CHAPTER 1

PREFACE

In my summer internship I worked on many aspects, which are related to the loans and other
bank related services. I worked on loan disbursement procedure,KYC norms,account opening
and other services offered by bank.

My allotted topic for the internship by bank was “ Term Loan Finance” where my major
focus was on the retail credit in which different types of loans like auto loan , home loan etc.
come. Where I came to know about the procedure and documentation related to these loans.

SIP give a great practical exposure where I came across with different type of customers.
While working on project I came to know about camel rating model. In CAMEL rating
model ratings are obtained by five aspects of banking i.e. Capital, Asset, Management,
Earning, liquidity. These five aspects are given a certain weightage and on the basis of this
weightage final rating is obtained. So by this I compare different banks of both public sector
and private sector with Bank Of India.

1
 CHAPTER 2
JUSTIFICATION

The growth rate of loans and advances of SCBs, which was as high as 33.2 per cent as at end
of March 2005 has been witnessing a slowdown since then. In continuation of the trend, the
growth rate of aggregate loans and advances of SCBs decelerated to 21.2 per cent as at end-
March 2009 from 25.0 per cent in the previous year. Apart from cyclical factors which lead
to slowdown in growth after a period of high credit growth, the deceleration was accentuated
this year due to the overall slowdown in the economy in the aftermath of global financial
turmoil. Notwithstanding the deceleration in growth of the term loans, their share in
investment in the economy increased to 81.0 per cent in 2008-09 from 77.8 per cent in the
previous year.

So as with the retail credit growth rate, which was higher than 40.0 per cent in 2004-05 and
2005- 06 has witnessed a deceleration since then. Continuing this trend, the growth rate in
retail credit by banks decelerated further to 4.0 per cent as at end March 2009 from 17.1 per
cent last year and 29.9 per cent as at end March 2007. It also remained lower than the growth
in loans and advances of SCBs (21.2 per cent).

As a result, the share of retail credit in total loans and advances declined to 21.3 per cent at
end-March 2009 from 24.5 per cent at end- March 2008. Deceleration in the growth of retail
portfolio of banks was mainly on account slow down in credit for housing loans, auto loans,
credit card receivables and other personal loans, though loans to consumer durables
witnessed a turnaround.

The domain of retail banking market has tremendous growth potential for banks and finance
companies, as at present it is largely untapped. The penetration level is 2.5 to 3 % and is in a
scenario when the requirements of the consumers are growing. In the past, people never
believed in buying consumer goods on credit. But today the attitude is changing. The
demand for consumer products has increased. Today, about 70% of consumer goods
purchased are through finance schemes/loans as against 40% about 1 to 6 years ago. The
home loans alone account for nearly two-third of the total retail portfolio of the bank.so here
I have tried to find out the different aspect of the retail credit and as it is a loan for the masses

2
and consumers are now a days attracted towords the bank finance for all of there needs. As
the per capita income of indian consumers are incressing.

3
 CHAPTER 3
LITERATURE REVIEW

Literature on community bank performance, especially related to the efficiency and bank
strategy continues to expand at greater extend. The following discussion summarizes some of
the research in this area over the past few decade. Wall (1985) examined small and medium
sized banks from the early 1970’s until deregulation was occurred in the early of 1980’s. He
found that the profitable banks had lower interest rate and non-interest expense than less
profitable banks. In addition, the more profitable banks had lower cost of funds, greater use
of transactions deposits, more marketable securities and higher capital levels.

Gup and Walter (1989) found that consistently profitable small banks stressed basic banking
with low cost funds and high quality investments. The study examined banks from 1982 to
1987 during the early stages of bank deregulation. During this period there were considerable
differences between regions due to declining energy, real estate and commodity prices. High
performance banks during this period made higher quality loans, held proportionately more
capital, invested more in securities (especially long-term) and relied on lower cost funding
sources compared with the average small bank.

Zimmerman (1996) examined community bank performance in California during the early
1990’s, a period of slow recovery for these institutions. Excessive reliance on real estate
lending caused deterioration in asset quality, which reduced overall profitability. Lack of
geographic diversification further compounded community bank performance.

Two different studies by Bassett and Brady (2001; 2002) examined recent performance of
community banks. The 2001 study found that many small banks from 1985-2000 vanished
through mergers and acquisitions. Increased competition with stock, bond and mutual fund
investments may have weakened the competitive position of small banks. These community
banks, nevertheless, were able to compete effectively against larger banks due in part to
superior knowledge of local loan markets combined with a reluctance of customers to bank
with out-of- area institutions. Bassett and Brady’s (2002) study found that small banks grew
more rapidly than large banks from 1985-2001 with profitability remained at a high level.
While interest costs increased, this was more than offset by higher returns on earning assets.

4
Gilbert and Sierra (2003) used the Federal Reserve System for Estimating Examination
Ratings (SEER) surveillance system to estimate the probability of failure for community
banks (which they define as less than $1 billion in assets) versus large banks (with assets
greater than $1 billion). The failure probability declined for both groups during the 1990’s.
The risk of failure since about 1997 rose slightly for community banks and as of 2003 was
about 4 basis points higher than for large banks.

Myers and Spong (2003) examined community bank growth in the 10th Federal Reserve
District (Kansas City) with an emphasis on economic conditions in slower growing markets.
These slower growing markets presented problems in loan quality as well as staffing
including senior management and directors. Community banks in low growth markets
experienced higher overhead costs relative to income than banks in higher growth markets.

DeYoung, Hunter and Udell (2003) provided an extensive investigation of community bank
performance commencing in the early 1970’s. They concluded that while many community
banks have left the industry in the past three decades, many more inefficient banks must still
exit in order for those remaining to be competitive with their larger bank counterparts.

Critchfield, Davis, Davison, Gratton, Hanc and Samolyk (2005) in a study of past, present
and future community bank performance conducted for the FDIC concluded that community
banks continue to be of interest because
1) They still constitute over 90% of all banks,
2) They are economically important to small business and agricultural lending and 3) they
represent a disproportionately large percentage of FDIC failure costs.

5
 CHAPTER 4
OBJECTIVES
A new innovation in Indian banking system during the last two decades is the growing role of
commercial banks in the field of term loan finance. Medium and long-term loans are
popularly known as the “term loan “. The business of term loan lending has gradually
developed in India with the effect that the entire pattern of financing in India has changed
drastically. In this report focus is entirely over the term loan facility in the retail loan,"There
is a huge retail credit opportunity available. Indian Banks have low penetration in this
segment currently. But it is the one area that is providing the momentum in the indian
banking business now".
A personal loan is type of loan that creates a kind of consumer credit, which is typically
granted for the personal use only. This type of loans is usually denoted as unsecured loans as
the transaction of lending is usually based on the borrower's integrity in fulfilling of the
lending as well as the ability to repay. The main objectives of the analysis are to assess:
1. Banking structure
2. Types of loans/advances and the facilities provide in them.
3. Basics of Bank Lending
4. Documentation related to lending
5. Comparative study of different banks by using camel rating

6
 CHAPTER 5
COMPANY PROFILE
Bank of India was founded on 7th September 1906 by a group of elite businessmen from
Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalized along with 13 other banks. Beginning with one office in Mumbai, with a paid-
up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years
and blossomed into a mighty institution with a strong national presence and sizable
international operations. In business volume, the Bank occupies a premier position among the
nationalized banks.

The Bank has 3101 branches in India spread over all states/ union territories including 141
specialized branches. These branches are controlled through 48 Zonal Offices. There are 29
branches/ offices (including three representative offices) abroad. The Bank came out with its
maiden public issue in 1997 and follow on Qualified Institutions Placement in February
2008. . Total number of shareholders as on 30/09/2009 is 2, 15,790.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront
of introducing various innovative services and systems. Business has been conducted with
the successful blend of traditional values and ethics and the most modern infrastructure. The
Bank has been the first among the nationalized banks to establish a fully computerized
branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank
is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health
Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is
an association that has blossomed into a joint venture with BSE, called the BOI Shareholding
Ltd. to extend depository services to the stock broking community. Bank of India was the
first Indian Bank to open a branch outside the country, at London, in 1946, and also the first
to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a
network of 29 branches (including five representative office) at key banking and financial
centers viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The international
business accounts for around 17.82% of Bank's total business.

7
\

8
 MILESTONES
• 1906: Founded with Head Office in Mumbai.
• 1921: BoI entered into an agreement with the Bombay Stock Exchange to manage its
clearing house.
• 1946: BoI opened a branch in London, the first Indian bank to do so. This was also
the first post-WWII overseas branch of any Indian bank.
• 1950: BoI opened branches in Tokyo and Osaka.
• 1951: BoI opened a branch in Singapore.
• 1953: BoI opened a branch in Kenya and another in Uganda.
• 1953 or 54: BoI opened a branch in Aden.
• 1955: BoI opened a branch in Tanganyika.
• 1960: BoI opened a branch in Hong Kong.
• 1962: BoI opened a branch in Nigeria.
• 1967: The Government of Tanzania nationalized BoI's operations in Tanzania and
folded them into the government-owned National Commercial Bank, together with those of
Bank of Baroda and several other foreign banks.
• 1969: The Government of India nationalized the 14 top banks, including Bank of
India. In the same year, the People's Democratic Republic of Yemen nationalized BoI's
branch in Aden, and the Nigerian and Ugandan governments forced BoI to incorporate its
branches in those countries.
• 1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen,
together with those of all the other banks in the country; this is now National Bank of Yemen.
BoI was the only Indian bank in the country.
• 1972: BoI sold its Uganda operation to Bank of Baroda.
• 1973: BoI opened a rep in Jakarta.
• 1974: BoI opened a branch in Paris. This was the first branch of an Indian bank in
Europe.
• 1976: The Nigerian government acquired 60% of the shares in Bank of India
(Nigeria).
• 1978: BoI opened a branch in New York.
• 1970s: BoI opened an agency in San Francisco.
• 1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.
• 1986: BoI acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank)
in Kerala in a rescue.
9
• 1987: BoI took over the three UK branches of Central Bank of India (CBI). CBI had
been caught up in the Sethia fraud and default and the Reserve Bank of India required it to
transfer its branches.
• 2003: BoI opened a representative office in Shenzhen.
• 2005: BoI opened a representative office in Vietnam.
• 2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to
branches, and to open representative offices in Beijing, Doha, and Johannesburg. In addition,
BoI plans to establish a branch in Antwerp and a subsidiary in Dar-es-Salaam, marking its
return to Tanzania after 37 years.
• 2007: BoI acquired 76 percent of Indonesia-based PT Bank Swadesi

Mission & Vision

Mission
"to provide superior, proactive banking services to niche markets globally, while providing
cost-effective, responsive services to others in our role as a development bank, and in so
doing, meet the requirements of our stakeholders".

Vision
"to become the bank of choice for corporate, medium businesses and up market retail
customers and to provide cost effective developmental banking for small business, mass
market and rural markets"

10
Performance as on 31.03.2010 (Rs. In Crores, Except %)

Deposits 229762 Operating Profit 4705

Growth 21% Net Profit 1741

Advances 168491 Gross NPA Ratio 2.85%

Growth 18% Net NPA Ratio 1.31%

Business Mix 401078 Provision Coverage 65.51%

Growth 20% Earnings Per Share (Rs.) 33.15

Growth Return on Equity 14.76% Book value per Share (Rs) 236.84

Capital Adequacy Ratio

(Basel-II) 12.94%

11
 `CHAPTER 6
INTRODUCTION
Banks have played critical role in the economic development of some developed countries
such as Japan and Germany and most of emerging economies including India. Banks today
are important not just from the point of view of growth of economic, but also financial
stability. In the emerging economies, banks are special for three vital reasons. First, they take
a leading role in developing and other financial intermediaries and markets. Second, due to
the absence of well-developed equity and the bond markets, the corporate sector depends
heavily on the banks to meet their financing needs. Finally, in emerging markets such as
India, banks cater to the needs of a large number of savers from household sectors, which
prefer assured income,liquidity and safety of funds, because of their inadequate capacity to
manage financial risks.

