Theme - Bankingicmai-wirc.in/bulletins/05-2020.pdf · • Banking reforms and enhancing Credit...

WESTERN INDIA REGIONAL COUNCILTHE INSTITUTE OF COST ACCOUNTANTS OF INDIA

(Statutory Body under an Act of Parliament)Rohit Chambers, Janmabhoomi Marg, Fort, Mumbai 400 001.

Tel.: 2204 3406 / 2204 3416 / 2284 1138 • E-mail : [email protected] • Website : www.icmai-wirc.in

Vol. 48 No. 5 May 2020 Pages 48 Price: Rs. 5/- RNI No. 22703/72

Inside Bulletin PagesCover Stories : • ImportanceofimplementationofsoundCostandManagement.... CMA Jayesh S. More 5 • RelevanceandApplicabilityofCostandManagementinBanking.... CMA Aparna Bhonde 7 • SimpleguidetoRBIMonetaryPolicyalongwithATRofmonetary.... CMA Utkarsh Yagnik 10 • BankingTerminology CMA Nikhil Subhash Pawar 14 • Basel3Norms–ImpactonIndianBanking CMA (Dr.) Subir Kumar Banerjee 16 • UnderstandingReverseMortgages:Benefits&Risks CMA Manohar V. Dansingani 19 • RoleofLetterofCreditinBusiness CMA Hemant Sindhwani 23 • BankingreformsandenhancingCreditSupplyforInfrastructure.... CMA (Dr.) K.V. Damodharan & Kapil Dev Kumar 26 • CMA’sRoleinbankingsectorasStockAuditor CMA Pradnya Chandorkar 29CFO Speaks : CMA Mohan Tanksale 31Other Articles • ImpactofCOVID19onIndianaswellasGlobalEconomy CMA Jay Mehta 35 • EconomicImpactofCovid-19onIndia CMADr.V.V.L.N.Sastry 38 • EquityInvestinginPandemictimes CMA Dhiraj Sachdev 39 • RoleofWomeninfosteringGreeneconomy CMA(Dr.) S. K. Gupta 40 • GST-ConcessionsGrantedConsequenttoCOVID-19Outbreak CMA Arun Karnik 42 • MISReportshowingIndividualRawMaterialCostas%ofTotal.... CMA Rajesh Kapadia 45Chapter News .... 46

EDITORIAL BOARDChief Editor:

CMA Ashishkumar BhavsarEditorial Team:

CMA Chaitanya MohrirCMA Arindam GoswamiCMA Sujata BudhkarCMA H. C. ShahCMA Rahul JainCMA Amit Shantaram ShahaneCMA Aparna Arvind Bhai BhondeCMA Dr. Niranjan ShastriISSN 2456-4982

Theme - Banking

WIRC BULLETIN – MAY 2020

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DearCMAProfessionalColleagues,

WarmgreetingsonmypersonalbehalfandbehalfoftheentireteamofWIRC.Ihopethatyouandyourfamilyareingoodhealth.FriendsweareinCOVID19Lockdown3.0.ThisphaseoflockdownisverycriticalasitisthetimetoassesstheexitplanfromtheLockdown.Itisthetimewhichwilltellwhetherweasasocietyfollowthenormsofsocialdistancingandguidelinesasgivenbythegovernmentoncethelockdownislifted.Iappealallofyoutofollowthenormsassetoutbythegovernmentauthoritiesandshowthatweareresponsiblecitizensandprofessionals.

This phase of lockdown has allowed life and business to return to normalcy in a phased manner.We asprofessionalshavetoplayourparttohelpthebusinessesandeconomytoreturntoitsnormaloperations.TheInstitutehasbeenplayingitsparttokeepthemembersandstudentsengagedbyconductingknowledgesharingsessionsusingweb-basedplatforms.Iamhappytonotethattheresponsefromthemembersalsohasbeenoverwhelming.RecentlytheInstitutehasintroducedanewWebPlatform“WEBINT”toofferinteractivewebbasedtechnicalsessions.ImustputonrecordmyappreciationofCMABalwinderSinghsir,President,CMAHPadmanabhansir,CouncilMemberandentireITteamoftheInstituteforbringingthiswonderfulfacilityintheserviceofthemembers.IamhappytosharethatIwasoneofthespeakersintheInauguralProgramofWEBINT.TheresponsetothesesessionshasbeenoverwhelmingandIthankallourmembersforthesame.ItwillbeourendeavourattheInstitutetobringexcellentresourcesontheInstitute’splatformforknowledgesharing.

Throughmanyoftheseknowledgesharingsessions,thespeakersandmembersbothhaveexpressesthatinthecurrentsituationofCOVID19,MSMEsectorisgoingtoplayakeyroleintheeconomicrevivalstrategy.ButatthesametimeMSMEsectorisgoingtoofferprofessionalopportunitiestoCMAs.ItisuponustoexploretheseopportunitiesandcontributetothegrowthoftheMSMESector.ThishighlightstheimportanceofMSMEsectorfortheCMAsandalsofortheIndianEconomyassuch.WiththisinmindweapproachedHon.NitinGadkariji,MinisterofMSME,GOIforaLiveInteractionSessionwithourmembers.Iamgladtoinformyouthathehasgraciouslyacceptedourinvitationandwillbewithusforaliveinteractionsession.Pleasefindbelowthedetailsofthisevent-

“Live Interactive Session with Hon. Shri. Nitin Gadkari ji, Minister of MSME, GOI” on Tuesday, 12th May 2020 from 1.45 p.m. to 2.30 p.m.

YouarerequestedtopleasesendusyourSuggestions&QuestionsfortheMSMEMinisterby6.00p.m., Saturday9thMay2020.TheQuestions&Suggestionsshouldbeinbriefandtothepoint.

Please send the Questions & Suggestions to : [email protected]

(Please mention your Name, Membership No. & Mobile Number)

AtWIRCalsowearecontinuingtoserveourMembersandStudentsthroughweb-basedoperations.However,thefocusoftheseeffortshadbeenStudentsservices.Wehavemadeavailablerevisionmaterialforthebenefitofstudents.WIRChasbeenconductingonlinelecturesforthestudentstocovertheentiresyllabus.Iamindebtedtothe facultymembersofWIRCwhohavesupporteduswholeheartedly inthisendeavour.IampleasedtoinformyouthatmanyofthefacultymembershavecompletedtheirsyllabusandIamsurethatthestudentshavebeenbenefittedbythis.Atthesametime,wealsoconductedCrashCourseforthestudentsofIntermediate&Final.TheresponsefromIntermediatestudentshasbeengood.ButIamsadtoreportthatthestudentsofFinalhavenotrespondedtothiseffortoftheInstitute.

From the Desk of Chairman . . . . . .-


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WIRCisnowgoingtosimultaneouslyfocusonbringinginnovativeCEPsessionsforthebenefitofthemembersthroughOnlineMode.CMAVinayakKulkarni,ChairmanPDCommitteeofWIRChasalreadyworkedoutadetailedandelaborateCEPplanandthesameisdeclaredinthisbulletin.

Iappealtoallthemembers,studentsandchapterstogetintouchwithWIRCincaseofanydifficultyorforanysuggestions.MeandmyteamatWIRCareavailable24X7toserveyou.Ionceagainurgeyoutofollowthenormsofsocialdistancingandthenormssetoutbythegovernmentbeforeweembarktowardsnormalcy.WehavetoappreciatethatourlivesandlifestylemayhavechangedforeverduetoCOVIDandthischangedorwhatwearecallingnowas“NewNormal”mayturnouttobe“Normal”.WeasasocietywillhavetoadapttothisNewNormal.Weasprofessionalshavetoadapttotechnologyandtechnology-basedworkculture.It’sabigculturalshiftandisgoingtobehardtomanage,butIamconfidentthatCMAswillbeleadingprofessionalstoadaptandutilizethischangetotheirbestadvantage.

“I cannot say whether things will get better if we change; what I can say is they must change if they are to get better. - Georg C. Lichtenburg”

“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow. - Rupert Murdoch”

SincerelyYours,

CMA Neeraj Dhananjay JoshiChairman, ICAI-WIRC

Please Follow the Norms of Social Distancing. Be Safe.


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From Desk of Cheif Editor . . . . . .-

DearCMAProfessionalColleagues,

We are now in the third phase of lockdown due to global pandemic of the Novel CoronavirusCOVID2019.Itseemsthefightagainstunseenenemygoingtobeforlongerperiod.WIRCbringoutEversionofWIRCbulletinforthemonthofMay,2020forprofessionalupdateandknowledgesharing.

Asyouknow,EditorialboardhasdecidedtostartThemeBaseWIRCbulletinfromApril-2020.Wehavepublishedinlastbulletinandfurthersendcommunicationtomembersaboutthemonth-wisevariousthemes.ThemeforthemonthofMay2020is“Banking”.Wehavereceivedexcellentresponsetoournewinitiative.Wehavereceivedaround9articlesonthe“Banking”themes.Articlesonthethemearepublishedascoverstory.Wearealsopublishingarticlesonotherprofessionalmatters. IamthankfultoallauthorsforprovidingarticlesandmakingWIRCbulletinaKnowledgePack.

WehavealsostartpublishinginterviewofCMAswhohadreachedarespectablepositionlikeCFO,VP,Directoretc.ObjectiveofthesametosharetheirexperiencewithCMAfraternity.ItwillinspireyoungCMAsformakingfuturebrighter.Inthisbulletin,wehavepublishedinterviewofCMAMohanTanksale,Ex.ChairmanofCentralBankofIndia.IthankCMAAmitShahaneforconductingtheinterview.IalsothanksCMAAmitApteImmediatePastPresidentoftheinstituteforprovidinghisgoodreference.IrequestourproudCMAswhoreachthishighestpositionduringtheircareertosharetheirexperiencewithCMAfraternity.Placereachussothatwecanconductinterview.

Womenempowermentisalsooneoftheneedsofthehour.WehavealsodecidedtopublishatleastonearticlefromladyCMA.IrequestladyCMAtocomeforwardandsendusarticlesothatwecanshowCMAwomenempowermenttotheworld.InresponsetoourappealwehavereceivedarticleforCMAPradnyaChandorkarandCMAAparnaBhonde.

IthankfultoallmycouncilcolleaguesforputtingfaithonmetochairEditorialBoard.IamalsothankfultoSurekhapressforarrangingE–WIRCBulletinforMay2020inthislockdownsituation.IamalsothankfultoWIRCstaffformanagingeverythingfromhome.

IurgememberstoshareknowledgebywayofarticletomakeWIRCBulletinsKnowledgePack.

WewelcomesuggestionandfeedbackforbettermentofWIRCBulletin.

Atlast,IrequestallmemberstofollowalltheguidelinesgivenbycentralandstategovernmentstofightwithCOVID2019.Pls.maintainsocialdistancingandremainathome.

StayHomeStaySafe

HappyReading!!!

WithWardRegards

CMA Ashish BhavsarChairman, Editorial Board


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Importance of implementation of Sound Cost and Management System in Banking Sector

CMA Jayesh S. More Mob.:9404516193•E-mail:[email protected]

Dearprofessionalcolleagues,

Asthebankingindustryhasundergonetremendouschangeoverthedecade.Alsobankingbusinesshasalsoexuviateto serve its customer in a far better way. But, bankingindustry has a huge challenge of cut throat competitionlikewise other industry has. So to serve its customerwithoutdisappointingthemwithcostofservice.However,tomeasurecostofserviceasoundcostingandmanagementsystemmustbeimplemented.Asthemeasurementofcostisthebestdeterminantofprofit.Moreovertoadoptmodernbusinesspracticelikebenchmarking,Businessprocessre-engineering (BPR)an integratedaccountingsystemisanessentialpre-requisite.

ThisArticleisanattempttostudytheneedandsignificanceof sound cost accounting systems in banks for gainingstrategic competence through effective management ofcosts,informedbusinessdecisions.

v Materiality of Cost Accounting in Cost Accounting system in banking industry:

Now,therearethreetypesofquestionarises,theyareasfollows:-

• Whether, traditional financial accounting systemsareenoughoradequatetoprovidecostinformationformanagerialdecision?

• Then, what are the benefit arising from theinstallationofsoundsystemofcostaccounting?

• And last one, Is it practicable to install costaccountingsysteminserviceindustrylikebankingsector?

So let’s, explore….1) Conventional or traditional accounting system is for

compliancepurposeonly.Andalso it isnotenoughtosupportscientificdecisionmakingtothemanagement.Though continuous analysis and monitoring ofbusiness performance makes cost accounting makesan essential function of any gradual organization. Toadoptnewbusinesspractice likebenchmarking, interfirm comparison, intra firm comparison, it is equallyimportanttohaveadetailcostinformation.However,suchsystemshavebeenemployedbymanyorganizationvoluntarilyfortheirinterest.Butsuchsystemarebeingadopted out of statutory compulsion. Also to bringuniformity inreportingofthecostingdata,statementandreportingformatmustbeuniformforcomparisonbetweentwoorganizations.IfCostAccountingRecordRulesandCostAuditReportRulesaremadeapplicableto the banking industry then the much desireduniformity in respect of cost accounting systems can

beensured.Thisinturnwillbenefittheindustryasawholebywayofimprovementinproductivity;andalsothepublicatlarge,oncesuchimprovementispassedontoproductsunderoffer.

2) Anorganizationshouldprimarilyfocusonthedecisionmaking by using such cost accounting data, merelyrecordingofcostwillnotgiveanyoutput.Althoughhereobjectiveistomanagecostoncontinuouslybasis.Whichwill ensure the sustainable growth of the business.A cost accounting system should be integrated withfinancial accounting, Asset - Liability management,Economic Research, Marketing etc. This will ensureexcellentquality fordecisions throughobjectivityandbusinesssynergy.

3) Traditional cost accounting is strengthening thecommunicationbetweendepartments.Thoughemphasisisontheinternalreportingandstatutorycompliance.Accordingly,itshouldfacilitatesmoothflowofstrategicinformation between the various departments (like,Economic planning, Marketing, Financial accountingetc.) and also such relevant external informationas competitors’ moves, market trends etc. Suchinformationflowshouldstrengthenandsupportthetopmanagementinitsdecision-making.

4) An integrated cost accounting system is not only fortheinternalreportingorstatutorycompliancepurposebutitalsoprovideacomprehensivedecisionmakingtothemanagement.Furthernotonlyinternalitalsokeepclose eye on the competitor’s stand, economic trendetc.Thisenablestheadoptionofthemodernstrategictechniques like benchmarking. Reason behind that,thiswillprovideallinformationasarerequiredforthekeyperformanceparameterswithinthefirmandalsooutsidethefirm.

5) Costaccountingenablesthecontinuousevaluationofthebusinessperformance.Hencethebasicemphasisisonthestrategicmanagementofcostonacontinuousbasis.Butitshouldnotbetheregularfunctionofmaintainingcost records. Such system shall facilitates on goingevaluationandmonitoringofoperationalperformanceshould ensure excellent operational efficiency andproductivity. This in turn facilitates (a) eliminationof wastes and deficiencies in the system. (b) Use ofimprovedmethods,systemsandprocedures.(c)Betterand tighter control of costs ona continuousbasis. (d)Moreefficientuseofhumanandphysicalfacilitiesandalsomoreefficientoperations.Asoundcostaccountingsystemshallensurethatthescarcehumanandphysicalresourcesareallocatedwithoptimumefficiency.


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v Benefitsofasoundcostand management accounting :

1) Makesfunctioningofdepartmentslike,Marketing,Planning & Development, Economic Research,accountingFinanceetc.moreeffective.Asthecostaccountingintegrateallfunctions.

Scientific and rational basis for such businessdecisionsasexpansion,productmix,targetmarkets,optimalutilization of humanand other resources,marketingstrategyetc.makesfunctioningofthesedepartmentsmuchmoreeffective.

2) Once a cost accounting system is installed in abank, itwillensuredramatic changes in the levelofcostconsciousnessamongemployeesatalllevels.Inacompetitiveenvironment,scientificinformationregardingthecoststructureofvariousproductsandactivities is vital even for a bankmarketer; thenonlyhecanmakepricenegotiationseffectivelywithhisclients.

3) Allocation of human and physical resources in anorganization can be made scientifically with thehelpoftheinputavailablefromthecostaccountingdepartment. This contributes towards improvedproductivityandefficiency.

4) Makesfunctioningofdepartmentslike,Marketing,Planning & Development, Economic Research,accounting Finance etc. more effective. Scientificand rational basis for such business decisions

as expansion, product mix, target markets,optimalutilization of humanand other resources,marketingstrategyetc.makesfunctioningofthesedepartmentsmuchmoreeffective.

Further,anintegratedCostAccountingdepartmentfacilitatesgreaterco-ordinationamongalltheallieddepartmentsthroughinformationinterchange.

5) Lastly,butnotofleastsignificance,isthecorporategovernance concerns. As already mentioned, themost effective means to adopt best corporategovernancepracticesistoputinplaceanefficientandindependentsystemofManagementAudit.

Hencetosumup,Canacountrylikeourswhichhasgottheuniquedistinctionforhavingimplementedstatutory Cost Audit for the first time in theworld, keep away the banking sector – the mostdominantsectorofanyeconomy–outsidetheambitofCostAccountingRecordsRules andCostAuditReportRules, anymore; especiallywhen corporategovernance, benchmarking etc. arebusinessbuzz-wordsworldwide?

Cost and management accounting systems inbanks, without doubt, have tremendous strategicsignificance in today’s banking sector in Indiawhich is characterized by cutthroat competition.These systems can improve quality ofmanagerialdecisions to a large extent and can also ensuresustainedbusinessprofitabilityandproductivity.


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Relevance and Applicability of Cost and Management in Banking Sector

CMA Aparna BhondeMob.:94282 45507•E-mail:[email protected]

Evolution of NPA Management in Indian Banking SectorThe Indian banking sector has been witnessing risingNPAsoverthelastfewyears.Whileresearchhasfocusedon identifying reasons – whether environmental, orsystemic,theReserveBankofIndiahasbeenworkingonvariousmechanismswherebystressedbankassetscanbereconvertedintobeingproductive.Whenassetsofabank(loans extended by it) stop generating regular income(interest) and there are possibilities of default/ delayin the principal repayment, the assets can be classifiedas ‘non-performing’. But when such cases increase,not only do the bank balance sheets get impaired, butproductive capital at the macro level also gets blockedleading to reduction in economic activity. Thus there isa need to curb/ reduce the incidence of non-performing asset.

Further Non Performing Assets are classified into thefollowingthreecategoriesonthebasisofthedurationforwhichtheyhaveremainednon-performing.

1. Sub-standardassets–assetsthathaveremainedNPAforaperiodoflessthanorequalto12months.Thereisadistinctpossibilityofthebanksustainingsomelossesonsuchassetsifdeficienciesarenotcorrected.

2. Doubtfulassets–non-performingassetsthathavebeeninthesub-standardcategoryfor12months.Giventheweaknessesintheseassets,collectionorliquidationisrenderedhighlyimprobable.

3. Loss assets – assets where loss has been identifiedby the bank or external auditor/ RBI team but hasnotbeen fullywritten off.Suchassetsare considereduncollectible

Recovery mechanismBanksemployvarioustoolstorecovertheirdues.Someofthesemechanismsderivetheirstructurefromlaws,policiesandregulationsmadeatdifferentpointsintime,whiletheothersarenon-statutoryinnature.Twodistinctapproachesof restructuring are observed across the world: 1) Thecentralized approach and 2) the decentralized approach(Claessens, 2005). The centralized approach has a largerroleforthegovernmenttypicallyintheformofestablishing

asset recovery/reconstruction companies that woulddisposeoftheassetsofnon-viablefirms.Thedecentralizedapproach,ontheotherhand,expectsbankstoresolvetheissuesofhighdebtwiththefirmsindividually,onaonetoonebasis.

While there were multiple channels for recovering debtin the formal legal mechanism, individual one-to-onenegotiationwas theonlymodeadopted informally.Therewasnomechanismtoaddressrestructuringofconsortium-based loans. The Reserve Bank of India, thus, initiatedthe establishment of Corporate Debt Restructuring(CDR)systeminIndia in2001(CDRCell,n.d.).TheCDRmechanism is a voluntary, non statutory system thatcovered multiple bank accounts/ consortium accounts ofdebts of large borrowers having outstanding aggregateexposureexceedingRs10crores.While therestructuringisworkedoutoutsidethepurviewofthelegalframework,onceanagreementwithinlendersandalsobetweenlendersandborrowerhasbeenreached,anindividualinter-creditoragreement(ICA)andaDebtor-creditoragreement(DCA)issigned.Thesearelegallybinding.

An Overview of Cost Management in Banking Sector:Banksearnprofitwhenitsinterestandoperationalexpensesarelessthanitsinterestandnoninterestincomethroughitsservicesandinvestments.Anybusinessforthatmattersurvives only if it earnsprofits.Banking isno exception.AlthoughBankingisconsideredasabloodlineofeconomyofanation, toprovideareasonablereturn for theabove-citedhugecapitalexpendituresandtoremainservicinganyeconomy, profitability of the banks is amust. To remainprofitable,‘efficientandeffectivecostmanagement’ofitsentireoperationsistheneedofthedayforthebankingsector.

Wewillexaminebrieflytheapplicabilityoftheconceptofalltheabovestrategiesofcostcontrolandcostreductioninthebanksandtherefrom,wewillexaminetheapplicabilityofthesestrategiesinthevariousbusinessandnonbusinesslinesofbanks,viz.,fundsmanagement,riskmanagement,risk based internal audit, cost competitiveness in bankbranches,nonperformingassetsmanagement, tonameafew.

The cost-cutting and efficiency agenda will vary amongregions and from bank to bank. For institutions mostaffectedbythecrisis,particularlythoseinNorthAmericaand theUnitedKingdom, tactical cost reductionsare theimmediatepriority.Ontheotherhand,manybanksintheAsia-Pacificregionarepursuingabroaderefficiencyagendafocusedbothondecreasingcostsandbuildingcapabilitiesto support growth. To achieve high performance, banks


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need the right balance between short-term tactical costdecreases suchasheadcount reductions, and longer-termstrategic cost initiatives such as streamlining processesoroutsourcingcertainnoncorefunctionssuchaslearning,human resources or finance and accounting. Banks thatpursueonlytraditionalcostreductionprogramswillachievecost benefits quickly.But in the long run, that approachwill leave them unable to sustain those cost reductions,resultinginacompetitivedisadvantage.

Cost of Risk Based Internal Audit:The Institute of Internal Auditors defines Risk BasedInternalAuditing(RBIA)as:

• a methodology that links internal auditing to anorganisation’soverallriskmanagementframework+

• thatallowsinternalaudittoprovideassurancetotheboard that riskmanagement processes aremanagingriskeffectively,inrelationtotheriskappetit

Risk Management in Banks:Banks in the process of financial intermediation areconfrontedwithvariouskindsoffinancialandnon-financialrisks viz., credit, interest rate, foreign exchange rate,liquidity,equityprice,commodityprice, legal,regulatory,reputational, operational, etc. These risks are highlyinterdependentandeventsthataffectoneareaofriskcanhave ramifications for a range of other risk categories.Thus,topmanagementofbanksshouldattachconsiderableimportance to improve the ability to identify, measure,monitorandcontroltheoveralllevelofrisksundertaken.

TheRiskManagementSystemstobesetupformanagingthevariousrisksarisingoutbankingbusinesswillinvolveincurringcostsatvariouslevels,viz.

