unit i commercial banks

8/14/2019 Unit I Commercial Banks

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2010

Dr. D. Joseph Anbarasu

Bishop Heber College

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Dr. Joseph Anbarasu

Banking in India


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Chapter 1

BANKING IN INDIA

Objectives of the Unit

After completing the unit, the student should beable to

a. Describe the features of Banking RegulationActs

b. Make an account of Indian Banking: the Historyand Development

c. List out the various functions rendered by thecommercial banks

d. Manage the various deposits and advances

e. Describes the steps in fair lending to the clients

Definition of Banking

The Banking Regulation Act, 1949 is the basis forregulation of banking in India.


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Section 5(b) of the Act defines banking asbanking means the accepting, for the purpose oflending or investment, of deposits of money fromthe public, repayable on demand or otherwise, andwithdrawable by cheque, draft, order or otherwise.

Forms of Business in which Banking Companiesmay Engage

Section 6(1) specified additional forms business inwhich banking companies may engage in.

Section 6 (1)

In additional to the business of banking, a bankingcompany may engage in any one or more of thefollowing forms of business, namely:-

Banking Businessa) the borrowing, raising, or taking up of money;

b) lending or advancing money either upon orwithout security;

c) the drawing, making, accepting; discounting,buying, selling collecting and dealing in bills of

exchange, hoodies, promissory notes, coupons,drafts, bills of lading, railway receipts, warrants,debentures, certificates, scrip and otherinstruments, and securities whether transferableor negotiable or not;

d) granting and issuing of letters of credit,travellers cheques and circular notes;

e) buying, selling and dealing in bullion andspecie;


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f) buying and selling of foreign exchangeincluding foreign bank notes;

g) the acquiring, holding, issuing on commission,underwriting and dealing in stock, funds, shares,debentures, debenture stock, bonds, obligations,securities and investments of all kinds;

h) purchasing and selling of bonds, scrips or other

forms of securities on behalf of constituents orothers,

i) the negotiating of loans and advances;

j) receiving of all kinds of bonds, scrips or otherforms of securities on deposits or for safecustody or otherwise;

k) providing of safe deposit vaults;l) the collecting and transmitting of money and

securities;

Agency Business

m) acting as agents for Government or localauthority or any other person or persons;

n) carrying on of agency business of anydescription including the clearing andforwarding of goods, giving of receipts anddischarges and otherwise acting as an attorneyon behalf of customers, but excluding thebusiness of a [managing agent or secretary andtreasurer] of a company;

o) contracting for public and private loans andnegotiating and issuing the same;


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p) effecting, insuring, guaranteeing, underwriting,participating in managing and carrying out ofany issue, public or private, of State, municipalor other loans or of shares, stock, debentures, ordebenture stock of any company, corporation orassociation and the lending of money for thepurpose of any such issue;

q) carrying on and transacting every kind ofguarantee and indemnity business;

r) acquiring and holding and generally dealingwith any property or any right, title or interest inany such property which may form the securityor part of the security for any loans or advancesor which may be connected with any such

security;s) undertaking and executing trusts;

t) undertaking the administration of estates asexecutor- trustee or otherwise;

u) establishing and supporting or aiding in theestablishment and support of associations,institutions, funds, trusts and conveniencescalculated to benefit employees or ex-employees of the company or the dependents orconnections of such persons; granting pensionsand allowances and making payments towardsinsurance; subscribing to or guaranteeingmoneys for charitable or benevolent objects orfor any exhibition or for any public, general or

useful object;


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v) acquisition, construction, maintenance andalteration of any building or works necessary orconvenient for the purposes of the company;

w) selling, improving, managing, developing,exchanging, leasing, mortgaging, disposing ofor turning into account or otherwise dealingwith all or any part of the property and rights of

the company;x) acquiring and undertaking the whole or any part

of the business of any person or company, whensuch business is of a nature enumerated ordescribed in this sub- section;

y) doing all such other things as are incidental orconducive to the promotion or advancement of

the business of the company;

z) Any other form of business which the CentralGovernment may, by notification in the OfficialGazette, specify as a form of business in whichit is lawful for a banking company to engage.

(2) No banking company shall engage in any formof business other than those referred to in sub-section (1).

India has a financial system that is regulated byindependent regulators in the sectors of banking,insurance, capital markets, competition and variousservices sectors. In a number of sectors Governmentplays the role of regulator.

Ministry of Finance, Government of India looksafter financial sector in India. Finance Ministry


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every year presents annual budget on February 28 inthe Parliament. The annual budget proposeschanges in taxes, changes in government policy inalmost all the sectors and budgetary and otherallocations for all the Ministries of Government ofIndia. The annual budget is passed by theParliament after debate and takes the shape of law.Reserve bank of India (RBI) established in 1935 isthe Central bank. RBI is regulator for financial and banking system, formulates monetary policy and prescribes exchange control norms. The BankingRegulation Act, 1949 and the Reserve Bank of IndiaAct, 1934 authorize the RBI to regulate the bankingsector in India.

India has commercial banks, co-operative banks andregional rural banks. The commercial bankingsector comprises of public sector banks, privatebanks and foreign banks. The public sector bankscomprise the State Bank of India and its sevenassociate banks and nineteen other banks owned bythe government and account for almost three fourthof the banking sector. The Government of India has

majority shares in these public sector banks.India has a two-tier structure of financialinstitutions with thirteen all India financialinstitutions and forty-six institutions at the statelevel. All India financial institutions comprise term-lending institutions, specialized institutions andinvestment institutions, including in insurance. State

level institutions comprise of State FinancialInstitutions and State Industrial Development


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Corporations providing project finance, equipmentleasing, corporate loans, short-term loans and billdiscounting facilities to corporate. Governmentholds majority shares in these financial institutions.

Non-banking Financial Institutions provide loansand hire-purchase finance, mostly for retail assetsand are regulated by RBI.

Insurance sector in India has been traditionallydominated by state owned Life InsuranceCorporation and General Insurance Corporation andits four subsidiaries. Government of India has nowallowed FDI in insurance sector up to 26%. Sincethen, a number of new joint venture privatecompanies have entered into life and general

insurance sectors and their share in the insurancemarket in rising. Insurance Development andRegulatory Authority (IRDA) is the regulatoryauthority in the insurance sector under the InsuranceDevelopment and Regulatory Authority Act, 1999.

RBI also regulates foreign exchange under theForeign Exchange Management Act (FERA). India

has liberalized its foreign exchange controls. Rupeeis freely convertible on current account. Rupee isalso almost fully convertible on capital account fornon-residents. Profits earned, dividends andproceeds out of the sale of investments are fullyrepatriable for FDI. There are restrictions on capitalaccount for resident Indians for incomes earned inIndia.