Banking industry have changed over the years and with needs of the economy its form has
changed a lot. The transformation of banking system has been brought about by technological
innovation and globalization. While banks have been expanding into the areas which were
traditionally out of the bounds for them, non-bank intermediaries have begun to perform
many of the functions of the banks. Thus the competition among the banks has incressed to
many folds, but also with nonbanking financial intermediaries, and over the years, this
competition has only grown. So all the banks has to introduced innovative products, seek
newer sources of incomes and diversify into non-traditional activities.

6.1 DEFINITION OF BANKS

The definition of business of banking has been given in the Banking Regulation Act, 1949.
According to Section 5(c) of the Act, 'a banking company is a company which transacts the
business of banking in India.' Further, the Section 5(b) of BR Act defines banking as,
'accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdraw can be able, by cheque, draft, by order or
otherwise.' This definition points to the three most primary activities of a commercial bank
which distinguish it from the other financial institutions. These are: (i) maintaining deposit
accounts including current a/c, (ii) issue and pay cheques (iii) and collect cheques for the
bank's customers.

12
6.2 EVOLUTION OF COMMERCIAL BANKS IN INDIA
Commercial banking industry in India started in 1786 with the start of the Bank of Bengal in
Calcutta. Government at the time established three Presidency banks, viz., the Bank of
Bengal (1809), the Bank of Bombay (1840) and The Bank of Madras (established in 1843).
In 1921, three Presidency banks were amalgamated to form Imperial Bank of India, which
took up the role of the commercial bank, a bankers' bank and a banker to the Government of
India. The Imperial Bank was established with mainly European shareholders. With the
establishment of RBI as the central bank of the country in 1935, that the quasi-central
banking role of the Imperial Bank of India came to end.

In 1860, limited liability concept was introduced in banking system of india, it results in the
establishment of joint-stock banks. the Allahabad Bank was established with Indian
shareholders. PNB came into existence in 1895. Between 1906 and 1913, Other banks like
BOI, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore
were set up.

After independence, the Government of India started taking steps to encourage the gap of
banking in India. In order to serve the entire economy in general and the rural sector in
particular, recommendation of the All India Rural Credit Survey Committee about the
creation of a state-partnered and state-sponsored banks taking over Imperial Bank of India
and integrating with it, former state-owned and state-associate banks. SBI was established in
1955. while in 1959, the SBI (subsidiary bank) Act was passed, enabling the SBI to take over
eight former state-associate banks as its subsidiaries.

To align banking system to the needs of planning and economic policy, it was considered
necessary to have proper social control over banks. In year 1969, 14 major private sector
banks were nationalized. This was an important milestone in the history of Indian banking
system, followed by the nationalisation of another 6 private banks in year 1980. With
nationalization of all these banks, the major segment of the banking sector came under the
control of the Government of india. The nationalisation of all banks imparted major impetus
to expansion of branches in un-banked rural are and semi-urban areas, which in turn resulted
in huge deposit mobilization, this will give boost to the overall savings rate of the indian
economy. It also resulted in scaling of lending to agriculture loan and its allied sectors.
However, this type of arrangement also saw some weaknesses like reduced banks
13
profitability, weak capital bases of bank, and banks getting burden of a larger non-performing
assets.

For createing a strong and the competitive banking system, number of reforms measures were
initiated in early of 1990s. The main stress of the reforms was on increasing operational
efficiency, strengthening the supervision over banks, creating competitive conditions and
developing the technological and institutional infrastructure for banks. These types measures
led to the improvement in the financial health, soundness and efficiency of the indian
banking system.

One of the important feature of the reforms of the 1990s was that the entry of new private
sector banks in india was permitted. Following to this decision, new banks such as ICICI,
HDFC Bank, IDBI Bank were set up. Indian Commercial banks have traditionally focused on
meeting the short-term financial needs of industry, trade and agriculture industry. However,
the increasing sophistication and diversification of the Indian economy, the range of services
extended by commercial banks has increased significantly, leading to an overlap with the
functions performed by other FIs. Further, share of long-term financing (in total financing) to
meet capital goods and project-financing needs of industry has increased over the years.

6.3 DIFFERENT FUNCTIONS OF A COMMERCIAL BANKS

figure 1: functions of a commercial banks

14
(i) Payment System
Banks are the core of the payments system in an economy. Payment refers to the means by
which financial transactions are settled down. The fundamental method by which banks help
in settling up the financial transaction process is by issuing and paying the cheques issued on
behalf of its customers. Further, in the modern banking, payments system also involves
electronic banking, wire transfers, In all such type transactions, banks play a critical role.

(ii) Financial Intermediation

The second important function of a bank is to take different types of deposits from customers
and then after lend these funds to borrowers. In financial terms, deposits represent the banks'
liabilities, while the loans disbursed, and investments made by the banks are their assets.
Banks deposits serve the vital purpose of addressing the needs of depositors, who want to
ensure the saftey of liquidity as well as returns in the form of interest. On the other side, bank
loans and investments made by the banks play important function in channelling funds into
profitable productive uses.

(iii) Financial Services

In addition to acting as the financial intermediaries, banks today are increasingly involved
with offering customers a wide range of financial services including investment banking,
insurance-related services, government-related business, forex businesses, wealth
management services. Income from providing such services improves the bank's profitability.

15
 CHAPTER 7
BANKING STRUCTURE IN INDIA

7.1 BANKING STRUCTURE

Reserve Bank of India is the central banking and monetary authority of India, and also acts as
the regulator and supervisor of Indian commercial banks.

Scheduled Banks in India

Indian Scheduled banks comprise scheduled commercial banks and scheduled co-operative
banks. SCB form the bedrock of the Indian financial system, currently accounting for more
than three-fourths of all Fis assets. SCBs are present throughout India, and their branches,
having grown more than four-fold in the last 40 years now number more than 80,500 across
the country.

figure 2: banking structure

16
Public Sector Banks
PSU banks are those in which the majority shares is held by the Government of India. A PSU
banks together make up the largest category in the Indian banking system. There are
currently 27 psu banks in India . Including SBI & its 6 associate banks (such as State Bank of
Indore, SBBJ etc), 19 nationalised banks are there ( Allahabad Bank, Canara Bank etc) and
IDBI Bank Ltd.

PSU have taken the lead role in branch expansion, particularly in the rural areas.
• PSU banks account for bulk the branches in India (88 % in 2009).
• In the rural areas, the presence of the PSUbanks is overwhelming; in year 2009, 96%
of the rural br. belonged to the PSU. Private sector and foreign banks have limited presence
in the rural areas.

Break-up of Bank Branches (as on June 30, 2009)

source : Reserve bank of India

Table 1: break-up of bank branches

17
Regional Rural Banks
RRB were established during 1976-87 with a view to develop the rural economy. RRB is
totally owned or jointly by Central Government, concerned State Government and a
sponsoring PSU commercial bank. RRBs provides credit to the small farmers, small
entrepreneurs and agricultural labourers. Over the years, Government has introduced a
number of a measures of improve viability and profitability of RRBs, one of them being the
amalgamation of RRBs of the same sponsored commercial bank within a State. This process
of the consolidation has resulted in a steep decline in total number of RRBs to 86 as on
March 31, 09, as compared to 196 at end of March 2005.

Private Sector Banks

In this types of banks, the majority of stock capital is held by the private individuals and
corporate. Not all of the private sector banks were got nationalized in 1969, and 1980. Private
banks which were not nationalized are collectively known as old private sector banks and it
include banks such as The Jammu & Kashmir Bank Ltd., Lord Krishna Bank Ltd. Entry of
the private sector banks was however prohibited during post-nationalisation period. In July
1993 as part of the banking system reform process and as a measure to induce competition in
the banking sector of india, RBI permitted the private sector to enter into the Indian banking
system. This resulted in to the creation of new set of private sector banks, which are
collectively known as new private sector banks. At end March, 2009 there were seven new
private sector banks and 15 old private sector banks operating in the India.

Foreign Banks
Foreign banks have their registered & head offices in a foreign country but operate their
branches in India. RBI permits these types of banks to operate either through branches; or
through wholly-owned subsidiaries. The primary activity of most of the foreign banks in
India has been in the corporate segment. However, some large foreign banks have also made
consumer financing a significant part of their portfolios. These banks offer various type of
products such as automobile finance, home loans, CC, household consumer finance etc.
Foreign banks in India are required to stick to all banking regulations, including priority-
sector lending norms as applicable to the domestic banks. In addition to entry of the new
private banks in the mid of 90s, the increased presence of foreign banks in the India has also
contributed to a boosting competition in the banking sector.

18
Co-operative Banks
Co-operative banks are there for catering the financing needs of agriculture, retail trade, SME
and self-employed businessmen in urban, semi-urban and rural areas. A very distinctive
feature of co-operative credit structure in India is its heterogeneity. The structure differs
across urban and rural areas across all states and loan maturities. Urban areas are served by
the urban cooperative banks (UCBs), whose operations level are either limited to one state or
stretch across states. The rural co-operative banks comprises of State co-operative banks,
district central cooperative banks, SCARDBs and PCARDBs.

The co-operative banking sector is one of the oldest segment of the Indian banking. The
network of UCBs in India constitute of 1721 banks as at end-March 2009, while the number
of the rural co-operative banks was 1119 as of end-March 2008. Owing to the their
widespread geographical penetration; cooperative banks have potential to become an
important instrument for the large-scale financial inclusion, provided they are financially
strengthened. The RBI and National Agriculture and Rural Development Bank have taken a
number of measures in the recent years to improve financial soundness of co-operative banks.

7.2 ROLE OF RESERVE BANK OF INDIA VIS-À-VIS COMMERCIAL BANKS

RBI is the central bank of the India. It was established on 1st April 1935 under the RB Act,
1934, this provides statutory basis for its functioning. When RBI was established, it took over
the functions of currency issue from the Government of India (GOI) and the power of credit
control from the Imperial Bank of India.

As the central bank of the country RBI performs a wide range of functions:
• Acts as currency authority
• It Controls money supply and credit
• It Manages foreign exchange
• It Serves as a banker to the government
• Builds up & strengthens the country's financial infrastructure
• Acts as the banker for the banks
• Supervises the banks
the RBI's role mainly relates to last two points stated

19
 CHAPTER 8
BANK DEPOSIT
Financial intermediation by schedule commercial banks of India has played a key role in
supporting the economic growth process. An efficient financial intermediation process is well
known that has two components: 1) effective mobilization of savings and their allocation to
most productive uses. When commercial banks mobilize savings they do it in the form of
deposits, which are the money accepted by the banks from customers to be held under the
stipulated terms and conditions. Deposits are treated as an instrument of savings.

Since the first part of bank nationalization in 1969, banks have been at the core of financial
intermediation process in India. They have mobilized a sizeable share of savings of
household sector, the major surplus sector of the India economy. This in turn has raised
financial savings of the household sector and hence overall savings rate. Notwithstanding the
liberalization of the India financial sector and increased competition from various other
saving instruments, bank deposits still continue to be the dominant instrument of savings in
India.