(i) Setting up of Risk Management Systems for Credit,Market, Liquidity and Operational risks, which willin turnneedpaymentofmarketdrivencompensationpackagestothestaff

(ii)CostofITsystemsneedstobedevelopedforgeneratingMISandotherreportsformonitoringrisks;

(iii)Cost of developing or outsourcing various riskmanagement models and validating them on acontinuousbasis

(iv)Cost of capital required to brought in because offollowingthecapitaladequacynormssuggestedinbaselnormsbytheBaselCommitteeofBankingSupervisionandasagreedtothenationalsupervisors(includingtheReserveBankofIndia)oftheworld

(v) CostoftrainingandupdatingtheentireworkforceintheRiskManagementDivisionalongwithkeystaffatvariousbusinessunitsofthebank;and

(vi)Costof integratingtheentirebankwithasuitableITsystemwhichwill enable thebank tobealwayswiththetimetoreceiveinformationaboutthevariousrisksemanatingoutofthebankingbusiness

Thelendingoperationsofthebankcarryaninterestincomebuttheriskoftheloanturningbadandunrecoverableisconsideredquitesignificantinoverallmanagementofloan

portfolio.Itisthereforeprudenttoarriveatariskreturntradeoffineachlendingtransaction.Iftheriskisperceivedashigh,theinterestratechargedshallalsobehighandviceversa.Thelossarisingoutofloanlossprovisionschargedtoprofitisconsideredasacostofriskundertakeninlendingoperations.Thecostofriskinbankthereforeisconsideredtomeasuretheproportionofbankstotalloansthathavebeenlostonaccountofbadandnon-performingassets.Themeasurementof such cost of risk involved in the lendingcanbedoneasunder:

Cost of Risk = Loan loss provision charged to profit Averageinterestgeneratingloans*

*Average interest generating loans=Average of openingbalanceandclosingbalanceofinterestgeneratingloans.

Interestgeneratingloans=CustomerLoans+inter-bankloans+otherloans.

Itimpliesthathighertheloanlossprovisions;thehigherwill be the cost of risk on interest generating loans.Thecost of riskwill be lower if the interest generating loansarehigherascomparedtotheloanlossprovisionamountcharged to Profit & Loss account of the bank. The costof risk thus has a significant bearing on profit andprofitabilityofthebank.Ifabankcancontrolthecostofriskatalowerlevel,theprofitearnedwillbehigher.Thecostmanagement is therefore considered as a significanttooltoimprovethenetprofitwhichisessentiallyafunctionofreductioninexpenditureandimprovementinincome.Inalargelyderegulatedregimewherethepriceoflendingisdeterminedbymarketcompetition,theborrowershavethefreedomtochoosewheretoplacetheirbusinessorswitchbanks. As a natural corollary, the bank that overpricetheirloanproductsarelikelytolosebusinesswhilethosebanksthatunder-pricetheirloanproductswillsucceedingarneringhigherlevelsofbusinessbutwillfinditdifficulttosustaintheirhigherlevelofoperations.

Types of RisksThe banks are required to compute the cost of followingrisks in their lending operationswhile pricing their loanproducts.Itisseenthatthereisnoobjectiveandscientificmethodtoallocatecostinrespectofindividualriskinvolvedina lendingproposition.Theavailabilityof securitycoverandguaranteefortheloansprovidecomforttothelenderandhenceinfluencepricing


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Role of CMAs in Risk Based Internal Audit in Banks:Theexpertiseof theCost&ManagementAccountants inRiskBasedSupervisionConsultingProcessincludes:

• Designanddevelopmentofappropriateorganizationalstructure

• Advisoryservicestodocumentsystemsandproceduresfor undertaking business in alignment with therequirementsofriskbasedsupervision.

• To identify gaps inmanagement information systemsandsuggestremedialmeasures

• Toreviewandstrengthenreportingandcontrolsystem

• Todesignanddevelopappropriateriskfocusedinternalauditmodel

• Toassistbankinsettingupcomplianceunits

The Cost and Management Accountants with theirspecializedprofessionalskillandexpertknowledgeandanalyticalcapabilitiescanprovideanin-depthserviceinRiskbasedauditinBanksandtheservicesinter-aliaincludesthefollowingfunctionalareas:

• RiskManagement includingCreditRisk,OperationalandMarketRiskManagement

• RiskProfilingandSWOTAnalysis

• RiskAssessmentforProjectEvaluation

• Bank Supervision/Audit Mechanism and Adoption ofRiskFocusedInternalAudit

• Credit Risk Management and Credit PortfolioEvaluation

• Customer Due Diligence and Compliance with KnowYourCustomerProcedures

• ProjectTechno-economicFeasibilityStudiesandProjectMonitoring

• Borrower Credit Appraisal and Working CapitalAssessment

• BorrowerSecurityEvaluationandStockAudits

• Asset and Liability Management System andManagementInformationSystem

• NPAManagementAdvisoryServices

• BusinessValuationsandAssetValuations

• InformationSystems/EDPAudit,SoftwareEvaluation

• BankStaffTraining

• Preparation of InstructionManuals for Credit, Auditandotherbankfunctions

Baroda Chapter in Media Coverage


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Simple guide to RBI Monetary Policy along with ATR of Monetary Policy post Lockdown

CMA Utkarsh YagnikMob.:9904669969•E-mail: [email protected]

Definition,Goal&Objectives:• Definition: Monetary policy refers to the use of instruments

under the control of the central bank to regulate theavailability,costanduseofmoneyandcredit.

• Goal: Toachievespecificeconomicobjectives,suchaslowand

stableinflationandpromotinggrowth.

• Main objectives of monetary policy in India are: -Maintainingpricestability

- Ensuring adequate flow of credit to the productivesectorsoftheeconomytosupporteconomicgrowth

-Financialstability(reducefluctuation)

MPC - Monetary Policy CommitteeMPCdeterminesthepolicy interestraterequiredtoachievetheinflationtarget.

• Frequency of Meeting: Policy -min4 times ina year, tomeet2daysbefore

decidingonrates.However inFY2019 -2020, itwasdecidedthatMPCshallmeet6times(bi-monthlymeet).But itmet7th timeon27thMarch,2020.Sowhat isstated isminimum, but it can alwaysmeet formoretimes,ifsituationiswarranted.

• Constitution - 6 members. Quorum - 4 members• Composition - 3 from RBI + 3 nominated by GOI.

Govtmembers hold office for 4 years. (RBIMembers- 1.ShriShaktikantaDas., 2.Dr.MichaelDebabrataPatra(DyGov).,3.Dr.JanakRaj(EDofRBI).,+GOIMembers - 1. Shri Chetan Ghate, Professor, IndianStatistical Institute (ISI)., 2. Professor Pami Dua,Director,DelhiSchoolofEconomics.,3.Dr.RavindraH.Dholakia,Professor, Indian Institute ofManagement,Ahmedabad)

• Decision -Majority voting system (one vote each, ifequalvotesthanGovernorhassecond/castingvote).

• Minutes Publication : Onthe14thday,theminutesoftheproceedingsofthe

MPC are published which include - a) the resolutionadoptedbytheMPC,b)thevoteofeachmemberontheresolution,andc)thestatementofeachmemberontheresolutionadopted.

Example/s: 1. referpolicyof27.03.2020-4membersvotedfor75

bpsreductioninRepowhileothertwovotedforonly50bpsreduction

2. Minutesofthismeetingof27.03.2020gotpublishedon13thApril,2020(i.e.,14daysaftermeeting).

3. Forpolicydecisiondated27.03.2020,theMPCmetfor3days(24,25and27Marchbeforedeciding-asperpolicytheyneedtomeetminimum2days).

• ThefirstmeetingofMPCwasheldinOctober3and4,2016(i.e.,for2days).BeforeMPC,aTechnicalAdvisoryCommittee(TAC)withexpertsfromeconomics,banking,financialmarkets&publicfinanceadvisedRBIonthestanceofmonetarypolicy.However, its rolewasonlyadvisory in nature. With the formation of MPC, theTACceasedtoexist.

FMC - Financial Markets Committee (meetsdaily,toreviewtheliquidityconditions).

• The Financial Markets Operations Department(FMOD) operationalizes the monetary policy, mainlythrough day-to-day liquiditymanagement operations.TheFinancialMarketsCommittee (FMC)meetsdailytoreviewtheliquidityconditionssoastoensurethattheoperatingtargetofmonetarypolicyisachieved

Tools & FlowchartThereareseveraldirectandindirectinstrumentsthatareusedintheformulationandimplementationofmonetarypolicy

Direct Instruments(tocontrolmoneysupply,inflation,liquidity)

• CRR - Cash Reserve Ratio The average daily balance that a bank is required to

maintainincashwiththe RBIasashareofsuchpercent of its Net demand and time liabilities (NDTL).Banks earn no interest here from RBI. It is used tocontrolliquidityi.e.,injectorreduceliquidity.

• SLR - Statutory Liquidity Ratio TheshareofNDTLthatabankisrequiredtomaintain

in safe and liquid assets, such as, unencumbered


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governmentsecurities,cashandgold.TheseremainwithBanks.BanksearnsreturnonSLRheredependingontheROIofG-Sec,T-billsetc.Itcontrolsbanksleverageforcreditexpansioni.e.,bankisunabletolendentiremoney which it has received as liability (FD/NDTL)fromitsclients.

Changes in CRR / SLR to influence the availability ofresourcesinthebankingsystemforlending.

Situation - high Inflation/lot of money/buying or highdemand/pricerising.

Action-increaseCRR/SLR.Impact - lessmoney to lend i.e., shall reducemoney incirculation

Example: Action - in policy dated 27.03.2020,CRR reduced to 3%(reductionby1%fromearlierof4%),w.e.f28.03.2020,for1 year, and theDailyCRRmaintenance reduced to 80%(reductionby10%fromearlierof90%),w.e.f28.03.2020,3months/upto26.06.2020.

Impact -liquidityreleaseof1.37Lakhcrores(dueto1%reductioninCRR).

RBI didn’t reduce SLR by 1% but reduced CRR by 1%,becauseat-timesSLRreductionhasnoactualimpact.EvenifRBIreducestheSLR,bankcancontinuetoholdexcessSLR.Manybankscontinuetoholdexcess,astherearenootheralternativeswhichbanksfindsuitable/safeingivenscenario.WhilebankshallneverholdexcessCRRasCRRdoesnotyieldanyinteresttothebanks.

RefinanceSector-specific refinance facilities (e.g.,against lending toexportsectorand/or renewableenergyand/orlendingtoMSME)providedtobanks.

Example : Policydated17.04.2020

Action : Refinance window of Rs. 50 K crores to AIFIincluding25KcrorestoNABARD,15KcroretoSIDBIand10K crore toNHB.ThisRefinance isatprevailingReporateofRBI.

Aim - tomeet sector specific requirements ofagriculturefunding,ruralsector funding,small industries funding&housingfinance.

Indirect Instruments (pricederivationandstability)

• RepoRate: The (fixed) interest rate at which the Reserve Bank

provides overnight liquidity to banks against thecollateralofgovernmentandotherapprovedsecuritiesunder the LAF. (LAF discussed in later slide) It isagainst G-Sec/others approved but cannot use SLRsecuritieshere.

Objective -liquidity/pricesetting.Technical : Re-Purchase=RePoi.e,repurchaseagreementtopurchasebacktheG-Secatthe end of tenor, called“dateofreversal”

Example : Action -Inpolicydated27.03.2020,theReporatereducedto4.40%,reductionof75bpswhichwasearlier5.15%.

Impact-Reductionincostofborrowing.¢ Reverse Repo Rate :(i.e,simplytheROIforparking

surplusmoneywithRBI)

The (fixed) interest rate at which the Reserve Bankabsorbs liquidity, on an overnight basis, from banksagainstthecollateralofeligiblegovernmentsecuritiesunder the LAF. It is reverse of repo. Generally, it isderivedbyreductionofspecifiedpercentfromRepo.

Example : In policy dated 27.03.2020 - RBI observed,that the distribution of liquidity is highly uneven acrossthe financial system, aswas reflected by the fact, banksparkedoverallsurplusofaboutRs.3lacscroreswithRBItill25.03.2020.

Actions -Reductioninreverserepoby90bpsin27.03.2020andfurtherby25bpsin17.04.2020(eventhoughtherepoonly reduced by 75 bps for one time, while reverse reporeducedtwicewithaggregatereductionof115bps).

Reason for second reduction in Reverse Repo -OnApril15,theamountabsorbedunderreverserepooperationswasRs.6.9lakhcrore(whichwas~3lakhcroreinMarch).RBIwantsbankstodeploythesesurplusfundsininvestmentsandloansinproductivesectorsoftheeconomy.

Impact -ThepurposeofthismeasurerelatingtoreversereporateistomakeitrelativelyunattractiveforbankstopassivelydepositfundswiththeReserveBankandinstead,touse these funds for on-lending toproductive sectors oftheeconomy.

• LAF - liquidity adjustment facility The LAF consists of overnight as well as term Repo

auctions.(term=tenor,termisliketermdeposit/morethan overnight i.e., for specific term/tenor). RBI alsoconductsvariable interestrateReverserepoauctions,asnecessitatedunderthemarketconditions.RBIhasincreasedthe liquidity injectionthroughvariableraterepoauctionsofrangeoftenors.

Theaimoftermrepoistohelpdeveloptheinter-bankterm money market, which in turn can set marketbasedbenchmarksforpricingofloansandd e p o s i t s ,andhenceimprovetransmissionofmonetarypolicy.

In simple terms, it is a Market place for Auction ofRepo&ReverseRepofordifferenttenors.RBIactsasconductor/conveyor.

Participants (buyer/sellers) includes - Govt (C+S), allkindsofBanks,NFBCandAIFI(i.e.,NABARD,SIDBI,Exim&NHB).Lead to derivingpricing of loans/depositsandtransmissionofmonetarypolicy.Security -Yesitissecured.Underlying/SecurityisG-Sec.But cannot useSLRquote of securities / cannot dip intoSLR.

Example - Latest policy tool used byRBI -TLTRO i.e., TargetedLongTermRepoOperations


12

LTROof1lakhcroreinpolicyof27.03.2020andsecondLTROof50Kcroreinpolicyof17.04.2020).

Disbursement of first 1L crore was completed on 17 April(fourtranchesof25Keachwithlasttrancheon17April.Let/sdiscusslastLTROoperations,

Below was announced by RBI on 15 April 2020 :

Sl. No.

Dateofoperation

NotifiedAmount (Rs.crore)

Tenor WindowTiming

DateofReversal

1 April17,2020

25,000 3-year 10.30AM-11.30AM

April13,2023

Outcomeon17April,2020asbelow:-

Tenor 3-yearDateofReversal April13,2023NotifiedAmount(in?crore) 25,000Noofbidsreceived 11Totalamountofbidsreceived(in?crore) 61,415Amountallotted(in?crore) 25,009Pro-rataAllotmentPercentage(%) 40.71

Action-RBIgavemoneyQuantum-1LakhCrore,forTenor-3yearsRate -Floating linked topolicy repo rate (i.e.,wheneverrepochangethisshallchange).Transmission - Bank will have to invest this moneyobtained from TLTRO in additional/fresh/incrementalinvestment in investment grade (BBB-/above) securitiesbonds/CP/NCD issued by corporates (of which 50% tocome fromprimary subscription and 50% can come fromsecondarypurchasei.e.,buyingfromMForNBFC-indirectliquiditytoNBFC/MF)Timelines-Thesefundstobedeployedwithin30workingdays. (If it is not deployed within prescribed time line,penaltyofrepo+200bpstobechargedforthenumberofdaysithasremainednon-deployed.)Restrictions -Themaximumamountof investmentintosecuritiesofparticularentityorgroupofentitiesiscappedat10%.Second LTRO-tobedeployedtowardsinvestmentinMFIandmid&smallNBFC(10%MFI,15%NBFCwithassetsizeupto500Crand25%NFBCwithassetsize>500Cr<5000Cr).Aim - to provide liquidity to MSME, small & mid-sizedcompanies.RestCriteriaaresameasoffirstLTRO.FirsttrancheofLTRO2werescheduledon:

Sl. No.

Dateofoperation

NotifiedAmount (Rs.crore)

Tenor WindowTiming

DateofReversal

1 April23,2020

25,000 3-year 10.30AM-11.30AM

April21,2023

• MSF - Margin Standing Facility Afacilityunderwhichscheduledcommercialbankscan

borrowadditionalamountofovernightmoneyfromtheReserveBankbydippingintotheirStatutoryLiquidityRatio (SLR) portfolio up to a limit at a penal rate ofinterest.

In simple terms-itisborrowingagainsttheSLRquotaofsecuritiesatRate-of Repo+25bpswithCeilingofsuchborrowing-3%(currently).Aim -Thisprovidesasafetyvalveagainstunanticipatedliquidityshockstothebankingsystem.

Example : Action - In policy dated 27.03.2020, the RBI increasedMSFborrowingceilingfrom2%to3%ofSLR/NDTL.Impact-liquidityinfusionof1.37Lakhcrores.

LAF v/s MSF (All:onlySCB,Nolimit:limitof3%ofNDTL,cannotuseSLR securities : can use SLR securities, Rate declared /Repo:Rateisrepo+25bps).

Observations : 1. In LAF, cannot use SLR quota - because SLR is

applicableonlyforBankswhileinLAFtheparticipantsincludeGovt(C+S),AIFI,NBFCwhodonothaveanySLR.

2. Similarly there is no limit on borrowing in LAF, asbanksarenotdippingtheirSLR,hencenorisk/noneedoflimit.WhileinMSFthereislimit,becauseotherwisebankscanindirectlyleverageitsentireSLRsecurities,thereforeleadingtorisk/vulnerability.

3. LAFisatreporates,whiletodis-incentivizebankstheMSFisatratehigherby25bpsthanthereporate.

Corridor :TheMSFrateandreversereporatedeterminethecorridorforthedailymovementintheweightedaveragecallmoneyrate.Thedelta/differencebetweentheMSFrate&reverserepodeterminecorridor.

Example - • Earlierrepowas5.15,MSFwas5.40(5.15repo+25)

andreverserepowas4.90(5.15repo-25).Hencepolicycorridorwas50bps(5.40less4.90)

• Inpolicy of 27.03.2020 -Repo reducedby75bpsandReversereporeducedby90bps.Hence,MSFrategotreducedto4.65%(repo4.40+25bps)whilereverserepogotreducedto4%,leadingtopolicycorridorof65bps(4.65less4).

• Hence,thepolicyratecorridorincreasedto65bpsfromearlier50bps(report+25/-25bps,now+25/-40bps).

• Basis policy of 17.04.2020, the policy corridor furtherincreased to 90 bps as RBI reduced reverse repo to3.75%, so policy corridor is now 4.65 (MSF) less 3.75(reverserepo)i.e.,90bps.

Observation / Explanation : Bank having surplus &parkingmoneywithRBIgetsonly3.75,whileBankneedingfundsgetitfromRBIat4.65,soitisbeneficialforbothifthelendergetsmorethan3.75andtheborrowergetslessthan 4.65, determining the daily callmoney rate / inter-bankmarketrates.• Bank rate It is the rate atwhich the Reserve Bank is ready to

buyorrediscountbillsofexchangeorothercommercialpapers.


13

ItisalignedtoMSFrate/automaticallywithMSF.• OMO-OpenMarketOperations These include both, outright purchase and sale of

government securities, for injection andabsorption ofdurableliquidity,respectively.

Situation-Inflation.Action-RBIstartsellingG-Sec(i.e.,givingpaper&gettingmoney).Impact-lessmoneytolendi.e.,liquidityreduce.Reverseactionincaseofdeflation• MSS - Market Stabilization Scheme This instrument for monetary management was

introducedin2004.Surplusliquidityofamoreenduringnature arising from large capital inflows is absorbedthrough sale of short-dated government securitiesand treasurybills.The cashsomobilized isheld inaseparategovernmentaccountwiththeReserveBank.

Important Policy Actions during 27.03.2020 to 17.04.2020• Aggregate direct impact of Rs. 4.74 Lakh Crores,

by way of - 1. CRRreductionimpact-1.37LCr,2. MSFlimitincreaseimpact-1.37LCr,3. LTRO1impact-1LCr,4. LTRO2impact-0.5LCr.5. RefinancetoAIFIof0.50Lcrores.

• Others Measures, are summarized below :- 1. Deferralofimplementationof-CapitalConservation

Buffer(‘CCB’)andNetStable Funding Ratio(‘NSFR’)forbanks

2. Moratorium - onTermLoanandWC facilities forborrowers

3. Asset Classification - the 90 day NPA norm, toexcludemoratoriumperiod.Allaccountsforwhichlendinginstitutionsdecidetograntmoratoriumordeferment,andwhichwerestandardasonMarch1, 2020, the 90-day NPA norm shall exclude themoratoriumperiod.NBFCscangrantrelaxedNPAclassificationtotheirborrowers.

4. BanksinIndiapermitted-participationinOffshoreNon-deliverable Rupee derivatives, to improvedepth&pricediscoveryinforexmarket.

5. WaysandMeansadvancesforStates,limitincreasefrom30%to60%

6. Relaxationof -Liquidity coverageratio forbanks,requirementreducedfrom100%to80%.

7. NoDividenddistribution8. RelaxationofDCCOforNBFCloanstocommercial

realestatedevelopers

Limitations of Monetary Policy• PeopleinIndiadoesnothavemanyinvestmentoptions.

Meaning that the Deposits (FD) are main source offundsforBankandnotRBI.DependenceisverylowonRBIsoimpactisverylow.

• Non-monetized Economy - means outside the ambitofbanking,largechunkofruralareas.Peoplearelessdependentonbanks/bankfinance.

• Time taken in transmission of policy measures. Nodirect benefit/measures get transferred to people.Bankstaketimeinpassingonthebenefitstothelargersociety.

• Uncertaineventslikecovid19.

Data for Reference :Current Policy Rate

PolicyRepoRate :4.40% Reducedby75bpsinpolicyof27.03.2020

ReverseRepoRate :3.75% Reducedby90bpsinpolicyof27.03.2020&furtherreducedby25bpsinpolicyof17.04.2020.

MarginalStandingFacilityRate

:4.65% Repo+0.25i.e.,4.40+0.25

BankRate :4.65% IsequaltoMSFRate

Reserve RatiosCRR :3% Reducedby1%inpolicyof27.03.2020. Impactof1.37LakhCroresofliquiditytobanksSLR :18.00%MSF Ceilingof3% Increasedfrom2%to3% Impactof1.37LakhCroresofliquiditytobanksLTRO1 27.03.2020 Upto3yearsintoinvestmentgradesecurities Impactof1LakhCroreofliquiditytobanksLTRO2 17.04.2020 TargetedforSmallSectors-MFI,small&midNBFC Impactof0.50LakhCroreofliquiditytobanksRefinance ToAIFI Targetedtosectorslikeagri,rural,housing Impactof0.50LakhCroreofliquiditytoAIFI Total Impact of 4.74 Lakh Crore of liquidity

tobanks


14

Banking TerminologyCMA Nikhil Pawar

Mob.: 9021831683 • E-mail : [email protected]

Introduction:BeforesharingthismontharticleIhopethatyouandyourfamilymembersaresafe.

FromApril 2020 ourWIRCadopted themebasis articlesandthismonththemeis“Banking”.Therearenumberofopportunities in banking sector and many more need tohappensyet.

Basisonthistheme,Iamjustsharingwithyoufrequentlyusedbankingterminologytoourreaders,BecauseIbelievethat ifwewanttoenter inthissectorwemustknowthetermsusedinbankingsector.

Ihopethatyouwilllike/feelusefulforyourcareer.Thanks…

1. Repo Rate• When RBI provides a loan to the bank for short-

termbetween1to90days,RBItakessomeinterestfromthebankwhichistermedasRepoRate.

2. Reverse Repo Rate• Whenbankdeposit it’s excessmoney inRBI then

RBI provides some interest to that bank. ThisinterestisknownasReverseRepoRate.

3. SLR –(Statutory Liquidity Ratio)• Every bank has to maintain a certain % of their

totaldepositsintheformof(Gold+Cash+bonds+ Securities)with themselves at the end of everybusiness days. Current SLR is 18.00%. (as on06.05.2020)

4. Bitcoin• Bitcoinisavirtualcurrency/cryptocurrencyanda

paymentsystem.

• Itcanbedefinedasdecentralizedmeansoftrackingandassigningwealth or economy, it is a softwareprotocol.

• Bitcoin uses two cryptographic keys, one public(username) and one private (password) aregenerated.