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Securities and Exchange Board of India (SEBI)established under the Securities and Exchangeaboard of India Act, 1992 is the regulatory authorityfor capital markets in India. India has 23 recognizedstock exchanges that operate under governmentapproved rules, bylaws and regulations. Theseexchanges constitute an organized market forsecurities issued by the central and stategovernments, public sector companies and publiclimited companies. The Stock Exchange, Mumbaiand National Stock Exchange are the premier stockexchanges. Under the process of de-mutualization,these stock exchanges have been converted intocompanies now, in which brokers only holdminority share holding. In addition to the SEBI Act,

the Securities Contracts (Regulation) Act, 1956 andthe Companies Act, 1956 regulates the stockmarkets. Amendments were made in the bankingregulations act now and then. Importantamendments are given below:

Banking Regulation (Amendment) Bill,2005

The Banking Regulation (Amendment) Bill,2005 was introduced in the Lok Sabha on May13, 2005. The Standing Committee on Financesubmitted its report to Parliament on December13, 2005. This Bill has been listed forconsideration and passage during the currentsession (budget session 2006) of Parliament.

The Bill seeks to amend the Banking RegulationAct, 1949 (the Principal Act). It has eight main


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objectives: (a) regulating acquisition of shares inbanking companies, (b) Increasing the flexibilityon the Statutory Liquidity

Requirement (SLR), (c) Including preferenceshares as capital, (d) Allowing banks to lend tocompanies in which their directors are engaged,(e) Monitoring the activities of associate

enterprises of banks, (f) vesting RBI withpowers to supersede the board of directors of abank, (g) disallowing primary credit societiesfrom banking activities, and (h) changing thedefinition of approved securities.

Acquisition of banking shares. Anyone desiringto acquire more than 5% shareholding of a bank

needs to obtain prior approval of RBI. RBI mayimpose certain conditions such as a minimumamount of shareholding to be acquired orrequiring specific approvals for any furtherincrease in shareholding. RBI is required tocommunicate its approval or rejection of anysuch application within 90 days, failing whichthe application is deemed to be approved. The

restriction of 10% voting rights on anyshareholder under the Principal Act is also beingrevoked.

SLR. RBI can notify SLR between zero and40% (currently the range is 25% to 40%) of abanks liabilities. SLR specifies the proportionof a banks deposits that it must hold in

government and other approved securities. A


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higher SLR increases the safety of a bank butpre-empts the funds available to extend as loans.

Preference Shares may be included in additionto equity shares while computing a bankscapital.

Banks may, with prior permission of RBI, grantloans or advances to companies in which any of

its directors is engaged as a director, manager oremployee. This was earlier prohibited.

RBI can ask for details of the business of anyassociate enterprise of a bank. It will also havethe powers to inspect any such enterprise.

RBI may supersede the board of directors of abank in public interest or in the interest of thebank or its depositors.

RBI may appoint an administrator to takecharge of the bank. Any supersession shall notbe for a period exceeding six months.

A primary credit society cannot carry onbanking business.

This will be applicable one year after thisAmendment Bill is notified and could beextended up to three years. Among co-operativesocieties, only a co-operative bank holding alicence from RBI may carry on bankingbusiness. RBI has been granted powers to ordera special audit of a cooperative bank in public

interest or in the interest of the bank or itsdepositors.


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The definition of approved securities has beenmodified to specify that these are securitiesissued by the central or state governments orany such other securities as specified by RBIfrom time to time. The definition in thePrincipal Act defined approved securities asthose in which a trustee may invest under theIndian Trusts Act, 1882.

Functions of Commercial Banks

The functions of commercial banks are divided intotwo categories:

i) Primary functions, and

ii) Secondary functions including agency

functions.i) Primary functions:

The primary functions of a commercial bankinclude:

a) accepting deposits; and

b) granting loans and advances;

a) Accepting deposits

The most important activity of a commercial bank isto mobilize deposits from the public. People whohave surplus income and savings find it convenientto deposit the amounts with banks. Depending uponthe nature of deposits, funds deposited with bankalso earn interest. Thus, deposits with the bank

grow along with the interest earned. If the rate ofinterest is higher, public are motivated to deposit


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more funds with the bank. There is also safety offunds deposited with the bank.

b) Grant of loans and advances

The second important function of a commercialbank is to grant loans and advances. Such loans andadvances are given to members of the public and tothe business community at a higher rate of interest

than allowed by banks on various deposit accounts.

The rate of interest charged on loans and advancesvaries depending upon the purpose, period and themode of repayment. The difference between the rateof interest allowed on deposits and the rate chargedon the Loans is the main source of a banks income.

i) Loans

A loan is granted for a specific time period.Generally, commercial banks grant short-termloans. But term loans, that is, loan for more than ayear, may also be granted. The borrower maywithdraw the entire amount in lump sum or ininstalments. However, interest is charged on the fullamount of loan. Loans are generally granted againstthe security of certain assets. A loan may be repaideither in lump sum or in instalments.

ii) Advances

An advance is a credit facility provided by the bankto its customers. It differs from loan in the sensethat loans may be granted for longer period, but

advances are normally granted for a short period oftime. Further the purpose of granting advances is to


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meet the day to day requirements of business. Therate of interest charged on advances varies frombank to bank. Interest is charged only on the amountwithdrawn and not on the sanctioned amount.

Modes of short-term financial assistance

Banks grant short-term financial assistance by wayof cash credit, overdraft and bill discounting.

a) Cash Credit

Cash credit is an arrangement whereby the bankallows the borrower to draw amounts upto aspecified limit. The amount is credited to theaccount of the customer. The customer canwithdraw this amount as and when he requires.Interest is charged on the amount actuallywithdrawn. Cash Credit is granted as per agreedterms and conditions with the customers.

b) Overdraft

Overdraft is also a credit facility granted by bank. Acustomer who has a current account with the bank isallowed to withdraw more than the amount of credit

balance in his account. It is a temporaryarrangement. Overdraft facility with a specifiedlimit is allowed either on the security of assets, oron personal security, or both.

c) Discounting of Bills

Banks provide short-term finance by discounting bills, which is, making payment of the amount

before the due date of the bills after deducting acertain rate of discount. The party gets the funds


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without waiting for the date of maturity of the bills.In case any bill is dishonoured on the due date, thebank can recover the amount from the customer.

i) Secondary functions

Besides the primary functions of accepting depositsand lending money, banks perform a number ofother functions which are called secondary

functions. These are as follows -

a) Issuing letters of credit, travellers cheques,circular notes etc.

b) Undertaking safe custody of valuables,important documents, and securities byproviding safe deposit vaults or lockers;

c) Providing customers with facilities offoreign exchange.

d) Transferring money from one place toanother; and from one branch to anotherbranch of the bank.

e) Standing guarantee on behalf of itscustomers, for making payments for

purchase of goods, machinery, vehicles etc.

f) Collecting and supplying businessinformation;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness ofcustomers.

Difference between Primary and SecondaryFunctions of Commercial Banks


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Primary Functions Secondary Functions

1. These are the mainactivities

These are the secondaryof the bank activities ofthe bank.

2. These are the mainsources of the income ofthe banks

These are not the mainsources of income of thebank.