It can be seen from Table that gross domestic savings of the economy have been growing
over the past years and the household sector has been the most significant contributor to
savings. Household sector saves in 2 major ways, viz. financial and physical assets.

20
Gross Domestic Savings

Table 2: gross domestic savings

Financial Savings of the Household Sector (Gross)

Table 3: financial savings of the household sector

21
Share of Deposits of SCBs-GroupWise

Table 4: share of deposits of scbs-groupwise

8.2 STRATEGIES OF MOBILIZING DEPOSITS

To maximize tprofits, commercial banks always attempt to mobilize savings at lowest cost
possible. While mobilizing the deposits, banks have to comply with the various directives
issued by the RBI, Indian Bank Association (IBA), Government of India and other statutory
authorities. At the same time since banks are operating in a very competitive environment,
they have to reach out to wide spectrum of customers and also offer deposit products that
lead to higher satisfaction. Banks uses various strategies to expand their customer base and
reducing the cost of raising deposits. This is done by identifying their target markets,
designing the products as per the requirements of the customers, taking measures for
marketing and promoting the various deposit products.
.
It is essential not only to expand customer base but also to retain it. This is done by providing
proper counselling, after-sales information and also through the prompt handling of customer
complaints. While the strategies for the mobilizing bank deposits vary from bank to bank,
one common feature is to maximize the share of CASA deposits. The other common features
generally observed are:

22
• Staff members posted at branches must have to be adequately trained to offer efficient and
courteous service to the customers and to educate them about their rights & obligations.
• A bank often offers the personalized banking relationship for its high-value customers by
appointing a Customer Relationship Managers (CRMs).
• Senior citizens/pensioners have become an important category of the customers to be
targeted by a bank. Products are developed by the banks to meet specific requirements of this
group.
• While banks endeavour to provide services to satisfaction of customers, they put in place an
expeditious mechanism to redressal the complaints of the customers.

23
 CHAPTER 9
BASICS OF BANK LENDING
Banks give credit to different categories of borrowers for a wide variety of purposes. For
many borrowers bank loan is the easiest to access at reasonable interest rates. Bank credit is
provided to the households, retail traders, SMEs, corporate, the Government undertakings
etc. in economy. Retail loans are accessed by consumers of goods and services for financing
their purchase of consumer durables, housing or even for day-to-day consumption. In contrast
to that the need for capital investment, and day-to-day operations of private corporate and
Government undertakings are met through wholesale (huge) lending.

Loans for the capital expenditure are usually extended with medium and long-term
maturities, while the day-to-day finance requirements are provided through short-term credit
(working capital loans). Meeting all financing needs of the agriculture sector is also an
important role that the Indian banks play.

Utility of Loans and Advances

Loans and advances granted by the commercial banks are highly beneficial to the individuals,
firms, companies and industrial concerns. The growth and diversification of business
activities are totally effected to a large extent through bank financing. Loans and advances
granted by the banks help in meeting the short-term and long term financial needs of business
enterprises. Different roles played by banks in the business world by way of loans and
advances as follows:-

(a) Loans and advances can be arranged from the banks in keeping with the flexibility in the
business operations. Traders may borrow money for the day to day financial needs availing
of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as
loan may be repaid within a short period of time to suit the convenience of the borrower.
Thus business may run efficiently with the borrowed funds from banks for financing its
working capital requirements.

(b) Loans and advances are utilized for making the payment of current liabilities, wage and
salaries of all employees, and also tax liability of business.

24
(c) Loans and advances from the banks are found to be ‘economical’ for traders and the
businessmen, because banks charge a reasonable rate of interest on such type of
loans/advances. For loans from money lenders rate of interest charged is very high. The
interest charged by commercial banks is regulated totally by the Reserve Bank of India.

(d) Banks do not interfere with the use, management and control of borrowed money. It takes
care to only ensure that the money lent is used only for the business purposes.

(e) Bank loans & advances are found to be the convenient as far as its repayment part is
concerned. This facilitates planning for future and timely repayment of the loans. Otherwise
business activities would have come to halt.

(f) Loans and advances by all banks generally carry element of secrecy with it. Banks are
totally duty-bound to maintain secrecy of their transactions with their customers. This
enhances people’s faith in the Indian banking system.

9.1 PRINCIPLES OF LENDING AND LOAN POLICY

9.1.1 PRINCIPLES OF LENDING

To lend the money banks depend largely on the deposits from the public. Banks act as
custodian of public deposits. Since depositors only require safety and security of their
deposits, they want to withdraw deposits whenever they need and also need adequate return,
bank lending must necessarily be based on the principles that reflect these concerns of
depositors. These principles must include: safety, liquidity, profitability, and risk diversion.

Safety
Banks need to ensure that advances must be safe and money lent out by them will come back.
Since repayment of loans depends on the borrowers' capacity to pay, the banker must be
satisfied before lending money for the business for which money is sought is a sound one. In
addition to that, bankers many times insist on security against loan, which they could fall
back on if things go wrong for the business. The security must be of adequate amount readily
marketable and free of encumbrances.

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Liquidity
To maintain the adequate liquidity, banks have to ensure that the money lent out by them
must not locked up for long time by designing the proper loan maturity period appropriately.
Further, money must have to come back as per the designed repayment schedule. If loans
become excessively illiquid, it may not be possible for the bankers to meet their obligations.

Profitability
To remain viable bank must have to earn adequate profit on its investment. This calls for
adequate margin between deposit rates and the lending rates. In this respect, appropriate
fixing of the interest rates on both advances and deposits is very critical. Unless the interest
rates are competitively fixed and margins are adequate, banks may lose customers to their
competitors and become unprofitable.

Risk diversification
To mitigate the risk, banks should lend to a diversified customer base. Diversification should
be in the terms of geographic location, nature of business etc. If, all the borrowers of a bank
are concentrated in one region only and that region gets affected by natural disaster, the
bank's profitability can be seriously eroded.

9.1.2 LOAN POLICYS

Based on general principles of lending stated above, the Credit Policy Committee (CPC) of
individual banks try prepares the basic credit policy of the Bank, which has to be approved
by the Board of Directors. The loan policy outlines lending guidelines and establishes
operating procedures in all the aspects of credit management including standards for
presentation of credit proposals, rating standards and benchmarks, delegation of the credit
approving powers, prudential limits on large credit exposures of banks, asset concentrations,
portfolio management, loan review mechanism, risk monitoring and evaluation procedure,
pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending
guidelines reflect specific bank's lending strategy (both at the macro level and individual
borrower level) and have to be in conformity with RBI rules The loan policy typically lays
down lending guidelines in following areas:
• Level of credit-deposit ratio
• Targeted portfolio mix
• Hurdle ratings
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• Loan pricing
• Collateral security

Credit Deposit (CD) Ratio

A bank can lend out only a certain proportion of its total deposits, since some part of the total
deposits have to be statutorily maintained as Cash Reserve Ratio (CRR) deposits, and an
additional part has to be used for making the investment in prescribed securities (Statutory
Liquidity Ratio or SLR requirement). It may be noted that these are minimum mendatory
requirements. Banks have option of having more cash reserves than CRR requirement and
invest more in the SLR securities. Further, banks also have the option to invest in non-SLR
securities approved by goverment.

Therefore, CPC has to lay down the quantum of credit that can be granted by banks as a
percentage of total deposits available. Currently, average CD ratio of the entire banking
industry is around 70%, though it differs across banks. It is rarely observed that the banks
lend out of their borrowings.

Targeted Portfolio Mix

The CPC totally aims at a targeted portfolio mix keeping in the view both risk and return.
Toward this end, it lays down guidelines on choosing preferred areas of the lending (such as
sunrise sectors and profitable sectors) as well as the sectors to avoid. Banks typically monitor
all the major sectors of the economy. They target a particular portfolio mix in the light of
forecasts for growth and profitability for each of the sector. If a bank perceives economic
weakness in a particular sector, it would restrict new exposures to that segment and similarly,
growing and profitable sectors of the economy prompt banks to increase new exposures to
those sectors. This entails to a active portfolio management.
Further, the bank also has to decide about which sectors to avoid.like, the CPC of a bank may
be of the view that the bank is already has over extended in a particular industry and no more
loans an advances should be provided in that sector. It may also like to avoid certain kinds of
loans keeping in mind the general credit discipline, say loans for the speculative purposes,
unsecured loans, etc.

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Hurdle ratings
There are a number of the diverse risk factors associated with borrowers. Banks should have
a comprehensive risk rating system that must serves as a single point indicator of diverse risk
factors of a borrower. This helps to take credit decisions in a consistent manner. To facilitate
this, a substantial degree of standardisation is a must required in ratings across borrowers.
The risk rating system should be so designed as to reveal the overall risk of lending. For the
new borrowers, a bank usually lays down the guidelines regarding minimum rating to be
achieved by the borrower to become eligible for bank loan. This is also known as the 'hurdle
rating' criterion to be achieved by a all types of new borrower.

Pricing of loans
Risk nd return trade-off is a fundamental aspect of the risk management. Borrowers with
having weak financial position and hence, placed in the higher risk category are provided the
credit facilities at a higher price . The higher the credit risk of a the borrower the higher
would be his cost of borrowing. To price the credit risks, banks devise the appropriate
systems, which usually allow a flexibility for revising the price (risk premium) due to the
changes in rating. In other words, if risk rating of a borrower deteriorates, his cost of the
borrowing should rise and vice versa.

At the macro level, loan pricing for a bank is usualy dependent upon a number of its cost
factors such as cost of the raising resources, cost of administration and overheads, cost of
reserve like CRR and SLR, cost of maintaining adequate capital, % of bad debt, etc. Loan
pricing is also dependent upon level of competition.

Collateral security
As part of a the prudent lending policy, banks usually advance the loans and advances against
some security. The loan policy provides proper guidelines for this. In case of term loans and
working capital assets, banks take a 'primary security' the property or goods against which
loans are granted by banks. In addition to this, banks often ask for additional security or
'collateral security' in the form of both physical asset and financial assets to further bind the
borrower. This reduces the risk for all the bank. Sometimes, loans are extended as 'clean
loans' for which only personal guarantee of the borrower is taken.

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9.1.3 COMPLIANCE WITH RBI GUIDELINES
The credit policy of a bank should be conformant with RBI guidelines; some of the important
guidelines of the RBI relating to bank credit are discussed below.

Directed credit stipulations

The RBI lays down guidelines regarding minimum advances to be made for priority sector
advances, export credit finance, etc. These guidelines need to be kept in mind while
formulating credit policies for the Bank.

Capital adequacy
If a bank creates assets or investment-they are required to be backed up by proper bank
capital; the amount of capital they have to be backed up by depends on the risk of the
individual assets that the bank acquires. The riskier the asset, the larger would be capital it
has to be backed up by. It is because bank capital provides a cushion against unexpected
losses of banks and the riskier assets would require larger amounts of capital to act as
cushion.

Basel Committee for Bank Supervision (BCBS) has prescribed a certain set of norms for the
capital requirement for the banks for all the countries to follow. These norms ensure that
capital should be adequate to absorb all unexpected losses. In addition, all countries,
including India, establish their own sets of guidelines for risk based capital framework known
as Capital Adequacy Norms. These norms have to be at least as stringent as the norms set by
Basel committee. A key norm of the Basel committee is about the Capital Adequacy Ratio
(CAR), also known as Capital Risk Weighted Assets Ratio,it is a simple measure of
soundness of a bank. The ratio is capital with the bank as a % of its risk-weighted assets.
Given the level of capital available with an individual bank, this ratio determines the
maximum extent to which a bank can lend.