• 1Bitcoin=108Satoshi.

· RBInotallowedBitcoininIndia.

5. Scheduled bank Bankswhichareincludedinthe2ndScheduleofRBI

Act1934areknownasascheduledcommercialbank.Thesebanksshouldfulfiltwoconditions:

• Paid up capital and collected funds shouldnot belessthanRs.5Lacs.

• AnyactivityoftheBankshouldnotadverselyaffecttheinterestsofthecustomers.

6. Non Performing Assets• NPAisanassetofabankwhich isnotproducing

anyincome.

• BankUsuallyclassifyasnonperformingassetsanycommercial loans which are more than 90 daysoverdue and any consumer loans which aremorethan180daysoverdue.

Check updates

7. Green Banking• Green bankingmeans promoting environmentally

friendly practices and reducing your carbonfootprintsfromyourbankingactivities.

• Green banking aims at improving the operationsandtechnologyalongwithmakingtheclientshabitsenvironment-friendlyinthebankingbusiness.

• Itislikenormalbankingalongwiththeconsiderationfor social as well as environmental factors forprotectingtheenvironment.

8. Blockchain system• Thesedaysthetransactions inthebankingsector

arebecomingaverytedioustaskandsoastoensurethat this tedious task tobe removed,ourbankingsector is trying to emerge towards blockchaintechnology.

• To simplify the transactions without the helpof any third party in a securemanner is really agreatchallenge,buttoovercomethischallengeananonymous online ledger (collection of financialaccounts)whichusesthedatastructuretosimplifyitiscalledblockchaintechnology.

9. Skimming• Skimmingisamethodusedbyfraudsterstocapture

customer’spersonaloraccountinformationofcreditcard.

• Customer’scardisswipedthroughtheskimmerandtheinformationcontainedinthemagneticstriponthecardisthenreadintoandstoredontheskimmeroranattachedcomputer.

• Skimmingisatacticusedpredominantlyforcredit-cardfraud,butitisalsoatacticthatisgaininginpopularityamongidentitythieves.

10. Cash Credit


15

• Cash Credit is a proper limit sanctioned by thebank to the borrowing manufacturing/tradingunitagainst thevalueof therawmaterials,semi-finishedgoodsandfinishedgoodsincludingstores.

11. Cash Reserves Ratio• EverybankMaintaincertain%oftheirtotaldeposits

withRBI in the formofCashandNetdemand&TimeLiabilities.

• Current CRR is 3%. Every Bank has to pay theamounttoRBIonevery15Days.

Core Banking Solutions• Core Banking Solution (CBS) is the networking

of branches, which enables customers to operatetheiraccounts,andavailbankingservicesfromanybranchoftheBankonCBSnetwork,regardlessof

wherehemaintainshisaccount.

• ThecustomerisnomorethecustomerofaBranch.

• HebecomestheBank’sCustomer.

12. Banking Ombudsmen• BankingOmbudsmanisaseniorofficialappointed

byRBI.

• He handles and redresses customer complaintsagainstdeficiencyincertainbankingservices.

• TheBankingOmbudsmanSchemewasintroducedunderSection35AoftheBankingRegulationAct,1949byRBIwitheffectfrom1995.

• One can file a complaint regarding banking issueonline onRBI officialwebsite.Below screen shortwillhelpyou.

13. NOSTRO Account• ANOSTROaccountisonewhichismaintainedby

anIndianBankintheforeigncountries.

14. Chatbots :-• chatbotshaveseenalotofinterestandhavebeen

implemented over the years. Chatbots are AIenabledconversationalinterfaces.Botscanconductsmartandcompellingconversationsonbehalfofthebankwithmillionsofconsumers,atafractionofthecost.Theypromisetoenhancethebank’scustomer’sexperienceandtheirapproachability.

Expectations of members :ItisalwaysdiscussedthatourstudentsalsolearnedFinancialManagement(FM)subjectduringourCMAcourselikeotherprofessionalstudentsbutstillourstudentsdon’tgetdirectjobinBankingsectorlikeothers.Wehavetothinkonthisissuewiththehelpofthiswriteup.

Sources :-- https://www.rbi.org.in/

- https://www.wikipedia.org/

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16

Basel 3 Norms – Impact on Indian BankingCMA (Dr.) Subir Kumar Banerjee

Mob.: 98201 13419 • E-mail : [email protected]

Basel is a city in Switzerland. In 1974, Group of Ten countries (G10) constituted a committee consisting of central bank governors. This committee is known as Basel Committee on Banking Supervision (BCBS). India was invited to join in this committee along with certain other countries. Total number of membership is now 45. Its objective is to upgrade standard of banking globally by plugging leakage from the safety and quality standpoint of banks.

Basel 1 (Issued in 1988) – Dealt only Credit Risk. The first Basel 1 paid attention to the capital adequacy of Banks/Financial Institutions (FI). It divided risks of assets of Banks/FI into five types. These five types of asset risks out of inadequacy of capital.

Basel 1 (Revised in1997) Added Market Risk with existing Credit risk.

Basel 2 (Issued in 2004) Added Operational Risk with existing Credit Risk and Market Risks.

Figure1

Comparing Basel I to Basel II

Source- https://www.princeton.edu/~markus/teaching/Eco467/10Lecture/Basel2_last.pdfBASEL 3 (Issued in 2009) Added Liquidity Risk withexistingCredit Risk,MarketRisk andOperationalRisk.The BCBS has issued banking regulation standards andmodifiedthestandardsfromtimetotimetocopewiththeflexibilitywith varied circumstances. In 2009, the BCBSpromulgateditsfirstmodelofBaselIIItocounterworldwideeconomicmeltdown (2007-2009). Basel 3 elaborated bothTier1andTier2Capital.

Tier 1 capital is money brought in by shareholders.Tier-I capital, plus additional Tier-I capital as per BASEL-III consist of a) Paid up equity capital, share

premium, statutory reserves, free reserves and leftoverreservesofearlierperiodifany,b)Capitalreservesconsistofexcessoutofsalerealisationofassetsc)Perpetualnon-cumulativepreferencesharesanddebtcapitalinstrumentsfitforcategorisedunderadditionaltier-I.

Tier II capital isTermLoanof long tenure. InrespectofRanking of these lenders in case of liquidation, theseborrowerswillgettheirmoneyafterdepositorsarerepaid.

UnderBasel III, tier1and tier2Capital taken togethermandatorily should be atleast 8.5% of its risk-weighted


17

holdingsconsistingof7%forTier1and1.5%forTier2capital.Capitalratioofabankismeasuredbydividingtotalcapitalbytotalrisk-basedassets.Thecapitalconservationbuffer(CCB)wouldbe2%abovetheleastcapitalrequirementof8.5%.Accordingly,thelowestlevelofcapitaladequacyratioincludingtheCCBis10.5%(8.5%+2%).

Basel III ExampleFind out Capital Adequacy Ratio for Bank A based onfollowinginformation:

Exposure RiskWeight (Rs.InLakhs)

RBIBond 15 0%LoanstoCorporates 150 10%LoanstoSmallBusinesses 80 20%Guaranteesandother non-balancesheetexposures 60 10%Thebank’sTier1CapitalandTier2CapitalareRs.2LakhsandRs.3Lakhsrespectively.

SolutionBanks’s total capital = 200,000 + 300,000 = Rs.500,000 (Rs.5Lakhs).

Risk-weightedexposures=15×0%+150×10%+80×20%+60×10%=Rs.37Lakhs

CapitalAdequacyRatio= Rs.5Lakhs =13.51% Rs.37Lakhs

Therefore,BankAcrossedthethresholdofthemandatorycapitaladequacyratioof8.5%(or10.50%includingcapitalconservationbuffer)underBaselIII.Hence,Bank Aissafe.

Figure2.

andForeignbanksareopeningshopsinIndia.Hence,thereis need for uniformBanking norms for running bankingbusinessinIndia.Moreover,ifwefollowbelowparbankingregulatory standard compared to global norms, we willexhibitpoorshowcomparedtoglobalpeers.Elevatedriskmanagement tools being followed in Basel 3, will act asshockabsorbersfromunpredictablerisks.

Table1:ComparativeBCBSNormsandRBIRegulations

Particulars BaselII BCBS

BaselII RBI

BaselIII BCBS

BaselIII RBI

MinimumcommonequityTier1(CET1)(A)

2.00% 3.60% 4.50% 5.50%

Capitalconservationbuffer(CCB)(B)

- - 2.50% 2.50%

Totalequity/capitalratio(C=A+B)

2.00% 3.60% 7.00% 8.00%

AdditionalTier1capital(D) 2.00% 2.40% 1.50% 1.50%TotalTier1capital(C+D) 4.00% 6.00% 8.50% 9.50%Tier2capital 4.00% 3.00% 2.00% 2.00%MinimumTotalCapital+CCB

8.00% 9.00% 10.50% 11.50%

LeverageRatio - - 3.00% 4.50%

Source: Developed by the author based on compilation of Basel norms and RBI norms.

Issues in implementing of Basel III framework on Indian Banking

1. Effect on Financial System Once Basel III implemented, Banks put right Capital,Capital conservation buffer and liability ceiling amongbanksandotherregulations.Positivesofalltheseelementsaugmentcutofsystemicrisksandprofessionalsupervisionofrisksarisingoutofdefaultsbyapartytoacontractandalsoprudentmanagementofliquiditycrisiswhenfinancialcrisis arise. Basel III mechanism make Indian Bankingsystemshockprooffromeconomicandfinancialmeltdown.

2. Forced Merger of Banks Because Basel 3 calls for maintaining Capital AdequacyRatio which has been made stricter by RBI, only fitterbankswillsurvive.SincetherewillbeaddedhighlightbyRBIonefficiencyofbanks,BalanceSheetmanagementandorganizationalstructure,therewillbeatendencyofsmalland feeble to go forMerger&Acquisition andhiving offtheirresourcestosurvive.

3. Pressure on weaker banks Traditionalwayofbankingisgone.StrictlyfollowingBasel3normsasperstatutoryregulationisdifficultspeciallyfornotsostrongbanksinviewofdifficultyofgettingrequiredfundtorecapitalisesuchbanks.Healthyandbiggerbankswill push such banks to the corner in competition andtheywilllosemarketsharedaybydayandonedaywillbeirrelevant.

4. Impact on capital requirements As per RBI guideline total capital adequacy ratio is at11.5% includingCapital conservationbufferof2.5%andleverageratioat4.5%underBaselIII.ImplementationoftheBaselIIIbybanksinIndiaaspertheyardsticksofRBIwillbedemandingjobbothforthebanksandGovernment

Source -https://www.dhyeyaias.com/current-affairs/perfect-7-magazine/basel-III-norms-indias-preparedness

Why Basel III required in Indian BankingInNovember,2018,RBIpostponedthatbankswillhavetoabidebynormsunderBasel III regulationsby31March2020, whose earlier dateline wasMarch 2019. However,because of outbreak of COVIS-19, the same may not bepossiable though Banks are continuously compling withPILLAR 3 Disclosure every quarter which conform toGAAP in Indiawhichcomprises thestatutoryprovisions,Regulatory/ReserveBankofIndia(RBI)guidelines.Inthisage,onacontinuousbasis, Indianbanksexpandglobally


18

ofIndia.Aspercalculation,IndianbankswillberequiredtomopupRs6,00,000croresincapital.Therequirementofcapitalwillbesmallerforlargeprivatesectorbanksduetotheircomfortablecapitalratiosandhigherbottomline.SuchenhancementofcapitalbasesofallbankswillreducestheROEforequityshareholdersespeciallyPSUbanks.

Table 2. Selected Pillar 3 (Basel III) disclosures by Banks as on 2019 vs. 2018

Details SBI Bank

HDFC Bank

ICICI Bank

LakhsmiVilas Bank

IDBI Bank

Period March 2019 & March 2018

March‘19 ‘18 March19’ 18’ March19’ 18’ March 19’ 18’

March19’ 18’

Capital Adequacy Ratio 12.72 12.60 17.11 14.82 16.47 17.90 7.72 9.81 11.58 10.41

CET1( % of risk weighted assets)

9.78 9.86 14.72 12.28 13.42 14.21 5.72 8.05 9.06 7.55

Tier 1 (% of risk weighted assets)

10.78 10.53 15.50 13.22 14.73 15.56 5.72 8.05 9.29 7.86

Total capital (of risk weighted assets)

12.83 12.72 16.77 14.72 16.47 17.90 7.72 9.81 11.73 10.53

% of Gross NPA 7.53 10.91 1.39 1.72 6.70 8.84 15.30 9.98 27.47 27.95

% of Net NPA 3.01 5.73 0.44 0.43 2.06 4.77 7.49 5.66 10.11 16.69

Basel III leverage ratio 5.25 5.38 10.84 9.19 9.31 9.83 3.01 4.58 4.69 4.16

Source – Complied by Author

From Table 2 above, it is evident that both Lakhsmi Vilas Bank and IDBI Bank have failed to attain Basel 3 in respect of Tier1 and Tier 2 capital. Recently, they approached RBI for raising Tier 1 capital. However, SBI, HDFC Bank and ICICI Bank complied with Basel 3 norm very successfully.

Indian Banks, COVID-19 and BASEL 3ItisclearnowthatcrisiscreatedbyCOVID-19globallyisfardeadlierthaneconomicslowdownof2008.

DuringandPost-COVID19,IndianBanksandNBFCswillbeswayedbyhugeNPAsbothfromprivatecorporatesandretailsectors inviewof thishugeeconomicblow.Mostly,MSME companies and self- employed will be hard hitandwillgofordefaultintheirloans.TheseNPAswilleatawaybothTier1andTier2capitalofbanks.HereistheimportanceofimplicationofBasel3mechanism.

SincethebeginningofCOVID-19outbreak,StockmarketsinIndiaandelsewherehasadownwardjourneyandthereis no optimism. In this situation, raising capital both byprivateplayersandalreadyfinanciallywearyGovernmentsis difficult. Hence, recapitalization of undercapitalizedbanks and PSU Banks will be problematic. Tomake upsuch shortage of capital, under the circumstances, thereis hardly any route left to RBI but to relax the CapitalAdequacy Ratio norm since RBI’s norms of CapitalAdequacyRatioisstricterthannormofBaselCommitteeon Banking Supervision (BCBS). Ultimately, RBI’s NO-OPTION-RELAXATION–OF–CAPITAL–ADEQUACY–NORM,willkeepbankslessthancapitalizedandconcealitslosses.However,itisthesurvivalofthefittest.BankslikeHDFCBank,SBIandmaybeICICIBank,whohavestrong Capital Adequacy Ratio will sail through whileothers will be continued to be undercapialised and willlose bottomline. InApril,2020, already, IDFCFirstBank

is looking for Rs.3000 crores recapitalization along withAXISBankofINR350Billion.Inquarterended31March2020,AXISBankalreadyprovidedofINR77.3bn($1.02bn)inanticipationoflossofloanrecoveryinCOVID-19.Thisprovisionisanincreaseof185%correspondingquarterlastyear. Similarly, to partly to absorb shock from COVID-19,Kotak Mahindra Bank wants to raise $1bn of in theform of shares to strengthen capital base. In immediatefuture, there will be a series of such capital raising byBanksandFinancialInstitutionsnotonlyinIndiabutalsoglobally.Basel3isaboutoptimumcapitalizationofBanksand Financial Institutions. Any titling towards lowercapitalizationgivesinitialnegativesignalofdoomdaysforBanksetc.

As result, courtesy COVID -19, banks and FinancialInstitutions in India which will be undercapitalized andwith massive NPAs and bankruptcies of borrowers, willalso call for relaxation of IBCnormswhich is one of thebesteconomic reform. If suchrelaxationsareadhered to,thiswillmassivelydwarftheexcellentworkdonebyIBCsofar.Thiswillbedisaster.

References1.https://www.livemint.com/market/mark-to-market/kotak-bank-s-version-of-covid-19-impact-is-scarier-than-hdfc-bank-s-11585745669014.html

2.https://theprint.in/opinion/why-indian-banks-could-make-the-covid-19-economic-crisis-only-worse/397515/

3.https://www.wjrr.org/download_data/WJRR0401017.pdf

4.https://www.investopedia.com/ask/answers/062515/what-minimum-capital-adequacy-ratio-must-be-attained-under-basel-iii.asp

5.https://xplaind.com/338167/capital-adequacy-ratio

6. http://www.ijlemr.com/papers/volume4-issue1/4-IJLEMR-44004.pdf

7.https://www.bloombergquint.com/coronavirus-outbreak/covid-19-policy-challenges-and-traps-in-restarting-indias-economy

8.https://www.bankersadda.com/all-you-need-to-know-about-basel-iii-norms/

Online Crash Course organised by WIRC

Due to Lockdown, WIRC has organised online crash course via Google Meet for students of Intermediate & Final from 29th April 2020 to 14th May 2020 in two sessions.


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Understanding Reverse Mortgages: Benefits&Risks

CMA Manohar V. Dansingani

E-mail:[email protected]

Introduction:AReverseMortgageLoan is just that: reversemortgage.Inaconventionalmortgage,theborrowerreceivesaloan,using her house as collateral, & pays back the loan +interestoverthelifeofthecontract.

In a Reverse Mortgage, the borrower uses the houseas collateral, & receives the loan (usually in monthlyinstalments),but has no liability to pay off the loan + interest during its tenure.

WhyRML? SeniorCitizens comprise a substantial portion of our

society Longevityisincreasing Asareinflation&medicalexpenses Thereisinadequate,ifany,socialsecuritynettosupport

them Incomestreamstypicallydwindle(whenneededmost) A house is usually themajor asset in the individual

portfolio With rising prices of residential accommodation, the

“homeequity”wealthofseniorcitizensisincreasing RMLisafacilitytomonetizethishomeequity&deliver

astreamofcashflowstosupplementtheirincome

Features: (as applicable in India, as per guidelines of the NHB, National Housing Bank)

* Onlyseniorcitizens(abovetheageof60years)canavailthisloan

* Thehouseismortgagedtothelender,inexchangeforperiodicpaymentsduringthecontractedlifeoftheloan

* No loan servicing is required from the senior citizen(neitherprincipalnorinterest)

* On death of the borrower, or when she leaves theproperty permanently, the loan plus accumulatedinterestisrepaid,bysellingtheproperty.

* Repaymentcanhappeneitherby:

theproperty vestingwiththelender,disposalbythelender,recoveryofloan+interest&returnofexcess,ifany,totheborrower(s)orlegalheir(s);or

theborrower(s)/legalheir(s)repayingorprepayingallamountsoutstanding;&themortgagebeingreleased,withoutthehomebeingsold

* NHB permits only Primary Lending Institutions(PLIs1)toextendRMLs

WhoCanBorrow?• SeniorCitizen(above60years)

• Married couples can be joint borrowers. At least oneshouldbeabove60years&theyoungershouldnotbebelow55yearsofage.

• Only residential properties, located in India, with aminimumresiduallifeof20yearsareeligible

• Thehouseorflatmustbeself-acquired&self-occupied

• The title must be clear & the property free fromencumbrances

• The property in question must be the permanentprimaryresidenceoftheprospectiveborrower

HowMuch?• Theloanamountwilldependonmarketvalue,residual

life&prevalentinterestrates

• Somebanksoffer total loanamountup-toRs.2crore(subjecttofullcompliance)

• An overarching consideration will be that the EVR2(EquitytoValueRatio)doesnotfallbelow10%atanytimeduringthetenoroftheloan.

• ThePLIswillre-valuethepropertyatleastonceeveryfiveyears&thequantumofloanmaychangeasaresultofthisvaluation.

• Themaximummonthly payment is currently capped

(This article was first published in Portfolio Organizer, an IUP Publication in August 2017. Reprinted with permission) “The universe of mortgage lending has gotten to the point where there is a place in it for everybody.” Joe Mays

Abstract:Youownahouse,haveretired&wishferventlythattherewassomeadditionalcashflowcomingin,tofacethetwindemonsofinflation&health-carecosts.

Yourchildrenoffertohelp,butyou&yourspousehavedecidedtoremainself-reliant&independent.

Thereishope;the Reverse Mortgage Loan.WhatfollowsisabriefintroductiontotheRML&itsfeatures.

Caveat:Aswithallmedicines,RMLmaynotbe right for everyone& it iscertainly not a commitment to be entered into lightly.


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atRs.50,000/-(subjecttorevisionbytheGovernmentofIndia)Paymentcanalsobequarterly,half-yearlyorannually

• Lump-summaybeconsideredinmedicalemergency

• Maximum lump-sum payment cannot exceed 50% oftotal eligible loan amount, subject to a maximum ofRs.15 lakh (subject to revision by the Government).Thisamount isonlytobeused formedical treatmentforself,spouse&dependants.

A special feature of the RML is the non-recourse guarantee, or no negative equity.Theloan+interestkeepcompounding&therearenorepayments.Instead,cashpaymentsarepaidtotheborrowerperiodically,aspertheloancovenant.3

• It could happen that over time (whether before or after the payments stop) the amount outstanding is in excess of the value of the property.Topreventdistress to the senior citizens & their heirs, RMLtypicallycomeswiththenon-recourseguarantee.

• Theborrower(s)/heir(s)arenot liable foranyamount,otherthanthemarketvalueofthehouse.Theycannotbe calledon tomakeanyadditionalpayment, even ifthe outstanding amount exceeds themarket value ofthehouse.

• Atmost,thehousecanbetakenoverbythelender(eventhat, only after death of the borrowers), orwhen theborrowerpermanently shifts residence (aidednursinghomeorrelativeoranotherhouse)

• Hence,theLTVorLoantoValueisgenerallyabout40%&notmorethan80%.

UseofFunds:RML is a unique financial facility for a particularrequirement&itsendusecanbeonlyfor:

• Upgradation, renovation & extension of residentialproperty

• Homeimprovement,maintenance,insurance

• Medical emergencies (see lump-sum payment termsabove)

• Supplementingincome

• Otherbona-fideneeds

• UseofRMLforspeculative,trading&businesspurposesisnotpermitted

InterestRateCanbefixed orfloating.Floating is generally decided asthe sum of: MCLR4 + Strategic Premium + Fixed %age(usually,about1.5%to2%)

MCLR&StrategicPremiumwillalsovaryfromlendertolender.

Ratesarehigherthanfornormalhousingloans,becauseoftheadditionalrisksdiscussedabove.Rangeisfrom9.40%to11.90%(indicative)

OtherChargesInsuranceisamust

ProcessingFeesServiceCharges&otherchargesasapplicable

TermMaximum20years(somePLIsoffermaximum15yearsinIndia)

Term20years impliesthatthecashflowswillstopbeing paid to the borrower at the end of 20 years. If however, the borrower outlives the term & decides not to repay yet, the loan continues to grow with interest accumulating, without any requirement of settlement on part of the borrower.

Taxation• AllpaymentsreceivedundertheRMLareexemptfrom

incometaxu/s10(43)oftheIncomeTaxAct,1961

• CapitalGainsonTransfer.Section47(16)oftheIncomeTaxAct,1961,excludestheactofmortgagingpropertyfor reversemortgage, from the definition of transfer.Hence, there is no tax implication onmortgaging thepropertytoavailoftheRML.

• However, if the property is subsequently sold, eitherbythePLItocleartheloan,orbytheborrower/heir(s),capitalgainswillbeapplicableaspertheIncomeTaxAct,1961.

RighttoRescissionAspecialfeatureofRMListhatevenafterthedocumentshavebeenexecuted&the loandisbursed,borrowersmaycancelthetransactionwithinthreebusinessdays.

ClosingThePLIswillprovidecomprehensivedocumentationalongwithdetailedbenefits&obligationsoftheproduct.

Closingcostsincludecustomaryfees&charges,including:

• Origination,appraisal&inspectionfees

• Verificationcharges&Titleexaminationfees

• Legalfees&othercharges

• Valuation,StampDuty&Registrationcharges

SettlementofLoanTheloanispayableonlywhenthelastsurvivingborrowerdies,orwishestosellthehouse,orpermanentlymovesout;whichmeans that none of the borrowers has lived therecontinuouslyforoneyear.

