certain cut-off limit ensuring that at least 30% to 40% of the portfolio is subjected to LRM in a year so as to ensure that all major credit risks embedded in the balance sheet have been tracked. This is done to bring about qualitative improvement in credit administration. Identify loans with credit weakness. Determine adequacy of loan loss provisions. Ensure adherence to lending policies and procedures.

As observed by RBI, Credit Risk is the major component of risk management system and this should receive special attention of the Top Management of the bank. The process of credit risk management needs analysis of uncertainty and analysis of the risks inherent in a credit proposal. The predictable risk should be contained through proper strategy and the unpredictable ones have to be faced and overcome. Therefore any lending decision should always be preceded by detailed analysis of risks and the outcome of analysis should be taken as a guide for the credit decision. As there is a significant co-relation between credit ratings and default frequencies, any derivation of probability from such historical data can be relied upon. The model may consist of minimum of six grades for performing and two grades for non-performing assets. The distribution of rating of assets should be such that not more than 30% of the advances are grouped under one rating.

Market risk

Market Risk may be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank’s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Market. Risk Management provides a comprehensive and dynamic frame work for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a bank that needs to be closely integrated with the bank’s business strategy.

Liquidity Risk:

Bank Deposits generally have a much shorter contractual maturity than loans and liquidity management needs to provide a cushion to cover anticipated deposit withdrawals. Liquidity is the ability

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to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance sheet claims. The cash flows are placed in different time buckets based on future likely behaviour of assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.

Funding Risk: It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit

Time risk: It is the need to compensate for non receipt of expected inflows of funds, i.e. performing assets turning into non performing assets.

Call risk: It happens on account of crystallisation of contingent liabilities and inability to undertake profitable business opportunities when desired.

The Asset Liability Management (ALM) is a part of the overall risk management system in the banks. It implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a proper balance between funds mobilization and their deployment with respect to their a) maturity profiles, b) cost, c) yield, d) risk exposure, etc. It includes product pricing for deposits as well as advances, and the desired maturity profile of assets and liabilities.

Interest Rate Risk:

Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to the vulnerability of an institution’s financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability off-balance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and effect risk return trade-off. Management of interest rate risk aims at capturing the risks arising from the maturity and re-pricing mismatches and is measured both from the earnings and economic value perspective. Earnings perspective involves analyzing the impact of changes in interest rates on accrual or reported earnings in the near term. This is measured by measuring the changes in the Net Interest Income (NII) equivalent to the difference between total interest income and total interest expense.

In order to manage interest rate risk, banks should begin evaluating the vulnerability of their portfolios to the risk of fluctuations in market interest rates. One such measure is Duration of market value of a bank asset or liabilities to a percentage change in the market interest rate. The difference between the average duration for bank assets and the average duration for bank liabilities is known as the duration gap which assess the bank’s exposure to interest rate risk. The Asset Liability Committee (ALCO) of a bank uses the information contained in the duration gap analysis to guide and frame strategies. By reducing the size of the duration gap, banks can minimize the interest rate risk. The various types of interest rate risks are detailed below:

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Gap/Mismatch risk: It arises from holding assets and liabilities and off balance sheet items with different principal amounts, maturity dates & re-pricing dates thereby creating exposure to unexpected changes in the level of market interest rates.

Basis Risk: It is the risk that the Interest rate of different Assets/liabilities and off balance items may change in different magnitude. The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities.

Embedded option Risk: Option of pre-payment of loan and Fore- closure of deposits before their stated maturities constitute embedded option risk

Yield curve risk: Movement in yield curve and the impact of that on portfolio values and income.

Reprice risk: When assets are sold before maturities.

Reinvestment risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested.

Net interest position risk: When banks have more earning assets than paying liabilities, net interest position risk arises in case market interest rates adjust downwards.

Forex Risk:

Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency. Even in case where spot or forward positions in individual currencies are balanced the maturity pattern of forward transactions may produce mismatches. There is also a settlement risk arising out of default of the counter party and out of time lag in settlement of one currency in one center and the settlement of another currency in another time zone. Banks are also exposed to interest rate risk, which arises from the maturity mismatch of foreign currency position. The Value at Risk (VaR) indicates the risk that the bank is exposed due to uncovered position of mismatch and these gap positions are to be valued on daily basis at the prevalent forward market rates announced by FEDAI for the remaining maturities.

Currency Risk is the possibility that exchange rate changes will alter the expected amount of principal and return of the lending or investment. At times, banks may try to cope with this specific risk on the lending side by shifting the risk associated with exchange rate fluctuations to the borrowers. However the risk does not get extinguished, but only gets converted in to credit risk.

Country Risk:

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This is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the possibility that a country will be unable to service or repay debts to foreign lenders in time. It comprises of Transfer Risk arising on account of possibility of losses due to restrictions on external remittances; Sovereign Risk associated with lending to government of a sovereign nation or taking government guarantees; Political Risk when political environment or legislative process of country leads to government taking over the assets of the financial entity (like nationalization, etc) and preventing discharge of liabilities in a manner that had been agreed to earlier; Cross border risk arising on account of the borrower being a resident of a country other than the country where the cross border asset is booked; Currency Risk, a possibility that exchange rate change, will alter the expected amount of principal and return on the lending or investment. In the process there can be a situation in which seller (exporter) may deliver the goods, but may not be paid or the buyer (importer) might have paid the money in advance but was not delivered the goods for one or the other reasons. As per the RBI guidance note on Country Risk Management, banks should reckon both fund and non-fund exposures from their domestic as well as foreign branches, if any, while identifying, measuring, monitoring and controlling country risk. It advocates that bank should also take into account indirect country risk exposure. RBI further suggests that banks should eventually put in place appropriate systems to move over to internal assessment of country risk within a prescribed period say by 31.3.2004, by which time the new capital accord would be implemented.

Operational risk

Always banks live with the risks arising out of human error, financial fraud and natural disasters. The recent happenings such as WTC tragedy, Barings debacle etc. has highlighted the potential losses on account of operational risk. Exponential growth in the use of technology and increase in global financial inter-linkages are the two primary changes that contributed to such risks. Operational risk, though defined as any risk that is not categorized as market or credit risk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. In order to mitigate this, internal control and internal audit systems are used as the primary means. Risk education for familiarizing the complex operations at all levels of staff can also reduce operational risk. Insurance cover is one of the important mitigators of operational risk. Operational risk events are associated with weak links in internal control procedures. The key to management of operational risk lies in the bank’s ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst-case scenarios. Operational risk involves breakdown in internal controls and corporate governance leading to error, fraud, performance failure, compromise on the interest of the bank resulting in financial loss. Putting in place proper corporate governance practices by itself would serve as an effective risk management tool. Bank should strive to promote a shared understanding of operational risk within the organization, especially since operational risk is often interwined with market or credit risk and it is difficult to isolate.

Over a period of time, management of credit and market risks has evolved a more sophisticated fashion than operational risk, as the former can be more easily measured, monitored and analysed. And

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yet the root causes of all the financial scams and losses are the result of operational risk caused by breakdowns in internal control mechanism and staff lapses. So far, scientific measurement of operational risk has not been evolved. Hence 20% charge on the Capital Funds is earmarked for operational risk and based on subsequent data/feedback, it was reduced to 12%. While measurement of operational risk and computing capital charges as envisaged in the Basel proposals are to be the ultimate goals, what is to be done at present is start implementing the Basel proposal in a phased manner and carefully plan in that direction. The incentive for banks to move the measurement chain is not just to reduce regulatory capital but more importantly to provide assurance to the top management that the bank holds the required capital.

Basel 3 pillars

The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.

Basel I

Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. Basel I is now widely viewed as outmoded. Indeed, the world has changed as financial conglomerates, financial innovation and risk management have developed. Therefore, a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries and new updates in response to the financial crisis commonly described as Basel III.

A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.

Investopedia explains Basel I:-

The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system. This classification system grouped a bank's assets into five risk categories:

0% - cash, central bank and government debt and any OECD government debt

0%, 10%, 20% or 50% - public sector debt

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20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection 50% - residential mortgages

100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks

The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million.

Basel II

Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS). The name for the accords is derived from Basel, Switzerland, where the committee that maintains the accords meets. Basel II improved on Basel I, first enacted in the 1980s, by offering more complex models for calculating regulatory capital. Essentially, the accord mandates that banks holding riskier assets should be required to have more capital on hand than those maintaining safer portfolios. Basel II also requires companies to publish both the details of risky investments and risk management practices. The full title of the accord is Basel II: The International Convergence of Capital Measurement and Capital Standards - A Revised Framework.

The three essential requirements of Basel II are:

Mandating that capital allocations by institutional managers are more risk sensitive.

Separating credit risks from operational risks and quantifying both.

Reducing the scope or possibility of regulatory arbitrage by attempting to align the real or economic risk precisely with regulatory assessment.

Basel II has resulted in the evolution of a number of strategies to allow banks to make risky investments, such as the subprime mortgage market. Higher risks assets are moved to unregulated parts of holding companies. Alternatively, the risk can be transferred directly to investors by securitization, the process of taking a non-liquid asset or groups of assets and transforming them into a security that can be traded on open markets.

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Pillar 1” of the new capital framework revises the 1988 Accord’s guidelines by aligning the minimum capital requirements more closely to each bank's actual risk of economic loss.

First, Basel II improves the capital framework’s sensitivity to the risk of credit losses generally by requiring higher levels of capital for those borrowers thought to present higher levels of credit risk, and vice versa. Three options are available to allow banks and supervisors to choose an approach that seems most appropriate for the sophistication of a bank’s activities and internal controls. Under the “standardised approach” to credit risk, banks that engage in less complex forms of lending and credit underwriting and that have simpler control structures may use external measures of credit risk to assess the credit quality of their borrowers for regulatory capital purposes. Banks that engage in more sophisticated risk-taking and that have developed advanced risk measurement systems may, with the approval of their supervisors, select from one of two “internal ratings-based” (“IRB”) approaches to

3 Pillar Concept

Pillar 2Supervisory Review

Encourages development of better risk management techniques

Assesses ability to measure economic capital

Allows for capital add-ons by supervisors

Pillar 3Market Discipline

Reinforces capital regulation/supervisory efforts

Greater transparency/ disclosure trade-off for use of internal measurement approaches

Pillar 1Minimum Capital Charge

Establish risk sensitive minimum capital requirements

Rules for calculating credit and operational risk capital

Menu of options from simple to advanced

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credit risk. Under an IRB approach, banks rely partly on their own measures of a borrowers’ credit risk to determine their capital requirements, subject to strict data, validation, and operational requirements.