The Basel committee specifies a proper CAR of at least 8% for banks. This means that
capital funds of a bank must be at least 8 % of the bank's risk weighted assets. In India, the
RBI has specified a 9%, which is more stringent than international norm. In fact, the actual
ratio of all commercial banks (SCBs) in India stood at 13.2% in 2009.

29
The RBI also provides guidelines about how much the risk weights banks should assign to
different set of classes of assets (such as loans). The riskier the asset class higher would be
the its risk weight. Thus, the real estate assets, like: are given very high risk weights. This
regulatory requirement that each of the individual bank has to maintain a minimum level of
capital, which is commensurate with risk profile of the bank's assets, plays a critical role in
safety and soundness of individual banks and the India banking system.

Credit Exposure Limits

As prudential measure aimed at better risk management and for avoidance of concentration
of credit risks, the Reserve Bank has fixed certain limits on bank exposure to the capital
market as well as to individual and a group borrowers with reference to a bank's capital.
Particular Limits on inter-bank exposures have also been placed. Banks are further
encouraged to place a certain internal caps on their sectoral exposures, their exposure to
commercial real estate & to unsecured exposures. These exposures are closely monitored by
the Reserve Bank of India. Prudential norms are there on banks exposures to NBFCs and to
related entities are also in place.

Table gives a summary of the RBI's guidelines on the exposure norms for the commercial
banks in India.

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Exposure norms for Commercial banks in India

Table 5: Exposure norms

Some categories of the above table are discussed below:

Individual Borrowers: A bank's credit exposure to the individual borrowers must not exceed
15% of the Bank's total capital funds. Credit exposure to individual borrowers may exceed
the exposure norm of 15 percent of capital funds by an additional of 5 % (i.e. up to 20 %)
provided additional credit exposure is on account of infrastructure financing.

31
• Group Borrowers: A bank's exposure to a particular group of companies under the same
management control must not exceed 40% of the Bank's capital funds in any case unless the
exposure is in respect of an infrastructure project. In that case, exposure to a group of
companies under the same management control may be up to 50% of the Bank's total capital
funds.

• Aggregate Exposure To Capital Market: A bank's aggregate exposure to capital market,

including both the fund based and a non-fund based exposure to capital market, in all forms
should not exceed 40 % of its net worth as on March 31 of previous year. In addition to
ensuring compliance with the above guidelines laid down by central bank, a Bank may fix its
own credit exposure limits for mitigating the credit risk. The bank may, for example, set the
upper caps on exposures to a sensitive sectors like commodity sector, real estate sector and
capital markets. Banks also may lay down the guidelines regarding of exposure limits to
unsecured loans.

Lending Rates
Banks are free to determine their own set of lending rates on all kinds of advances except a
few advances such as export finance; interest rates on these types of exceptional categories of
advances are regulated by the RBI. It may be noted that the Section 21A of the BR Act
provides that the rate of interest charged by a commercial bank shall not be reopened by any
court on the ground that the rate of interest charged is quite excessive.

The concept of the benchmark prime lending rate (BPLR) was however introduced in
November 03 for pricing of loans by commercial banks with the objective of enhancing
transparency in pricing of their loan products. Each bank must have to declare its benchmark
prime lending rate (BPLR) as approved by its Board of Directors. A bank's BPLR is interest
rate to be charged to its best clients; that is, clients with having lowest credit risk. Each bank
is also required to indicate the proper maximum spread over the BPLR for various credit
exposures.

However, BPLR lost its relevance over time as meaningful reference rate, as bulk of loans
were advanced below the BPLR. Further, this also impedes the smooth transmission of the
monetary signals by RBI. The RBI therefore set up a unique Working Group on Benchmark
Prime Lending Rate (BPLR) in June 2009 to go into the issues relating to the concept of
32
BPLR and suggest proper measures to make credit pricing more transparent. Banks may, in
exceptional circumstances, with approval of their boards, they enhance the exposure by
additional 5% for both individual, and group borrowers and following the recommendations
of the Group, the Reserve Bank has issued guidelines in February 2010. According to these
guidelines, the 'Base Rate system' will replace the previous BPLR system with effect from
July 01, 2010.All the categories of loans should henceforth be priced only with reference to
Base Rate. Each bank will decide its own set of Base Rate. The actual lending rates charged
to borrowers would be Base Rate added borrower-specific charges, which will include
product wise operating costs, credit risk premium and tenor premium.

Since transparency in the pricing of the loans is a key objective, banks are required to exhibit
the information on their Base Rate regime at all branches and also on their websites.
Changes in the Base Rate should also be conveyed to general public from time to time
through the appropriate channels. Apart from transparency, banks should also ensure that
interest rates charged to customers in the above arrangement are non-discriminatory in
nature.

Guidelines on Fair Practices Code for Lenders

RBI has encouraging banks to introduce a fair practices code for the bank loans. Loan
application forms in respect of all the categories of loans irrespective of amount of loan
sought by borrower should be comprehensive. It should include the information about the
fees, if any, payable for processing the bank loan, the amount of such fees refundable in case
of non acceptance of application, prepayment options & any other matter which affects the
interest of the borrower, so that a proper meaningful comparison with the fees charged by
other banks can be made and informed decision can be taken by borrower. Further, the banks
must inform to the customer to enable him to compare rates charged with other sources of
finance.

Regulations Relating To Providing Loans

The provisions of the BR Act, 1949 govern the making of loans by banks in India. RBI issues
directions covering loan activities of commercial banks. Some of the major guidelines of
RBI, which are now in effect, are as follows:

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• Advances against the banks own shares: a bank cannot grant any loans against the security
of its own shares.
• Advances to the bank's Directors: The BR Act lays down the restrictions on the loans and
advances to directors and the firms in which they hold substantial interest.
• Restrictions on the Holding Shares in Companies: In terms of Section 19(2), banks should
not hold shares in any company except provided in sub-section (1) whether as pledgee,
mortgagee or absolute owner, of amount exceeding 30% of the paid-up share capital of that
particular company or 30% of its own paid-up share capital and reserves, whichever is less.

4.2 BASICS OF LOAN APPRAISAL, CREDIT DECISION-MAKING AND REVIEW

9.2.1 CREDIT APPROVAL AUTHORITIES

Board of Directors also has to approve delegation structure of the various credit approval
authorities. Banks establish a multi-tier credit approval authorities for the corporate banking
activities, small enterprises, retail credit, etc. Concurrently, each bank should set up a Credit
Risk Management Department (CMRD), being independent of CPC. The CRMD should
enforce and monitor compliance of the adequate risk parameters and prudential limits set up
by the CPC.

The structure for approving credit proposals is as follows:

• The Credit approving authority: multi-tier credit approving system with proper scheme of
delegation of powers.
• In some of the banks, high valued credit proposals are cleared through a Credit Committee
approach consisting of, 4 officers. The Credit Committee must have invariably have a
representative from the CRMD, who has no volume or profit targets related.

9.2.2 CREDIT APPRAISAL AND CREDIT DECISION-MAKING

When a loan proposal comes to bank, the banker has to decide how much the funds does the
proposal really require for it to be a viable project and what are credentials of those who are
seeking this project. In checking the credentials of the potential borrowers, Credit
Information Bureaus play an vital role.

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Credit Information Bureaus
The Parliament of India has enacted Credit Information Companies (Regulation) Act, 2005,
pursuant to under which every credit institution, including a bank, has to become a member
of a bureau and furnish to it such credit information as may be required of credit institution
about persons who enjoy a credit relationship. Credit information bureaus are thus
repositories of a information, which contains the credit history of the commercial and
individual borrowers. They provide all this information to their Members in the form of
credit information reports.
To get a overall picture of the payment history of a credit applicant, credit grantors must be
able to gain access to applicant's complete credit record that may be spread over the different
institutions. Credit information bureaus collect a commercial and consumer credit related
data and collate such data to create a credit reports, which they distribute to their genuine
Members. A Credit Information Report (CIR) is a original factual record of a borrower's
credit payment history compiled from information received from different credit grantors. Its
purpose is to actualy help credit grantors make informed lending decisions - quickly and
objectively. bureaus provide the history of credit card holders and SMEs.

9.2.3 MONITORING AND REVIEW OF LOAN PORTFOLIO

It is not only important for banks to follow the due processes at time of sanctioning and
disbursing loans, it is equally important to monitor the loan portfolio on the continuous basis.
Banks has need to constantly keep a check on e overall quality of the portfolio. They have to
ensure that the borrower genuinely utilizes the funds for the purpose for which it is
sanctioned and complies with the terms and conditions of sanction. Further, they must
monitor individual borrower accounts and check to see whether the borrowers in different
industrial sectors are facing difficulty in making the loan repayment. Information technology
has become an important tool now a days for efficient handling of the above functions
including decision support systems and the data bases. Such a surveillance and monitoring
approach helps to mitigate the overall credit risk of the portfolio.

Banks have set up the Loan Review Departments or Credit Audit Departments in order to
ensure the compliance with extant sanction and post-sanction processes and procedures laid

35
down by Bank from time to time. This is mostly applicable for larger advances. The Loan
Review Department helps a bank to improve its quality of the credit portfolio by detecting
early warning signals, suggesting remedial measures and by providing the top management
with information on the credit administration, including the credit sanction process, risk
evaluation and post-sanction.

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 CHAPTER 10
LOANS AND ADVANCES

10.1 TYPES OF ADVANCES

Advances can be classified into: fund-based lending and non-fund based lending.

Fund based lending: This is a direct form of the lending in which a loan with actual cash
outflow is given to borrower by the Bank. In most of the cases, such a loan is backed by
primary and/or collateral security. The loan is to provide for financing capital goods and/or
working capital requirements.

Non-fund based lending: In this typelending , the Bank makes no funds outlay. However,
such arrangements may be converted to the fund-based advances if the client fails to fulfil
terms of his contract with the counterparty. Such facilities are known as the contingent
liabilities of the bank. Facilities such as 'letters of credit' & 'guarantees' fall under such
category of non-fund based credit.
Example of how guarantees work. A company takes term loan from a Bank A and obtains a
guarantee from the Bank B for its loan from Bank A, for which he pays a charge. By issuing
the bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if company
fails to meet primary responsibility of repaying Bank A.

10.1.1 WORKING CAPITAL FINANCE

Working capital finance is utilized for the operating purposes, resulting in the creation of
current assets. This is in contrast to the term loans which are utilized for establishing or
expanding a manufacturing unit by acquisition of the fixed assets.

Banks carry out a detailed analysis of a borrowers' working capital requirements. Credit
limits are established in accordance with a process approved by the board of directors. The
limits on Working capital facilities are primarily secured by inventories and receivables
(chargeable current assets).
.
Working capital finance consists mainly of cc facilities, short term loan & bill discounting.
Under the cash credit facility, a line of credit is also provided up to a pre-established amount
based on the borrower's projected level of the sales inventories, receivables and the cash
37
deficits. Up to this particular pre-established amount, disbursements are to be made based on
the actual level of inventories and receivables. Here the borrower is expected to buy
inventory on the payments and, thereafter, seek reimbursement from Bank. In reality, this
may not happen. The facility is generally given for a particular period of up to 12 months and
is extended after a proper review of the credit limit. For clients facing the difficulties, review
may be made after a shorter period.

One problem faced by the banks while extending cc facilities, is that customers can draw up
to a maximum level or approved credit limit, but may decide not to. Because of this, liquidity
management becomes more difficult for a bank in the case of cash credit. RBI has been
trying to mitigate this type of problem by encouraging the Indian corporate sector to avail
working capital finance in two ways: 1) a short-term loan component 2) a cash credit
component.