3. These are obligatoryon the part of bank toperform

These are not obligatoryon the part of bank to perform. Generally allthe commercial banksperform these functions

Different modes of Acceptance ofDeposits

Banks receive money from the public by way ofdeposits.

The following types of deposits are usually receivedby banks:

1) Current deposit

2) Saving deposit

3) Fixed deposit

4) Recurring deposit

5) Miscellaneous deposits

1) Current Deposit


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Banks play the role of financial intermediary. Theyare permitted to accept demand deposits. Thedepositor can withdraw the money at any time ofhis or her will and choice. Since these deposits arerepayable on demand, they are generally calleddemand deposits. These are either savings or currentdeposits. Demand deposits are withdrawn by thedepositor by issuing a cheque. Cheque is an order orwritten instruction to the bankers to pay the amountto a person, whose name is found in the face of thecheque.

Businessmen generally open current accounts withbanks. Current accounts do not carry any interest asthe amount deposited in these accounts is repayableon demand without any restriction.

The Reserve bank of India prohibits payment ofinterest on current accounts or on deposits up to 14Days or less except where prior sanction has beenobtained. Banks usually charge a small amountknown as incidental charges on current depositaccounts depending on the number of transaction.

2) Savings deposit/Savings Bank AccountsSavings deposit account is meant for individualswho wish to deposit small amounts out of theircurrent income. It helps in safe guarding their futureand also earning interest on the savings. A savingaccount can be opened with or without cheque bookfacility. There are restrictions on the withdrawals

from this account. Savings account holders are alsoallowed to deposit cheques, drafts, dividend


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warrants, etc. drawn in their favour for collection bythe bank. To open a savings account, it is necessaryfor the depositor to be introduced by a personhaving a current or savings account with the samebank.

3) Fixed deposit

The term Fixed deposit means deposit repayable

after the expiry of a specified period. Since it isrepayable only after a fixed period of time, which isto be determined at the time of opening of theaccount, it is also known as time deposit. Fixeddeposits are most useful for a commercial bank.Since they are repayable only after a fixed period,the bank may invest these funds more profitably by

lending at higher rates of interest and for relativelylonger periods. The rate of interest on fixed depositsdepends upon the period of deposits. The longer theperiod, the higher is the rate of interest offered. Therate of interest to be allowed on fixed deposits isgoverned by rules laid down by the Reserve Bankof India.

4) Recurring DepositsRecurring Deposits are gaining wide popularitythese days. Under this type of deposit, the depositoris required to deposit a fixed amount of moneyevery month for a specific period of time. Eachinstalment may vary from Rs.5/- to Rs.500/- ormore per month and the period of account may vary

from 12 months to 10 years. After the completion ofthe specified period, the customer gets back all his


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deposits along with the cumulative interest accruedon the deposits.

5) Miscellaneous Deposits

Banks have introduced several deposit schemes toattract deposits from different types of people, likeHome Construction deposit scheme, SicknessBenefit deposit scheme, Children Gift plan, Old age

pension scheme, Mini deposit scheme, etc.

Different methods of Granting Loans by Bank

The basic function of a commercial bank is to makeloans and advances out of the money which isreceived from the public by way of deposits.

The loans are particularly granted to businessmen

and members of the public against personalsecurity, gold and silver and other movable andimmovable assets. Commercial bank generallylends money in the following form:

i) Cash credit

ii) Loans

iii) Bank overdraft, andiv) Discounting of Bills

a) Cash Credit:

A cash credit is an understanding on the part of the bank to advance to an individual such sums ofmoney as he may from time to time require. It is notexceeding in the whole a certain definite amount.

The individual, to whom the credit is given, isentering into a bond, with securities, generally two


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in number. One is for the repayment, on demand, ofthe sums actually advanced, with interest upon eachissue from the day upon which it is made.

A cash credit is, in fact, the same thing as anoverdrawn current account, except that in a currentaccount the party overdraws on his own individualsecurity, and in the cash credit he finds two

securities that are responsible for him. Anotherdifference is, that a person cannot overdraw hiscurrent account without asking permission eachtime from the bank, whereas the overdrawing of acash credit account is a regular matter of business; itis, in fact, the purpose for which the cash credit hasbeen granted.

The following considerations will show that aperson who has occasion for temporary advances ofmoney will find it more advantageous to raise thesesums by a cash credit than by having billsdiscounted: -

In a cash credit the party pays interest only for

the money he actually employs. If a person

wants to make use of Rs.100, and has a bill forRs.150, he will get the bill discounted, and thuspays interest for Rs.50 for which he has no use.But if he has a cash credit he draws only Rs.100,and pays interest for that amount.

In a cash credit he can repay any part of the sum

drawn whenever he pleases. If a trader has a bill

for Rs.150 discounted to-day, and shouldunexpectedly receive Rs.150 to-morrow, he


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cannot re-discount the bill, but has actually paidinterest for money he does not want. But if hedraws Rs.150 upon his cash credit account to-day, and to-morrow receives Rs.150, he takesthis money to the bank, and will have to pay theInterest upon Rs.150 for only one day.

In a cash credit he has the Dower of drawing

whenever he pleases, to the full amount of hiscredit; but in the case of discounting bills, hemust make a fresh application to the bank todiscount each bill, and if the bank have at anytime more profitable ways of employing theirmoney, or if they suspect the credit of theapplicant, they may refuse to discount, but thiswould not be the case if he had a cash credit.

In a cash credit the party does not pay the

interest until the end of the year; whereas, in theother case, he pays the interest at the time thebill is discounted.

Cash credits are granted not only upon personalsecurity, but also upon the security of the Public

Funds.This furnishes great facilities for raising money tothose who possess property which they are notdisposed to sell A person who is a holder ofgovernment stock may sell out a portion to supplyhis temporary necessities; and when he wishes toreplace it he finds the price of stock has risen, and it

will cost him more money to repurchase than hereceived when he sold. But if he transfers the stock


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to a bank as a security for a cash credit, he mayrepay the money whenever he pleases; and if, in themeantime, the value of the security should haveraised all the advantage will be his own.

i) Loans :

A specified amount sanctioned by a bank to thecustomer is called a loan. It is granted for a fixed

period, say six months, or a year. The specifiedamount is put on the credit of the borrowersaccount. He can withdraw this amount in lump sumor can draw cheques against this sum for anyamount. Interest is charged on the full amount evenif the borrower does not utilise it. The rate ofinterest is lower on loans in comparison to cash

credit. A loan is generally granted against thesecurity of property or personal security. The loanmay be repaid in lump sum or in instalments. Every bank has its own procedure of granting loans.Hence a bank is at liberty to grant loan dependingon its own resources.