Second, the new Framework establishes an explicit capital charge for a bank’s exposures to the risk of losses caused by failures in systems, processes, or staff or that are caused by external events, such as natural disasters. Similar to the range of options provided for assessing exposures to credit risk, banks will choose one of three approaches for measuring their exposures to operational risk that they and their supervisors agree reflects the quality and sophistication of their internal controls over this particular risk area.

By aligning capital charges more closely to a bank’s own measures of its exposures to credit and operational risk, the Basel II Framework encourages banks to refine those measures. It also provides explicit incentives in the form of lower capital requirements for banks to adopt more comprehensive and accurate measures of risk as well as more effective processes for controlling their exposures to risk.

 

 

Pillar 2 ” Supervisors will evaluate the activities and risk profiles of individual banks to determine whether those organisations should hold higher levels of capital than the minimum requirements in Pillar 1 would specify and to see whether there is any need for remedial actions.

“Pillar 2” of the new capital framework recognises the necessity of exercising effective supervisory review of banks’ internal assessments of their overall risks to ensure that bank management is exercising sound judgement and has set aside adequate capital for these risks. Supervisors will evaluate the activities and risk profiles of individual banks to determine whether those organisations should hold higher levels of capital than the minimum requirements in Pillar 1 would specify and to see whether there is any need for remedial actions. Basel Three Pillars - The Committee expects that, when supervisors engage banks in a dialogue about their internal processes for measuring and managing their risks, they will help to create implicit incentives for organisations to develop sound control structures and to improve those processes.

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Pillar 3” leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in banks’ public reporting to shareholders and customers.

“Pillar 3” leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in banks’ public reporting. It sets out the public disclosures that banks must make that lend greater insight into the adequacy of their capitalisation. Basel Three Pillars - The Committee believes that, when marketplace participants have a sufficient understanding of a bank’s activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organisations so that they can reward those that manage their risks prudently and penalise those that do not.

Basel III

BASEL III (sometimes "Basel 3") refers to a new update to the Basel Accords . While the Bank for International Settlements (BIS) does not currently specify this work as "Basel III", the term appeared in the literature as early as 2005 [1] and is now in common usage anticipating this next revision to the Basel Accords.

The draft Basel III regulations include:

"Tighter definitions of Tier 1 capital,

The introduction of a leverage ratio,

A framework for counter-cyclical capital buffers,

Measures to limit counterparty credit risk,

Short and medium-term quantitative liquidity ratios.

Development of the New Basel III Standard

First, the quality, consistency, and transparency of the capital base will be raised.

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o Tier 1 capital: the predominant form of Tier 1 capital must be common shares and

retained earnings

o Tier 2 capital instruments will be harmonised

o Tier 3 capital will be eliminated.

Second, the risk coverage of the capital framework will be strengthened.

o Strengthen the capital requirements for counterparty credit exposures arising from banks’

derivatives, repo and securities financing transactions

o Raise the capital buffers backing these exposures

o Reduce procyclicality and

o Provide additional incentives to move OTC derivative contracts to central counterparties

(probably clearing houses)

o Provide incentives to strengthen the risk management of counterparty credit exposures

Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework.

o The Committee therefore is introducing a leverage ratio requirement that is intended to

achieve the following objectives:

o Put a floor under the build-up of leverage in the banking sector

o Introduce additional safeguards against model risk and measurement error by

supplementing the risk based measure with a simpler measure that is based on gross exposures.

Fourth, the Committee is introducing a series of measures to promote the buildup of capital buffers in good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting countercyclical buffers").

o The Committee is introducing a series of measures to address procyclicality:

o Dampen any excess cyclicality of the minimum capital requirement;

o Promote more forward looking provisions;

o Conserve capital to build buffers at individual banks and the banking sector that can be

used in stress; and

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o Achieve the broader macro prudential goal of protecting the banking sector from periods

of excess credit growth.

o Requirement to use long term data horizons to estimate probabilities of default,

o downturn loss-given-default estimates, recommended in Basel II, to become mandatory

o Improved calibration of the risk functions, which convert loss estimates into regulatory

capital requirements.

o Banks must conduct stress tests that include widening credit spreads in recessionary

scenarios.

o Promoting stronger provisioning practices (forward looking provisioning):

o Advocating a change in the accounting standards towards an expected loss (EL) approach

Fifth, the Committee is introducing a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio. The Committee also is reviewing the need for additional capital, liquidity or other supervisory measures to reduce the externalities created by systemically important institutions.

Capital Adequacy

Subsequent to nationalization of banks, capitalization in banks was not given due importance as it was felt necessary for the reason that the ownership of the banks rested with the government, creating the required confidence in the mind of the public. Combined forces of globalization and liberalization compelled the public sector banks, hitherto shielded from the vagaries of market forces, to come to terms with the market realities where certain minimum capital adequacy has to be maintained in the face of stiff norms in respect of income recognition, asset classification and provisioning. It is clear that multi pronged approach would be required to meet the challenges of maintaining capital at adequate levels in the face of mounting risks in the banking sector.

In banks asset creation is an event happening subsequent to the capital formation and deposit mobilization. Therefore, the preposition should be for a given capital how much asset can be created? Hence, in ideal situation and taking a radical view, stipulation of Asset Creation Multiple (ACM), in lieu of capital adequacy ratio, would be more appropriate and rational. That is to say, instead of Minimum Capital Adequacy Ratio of 8 percent (implying holding of Rs 8 by way of capital for every Rs 100 risk weighted assets), stipulation of Maximum Asset Creation Multiple of 12.5 times (implying for maximum Asset Creation Multiple of 12.5 time for the given capital of Rs 8) would be more meaningful. However as the assets have been already created when the norms were introduced, capital

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adequacy ratio is adopted instead of asset creation multiple. At least in respect of the new banks (starting from zero), Asset Creation Multiple (ACM) may be examined/thought of for strict implementation.

Risk aggregation & capital allocation

Capital Adequacy in relation to economic risk is a necessary condition for the long-term soundness of banks. Aggregate risk exposure is estimated through Risk Adjusted Return on Capital (RAROC) and Earnings at Risk (EaR) method. Former is used by bank with international presence and the RAROC process estimates the cost of Economic Capital & expected losses that may prevail in the worst-case scenario and then equates the capital cushion to be provided for the potential loss. RAROC is the first step towards examining the institution’s entire balance sheet on a mark to market basis, if only to understand the risk return trade off that have been made. As banks carry on the business on a wide area network basis, it is critical that they are able to continuously monitor the exposures across the entire organization and aggregate the risks so than an integrated view is taken. The Economic Capital is the amount of the capital (besides the Regulatory Capital) that the firm has to put at risk so as to cover the potential loss under the extreme market conditions. In other words, it is the difference in mark-to-market value of assets over liabilities that the bank should aim at or target. As against this, the regulatory capital is the actual Capital Funds held by the bank against the Risk Weighted Assets. After measuring the economic capital for the bank as a whole, bank’s actual capital has to be allocated to individual business units on the basis of various types of risks. This process can be continued till capital is allocated at transaction/customer level.

Risk Based Supervision (RBS)

The Reserve Bank of India presently has its supervisory mechanism by way of on-site inspection and off-site monitoring on the basis of the audited balance sheet of a bank. In order to enhance the supervisory mechanism, the RBI has decided to put in place, beginning from the last quarter of the financial year 02-03, a system of Risk Based Supervision. Under risk based supervision, supervisors are expected to concentrate their efforts on ensuring that financial institutions use the process necessarily to identify, measure and control risk exposure. The RBS is expected to focus supervisory attention in accordance with the risk profile of the bank. The RBI has already structured the risk profile templates to enable the bank to make a self-assessment of their risk profile. It is designed to ensure continuous monitoring and evaluation of risk profile of the institution through risk matrix. This may optimize the utilization of the supervisory resources of the RBI so as to minimize the impact of a crises situation in the financial system. The transaction based audit and supervision is getting shifted to risk focused audit.

Risk based supervision approach is an attempt to overcome the deficiencies in the traditional point-in-time, transaction-validation and value based supervisory system. It is forward looking enabling the supervisors to diferentiate between banks to focus attention on those having high-risk profile. The implementation of risk based auditing would imply that greater emphasis is placed on the internal auditor’s role for mitigating risks. By focusing on effective risk management, the internal auditor would

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not only offer remedial measures for current trouble-prone areas, but also anticipate problems to play an active role in protecting the bank from risk hazards.

CONCLUSION

Banking is nothing but financial inter-mediation between the financial savers on the one hand and the funds seeking business entrepreneurs on the other hand. As such, in the process of providing financial services, commercial banks assume various kinds of risks both financial and non-financial. Therefore, banking practices, which continue to be deep routed in the philosophy of securities based lending and investment policies, need to change the approach and mindset, rather radically, to manage and mitigate the perceived risks, so as to ultimately improve the quality of the asset portfolio.

As in the international practice, a committee approach may be adopted to manage various risks. Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc are such committees that handle the risk management aspects. While a centralized department may be made responsible for monitoring risk, risk control should actually take place at the functional departments as it is generally fragmented across Credit, Funds, Investment and Operational areas. Integration of systems that includes both transactions processing as well as risk systems is critical for implementation.

To the extent the bank can take risk more consciously, anticipates adverse changes and hedges accordingly, it becomes a source of competitive advantage, as it can offer its products at a better price than its competitors. What can be measured can mitigation is more important than capital allocation against inadequate risk management system. Basel proposal provides proper starting point for forward-looking banks to start building process and systems attuned to risk management practice. Given the data-intensive nature of risk management process, Indian Banks have a long way to go before they comprehend and implement Basel II norms.

The effectiveness of risk measurement in banks depends on efficient Management Information System, computerization and net working of the branch activities. The data warehousing solution should effectively interface with the transaction systems like core banking solution and risk systems to collate data. An objective and reliable data base has to be built up for which bank has to analyze its own past performance data relating to loan defaults, trading losses, operational losses etc., and come out with bench marks so as to prepare themselves for the future risk management activities. Any risk management model is as good as the data input. With the onslaught of globalization and liberalization from the last decade of the 20th Century in the Indian financial sectors in general and banking in particular, managing Transformation would be the biggest challenge, as transformation and change are the only certainties of the future.