The loan component would be a fully drawn, while the CC component would vary depending
upon borrower's requirements. According to the RBI guidelines, in the case of borrowers
enjoying WC credit limits of Rs. 10 crores and above from banking system, the loan
component should normally be 80 percent and CC component 20 %. Banks, however, have
the freedom to change composition of WC finance by increasing the CC component beyond
20% or reducing it below 20 %, as the case may be, if so desire. Bill discounting facility
involves the financing of the short-term trade receivables through negotiable instruments.
These instruments can then be discounted with all other banks, if required, for providing
financing banks with liquidity.

10.1.2 PROJECT FINANCE

Project finance business consists mainly of an extending medium-term and long-term rupee
and foreign currency advance to the manufacturing and the infrastructure sectors. Banks also
provide financing by the way of investment in marketable instruments such as fixed rate and
floating rate debentures. All Lending banks usually insist on having first charge on fixed
assets of the borrower. During recent years, the larger banks are increasingly becoming
involved in the financing of large projects, including infrastructure projects. Given large
amounts of financing involved, banks need to have strong regulatary framework for project
appraisal. The adopted framework will need to emphasize on proper identification of
projects, optimal allocation and mitigation of the risks.
38
The project finance approval process includes a detailed evaluation of technical, commercial,
financial and management factors as well as the project sponsor's financial strength and
experience. As part of appraisal process, a risk matrix is to be generated, which identifies
each of the project risks associated to it, mitigating factors and risk allocation. Project finance
extended by all the banks is generally fully secured and has full recourse to borrower
company. In most project finance cases, banks have a first lien on all of the fixed assets and a
second lien on all of the current assets of the borrower company. In addition, guarantees may
be taken from sponsors or the promoters of company. If the borrower company fail to repay
on time, the lending bank can have full recourse to sponsors or promoters of the company.
(Full recourse means that lender can claim the entire unpaid amount from sponsors /
promoters of the company.) However, while financing a very large projects, only partial
recourse to the sponsors or to promoters may be available to the lending banks.

10.1.3 LOANS TO SMALL AND MEDIUM ENTERPRISES

A very substantial quantum of loans is granted by the banks to small and medium enterprises
(SMEs). While granting the credit facilities to smaller units, banks often use a unique
cluster-based approach, which encourages the financing of small enterprises that have a all
homogeneous profile such as leather manufacturing units, chemical, or even export oriented
units. For assessing the credit risk of the individual units, banks use a credit scoring models.

As RBI guidelines, banks should use a simplified credit appraisal methods for the assessment
of bank finance for smaller units. Banks have also been advised that they should not insist on
the collateral security for the loans up to Rs.10 Lakh for a micro enterprises.

39
Specialised Branches for SME Credit
Given the importance of the SME sector, RBI has initiated several measures to increase flow
of credit to this segment. As a part of this effort, PSBs have been operationalizing the
specialized SME bank branches for ensuring an uninterrupted credit flow to this sector. As at
end-March 2009, PSBs have a operationalised as many as 869 core specialized SME bank
branches.

Source: Report on Trend and Progress of Banking in India 2008-09, RBI

Small Industries Development Bank of India (SIDBI) also give facilitates to the flow of
credit at reasonable interest rates to the SME sector. This is done by a incentivising banks
and State Finance Corporations to lend SMEs by refinancing a specified % of incremental
lending to SMEs, besides providing the direct finance along with banks.

10.1.4 RURAL AND AGRICULTURAL LOANS

The rural and agricultural loan portfolio of banks comprises loans to farmers, small and
medium enterprises in rural areas, dealers and vendors linked to these entities and even
corporate. For farmers, banks extend term loans for equipments used in farming, including
tractors, pump sets, etc. Banks also extend crop loan facility to farmers. In agricultural
financing, banks prefer an 'area based' approach; for example, by financing farmers in an
adopted village. The regional rural banks (RRBs) have a special place in ensuring adequate
credit flow to agriculture and the rural sector.

The concept of the 'Lead Bank Scheme (LBS)' was first mooted by Gadgil Study Group,
which actualy submitted its report in October 1969. Pursuant to these recommendations of
the Gadgil Study Group and those of Nariman Committee, which suggested the adoption of
'area approach' in evolving credit plans and a programmes for development of banking and
credit structure, the LBS was introduced by RBI in December, 1969. The scheme envisages
allotment of districts to the individual banks to enable them to assume leadership in bringing
about banking developments in their respective districts. More recently, a High Level
Committee was constituted by RBI in November 2007, to review LBS and improve its
effectiveness, with a focus on financial inclusion and on recent developments in the banking
sector. The Committee has recommended several steps to improve the working of LBS. The

40
importance of role of State Governments for supporting banks in increasing the banking
business in rural areas has been emphasized by Committee.

10.1.5 DIRECTED LENDING

The RBI requires banks to deploy a certain amount of their credit in the certain identified
sectors of the economy. This is called the directed lending by banks. Such directed lending
comprises priority sector and export credit.

A. Priority sector lending

The major objective of priority sector lending program is to ensure that the adequate credit
flows into some of the vulnerable sectors of economy, which may not be attractive for the
banks from the point of view of profitability. These sectors include an agriculture, small scale
enterprises, retail, etc. Small housing loans, loans to the individuals for pursuing an
education, loans to weaker sections of the society etc also qualify as the priority sector loans.

The RBI has certain set of guidelines defining targets for lending to a priority sector as whole
and in certain cases, sub-targets for lending to the individual priority sectors.

41
Targets under Priority Sector Lending

Table 6: targets under priority sector lending

Note: ANBC: Adjusted Net Bank Credit

CEOBSE: Credit Equivalent of Off-Balance Sheet Exposure

RBI guidelines require banks to lend at least 40% of the Adjusted Net Bank Credit (ANBC)
or credit equivalent amount of Off-Balance Sheet Exposure (CEOBSE), whichever higher. In
case of foreign banks, their target for priority sector advances is 32% of ANBC or CEOBSE,
Whichever is higher. In addition to that these limits for overall priority sector lending, the
RBI sets a sub-limits for certain sub-sectors within the priority sector such as the agriculture.
Banks are required to comply with priority sector lending requirements at the end of each
financial year. A bank having shortfall in the lending to priority sector lending target or sub-
target shall be required to make the contribution to the Rural Infrastructure Development
Fund (RIDF) established with NABARD or funds with other FIs as specified by the RBI.

42
 Differential Rate of Interest (DRI) Scheme
Government of India had formulated in March, 1972 a scheme for extending a financial
assistance at the concessional rate of interest @ 4 percentage to selected low income groups
for the productive endeavours. The scheme known as Differential Rate of Interest Scheme
(DRI) it is now being implemented by all SCB. The maximum family incomes that qualify a
borrower for DRI scheme is revised periodically. Currently, the RBI has advised the banks
that the borrowers with annual family income of Rs.18, 000 in a rural areas and Rs.24, 000 in
urban and a semi-urban areas would be eligible to avail it as against the earlier annual income
criteria of Rs.6, 400 in rural areas and Rs.7, 200 in urban areas. The target for the lending
under the DRI scheme in a year is maintained at 1% of the total advances outstanding as at
the end of the previous year.

Source: RBI Circulars

B. Export Credit
As a part of the directed lending, RBI requires the banks to make all loans to exporters at
concessional rates of interest. Export credit is provided for the pre-shipment and post-
shipment requirements of the exporter borrowers in rupees and foreign currencies. At the end
of any fiscal year, 12 % of a bank's credit is required to be in form of export credit. This
requirement is in addition to the other priority sector lending requirement but credits
extended to exporters that are SSI or small businesses may also meet part of priority sector
lending requirement.

Retail Loan
Banks now a days offer a range of retail asset products, including home loans, automobile
loans, personal loans ,credit cards, consumer loans (such as TV sets, personal computers etc)
and, loans against the time deposits and loans against firms shares. Banks also fund dealers
who sell automobiles, two wheelers, consumer durables and commercial vehicles. The share
of retail credit in the total loans and advances was 21 % at end- March 2009.

Customers for retail loans are typically the middle and high-income, salaried or self-
employed, and, in some cases, proprietorship and partnership firms also. Except for personal
loans and credit through the credit cards, banks stipulate that (a) a certain percentage of the

43
cost of the asset (such as a home or a TV set) sought to be financed by the loan, to be borne
by borrower and 2) that the loans are secured by the asset financed.

Many banks have to implemented a credit-scoring program, which is an automated credit

approval system that assigns a credit score to each of the applicant based on certain attributes
like his/her income, educational background and age. The credit score then forms a proper
basis of loan evaluation. External agencies like field investigation agencies and credit
processing agencies may be used to facilitate a proper comprehensive due diligence process
including visits to offices and homes in the case of loans to individual borrowers. Before
disbursements are made, the credit officer checks a overall centralized delinquent database
and reviews the borrower's profile. In making credit decisions, by the banks draw upon
reports from agencies such as the Credit Information Bureau (India) Limited (CIBIL).

Some private sector banks use the direct marketing associates as well as their own branch
network and employees for the marketing retail credit products. However, credit approval
authority lies only with bank's credit officers.

Two important categories of retail loans—are home finance and personal loans—

Home Finance: Banks extend home finance loans, either directly or through the home
finance subsidiaries. Such long term housing loans are provided to the individuals and
corporations and also given as construction to finance to builders. The loans are secured by a
mortgage of property. These loans are extended for maturities generally ranging from 5 to 15
years and a large proportion of these loans are at floating rates. This reduces the interest rate
risk that the banks assume, since a bank's sources of finance are generally of a shorter
maturity. However, fixed rate loans may also be provided usually with banks keeping a
higher margin over the benchmark rates in order to compensate for the higher interest rate
risk. Equated monthly instalments are fixed for the repayment of loans depending upon the
income and age of the borrower(s).

Personal Loans: These are often unsecured type of loans provided to customers who use
these funds for various the purposes such as higher education, medical expenses, social
events and holidays. Sometimes collateral security in the form of physical asset and financial
assets may be available for securing the all personal loan. Portfolio of personal loans also
44
includes micro-banking loans, which are relatively small in value loans extended to lower
income customers in urban and the rural areas.
.
10.2 MODE OF CREDIT
Loan is the amount borrowed from any bank. The nature of borrowing is that the money is
disbursed and recovery is made in the instalments. While lending money by way of loan,
credit is given for a pre definite purpose and for a pre-determined period. Depending upon
the purpose and period of loan, each bank has its own procedure for granting the loan.
However the bank is at liberty to grant the loan requested or refuse it on depending upon its
own cash position & the lending policy. Bank grants credit facility to its all customer in any
one of the following mode:

(a) A Demand Loan is a loan which is repayable on a demand by the bank. In other words,
it is repayable at the short-notice. The entire amount of demand loan is disbursed at one time
and the borrower has to pay interest on it on regular basis. The borrower can repay the loan
either in lumpsum (one time) or in as agreed with bank. For example, if it is so agreed the
amount of loan may be repaid in the suitable instalments. Such loans are normally granted by
banks against a adequate security. The security may include materials or goods in the stock,
shares of companies or any other asset. Demand loans are raised normally for the WC
purposes, like purchase of raw materials, making payment of short-term liabilities.

As amount credited to a loan account in reduction of the borrowers liability to bank has the
effect of permanently reducing the original advances, any further drawing permitted to
account are not secured by the DP note deposited to cover the original loan. Therefore, a
fresh loan account must be opened for every new advance granted to borrower and a new
demand promissory note taken as security.