The loan can be granted as:

a) Demand loan, or

b) Term loan

a) Demand loan

Demand loan is repayable on demand. In otherwords it is repayable at short notice. The entireamount of demand loan is disbursed at one time and

the borrower has to pay interest on it. The borrowercan repay the loan either in lumpsum (one time) or


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as agreed with the bank. Loans are normally granted by the bank against tangible securities includingsecurities like N.S.C., Kisan Vikas Patra, LifeInsurance policies and U.T.I. certificates.

b) Term loans

Medium and long term loans are called Termloans. Term loans are granted for more than one

year and repayment of such loans is spread over alonger period. The repayment is generally made insuitable instalments of fixed amount. These loansare repayable over a period of 5 years andmaximum upto 15 years.

Term loan is required for the purpose of setting upof new business activity, renovation, modernisation,

expansion/extension of existing units, purchase ofplant and machinery, vehicles, land for setting up afactory, construction of factory building or purchaseof other immovable assets. These loans aregenerally secured against the mortgage of land,plant and machinery, building and other securities.The normal rate of interest charged for such loans is

generally quite high.i) Bank Overdraft

Overdraft facility is more or less similar to cashcredit facility. Overdraft facility is the result of anagreement with the bank by which a current accountholder is allowed to withdraw a specified amountover and above the credit balance in his/her

account. It is a short term facility. This facility ismade available to current account holders who


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operate their account through cheques. Thecustomer is permitted to withdraw the amount asand when he/she needs it and to repay it throughdeposits in his account as and when it is convenientto him/her.

Overdraft facility is generally granted by bank onthe basis of a written request by the customer. Some

times, banks also insist on either a promissory notefrom the borrower or personal security to ensuresafety of funds. Interest is charged on actual amountwithdrawn by the customer. The interest rate onoverdraft is higher than that of the rate on loan.

ii) Discounting of Bills

Apart from granting cash credit, loans and

overdraft, banks also grant financial assistance tocustomers by discounting bills of exchange. Bankspurchase the bills at face value minus interest atcurrent rate of interest for the period of the bill. Thisis known as discounting of bills. Bills of exchangeare negotiable instruments and enable the debtors todischarge their obligations towards their creditors.

Such bills of exchange arise out of commercialtransactions both in internal trade and externaltrade. By discounting these bills before they are duefor a nominal amount, the banks help the businesscommunity. Of course, the banks recover the fullamount of these bills from the persons liable tomake payment.

Agency and General Utility Services provided byModern Commercial Banks


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You have already learnt that the primary activitiesof commercial banks include acceptance of depositsfrom the public and lending money to businessmenand other members of society. Besides these twomain activities, commercial banks also render anumber of ancillary services.

These services supplement the main activities of the

banks. They are essentially non-banking in natureand broadly fall under two categories:

i) Agency services, and

ii) General utility services.

a) Agency Services

Agency services are those services which are

rendered by commercial banks as agents of theircustomers. They include:

a) Collection and payment of cheques and bills onbehalf of the customers;

b) Collection of dividends, interest and rent, etc. onbehalf of customers, if so instructed by them;

c) Purchase and sale of shares and securities onbehalf of customers;

d) Payment of rent, interest, insurance premium,subscriptions etc. on behalf of customers, if soinstructed;

e) Acting as a trustee or executor;

f) Acting as agents or correspondents on behalf of

customers for other banks and financialinstitutions at home and abroad.


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Universal banking generally takes one of the threeforms: -

a. In-house Universal banking. Eg. Germany

b. Through separately capitalized subsidiaries. Eg.England.

c. Operations carried through a holding company.

Eg. USA. (Nair, 1998)Universal Banking includes not only servicesrelated to savings and loans but also investments.However in practice the term 'universal banks'refers to those banks that offer a wide range offinancial services, beyond commercial banking andinvestment banking, insurance etc. It is acombination of commercial banking, investment banking and various other activities includinginsurance. If specialised banking is the one enduniversal banking is the other. This is most commonin European countries.

A narrow view of Universal banking could beactivities pertaining to lending plus investments in bonds and debentures. A broader view couldinclude a basket of all the financial activitiesincluding insurance. Though the concept is prevalent in countries like France, Germany andUSA but is yet to take-off, officially in India.

International Scenario

Federal Republic of Germany, Switzerland are

generally known to be the home of universal banking. Factors like technological up gradation,


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wide spread of applications, increasing competitionin financial sector etc., are the driving forces inthese nations. In few other European countries,almost all other banking and non-banking servicesare carried out by financial institutions. Forinstances, in Germany, commercial and investmentbanking activities are performed by a single entity, but separate subsidiaries are required for otheractivities. In UK a separate subsidiaries ofcommercial banks involve in providing wide rangeof activities.

What the USA follows is an extreme model, wherethe commercial banks are prevented legally fromcombining their normal lending functions withinvestment operations, where they are separated byseveral legislative acts, including the Glass-SteagallAct of 1933 and the bank Holding company Act of1956. However, at present USA is having a re-lookat the position. Much of the international debate onuniversal banking has been centered around therestriction on diversification of the type.

Indian Scenario

1. Commercial banks

In early 90's the financial sector in India was cryingout for reforms. Ever since the process ofliberalization hit the Indian shores, the bankingsector saw the emergence of new-generation privatesector banks. Public sector banks which played a

useful role earlier on are now facing deterioration intheir performance. For very long, the banks in India


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universal banking is very much on. Should Indiahave universal banking and if so when? Much has been written about it domestically, however thefollowing are the issues which are key in Indiancontext.

i. Regulatory burden

ii. Regulatory requirements

iii. Distinction between maturity and duration

iv. Optimum Transition path

i. Regulatory burden:

One of the major problems associated withuniversal banking is the issue of regulation. DFIs inIndia are governed by separate Acts and banks are

regulated by RBI and Banking Regulation Act.DFIs in India have commercial banks as theirsubsidiaries, but due to the separation of regulation,the DFIs cannot have direct access to the resourcebase of its subsidiary bank. Without any doubt, thenet regulatory burden for all participants in theentire financial system should be equalized in order

to ensure that no participant might end up having adisadvantage relative to any other. The importanceof this point can be highlighted by citing theexample of USA, Japan, West Germany and Britainwhere there was a tremendous decline in the shareof banks in composition of household financialassets and its movement to mutual funds andinsurance. The study reveled that the decline hasbeen due to very high net regulatory burden beingimposed upon the entire banking system relative to


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that on the mutual funds and insurance companies.In India there is an urgent need to reduce theregulatory burden, particularly for banks vis--vismutual funds and insurance companies, if the banksare expected to compete in free market place. (Mor,1999)

ii. Regulatory requirements

The reference of regulatory requirements here areon the following issues a. Cash Reserve Ratio (CRR): From early 90's themonitory policy in India has been focusing onreview of CRR. Off late RBI is concentrating moreso on indirect instruments like Bank Rate and OpenMarket Operations, and felt that the CRR must be

brought down to its minimum level of 3 percent atthe earliest. It is also argued by some experts thatinstead of the complete Net Demand and TimeLiabilities (NDTL) of banks, its application ifrestricted only to cash and cash like instruments, itwould be more effective as an instrument ofmonetary policy and by applying the ratio, for thesenior bonds that may be issued by banks to

industry, is not in the interests of Monetary policyand this would further increase the cost of funds tothe industry by almost at 1 percent.b. Statutory Liquid Ratio (SLR): Though, theSLR has already reached its statutory minimum of25 percent, some experts feel there is need to re-examine the present minimum limit, which is very

high as per the international practices and could be brought down further by amending the Banking