Before selling the house to recover the outstanding loanamount, the PLI will give first right to the borrower(s)/heir(s),withareasonabletimetocleartheloan.Iftheydo,thenthepropertyrevertsbacktothem.

PrepaymentCanbedoneanytime

Noprepaymentpenalty

ForeclosureThePLI can foreclose the loan if any one ormore of thefollowingeventsoccur.Theborrower:

• hasnotstayedinthepropertyforacontinuousperiodofoneyear


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• failstopaypropertytaxes,ortomaintaintheproperty

• doesnotinsurethehome

• declaresbankruptcy

• effectsmaterialadversechanges,orrentsoutthehouseorpartthereof

• perpetratesfraudormakesamisrepresentation

• is called upon by the government under statutoryprovisions, to relinquish the residential property forpublicuse

• is served notice by the government, condemning theproperty(e.g.forhealthorsafetyreasons)

ImportantRMLisaspecialfinancial instrument,new&asyet,notfullytestedbymarketpressures.

Counsellingoftheborrowerisessential(infact,inseveralcountries,itismandatory)

Caution* Most people do not realize how powerful compound

interest is. The loan + interest outstanding can soonbecome much more than the borrowers anticipated,resulting in far lower (or zero), residual equity valuethantheyoriginallyplannedfor.

* Often,therisksarenotexplainedattheoutset,orthefactthattheloanamount&cashpaymentscanchange

* Floatinginterestratesmayappearattractive,butiftheinterestcycleturnsupward,itwillcreatedifficultiesfortheborrower

* Acombinationoffallinghouseprices&risinginterestratescanbepotentiallydangeroustobothparties.

Illustrations below are courtesy, NHB

1 PLIsareScheduledBanks&HousingFinanceCompanies(HFCs)registeredwithNHB,oranyclassofinstitutionsasmaybenotifiedbytheGovernmentofIndia.2 EVRistheratioofthehomeowners’equitytothevalueoftheloan.RMLbynatureisanegativeamortizationinstrument,whichmeansthattheloanamountincreasesoverthelifeoftheloan.Hence,theEVRconstantlyreduceswithtime.3Covenant=awrittenagreementorpromiseusuallyundersealbetweentwoormorepartiesespeciallyfortheperformanceofsomeaction(https://www.merriam-webster.com/dictionary/covenant)4 MarginalCostofFundsbasedLendingRate(MCLR)

Illustration1:15years


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ConclusionReverseMortgageLoanisanicheproduct,notforeveryone.Eventhosewhodecidetooptforitmustmakeeveryefforttounderstandtheproduct&thepossibledownside.

PartingThought:CaveatEmptor1Actually,thefullphraseis,“Caveatemptor,quiaignorarenon debuit quod jus alienum emit” (“Let a purchaserbeware,forheoughtnottobeignorantofthenatureofthepropertywhichheisbuyingfromanotherparty.”)Inthiscase,thebuyerisnotbuyingproperty,buttakingaloan.Nevertheless, the legal jargon&fineprint canmake lifedifficultforeventhealert&theeducatedcustomer.

PLEASE,PLEASE,BECAREFUL&FULLYINFORMEDBEFORE PLEDGING YOUR MOST SUBSTANTIALASSET.

ELSE,ANIMAGINEDBOONCANBECOMEACURSE.

(a la Dr. Jekyll & Mr. Hyde)

DisclaimerTheauthormakesnoattempttorecommendorotherwise,anyproductorservicementionedhere.Thesoleobjectiveof this article is to share concepts& ideas, with cautionalwaysbeingthewatchword.

e & oe. Without prejudice, without recourse.

Illustration2:20years

TheCalculations&Logic


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Role of Letter of Credit in BusinessCMA Hemant Sindhwani

Mob.:9812341497•E-mail:[email protected]

In the modern era of trade, letter of credit is playingsignificant role in Business financing, earlier letter ofcreditwas only used as international financing device inInternationaltrade,howevernowadaysitisquitepopularindomestictradealso.TheoriessaidthatLetterofcreditisnotanewterminthisworld.Somebelievesthatoriginsof lettersofcreditgobacktoancientEgyptandBabylon.Itcanbesaythat‘NecessityismotherofInvention’,whenbusiness realized mutual lack of trust between partiesand observed that business cannot be made simply byhandshake,somesuretytosellerisrequiredthatbuyerwillnotmakedefault inpaymentafterreceivingthegoodsorservices, thenLetterof credit come inpictureandslowlybecomes necessity of business. Originally it was a letteraddressedbythebuyer’sbanktotheseller’sbankstatingthey would guarantee payment the seller in case of thebuyer’sdefault.

L/Cs plays an important role in the trade of a country,especially in its internationaltrade.Inmostofthecases,the exporters (sellers) are personally not acquaintedwith the importers (buyers) in foreign countries. In suchcases the exporters bear great risk, if they drawbills onimporters,afterhavingdispatchedthegoodsasper theirorders,becauseifthelatterdefaultinacceptingthebillsormaking thepayment, theexporterwill sufferwithheavylosses.Toavoidsuchkindof risks, theexportersask theimporterstoarrangealetterofcreditfromtheirbankerinfavourofthemselves,onthebasisofwhichgoodsmaybeexportedtotheforeignimporters

Meaning of letter of Credit LetterofCredit(‘L/C’),alsoknownasadocumentarycreditis a payment mechanism used specially in internationaltrade.InanL/C,buyer’sbankundertakestomakepaymentto seller on production of documents stipulated in thedocumentofL/C.

AccordingtoUniformCustomandPracticeforDocumentaryCredit(UCP),600,LetterofCreditmeans‘anyarrangement,howevernamedordescribed,thatisirrevocableandtherebyconstitutes a definite undertaking of the issuing bank tohonouracomplyingpresentation’.

Uniform Custom and Practice for Documentary Credit(UCP),600providesstandardformatofLetterofcreditandUniformCustomsandPracticesforDocumentaryCredits-600(UCPDC-600)applytoanyLCwhenitstextexpresslyindicates that it is subject to these rules. The rules arebindingtoallpartiesunlessexpresslymodifiedorexcluded.

Parties of Letter of credit Therearemainly fourparties in letterofCreditwhich isasunder;

Applicant Applicantisthebuyerorimporterofgoodsor services. The Bank opens the L/C onbehalfofbuyer.HeistermedasApplicantorOpenerofLetterofCredit.

IssuingBank

Issuing bank is a bank which opensL/C and undertakes to make paymentto the beneficiary (seller/ exporter) onsubmissionofrelevantdocument(Deliverychallan,GSTInvoice,shippingdocuments,transport slip as the casemay be) as perthetermsandconditionofL/C.

Beneficiary Beneficiaryistheseller/exporterofgoodsinwhosefavourL/Cisopened.

AdvisingBank

AdvisingBank is the sellerbank throughwhomLCisadvisedtothebeneficiary.

ConfirmingBank

Confirming Bank is the bank which inaddition to L/C issuing bank, undertakesthe responsibility of payment under L/C.ThisisrequiredsincetheL/Cissuingbankmaynotbeknowntotheexporterandhetherefore needs reputed bank from hiscountry to add confirmation to the LC.ConfirmingBankmayormaynotbethere.

How the Letter of credit work Theprocessof letterof credit canbeunderstood throughfollowingdiagram:

1) Thereissale/supplycontractbetweenBuyer(Applicant)andseller (Beneficiary)andsupplycontract ishavingclausethatbuyercanmakethepaymentthroughL/Candnameofadvisingbankisgiveninsupplycontract.

2) Buyer (Applicant) approach to theirBank for issuingthe Letter of credit with the name of buyer Bank


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(AdvisingBank).Usually there is standard format ofletter of credit, however there may be some specificclausemutuallydecidedbyboththepartiesandagreedbytheirbankers.

3) IssuingBankissueletterofcredittoadvisingbankasmentionedinsupplycontract.

4) Seller (Beneficiary) approach to theirBank (AdvisingBank)forletterofcredit.

5) Seller (Beneficiary) dispatches the goods/provides theserviceasperthesupplycontracttobuyer.

6) Seller (Beneficiary) present the specified documentsto Advising bank as proof of dispatch of goods. Thespecifieddocumentsmayincludethefollowing;a) FinancialDocuments:BillofExchange,Co-accepted

Draftb) CommercialDocuments:DeliveryChallanorGST

InvoiceorDebitNoteorCommercialInvoicec) ShippingDocuments:LorryReceiptorE-wayBillor

Railwayreceiptd) Anyotherdocumentsasprescribedinsalecontract

7) AdvisingBankpresentthedocumentstoissuingbankfor releasing of fund and after receiving the fund forissuingbankprovidefundtobeneficiary.

8) Issuing Bank release documents to Applicant afterreceivingthefund

Theremaybetimelagforreleasingthefundforissuingbank to advising bank and receiving the fund fromApplicant.Bankchargefixedfeefortheletterofcreditascompensationof time lag.Usuallybankcharge feefrombuyer/applicantofL/C.

Types of Letter of credit ThefollowingarethetypesofLetterofCredit

Usance letters of credit is considered risky fromthepointofviewofanexporter/sellerasheis leftunpaid for a considerable period of time after thedeliveryofthegoodsorprovidingofservice.

ii) Revocable or Irrevocable L/C Revocableletterofcreditcanbecancelledanytime

by the Issuing bank without the consent of orwithout intimating the beneficiary. Irrevocableletterofcreditcannotbecancelledorwithdrawnbythe issuing bankwithout informing and receivinganapprovalfromthebeneficiary.Revocableletterisveryriskyfromtheseller/beneficiarypointofview.

iii)UnconfirmedorConfirmedL/C Confirmed L/C wherein apart from issuing bank,

Seller acquire the guarantee of payment fromconfirmingBank.UnconfirmedL/CthatisassuredonlybytheissuingBankanddoesnotrequiretheguaranteefromsecondbank

B) Special Type of Letter of Credit i) Red Clause L/C Aletterofcreditthatpartiallypaysthebeneficiary

before the goods are shipped or the services areperformed.Theadvanceispaidagainstthewrittenconfirmationfromtheseller.

ii) Transferable L/C ATransferableCreditisoneinwhichabeneficiary

cantransferhisrightsto thirdparties. Intradingbusiness,thiskindofL/cisused,whereinbeneficiary(Trader of goods) transferred the letter of creditto next chain of supplier or manufacture. Thebeneficiaryworkasintermediaryofactualsupplierormanufacture

iii) Back to Back L/C In Back to Back Letter of credit, seller of goods

requestedtobanktoissueletterofcreditinfavouroftheirinputsupplier.Sellerofgoodsactsbeneficiaryaswellasapplicant.

iv) Deferred Payment L/C Deferred Letter of Credit is a type of Letter of

Creditinwhichaconditionalundertakingistakenbythebanktopaytheselleronbehalfofthebuyeron a specified future date after completion of thetransaction. It is looking similar to usance letterof credit;however, inusanceLetter ofCredit, thebank makes the payment to the beneficiary on apre-determineddateaftersubmissionofnecessarydocuments. In deferred letter of credit, specifiedfuturedateaftercompletionofthetransaction.

C) Other type of Letter of Credit

i) Standby Letter of Credit StandbyLetterofcredit,thatassurethatincaseof

buyerfailuretomakethepayment,Bankwillpaytoseller

A) Basic Type of Letter of Credit i) Sight or Usance Letter of Credit When an issuing bank makes payment to the

beneficiaryimmediatelyonreceiptandverificationof the documents from the beneficiary (Seller/exporter);itiscalledasightletterofcredit.Onthecontrarywheretheissuingbankagreestopaythebeneficiaryonlyontheexpiryoftheletterofcredit,theL/Cissuediscalledusancelettersofcredit.


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ii) Uniform Custom and Practice documentary Credit (UCP)

Uniform Customs and Practice (UCP) forDocumentary Credits is a publication ofInternational Chamber of Commerce (ICC) whichis a voluntary code applied by the banks all overtheworld.AsperUPCLetterofcreditcanonlybeirrevocablecredit.

What is the Common discrepancy in Letter of Credit?Inthefollowingcircumstancesbankmayraisediscrepancyand stop releasing the payment until discrepancy is notremoved;

i) Inconsistency in Documents; As per the terms andcondition of L/c; relevant documents for claim willbe Invoice, however seller present the Debit note forpayment. The banker may raise discrepancy. WhileframingthetermsandconditionofL/C;Sellershouldensurethatalltherelevantdocuments(LikeDeliverychallan,DebitNote, invoice,commercial invoice)usedincommercialbusinessparlanceisincludedinLetterofcredittoavoiddispute

ii) Incorrectdata;documentspresentsisnotcomplywiththetermsandconditionofLetterofcredit.

iii)Late shipment ; Goods shipped after the expiry ofdate asmentioned in termsand condition of letter of credit

iv) LatePresentation: In termsand conditionof letter ofcredit,itisstatedthatsellerwillpresentthedocumentswithin 24 hours of dispatch of goods, howeverdocumentsispresentedbeforebankaftertheexpiryof 24hours.

v) Letterofcreditexpired:Documentspresentedaftertheexpiryofletterofcreditcoverperiod.

vi) Absenceofdocuments:CompleteDocumentsmentionedintermsandconditionofLetterofcreditisnotsubmittedtobank

vii)Incorrectdescriptionofgoods:IntermsandconditionofLetterofcredit,goodsismentionedasX,howeversellerchargesomeotherchargeslikeincentiveforfulfillmentfor timely fulfillment of contract and the same is notincludedinL/Ctermsandcondition,inthatcasebankmayraiseobjection.


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Banking reforms and enhancing Credit Supply for Infrastructure Projects

CMA (Dr.) K.V. Damodharan & Kapil Dev KumarMob.:9818248540•E-mail:[email protected]

1)

Kapil DDev Kum

CMA (D

ar

Dr.) K.V. DDamodharaan

1)

Kapil DDev Kum

CMA (D

ar

Dr.) K.V. DDamodharaan

Banking Sector Reforms have continually remained acrucialagendafortheGovernment.Overthelastfewyears,theGovernmenthasundertakensignificantconsolidationamongstPSUBanks.First,theassociatebanksofSBIweremergedwith theparent inApril 2017.Then,DenaBankandVijayaBankmergedintoBankofBarodainApril2019.And,fromApril2020,alargerprogramtomerge10PSUbanks into4cameintoeffect.Overtheyears,normsandprocesses related to loan loss recognition and recoverieshave been streamlined. BIFR, CDR mechanism, S4SmechanismandmanyothervariantshavenowconvergedtoproceedingsundertheInsolvency&BankruptcyCode.TheGovernmenthasalsoundertakenmassiverecapitalizationofPSUBanksinrecentyears.

Thegovernmenthasunveiledaseriesofmeasuresoverthepastfewmonthsaimedatimprovingliquidityinthesystem,moderating interest rates aswell as credit growth apartfromaddressingstressintheNBFCsector.Betterefficiency,productivity and transparency in thepublic sector banksarealsointheagendaoftheGovernment.AmendmentstotheBankingRegulationActhavebeenproposedtoincreaseprofessionalism, facilitate access to capital and improveoversight through theReserveBank of India (RBI). It isalso recognized thatCooperative banks and non-bankingfinancecompanies(NBFCs)arealsoimportantconstituentsofthefinancialsectortobestrengthenedthroughimprovedgovernance.Itiswellrecognizedthataclean,reliableandrobust financial sector is critical to achieving the visionofIndiatobecomeafivetrillioneconomyinthenextfiveyears’time.

However,theimportantquestioniswhetherthesereformshave brought or will bring any relief to infrastructurefundinginthecountrywhichisgoingtobeafoundationfornewIndia.

Infrastructure is an impetus to sustained economicgrowth.Ifnotdevelopedadequately,itcanbeabottleneckto future development and growth of the country.Infrastructuredevelopment consumes demands largeticket scale investments, it creates job opportunities,alleviatespoverty,churnstheeconomiccycleandimprovesinternational competitiveness. The infrastructureirrespectiveofthesector,actasaplatformtootherservicesand an important building block for the development.Recognizing the importance of Infrastructure, likemanycountries, India has implemented far reaching reforms.Introduction ofRegulationandprivatizationwasdone inseveralinfrastructuresectors.Therehasbeentremendousimprovement in infrastructure supply and services.However,therearestillmilestogo.Oneoftheconstraintsremainsavailabilityofadequatelow-costlong-termfinancetobuildandmaintaintheInfrastructureservices.

Traditionally, banks and international donors were themajor funding sources for infrastructureprojects inmostemerging market economies. While infrastructure needsexceed sources of traditional funding, traditional sourcesseemtobeshrinkingduetoreducedfiscalspaceandfallingdonor resources.Therefore, increasingneed for enhancedparticipation of private sector in infrastructure projectsbecomesinevitable.WorldBankisalsooftheopinionthatthe goal should be to deliver infrastructure projects byreducingtherelianceonpublicfunds(i.e.taxpayermoney)–eitherforimmediatefinancingorfuturerepayment–andmobilizinggreateramountofcommercialfinancing.

Infrastructure projects require high investment with along gestation period and involved great degree of risk.Involvingtheprivatesectorinthedesignandconstructionof infrastructure,evenwhenit isownedandmanagedbythepublicsector,canincreasesupplyefficiency.Thereareonlyafewinfrastructureplayersinthecountrywhohavethetechnicalandfinancialcapabilityandabilitytorolloutprojectsofnationalinterestlikeairports,ports,roads,powerplantsetc.Theseagenciesareselectedthroughcompetitivebiddingprocesseswhichfilteroutmanyplayersontechnicalorfinancialgrounds.Thishasresultedinfewlargeplayersresponsible for driving the infrastructure growth of thecountry. Accordingly, few major Infrastructure playerscontinue tohavehighdebton theirbalance sheet.Thesebarriers/restrictionswouldlessentheabilityandeligibilityof many organizations to bid for future projects as theorganizationswithsuperiortechnicalcredentialscomparedtootherswouldstruggletoraisefinancingtoparticipateinstrategicallyimportantprojects.

ApartfromthisthereareseveralotherreasonsforhigherDebtsituationinexistingInfrastructureAssetswhicharebrieflyexplainedbelow.

The first and foremost reason is that the Infrastructureprojects are generally long gestation projects, whereinthecashflowsintheinitialyearsareinsufficienttorepaythedebt,duetovariousprojectdynamics&inefficiencies.Hence, debt repayments are made back ended to matchwiththecashflows.

Timeoverrunisanotherreasonforincreasingdebt.Delayin availability of Right of Way (ROW), EnvironmentalClearances,DelaysincriticalSupplyorPurchaseContracts,ApprovalsforUtilityShiftingetc.,aresomeofthekeyissueswhichlegitimatelyimpacttimelycompletionofprojectsandprojectsgettingdelayed.Furtherduetoreasons,whicharebeyondconcessionaire’scontrol,likedisruptionsinsupplyofrawmaterial,publicresistance,lowerrevenuerealizations,revenuerealizationissuewithbulkcustomers,etc.resultinincreaseintheprojectdebtanddelayindebtservicing.


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Tax-freeInfrastructurebondsareveryattractivesourceof obtainingquickfinance for the infrastructureprojects.However Private Companies are not permitted to issueTax–freeInfrastructureBonds.Section54ECoftheIncomeTaxActprovidesexemption to long termcapitalgain forinvestmentinlongtermspecifiedassetslikecertainbondsissued by PSU Non-Banking Finance Companies likeREC and NHAI. On a similar pattern, bonds, issued byinfrastructure companies are not considered for benefitsundersection54ECoftheAct.Thisrequirestobeconsidered.Thiswillacceleratethegrowthininfrastructuresectorinaddition assist the infrastructure companies in reducingtheirdebtcost,andalsoincreasestheinvestmentavenues.

Money markets are another source of finance forinfrastructure projects. However there are difficulties inborrowing fromMoney markets. Corporate bond marketinIndiaareabsentforcompanieswithratinglessthanA.Typically,infrastructureprojectcompaniesareratedatthelowestrungintheinvestmentgraderating,whichmakesthemarket participants careful about their credit profileandhence they stay away or avoid fromparticipating insuchpapers.Furtherinfrastructureassetsarebuiltontheback of long-term concession agreement; infrastructurecompanies require long term funds. However, bulk ofparticipantsinmoneymarketshaveinvestmenthorizonof3to5yearsonly.Perceivedriskofinfrastructureprojectisveryhigh,whichresultsinhighcostofborrowingweakeningtheviabilityoftheinfrastructureprojects.Intheabsenceofequallybroad-basedalternativemarket,itisabsolutelyessential that corporate bond markets, particularly forlowerratedissuersaredevelopedinthecountry.

Overseas lenders are another source of finance forinfrastructureprojects.Therearedifficultiesinborrowingin foreign currency too. Majority of the revenue of aninfrastructure company is in local currency. Even if thecompany is able to borrow from foreign banks in foreigncurrency, it is very essential for the company to hedgeits exposure. In the absence of any natural hedge, thisarrangement can result into high cost of borrowing.Moreover, the infrastructure sector requires long termfinancing for15-20years, andhedgingmechanism isnotavailableformorethan5years.Thisbringsnewchallengesfor risk management, thereby restricting the ability ofcorporatetoraisefundsfromoverseaslenders.

Higher interest rate is another reason impacting thedevelopment of Infrastructure projects. The burden ofhigher interest cost among other factors has impactedthe financial viability ofmany large projects. There is arequirementtofacilitateborrowingcheaplyandrepayoverlongerperiods.Infrastructurecompanies,whosufferfromhigher cost due to several other reasons explained abovewouldbe loadedwithadditionalcostduetohigh interestratewhichwill have twomultiplier effects, and that canaffecttheviabilityofprojectsresultinginhigherstressedassets:

• Projectswherecostsarepassthrough(suchasAirports)– higher interest rates will result into passenger /consumers paying higher, thus bringing inflationarypressure.

• Projects where costs are NOT pass-through (suchas Power projects) – increase the cost and affect theviabilityoftheproject.

TheissueofclassificationofInfrastructureprojectsunder“Specified Borrowers” is another hurdle for availingeasy finance. Specified borrowers are those who haveAggregate SanctionedCredit Limit (ASCL)whichmeansthe aggregate of the fund-based credit limits sanctionedoroutstanding,whicheverishigher,toaborrowerbythebankingsystem.Atpresentthelimitis25,000croresatanypointoftime.Manyinfrastructurecompaniescannotreachuptothislimittoavailthefacility.Thereisrequirementthat the infrastructure projects should be excludedfrom the definition of “Specified Borrowers”. RBI shouldfacilitate development of alternate means of financingfor infrastructure companies in addition to traditionalbanking channel. There are many such schemes whichcanbeconsideredasalternativearrangementoffinancinginfrastructureprojects.Apart from these measures, banking sector must beencouraged to finance long gestation projects with longterm funding. Ideally the recovery tenure must matchthecontract/leaseagreementperiod.However,inviewoftheinherentrisksininfrastructureprojectsduetofactorssuchasstretchedviabilityduetoaggressivebidding,non-availability of 100% land, delay in statutory approvals,andpotential funddiversionbyunscrupulousdevelopers,Banksneed to takeallnecessaryprecautions indecidingassetcoverage,servicecoverage,andothermetricstoavoidnon-performanceandreleasefundsstrictlybasedonstage-wiseexecutionofprojects.LetushopetheBankingreformsintroducedinthecountrywillfindsolutionforthisimportantconcernandwillboosttheinfrastructuredevelopmentinthecountry.

Reference• Wana, N., Jamilah, I., & Mahyideen, M. (2015). ADBI Working

Paper Series The Impact of Infrastructure on Trade and Economic Growth in Selected Economies in Asia Asian Development Bank Institute. In ADB Institute.

• Chow, D. C. K. (2016). Why China Established the Asia Infrastructure Investment Bank. In Vanderbilt Journal of Transnational Law.

• World, T. H. E., & Annual, B. (2010). THE WORLD BANK ANNUAL REPORT 2010 YEAR IN REVIEW. World Bank Annual Report.