When the bank wants to grant further loan against the same security the bank must liquidate
the existing account and have to open a fresh account opened for the same. Interest on D/L
will ordinarily be charged at rates laid down by the bank from time to time subject to a
minimum amount of charge of interest for seven days. This interest is calculated on basis of
daily products and applied quarterly.

45
(b) Term Loans: All Medium and long term loans are called term loans. Term loans are
granted for more than a year and repayment of such loans is spread over a larger period. The
repayment is generally made in the suitable instalments of a fixed amount. Term loan is
required for purpose of starting a new business activity, renovation, modernization,
expansion of existing units, purchase of plant and machinery, purchase of the vland for
setting up of a factory, construction of factory building or purchase of other immovable
assets. These loans are generally secured against the mortgage of land, plant and machinery,
building and the like.
A T/L may be granted for any period stipulated for purpose by bank from time to time but in
no case exceeded 15 years. A T/L account is not a running a/c therefore no debits to the
account may be made subsequent to the initial advance except for the interest, insurance
premium and other sunder charges.

(c) Cash credit

CC is a flexible system of lending under which the borrower has the option to withdraw the
funds as and when required and to extent of his needs. Under this arrangement the banker
specifies a limit of loan for customer (known as cash credit limit) up to which the customer is
allowed to withddraw. The CC limit is based on the borrower’s need and as agreed with the
bank. Against the limit of CC, the borrower is permitted to withdraw as and when he needs
money up to the limit sanctioned.

It is normally sanctioned for a period of 1 year and secured by the security of some tangible
assets or the personal guarantee. If the account is running satisfactorily, the limit of cash
credit may be renewed by bank at the end of year. The interest is calculated and charged to
the customer’s account as per use.CC, limits are granted by the banks against following
securities:
a) pledge of bullion, goods or produce or the documents of title thereto,
b) Pledge of goods or produce or documents of title thereto, with additional security or
DP notes bearing two or more names.
c) Hypothecation of the book debts and other assets of any undertaking engaged in
financing of hire purchase transaction.
d) DP notes may bearing two or more names
e) DP notes bearing two or more signatures, collaterally secure
f) Hypothecation of the stock of goods or produce
46
g) Debentures or the fully paid shares of limited liabilities companies
h) Immovable property or documents of title thereto.

(d) Overdraft
Overdraft facility is more or less similar to the ‘cash credit’ facility. Overdraft facility is the
result of an agreement with bank by which a current account holder is allowed to draw over
and above the credit balance in his/her account. It is a short-term facility. This facility is
made available to current account holders who operate their account through the cheques.
The customer is permitted to withdraw amount of overdraft allowed as and when he/she
needs it and to repay it through deposits in the account as and when it is convenient to
him/her.

Overdraft facility is generally granted by a bank on the basis of a written request by the
customer. Sometimes the bank also insists on either a promissory note from the borrower or
personal security of the borrower to ensure safety of amount withdrawn by the customer. The
interest rate on overdraft is higher than is charged on loan. Overdrafts are generally granted:

a) against government or other securities of certain district boards, municipalities court

trust and improvement trusts
b) against fully paid up shares and debentures of public corporations and limited
liabilities companies
c) against receipts, certificates or any other instruments issued by the bank in evidence
of or in representing the amount deposited with in
d) against documents of titles to goods assigned to bank as security
e) against the surrender value of the policies of LIC

Without securities: OD without security or against unauthorised security can be granted to

constituent by the branch manager to the extent of his discretionary powers. Without prior
intimation to the customer, bank can not withdraw the OD facility .Unilaterally from the
customer’s accounts irrespective of the fact that the bank has obtained an application for OD
or not. Even, bank cannot reduce the limit of OD at its own.

The following are some of the benefits of cash credits and overdraft:-

47
(i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of
the borrower.
(ii) There is no necessity of providing security and documentation again and again for
borrowing funds.
(iii) This mode of borrowing is simple and elastic and meets the short term financial needs of
the business.

(e) Discounting of Bills

Apart from sanctioning loans and advances, discounting of bills of exchange by bank is
another way of making funds available to the customers. Bills of exchange are negotiable
instruments which enable debtors to discharge their obligations to the creditors. Such Bills of
exchange arise out of commercial transactions both in inland trade and foreign trade. When
the seller of goods has to realise his dues from the buyer at a distant place immediately or
after the lapse of the agreed period of time, the bill of exchange facilitates this task with the
help of the banking institution. Banks invest a good percentage of their funds in discounting
bills of exchange. These bills may be payable on demand or after a stated period.

In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due
date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so
discounted is retained by the bank till its due date and is presented to the drawee on the date
of maturity. In case the bill is dishonoured on due date the amount due on bill together with
interest and other charges is debited by the bank to the customer’s account.

48
 CHAPTER 11
TERM LOAN
Term Loans are counter parts of Fixed Deposits in the Bank. Banks lend money in this mode
when repayment is sought to be made in fixed, pre-determined instalments. This type of loan
is normally given to borrowers for acquiring long term assets i.e. assets which will benefit the
borrower over a long period (exceeding at least one year). Purchases of plant and machinery,
constructing building for the factory, setting up new projects fall in this category. Financing
for purchase of automobiles, consumer durables, real estate and creation of infra structure
also falls in this category.

A term loan is a monetary loan that is repaid in regular payments over a set period of time.
Term loans usually last between one and ten years, but may last as long as 30 years in some
cases. Term loans can be given on an individual basis but are often used for small business
loans. The ability to repay over a long period of time is attractive for new or expanding
enterprises, as the assumption is that they will increase their profit over time. Term loans are
a good way of quickly increasing capital in order to raise a business’ supply capabilities or
range. For instance, some new companies may use a term loan to buy company vehicles or
rent more space for their operations.

One thing to consider when getting a term loan is whether the interest rate is fixed or floating.
A fixed interest rate means that the percentage of interest will never increase, regardless of
the financial market. Low-interest periods are usually an excellent time to take out a fixed
rate loan. Floating interest rates will fluctuate with the market, which can be good or bad for
you depending on what happens with the global and national economy. Since some term
loans last for 10 years, betting that the rate will stay consistently low is a real risk.

11.1 SECURITIES
Normally bank does not lend without adequate security. Security is the cover obtains by the
banker to safeguard its fund lent. Security is regarded as an insurance against any emergent
situation when the borrower fails/ is unable to pay loan or advances.

49
CLASSIFICATION OF SECURITIES
Securities are classified in different manners as per their nature and characteristics, as follows

PRIMARY SECURITY AND COLLATERAL SECURITY

Primary security means the main cover for loan\advance. In other words asset for which bank
has financed. For example in an advance for purchasing a truck, the truck is primary security
which is hypothecated to bank.
Collateral security is an additional cover to secure advance. These are additional securities to
be realised upon in case of need and serve as a cushion to the bank. Third party guarantee or
equitable mortgage of the house to secure an advance is an example of collateral security.

PERSONAL SECURITY AND IMPERSONAL SECURITY

Personal security is the kind of security which provides legal remedy to the bank against the
borrower. It provides personal rights of action against borrower. It provides personal right of
action against borrower. A promissory note is an example of personal security.
Impersonal or tangible security refers to the security which is in the physical form like shares
stocks or land etc.

SPECIFIC SECURITY AND CONTINUING SECURITY

Specific security is one which covers any specific or existing debt. Example is a FDR which
is kept as security to cover an advance. While continuing security refers to a security which
covers all sums due or may become due in future subject to a specified limit. The purpose of
obtaining continuous security is to cover an advance even when the same is fully paid or
temporarily liquidate. It obviates the requirement of obtaining fresh documents. Continuing
security keeps the document valid and enforceable. It is obtained in case of cash credit/OD
where the balance of account frequency converts into debit and credit.

50
FORMAL AND INFORMAL SECURITY
Formal security is one in which a contract has been made between the borrower and the bank
and which is formally handed over by the borrower to the banker. Pledge, hypothecation,
mortgage and assignments are the example of formal security.
A security which comes in to the hands of bank while dealing with the customer is called an
informal security. Right of lien, right of set off are the example of informal security.

11.2 MAST CHARACTERSTICS OF GOOD TANGIBLE SECURITY

“Mast principle” considered important in identifying the good and tangible security
acceptable to the bank. MAST consists of:
M: MARKETABILITY
A: ASCDERTAINABILITY
S: STABILITY
T: TRANSFERABILITY

A security obtain by the bank should posses the characteristic o0f marketability so that the
bank may realise it in case of default of repayment. The value of security should be
ascertainable easily. There should be stability in the value of the security. Commodities,
which values fluctuates frequently are not considered to be taken as a security.
The transfer of title of security should not be difficult; otherwise bank would not be able to
transfer its title if such needs arise.

11.3 5M’S FOR APPRAISAL OF LOAN/ADVANCE APPLICATION

MAN: man is the most important aspect of appraisal system. All other factors are less
important than man because he is the person who borrows and utilise the money. Three C’s
namely
CHARECTER, COMPETANCE, AND CAPITAL ARE VITAL traits for evaluating man

MATERIAL: it is an important point to consider the unit which propose to start

manufacturing will be able to procure enough raw material, labour power etc. Amenities
essential for production.

51
MARKET: whether the borrower who may be a trader or a manufacturer would be able to
market the goods is an important point of examination. There for banker examine the total
demand and supply of product in the market. Past trends of sale and inventory hold ups etc.

MACHIJNERY: what kind of machinery the borrower would be requiring, what would be
its cost are important points to consider.

MONEY: examination of the monetary requirement of borrower and to apportion his credit
limit in to various modes of finance like term loan, worki9ng capital loan and non fund based
facilities etc. Is most crucial part of lending?

11.4 MARGIN
Afteracce3ssing the borrower’s need for bank finance the banker stipulates margin which the
borrower himself contributes for his need. MARGIN is there for borrower’s contribution in
total quantum of finance. \
MARGIN is stipulated by borrower with the following objective:
1. It provides cushion against price level changes, intrest6 application and recovery in
future.
2. It ensures a degree of stake of borrower in his enterprise.
3. To regulate the level of finance especially in some selected commodities.
4. To protect against the detritions in the value of the security.

11.5 INSURANCE
All properties whether movable or the immovable held as a security by the bankers. By way
of hypothecation, pledge or mortgage must be ensured against like fire, theft, Natural
calamities etc. So that the bankers is not put to any loss when such eventualities occurs.

If insurance policy taken by banker, it will be in banks name and borrowers name is added by
way of description. Where policy is taken by the borrower in his name, it must be assigned in
the bank favour and the assignment must be got registered with the insurance company.

All policies must bear the bank clause. The bank clause provides that in all matters related to
insurance & its subject matters, notice shall be given to the bank by the insurance company
and all claim related thereto shall be paid to the bank against its receipts which will be
52
accepted by the insurance company as valid and complete discharge of claim. Bank clause
also enables a bank to compromise regarding its claim with the insurance without
intervention of the borrower. It protects bank from any wrong done by the borrower to the
prejudice of the bank rights. Due dates of insurance policies must be diarised properly and
renewals must be obtain well in time.

11.6 TYPES OF CHARGES

11.6.1 LIEN
Lien is the right of a person (usually the creditor) to retain the possession of goods and
securities belonging to another person (the debtor) till the amounts due to him from such
owner are fully realised. Lien confers the right only to retain the possession of the goods but
does not convey the property in them to lien holder. Two types of lien are recognised:
a) PARTICULAR LIEN
b) GENERAL LIEN
The general lien which is available to only to a selected class of people likes bankers,
attorneys of high courts etc. Confers the right on the holder to retain the goods and securities
which comes in to the possession in the course of his dealings as a banker for a general
balance due from the customer, provides there is no agreement inconsistent with the lien.