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Regulation Act. Few banking experts extended tospecific infrastructure projects as a part of SLR,since these facilities have directly replaced similarfinancing by Government of India.c. Priority Sector: The whole issue of prioritysector needs a closer look. The S.H Khan panelcalled for modifications in defining the prioritysector by excluding all infrastructure loans from thenet bank credit for the priority sector. It has alsosuggested the creation of an alternative mechanismto finance the priority sector.Even the international experience of banks in Asia-Pacific region had a 'must serve' obligation towardspriority sector and the result was discriminatory andinefficient performance without the support of

commercial mindset.iii. Distinction between Maturity and Duration

This is the another issue of debate between longterm and short term. Somehow DFIs are thesuppliers of term finance, where the maturity isclearly specified which could be between 3 years to7 years, where as banks are providers of short-term

finance where in reality bank finance in a wayamounts to financing in perpetuity since there are ingeneral no definite maturity dates. Usually thedeposit base of the banks have are short durationbut with a variably high interest rates but its not thecase with DFIs. Their funds have a longer durationwith less interest rates. (Mor, 1999)

The interim report of S H Khan committee hasargued that the distinction between commercial and


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investment banking have become increasinglyblurred with banks providing both working capitaland term loans to corporates but DFIs can provideonly term loans as they cannot accept short termdeposits. The committee further argued that DFIsshould be given banking licenses eventually anduntil then they should be allowed to establish 100percent banking subsidiaries while they continue toplay their present role.

iv. Optimal Transition path

Viable transition path is one of the major areas ofconcern for institutions which are desirous ofmoving in the direction of universal banking. Thetransition path contains several operational and

regulatory issues for information and guidance ofDFIs. The S H Khan working group and thediscussion paper on the subject prepared by RBIeventually felt that DFIs should transformthemselves into commercial banks but in a phasedmanner. The committee also recommended thatDFIs can have 100 percent owned bankingsubsidiaries which would be extremely beneficial to

them. If this happens, then it would allow DFIs togain expertise in the area of commercial bankingwhich would in turn help the DFIs if they areseriously looking at the prospect of converting intoa commercial bank. Also the 100 percentsubsidarisation allows banks to have a full access tocapital base of DFIs and gain substantial knowledge

in the area of project financing.


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The RBI has asked FIs, which are interested toconvert itself into a universal bank, to submit their plans for transition to a universal bank forconsideration and further discussions. FIs need toformulate a road map for the transition path andstrategy for smooth conversion into a universalbank over a specified time frame. The plan shouldspecifically provide for full compliance with prudential norms as applicable to banks over theproposed period.

Considerations

Caution must be applied on Universal bankingbecause of the following considerations:1. Disintermediation (i.e. replacement of traditional

bank intermediation between savers and borrowersby a capital market process) is only a decade old inIndia and has badly slowed down due to loss ofinvestors' confidence.

2. There is an ample room for financial deepening(by banks & DFIs) since loan market will continueto grow.

3. DFIs as a folder of equity in most of the projects promoted in the past have never used the tooladvantageously.

4. DFIs are now only moving into working capitalfinance, an area in which they need to gain lot ofexpertise and this involves creation of network ofservices (including branches) in all fields like

remittances, collections etc.


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5. Reforms in the Indian capital market is still in thehalf way stage. The priority will be to ensure branchexpansions, financial deepening of credit markets,and creation of an efficient credit deliverymechanism that can compete with the capitalmarket.Salient operational and regulatory issues to beaddressed by the FIs for conversion into aUniversal Bank[RBI circular]

a) Reserve requirements

Compliance with the cash reserve ratio andstatutory liquidity ratio requirements (under Section42 of RBI Act, 1934, and Section 24 of the BankingRegulation Act, 1949, respectively) would be

mandatory for an FI after its conversion into auniversal bank.

b)Permissible activities

Any activity of an FI currently undertaken but notpermissible for a bank under Section 6(1) of the B.R. Act, 1949, may have to be stopped or divestedafter its conversion into a universal bank.

c) Disposal of non-banking assets -

Any immovable property, howsoever acquired byan FI, would, after its conversion into a universal bank, be required to be disposed of within themaximum period of 7 years from the date ofacquisition, in terms of Section 9 of the BankingRegulation Act.

d)Composition of the Board


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share capital and reserves, whichever is less, on itsconversion into a universal bank, would need todivest such excess holdings to secure compliancewith the provisions of Section 19(2) of the BankingRegulation Act, which prohibits a bank fromholding shares in a company in excess of theselimits.

h)Connected lendingSection 20 of the Banking Regulation Act prohibitsgrant of loans and advances by a bank on security ofits own shares or grant of loans or advances onbehalf of any of its directors or to any firm in whichits director/manager or employee or guarantor isinterested. The compliance with these provisions

would be mandatory after conversion of an FI to auniversal bank.

i)Licensing

An FI converting into a universal bank would berequired to obtain a banking license from RBI underSection 22 of the Banking Regulation Act, forcarrying on banking business in India, after

complying with the applicable conditions.

j)Branch network

An FI, after its conversion into a bank, would alsobe required to comply with extant branch licensing policy of RBI under which the new banks arerequired to allot at east 25 per cent of their totalnumber of branches in semi-urban and rural areas.

k)Assets in India


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An FI after its conversion into a universal bank, willbe required to ensure that at the close of business onthe last Friday of every quarter, its total assets heldin India are not less than 75 per cent of its totaldemand and time liabilities in India, as required of abank under Section 25 of the Banking RegulationAct.

l) Format of annual reportsAfter converting into a universal bank, an FI will berequired to publish its annual balance sheet andprofit and loss account in the in the forms set out inthe Third Schedule to the B R Act, as prescribed fora banking company under Section 29 and Section30 of the Banking Regulation Act.

m) Managerial remuneration of the ChiefExecutive Officers

On conversion into a universal bank, theappointment and remuneration of the existing ChiefExecutive Officers may have to be reviewed withthe approval of RBI in terms of the provisions ofSection 35 B of the Banking Regulation Act.