• Zhang, J., Jiang, C., Qu, B., & Wang, P. (2013). Market concentration, risk-takin g, and bank performance: Evidence from emerging economies. International Review of Financial Analysis. https://doi.org/10.1016/j.irfa.2013.07.016

• Bank, A. D. (2011). Asian Development Bank and Cambodia: Fact Sheet. World Development.

• Callaghan, M., & Hubbard, P. (2016). The Asian Infrastructure Investment Bank: Multilateralism on the Silk Road. China Economic Journal. https://doi.org/10.1080/17538963.2016.1162970

• Kubalkova, P. G. (2015). Asian Infrastructure Investment Bank. China Quarterly of International Strategic Studies. https://doi.org/10.1142/s237774001550027x

• Yu, H. (2017). Motivation behind China’s ‘one belt, one road’ initiatives and establishment of the Asian infrastructure investment bank. Journal of Contemporary China. https://doi.org/10.1080/10670564.2016.1245894


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• Ferguson, L., & Harman, S. (2015). Gender and Infrastructure in the World Bank. Development Policy Review. https://doi.org/10.1111/dpr.12128

• Florsheim, J. L., Mount, J. F., & Chin, A. (2008). Bank Erosion as a Desirable Attribute of Rivers. BioScience. https://doi.org/10.1641/b580608

• Shi, Y. (2018). Asian Infrastructure Investment Bank (AIIB). In From World Factory to Global Investor. https://doi.org/10.4324/9781315455815-9

• Beck, T., Demirgüç-Kunt, A., & Peria, M. S. M. (2008). Banking services for everyone? Barriers to bank access and use around the world. World Bank Economic Review. https://doi.org/10.1093/wber/lhn020

• Mishra, R. (2016). Asian infrastructure investment bank: An assessment. India Quarterly. https://doi.org/10.1177/0974928416643582

• De Jonge, A. (2017). Perspectives on the emerging role of the Asian Infrastructure Investment Bank. International Affairs. https://doi.org/10.1093/ia/iix156

• Griffith-Jones, S. (2014). A BRICS Development Bank: A Dream Coming True? In UNCTAD Discussion Papers. https://doi.org/10.1016/j.quascirev.2006.11.019

• Bakker, K. (2013). Constructing “public” water: The World Bank, urban water supply, and the biopolitics of development. Environment and Planning D: Society and Space. https://doi.org/10.1068/d5111

• Akhisar, Ý., Tunay, K. B., & Tunay, N. (2015). The Effects of Innovations on Bank Performance: The Case of Electronic Banking Services. Procedia - Social and Behavioral Sciences. https://doi.org/10.1016/j.sbspro.2015.06.336

• Chin, G. T. (2016). Asian infrastructure investment bank: Governance innovation and prospects. Global Governance. https://doi.org/10.1163/19426720-02201002

• Hanlon, R. J. (2017). Thinking about the Asian Infrastructure Investment Bank: Can a China-Led Development Bank Improve

Sustainability in Asia? Asia and the Pacific Policy Studies. https://doi.org/10.1002/app5.186

• Velankar, S., Best, C., Beuth, B., Boutselakis, C. H., Cobley, N., Sousa da Silva, A. W., … Kleywegt, G. J. (2009). PDBe: Protein Data Bank in Europe. Nucleic Acids Research. https://doi.org/10.1093/nar/gkp916

• Ru, H. (2018). Government Credit, a Double-Edged Sword: Evidence from the China Development Bank. Journal of Finance. https://doi.org/10.1111/jofi.12585

• Baindur, V., & Kamath, L. (2009). Reengineering Urban Infrastructure/ : How the World Bank and Asian Development Bank Shape Urban infrastructure Finance and Governance in India. In Bank Information Centre, South Asia.

• Central Bank of Sri Lanka. (2016). Central Bank of Sri Lanka Annual Report 2016. Central Bank of Sri Lanka.

• Scott, S. V., Van Reenen, J., & Zachariadis, M. (2017). The long-term effect of digital innovation on bank performance: An empirical study of SWIFT adoption in financial services. Research Policy. https://doi.org/10.1016/j.respol.2017.03.010

• Sayuri Shirai. (n.d.). BANKING SECTOR REFORMS IN INDIA AND CHINA: DOES INDIA’S EXPERIENCE OFFER LESSONS FOR CHINA’S FUTURE REFORM AGENDA? Retrieved from https://www.unescap.org/sites/default/files/3 Shirai.pdf

• Government Announces Merger Of Bank of Baroda, Dena Bank And Vijaya Bank. (n.d.). Retrieved from https://www.bloombergquint.com/business/government-announces-merger-of-bank-of-baroda-dena-bank-vijaya-bank

• Ramprasad Sengupta, S. M. and M. G. (n.d.). Financing for Infrastructure Investment in G-20 Countries. Retrieved from https://nipfp.org.in/media/medialibrary/2015/02/WP_2015_144.pdf

• PUBLIC-PRIVATE PARTNERSHIP IN INFRASTRUCTURE. (n.d.). Retrieved from https://www.unescap.org/sites/default/files/ppp_guidebook.pdf

Theme for Coming MonthsMonth ThemeJune InsuranceJuly GSTAugust ERP/SAP

Theme of June 2020 is Insurance. Editorial board invitees’ articles / papers on Insurance for the WIRC Bulletin for the month of June 2020.

Regular articles/papers on other professional matter are also going to be published in WIRC Bulletin apart from articles/papers on respective theme. Editorial board also invitees’ articles / papers on other professional matters.

Kindlysendyourarticlesonorbefore5thJune2020byemailtoWIRC:wirc.admin@icmai.in.EditorialboardhadalsoformedminimumcriteriaforselectionofArticle/PaperforWIRCBulletininEditorialBoardmeetingheldon14thFebruary,2020.FollowingistheminimumcriteriaforselectionofArticle/PaperforWIRCBulletin.

1. TypeofArticle:Relatedtothemeofthemonthoranyotherprofessionalmatter.

2. Font:Arial/TimeNewRoman/Calibri

3. FontSize:11

4. MinimumlengthoftheArticle:1000Words(Otherthangraphs/tables/figure/pictures)

KindlysendyourArticle/paperaccordingly.

Pls. Note the final decision to consider Article/Paper is left with Chairman – Editorial Board.


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CMA’s Role in banking sector as Stock AuditorCMA Pradnya Chandorkar

Mob.:99228 67455•E-mail:[email protected]

CostandManagementAccountantplaypivotalroleinStockAuditofvariousindustries,buttheroleinbankingsectorismorecrucial.Empanelmentinbankingsectorisaaltogetherdifferent experience. After Conducting Concurrent AuditandStockAudit forvariousbanks Iwould like to sharesomepracticalaspectsofthesame.

Inthecontextofrapidgrowthofcredit,effectivesupervision& monitoring of advances have assumed considerableimportance in IndianBankingSector. In caseofworkingcapitalfinance,oneofthemeasuresthatisdeployedbythelendersforensuringtheenduseof fundsandmonitoringtheborrowalaccountisthesystemofperiodicalStockAuditbytheindependentqualifiedStockAuditors.

Stock Audit policyBefore conducting stock audit it is necessary to studythe policy of the particular Bank. The Credit Audit &MonitoringDepartmentisresponsiblefordraftingofStockAuditpolicyandalso forperiodical reviewof therelativepolicyandprocesses.

The document termed as “Stock Audit Policy”, codifiesthepolicyand theprocedure involved in theStockAuditfunction.Thishasbeencompiledaftertakingintoaccountchangesthathavetakenplaceinthelendingscenarioandmonitoringsystems.

The ObjectiveThemainobjectiveof stockaudit is toascertainwhetherthesecurity (borrower’sstockanddebtors)againstwhichworkingcapitalfinancehasbeenmadeissafeandisvaluedcorrectly. It is thedutyof theStockauditor toverify thephysical existence and absolute ownership of inventory /movablepropertychargedtothebankandtoexaminethegenuineness of theSundryDebtors list submittedby theborrower

Thevariouspurposesexpectedtobeachievedthroughstockauditmaybesummarizedasfollows

• Tocarryoutphysicalexaminationofstocktoascertainthe quality, value and age of the inventory therebyidentifyingwhetherthereexistanyobsoletestock&ifyes,whetherithasbeensegregated&writtenoffandexcludedwhilearrivingthedrawingpower

• Toverifywhetherthestockisadequatelyandproperlyinsured against fire and other natural calamities(in appropriate cases against other risks like theft,

burglary,marine,riotsetc.aspersanction)andkeptinsecuredmanner

• Toascertainwhetherphysicalstocktallywiththestockstatementsubmittedto thebanker. (This is thegreyareaandAuditor’sResponsibilityisenormous.)

• Toascertainwhetherhypothecatedstockisrealizable.

• To physically verify the value of paid Stock (byexcludingthetotalvalueofunpaidstockwithreferenceto the level of TradeCreditors and the total value ofstockprocuredundertheNonFundbasedcreditlimitsviz.,FLC(Foreign letter of credit) /ILC (Inland letterofcredit)/BG)availableintheborrower’slocationandconfirmthesametogetherwiththeeligibleBookDebtsaresufficienttocoverthetotalamountoutstandingintheWorking Capital Limits (Fund based) alongwiththerequiredlevelofmargin.

• To verifywhether the value of stock (procuredunderNonfundbasedlimits)availableonthedateofphysicalverificationalongwiththeeligibleBookDebtsemanatedfromthesaleofsuchgoodsissufficienttocoverthetotalamountofBillLiabilityundertheNonfundbasedlimitsincludingBankGuaranteeLimitforSupplyofGoods

• Toverifyrelatedrecords/registers/Booksofaccountssuch as Stock Register, Purchase Register, SalesRegister, Purchase Invoices, Sales Invoices, CreditNotes,DebitNotesetc.,maintainedbytheborrower.

• Toensureproperpreservation/storageandhandlingofstock.

• ToensurethestockunderhypothecationhavenotbeenhypothecatedtootherBanks.

• Toexaminetheenduseofthefundsandverifywhetherany diversion of funds, interlocking of funds amongsisterconcerns.

• To confirm whether all the sanction conditions arecomplied.

• To confirm that stock is owned by the borrower andfinanceismadeagainstvalueofpaidstockonly.

• To examine the age wise debtors outstanding as perbooksandasperstatementsubmittedbytheborrower,steps taken for recovery of long pending debtors andlikelyinstancesofdebtorsturningbad,ifany.

• ToensurethetimelysubmissionofStock/BookDebtsstatement,QISstatementetc.,


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Stock Audit coverageThe borrowal accounts having working capital limitsof both Fund based and Non Fund based Limits wherethe primary security is hypothecation of Stock and / orBook Debts come under the purview of Stock Audit. Inexceptional cases, Stock Auditmay be conducted for theworkingcapitallimitsbelowbasedonthespecificrequestofCreditDepartmentMoreover,incaseofNPAborrowalaccountshavingWorkingCapitallimitswheretheprimarysecurityofstockand/orBookDebtsareavailablearealsocomeunderthepurviewofStockAudit.

Fund Based limits: Fund Based Limit includes all typesofWorkingCapitalLimitssanctionedsuchasCashCredit(Stock),CashCredit (BookDebts),Overdraft,TermLoan/DemandLoan(ForWorkingCapitalpurpose),BilllimitsPacking Credit Limit, Key Loan, Ware House ReceiptsLoan,etc.

NonFundBasedlimits:NonFundBasedLimitssanctionedforWorkingCapital purposes such asBankGuarantees,ILC (DA terms) /FLC (DA terms), etc., for the supply ofgoodsoncreditterms.

Advances under Consortium / Multiple BankingarrangementIncaseofadvancescomingunderConsortium/MultipleBankingarrangement,theBankmayfallinlinewiththeLeaderoftheConsortiumorHighestlender,asthecasemaybe.

In certain industries, business activities and projects, bytheverynatureofthebusinessmodel,theprimarysecuritychargedtotheBankisthoughtangible,noteasilyverifiable.In such cases, the Stock Audit should be conducted byoutsourcing StockAuditorwho is having special/ specificknowledge about the nature of goods or knowledge ofthe industry. Specialized Auditors i.e. auditors havingknowledge/expertiseoftheindustryareconsideredtotheextentpossiblesoastoachieveefficientandeffectivestockauditmechanism.

Outsourcing of Stock Auditors: StockAuditorsareappointedtakingintotheconsiderationofthefirm’sconstitution,experienceetc.Someofthestock/ goods may be graded depending on the composition,durabilityandothertechnicalspecificationswhichcannotbe assessed by layman. Chartered Engineer who istechnically / professionally qualified,may be engaged byStockAuditorswithpriorpermission

Periodicity of Stock Audit Stock Auditshouldbeconductedfortheeligibleborrowalaccountsonceortwiceinayear.Itshouldbeensuredthatthereisnoomissioneitherintheeligibleaccountsorintheareaofcoverage.

It is the responsibility of Credit Audit & MonitoringDepartment to review theStockAuditorswhoare in the

BankpaneleveryyearbyplacingareviewnotetoManagingDirector&ChiefExecutiveOfficer.

ReportingSystem&SubmissionofFinalCertificate: TheStockAuditorshouldverifytheborrower’sunit/godownastotheirpositiononStock/BookDebtsandsubmitthereport immediately in triplicate (3 copies) two copies toCredit Audit &Monitoring Department, one copy to therespectiveRegionalOfficethroughtheBranchandonecopytothebranch.

TheFinalCertificateshouldbesubmittedbythebrancheswithin prescribed limit say one month from the date ofreceiptofthestockauditreportbytheconcernedbranch.The concerned Regional Office should verify the fullcomplianceandobtainFinalCertificatefromtherespectiveBranchesandsubmitthesametoCreditAudit&MonitoringDepartment. The entire process till the getting FinalCertificate from the respective Regional Office is beingmonitoredattheCreditAudit&MonitoringDepartment

Current ScenarioTheCOVID-19outbreakisalsoexpectedtocreateanumberof potential challenges for auditors to attend inventorycounts.StockAuditorsareconsideringtoaddresssomeofthe changes for physical verification of inventory by theuseoftechnologyorvirtualobservationsthroughmediumslike live videos wherever possible. New technology, suchasdronesorremotelycontrolledrobotics,mighthelpwithyourinventorytestinginsomecases,withthecurrentcrisisarising out of the pandemic, especially in view of socialdistancing;theIBAhassoughttherelaxationthatwouldallowboththebanksandstatutoryauditorstocompletetheannualclosingexercisewithouttoomuchdisruption.


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CFO SpeaksCMA Mohan Tanksale

Ex-Chairman, Central Bank of India

Mr. Mohan Tanksale is a career banker with over 4 decades in the Indian banking industry and has led three major Indian Public Sector banks in this span. During his illustrious career, Mr. Tanksale has spent time and contributed in every area of banking. He retired as Chairman from one of the top 10 banks in India, Central Bank of India, in 2013. Given his wealth of experience, he was immediately roped in as the Chief Executive of the Indian Banks Association (IBA), during which he successfully represented the entire banking industry for the period December 2013 to August 2016.Mr. Tanksale is presently engaged as an Advisor to SWIFT India (SWIFT India Domestic Services Private Limited, majority owned subsidiary of Society of Worldwide Interbank Financial Telecommunication, Belgium) providing support to adoption of high quality financial messaging services in India and giving insights on developing market opportunities.Mr. Tanksale has been conferred with several prestigious awards and recognitions. The HR initiatives under his leadership at Central Bank of India, resulted into the Bank winning the Golden Peacock HR excellence Award 2012. He has been lauded as a thorough HR practitioner with excellent employee motivation and engagement skills, and has been chairperson of the IBA Standing Committee on HR during 2012-13. Mr. Tanksale was awarded Person of the Year for his contribution to Financial Inclusion by SKOCH Foundation. Mr. Tanksale is also a proud recipient of the Golden Peacock Lifetime Achievement Award.Mr. Tanksale holds a Bachelor’s degree in Science, Master’s degree in English Literature and is a Fellow Member of Management Accountants of India (FCMA); has completed professional course of Company Secretary (Inter) from the Institute of Company Secretaries of India and is a Certified Associate of the Indian Institute of Banking and Finance (CAIIB). He has a keen interest in learning various languages, which led him to achieving Diploma in Russian language.1. What was the reason of pursuing CMA when you

already had a secured job in the bank? I graduated in Science, did my post-Graduation in

Englishliterature&didCAIIB.AfterservinginRuralbranches, I was posted asGeneralManager of RewaSidhi Gramin Bank (RSGB). It was a challengingleadershipopportunityasasecondincommandandIhadtomanageperformanceof70-80branches.

After moving to Bhopal in 1986 with Union Bankof India, I feltaneed toaugmentmyskill setwithaprofessional qualification thatwill helpme dealwithlarge corporates, institutions and make me a betterbanker.Postdueconsideration,I joinedCMAin1988

and completed it in 1990. The course improved myunderstandingandboostedmyconfidencewhiledealingwith project lending, credit monitoring of Industriesandtradecreditfinance.

Insteadofmerelylookingatnumberswhileapprovingcredit, I was able to now judge rationale behind thenumbersandunderstandthedynamicsoforganization,industry and specific projects. Instead of consideringmybankasmerelender,Iputmyselfasa75%partnerwho not only disbursed money but also monitoredperformanceandsuggestedcoursecorrectionfromanydeviations.

The base from ICWA course, allowed to me toprogressively take up bigger roles over 22 yearsultimatelyhelpingtobecomeChairman.

It’s this base that gaveme confidence to recommendInstitute of Cost andManagement Accountant as anIndependentevaluationcommitteememberunderaegisoftheRBIforresolutionofStressedAssets-afirstforthe instituteandprofessionals to gobeyond itsusualmandate.

2. What are the opportunities in Banking Sector for a CMAs?

Opportunities for CMAs are multi fold, right fromcostauditandmanagementtocreditrisk&feasibilityanalysistoenterpriserisktosustainability.

Cost audit and management: In the currentenvironment, strategic cost management is animperative.Inordertosurvivealltypesofbanks-rightfromPublic Sector Banks to Private Sector Banks toForeignBankstoSmallFinanceBankstoCooperativeBanks-needtofocusoncosts.CMAscanaddsubstantialvalue inanalysing thecost structureofeachproduct,theireffectonP&Landensuredeliveryofproductinacompetitivemanner.

Credit risk and feasibility analysis: CMA shouldcreatetheircompetencesinProjectConsultancy,TechnoEconomic Viability Study, support credit monitoring,empanelasMSMEconsultancyapartfromCostAuditandStockAudit.Forthis,CMAsshouldunderstandthecompletelifecycleofaCreditBorrower.

Another area is Enterprise Risk Management Consultancy where, as an enterprise, you have tounderstand risk appetite, foreseeable risk and riskmitigants.RiskbasedInternalauditcouldbeanotheropportunity. Going forward, banks are likely tooutsourcetheseasagainstinvestintheemploymentofpeople.AnotherareaisIBC&IPwhereCMAcanreallydevelopexpertise.

Finally, sustainability practice will provide futuregrowthopportunities.ItisdirectlyrelatedtotheGlobal


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SustainableGoalsthatIndiaiscommittedto.CMAscanhelpcomplysustainabledevelopmentgoalsthathasanESGimpact(Environment,SocialandtheGovernance).

I have touched upon majority of the above points intheWebinarconductedbytheInstituteonMarch9thon“RoleofCMAsinBanking&Insurance”whichwasattendedbymorethan500participants.

3. Whether the Govt.’s drive to consolidate Nationalised Banks will help?

The core objective of the consolidation is capitaloptimisation which will ultimately result in havingcapitalforgrowthandasoundbankingsystem.

The second objective is size. Globally, it’s said thatinsteadoftoobigtofail,toosmalltofailapplies.Forifsmallisefficientitwillnotfailandtoobigtofaildoesnotreallyholdtrue.Whathelpsyouin“toobig”isthatyoucanbeaplayerwiththebiggeropportunity.ThiswillbecertainlyusefulifIndiaemergesasmanufacturinghubasanalternativetoChina.Atthatjuncture,banksshouldhavesizetofundsuchprojects.Iftheycan,thenthesecondobjectiveofconsolidationwillgetfulfilled.

Inaddition,consolidationwillreleaseresources,both,physicalandhuman.Wewillseereductionofbranches,rationalisation of overlapping administrative offices,regional offices, zonal offices etc. This will enablebankstosellownpropertyandreleasecapitalformoreproductiveuse.The excesshuman resources cannowbuild necessary relationships to help customers inbridgingthedigitalandphysicaldomainandchoosingappropriateproductsacrossfinancialservices.

Thatisreallynothappeningandthatishownoneofthepublicsectorbanksaregreatlysuccessfulinpromotingalltheirproductstoalltheirdedicatedcustomers.Whenyou release themanpower and deploy them properlyfortheefficientpurposes,definitelytheobjectiveofthebanktoimprovetheproductivityandprofitabilitywillbe achieved. It further allows banks to raise capitalat lower cost improving their capital adequacymuchbeyondtheregulatoryrequirement.

While integrationhassoundbasis,banksneeds tobemindfulof3challenges:1. Technology integration - While merging banks

are on same technology framework, the processat each bank is customized towards own productand process. Ensuring a common framework andproductalignmentacrossmergedbankwilltakeuptoayear.

2. Culturalintegration-Eachofthemergingbankhadits distinct identity and culture. Banks will needconcrete efforts and time for cultural integration.Fortunately, banks have a head start in terms ofengaging its employee even before consolidation.Banks need to identify and define best practicesamong the consolidated banks, adopt thosepractices, give proper recognition to the skills ofacquiredbank.

3. Customers - Banks will need to build customerconfidence such that existing relationships aretransitionedtothenewentity.Notonlywillbanks

need to provide comfort to the existing customerbase that still relies onphysical relationshipsbutalso attract and assimilate new customers whorely heavily on technology. Similarly, customersfrom rural areas will have different expectation.Overall,totakecareofeachcustomerisgoingtobeachallenge.

4. Last few years, we have seen lot of changes in the banking operations like internet banking, what is your opinion about the further changes expected post COVID situation.

I have seen banking transformation right from zerocomputerisationtillautomatedledgerpostingmachineand from therewemoved to total automation to corebanking where the entire bank was brought on onesingleplatform.Havingachievedthat,webeganmulti-channeldeliverymore likeATM,netbanking,mobilebankingetc.

NewPrivateSectorBank,whichstartedin1994,hadanadvantagetoinculcatetechnologyfromday1.Butwemustsalutethepublicsectorbanksforreaching100%corebankinginthelate2000despiteofzerotechnologyattheirhandsandmultiplelegacyissues.Theycontinueto improveprocesseswithin the organisation throughdigitalisation.

YouareawarethatSIDBIhasrecentlystartedonlineplatformforlendingtoMSMEandIhadanopportunitytogetassociatedwithit.

Similarly trade digitalisation is happeningwhere thetradefinance instruments likeLetter ofCredit,BankGuaranteearealsogettingdigitisedandcompletepaperworkwillbemovedtothedigitalplatform.

WearealsotalkingabouttheNeoBankswhoaretechcompanies supporting the banks only to do platform-basedlending.Wearetalkingabouttheopenbankingwhich isnewconcept todayverypopular inAustraliaandvariousEuropeancountrieswhereanindependentaggregatorispullingtheinformationfromthebank,ofcourse at the request of the customer and furnishingthatinformationtotheFinTechcompanieswhowanttoservethecustomeronthefinanceorinsuranceproductsand this is going to be gradually popular platformamongthenewgenerationcustomersofthebanks.

Withthisrichheritageof innovations, Iamconfidentthatbankswillstepuptoadopttothenewreality.Evencustomersareacceleratingtheiradoptiontodigital.Infact,bankswilldevelopasmanyproductsandprocessespossible which can serve the customer end to enddigitally.

Nevertheless,asabankerIamoftheopinionthatyoucannot totally do awaywith the physical interaction.That interaction will be necessary to make betterdecisionswhichwouldnotbepossiblepurelybasedondataandwithoutphysicalinteraction.