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Chapter 8

COMPETITION IN INDIAN BANKING INDUSTRY

Introduction

The banking industry is transformed, global forces for change include technological innovation; the deregulation of financial services at the national level and opening-up to international competition and changes in corporate behavior, such as growing disintermediation and increased emphasis on shareholder value. Indian banking system and financial system has as a whole had to be strengthened so as to be able to compete. India has had more than decade of financial sector reforms during which there has been substantial transformation and liberalization of the whole financial system. Competition is sought to be fostered by permitting new private sector banks and liberal entry of branches of foreign bank. Competition is sought to be fostered in rural and semi-urban areas also by encouraging Local Area Banks. Some diversification of ownership in select public sector banks has helped the process of autonomy and thus some response to competitive pressures. And competition induced by the new private sector banks has clearly re-energized the Indian banking sector as a whole: new technology is now the norm, new products are being introduced continuously, and new business practices have become common place.

The principles underlying these guidelines would also be applicable as appropriate to public sector. More important, this suggests that the competitive nature of the Indian banking system is not significantly different from banking system in other countries, particularly in view of the fact that nearly 75 percent of banking system assets is with state owned banks. The validation of monopolistic competition during the second sub-period suggests that the recent trends toward consolidation led to more rather than less competition in the banking sector.

Detail about competition in Indian Banking Industry

The using Indian banking industry as one case study, there will propose and test hypotheses regarding the possibility of relationship between three elements of bank related reforms like, fiscal reforms, financial reforms and private investment liberalization and bank efficiency. Bank efficiency is measured using data envelopment analysis or DEA and the relationship between the measured efficiency and India bank specific characteristics and environmental factors associated with reform is examined using estimations. Negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks

There will be more competition in banking, with the finance minister announcing that RBI is considering issue of fresh bank licenses to private sector players and finance companies if they meet the RBI eligibility criteria. Religare, Shriram Group, Birla group, Anil Ambani group and Bajaj group have

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said that they would be interested in a banking license and are awaiting guidelines while South based Sundaram Finance has said it is not interested in a banking license. Among finance companies, Indiabulls had also earlier shown an interest in getting into banking. Lenders such as IDFC, Exim Bank and SIDBI have also shown interest for a banking license. There are currently 15 old private sector banks and seven new private sector banks.

Share of Credit- September 2009 Credit (%)

Nationalised banks 50.5

SBI Group 23.7

Private Sector 17.8

Foreign Banks 5.5

RRBs 2.5

But despite the finance minister’s positive speech, corporate India could face some resistance from the formidable entry barriers set by RBI. Hours after the budget speech, RBI called a press conference where deputy governor Usha Thorat told reporters, “The basic principles of ownership and governance will remain unchanged. They are sacrocant. All the principles of ownership and governance will be taken into account while evolving the new guidelines”. She also added the fit and proper criteria to own and control a bank will be applied. This was the guideline which we apply for transfer beyond 5% and for transfers beyond 10% requires a prior approval of RBI. She refused to give a timeframe for the new guideline. She added that she will review all applications only after the new guide-lines are out. According to RBI guidelines no single entity or group of related entities can have a shareholding in excess of 10% in a private sector bank.

The last time RBI had granted approval for setting up or a conversion of an NBFC into a bank was in 2002 when it granted an "in-principle" approval to Kotak Mahindra Finance Ltd (KMFL) and three Indian finance professionals who had teamed up with Rabo In-dia to set up a commercial bank- Yes Bank. In recent years RBI has been circumspect on issuing new banking licenses, especially to corporates. It is likely to issue licenses with groups with clean shareholdings and a large presence in the finance space, rather than in manufacturing. According to Sunil Godhwani, CEO & MD, Religare Enterprises Limited, “Any diversified financial player who has an interest in the space would be looking

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at it. We have to see how it synergizes and adds value to the group.” Religare’s holding company has a net-worth of above Rs 2500 cr.

“Capitalisation should not be an issue for us,” adds Mr. Godhwani. Sundaram Finance, one of the oldest NBFCs in the country which had in the 1990s looked at the option of becoming a bank, has ruled out any proposal to float a bank or become a bank. TT Srinivasaraghavan, MD, Sundaram Finance said "We have no plan to apply for a bank license or seek conversion of Sundaram Finance into a bank. It is not part of our business plan. We believe what we are doing is fine. We strongly believe there is relevance for NBFCs in India". However these new aspirants will also have to fulfill a host of RBI guidelines. According to the current guidelines a new private sector bank should have a minimum net worth of Rs 300 crore. Sources said RBI is likely to increase the minimum net worth requirement. Also earlier guidelines lay down by RBI for conversion of NBFCs into a bank had said that the NBFC should not have been promoted by a large industrial house or owned/controlled by public authorities. Among the other conditions it had also stated that the NBFC should have an impeccable track record in compliance with RBI regulations and in repayment of public deposits and no default should have been reported.

“Private sector banks have contributed significantly to improvement of customer service and upgradation of technological and risk management platform. However it would be important to understand that, apart from adding to competition, how these banking aspirants will increase penetration of banking services to wider range of population and achieve other objectives of high economic growth. Needless to add is that these aspirants must have a diversified ownership over time, clear distinction of ownership from fit and proper management and adequate capital to cover the banking risks,” Viren Mehta, director, Ernst & Young, India.

According to RBI guidelines no single entity or group of related entities can have a shareholding in excess of 10% in a private sector bank. "The Aditya Birla Financial Services Group is already a large non bank player. We will definitely apply for a license. The Aditya Birla Group is confident that we will meet any eligibility criteria that might be set," Ajay Srinivasan, Chief Executive - Financial Services Aditya Birla Group.

“The move will potentially open exciting new avenues of growth for Reliance Capital in the future. We await further details and guidelines," Sam Ghosh, CEO, Reliance Capital The Shriram Group which has a customer base of 6.4 million had already shown their intent for a banking license. Says R Sridhar, MD, Shriram Transport Finance, “We will be approaching the government and the RBI on this. We have been financing niche segments which are not catered by any bank.”

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Chapter 9

TYPES OF INDIVIDUAL INVESTMENT IN INDIAN BANKING INDUSTRY

Introduction

On the face of it, the financial services industry is far removed from the 'smokestack' industries that traditionally come under the sustainable development spotlight. Yet banking and investment have a crucial role to play - not only by reforming the way they do business, but by providing the means for other businesses to do the same. By the same token, financial institutions are responding to a growing demand for sustainable investments. Evidence is emerging that investing in sustainable businesses, whether individually or as a collective whole, can deliver an excellent rate of return, as well as giving investors the reassurance that their capital is helping to bring about change for the better.

'Anybody can earn money, it's the savings and investments that count', is an adage that has become more fitting in the modern world. In today's fast volatile world, investments have become a catchword in the financial world. Once the necessary expenses are taken care of, one has to decide which is the best way and place for them to invest their hard earned money. One should make investments in a safe and sane manner. Before deciding to invest money, one should set aside their daily and monthly expenditure. One should also set aside the necessary amount to pay for any bills at the end of the month. Only a percentage of the monthly income should go in investments. Simply put, the amount put out for long or short term investments should not affect your daily lifestyle or liquidity. Time is an investor's best friend and even a small investment of $100, $50 or even $25 a month can payoff through the magic of time and compounding interest. Although investing can be a very rewarding experience, many people, especially young adults, are reluctant to start an investment plan. Part of the problem is the common misconception that investing takes a lot of time and money and requires the person to sacrifice the "good things in life." Spending less and saving more doesn't mean you have to give up having fun altogether. By setting up a budget and controlling impulse buying, you can save enough to begin investing. The next step for the small investor is to learn about and understand the various investment opportunities.

Different Types of investment

Saving Accounts

Current Deposit Accounts

Fixed Deposits (FDs)

Recurring Deposits

NRI Bank Accounts

Term Deposit

Home Finance Fixed Deposits

ENCASH 24

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Saving Account

Savings accounts typically start with basic savings plans. People use savings accounts to set aside money for safekeeping and potentially earn interest or benefits from their bank for doing so. If you have smaller amounts to save and just want to put the funds in account that is separated from their checking account would look to basic savings. A deposit account intended for funds that are expected to stay in for the short term. A savings account offers lower returns than the market rates.

Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money (for example, by writing a cheque). These accounts let customers set aside a portion of their liquid assets while earning a monetary return. Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. On top of that Savings Bank Account earns moderate interest too. The rate of interest is decided and periodically reviewed by the Government of India. Presently, the rate of interest is 3.5% compounded half yearly. Savings Bank Account can be opened in the name of an individual or in joint names of the depositors. Savings Bank Accounts can also be opened and operated by the minors provided they have completed ten years of age. Accounts by Hindu Undivided Families (HUF) not engaged in any trading or business activity can be opened in the name of the Karta of the HUF.

The minimum balance to be maintained in an ordinary savings bank account varies from bank to bank. It is less in case of public sector banks and comparatively higher in case of private banks. In most of the public sector banks, minimum balance to be maintained is Rs. 100. In accounts where cheque books are issued, a minimum balance of Rs. 500/- has to be maintained. For Pension Savings Accounts, minimum balance to be maintained is Rs. 5/- without cheque facility and Rs. 250/- with cheque facility.

Features: 

The minimum amount to open an account in a nationalized bank is Rs 100. If cheque books are also issued, the minimum balance of Rs 500 has to be maintained. However in some private or foreign bank the minimum balance is Rs 500 or more and can be up Rs. 10,000. One cheque book is issued to a customer at a time. 

A Savings account can be opened either individually or jointly with another individual. In a joint account only the sign of one account holder is needed to write a cheque. But at the time of closing an account, the sign of the both the account holders are needed.  

Return

The interest rate of savings bank account in India varies between 2.5% and 4%. In Savings Bank account, bank follows the simple interest method. The rate of interest may change from time to time according to the rules of Reserve Bank of India. One can withdraw his/her money by submitting a

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cheque in the bank and details of the account, i.e. the Money deposited, withdrawn along with the dates and the balance, is recorded in a passbook. 