The Section stipulates fixation of remuneration ofthe Chairman and Managing Director of a bank byReserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval ofRBI would also be required for appointment ofChairman and Managing Director.

n) Deposit insurance


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An FI, on conversion into a universal bank, wouldalso be required to comply with the requirement ofcompulsory deposit insurance from DICGC up to amaximum of Rs.1 lakh per account, as applicable tothe banks.

o) Authorized Dealer's License

Some of the FIs at present hold restricted AD

license from RBI, Exchange Control Department toenable them to undertake transactions necessary foror incidental to their prescribed functions. Onconversion into a universal bank, the new bankwould normally be eligible for full-fledgedauthorized dealer license and would also attract thefull rigour of the Exchange Control Regulations

applicable to the banks at present, including prohibition on raising resources through externalcommercial borrowings.

p) Priority sector lending

On conversion of an FI to a universal bank, theobligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit'

would also become applicable to it.

q) Prudential norms

After conversion of an FI in to a bank, the extantprudential norms of RBI for the all-India financialinstitutions would no longer be applicable but thenorms as applicable to banks would be attracted andwill need to be fully complied with.

Concluding Remarks


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The following are the steps suggested:a. Equalize the net regulatory burden across

the financial system (including banks, DFIs,mutual funds, NBFCs and Insurancecompanies).

b. Lower the regulatory burden on the overregulated entities.

c. Promote and encourage strong competition.

d. Do not allow the merger of a weak bankwith a viably strong DFI or vice-versa.

e. DFIs should be permitted to set up a 100percent owned banking subsidiaries.

f. Need is felt to re-examine the minimum

level of SLR requirement in order to meetthe best of international standards.

Principles of Sound bank lending

Lending depends on obtaining and analysing thefacts of a loan request. It is an art of makingjudgements about the information, the feasibility of

the business and the credibility of the borrower. Anintelligent lender focuses on the key business issuesquickly. He determines what information isrequired. Based on the information, he makes aprompt decision. The lending banker should taketime and experience to develop sound creditdecision.

This part of the unit deals with some basicprinciples for lending. The following principles are


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implemented before making a decision. Investmentin people, management and leadership, and asystematic approach to risk are the key elementsthat allow lenders to be effective.

The principles of effective lending presented belowreflect the lessons that micro lenders have learnedthrough experience and the innovative approaches

being used for small business lending today. Thisdoes not include marketing and outreach discussionbecause demand is assumed to exist if a programmeoffers the right products and services. The use oftechnical assistance in loan screening and borrowerevaluation is discussed below under the Role ofTechnical Assistance.

1. Know your Borrower:Understand your market niche and the types ofpeople, and characteristics needed to succeed in thelocal environment. The best entrepreneurs may bestubborn, without formal education, and blithelyunaware of any personal weaknesses, yet they mayhave the street smarts, resourcefulness, and ability

to do one thing well to be successful entrepreneurs.Be aware of their strengths, limitations, andweaknesses, and why you like or dislike them. Inother words, lend to the person, not to the idea.Personal commitment to repay is the strongest bondbetween a lender and its customers.

2. Structure Loans to Minimise Risk:

Successful lenders provide minimal credit amountsat first and then increase the subsequent loan size


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once a borrower has demonstrated his or her abilityand commitment to repay. These stepping loansminimise risk to the borrower (particularly start-upsor early stage expansions) and to the lender. Inaddition to stepping loans, other methods forreducing risk to the lender include:

3. It is Hard to Fix a Poor Underwriting Decision:

If staff misjudged either the business or theborrower, it is difficult to fix the problem once theloan is made. Loan restructuring and collectionstake significant staff time and reduce the timeavailable for other borrowers. Careful evaluation ofthe business viability and borrower character isessential to lending unless the organisation can rely

on(a) collateral,

(b) cross-guarantees within a group ofborrowers, or

When it comes time to collection, collateral meltslike ice cream in the summer sun. Therefore, prudent judgements of business viability andborrower character are essential.

1. Pay Attention to the Details:

Lending is a business of details. Careful informationgathering and analysis, loan documentation andrapid follow-up on any discrepancies all require afocus on details. Although many credit programmes

learned this the hard way, the most successful programmes now are meticulous in their loan


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procedures and prompt in their follow-up if anypayments or reporting requirements are past due.Collect aggressively to establish market credibilityand minimise loan losses.

2. Streamline loan administration systems, but stayin close touch with the borrower.

Most of the lending programmes in operation are

using direct loans to individual businesses in amanner similar to traditional banking. The key is tostay in close touch with the borrower by

a. requiring frequent payments at the localoffice and

b. making periodic site visits.

A missed payment or disarray at the place of business is immediate signs of trouble. Lendingstaff must monitor loans for changing economic ormarket conditions and spot early signs of potentialtrouble.

1. Charge market interest rates:

Access to credit is more important than its cost.

Because access to credit can dramatically improvethe income generation of any business, mostentrepreneurs are less cost-sensitive and moreaccess-driven. Most credit organisation charge feesand interest rates those are higher than theconventional finance system and lower thaninformal moneylenders. Additional margin on each

loan has a relatively small impact on the borrower(given the small loan amounts and increased income


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delivery with the more rigorous assessment ofborrower and business that has been used.

4. Loan Assessment and Credit Analysis

There is no formula for determiningcreditworthiness. The loan officer must assembleand evaluate information and then determine whatthe entire picture looks like. Traditional bank

lenders refer to the Four Cs of lending: Credit,Capacity, Collateral, and Character. Lending usesthe rigorous credit assessment principles, butapplies them to situations in which the lender mustrely on borrower character and cash flow from thebusiness. The loan application and the first meetingwith the borrower are the first screen of whether a

business is a potential candidate. Beginning with thefirst meeting, the lender must evaluate the quality ofthe business deal, the fit with the borrowersexperience and capacity, and whether the financingamount and structure is appropriate.

Example

Fair Lending Policy of Indian Bank

FAIR LENDING PRACTICES CODE

1. Preamble

(a) Scope: Fair lending practices code (FLPCfor short) aims at providing information tocustomers seeking credit facilities of allcategories of loans irrespective of amount of

loan sought by the borrower and facilitates


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effective interaction of customers with thebank.

(b) Extent: modified FLPC is put in place byour bank with effect from 30.04.2007.

(c) The bank reserves the right to modify /incorporate / delete any of the clauses in thisflpc at any time and will announce the

revised code, in place of the present flpcfurnished hereunder.

1. Important declarations:

Our bank declares and undertakes

A) to provide professional, efficient, courteous,diligent and speedy services in the matter of

lending.B) not to discriminate on the basis of religion,

caste, sex, descent or any of them (except participation in credit-linked schemes framedfor weaker sections of the society like womenentrepreneur scheme etc.)

C) to be fair and honest in advertisement and

marketing of loan products

D) to provide customers with accurate and timelydisclosure of terms, costs, rights and liabilitiesas regards loan transactions.

E) if sought, to provide such assistance or advise tocustomers applying for loans.


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F) to attempt in good faith to resolve any disputesor differences with customers by the complaintredressal cells within the bank.

G) to comply with all the regulatory requirementsin good faith.

H) to spread general awareness about potentialrisks in contracting loans and encourage

customers to take independent financial adviceand not act only on representation from banks.

1. Fair practices:

3.1 product information:

A) a prospective customer would be given all thenecessary information adequately explaining the

range of loan products available with our bankto suit his needs.