5. These changes have also resulted in the various challenges like Cyber Crimes. So what is the role of System Audit & whether technologically India is advanced enough to face these challenges.


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FinancialInstitutionsareworkingtowardspreventingthe possibility of cyber-attacks, but asMicrosoft andGooglehasalsosaidthatthereisnobodywhocansaythat they cannot be attacked. In fact,BillGates saidthat somebody knows that they are attacked, whileothersdon’tevenrealizeit.

RBIhasoveradecadebeenfollowingupontheefficiencyofthetechnologytoavoidthecyber-crimeandhasnowtakennextstepbysettingupaseparateentitytostudypossiblerisksandmitigants.Thecybercriminalstargetvulnerabilityinsystemsatusergrouporemployeeoracustomer.

That said the most important part for me is howindustrydynamically lifts itselfby leveragingvariousnew technologies to not just thwart cyber criminalsbut also to reduce frauds, black money, bogus paperactivities, etc.This canbe to great extentdoneusingBlockChainsorendtoenddigitisationoftradefinanceoruseofArtificialIntelligence(AI)toidentifyunusualand exceptional transaction activities. So, while youcannot completely stop cyber-crime,you can certainlyreduce vulnerability by strengthening your firewallsandbycreatingawareness,skilling,training,etc.

6. On one hand RBI is reducing the repo & reverse repo rates but the businessmen may be reluctant to take these advances because of the uncertain future, so banks may face the problems. Whether any other measures will be required in support of this by the Government?

Most important function of repo& reverse repo is toprovide sufficient liquidity in the system in order tosupporttheexistingCorporatesectororMSMEsector.Its estimated that additional 10% credit supportwill help industry manage these challenging times.This support will not only ensure survival but alsoprotectemploymentandqualityofbankassets.Thus,RBI’sactofproviding this liquidity, toNBFCs,MicroFinanceInstitutionorcorporaterequirementorMSMErequirementisabsolutelytimelyandnecessary.

Now second point is that while none of the newinvestmentswillhappenimmediately,corporateshaveto think over that what is going to be the scenariosixmonths down the line.While keeping one eye onsurvivaltheyneedtostartthinkingaboutopportunitiespresentedbyshiftofmanufacturingbasetoIndiaandareaswhere investmentswillberequired toaugmentsupportinfrastructure.Inalllikelihood,manyoftheseinvestments will be funded by banks. Without thatfinancing support its unlikely for any internationalcompanytoconsideramovetoIndia.

And thus, I think that for future investments youhave six months’ time available wherein the banks,thecorporates,theindustryassociation,theCMAandProfessional association should prepare themselvestowork for thoseproposalswhicharegoing tobe thepotentialsectorswherethefutureinvestmentsshouldhappen.Iftheorganisedeffortsareundertakentowardsidentifying the future opportunity, businessmen willwork for it. These opportunitieswill needmedium tolongtermmindsetandfunding.UnlesstheGovtdecidesto invest substantially in the infrastructure, throughthePPPmodel, orfiscal support,private sectoralone

wouldnotbeinapositiontotaketheburden.ThusIfeelthatthefiscalsupportwillhavetocomesubstantiallyandthatiswhyeveryeconomistsaysthat,thisisnotthe timeyoushould thinkof thefiscaldeficityetyoushould havemedium to long termplan to keep fiscaldeficitbetween4to6%andeffortsshouldalsobemadetoseehowcanitcanbroughtitdowntoideal3%inthegiventime.

7. Because of certain wrong funding & resultant NPAsofmanybanks,thestakeholder’sconfidenceabout the banks has shaken. What do you feel banks should do for this or the measures already being taken & what is the role of Independent Director in this?

Firstly,manychallengesrelatedtolendingareduetomis-representation by companies or/and changes tomacro environment. Independent Directors to greatextent in corporate sector would have avoided thepressuretogrowatanycostforthefirmsandavoidedmisrepresentation and aggressive projections. Inaddition, in many cases, we would have seen muchmore ethical behaviour along with harder looks attheseprojectsandcapitalrequirementsoveraperiodoftime.Whileallthesewereexpected,therealityisthatmajority ofNPAs are from top 50 accounts.Weneedto ask,whatwas the role of independentdirectors inthose cases? Could they have been more sceptical oftheprojects?Didtheythinkofexcesscapacitywithintheirindustrieswhileapprovingtheseprojectsatboardmeeting? Would they have asked different questionshadtheygotprofessionalhelpfromCMAs?

Secondly,therehavebeensituationswherethingswerebeyondcontrolofcompanies.Itcouldhavebeenduetodownturnordelaysinapprovalsorotherdelaysbeyondcontrol.Hereit iscriticaltounderstandthatallofusneed to rally behind these projects and make themproductiveas it results innationalwealthelse it isanationalloss.

As for bank boards, they would be strengthened bynominatingtheprofessionalsasindependentdirectorswhoare conversantwithproject lending. In addition,regularsupportwillhavetobeprovidedtotheboardinformofdiscussionswithvariousthird-partyconsultantson changes in project finance landscape, businessmodelsandrisks.

IwillsuggestthatInstituteofCostAccountantsofIndiashoulddevelopatrainingscheduleoftheIndependentDirectors of the corporate world as well as bankingindustry.

8. Is there any index to measure the performance of banking operations? What is the overall position of Indian Banking operations & practices as compared to best practices being followed world-wide?

Thebasicmeasuretoassessthebankingoperationsareonthreeparameters.1) Soundness-WhenIsaysoundness,itmeanswhat

ismycapitaladequacy,whataremycorestrengthsto retain the strong capital, generate the strongcapital, generate the capital at the least cost orefficient cost.Thishas gotnothing to dowith thesizeofthebank,itdependsuponexistingsoundness


34

andperceivedsoundnessofthebank.Nowwhatiscapital?Capitalisaccruedprofit.IalwayssaythatIdon’twanttogetcapitalfrommarket,ifIamabletogenerateinternalcapital,ifmyReturnonAssetorReturnonCapitalisasperthebenchmark.Thus,thefirstparameterishowsoundistheorganisationatpresentandhowitisperceivedtobesoundgoingforward.

2) Productivity - Productivity is measurement ofyourmarketshare,marketshareperemployeeperstrategicbusinessunitwhetheryoucallitabranch,region, zone, each area of operation, comparedwithIndustrybenchmarkonproductivity.Nowthedatabases are available for benchmarking whichwilltellyouthesearethebest,thesearethelowest,thisistheaverage.Now,fordrivingaproductivityofabank,Ishouldbecapableofretainingmyexistingmarket share in terms of productivity. I shouldmaintain growth in linewith themarket growth.ButifIwanttoincreasemymarketshareonepointup,thenIhavetogrowbetterthanthemarket.Nowwhatarethereadinessofthebankinordertoretainthe market share and growing the market sharegoingforwardwillbeanotherbenchmarktolookatthebank.Thisishowtheperceivedvaluationwillgetcreatedonthebasisofproductivity.

3)Profitability -Measurement of profitability is allefficiencyratios,thatisReturnonEquitybut,ROEisagaintheequityacquiredduringdifferentphasesofthetimeandthusmaynotbetheexactparameter,butthisishowthemarketlooksatandperformanceis measured with reference to the minimum rateof Return on Equity. But Return on capital orReturnonAssetisveryimportantparameter.Nowtypicallyweallmeasurethebankfromthereturnonassetand thebestbankgiveasgoodas1.8 to2%.Todayhalfof themarenegative,but thebestROA is around 1.5+. Then you look at NIM (NetInterestMargin),NIMisafunctionofwhatiscostofresourcesthatisdepositsandwhatisyouryieldontheasseti.e.advances.

Profitability can be further augmented by controllingcost to income ratio of the bank. Income consists ofNetInterest Income,Non-Interest Incomeandcanbeaugmented through treasury management of bank’sfunding structure and trading book along with crossselling.Forexample,Non-InterestIncomeofallprivatesectorbank isbetween20 to25%,while it ranges forpublic sectorbankbetween10 to12%. Itmeanswithsame resources and with same set of clients, publicsector banks are losing that opportunity to generatethe income. The second question is how does onereduce your operating cost by reassessing operationsandexploringnewerwaystoreachout toclients inacheaperway.And that iswhy I think cost to incomeratio is very important parameter. And these are allglobalparametersonwhichthebanksaremeasured.

Intermsofglobalbestpractices,IwillsaythatIndianbanking is at parwith the globalmarket.Weare allpartoftheBaselInstitution,weallareconformingtotheBankingLawsandareatpar on technology.TheonlythingthatweneedtolookatisnewactivitiesliketheapplicationofBlockChainTechnology,OpenAccessBanking,Artificialintelligenceandmachinelearning.

IwasinEDPunjabNationalbankin2009to2011and

thatwas timewhen globalmelt down had happenedand Indian economy was progressive and resilient.In those days, our GDP used to be around 8 to 9%and Government wanted to boost it to double digits.InthosedayswhenIusedtogofor investorsmeet inNewYork,London,Singapore,Hongkong,PNB’sROAusedtobe1.8%,NIMabove4%,CosttoIncomeRationaround 40% and thus meeting all the benchmarks.TheForeignInstitutionalInvestorusedtosaythatwehavealreadyinvested19.9%inPunjabNationalBank,youhave toonly tellme thatwhen theGovtof Indiais going to increase its limit from 20 to 30%.What Iwant to communicate through this is that if bankingindustryisconsciouslyworkingonthese3parametersandconsciouslyensuringthatyournumbersareaspertheexpectedbenchmark,Ithinkyouaredoingagoodjob.

ThereisnoseparateindexforBankingassuchbutintheeaseofdoingbusiness,whereIndiaRankin2020is63whereaseaseofgettingcredittherankingofIndia’sranking is25. Iamsurethatwiththemeasuresthatwehavespoken,therankingwilldefinitelyimproveinfuture.

9. What are the challenges & opportunities to banking industry in the years to come?

Onthechallengespart,therearefivepoints,1) To boost the employee morale by removing the

credit aversion from the minds of the employees.This should be done by the management. TheGovernment will do their part but this driveshould be done internally by boosting themoraleof the Branch Managers sensitising about theopportunities.

2) Address the existing & expected stress on assetquality. What is important is to review eachaccount carefully rather than using a generalisedformula.ThefieldpersonnelshouldhaveadetaileddiscussiononimpactofCOVIDoneachaccount.

3) Supportingthoseunitswhoarenotcertainontheirliquidityissues,collateralsecurityetc.afterdoingaduediligence.

4) Banksshould look for thoseSectorswhichhaveagrowthpotential.Detailedstrategicplanningwiththehelp of industry surveys to decide investmentneedstobedone.

5) Upgrading the technology to make available endto end digital solutions to the customers. Lastly,streamlining the consolidation efforts so that themaximumbenefitcanbederivedfromit.

OntheopportunitiessideIhavethreepoints,1) India is likely to be considered as potential

manufacturing hub. So, one has to grab theopportunities.

2) Goingdigitallywillhelpinreducingthecosts.3) Thereisanopportunityforemployee’sreorientation

forhigherproductivity. Overall,whatIfeelthatthefutureforbankingwillbe

fullofopportunitiesandchallengesandCMAscanplayamajor role in this industry by supporting banks aswellastocorporates.

Interview By CMA Amit Shahane (Member Editorial Board)


35

“You cannot start from normal again because you have lost so much”

Fitch solution has cut India’s Economic Growth RateForecastto1.8%forthefinancialyear2020-21.Accordingto the rating agency, due to the coronavirus epidemic,personal consumption is projected to decrease and largescaleearningsarereducedduetowhichtheestimateofrealGDPgrowthrate for thefinancialyear2020-21hasbeenreducedfrom4.6percentto1.8percent.

According IMF’s Gita Gopinath warns global economycanlose$9trillionduetocoronavirus.Everycountrywillhavesomeorganisationwhichtrackstheeconomyofthatspecificcountrywilllookattheirowneconomicgrowthbutthere is an overall organisation which looks not only atthecountry’seconomybuttheoveronglobaleconomyitisIMF(internationalmonetaryfund)sectorwhichImpactofCOVID-19.

Some of Sector wise impact to indian economy as well as globally as follow :

FMCG SECTORThissectorsignificantlycontributesfourthlargesttowardsGDPintheeconomy.

theflowofFMCGoranyothersectorasfollowing:• Raw materialProblemisthatMajorityofsupplychain

managementrightnowisdisruptedbecausetherearea lotofckpostaswellas freemovementofgoods inourcountryisnotasfreerightnowversusbeforethecurrent situation. I personally feel that rawmaterialprocurement itself is a big challenge for the FMCGsector.

• Production is going to be very smooth right nowbecause of the lower demand. factories might notthemselvesworkatfullcapacitysolet’ssaywhateveristhecurrentcapacitytheymightbeworkingatis50%capacityor60%capacitybecauseoftheoveralleconomyposition.productionitselfdependsondemandforsales.

• Sale also dropped due to economic position undercurrent situation.FMCG sector is not as badly hit asothersectorsbuthereFMCGcanbedivided into twopartsonecanbeessentialgoodsandonecanbeluxurygoods.

• Realisation of moneyUnderthecurrentscenariodoyouthinkthatcustomersaregoingtobepaidontimeordebtorsaretherealiseontime!

• whatwill be going to emerge underFMCGsector after this pandemic ?

Impact of COVID 19 on Indian as well as Global Economy

CMA Jay MehtaMob.:8690611515•E-mail:[email protected]

Essential goods :

UnderEssential goodsphaseatwhich thedemand/sales/liquidity falls the phase at recovery also going to be thesame.

Lury goods :

“U” shaped recovery is after fall recovery is a little bitsluggish getting back after a small period from at thebottomoftheline.onethinggetsbacktonormalthenstartsputtingupatahigherrate.

Pharma sectorA recentKPMG report states that the country’s pharmaexports add up to $13.7 billion (while imports stand at$1.99 billion) and itmeets 50%of the global demand forgenericdrugs.Theproblemisweimportanestimated70%of active pharmaceutical ingredients (APIS) from China.Understandably,theCOVID-19crisisandtheconsequentlockdownservedagut-punchtotheindustry.Therehavebeen freight shutdowns,non-availability of labour, andaspikeincostofafewimportedrawmaterials.

Focusinginwardsisgoingtobeoneverycountry’sagendaand India needs to figure out a way to become globallycompetitive.That’swhereIbelievethatIndia’sbiomedicalindustryhasa lot ofpotential becausenot every country


36

canbeselfreliantandexportbiomedicalproducts.Wehaveamaturepharmaceuticalindustryduetoourgenericsandarealsodeveloping strengths inbiopharmaceuticalswithcompaniessuchasours.Wehaveseenduringthiscrisisthatwearestrongintermsofequipmentmanufacturing.Indiaalsohascapabilitiesindiagnosticsbecauseoftheabilitytoquicklyassemblekits.So,thefocusshouldbeonexpandingand scaling the manufacturing of these sectors in a selfsufficient way. Similarly, with vaccines, there should bemorefocusoninnovation.Therearealotofopportunitiesinthebiopharmaandbiomedicalsegments.

• whatisgoingtoemergepostthispandemic?Italldependsonhowlongtheworldwill taketorecoverfrom COVID-19. Organisations such as the IMF havealreadydeclaredaglobalrecession.InIndia,we.couldlose30-40millionjobsbytheendoftheyearifweareun-ableto bring the economyback on track.Theworld economy,whichwasestimatedat$90 trillion,wasalreadyundera $260 trillion debt burden, and itwill getworse.Manybelieve itwill takeat least another year to see anythingclosetonormalcy.IthinkweneedtolookatthegeopoliticaldynamicsandseehowtheworldisgoingtoshapeupafterCOVID-19.

Crude oil sectorDuetothecontinuedlockdownintheentireworldduetoCorona,thedemandforcrudeoilhasfallencompletely,duetowhichthepriceofcrudeoilisatalowerlevelformanyyears.Duetodecliningoilpriceanddemand,thefinancialconditionofoilproducingcountriesisdeteriorating,duetowhichGulfcountrieshavetoselltheirbonds.SaudiArabia,whichholdsimportantstatusinOPEC,collected$7billionthroughbondsaleslastweek.

Airline sectorAirlines are in poor conditiondue to continued lockdownduetoCorona.AlltheairlineshavebeenclosedsinceMarch25, due to which the airline’s earnings are completelyclosed, but there aremany types ofCharges like Salary,Maintenance.

The burden on companies has increased so much thatairlineshavedecidedtocutsalaries.AccordingtoSpiceJet,

inApril,Employeeswillgetthesamesalaryasthenumberofdaystheyhaveworked.

AviationregulatorDGCAhasgiveninstructionstoaviationcompanies not to book travel tickets afterMay 3, due towhichthesharesofthesecompanieshavefallen.

Apparel industry India’s Apparel Industry has been greatly affected bythe lockdown in most countries of the world due to thecoronavirus.

IndianApparelIndustry,whichhasastrongholdinglobalapparelexports,isgoingthroughtheeventsofnottakingordercancellationandconsignmentdeliveryatthistime,itisestimatedthattheexportersherewillbelosingabout$4billion.Withthis,therehasbeenalockdowninthecountry,duetowhichproductionisalsostoppedhere.Notonlythis,globalbuyershavenotyetsentpaymentforgoodssenttothemmonthsago.


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Economic Impact of Covid-19 on IndiaCMA (Dr.) V. V. L. N. Sastry


COVID-19pandemicisaglobalhumanitarianchallengetheworldhasfacedsinceWorldWarII.ThenumberofcasesisrisingdailythoughthegovernmentofIndiahasmovedquicklyinimplementingaproactivenationwidelockdown.Theeconomicimpactofthe2019-20coronaviruspandemicinIndiahasbeenhugelydisruptive.WorldBankandcreditratingagencieshavedowngradedIndia’sgrowthforfiscalyear2021withthelowestfiguresIndiahasseeninthreedecadessinceIndia’seconomicliberalizationinthe1990s.

Alongwithanunprecedentedhuman toll,COVID-19hastriggeredadeepeconomiccrisis.Theglobaleconomicimpactcouldbebroader thanany thathasbeensince theGreatDepression. Leading Indian economists have said thatIndia shouldprepare for anegative growth rate inFY21andthatthecountrywouldneeda?70lakhcrore(US$980billion)stimulustoovercomethecontraction.However,theInternationalMonetaryFundprojection for India for theFinancialYear2021-22of1.9%GDPgrowthisthehighestamong G-20 nations. Within a month, unemploymentrose from6.7% on 15March to 26% on 19April.Duringthe lockdown, an estimated 140million people have lostemployment. More than 45% of households across thenationhave reportedan incomedropas compared to thepreviousyear.

According to McKinsey’s scenario-based analysis, “thelockdownwouldcontinueinroughlyitscurrentformuntilmid-May 2020, followed by a very gradual restarting ofsupply chains. This could put 32 million livelihoods atriskandswellNPLsbysevenpercentagepoints.Thecostof stabilizing and protecting households, companies, andlenderscouldexceed10lakhcroreIndianrupees(exceeding$130billion),ormorethan5percentofGDP.”

Given the uncertainty about the virus and how it willcontinuetodevelop,quantifyingitseconomicimpactisfarfromeasy.Economistsallovertheworldarestrugglingtomake an assessment.Nevertheless, everyone is forced tomakeacallonthequantitativeimpact,asthisneedstobetakenintoaccountintheforecasts.TheIndianeconomyisexpectedtoloseoverRs.32,000crore(US$4.5billion)everydayduringacompletelockdown.Upto53%ofbusinessesinthecountrywillbesignificantlyaffected.Supplychainshavebeenputunderstresswiththelockdownrestrictionsinplace;initiallytherewasalackofclarityinstreamliningwhatisanessentialandwhatisnot.Thoseintheinformalsectors and daily wage groups are the most at risk. Alarge number of farmers around the country who growperishablesarealsofacinguncertainty.Variousbusinessesarelayingoffemployees.

The Government of India has announced a variety of

measures to tackle the situation, from food security andextrafundsforhealthcaretosectorrelatedincentivesandtax deadline extensions.On 26thMarch 2020, a numberof economic reliefmeasures for thepoorwereannouncedtotallingover?170,000crore(US$24billion).On27thMarch2020,theReserveBankofIndiaalsoannouncedanumberof measures which wouldmake available ?374,000 crore(US$52billion)tothecountry’sfinancialsystem.On29thMarch2020,thegovernmentallowedthemovementofallessentialaswellasnon-essentialgoodsduringthelockdown.On3rdApril2020,thecentralgovernmentreleasedmorefunds to the states for tackling the coronavirus totallingtoRs.28,379crore(US$4.0billion).TheWorldBankandAsianDevelopmentBankhaveapprovedsupporttoIndiato tackle the coronavirus pandemic.On 17thApril 2020,the RBI Governor announced more measures to counterthe economic impact of the pandemic including ?50,000crore(US$7.0billion)specialfinancetoNABARD,SIDBI,andNHB.On18thApril2020,toprotectIndiancompaniesduring the pandemic, the government changed India’sforeigndirectinvestmentpolicy.

ThePrimeMinisterofIndiaextendedthelockdownupto17thMay2020.Anewsetofguidelinesforthecalibratedopening of the economy and relaxation of the lockdownhavealsobeenput inplacewhichhavetakeneffect fromMay4th,2020onthebasisofclassificationofgeographicalzones.

ThePressInformationBureaubroughtoutafactcheckthatstoriesaboutafinancialemergencybeingimposedinIndiaarefake.AfinancialemergencyhasneverbeenimposedinthehistoryofIndiaasyet.

Stategovernmentshaveincurredhugelosestotheextentofhavingtocutcapitalexpenses,governmentplansinthenearfutureandfindingalternatewaystopaysalaries.TheDelhigovernmenthasfallen90%shortintaxcollectionascomparedto2019andisplanningtotakeloansandraisetaxesincertainsectors.MaharashtrahasputaholdonallnewcapitalworkstillMarchnextyearandspendingundergovernment development schemes has been reduced by67%forthecurrentfiscal.

Allsaidanddone,asthePandemicisbeyondthereachofanymathematicalmodels,thereisanurgentneedtotakeinstant steps tonot only contain the spreadof thevirus,but also to address the pain areas of the industrywhichcanhelpinminimisingtheimpactoftheoutbreakontheIndian economy and businesses. The IndianGovernment&RBIneedtosupporttheIndianindustryandeconomyatthisjunctureindifferentwaysandmeansincludingpumppriming.


38

Equity Investing during Pandemic timesCMA Dhiraj Sachdev

Mob.: 9820305944 • E-mail : [email protected]

Fear is more contagious than the disease.Carona Virus has disrupted life and financial marketsglobally. There has been unprecedented lockdowns inalmostallcountriesincludingIndia.Notonlyistheworldworried about spread and survival but also depth anddurationofeconomicimpactitcancreate.

Insuchanuncertainfearfulenvironment,itisimperativeto reflect likely probable scenarios of this pandemic innavigatingthisturmoil.

Withallhumility,weacknowledgenotknowingwhenthisepidemicorlock-downswillendcompletely.However,whatis required is a sense of discipline & patience in equityinvestinganddoingtheoppositeofhumanemotions.

Likely scenarios -a) Control of Corona spread and gradual lifting of

lockdowns.

b) Spread and control taking longer than expectedwithextendedlockdowns.

c) VaccineandCure

Control of Corona and gradual lifting of lock-downs within 1-2 months –Thisisabasecaseassumptiongiventhat globally we have seen countries like China, Korea,Japan,Hongkong,Singaporedoingwelltofightthecrisis.FewotherslikeEuropeandUShasseentheworstofspreadin recent times though some reflection of bending thespreadcurveisnoted.Indiahasrightlyadoptedcautionarylockdownsgivenadverseratioofmedicalinfrastructuretopopulation density. Gradual lifting of lock-down is beingadoptedinnon-containmentzoneswithrestrictedopeningsinmost affectedareas or red zones. In this scenario, theeconomicandbusinessimpactthoughdeep,willbelimitedtoaboutcoupleofquarterswithgradualpickupin2Hfy21.