Advantages 

It's much safer to keep your money at a bank than to keep a large amount of cash in your home. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters. The federal Government insures your money. Saving Bank account does not have any fixed period for deposit. The depositor can take money from his account by writing a cheque to somebody else or submitting a cheque directly. Now most of the banks offer various facilities such as ATM card, credit card etc. Through debit/ATM card one can take money from any of the ATM centres of the particular bank which will be open 24 hours a day. Through credit card one can avail shopping facilities from any shop which accept the credit card.  And many of the banks also give internet banking facility through with one do the transactions like withdrawals, deposits, statement of account etc. 

How to open

Savings Bank Account can be opened in the name of an individual or in joint names of the depositors by filling up the appropriate forms. A minor who have completed ten years of age can also open and operate the account. At the time of opening an account one must submit the documents like photocopy of passport or Electoral card, Postal identification cards as address proof and two passport size photos.  Most banks also require an introduction for opening an SB account. The introduction may be obtained either from an existing account holder or from a respectable citizen, well known to the bank, which should normally call on the bank and sign in the column specially provided for the purpose of introduction in the account opening form.

Current Deposit Accounts

A deposit product combining Current & Short deposit account with ‘ sweep-in’ and ‘sweep-out’ facility to take care of withdrawals, if any. Available at all branches. Facility available to Current Deposit Account of Corporates, Proprietorship, Partnership, Individuals, Schools, Colleges and other institutions (other than Banks). Minimum average quarterly balance of Rs.2,00,000/- in Current Deposit Account and Rs.75,000/- in Short Deposit Account to be maintained initially. Amount in excess of Rs.2,00,000/- will be transferred to the Short Deposit portion in multiples of Rs.75,000/- for a minimum period of 15 days and maximum period of 91 days (Max Deposit in TD Rs 10 Cr.) To meet urgent requirement of funds in the Current Deposit Account portion, funds in multiples of Rs.75,000/- will be swept-in from Short Deposit portion on last-in first-out (LIFO) basis subject to availability of funds

Automatic renewal facility for original tenure and amount of deposit. Interest will be payable on Short Deposit portion only as per maturity period. Payment before maturity will be allowed without penalty, to meet shortfall if any, subject to availability of fund. Penalty charges of Rs.500/- per quarter

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will be levied where the average quarterly balance in Current deposit account falls below the minimum stipulated amount. Sweep out from current to short deposits will only be an 1st & 16th of every month.

Other Incentives

Instant transfer of funds between  one Branch to  other branch No charges for remittances of fund From one branch to other branch

Free pre-printed personalised cheque books. Identified eligible customers using continuous stationery cheques will continue to use the same with suitable modification.

6 free remittance - DD / payorder - per quarter up to Rs.50,000/- per transaction. Collection of crossed cheques from the door-steps of the customers maintaining an average

monthly balance of Rs.5 lakh i.e. (balance in Current + Short Deposit Account).A monthly charge of Rs.250/- or the actual charges, whichever is higher will be levied.

Commission on upcountry cheques at locations where we have branches upto a total value of Rs.25000/- per month will be waived. However, out of pocket expenses will be charged.

Waiver of folio charges. Free ATM cards as applicable. (Annual Charges applicable from next year Free tele-banking facility wherever available. Fortnightly statement of accounts will be sent through e-mail to the customers. Waiver of stop payment charges. Relationship Manager.

Benefit to Customers

Opportunity to earn higher interest on idle funds in Current Deposit Account in Short deposit portion.

Automatic renewal facility will take away the botheration for keeping track of various maturity dates.

No loss of interest on account of before maturity penalties. For the period the Short Deposit has run the customer gets the applicable rate of interest.

Opportunity to keep the funds liquid and at the same time earn attractive interest on it.

Fixed Deposits (FDs)

Bank fixed deposits (FDs) are favorite choice for parking your funds due to safety of capital and assured / guaranteed returns. Other reasons for their popularity are familiarity and dependability. No doubt, bank FDs are best for parking your short-term temporary cash. For long term investment one has to take a call based on the interest rate scenario. But solely relying on FDs is not a prudent choice due to lethora of other debt / fixed income instruments available for investment. However, if you’re already investing in fixed deposits (FDs) of banks or would like to invest in future you should at least be aware of certain tips and tricks to make the most of your money invested in fixed deposits. Fixed Deposits

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(FDs) of banks are no more a passive investment instrument which didn’t require a much thought. There is a lot of scope for planning while investing in them.

A safe, cut and dry method of saving money is the bank. Banks offer you a set interest for the amount of money you deposit with them per month. The interest rate can be anything from 2 percent to 2.5 percent. Bank accounts are known to be the safest and most flexible, if not the best way to invest money. Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 15days to 5 years. The interest can be compounded Monthly, Quarterly, Half-yearly or annually and varies from bank to bank. Minimum deposit amount is Rs 1000/- and there is no upper limit. Loan / overdraft facility is available against bank fixed deposits. Premature withdrawal is permissible but it involves loss of interest. Investor gets a lump sum (principal + interest) at the maturity of the deposit. 

Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account.  The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India. 

Features

Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate.  

The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-. 

Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making one big deposit. In case of any premature withdrawal of partial amount, then only one or two deposit need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to consider before investing in an FD is the rate of interest and the inflation rate. A high inflation rate can simply chip away your real returns

Returns

The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested. Interest rate also varies between each

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bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest.  The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, and 1.5 years to 10 years. Interest Rate Varies from Bank to Bank.

Things to Remember Before Opening a FD Account

Before opening a fixed deposit account, check the financial position of the bank. Also, try to check the rates of interest for different banks for different periods. Instead of putting a big amount in one fixed deposit, keep the amount in five or ten small deposits. This way, in case of any premature withdrawal of partial amount, then only one or two deposits may need to be prematurely encashed. Thus, the loss of interest will be less than if a single big deposit were to be encashed. Check deposit receipts carefully to ensure that all details have been properly and accurately filled in. Do not leave the renewal column unfilled. Otherwise, on maturity the fixed deposit amount will go back into an FD. Before investing in a FD it is important to consider the rate of interest and the inflation rate. A high inflation rate can eat into your real returns. So, it is vital to have a look at the inflation rate before arriving at the real rate of interest.

Advantages of Fixed Deposit

Fixed deposits with the banks are nearly 100% safe as all the banks operating in the country, irrespective of whether they are nationalised, private, or foreign, are governed by the RBI's rules and regulations, and give due weightage to the interest of the investor. Till recently, all bank deposits were insured under the Deposit Insurance & Credit Guarantee Scheme of India, which has now been made optional. Nonetheless, bank deposits are among the safest modes of investment. One can get loans up to 75- 90% of the deposit amount from banks against fixed deposit receipts. Though the interest charged will be slightly more than the interest earned by the deposit.

How to apply 

One can get a bank FD at any bank, be it nationalised, private, or foreign. You have to open a FD account with the bank, and make the deposit. One can easily open Bank FDs through Net Banking but they have to register their Nominee only when they fill form which they will get from bank. However, some banks insist that you maintain a savings account with them to operate a FD. When a depositor opens an FD account with a bank, a deposit receipt or an account statement is issued to him, which can be updated from time to time, depending on the duration of the FD and the frequency of the interest calculation. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in.

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Recurring Deposits

Under a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor. Recurring Bank Account provides the element of compulsion to save at high rates of interest applicable to Term Deposits along with liquidity to access those savings any time. Since a recurring deposit offers a fixed rate of return, it does not provide protection against inflation. The Recurring deposit account is an account in the bank (or a Post office in some countries) where an investor deposits a fixed amount of money every month for a fixed tenure (mostly ranging from one year to five years). This scheme is meant for investors who want to deposit a fixed amount every month, in order to get a lump sum after some years. The small monthly savings in the Recurring Deposit scheme enable the depositor to accumulate a handsome amount on maturity. Interest at term deposit rates is computable on quarterly compounded basis. There is great flexibility in period of deposit with maturity ranging from 6 months to 120 months. The minimum monthly deposit varies from bank to bank. In most of the public sector banks, one can start a Recurring Deposit Account with a monthly installment of Rs. 100/- only. There is no upper limit on investing. The rate of interest varies between 7 and 11 percent depending on the maturity period. Loan/overdraft facility is also available against Recurring Bank Deposits.

The deposit for RD account is paid in monthly installments and each subsequent monthly installment has to be made before the end of the calendar month and is equal to the first deposit. In case of default in payment, penalty is levied for delayed deposit at the rate of Rs. 1.50/- for every Rs. 100/- per month for deposits up to 5 years and Rs. 2/- per Rs. 100/- in case of longer maturities. In case of Recurring Deposit being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the Bank. Premature withdrawal is also permissible but penalty is levied. TDS is not applicable on Recurring Deposits.

How to open a RD Account

A Recurring Bank Deposit account can be opened at any bank that offers this facility. However, some banks insist that you open a savings bank account with them to operate a Recurring Deposit account.

NRI Bank Accounts

NRIs/OCBs can open the following types of accounts with banks in India, which hold authorized dealer licenses, as also other banks, specifically authorized by the Reserve Bank to maintain accounts in the names of NRIs/OCBs.

Rupee Accounts

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Non-Resident (Ordinary) Account - NRO A/c.

Non-Resident (External) Rupee Account - NRE A/c.

Foreign Currency Accounts

Non-Resident (Foreign Currency) Account - FCNR A/c (in Pounds, Sterling, US Dollars, Japanese Yen and Euro).

A person, resident in India, who is earning foreign exchange, is also permitted to maintain a Foreign Currency account in India with an authorized dealer bank, to the extent of 50% of such foreign exchange earnings, under the Exchange Earners Foreign Currency Account (EEFC) Scheme.

The special features are as under:

NRO Account

The funds, standing to the credit of this account, cannot be repatriated outside India in foreign exchange, without prior permission of the Reserve Bank of India. Interest, earned on these accounts, is, however, eligible for repatriation outside India, net of Indian taxes. The remittance of interest (net of taxes) will be permitted by the authorized dealer, where the account is maintained, if the account holder makes an application to the authorized dealer, in the prescribed form. No RBI permission is required for remittance of interest.

NRE Account

The funds, standing to the credit of this account, as well as interest earned thereon, are remittable outside India in free foreign exchange, without permission of the RBI. The interest income is not subject to Indian Income-tax. Credits to the accounts should be in the form of remittance in foreign exchange from outside India, as well as other funds, which are eligible to be remitted outside India, in free foreign exchange. Funds, emanating from local sources, are not eligible to be credited to these accounts, unless these funds are otherwise remittable outside India, in terms of the existing Exchange Control Regulations.