The creditor with particular lien can retain the possession of goods only till the dues from the
debtors for a particular debt for which the securities were handed over have been satisfied.
He cannot retain them for any dues from the debtors on other accounts. For example a tailor
who has been entrusted with the work of stitching 2 shirts may refuse to deliver unless his
charges are paid. However his charges for one shirt have been paid he has to deliver one shirt
and he cannot retain it for the charges due on the other piece.
Banker’s lien is not merely a general lien but is an implied pledge.
It not only confuses on him the right to possess the securities but also converse the title in
them to the banker. No agreement is necessary for the creation of the lien. It is a statutory
privilege confront on the banker by section 171 of the Indian contact act. But certain
condition must be fulfilled before the banker can exercise the right of lien over goods and
securities.

53
a) The securities should have come into his possession in the ordinary course of business
as a banker.
b) There should not be any agreement between the customer and the banker in consistent
with the lien. The presence of such an agreement takes prudent over the right of lien
c) The securities should not have been entrusted with the banker for a special purpose.
d) The securities should have come into the passion lawfully.

11.6.2 SET OFF

Where there is more than one account of the customer with the bank, the accounts can be
combined if there is an agreement to this effect between the banker and the customer
precluding the necessity of issuing a notice. Even in the absence of such an agreement, the
banker may desire the accounts to be combined, especially when one of the accounts is
showing the debit balance. Such a right of a banker where he can adjust the debit balance in
one account out of the balance available in another account of the same customer is known
the right of set off. no notice of set off is necessary to the customer if there is an agreement
with the customer to this effect otherwise, the banker should issued a sufficient notice to
customer intimating his attention of combining the accounts.
The banker should take certain precaution before proceeding to exercise to right set off:

1. He should ensure that sufficient notice is issued to the customer even if there is an
agreement. Such a precaution would guard in later against any claim of the customer for the
wrong full dishonoured cheque.
2. The accounts must belong to the same person and exists in the same capacity.
Accounts belonging to two the different person cannot be combined. Even if the accounts
belong to the same person they cannot be combined if they exist in the different capacities of
the customer.
3. The amount of debts to be set off should be certain for example, if the customer is a
guarantor for a loan, his credit balance cannot be set off against the Dues from the borrower
till the guarantors liabilities ascertained.
4. The set off can be applied only against debt actually due. The banker cannot set off
credit balance in the current account for the contingent liabilities on a bill discounted
5. If the customer has conveyed to the banker his intention to keep the accounts
separate, the banker cannot combine the accounts contrary to such instructions.

54
11.6.3 PLEDGE
Pledge is a bailment of goods as security for payment of a debt or performance of a promise.
Bailment is the delivery of goods by one person to another for some purpose upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them.
When the bank advances against pledge it becomes the pledge (Pawnee) and the borrower the
pledger (pawneer)
Essentials of pledge:
1. Pledge can be created in case of goods or any other movable property including share
and stocks. Immovable properties cannot be pledged; they can only be mortgaged.
2. Goods must be delivered to the pledge. Delivery is the essential of pledge. The goods
must be in the possessions of the pledgee. delivery can be effected in any one of the
following way:
a) Actual delivery: the goods are physically handed over to the pledge by the pledger.
b) Symbolic delivery : the pledger hands over the keys of the store or the documents of
the titled goods dully endorsed to the pledgee
c) Constructive delivery: the goods are in the possession of the third party or the pledger
and they such third party or the pledger acknowledges that he holds goods as a baliee for the
pledgee.
3. The delivery of goods must be with the intension that the goods should serve as
security for a debt or performance of a promise.
4. The pledge must be made by or on behalf of the debtors.

11.6.4 HYPOTHECATION
As defined by DR. HART, hypothecation is a “charge against property for an amount of debt
where neither ownership nor possession is passed to the creditor.” In the hypothecations good
are in the possession of the borrower, but are charged equitably to the banker. Usually the
hypothecation deed empowers the banker to require possession to be handed over to him. In
such cases when possession is acquired by the banker, hypothecation is converted in to
pledge.

The letter of hypothecation gives banker all the power available under the pledge. However
the major difference is that the rights accrue to the bank only when the goods are taken in to0
the possession by it. The real difficulty in case of hypothecation is the acquisition of
55
possession of goods by the bank. “If possession is not given voluntarily it is not lawful to
take possession forcefully even though such a power is included in the document. It may
amount to breach of peace, wrongful entry, wrongful restrain etc. For which criminal
complaint can be filled by the borrower against the lending bank officials. An agreement
permitting commission of offence is itself unlawful and, therefore not enforceable in the
court.

Unlike pledge hypothecation is attended with the risks. As the banker is not in the possession
of the goods, effective supervision is not possible .Chances of the borrower charging the
same goods to two or more banks is easy. The borrower may even sell the goods without
even the knowledge of the banker. But hypothecation is unavoidable. Sometimes it may be
the only mode of charge available. For example, advances may be made against goods in the
showroom.

11.6.5 MORTAGAGE
The rules relating to mortgage of immovable properties are governed by the transfer of
property act 1882.it defines the term mortgage as “the transfer of interest in specific
immovable property for the purpose of securing the payment of money advance or to be
advanced by way of loan, an existing or future debt, or performance of engagement which
may give rise to the pecuniary liabilities. The transferor is called mortgagor the transferee a
mortgagee , the principal money and interest of which payment is secured for the time being
are called mortgage and the instrument (if any) by which the transfer is effected is called a
mortgage deed. “Immovable property includes land benefits that arise of Land and things
attached to Earth.

TYPES OF MORTGAGES: the different type of mortgages recognized by law are given
below they are governed by sections 58 (b) to 58 (g) of the transfer4 of property act 1882.

SIMPLE MORTGAGE:
Under a simple mortgage without delivering of the mortgage property, the mortgager binds
him personally to pay the mortgage money. He agrees , expressly or impliedly, that in the
event of his failing to pay according to his contract the mortgage shall have a right to cause
the mortgage property to be sold and the proceed of sell to applied, so far as may be
necessary in payment of the mortgage money . The words “cause the mortgaged property to e
56
sold” should be taken to, mean that the mortgage no power of sell but can sell the property
after obtaining a decree from a court.
Simple mortgage is very popular among banks the remedies available to the mortgage under
a simple mortgage are
a) To obtain a personal decree of a court against the mortgager
b) To apply to court for a decree permitting sale of mortgaged property.

MORTGAGE BY CONDITIONAL SALE

The mortgager here ostensibly sales the mortgaged property on the conditions that:
1. In default of payment of the mortgage money on a certain date the sale shall become
absolute ; or
2. On such payment being made the sale shall become void ; or
3. On such payment being made t5he buyer shall transfer the property to the seller
It is essential that the transaction to be deemed to be a mortgage, the above condition should
be embodied in the same document whi9ch effects or purports to affect the sale. Otherwise it
will become an absolute sale.
The remedy available to the mortgage is that foreclosure

USUFRUCTUARY MORTGAGE
In a usufructuary mortgage the mortgager delivers the possession or binds himself expressly
or by implication to deliver possession of the mortgaged property to be mortgagee, an
authorises him to retain such possession until repayment of the mortgage money, and to
receive the rent and profit accruing from the property, or any part o0f such rents and profits
and to appropriate same in lieu of interest or in payment of the mortgage money, or partially
or both. The mortgager is not personally liable unless there is a special agreement on this
point the mortgagee cannot sue for sale of foreclosure. He can o0nly retain the possession of
the property and be utilising rents or profits accruing on it. Bank seldom advances against
unsufructary mortgage.

ENGLISH MORTGAGE
In this mortgage the mortgager binds himself the mortgage money on a certain date and
transfer the mortgage property to the mortgage, subject to the proviso that the mortgagee will
transfer it to the mortgager up[on repayment of the mortgage money as agreed. The word
absolute does not mean that the mortgager transfer all his rights in the property to the
57
mortgagee. The mortgager can retain the property in his possession and enjoy the rents, etc.,
accruing from it. He retains with him the power to redeem the property on payment of the
mortgage money.
The mortgagee of an English mortgage can
a) Sell the property without the intervention of the court
b) a point a reviver of the income of the property

EQUITABLE MORTGAGE
This is also known as mortgage by deposit of title deed. Where a person in any of the
presidency towns, viz., the towns of Calcutta, madras and Bombay and in any other town
which the state government concerned may,, by notification in the official gazette specify in
this behalf delivers to the creditors or his agent documents of title to immovable property,
with intent to create a security thereon, the transaction is called mortgage by deposit of title
deeds .registration is not necessary for equitable mortgage. This is most popular type of
mortgage among banker.

ANAMOLUS MORTGAGE
A mortgage which does not come under any of above type but still satisfies the conditions of
mortgage is considered as anomalous mortgage.

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 CHAPTER 12
MANAGEMENT OF NON PERFORMING ASSETS

An asset of a bank turns into a non-performing asset (NPA) when it ceases to generate
regular income such as the interest etc for the bank. In other words, when a bank which lends
a loan does not get back its principal and interest on the time, loan is said to have turned into
an NPA.

NPAs are natural fall-out of undertaking banking business and hence cannot completely
avoided, high levels of NPAs can severely erode bank's profits, its capital and ultimately its
ability to lend further funds to potential borrowers. Similarly, at macro level, a high level of
the nonperforming assets means choking off credit to potential borrowers, thus lowering
capital formation and economic activity. So challenge is to keep the growth of NPAs under
control. Clearly, it is an important to have a robust appraisal of the loans, which can reduce
the chances of loan turning into an NPA. Also, once a loan starts facing the difficulties, it is
important for bank to take remedial action.

Level of Non Performing Assets

The gross NPA of the banking segment were Rs. 68, 972 crores at the end of March 2009,
and the level of net NPAs (after provisioning) was Rs.31, 424.5 crores. Although they appear
to be very large amounts in the absolute terms, they are actually quite small in comparison to
the total loans by banks. The ratio of gross NPA loans to gross total loans has fallen sharply
over the last decade and is at 2.2 per cent as at end-March 2009. This ratio, which is an
indicator of soundness of banks, is comparable with the most of the developed countries such
as France and Japan. The low level of gross NPAs as a % of gross loans in India is a positive
indicator of the Indian banking system.

Source: Report on Trend and Progress of Banking in India 2008-09, RBI and Report on
Currency and Finance 2006-08.

12.1 CLASSIFICATION OF NON-PERFORMING ASSETS

Banks have to classify their assets as performing & the non-performing in accordance with
RBI's guidelines. Under these, an asset is classified as NPA if any amount of interest or

59
principal instalments remains overdue for more than the 90 days, in respect of T/L. In
respect of overdraft or CC, an asset is classified as non-performing if the account remains out
of order for a period of 90 days and in respect of bills purchased and discounted account, if
the bill remains overdue for a period of more than that of 90 days.

All assets do not perform uniformly. In some cases, assets perform very well and the
recovery of principal and the interest happen on the time, while in all other cases, there may
be delays in recovery or the no recovery at all because of one reason or the other. Similarly,
an asset may exhibit good quality performance at one point of time and poor performance at
the some other point of time.

According to the guidelines, banks must classify their total assets on an on-going basis into
the following four categories:

Standard assets: Standard assets service their interest and the principal instalments on time;
although they occasionally default up to a period of the 90 days. Standard assets are also
called performing assets. They will yield regular interest to the banks and return the due
principal on the time and thereby help the banks earn the profit and recycle repaid part of the
loans for further lending. The other 3 categories (sub-standard assets, doubtful assets and loss
assets) are
NPAs and are discussed below.