B) on exercise of choice, the customer would begiven the relevant information about the loanproduct of his choice.

C) the customer would be explained the processesinvolved till sanction and disbursement of loan

and would be notified of timeframe withinwhich all the processes will be completedordinarily at our bank.

D) the customer would be informed of the namesand phone numbers of branches (or the persons)whom he can contact for the purpose of loan tosuit his needs.


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E) the customer would be informed the procedureinvolved in servicing and closure of the loantaken.

3.2 interest rates:

3.2.1 Interest rates for different loan products wouldbe made available through and in any one or all ofthe following media, namely:

A. In our bank's web site

B. Over phone, if tele-banking services areprovided

C. Through display in the branches

D. Through other media from time to time.

3.2.2 Customers would be entitled to receiveperiodic updates on the interest rates applicable totheir accounts, if the revision is individualcustomer-specific.

3.2.3 On demand, customers can have full details ofmethod of application of interest.

3.3 revisions in interest rates:

A. Our bank would notify immediately or as soonas possible any revision in the existing interestrates and make them available to the customersin the media listed in para 3.2.1.

B. Interest rate revisions to the existing customerswould be notified within a reasonable period often days from the date of change through the

media as per para 3.2.1.


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3.4 default interest / penal interest :Our bank would notify clearly about the defaultinterest / penal interest rates to the prospectivecustomers.

3.5 charges

A. Our bank would notify details of all charges

payable by the customers in relation to theirloan account.

B. Our bank would make available for the benefitof prospective customers all the details relatingto charges to all loan applicants of all categoriesof loans irrespective of amount of loan sought by the borrower in the media as specified inpara 3.2.1.

C. Any revision in charges would be notified inadvance and would be made available in themedia as listed in para 3.2.1

D. Our bank would clearly specify the charges tobe recoverable from the borrower for interestand charges, wherever necessary and get a

mandate for debiting the said account alongwith the documentation.

3.6 terms and conditions for lending:

A. Our bank would ordinarily give anacknowledgement of receipt of loan applicationand if demanded by the customer, a copy of theapplication form duly acknowledged would also

be given, as soon as the customer chooses tobuy a retail product or service of his choice. In


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respect of loan applications all loan applicantsof all categories of loans irrespective of amountof loan sought by the borrower, theacknowledgement will indicate the timeframefor disposal of such applications.

B. Immediately after the decision to sanction theloan, our bank would show draft of the

documents that the customer is required toexecute and would explain, if demanded by thecustomer, the relevant terms and conditions forsanction and disbursement of loan. The bankwould obtain the customers' acceptance /guarantor's acceptance of these terms andconditions on record by way of an acceptancesignature in the copy of sanction advice / ticketissued to the customer.

C. Loan application forms, draft documents,sanction letter, declarations or such other papersto be signed by a customer wouldcomprehensively contain all the terms andconditions relating to the product or service ofhis choice.

D. Wherever possible, reasons for rejection of loanwould be conveyed to the customers.

E. Before disbursement of loan, our bank uponwritten request would deliver the format (copy)of the documents to be executed by thecustomers against their acknowledgement at

their cost.


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F. If the borrower desires to have the copies of theexecuted loan documents, bank upon writtenrequest would deliver the copies of dulyexecuted documents after due verification by thebranch lawyer, against the borrowers writtenacknowledgement, at their cost.

G. Modification on time frame for disposal of

applications in respect of all categories of loansirrespective of the amount of loan shall be asunder:

Up to Rs. 25000 Within 15 days

Beyond rs.25000 andup to Rs. 5 crore - fresh

limits and increase inlimits for existing units

Within 4 weeks

Above Rs. 5 crore -fresh limits andincrease in limits forexisting units

Within 8 weeks

For adhoc limits within 3 weeks

3.7 account practices:

A. Our bank would provide regular statementof accounts, unless not found necessary bythe customers.

B. Our bank would notify relevant due dates

for application of agreed interest, penalinterest, default interest and charges if they


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are not mentioned in the loan applications,documents or correspondence.

C. Our bank would notify in advance anychange in accounting practices that wouldaffect the customer, before implementation,in the media listed in para 3.2.1.

A. 3.8 information secrecy

A. All personal information of the customerwould be confidential and would not bedisclosed to any third party unless agreed to by the customer. The term 'third party'excludes all law enforcement agencies,credit information bureau, reserve bank ofIndia, other banks and financial institutions.

B. Subject to above Para, customer informationwould be revealed only under the followingcircumstances, namely;

if our bank is compelled by law

if it is in the public interest to reveal theinformation

if the interests of our bank requiredisclosure.

3.9 financial distresses

A. Our bank would reckon cases of customer'sfinancial distress and consider themsympathetically.

B. Customer would be encouraged to inform abouttheir financial distress as soon as possible.


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C. Our bank would adequately train theoperational staff to give patient hearing to thecustomers in financial distress and would rendersuch help as may be possible in their view.

D. In the event of default our bank will take everylegal means for the recovery of the loans fromthe borrowers / guarantors / securities / other

assets.3.10 grievance redressal

The branch manager can be approachedthrough letter or in person, who will attendto / give personal hearing to the grievancesof the credit applicants on any working dayduring the banking hours. The findings will

be communicated within one week to theaggrieved party.

If the customer is not satisfied with thereply, he can approach the circle head(whose name and office address aredisplayed in the branch) for redressal of thecomplaints / grievances. All circle heads or

the nominated officer at the circle. Officewill attend to the complaints / grievancesand also give personal hearing to theapplicants. The decision will becommunicated to the applicants within twoweeks.

The grievances can be represented in plain

paper with all relevant particulars by theapplicant.


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General terms and conditions applicable for allfacilities /all types of borrowers

1. All applicants / borrowers and guarantors mustfurnish their passport size photos along withapplication.

2. the advance will be released only uponcompletion of documentation in all respects asper banks rules

3. Processing fee and other charges as per bank'srules should be paid upfront.

4. Processing charges for renewal of facilities willbe charged on due dates irrespective of whether

the renewal papers are submitted or not.5. Bank is entitled to charge and recover interest,

various fees, and charges as per actuals /prescribed tariff from the borrower as applicablefrom time to time.

6. the limits shall be availed within the prescribedtime limit as specified in the sanction ticket or

within 3 months from the date of communication of sanction which ever is earlier

7. The advance must be used for the purpose forwhich it is sanctioned. Unless otherwisespecified, the working capital limits disbursedare valid for a period of one year from the dateof sanction. For any request for

renewal/enhancement, application should bemade at least three months in advance


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furnishing all the relevant data as required bybank.

8. Acceptance of immovable properties offered assecurity is subject to the unqualified legalopinion of the banks approved lawyerconveying a clear, valid, subsisting andmarketable title.

9. Valuation of the property, wherever given assecurity, should be done by the banks approvedengineer/revenue authorities.