FCNR Account

These accounts can be opened in four foreign currencies:

Pounds Sterling;

US Dollars;

Japanese Yen;

Euro.

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For the purpose of opening an account, remittance in foreign exchange, in the same currency, should be received in India. The accounts can be opened only as fixed deposits, with a minimum maturity of one year and, a maximum maturity of three years. The principal, as well as interest, earned on these accounts, is remittable outside India, in the same currency or, in other convertible currency, as desired by the account holder. The interest, earned on these deposits, Balances held in NRE accounts can be repatriated abroad freely, whereas funds in NRO account are not generally repatriable. Repatriation of balances held in NRO accounts is allowed subject to certain conditions. Funds remitted from abroad or local funds which can otherwise be remitted abroad to the account holder can be credited to NRE accounts. Funds due to the non-resident account holder which do not qualify, under the Exchange Control regulations, for remittance outside India are required to be credited to NRO accounts. The interest income earned on NRO attracts income tax deduction at source. Only those banks holding an Authorized Dealers' license or banks specially authorized in this regard by the Reserve Bank of India (RBI) are permitted to open these accounts on behalf of NRIs. NRO accounts can be held jointly with residents. However, NRE accounts cannot be held jointly with residents. It can be held jointly only with NRIs. The conditions regarding repatriation of balances in NRO accounts Repatriation is allowed up to US dollars 1 million per calendar year for any purpose from the balances in NRO accounts subject to payment of applicable taxes. The limit of US dollars 1 million includes sale proceeds of immovable properties held by NRIs/PIOs for a period of 10 years. In case a property is sold after being held for less than 10 years, remittance can be made if the sale proceeds have been held by the NRI/PIO for the balance period.

Term Deposit

Term Deposit means a deposit with a scheduled bank for a fixed period of not less than five years. An assessee can invest in the term deposit of a scheduled bank any amount not exceeding one lakh rupees in a year. The amount to be invested in the term deposit of a scheduled bank shall be a minimum of one hundred rupees or multiples thereof. An assessee desiring to invest in term deposit, shall present at any branch of a scheduled bank, an application in the prescribed form. The term deposit shall not be pledged to secure loan or as security to any other asset. The maturity period of a term deposit receipt of any denomination shall be five years commencing from the date of the receipt. No term deposit shall be encashed before the expiry of five years from the date of its receipt. The rate of interest on the term deposit shall be in accordance with the rate fixed by the scheduled bank from time to time. The interest may be paid either in lump sum at the time of maturity or it may be paid every quarter or every month in accordance with the regulatory guidelines for payment of interest on the term deposit. Where the interest is paid by the scheduled bank in lump sum at the time of maturity, the term deposit receipt shall bear the yearly rate of interest on the term deposit. If a holder of a term deposit dies and there is no nomination in force at the time of his death, manager of the branch of bank from where the term deposit was issued, shall pay the sum due to the deceased, to his legal heirs.

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Home Finance Fixed Deposits

Home Finance Fixed Deposits is a FD scheme run by a subsidiary of Bank called the Home Finance Company Limited. So, this is not a fixed deposit by the bank itself, but one offered by its subsidiary. Here are some things about Home Finance fixed deposit that will help you evaluate if this is meant for you or not.

Maturity period: There are plans with several maturity periods that range between 1 and 7 years.

Interest Rates: Here are some tables that break it up according to scheme types and maturity periods. These are rates that I saw on November 7, 2009. Please check with the bank or through your online broker to see the prevailing interest rates and make sure you use the most current.

Minimum Amount: Minimum amount ranges from Rs. 10,000 to Rs. 40,000, based on the scheme you apply for.

Credit Rating: ICICI Home Finance has a credit rating of AAA from CARE for its fixed deposits. This rating indicates that CARE considers it of the best quality offering highest safety for timely servicing and debt obligation.

Timing PenaltyBetween 3 and 6 months No interest will be payableBetween 6 and 12 months 3% lower than the minimum rate at which public

deposits are accepted by ICICI HFCAfter 12 months, but before maturity 2% lower than the rate applicable for the

completed tenure of deposits

ECS Facility: The scheme allows payment of interest through the Electronic Clearing System

(ECS) facility in locations where the scheme is available. This is a useful thing to have and you should check if you can avail it where you live or not. If you don’t use the ECS facility, then you will be paid through a cheque or demand draft. These days banks charge for depositing outstation cheques, so you could potentially be charged that.

ENCASH 24

The ENCASH 24 (Flexi Deposit) gives you the liquidity of a Savings Account coupled with high earnings of a Fixed Deposit. This is achieved by creating a Fixed Deposit linked to your Savings Account providing you the following unique facilities:

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Maximum Returns:

Your money is no longer idle. As soon as the balance in your Savings Account crosses over Rs 25,000, the excess, in multiples of Rs 10,000 will be transferred automatically to a higher interest earning Fixed Deposit Account. The maturity of fixed or term deposits formed as a result of transfer of money from the Savings Bank account will be for a maximum period of 181 days and the interest will be calculated on simple interest rate basis.

Maximum Liquidity:

The money parked in Fixed Deposits as a result of the above mentioned sweep out from your Savings account can be easily accessed by issuing a cheque, withdrawing through ATM etc. This amount is automatically reverse swept from the most recently formed Fixed Deposit in units of Rs 5,000 to the Savings account whenever the balance in your Savings account falls below Rs 25,000. The amount broken form your Fixed Deposit will earn interest rates at the applicable rate for the period that the deposit was held with the Bank. The remaining amount of Fixed Deposit will continue to earn the contracted rate of interest.

Auto Renewal:

On maturity of your linked Fixed Deposit, the Bank will automatically renew it for a maximum period of 181 days.

How do I sign up for ENCASH 24?

All you have to do is to open a Savings Account and sign up an ENCASH 24 declaration form. A minimum average quarterly balance of Rs 10,000 must be maintained in your Savings Account to avail the ENCASH 24 facility. Priority Banking customers wishing to avail of ENCASH 24 Facilities, need to maintain a minimum total relationship of Rs 5 lakh only, in their ENCASH 24 Account. As soon as the balance in the Priority Banking Savings Account crosses over Rs 1,00,000 the excess balance, in multiples of Rs 50,000 will be transferred automatically to the Fixed Deposit Account.

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Chapter 10

TAX SAVING PLANS PROVIDED ON INVESTMENTS

Introduction

It is that time of year again, when we have to make tax saving investments. But how do we go about choosing the right tax saving instruments that will give you the optimal returns while saving you tax? If you need help, then here is how to go about making an ideal tax saving portfolio. Indian citizens are offered several tax saving options in India by both the public sector and the private sector as discussed in the previous topic. There are many types of Investment provided by banks such as saving accounts, Current Deposit Accounts, Fixed Deposits (FDs), Recurring Deposits, NRI Bank Accounts, Term Deposit, Home Finance Fixed Deposits, and ENCASH 24. This investment helps in saving tax. How and what are the Tax benefits that individual investors going to get on this investments.

Tax Benefits

FORM 15 G and FORM H

Form 15G and Form 15H are used for averting the TDS deduction on interest earned during the financial year on fixed deposits in Banks. There are lots of hesitations in the minds of my subscribers about these forms. They usually enquire about these questions i.e. What is Form 15G and form 15H, How one can submit these forms, How to fill these forms, What is purpose to use these forms ?. In this article I will try to cover all aspect of form 15G and form 15H.

Form 15H

In routine process Bank will deduct tax at source on fixed deposit interest, if it is above Rs. 10000.  The TDS is deducted at the rate of 10% (w.e.f.1-4-2010 If PAN will not be furnished then TDS will be deducted @ 20%). So to get the income tax refund, you have to file the income tax return. To avoid this process, you have to declare that you have not any taxable income. The main and only purpose of these forms is to submit declaration in writing in duplicate that there is not tax payable on his total income. In this case the payer shall not deduct any tax at source.

Form 15H must be used above 65 years old individual.

Previous year income should not be taxable.

Form 15H should be submitted before the first payment of interest on fixed deposit.

Form 15G

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Form 15G is same like Form 15H difference is only that form 15G is for every individual below then 65 years.

The duty of submit these forms with assessee before end of the financial year or first payment of interest whichever is earlier. The payer is under an obligation to deduct tax until the declaration in Form No. 15 G/15H is received and in the event that such form is not received till the end of the financial year, the failure to deduct tax amounts to violation of this section. This are the Slab how tax going to be deducted

Resident Individuals

Tax Rate SurchargeEducation

CessTOTAL

Payment upto 10 lakhs

10% ---- 3% 10.30%

Payment equal to & above 10 lakhs

10% 10% 3% 11.33%

In a measure that would bring cheers to savings accounts holders, RBI has asked banks to start calculating interest rates on these accounts on daily basis from April 01 2010. A savings account allows an account holder to set aside and earn interest on money that is not required in the immediate future. Savings accounts generally pay higher rates of interest than checking accounts, but lower interest rates as compared to treasury bills and often do not allow account holders to withdraw money via checks. Saving Account interest is 3.5% annually. Saving Account is mostly used by the Customers to keep their excess money in bank. Bank gives limited amount of return on the amount as customer can withdraw his money anytime from the bank. In India Interest received on Saving Account deposit is taxable. Tax will be charged on the annual Interest amount as per the deposit on the Saving account and it will be charged as per total individual income earned during the year. As per present income tax guidelines,  banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10, 000 in a financial year.

Current Deposit Accounts

Tax will be charged on the annual Interest amount as per the deposit on the Current Deposit Account and it will be charged as per total individual income earned during the year.

Fixed Deposits (FDs)

No income tax at source will be deducted if banks have only made a provision for interest on fixed deposits and not actually paid it to the depositor, the Finance Ministry has clarified.

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Until now, tax was supposed to be deducted by banks even if only provisioning was made for interest payment. The matter was considered by the Central Board of Direct Taxes to plug this loophole. According to a Finance Ministry official, CBDT clarified that since no credit is given to the depositors while calculating interest on fixed deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest. “In such cases, tax shall be deducted at source on accrual of interest,” the board clarified, according to a source. Income tax is charged at the rate of 10 per cent on interest income of more than Rs 10,000 in a year.