Spread and control taking longer than expected with extended lockdowns –Thisislowprobablescenariocurrently based on greater awareness of caution beingadoptedgloballywithsocialdistancing.Ifwedonotwitnessbending of spread curve and consequent lifting of lock-downs(thoughpartial)overthenexttwomonths,theriskoneconomywillassumegreaterproportionsinIndiaalongwithrecessionscareinfewdevelopedlargenations.

Vaccine and cure –Thisisahighprobablebutmediumtermevent.Over40companiesareapprovedfordevelopingvaccinesthoughclinicaltrialanddevelopmentwouldtaketime. Some trial of existing medicine (like anti-malarialHCQ)isontrialthoughmassadoptionanditseffectivenessisawaited.CureorVaccineisaneventualoutcomehowever,

whatmattersisthe“interim”survivalofhealth,businessandfinancialmarkets.

Globalstimulustoaidandfighteconomicdownfall What comes to aid ismassive and coordinatedmonetaryand fiscal stimulus of close to $5 trillion announced byglobalcentralbankersinadditiontolowerinterestrates.Inourexperience,suchmoneyalwaysinflateallassetprices.India will have to provide more economic and financialstimulus to support business and people (specifically atlowerstrataofsociety),inadditiontoRs1.7trillionreliefpackageannouncedsofar.Fallinoilpricesiswelcomeinsuch a critical time and is substantial for an importingcountrylikeIndiatoprovideadditionalfiscalstimulus.Wealsowish for corporate and capitalmarket stimulus likeNIL tax on capital gains besides relaxation on dividendandbuy-backtaxesinsuchtryingtimes.Evenotherwise,wehaveseenmanypromotersenhancingtheirrespectivestake in companies to take advantage of low valuationsorreleasingpledgetoavertlosingcontrolatthehandsoflenders.Thisinvokesconfidence.

What has market discounted?Equitymarketbroadlyhadmorethanadequatelycorrectedgivensharpandviolentdeclinesof30-50%tothis‘one-off’event,beforeabriefrallyoverthelastfewdays.Thedeclinehasbeenwide-spreadwithoutanymajordiscriminationtolarge ormid-caps, quality ormediocre businesses. In thenearterm,bendingofspreadcurveislikelytocreatereliefrallies–arelationshipofinversecorrelationbetweenspreadcurveandmarkets. Ifmoreprobablescenariosofa)or c)mentionedabovedoplayout,thensucha‘myopic’reactionbymarketsisanopportunityforlongterminvestorswithmuchhighermarginofsafetythanbefore.Afterall,valueofmanyabusinessisfarhigherbasedondiscountedcashflows it can generate over its life compared to irrationalquoted price driven by pessimismand fear.Only in caseof a low probable scenario like b) mentioned above, willreliefralliesofmarketsbeshortlivedwithpossibleretestofpreviouslows.

Investment Strategy There should be undiluted quest to invest in qualitybusinesseswithcashflow&capitalefficientcharacteristicsalong-withpredictablegrowthandlowleveragecompaniesto build a long term equity portfolio. This eliminatesgreaterdegreeofexistentialorsurvivalthreatofinvestedcompanies in such times of turmoil. Barring company-specific exceptions, different businesses or sectors havedifferentgeneralcharacteristicsasunder-


39

Sector-wise or Business Character

Business/Themes Cashflows

Debt Roce Impact* Marginofsafety#

Pharmaceuticals High Zero/low High low/Positive MediumAgriculture(seeds/pesticides/tractors) High Zero/low High Low HighConsumer High Zero/Reasonable High Medium Medium/HighSpecialtyChemicals(endusepharma/agri) High Zero/low High Low HighE-commerce/onlinebusiness High Zero/low High low/positive MediumCapitalGoods High Zero/low High Negative HighInfrastructure Low Zero/Reasonable Medium Negative HighMetals High Zero/low Cyclical Negative HighFinancials Low High Medium Negative HighAutos(Cars/2wheeler/Trucks)/Aviation High Low Medium Negative High

*Impactduringlockdownperiodthoughtemporary

#basedonvaluations&perceivedbusinessriskpostcorrection

At this stage, relativepreferenceshouldbe inhealthcareor pharmaceuticals, agriculture, related chemicals, non-discretionaryconsumerthathavelimitedearningsimpactdueto lockdown.E-commerce&digitalplatformorientedbusinesses is another area that can be preferred due toscalable, asset-light&unique businessmodelwith entrybarriers.

Currently, favorable value exists across several sectors.Manysolidfreecashflowgenerating,netcashcompanieswithhighROCEareavailableatrecordlowvaluations.Itisnotaboutlargeormid/smallcompaniesbutaboutqualityofthebusinessmodelforsuperiorandconsistentreturns.Investors should recognizemyth of large caps being safewhen several large companies in banking, telecom, realestate ormetals have failed to survive or delivered poorreturnsinthenottoodistantpast.Asastrategy,emphasisshouldcontinuetobeoncashflows,capitalefficientgrowthorientedbusiness.Oneshouldnotbeaversetoparticipatingin business that offers deep or distress values, providedrespective Balance Sheet strength of companies is notcompromised. For example, financial sector likeBanking

or NBFCs is most vulnerable in terms of their lendingbook/cashflows/collections.However,postsharpcorrectionacrossfinancials,itoffersdeepvalueandhighestmarginofsafety(selectively),providedthereisaccesstocapitalandqualityofbookissecured.

What Should Investors do? Fear, an emotion without facts or rationality is rulingfinancialmarkets.Itispurefearthatdrivespeopletoignorebargainswhentheyareavailableinstockmarkets.Timingmarketbottomsisafutileexerciseasnoonecancatchitprecisely.Timeisthebesthealer.Fewyearsfromnowwewill look at this time as a great buying opportunity.Wedon’tknowifthispanicwillgetworse,butcanclaimwithcertaintythatthistooshallpassandendlikemanyotherpreviouscrisis.Insuchtimes,itisimportanttoremembertimeless principle by Sir John Templeton, “The point ofmaximumpessimismisthebesttimetobuy”ortheclassicWarrenBuffettquote “Be fearfulwhenothersaregreedyandbegreedywhenothersarefearful”.

Stay Safe. Keep Investing.


40

Role of Women in fostering Green economyCMA (Dr.) S. K. Gupta


“Women have a vital role in environmental management and development. Their full participation is therefore essential to achieve sustainable development” (Principle 20, Rio Declaration)

The perspectiveGender equality and environmental sustainability are twosides of the same coin - both women and the environmentare undervalued in our global systems and economies. Andboth are essential if we are to see transitions to inclusiveand sustainable economies. Greener economies holds greatpotentialtoreducegenderinequalitiesandincreasewomen’seconomic participation. It offers the opportunity to makewomen’s contributions to societyand theeconomyvisibleaswellastorevaluethem.

What is a green economy ?Sustainable development has been at the forefront ofdevelopment agendas all over the world. And with currentchallengessuchasclimatechange,oneofthemajorstrategiesinplaceforthisformofdevelopmenttobeachievedisthroughtheconceptoffacilitatingagreeneconomy.Agreeneconomyisonethatimproveshumanwell-beingandsocialequity,whilesignificantly reducing environmental risks and ecologicalscarcities.

In its simplest expression, a green economy can be thoughtofasonewhich is lowcarbon,resourceefficientandsociallyinclusive. Green economy, understood either as a goal or astructural adjustment process to greener industrialization,agriculture, services sector and scientific and technologicaldevelopment,mustnotbe seenasan end in itself, butasapathwaytowardachievingthegoalsofsustainabledevelopmentandpovertyeradication.

Transitioning to a green economy to achieve sustainabledevelopmentisatallorderthatrequiresconsistentcooperationofeverysegmentofsociety.Asthecomplexbutinterconnectedissues of social inequality, environmental degradation, andeconomic instability remain amajor threat to progress andquality living, each and everyonehas a role to play to fast-trackthegreeneconomymovementworldwide.

What has gender got to do with nature?Genderinequalityisnot justamoralissue.It’saneconomicand environmental one. The surge in activism for women’srights - #MeToo, #TimesUp and #StillMarching – send astrongglobalmessage:womenhavehadenough.Fuellingthepowerful sentiments driving these campaigns, there is nowcompelling evidence to show that reducing the gap betweengendersisessentialfortacklinghumanity’sgreatestchallenge:todevelopfaireconomieswithinourecologicallimits.

Women remain to be the majority of the population to beadversely affected by climate change and environmentaldegradation. Women constitute approximately 70 per centofthe1.3billionpeople livingonlessthanUS$1aday,andtheytendtobemoredependentonInthesamewaythatthe

natural capital which underpins our economies is too oftentreatedasaneconomicexternality,sotooistheunpaidworkcarriedoutby themajority of theworld’swomenonadailybasis.Yetunpaidcareanddomesticworkmakesaveryrealcontribution to our economies. At the same time, womenownbetween10and20%oftheworld’slandyetproducethemajorityof theglobal foodsupply.Womenconsistentlyearnless and fewerwomen occupy corporate executive positions.Worldwide,themajorityofwomenworkininformalmarkets,mainlyconcentratedinthelowest-paidandleastsecureformsofwork.Andwomencarryoutbetweentwoandtentimesasmuchunpaidcareworkasmen.Theglobalvalueofthisworkeach year is estimated at $10 trillion – one-eighth of globalGDP.

Women and Green economyThere is a dual rationale for promoting gender equality.Firstly,thatequalitybetweenwomenandmen-equalrights,opportunities and responsibilities – is a matter of humanrightsandsocial justice.Andsecondly,thatgreaterequalitybetween women and men is also a precondition for (andeffectiveindicatorof)sustainablepeople-centreddevelopment.Theperceptions,interests,needsandprioritiesofbothwomenandmenmustbetakenintoconsiderationnotonlyasamatterof social justice but because they are necessary to enrichdevelopment processes” women are critical to global greeneconomymovement.

Women remain to be the majority of the population to beadversely affected by climate change and environmentaldegradation. Women constitute approximately 70 per centofthe1.3billionpeople livingonlessthanUS$1aday,andtheytendtobemoredependentonInthesamewaythatthenatural capital which underpins our economies is too oftentreatedasaneconomicexternality,sotooistheunpaidworkcarriedoutby themajority of theworld’swomenonadailybasis.Yetunpaidcareanddomesticworkmakesaveryrealcontribution to our economies. At the same time, womenownbetween10and20%oftheworld’slandyetproducethemajorityof theglobal foodsupply.Womenconsistentlyearnless and fewerwomen occupy corporate executive positions.Worldwide,themajorityofwomenworkininformalmarkets,mainlyconcentratedinthelowest-paidandleastsecureformsofwork.Andwomencarryoutbetweentwoandtentimesasmuchunpaidcareworkasmen.Theglobalvalueofthisworkeach year is estimated at $10 trillion – one-eighth of globalGDP.

Gender equality is good for the environment. Women tendto have smaller ecological footprints than men and engagein more sustainable behaviors. Women and men approachenvironmental issues differently, and have different levelsof use, access to and control of environmental resources. Inmany parts of the world women’s extensive experience alsomakesthemaninvaluablesourceofknowledgeandexpertiseon more sustainable environmental management. Women


41

aroundtheworldarepowerfulagentsofchangeandcanplaya vital role in the greening of economies. Women are keymanagersofnaturalresourcesandpowerfulagentsofchange.Notjustvictims,womenhavebeenandcanbecentralactorsinpathwaystosustainabilityandgreentransformation.

Women are a core player in this all-encompassing crusadeto build a sustainable future for all. As active contributorstotheeconomyandsocietyasawhole,womenarecrucialtoensuringthegrowthofagreeneconomy.Womenhaveinnateleadershipskillsandsoundjudgmenttomakethemeffectiveleaders.They’rekeypartnersinthegreeneconomictransition.Theyhaveawayofseeingthingscomprehensively,bringingamentoringapproachtomanagementandtreatmentofissues,includingsocialconsiderationsandimplications.Theiruniqueleadership and skills, non-traditional approach to a myriadof issues, and great influencewithin families— the core ofany society— are vital to pushing common green economygoals; increasing demand for green products and services;andsignificantly reducinggreenhousegasemissions,amongothers.Theycanhelppushthoseinpowertoprioritizeclimatechange and take immediate, long-lasting action addressingthisthreat. Intheabsenceofappropriatesocialpolicies, thegreeneconomymayexacerbateexistinggender inequities tothedetrimentofoverallsustainability.

Opportunities of green economy for gender equalityActions are needed to address the issues that currentlyimpedewomen fromeconomicparticipationsuchasbarrierstoeducation,lackoftime,limitedaccesstoproductiveinputs,lack of land rights, access to finance etc. Since women areover-represented in the informal sector this should alsobe considered when assessing the potential for women’sparticipationingreening,particularlyinrelationtoimprovingworkingconditionstoensuregreenjobsaredecentjobs.

Whilethereareconcernsthattheemergingjobsinkeygreensectorstendtobemale-dominatedandhighlyskilled,thereisalsotheopportunitytorecognizethisandsupportbothwomenandmen to learn new skills for green jobs. Sectors such asagriculture,forestryandenergywillalsobeamajorfocusofthetransitiontogreeneconomy.Giventheirhighparticipationin these sectors, women could use their knowledge of anddependencyonnaturalresources toaccessgreenanddecentjobopportunities.Inmanydevelopingcountries,thoughoftenunrecognized and undervalued, women as farmers, foreststewards, natural resource managers and entrepreneursalreadyengageingreeneconomicactivities. Women’seconomicempowermentaffectspatternsofhouseholdspending and is likely to increase demand for sustainableservicesandproducts.Thistrendcouldleadtosignificantimpactongreengrowth.Butwomenarealsoworkersandproducersandthepotentialoftheirparticipationina“greenlabourforceshouldnotbeunderestimated.Currentlyatleast80percentofglobalgreenjobsareexpectedtobeinthesecondarysectors,such as construction,manufacturing and energy production—industrieswherewomenarecurrentlyunder-represented.Forexample,womenaccountfor9percentoftheworkforceinconstruction,12percentinengineering,15percentinfinancialandbusinessservices,and24percentinmanufacturing—allsectorscriticaltobuildingagreeneconomy.Tofillthisshortage,trainingisneeded.Whilethisentailsacost;thebenefitsaremany. On the production end, women trained in researchand development for environmentally friendly products cancontributetodesignsthathavebothwomenandmeninmind,

enhancingthemarketabilityanduseofsuchproducts.

With increasing demand for professionals trained in greensectors and sustainable business practices, women providean untapped resource for green growth. Therefore, targetedpublic support can ensure that girls andwomenhave equalopportunitiesineducationandtraining,leadingtoastrongerrole in researchanddevelopmentonenvironmentally soundtechnologies.Businesseshaveakeyroletoplayinadvancingthese complementary objectives — gender equality in theworkplace,marketplace and community, aswell as climate-smartandenvironmentallysoundpractices.

The‘greening’ofeconomiesmayalsorequiretheintroductionof policy frameworks that promote sustainable patterns ofconsumption and production, public finance, and capacitydevelopmentof localcommunities.Greenpolicy instrumentsfor moving along a sustainable growth path may requiresetting-up of specific incentivemeasures for both producersand consumers. This may involve subsidizing sustainablemethods of production and taxing harmful practices, andrequireecologicaltaxreformsthatpromoteashiftofthetaxbase away from ‘good factors’ of production (e.g. labour) to‘bad factors’ (e.g. pollution), therewith boosting employmentfor both women and men while correcting environmentalexternalities.

The Women’s Empowerment Principles (WEPs) — a jointinitiativeofUNWomenandtheUNGlobalCompact—area set of seven principles that offer a clear, coherent andattainablevisionofthecontributionthatbusinesscanmaketoadvancegenderequalityinlock-stepwithsustainableeconomicgrowth. The result canmean good business forwomen, theenvironment,andthemarketplace.Morebroadly,anenablingenvironmentmustbecreated.Legalmeasuresmustbeputinplacetoprotectwomen’sfullandequalrightstoland,propertyand inheritance. Gender-responsive budgeting inMinistriesin charge of water, energy and agriculture is another toolto eliminate inequalities in access to basic services thatsimultaneously maximizes the effectiveness of developmentpoliciesandcontributestotheachievementofmoreequitabledevelopmentoutcomes.

Green economy, understood either as a goal or a structuraladjustmentprocess togreener industrialization,agriculture,services sectorandscientificand technologicaldevelopment,must not be seen as an end in itself, but as a pathwaytoward achieving the goals of sustainable development andpovertyeradication. In this context, it is clear thatwomen’sparticipation in inclusive, sustainableandgreengrowthcanpropelthegrowthofagreeneconomy.Womenareconsumers,theyarealsoworkersandproducers,andinthiscontexttheyplayacrucialroleinbenefitingthegrowthofagreeneconomyandinreapingthebenefitsfromit.

ConclusionIthasoftenbeensaidthatthegreeneconomybringstogetherthe economic and environmental pillar of sustainabledevelopment. Women’s participation in the green economymakesanimportantlinktothesocialpillar.Theircontributionsarethereforenotonlycentral tosustainabledevelopment initsthreedimensions,butalsoakeyaspectoftheintegrationofthethreepillars-environmental,economicandsocial.Nowisthetimetomakesurethattherightpoliciesandactionsareinplacetomakethisareality.


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GST- Concessions Granted Consequent to COVID-19 Outbreak

CMA Arun KarnikMob.:9004035754•E-mail:[email protected]

The worldwide outbreak of the Corona Virus pandemichas forced the Government to announce unprecedentedmeasures to contain the spread of the dreaded disease.Countrywide lockdownhad to be imposed. The lockdownhas chain reaction of slowdowns all round. The GSTCouncil, which steers the implementation of this majorreforminIndian indirect taxation,has fromtimetotimeshown sensitivity to the problems and difficulties facedbythetaxpayer.Theslowdownresultingfromthesuddenimpositionofthelockdownhas,asexpected,ledtofinancialcrunchandadministrativedifficultiesfortaxpayers.Therewasurgentneedtoprovidereliefmeasurestothestressed-out taxpayer community. TheGovernment has on 3rd ofApril 2020 issued 7 Notifications announcing a series ofconcessionsinthematterofcompliancesandtaxpaymentsby the taxpayers. All these 7Notifications (Nos. 30/2020to36/2020-CentralTax)havecomeinacluster.HereisanattempttoexplaintheimplicationsoftheseNotificationstothetaxpayers.

1.NotificationNo.30/2020-CentralTax,dt.3-4-2020This Notification announces certain concessions to thetaxpayers,asunder:

i. Taxpayers,whoavailoftheoptionofpaymentofnominaltax (Composition Levy) under S. 10 of the CentralGoodsandServicesTaxAct,2017(CGSTAct)fromthefinancialyear2020-21,arerequiredfileanintimationin FormGSTCMP-02 prior to the commencement ofthefinancialyear.Thus,wherearegisteredpersonhasoptedtopayCompositionLevyfromthefinancialyear2020-21,intimationinFormCMP-02wasduetobefiledbeforeApril1,2020.NotificationNo.30hasextendedtheduedateforfilingFormCMP-02to30thJune2020.

ii. Aregisteredperson,whohasoptedtopayCompositionLevy is required to reverse ITC availed on stocks ofinputs,work-in-process andfinished goods held as atthe end of the prior year. Such registered person isrequiredtofileastatementinrespectofsuchreversalofITCinFormITC-03withinaperiodof60daysfromthe commencement of the financial year from whichCompositionLevyisgoingtobeavailed.Thustheduedate for filing Form ITC-03 where Composition Levyisgoingtobeavailed fromthefinancialyear2020-21wouldbeJune9,2020.NotificationNo.30hasextendedthe time limit for filing Form ITC-03 until 31st July2020.

iii. Rule 36(4), which was inserted vide Notification No.49/2019 dt. 19-10-2019, restricts the ITC availablein respect of supplier invoices which have not beenuploadedbytheconcernedsuppliersintheirrespectiveGSTR1Returns.AregisteredpersoncanavailITCinrespectofsuchinvoicesonlyuptoavalueequalto20%oftheITCavailabletosuchregisteredpersonoutofalltheotherinvoicesintheparticularmonthwhichhavebeendulyuploadedbytherespectivesuppliersintheir

GSTR 1 Returns. This provision, which restricts aregisteredpersonofhislegitimaterighttoclaimITC,tends to be harsh. Notification No 30 /2020 providesthat the restrictions of Rule 36(4) will be applied‘cumulatively’forthe7monthsofFebruarytoAugust2020.Thus, it seems theregisteredpersonscanavailoffullITCevenifsomeoftheinvoicesdonotfigureintheirGSTR2AintheGSTR3BReturnsfortheinterimperiod of February to August 2020. A cumulativecalculationtobemadefortheGSTR3BforthemonthofSeptember2020,whenthecumulativecalculationwillbedonetoascertaintheinvoicesfortheperiodFebruarytoSeptember2020whichdonotfigureintheGSTR2A.TheITCinrespectofsuchinvoiceswillberestrictedto20%ofthetotalITConinvoicesdulyappearinginGSTR2Aduringthisperiod.Thisprovisionprovidespartialrelief to the registered persons during the interimperiod,allowingtheregisteredpersonadditionaltimetofollowupwiththesupplierswhohavenotuploadedtheir invoices. (Detailed clarification on the modus-operandi of this provisionhasnot yet been issuedbytheCentralGovernment.)

2.NotificationNo.31/2020-CentralTax,dt.3-4-2020Interest@18%ispayableiftaxisnotpaidbyaregisteredpersonby theduedate.Notification31/2020provides forrelieftotheregisteredpersonsfordelayinthepaymentoftaxduesforthemonthsofFebruaryMarchandApril2020.Theseprovisionsareasunder:

i. For taxpayers having an aggregate turnover ofmorethanrupees5croresintheprecedingfinancialyear:

a. Nilinterestforthefirst15daysofdelay;

b. 9%p.a.interestfordelaybeyond15days.

However, the above concessions will be available providedthetaxpayerfilestherespectiveGSTR3B Returns for the three months by 24th June 2020.


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ii. For taxpayers having an aggregate turnover of morethanrupees1.5croresanduptorupeesfivecroresintheprecedingfinancialyear, therewillbeno interestpayablefordelayprovided:

a. GSTR3BReturnsforthemonthsofFebruaryandMarch2020arefiledby29thJune2020;

b. GSTR 3BReturn for themonths of April 2020 isfiledby30thJune2020.

iii. For taxpayers having an aggregate turnover of up torupees1.5croresintheprecedingfinancialyear,therewillbenointerestpayablefordelayedpaymentoftax,provided:

a. GSTR-3BReturnforthemonthofFebruary2020isfurnishedonorbefore30thJune2020;

b. GSTR-3BReturn for themonth ofMarch 2020 isfurnishedonorbefore3rdJuly2020;

c. GSTR-3B Return for the month of April 2020 isfurnishedonorbefore6thJuly2020;

These reliefs in interest for delayed payments is nodoubtawelcomemovebytheCentralGovernment.

However, it is to be noted that the concessions in the matter of interest for delayed payment of tax will not be available if the GSTR 3B Returns are notfiledbythetaxpayerbythedatesprescribedinthisNotification.Inotherwordsinterest@18%p.a. will be payable for the entire period of delay if GSTR 3B Returns are not filed by the datesprescribedinthisNotification.

3.NotificationNo.32/2020-CentralTax,dt.3-4-2020Latefeeispayableattherateof25rupeesforeverydayofdelayinfilingtheGSTR3BReturn.LatefeepayableincaseitisanilReturnis10rupeesforeverydayofdelay.