10. In the case of immovable properties given assecurity the borrower should furnish upto- dateencumbrance certificate showing nilencumbrance and up-to-date tax paid receipt at

the time of documentation. Stamp duty chargesfor creation of em to be borne by the applicant /borrower.

11. Immediately on completion of 4 months fromthe date of creation of equitable mortgage,further encumbrance certificate shall beproduced. Thereafter, encumbrance certificates

and property tax paid receipts shall be producedevery year.

12. Securities for one or more facilities shall alsostand as additional security for all otherfacilities granted or to be granted from time totime to the said borrowers, unless specificallywaived by the bank.

13. Fixed assets charged to the bank shall not beleased / disposed / substituted / relocated/


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mortgaged / assigned without prior approval ofthe bank.

14. All the assets charged to the bank [except forthe assets exempted from insuring in certainloan products/ schemes] shall be adequatelyinsured against all attendant risks at the expenseof the borrower(s). The insurance policy with

bank clause (viz. Bank as mortgagee,hypothecatee or pledgee as the case maybe)shall be lodged with the bank. The insurancecover shall be kept in force at all times through prompt renewals and with suitableenhancements to include any increase in thevalue of securities.

15. Machinery, equipment, vehicles, etc. Charged tothe bank should be painted with the Banksname or affixed with the banks name board. Inthe premises where stocks hypothecated/pledgedto the bank are stored, bank name board withspecific mention of the branch name should bedisplayed prominently both inside and outsidethe premises.

16. Assets charged to the bank are subject toinspection by banks officials from time to time.

17. For working capital facilities against stock etc,monthly stock statement with break up of stocksas required by the bank is to be submitted.Delayed submission of stock statements /

financial statements etc., will attract levy of


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penal interest as per banks rules in force fromtime to time.

18. All fund based/non-fund based /fee basedtransactions shall be routed only through theaccount with our bank.

19. Interest will be generally charged on the lastworking day of every month and should be paid

as and when charged.

20. Default in payment of interest / instalments onthe respective due dates will attract overdueinterest on the defaulted amount at 2% over andabove the contractual / maximum interest ratesor at such rates as applicable from time to time.

21. Stipulated margin on securities charged to thebank should be maintained during the currencyof the advance.

22. If any default / deterioration occurs in anysecurity charged to the bank, the liability of the borrower shall become immediately due andpayable.

23. Upon sanction, the duplicate copy of thesanction letter is to be returned duly signed bythe borrower / guarantor in token of acceptanceof terms and conditions.

24. The bank is not under any obligation to makefurther advances or other accommodation to theborrower, unless deemed fit and necessary by

the bank.


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25. Changes, if any made to the structure ofownership/management of the borrowingconcern shall be promptly informed to the bank.

26. Besides general terms and conditions, scheme-specific / activity-specific terms and conditionswill be stipulated in the sanction ticket andshould be complied by the applicant, based on

the nature of facility; constitution of theborrower; purpose; end use; security and natureof charge on the security.

27. For scheme-specific / activity-specific loans foractivities like small scale industries, cottageindustries, agriculture, allied activities, poultry,minor irrigation, land development, gobar gas

plant, self help group, crop loans for specificcrops, tie up arrangement details, personal loan products, consumer articles, vehicles forcommercial / personal use, retail traders, serviceproviders, etc., terms and conditions can be hadfrom the branches separately.

28. The bank may at its discretion recall the entire

advance upon default of a single instalment /interest.

29. In addition to these terms and conditions all thefacilities sanctioned shall be subject to thebanks rules as well as the directives issued byrbi or any other regulatory authority from timeto time.

30. The bank reserves to itself the right to cancel /suspend / reduce any or all the limits


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sanctioned / alter / amend / vary the terms ofsanction including rate of interest at its solediscretion without assigning any reason.

31. Bank at its discretion may approve or disallow,drawings beyond the sanctioned limit orhonouring cheques issued for the purpose otherthan specifically agreed to in the credit sanction.

32. Bank may disallow drawing on a borrowalaccount on its classification as a nonperformingasset or on account of non compliance with theterms of sanction.

Rs.70/- per charge

Note :

(1) for computerised accounts 40 entries or partthereof will be reckoned as one folio (no foliocharges for facility deposit accounts and rrbs of ourbank)

(2) the charges are to be recovered annually on 28thfebruary every year or at the time of closure of theaccount whichever is earlier

4. Cost of Kisan credit card (not exceeding rs.50/-)to be borne by borrower

5. CGTSI charges (SSI a/cs which are collateral free/ without third party guarantee): guarantee fee 2.5%(one time) initially Annual service fee 1% (on theamount outstanding as of march 31st every year)

6. Insurance charges actual


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7. Out-of-pocket expenses including legal charges,remittances by post:

All out-of-pocket expenses such as pre-sanction andpost-sanction visits, recovery visits, valuation feespayable to approved valuers, fees to panel advocatesfor opinion, sending notices, etc., should be paid bythe borrower, as applicable

8. Penal interest for overdue / irregularities:

Upto rs.25000/- nil

Above rs.25000/- additional interest @ 2%above the applicable rate

9. Periodicity of charging interest:

As per RBI master circular - interest rates on

advances (DBOD dated 01.07.2005), banks shouldcharge interest on agricultural advances for longduration crops at annual rests. As regards otheragricultural advances in respect of short durationcrop and allied agricultural activities such as dairy,fishery, piggery, poultry, bee-keeping etc., banksmay take into consideration due dates fixed on the

basis of fluidity with borrowers and harvesting /marketing season while charging interest andcompounding the same if the loan / instalmentbecomes overdue.

In our bank, for crop loans, interest on simple basisis debited to the account and only on the due datethe same is compounded at half yearly rests. In

other words, interest on stpl is not compounded tillit becomes due.


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In case of all agri-term loans interest is debited tothe account on simple basis at half yearly rest tillthe instalment become due. However, interest iscompounded on due dates as soon as theholiday/gestation period is over.

For non-agricultural advances, interest will becharged at monthly intervals. *service charges are

subject to periodical change service charges arecharged according to the rating of the account.

Any revalidation and / or modification in sanctionterms after 15 days from the date of communicationof sanction by the bank/branch will attract further processing charges at 25% of the original processing charges stipulated. Adhoc limit if

adjusted beyond 3 months will attract penal interestas per extent guidelines.

Review Questions:

1. Define banking.

2. What additional businesses can the commercial

banks do?

3. List out the various agency business of

commercial banks.

4. How is Indian financial system controlled?

5. Explain the banking structures in India.


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17. List out various deposits mobilized bycommercial banks apart from main deposits.

18. How do commercial banks grant loans to

clients?

19. What is cash credit? What are the stipulations

followed by banks to grant it?

20. Differentiate demand loan from term loan.

21. Explain bank overdraft. What are the procedures

to be followed to grant overdraft to the clients?

22. What is meant by discounting of bills?

23. List out various agency services rendered by the

modern banks.

24. Define universal banking. Explain its status

today

unit i commercial banks

Documents