Fixed Deposit for Above 5 Years

The one restriction on choosing term deposit is, it should be minimum of five years. According to the section 80c

“The maturity period of a term deposit receipt of any denomination shall be five years commencing from the date of the receipt”.

Recurring Deposits

There is no income tax benefit available for a recurring deposit. The investment in a recurring deposit is not considered for deduction u/s 80C. (Please read “Saving Income Tax – Understanding Section 80C Deductions” to know details of deductions available under section 80C). Please note that sec 80C benefit is not available even if the recurring deposit is for a period of 5 years or more. The interest earned on a recurring deposit is also taxable. Usually, there is no tax deducted at source (TDS) for recurring deposits.

NRI Bank Accounts

Interest earned on balances in NRO Accounts is not exempted from Indian Income tax. Instead income tax (at present @ 20%) is deducted at source (TDS) i.e. at the time of payment of interest by the bank. No income Tax charged on NR (E) Account.

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TAX INCIDENCE AT A GLANCE

 Type of income

Tax incidence in case of

ResidentResident but not ordinarily resident

Non- Resident

Income received or deemed to be received in India, wherever accrued

Taxable Taxable Taxable

Income accrued or arisen or deemed to be accrued or arisen in India, wherever received

Taxable Taxable Taxable

Income received and accrued outside India from a business/ profession in India

Taxable Taxable Exempt

Income received and accrued outside India from a business/ profession outside India

Taxable Exempt Exempt

Income earned and received outside India, subsequently remitted to India (At the time of remittance)

Exempt Exempt Exempt

Term Deposit

In this case it is optional to the assessee to choose whether he want to pay on yearly basis or at the time of maturity. Interest on these term deposits shall be liable to tax under the Act on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee. The tax on such interest shall be deducted in accordance with the provisions of section 194A or Section 195 of the Act.

Home Finance Fixed Deposits and ENCASH 24

Tax will be deducted at source according to the applicable rules at the time.

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CASE STUDY

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Introduction

The evolution of State Bank of India can be traced back to the first decade of the 19th century. It began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the British India, established under the sponsorship of the Government of Bengal. Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras (established on 1 July 1843) followed the Bank of Bengal. These three banks dominated the modern banking scenario in India, until when they were amalgamated to form the Imperial Bank of India, on 27 January 1921. It was the first Joint-Stock company of India.

An important turning point in the history of State Bank of India is the launch of the first Five Year Plan of independent India, in 1951. The All India Rural Credit Survey Committee proposed the takeover of the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. Subsequently, an Act was passed in the Parliament of India in May 1955. As a result, the State Bank of India (SBI) was established on 1 July 1955. This resulted in making the State Bank of India more powerful, because as much as a quarter of the resources of the Indian banking system were controlled directly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in 1959. The Act enabled the State Bank of India to make the eight former State-associated banks as its subsidiaries.

The State Bank of India emerged as a pacesetter, with its operations carried out by the 480 offices comprising branches, sub offices and three Local Head Offices, inherited from the Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to creditworthy parties, the State Bank of India catered to the needs of the customers, by banking purposefully. The bank served the heterogeneous financial needs of the planned economic development.

Symbol and slogan

“Symbol is the Key Hole, whose meaning is "Welcome to SBI".

Slogans are:

With you all the way

Pure banking nothing else

The Banker to every Indian

The Nation banks on

The Symbol of State Bank of India is a Circle and not Key hole and a small man at the centre of the Circle. Circle depicts perfection and the common man being the centre of the banks business.

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Size and Growth of SBI

State Bank of India (SBI), the largest domestic banker with a share of around 16 per cent (in both, advances and deposits), is aiming to up its market share further and in a profitable manner. The above industry growth in advances in the recent past is just an indication. A wide branch network would sustain the management’s stance of improving its business share in these difficult times.

Facts of SBI

State Bank of India has 131 foreign offices in 32 countries across the globe.

SBI has about 21000 ATMs and SBI group (including associate banks) has about 45000 no of ATMs.

SBI has 26500 branches, inclusive of branches that belong to its Associate banks.

SBI alone has 13076 Branches (including the branches of State Bank of Indore), as on 26 August 2010.

SBI Head Quarter is in Corporate Centre, Madam Came Road, and Mumbai.

SBI Deposits is $285 Billion till 2010

SBI Revenues is 28,212 Billion till 2010

SBI Total Assets is $323.04 Billion till 2010

SBI Accounts for almost 1/5 of the Nation’s loan.

The State Bank of India is 10th most reputable company in the world according to FORBES.

Listed in B.S.E and N.S.E

It’s Website: www.Statebankofindia.com.

Management Details

Name Designation

O P Bhatt Chairman / Chair Person

R Sridharan Managing Director

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Dileep C Choksi Director

D Sundaram Director

Rajiv Kumar Director

Shyamala Gopinath Director

S K Bhattacharyya Managing Director

Ashok Jhunjhunwala Director

S Venkatachalam Director

Vasantha Bharucha Director

Ashok Chawla Director

Subsidiaries of SBI

State Bank of Bikaner & Jaipur.

State Bank of Indore.

State Bank of Hyderabad.

State Bank of Mysore.

State Bank of Patiala.

State Bank of Travancore.

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Non Banking Subsidiaries of SBI

SBI Capital Markets Ltd.:- SBICAP is involved in merchant banking activities, advisory services, project appraisal, securities broking and credit syndication. Posted a PAT of Rs 114.23 crs on 31.12.09 registering a YoY growth of 39%. The Group has a market share of 59.2% in Indian market and 16.4% in Asia Pacific market as Mandated Lead Arranger. YoY growth in Fee Based Income as high as 65%. As per Thomson Year India Syndicated Loan Table for India, SBICAPs is rankedNo.1 with 49 deals on hand with proceeds of USD 25769 million. During the period April-December 2009 the Company is ranked 2nd in “Public Offerings” as per Prime database.

SBI Mutual Fund (A Trust):- It is responsible for supervising and processing all activities related to mutual funds of SBI customers.

SBI Factors and Commercial Services Ltd.:- It provides factoring services to all small and big factoring companies. Factoring implies to finance services designed to improve the cash flow of companies. Net profit growth of 43% YoY (from Rs 26.79 crs as on Dec 08 to Rs 38.20 crs as on Dec 09). Company opened its 12th branch at Indore on 29.10.2009. Launched ‘Without Recourse Factoring Facility’ by offering the product to Mahindra & Mahindra Ltd. (Swaraj Division).

SBI DFHI Ltd.:- It is involved in undertaking in debt market of government and non- government securities. Posted a PAT of Rs. 72.37crores as against Rs. 53.60 crores as on December 2008. YoY growth of 35%. The secondary market turnover of Rs 67,979 cars is the highest in the last 5 years

SBI Cards and Payment Services Pvt. Ltd.:- It provides plastic money services to its customers and helps those making payments the easier way. Recorded a net loss of Rs.123 crores as on Dec 09 as against a loss of Rs 162 crores as on December 2008. The Company’s Paid up Capital went up by Rs. 50 crores to Rs. 610 crores during 2009-10 due to fresh infusion. Annual spend per account has increased from Rs 22000 as on Sept 08 to Rs 24000 as on Sept 2009 SBI Cards has emerged as the most trusted brand by being the undisputed Gold Award winner in Reader’s Digest Trusted Brands Survey 2009 in Credit Card Category First mover in re – introduction of Fee – based Cards; realized Rs 9 crs of fees YTD.

SBI Life Insurance Co. Ltd.:- It is the largest company providing private life insurances to customers. Company tops the list of private sector insurance companies, improving its position from 2nd rank in terms of New Business Premium, as per IRDA rankings Gross Premium Income at Rs.6087crs showed a YOY growth of 32% Market share is 18.8% amongst private players and 6.5% of total market as on December 2009. AUM of the Company as on 31st December 2009 stood at Rs.24614 crs. YoY growth of 85.5% recorded a PAT of Rs. 199 crores as against a loss of Rs.129 crores as on December 2008. Ranked 1st in terms of number of Million Dollar Round Table (MDRT) members

SBI Funds Management Pvt. Ltd.:- It is responsible for supervising and processing all activities related to mutual funds of SBI customers. AUM has increased from Rs 24,104 crs as on Dec 08 to Rs 37,900 crs as on Dec09. YoY growth of 57% despite the ban on entry load the company has posted a PAT of Rs. 61.55 crores as against a PAT of Rs. 52.53 crores in December 2008. YoY growth of 17%. Launched a new product ‘CHHOTA SIP’ in April 09 under which an investor can invest Rs. 100 in Mutual Fund Schemes.

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International presence of SBI

The bank has 92 branches, agencies or offices in 32 countries. It has branches of the parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape Town. SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank, State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India (California), and State Bank of India (Canada). In 1982, the bank established its California subsidiary, named State Bank of India (California), which now has eight branches - seven branches in the state of California and one in Washington DC which was recently opened on 23rd November, 2009. The seven branches in the state of California are located in Los Angeles, Artesia, San Jose, Canoga Park, Fresno, San Diego and Bakersfield. The Canadian subsidiary too dates to 1982 and has seven branches, four in the greater Toronto area, and three in British Columbia. In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo-Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria. In Nepal SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo Monex. State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin.

Services and Products

For Services and Products please login to www.sbi.co.in.

Personal Banking

State Bank of India offers a wide range of services in the Personal Banking Segment which are indexed here. Our products are designed with flexibility to suit your personal requirements. Enjoy 24 hour facility through our ATMs - growing speedily it has crossed the 5000 mark Watch this space for more details.

Current Account Savings Plus Account

Savings Bank Account Basic Banking 'No frills Account'

Term Deposits Recurring Deposit Account

Special Term Deposits Premium savings account

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Multi Option Deposit Scheme Rate of Interest on Domestic Term Deposits

Scheme SBI Tax Savings Scheme, 2006

Demat Account SBI Term Deposits

SBI Recurring Deposits SBI Loan For Pensioners

SBI Loan For Pensioners SBI Housing Loan

Loan Against Mortgage Of Property SBI Car Loan

Loan Against Shares & Debentures SBI Educational Loan

Rent Plus Scheme Housing Loan

Medi-Plus Scheme Car Loan

Property Loan Credit Khazana

Educational Loan Loan from ESOPS

Loan against Shares/ Debentures Personal Loan

Festival Loans SBI Personal Loan

Loan to Pensioners Tribal-Plus Scheme

Agricultural/Rural Banking

State Bank of India Caters to the needs of agriculturists and landless agricultural labourers through a network of 7400 rural and semi-urban branches. Apart from the branches, there are 427 Agricultural Development Branches (ADBs) which also cater to agriculturists. Our branches have covered a whole

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gamut of agricultural activities like crop production , horticulture , plantation crops, farm mechanization, land development and reclamation, digging of wells, tube wells and irrigation projects, forestry, construction of cold storages and godowns, processing of agri-products, finance to agri-input dealers, allied activities like dairy , fisheries, poultry, sheep-goat, piggery and rearing of silk worms.