Notification32/2020providesreliefintheformofwaiveroflatefeesfordelayinfilingGSTR3BReturnsforthemonthsofFebruaryMarchandApril2020,asunder

i. Inthecaseoftaxpayershavinganaggregateturnoverofmorethanrupees5croresintheprecedingfinancialyear,providedtheGSTR3BReturnsarefiledby24thJune2020.

ii. Inthecaseoftaxpayershavinganaggregateturnoverofmorethanrupees1.5croresanduptorupeesfivecroresintheprecedingfinancialyear,providedtheGSTR3BReturnsarefiledforthethreemonthsbythedatesasunder:-

a. ForthemonthsFebruaryandMarchby29thJune2020.

b. ForthemonthofAprilby30thJune2020.

iii. Inthecaseoftaxpayershavinganaggregateturnoverofuptorupees1.5croresintheprecedingfinancialyear,provided theGSTR 3BReturns for the threemonthsarefiledbytheduedatesasunder:-

a. ForthemonthofFebruaryby30thJune2020.

b. ForthemonthofMarchby3rdJuly2020.

c. ForthemonthofAprilby6thJuly2020.

However,itistobenotedthattherewillbenowaiverwhatsoeveroflatefeeiftheGSTR3BReturnsarenotfiled by the taxpayer by the dates stipulated in thisNotification.

4.NotificationNo.33/2020-CentralTax,dt.3-4-2020ThereisapenaltyprescribedforlatefilingoftheReturninFormGSTR1.Thepenaltyis25rupeesperdayofdelay.IftherearenooutwardsuppliesandhenceitisanilReturn,the penalty is ten rupees per day of delay. Notification33/2020waives penalty for delayed filing of theGSTR 1ReturnsforthemonthsofMarch,AprilandMay2020andwhereatheregisteredpersonhasoptedforquarterlyfilingofGSTR1Return,thewaiverofpenaltyfordelayedfilingofGSTR1hasbeengrantedforthequarterJan-March2020.

However,thewaivergrantedbythisNotificationwillbe available only if the respective GSTR 1 Returns arefiledbytheregisteredpersonby30thJune2020.IfanyoftheseGSTR1Returnsarenotfiledtill30thJune 2020, penalty at the prescribed rate will be chargeable for the entire period of delay.

5.NotificationNo.34/2020-CentralTax,dt.3-4-2020RegisteredpersonsoptingforpaymentofCompositionTaxintermsofS.10oftheActarerequiredtofileastatementin FormCMP-08 for each quarter within 18 days of theendofthequarter.CMP-08isastatementofself-assessedComposition taxpayableby the taxpayeron the suppliesmade during the quarter and tax paid. For the quarterendedMarch 2020 the quarterly CMP-08 statementwasduetobefiledby18thApril2020.ThisNotificationgrantsextensionforfilingstatementinFormCMP-08till7thJuly2020.

Further, such registered persons are required to file foreveryfinancialyearaReturninFormGSTR-04bythe30thAprilofthefollowingyear.Thus,theGSTR-04Returnforthe year 2019-20 was 30th April 2020. This NotificationgrantsextensionforfilingsuchGSTR04Returntill15thJuly2020.

6.NotificationNo.35/2020-CentralTax,dt.3-4-2020Oneof themajor stepsannouncedby theGovernment torestrictspreadofCOVID19isannouncementofnationwidelockdown.UndertheCGSTActstheregisteredpersonsaswellastheGSTAdministrationarerequiredtoensurethatcertainactionsexpectedtobecompletedundertheActarecompletedwithinstipulatedtimelimits/dates.Onthesideof theGSTAdministration such compliances could be inthe nature of completion of any proceeding or passing ofanyorderorissuanceofanynotice,intimation,notification,sanctionorapprovalorsuchotheraction,etc.Onthepartof the taxpayers, such actions may include filing of any


44

appeal, reply or application or furnishing of any report,document,return,statementorsuchotherrecord,etc.

Thus,thereareboundtobecertainactionsthatareneededtobecompletedduringthelockdownperiod.Inrespectofany such actions that fall due for compliance during theperiod 20th March to 29th June 2020, this Notificationprovides extension for complying with such statutoryobligationstill30thJune2020.

However, it is to be noted that the extension grantedunder thisNotificationwillnotbeavailable in respect ofthefollowingactionswhichfalldueforcomplianceduringtheperiod20thMarchto29thJune2020.Suchobligations,which do not qualify for the extended time limit forcompliance granted by Notification 35/2020 include thefollowing:

i. Rulesregarding‘timeofsupply’ofgoodsorservicesfordeterminingtheliabilitytopaytax;

ii. ACompositiondealerexceedingthemaximumlimitofturnover and thereby becoming ineligible for availingCompositionlevyscheme.

iii. S.25oftheCGSTActprescribestimelimitforobtainingregistrationandothertimelimits.Suchtimelimits,asprovidedunderS. 25will not be extended. Similarly,S. 27 prescribes time limits in thematter of dealingwith casual taxablepersonsandnon-resident taxablepersons.Suchtimelimitswillnotchange.

iv. S.31oftheCGSTActstipulatestimelimitsforraisingtaxinvoicebysuppliersofgoodsorservices.Thesetimelimitswillnotchange.

v. It is to be noted that the official dates for filing themonthly GSTR 1, GSTR 3B and payment of taxeshavenotbeenextendedbythisNotification.However,as explained above, separate Notifications have beenissuedwaiving/reducing interest for delayedpaymentoftaxandwaivinglatefeefordelayedfilingofmonthly/quarterlyReturns.

vi. S.69(2)oftheCGSTActrequiresthatwhereapersonisarrestedundertheprovisionsoftheAct,theofficermaking thearrest shallpresent sucharrestedpersonbeforeaMagistratewithin24hours.Thisobligationonthepartofsuchofficerdoesnotchange.

vii.S.90oftheActprovidesthatwhenapartnerinafirmretiresfromthefirm,suchretiringpartnerorthefirmshouldinformtheCommissionerabouttheretirementofsuchpartnerwithin30days.Oncedueintimationoftheretirementofthepartnerisgivenwithin30days,the liability of the retiring partner to pay any taxesremains limited up to the date of retirement. If thepartner or the firm fail to give such intimation, theretiringpartnerwouldcontinuetobeliablealongwiththeotherpartnersfordischargingpaymentoftaxevenin repectof tax liabilitiesarisingposthis retirement.

TheobligationtoinformdoesnotchangeasaresultofNotification35/2020.

viii.S.122oftheCGSTActstipulatespenaltiesforcertainoffences under the Act. Any time limits related tooperationofS.122donotchange.

ix. S. 129(6) provides that in the case of detention orseizureofgoods,iftheownerofthegoodsfailstopaytax andpenalty on the seized goodswithin 7 days ofsuchseizureordetention,furtherproceedingssuchasconfiscation of goods, conveyance and levy of penaltyaretobecommenced.Thistimelimitof7daysdoesnotchange.

x. As explained above, the revised time schedules forsubmittingReturnGSTR3BReturnsforthemonthsofFebruary,MarchandApril2020havebeenprescribedby Notification 32/2020. However, concessions havebeenprovidedoninterestpayablefordelayedpaymentoftaxandlatefee,subjecttofilingoftheReturnsbythestipulateddates.

xi. Where the validity of the e-way bill expires duringtheperiod20thMarchto15thApril2020,thevalidityperiodofsuche-waybillshallbedeemedtohavebeenextendedtillthe30thdayofApril2020.

7.NotificationNo.36/2020-CentralTax,dt.3-4-2020

ThisNotificationallowsextendedtimeforfilingGSTR3BReturnsforthemonthofMay2020.Theextendeddatesareasunder:-

i. In the case of taxpayers having aggregate turnoverof more than rupees 5 crore rupees in the previousfinancialyear,theGSTR3BReturntobefiledby27thJune2020.

ii. Inthecaseoftaxpayershavingaggregateturnoverofup to rupeesfive crore in thepreviousfinancialyear,whose principal place of business is in the States ofChhattisgarh,MadhyaPradesh,Gujarat,Maharashtra,Karnataka, Goa, Kerala, Tamil Nadu, Telangana,Andhra Pradesh, the Union territories of Damanand Diu and Dadra and Nagar Haveli, Puducherry,Andaman and Nicobar Islands or Lakshadweep, theGSTR-3BReturntobefiledby12thJuly,2020.

iii. Inthecaseoftaxpayershavingaggregateturnoveruptorupeesfivecroreinthepreviousfinancialyear,whoseprincipalplaceofbusinessisintheStatesofHimachalPradesh, Punjab, Uttarakhand, Haryana, Rajasthan,Uttar Pradesh, Bihar, Sikkim, Arunachal Pradesh,Nagaland, Manipur, Mizoram, Tripura, Meghalaya,Assam,WestBengal,JharkhandorOdisha,theUnionterritoriesofJammuandKashmir,Ladakh,ChandigarhorDelhi,theGSTR-3BReturnistobefiledby14thJuly2020.


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MIS Report showing Individual Raw Material Costas%ofTotalRawMaterialCost

CMA Rajesh KapadiaE-mail: [email protected]

InanyCompany/Industry,usuallyRawMaterialCostdominatesProductCostStructure.ProfitisthedifferencebetweenSalesValueandCostofSalesSotoincrease/improveMarginitbecomesimperativetocontrol/monitor/reduceCostofSales.AndasRawMaterialCostbeingDominantCostComponent inCostofSales,itpaystoMonitor/Control/ReduceRawMaterialCost.This can be achived through MIS Report as mentioned inAnnexure1.FocusshouldbeonMajorRawMaterialsthatmaycontribute70%to80%ofTotalRawMaterialCost.ToReducePerUnitUsageofMajorRawMaterials:1) ExplorethepossibilityofusingsuperiorRawMaterialswhere

decrease in usage will offset the higher procurement pricepaid

2) MaintainPlantandMachineryinGoodCondition3) TheR&Ddepartmentofthecompanycanplayveryimportant

role by suggesting improvement in production process /modification in production process which will result in

achievingpermanentreductioninusageofkeyrawmaterial/materialspermtofproduct.Thiswillalsonullifytheeffectofincreaseinrawmaterialprice.

ToReduceProcurementPricesofMajorRawMaterials:1) Avoidemergencypurchaseathigherrates This necessitates proper coordination among Purchase

Department, Production Department and MarketingDepartment.

2) Requirementsof2ormoreplantscanbecombinedtonegotiatequantitydiscount

3) ExploreNewVendors4) ExplorethepossibilitytohaveowninhousemfgofMajorRaw

Materials. Withrespecttokeyrawmaterial/materialsofaproduct,the

requirementofwhichisveryhuge,managementcanexplorethepossibilityofputtingupitsownplanttomanufacturethiskeyrawmaterialbycarryingoutpropercostbenefitanalysis.Thisisalsoknownasbackwardintegration.

Thiswillalsoensureregularsupplyofthiskeyrawmaterialatownmanufacturedcost(reducedcost).

Annexure1:YearwiseTrendofIndividualRawMaterialas%of Total Raw Material Cost of for Company / for Plant 1 / for Product 1

YEAR 2019-20(Rs Lacs) % 2018-19(Rs Lacs) % 2017-18(Rs Lacs) %PARTICULARSSalesValueCostOfSalesMarginCostofSalesas%ofSalesValueTotalRawMaterialsCostRawMaterialCostas%ofCostofSalesBreakUpofRawMaterialCost

RawMaterial1RawMaterial2RawMaterial3RawMaterial4RawMaterial5RawMaterial6RawMaterial7RawMaterial8RawMaterial9RawMaterial10RawMaterial11RawMaterial12RawMaterial13RawMaterial14

OtherRawMaterials

TOTAL COST OF RAW MATERIALS


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conducting theseriesof thewebinarson themultiplesubjects.Theyoung&experiencedspeakersimpartedtheirsoundknowledge&technicalexperience.Total17WebinarConducted.

PUNE Participation of Students in Students Regional Convention 2020 at Aurangabad on 6th & 7th March 2020.WIRCwasorganizedStudentsRegionalConvention2020at Aurangabad on 6th& 7thMarch 2020,more than 80studentswereparticipatedfortheconventionfromChapter.

Ontheoccasionof studentsconventionWIRCannouncedPPT Competition for students, from Pune Chapter Twonominationsweresentforthesaidcompetition.

Final Students nominees group won 2nd prize in thecompetition,namesofthewinnersareMs.AishwaryaMali&Ms.YashaswiMandhana.

All Participated students enjoyed the Convention. CMANagesh Bhagane, Treasurer & CMA Nilesh Kekan, PDCommittee Chairman Pune Chapter & staff memberstookeffortsforthesuccessforparticipationofstudentsinconvention.

CEP on “Valuations Requirements under Companies Act 2013”.Chapter organised CEP on “Demystifying Block chain”on7thMarch2020atCMABhawan,Karvenagar.CMANeha Dharurkar was speaker for the programme. CMASmitaKulkarni-Secretary-ICAI-PuneChapterwelcomed&felicitatedthespeaker.Largenumberofmembersattendedtheprogramme.

On line coaching facility for Oral students.OnthelockdownsituationinthecountryduetoCOVID-19,Chapter provided on line coaching to all Oral coachingstudents (Foundation, Intermediate & Final) from 4thApril2020.

All Office bearers & Committee members of the PuneChapter involved in the success of such activity for thebenefit of students. Response from the students is verygood.

Webinars for Members.OnthelockdownsituationinthecountryduetoCOVID-19,Chapter organized 6 webinars for the members throughZoomonlinevideoconferencingtoolduringtheApril2020.

1stWebinar arranged on18th April 2020 on “ChallengesandOpportunitiestoCMA’sinpracticeandIndustryPostCoronaoutbreak”andSpeakersforwebinarwere,CMADr.SanjayBhargave(PracticingCostAccountant),CMAAmitApte(ImmediatePastPresident-ICAI),CMARajeshShukla(Industryrepresentative)&CMAMilindDate(PracticingCost Accountant). ICAI PuneChapter ChairpersonCMASujataBudhkarwelcomedallparticipantsof1stwebinararrangedbychapter.CMARahulChincholkarintroducedall

CHAPTER NEWSAHMEDABAD

Online coachingLooking to the situation of lockdown due to COVID-19Chapter has started online coaching of foundation,intermediate andfinal students from7thApril 2020andarranged lecturesall thesevendaysof theweekwithoutbreakofsingleday.GoodResponsehasbeenreceivedfromtheStudents.

CEP through WebinarChapterhadorganizedSeriesofWebinar.

• First webinar organized on “Emotional intelligence”on23rdofApril2020.CMAPDModhexplainedaboutEmotionalIntelligence.20membershaveparticipatedinWebinar.

• Second Webinar Organized on “Office Automationfor Professional Firms” on 24th of April 2020. CMADakshesh Choksi-Chairman of P D CommitteeWelcomedSpeaker.CAParagSoniexplainedabouthowsmall and medium Professional firm can save time,Costandenergybyofficeautomation.

• ThirdWebinar Organized on “Yoga Prana Vidya” on25thofApril2020.CMADaksheshChoksiWelcomedSpeakerMr.AlokVasavda.HeexplainedhowtoincreaseImmunitySystembyyogaandPranayam.

Pre-placement Orientation ProgramChapter organized Pre-placement Orientation TrainingProgram for the fresh CMAs passed out of December19examfrom12/03/2020to15/03/2020.12daysPre-placementorientation program was inaugurated by CMA MaulikJasani,CFO,HarshaEngineering.

Celebration of International Women’s DayLadieswingofAhmedabadChaptercelebratedInternationalWomen’sdayon8thMarchatChapteroffice.ChiefGuestoftheprogramwasAnjaliBothra.

BARODA • On 7thMarch 2020 Chapter organized CEP on “Say

YEStoGoodHealth”.

• Chapter celebrated Women’s day in association withtheVadodaraBranchofCompanySecretariesofIndiaandtheCharteredAccountantofIndia.OntheoccasionChapter in association with Vadodara Branch of CAandWICASAorganizedWomen’sCricketMatch.Thereare3CMAteamand2reachedtoSemiFinalandOnereached to Finals. CMA Amruta Vyas, CMA DhavalShah (TeamSponsors)&CMAKiranMishra and allothersparticipatedtomakethiseventmemorable.

• DuringthepandemicofCOVID19,whenwholeIndiafoughtagainstanunseenenemyfromtheirhome.TheChapter has bestowed their contribution, by keepingthe members and the students engaged, through


47

speakers.Veryfruitfulpaneldiscussiongivenbyspeakers.Morethan60membersparticipatedintheWebinar.CMAShrikantIppalpalliexpressedvoteofthanks.

2ndWebinararrangedon25thApril2020on thesubject“AnalysisofrecentnotificationissuedunderGSTonAccountofCOVID19’’andtheSpeakerwasCMARahulChincholkar.CMAAbhayDeodhar,ViceChairmanwelcomedtoSpeakerand participantsmore than 50 participants attended thesession.VoteofthanksgivenbyCMAN.K.Nimkar.

On 27th April 2020 webinar arranged on “Advisory onthe Treatment of Various Items of Cost in light of theCOVID19’’. Speaker for the session was CMANeeraj D.Joshi(PracticingCostAccountant,CCM,ChairmanWIRCandChairmanCASB),CMARahulChincholkarwelcomedtoallmembers&Speakeroftheprogram.Verylucidlecturegivenbythespeaker.Morethan50membersattendedthewebinar.Concluding&vote of thanksdelivered byCMADr.SanjayBhargave.

28th April 2020 webinar on “Compliance Relief underCompaniesAct,2013tocompaniesDuetoCOVID-19’’byCS Sushant Kulkarni (Practicing Company Secretary) CMA Rahul Chincholkar welcomed to members andintroducedthespeaker.CMAAmitShahaneexpressedvoteofthanks.

29thApril 2020webinar arranged on “Impact of COVID19andStrategiesforBankingSector-RoleofCMA’CMA

Dr. Shilpa Parkhi (Practicing Cost Accountant) wasspeaker.CMASujataBudhkar,Chairperson-PuneChapterwelcomedspeakerandparticpants.CMANageshBhagane,Treasurer-PuneChapterintroducedtospeaker.Sessiononthesubjectbanking isveryuseful for theparticipantsoncurrent situation. Vote of thanks given by CMANageshBhagane,Treasurer-PuneChapter.

30thApril2020webinararrangedon“ValuationofSharesandRegulatoryrequirements’’.SpeakerforthesessionwasCA Aalhad Deshmukh (Practicing Chartered Accountantand Registered Valuer). CMA Abhay Deodhar, ViceChairman Pune Chapter welcomed to the Speaker andparticipants. CMA Shrikant Ippalpalli expressed vote ofthanks.

PD Committee Chairman CMA Nilesh Kekan, WebinarCoordinators CMA Rahul Chincholkar & CMA ShrikantIppalpallisuccessfullyarrangedandconductedallwebinarsunderguidanceofofficebearersofPuneChapter.

VAPI – DAMAN – SILVASSAChapter conducted seminar on 16thMarch 2020 on newreturns,einvoicingandrecentchangesunderGST.EminentfacultieswereCMAB.F.Modi,CA(Dr)ShailendraSaxena,CMAR.M.KandoiandCMAMalavDalwadi.Theseminarwas attended bymore than 50 participantsmainly fromindustriesofthisarea.ThepictureshowsCMAB.F.ModiengrossedwiththeaudianceonNewsystemofreturns.

Hon’ble President CMA Balwinder Singh with fresh CMAs during pre-placement orientation organised by Ahmedabad Chapter. Also seen CMA Ashwin Dalwadi CCM and CMA Ashish Bhavsar Secretary WIRC.

Women’s Day celebration organised by Ahmedabad Chapter

Women’s Day celebration organised by Baroda Chapter CMA B F Modi interacting with the participants during Seminar on GST organised by Vapi – Daman-Silvassa Chapter on 16th March 2020.

RNI No. 22703/72 Posted at Mumbai Patrika Channel on 10th of every month. Date of Publication is on 10th of every month.Postal Regn. No. MCS/089/2018-20 WPP License No. MR/TECH/WPP-41/South/2018-20

Printed&PublishedbyAshishkumarSureshchandraBhavsar onbehalf of theWestern IndiaRegionalCouncil of the Institute ofCostAccountantsofIndia,PrintedatM/s.SurekhaPress,A20ShalimarIndustrialEstate,Matunga,Mumbai400019.PublishedatWesternIndiaRegionalCounciloftheInstituteofCostAccountantsofIndia,RohitChambers,4thFloor,JanmabhoomiMarg,Mumbai400001.Editor:AshishkumarSureshchandraBhavsar.

Disclaimer1. WIRCdoesnottakeresponsibilityforreturningunsolicitedpublicationmaterial.Unsolicitedarticlesandtransparenciesaresent

inattheowner’sriskandthepublisheracceptsnoliabilityforlossordamage.2. TheviewsexpressedbytheauthorsarepersonalanddonotnecessarilyrepresenttheviewsoftheWIRCandthereforeshouldnot

beattributedtoit.3. WIRCisnotinanywayresponsiblefortheresultofanyactiontakenonthebasisofthearticlesand/oradvertisementspublishedin

thebulletin.Thematerialinthispublicationmaynotbereproduced,whetherinpartorinwhole,withouttheconsentoftheEditor,WIRC.

THE INSTITUTE OF COST ACCOUNTANTS OF INDIAWESTERN INDIA REGIONAL COUNCIL

ANNOUNCES WEBINARS ONSl

No. DATE TIME SUBJECT SPEAKERS

GST1 14-05-2020 11to12.30 GST-ReliefduetoCOVID19 CMARahulPore2 15-05-2020 11to12 GST-JobWorks CMADrSanjayBhargave3 16-05-2020 11to12 ImportExportunderGST CMADrSanjayBhargave4 19-05-2020 11to12 GSTonCo-operativeHSGSoc CMANarharNimkar5 20-05-2020 11to12.30 GSTonBank&NBFC CMAShripadBedarkar6 21-05-2020 11to12.30 GST-RealEstate&WorkContract CMAVSDatey7 22-05-2020 11to12 GST-EducationalInstitutions&Healthcare CMADrSanjayBhargave8 23-05-2020 11to12.30 RCMUnderGST-PARTI CAPratikShah9 26-05-2020 11to12.30 RCMUnderGST-PARTII CAPratikShah10 27-05-2020 11to12.30 GST-Assessment&Appeal CAPratikShah11 28-05-2020 11to12.30 ECommerceOperator&OiderServices CMANarharNimkar12 29-05-2020 11to12.30 GST-AntiProfitingAndAdvanceRuling CAPratikShah13 30-05-2020 11to12.30 GST-InspectionDemandANDRecovery CAPratikShah

Maharashtra Co-op. Hsg Soc.14 14-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Registration&MgtoftheSociety CAManishaDamle15 16-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-transfer&Transmission,handoverandtakeover CAManishaDamle16 17-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Accounts-I CAManishaDamle17 18-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Accounts-II CAManishaDamle18 19-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Audit CAManishaDamle19 20-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Accountingstandared CAManishaDamle20 21-05-2020 4to5.30 MaharashtraCo-op.HsgSoc-Taxation-IncomeTax&GST CAManishaDamle21 22-05-2020 4to5.30 MaharashtraUrbanCo-operativeSociety CAManishaDamle22 23-05-2020 4to5.30 MaharashtraConsumerCo-operativeSociety CAManishaDamle23 24-05-2020 4to5.30 onlinesubmissiontoVariousAuthoritiesundertheMaharashtraCo-opSoc CAManishaDamle

RERA24 26-05-2020 4to5.30 RERA-Introduction CASumitKapure25 27-05-2020 4to5.30 RERA-Registration CASumitKapure26 28-05-2020 4to5.30 RERA-Compliance CASumitKapure27 29-05-2020 4to5.30 RERA-ComplaintsandLitigations CASumitKapure

Companies Act

28 30-05-2020 4to5.30 CompaniesfreshstartschemeandLLPSettlements CSRohitKarurkar

29 31-05-2020 4to5.30 FilingofFormsUnderCompaniesAct CSRohitKarurkar

Others

30 25-05-2020 4to5.30 FTPANDImpactUnderCOVID19 MrVinayJadhav

31 31-05-2020 11to12.30 AdvisoryontheTreatmentofVariousItemsofCostinCOVID19 CMANeerajJoshi

*Webinar link will be sent separately (1 CEP Credit hours will be provided to CMAs on basis of attendance)

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