To give special focus to agriculture lending Bank has set up agri business unit. Bank has also agri specialists in various disciplines to handle projects/ guide farmers in their agri ventures.  Advances are given for very small activity covering poorest of the poor to hitech activities involving large fund outlays. We are the leaders in agri finance in the country with a portfolio of Rs.56,000 crs in agri advances covering around 70 lac farmers. Considering that agriculture would continue to be significant driver of Indian economy, with the possibilities of rapid growth in emerging areas like contract farming, agro-processing and agro-export zones. The creation of a separate ABU with a distinct organizational structure and under noted objectives:-

Providing focused attention on the banking requirements of the agriculture segment,

Achieving 18% target under agricultural advances as required under priority sector norms,

Focus on micro finance and SHG opportunities (now part of non-farm sector in Rural Business),

Focus on Key Corporate and Institutional relationships in agriculture, emerging opportunities, and special initiatives, as may be necessary,

Focus on product development and management,

Reduce NPA levels in Agriculture,

Make agriculture a commercial proposition.

ABU have four departments headed by Deputy General Managers.

Agri Business, Planning, Monitoring and Market Intelligence

Corporate and Institutional Relationship

Product Development and Marketing

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RRBs & Lead Bank Department

At circle level, to enable enhance focus and accountability on agri-business, a DGM/AGM is responsible for driving agri-business supported by a team. They are focusing on Institutional marketing, business opportunities and regulatory functions. Marketing and recovery teams are created in each region with responsibilities for marketing and building relationships with dealers of agri-products, organizing promotional events and for loan sanction, processing, monitoring and recovery. Traditionally, rural business is associated with agri-spillover effects of economic growth and renewed focus on infrastructure, development, and employment generation in rural areas, led to huge investment by the Government in rural India, with a view to bridge the urban and rural divide."SBI now provides your Account Balance and Transaction details over phone round-the-clock. Information on deposits & loan schemes and services also available.

NRI Services

“Indians everywhere should become enlightened International citizens. Wherever you are, whichever country you live, enrich that nation, not only in financial terms, but also with your sweat knowledge and dignity since that is the tradition of the country from where you came. At the same time, remember we have a common umbilical connectivity to our motherland, India.”

NRIs can open the following types of accounts with us

NRE Rupee Accounts.

Savings Bank.

Current Accounts.

Term Deposits (Interest Paid out Quarterly).

Special Term deposits (Interest compounded quarterly).

Non-Resident (Ordinary) Account.

NRO Accounts - Rupee Accounts for crediting income in India.

Foreign Currency Non Resident Accounts.

Fixed Deposits in Pound Sterling, US Dollar Euro  Canadian Dollar and Australian Dollar

Resident Foreign Currency Accounts.

Also SBI provide NRI Home Loan and NRI Car

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International Banking

International banking services of State Bank of India are delivered for the benefit of its Indian customers, non-resident Indians, foreign entities and banks through a network of 131 offices/branches in 32 countries as on 31 July 2009, spread over all time zones. The network is augmented by a cluster of Overseas and NRI branches within India and correspondent links with over 522 banks, the world over. Bank's Joint Ventures and Subsidiaries abroad further underline the Bank's international presence. The services include corporate lending, loan syndications, merchant banking, handling Letters of Credit and Guarantees, short-term financing, collection of clean and documentary credits and remittances. The Bank has carved a niche for itself in the Euroland with branches located in Antwerp, Paris and Frankfurt. Indian banks and corporates are able to avail single-window Euro services from the Bank's Frankfurt branch. "SBI now provides your Account Balance and Transaction details over phone round-the-clock. Information on deposits & loan schemes and services also available.

Corporate Banking

SBI is a one shop providing financial products / services of a wide range for large, medium and small customers both domestic and international.

Working Capital Financing

Assistance extended both as Fund based and Non-Fund based facilities to Corporates, Partnership firms, Proprietary concerns.

Working Capital finance extended to all segments of industries and services sector such as IT

SBI offers:-

Working Capital Finance Project Finance Deferred Payment Guarantees Corporate Term Loans Structured Finance Dealer Financing

Channel Financing Equipment Leasing Loan Syndication Financing Indian Firms Overseas

Subsidiaries or JVs

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Services

Domestic treasury

SBI Vishay Yare foreign travel card

Broking services

Revised service charges

ATM services

Internet banking

E-pay

E-rail

RBIEFT

Safe deposit locker

MICR codes

Foreign inward remittances

RTGS and NEFT

Government Business

State Bank of India's linkage with Government business is widespread.  No wonder that out of 9315 branches in India, about 7000 branches are conducting Government Business.  The large network of our branches provides easy access to the common man to deposit the following Government dues and pension payments

SME

State Bank of India has been playing a vital role in the development of small scale industries since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialised SSI branches, 99 branches in industrial estates and more than 400 branches with SIB divisons. The Bank finances for Small Business activities which are of special significance to a large number of people as many of these activities can be started with relatively lower investment and with no special skills on the part of the enterpreneurs.

Service charges & fees

Sr. No.

Item

(Uniform to all Branches)

Core/Non-Core Banking Branches Regular Branches other than P-Segment irrespective of Location (w.e.f 11th Feb. 2008)

1. Issue of MICR cheque-SB Rs 2.00 per cheque leaf and 25 leaves free in a year ( Other than

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Multi city cheque Book)

2. Issue of non-MICR cheque- SB

Rs 2.00 per cheque leaf and 25 leaves free in a year( Other than Multi city cheque Book)

3. Issue of MICR cheque- CA Rs 2.00 per cheque leaf other conditions to remain

4. Issue of non MICR cheque- CA

Rs 2.00 per cheque leaf other conditions to remain

5. Issue of Pass book/Balance certificate

Issue of Passbook/statement -NILIssue of Balance certificate Rs 100/-

6. Duplicate pass book/ Statement

With latest balance Rs.100/- (Rs.100/-per ledger folio (40 entries) for previous entries) additional

7. Stop payment instructions Rs.50/- per instrument up to 3 leaves.Range of cheques- Rs.200/-

8. Balance enquiry NIL

9. Account closure before 12 months (a/c transfer not

included)

Individuals- Rs.150/- Companies Rs. 500/-

10. Cheque returned charges- cheques drawn on us.

Rs.75/ + other bank charges if any

11. Cheques/ bills deposited returned unpaid- Local

Rs.75/ + other bank charges if any

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12. Signature verification Rs.50/

13. No dues certificate Priority sector NilOthers Rs 100/- per certificate

Remittance Facility

14. Issue of demand drafts Up to 10,000/- Rs. 30/- Above Rs10,000/- Rs.2.50 per Rs 1,000 Min.

Rs. 50/- Max. Rs 12500/- For remittances by cash deposit, cash handling charges will be

extra

15. Revalidation/ cancellation of drafts

Rs.100/

16. Issuance of duplicate demand draft

Rs 100/- per draft

17. Issue of Banker's cheque Up to 10,000/- Rs. 30/- Above Rs10,000/- Rs.2.50 per Rs1,000 Min.

Rs. 50/- Max. Rs 12500/- For remittances by cash deposit, cash handling charges will be

extra

18. Revalidation/ cancellation of Bankers' cheque

Rs.100/

19. Issue of duplicate bankers cheque

Rs 100/-

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20. Issue of TT Same as draft charges+ transmission charges Rs 100/-

21. Cancellation of TT N.A.

22. Collection of cheques

(W.E.F. 11.10.2008)

a Upto Rs. 10,000 Rs. 50 per instrument

b Rs. 10,000 to Rs. 1,00,000 Rs. 100 per instrument

c Rs. 1,00,001 and above Rs. 150 per instrument

Above charges are all inclusive. (No courier charges, out of pocket expenses)

These charges are applicable only to transactions originated and payable within India.

23. Collection of bills Up to Rs.5,000/- Rs50/-Above Rs 5000/-and Up to Rs10,000/-Rs75/-

Above Rs.10,000/- Rs 6/-per thousand Min. Rs 100/- Max 12,500/-+ out of Pocket expenses

24. DD Purchase Outstation cheque

Interest @ 50 paise % + collection charges + out of pocket expenses. In case of cheques returned unpaid interest at 16% p.a.

after adjusting the amount collected @ 50 paise %.

25. Cheques/ bills deposited returned unpaid-outstation.

Rs.150/- + other bank charges if any

26. Presentation of usance bills 75/-

27. Postal charges Ordinary - Rs.15/-Regd. / courier - Rs.35/-

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28. Min. Service charges Urban/Metro/SU- Savings Bank

Rs 200/-per quarterRural Rs 100/-per quarter

Current account At all Centers-Individual Rs 500/-per quarter

29. Inoperative account No service charge if stipulated minimum balance requirement is complied in the A/C.

otherwise Rs 75/- per annum.If the amount is less than Rs 75/- account to be closed and advised

to the customer.

30. Charges for excess debit entries in SB

Rs 5/- per entry.(For entries over 30 per 1/2 year)(Other than alternate channel)

31. Setting up Standing Instructions (SI).

Rs 50/-

Processing of SI(other than Bank Transfers)

Rs.25/- + remittance charges + postage.

32. Issue of Deposit at Call Receipt (payable at branch of

issue)Nil

33. Cash handling charges for CA /CC deposit (Other than P

segment Customer)

Upto one bundle -Nil More than one bundle Rs 100/-

per bundle Max 10,000/-

34. Safe custody chargesScrips ( for each scrip)

Rs. 100/- per script Min. Rs. 200/- p.a. or part thereof.

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Sealed cover (for each cover)

Bank's own deposit receipt

Rs. 200/- per cover p.a. or part thereof NIL

35. Safe deposit articles Rs.500/- one time charges plus, Envelope -Rs.100/- p.a.Package-Rs.500/- p.a.

Large packet/Box-Rs 1000/-p.a.Subject to maximum total dimensions ( i.e.length+width+ height)

should not exceed 100 c.m. if exceed 100 c.m. Rs 20per c.m.(subject to availability of space available)

36. Safe Deposit LockersAnnual charges

New Size/ Type=Small Size A:125 x 175 x 492Size B:159 x 210 x 492

Metro & Urban Centres: Rs.1000/-Semi-urban & Rural: Rs.750/-

MediumSize:C:125X352X492Size:D:189X263X492Size:E:159x423x492

Size H1:325X210X492Metro & urban Centres: Rs.2500/-

Semi-urban & Rural: Rs.1500/-Large:

Size:F:278X352X492Size:G:189X529X492Size:H:325x423x492

Metro & Urban Centres: Rs.3000/-Semi-urban & Rural: Rs.2500/-

Extra large:Size L:404X529X492

Size:L1:385X529X492Metro & Urban Centres: Rs.5000/-

Semi-urban & Rural: Rs.4000/-Note: In case of loss of key of the Lockers, a service charge of Rs500/- has to be recovered from hirer in addition to the actual expenditure incurred for breaking open the locker and changing

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the lock by manufacturers of lockers.

37. Solvency certificate Non-commercial Rs 300/- Commercial Rs.250/- per lakh Min. Rs.1000/- Max.

Rs.15000/-

38. Photo attestation charges Rs.100/-

39. Record copy of the Cheque Rs.50/-per instance

40. Interest certificate First Free Extra copy Rs.50/- per certificate

41. Enquiries relating to old records (more than 12 months

old)Rs 100/- per item

42. Payment of Deposit receipts to another bank

Local-Charges as applicable to issue Banker's ChequeOutstation- Charges as applicable to remittances

For Individuals in rural areas, pensioners and senior citizens service charges would be 50% of the applicable prescribed charges in respect of following services :-

Issue of duplicate passbook/statement of accounto Issue of cheque books,

o Noting of standing instructions,

o Stop payment instructions,

o Charges of non maintenance of minimum balance,

o Issue of balance certificate,

o Signature verification,

o Ledger folio charges

Minimum balance requirement would also be reduced to 50% for these class of customers. No service charges will be levied on no frill accounts.

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Competitors of SBI

Punjab National Bank ICICI Bank HDFC Bank

Bank of Baroda Others

SBI was now forced to brace itself for the arrival of a new wave of competitors eager to enter the fast-growing Indian economy's commercial banking sector.

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SBI Financial Details

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Dealogic in its January 2010 report has rated SBI the Global Leader in five Project Finance areas for the calendar year 2009. YoY growth in corporate fee income is 53.33%. Underwriting fee earned during Apr – Dec 09 is more than Rs.200 crore. Loans to 632 new connections worth Rs.21,991 crores sanctioned upto Dec 09 in Mid Corp group. 306 new connections worth Rs.11,273 crores are under process at Mid Corp Project Finance has 70 proposals in pipeline with SBI’s share of debt being Rs.30,883 crore and syndication mandates of Rs.28,665 crore. The major contributor is Power sector.

The bank has launched a scheme for collateral free loans to Micro & Small Enterprises. To set up new units, SBI extends assistance in the form of Small & Micro Interest-free Loans as Equity. Launched a new Current Account product – SBI SHAKTI. Launched SBI OTS-SME 2009, a onetime settlement scheme for SME NPAs. Under Dealers Account Drive, 3453 accounts booked amounting to more than Rs.1400 crore. As in the past, we are set to achieve the 18% benchmark for Agri credit by March 2010. Surpassed 10% Benchmark under Weaker section (achieved 11.37%) and 15% Benchmark under Lending to Minority segment (achieved 16.20%). Launched special drought relief schemes to support. Farmers As on 31.12.2009 the bank has 141 Foreign Offices in 32 countries During the quarter remittances increased by Rs.9762 crs, an increase of 93% (Q-o-Q). Usage of International Toll Free Numbers increased by 116%. Opened 4 new NRI branches. We have successfully raised US $ 850 mn during the quarter under our US D 5 bn MTN programme at the tightest of pricing. During the period Apr-Dec 09, 7 syndication deals worth USD 2.6 bio and 10 bilateral deals worth USD 537 mio were concluded. Upfront fee to the tune of USD 26.67 mio was booked in these Deals Market share in

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incremental growth in Home Loans between April – Oct 09 was as high as 84% SBI continues to be #1 in market share, outstanding and incremental growth in home loans More than 98% of our Home Loans have been availed by first time buyers Target to increase the number of institutions under SBI Scholar Loan schemes from 61 to 100 for the next academic year Leverage the interest subsidy scheme for technical and professional education announced by Ministry of HRD So far we have extended education loan to 4.18 lac students On an average 22,000 auto loans per month have been SBI Advantage Car Loan Scheme for premium products launched in Oct 09. Loans worth Rs 26.65 crs sanctioned MoU entered with Chevrolet and Hondasil Sales India Pvt Ltd We continue to be the largest player in auto oans, with market share of around 15% We continue to selectively disburse personal and other unsecured loans Bulk of lending is against salaries and YTD growth in Express Credit is Rs.6237 crs Under SBI Loan to Pensioners, the YTD growth is Rs.1066 crs SBI Loan to Affluent Pensioners launched in July 09, current outstanding is Rs.32.75 crs.

YTD growth in total advances is Rs 58,614 crs with growth of Rs.26,917 crs during Q3 FY10. 67% (26% in housing) of this growth is below PLR lending in housing, auto, education, agri and corporate sectors, the impact of which on YOA is 6 bps. YOA is likely to stabilise as full benefit of growth in terms of interest earning will be visible during Q4

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1.56 crore SB accounts and 2.03 lac CA opened from 01.04.09 upto Dec 09 taking total SB and CA accounts to 10.44 crores and 22.57 lac respectively as on Dec 09 SB deposits grew at an average of Rs. 5,337 crores per month (Apr 09 – Dec 09); leading to a Y-o-Y growth of 32.15% in SB

Ratio of high cost bulk deposits to total domestic deposits has come down from 15.96% in Dec 08, to 10.74% in Mar 09, and to 2.40% in Dec 09. Despite shedding of high cost bulk deposits to the extent of Rs.57,450. Cr during April-Dec 09 total TD have not shrunk due to strong inflow of retail term deposits. More than Rs 290,000 crores Term deposits re-priced by 163 bps during April – Dec 09

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•PLR has come down by 125 bps from Dec 08 to Dec 09. The impact during Q3FY10 on interest income is to the tune of Rs.900 crores.

• Opportunity loss on account of liquidity overhang is estimated at Rs.600 crores in Q3 and Rs.1830 crores in 9M.

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Out of the Standard Assets of Rs.16796 crores restructured under RBI dispensation upto June 09, Rs.996 crores have slipped into NPA category upto December 09, taking the slippages ratio to 5.93%.

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Combined Performance Highlights of Associate Banks

Operating Profit registered a growth of Rs.300.36 (7.41%) y-o-y reaching a level of Rs.4356.41 crore as against Rs.4056.05 in Dec.08. Net Profit registered a growth of Rs.198.39 crore (9.85%) reaching a level of Rs.2213.16 crore as on Dec 09 (Dec-08 Rs.2014.77 crore). Capital Adequacy Ratio improved to 13.69% in December 09 from 13.01% in March 09, Tier-I improving to 8.09% from 7.61% in March-09. Net Interest Margin improved from 2.60% in March-09 to 2.65% in Dec-09. Net Interest Income increased by 10.90% y-o-y to reach a level of 5680.91 crore. Average cost of Deposits declined by 61 bps from 7.08% in March 09 to 6.47% in December 09. In keeping with the market dynamics Average. Yield on Advances declined by 50 bps to 10.41% in December 09 from 10.91% in March 09. Deposits registered a YoY growth of Rs. 33167 crore (13.33%) reaching a level of Rs. 282023 crore in December 09. YoY growth of CASA deposits was robust at 17.47%. CASA ratio improved to 30.37% in December 09 from 29.30% a year ago. Advances grew by 11.33% YoY.

NPA Management

Gross NPAs increased by Rs. 1167.72 crores to Rs. 3931.28 crore in December 09 as against Rs. 2763.56 crore in March 09.

Gross NPA ratio increased from 1.39% in March 09 to 1.86% in December 09. Net NPA ratio increased from 0.61% in March 09 to 0.96% in December 09.

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Recent Rewards and Recognition

SBI has been adjudged Bank of the Year 2009, India by the Banker magazine for the second year in succession.

SBI ranked 64th in the Top 1000 banks in the world by The Banker SBI has bagged the awards for ‘Best Bank – Large’ and ‘Most Socially. Responsible Bank’ from Business World – Best Bank Awards 2009. State Bank of India ranks no. 2 (from no. 4 in 2008) in India’s Most Valuable Brand 2009 – study carried out by Brand Finance exclusively for The Economic Times.

(dated 20th November 2009). State Bank of India ranks no. 6 (from no. 7 in 2008) in India’s Biggest Companies ranking – ET 500 - The Economic Times. (dated 24th November 2009). State Bank of India has emerged as a winner in the Best Bank category – Outlook Money NDTV

Profit Awards, 2009. State Bank of India has emerged as a winner in the Best Home Loan category – Outlook Money

NDTV Profit Awards, 2009. State Bank of India ranks no. 5 as per average market capitalization (April – Sept 09) - BT 500

India’s Most Valuable Companies – Public Sector. State Bank of India has won the NASSCOM CNBC. TV18 IT User Award 2009 for the Banking

Vertical. SBI Group has achieved top of the league status globally in the Loan Syndication Business for

H1 – 2009 by Dealogic, PFI Thomson and Bloomberg SBI has been chosen as a recipient of High Performance Brand of the Year 2009 by AIMA (All

India Management Association) R K Swamy High Performance Brand Award.

Awards for the Chairman

Shri O P Bhatt , Chairman, State Bank of India, has been awarded the Inspiring Business Leader in Crisis Award by NDTV Profit Business Leadership Awards, 2009.

Shri Om Prakash Bhatt, Chairman, S.B.I., has been awarded the Best Banker Of The Year Award 2009 - Businessworld Best Bank Awards 2009

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