Sub-standard assets: Sub-standard assets are those assets which have very much remained
NPAs (that is, if any amount of interest or principal instalments remains overdue for more
than the 90 days) i.e for a period up to 12 months.

Doubtful assets: becomes doubtful if it remains a sub-standard asset for a period of 12

months and recovery of bank dues is of doubtful.

Loss assets: It comprise assets where a loss has been identified by the bank or the RBI. These
are generally considered as uncollectible. Their realizable value is so low that their
continuance as bankable assets is not being warranted.

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12.2 DEBT RESTRUCTURING
Once a borrower faces difficulty in the repaying loans or paying interest, the bank should
initially address the problem by trying to verify whether financed company is viable in the
the long run. If the compan or the project are viable, then rehabilitation is possible by
restructuring the credit facilities. In a restructuring exercise, the bank can change the
repayment or the interest payment schedule to improve the chances of recovery or even make
some sacrifices in the terms of waiving interest etc.

RBI has a separate guidelines for proper restructured loans. A fully secured standard or the
sub-standard/ doubtful loan can be restructured by rescheduling of principal repayments
and/or interest element. The amount of sacrifice, in the element of interest, is either written
off or provision is made to the extent of sacrifice involved. The sub-standard accounts or
doubtful accounts which have been subjected to restructuring, whether in respect of principal
instalment or the interest amount are well eligible to be upgraded to standard category only
after a specified period.

To create an institutional mechanism for the restructuring of corporate debt, RBI has devised
a Corporate Debt Restructuring system. The objective of this framework is to ensure a timely
and transparent mechanism for restructuring of corporate debts of the viable entities facing
sever problems.

12.3 OTHER RECOVERY OPTIONS

If rehabilitation of debt through restructuring is not at all possible, banks themselves make
efforts to recover debts. For example, banks set up special asset recovery branches by help of
RBI,which concentrate on recovery of bad debts. Private & foreign banks often have a
collections unit structured along various product lines and that of geographical locations, to
manage the bad loans. Very often, banks engage external recovery agents to collect past due
debt, who make phone calls to customers or make visits to their residence. For making debt
recovery, banks lay down their policy and procedure in conformity with RBI guidelines on
recovery of debt.

The past due debt collection policy of the banks generally emphasizes on the following at
ttime of recovery:
61
• Respect to the customers
• Appropriate letter of authorizing agents to collect
• Due notice to the customers
• Confidentiality of the customers' dues
• Use of simple language in communication and maintenance of the records
ofcommunication In difficult cases, banks have the option of taking recourse to filing the
cases in courts, Lok Adalats, Debt Recovery Tribunals (DRTs) and to the One Time
Settlement (OTS) schemes, etc. DRTs have been established under Recovery of Debts due to
Banks and Financial Institutions Act, 93 for expeditious adjudication and recovery of the
debts that are owed to the banks and financial institutions.

A/Cs with loan amount of 10 lacs and above are eligible for being referred to theb DRTs.
OTS schemes and Lok Adalats are especially useful to the NPAs in smaller loans in different
segments, such as small and marginal farmers and SME entrepreneurs. If a bank is unable to
recover the amounts due within a reasonable period time, the bank may write off the loan.
However, even in these cases, efforts should be continue to make the recoveries.

12.4 SARFAESI ACT, 2002

Banks utilize the Securitisation and Reconstruction of Financial Assets & Enforcement of
Security Interest Act, 02 (SARFAESI) as an effective tool for NPA recovery. It is possible
where NPA are backed by securities charged to Bank by way of hypothecation or mortgage
or assignment. Upon loan the default, banks can seize securities (except agricultural land)
without intervention of court.

The SARFAESI Act, 2002 gives powers of "seize and desist" to the banks. Banks can give a
notice in writing to defaulting borrower requiring it to discharge its total liabilities within 60
days. If the borrower fails to comply with the notice, Bank may take recourse to one or more
of the following measures:

• Take possession of security for the loan

• Sale or lease or assign right over the security
• Manage the same or appoint any person to manage
The SARFAESI Act also provides for the establishment of all asset reconstruction companies
regulated by RBI to acquire assets from banks and FI. The Act provides for sale of financial
62
assets by banks and FI to asset reconstruction companies (ARCs). RBI has issued proper
guidelines to banks on the process to be followed for sales of financial assets to ARCs.

63
 CHAPTER 13
RELATIONSHIP BETWEEN BANK AND CUSTOMER
In India, banks face a challenge of providing services to broad range of customers, varying
from highly rated corporate and high NW individuals to low-end depositors and borrowers.

Banks usually place their customers into certain categories so that they sable to (a) develop
suitable products according to customer requirements and (b) service customers efficiently.
The bank-customer relationship is influenced dimensions, notably:

• While banks are competing with each other to attract the most profitable businesses,
financial inclusion is increasings. An important issue in India is that a large number of the
people, nearly half of the adult population, still do not have bank accounts. 'Financial
Inclusion' would imply bringing s large segment of the population into the banking fold.
• Second, banks have started using innovative methods in approaching scustomers;
technology is an important component of such efforts.
• Finally, on account of security threats as well as black money circulating in the system, care
has to be taken to the identify the customers properly, know sources of their funds and
prevent money laundering.

13.1 SERVICES TO DIFFERENT CUSTOMER GROUPS

Developing and properly categorising a customer data base forms part of core strategy of a
bank. A typical bank with a widespread network of branches aims at the serving the
following broad customer groups.
• Retail customers;
• Corporate customers;
• International customers;
• Rural customers.
A bank formulates its overall customer strategy to the increase profitable business keeping in
mind its strengths and weaknesses. key strategy components and trends in each of these
customer groups are briefly discussed below.

64
13.1.1 Retail Customers
With growing household incomes, Indian retail financial services has high growth potential.
The key dimensions of retail strategy of a bank include customer focus, a wide range of
products, customer convenience, distribution, strong processes and prudent risk management.
fee income that banks earn while extending commercial banking services to the retail
customers includes retail loan processing fees, credit card & debit card fees, transaction
banking fees and fees from distribution of the third party products. Cross selling of the entire
range of credit investment products and the banking services to customers is often a key
aspect of retail strategy.

13.1.2 Retail Lending Activities

There is widespread acceptance by average consumer of using credit to purchases. Given this
background, retail credit has emerged as a rapidly growing opportunity for the banks. Banks
also focus on growth in retail deposit base which would include low cost current a/c and
savings bank deposits. Retail deposits are usually more stable than corporate bulk deposits or
wholesale deposits.

Banks offer a range of retail products, including the home loans, automobile loans,
commercial vehicle loans, two wheeler loans, personal loans, & credit cards, loans against
time deposits & loans against shares. Banks also fund the who sell automobiles, 2 wheelers,
consumer durables and commercial vehicles. A few of the banks have set up home finance
subsidiaries in order to concentrate on this business in a more focused manner.

Personal loans are unsecured loans provided to the customers who use funds for various
purposes such as higher education, medical expenses, social events and even for holidays.
Personal loans include micro-banking loans, which are relatively small value loans to lower
income customers in the urban and rural areas. Credit cards have become an important
component of the lending to the retail segment in the case of a no. of banks. Indian economy
develops, it is expected that the retail market will seek short-term credit for personal uses,
and the use of credit cards will facilitate further extension of banks' retail business.

65
Share of retail loans in total loans
The share of retail loans in all olans and advances of (SCBs) was 21.35% at end-March 2009.
The maximum share was accounted for by housing loans followed by 'personal loans', auto
loans, credit card receivables, loans for commercial durables.
Source: Report on Trends and Progress of Banking in India, 2008-09, RBI.

13.1.3 Lending to small and medium enterprises

Most of the private and foreign banks have integrated strategy with regard to small and
medium enterprises with their strategy for retail products and services. Hence, the retail focus
includes meeting the WC requirements, servicing deposit accounts and providing other
banking products and services required by SME. Of late PSU banks are also very active in
lending to this business segment. Banks often adopt a community based approach to
financing of small enterprises, that is, identifying small enterprises that have a homogeneous
profile such as apparel or jewellery exporters.

13.1.4 Corporate Customers

Corporate business covers project finance including infrastructure finance, cross border
finance, working capital loans, non-fund based working capital products and other fee-based
services. Banks often have to make special efforts to get the business of highly rated
corporations. The recent emphasis on infrastructure in India, including projects being built on
private-public partnership basis, is leading to profitable business opportunities in this area.
Further, Indian companies are also going global, and making large acquisitions abroad. This
trend is likely to pick up momentum in future and banks which gear themselves up to meet
such requirements from their customers will gain.

There is also a growing demand for the foreign exchange services from corporate customers.
Banks offer fee-based products & services including foreign exchange products,
documentary credits (such as letter of credit or LC) and guarantees to the business
enterprises. Corporate customers are also increasingly demanding the new products and
services such as forward contracts and interest rate and currency swaps.

66
International Presence
Indian banks while expanding business to abroad have usually been leveraging home country
links. The emphasis has been on to supporting Indian companies in raising corporate and
project finance overseas for their investments purpose in India and abroad (including
financing of overseas acquisitions by Indian companies), and extending trade and personal
financial services (including remittance and deposit products) for NRI.

Rural Banking Customers

Over 70% of India's citizens live in the rural areas. Hence, there is a need for the banks to
formulate strategies for rural banking, which have to include the products targeted at various
customer segments operating in rural. These customer segments include the corporate, SME
and finally the individual farmers and traders. Primary credit products for rural retail segment
include farmer financing, micro-finance loans, WCfinancing for agro-enterprises, farm
equipment financing, and commodity based financing. Other services such as savings,
investment and insurance products customised for rural segment are also offered by banks.

13.2 BANKING OMBUDSMAN SCHEME

The Banking Ombudsman Scheme makes available an expeditious and inexpensive forum to
bank customers for the resolution of complaints relating to certain services rendered by all
banks. The Ombudsman Scheme was introduced under Section 35 A of the Banking
Regulation Act 1949 with effect from 1995. All SCB, Regional Rural Banks and Scheduled
Primary Co-operative Banks are covered under Scheme.

13.2.1 Appointment of Banking Ombudsman

The Banking Ombudsman is a senior official appointed by RBI to receive and redress
customer complaints against deficiency in the certain banking services (including Internet
banking and loans and advances). At present, 15 Banking Ombudsmen have been appointed,
with their offices located mostly in the state capitals.

67
13.2.2 Filing a Complaint to the Banking Ombudsman
One can file a complaint before the Banking Ombudsman if (a) the reply to the representation
made by the customer to his bank is not received from the concerned bank within a period of
one month after the bank has received the representation, or (b) the bank rejects the
complaint, or (c) if the complainant is not satisfied with the reply given by the bank. The
Banking Ombudsman does not charge any fee for filing and resolving customers' complaints.

13.2.3 Limit on the Amount of Compensation as Specified in an Award

The amount, if any, to be paid by bank to the complainant by way of compensation for any
loss suffered by the complainant is limited to amount arising directly out of the act or
omission of the bank 10 lacs, whichever is lower. Further, the Ombudsman may award
compensation not exceeding Rs 1 lacs to the complainant only in case of complaints relating
to credit card operations for mental agony & harassment. The Banking Ombudsman will take
into account loss of the complainant's time, expenses incurred by the complainant
&harassment and mental anguish suffered by the complainant while passing such award.

13.2.4 Further recourse available

If a customer is not satisfied with the decision passed by the Banking Ombudsman, he can
approach the Appellate Authority against the Banking Ombudsman's decision. Appellate
Authority is vested with a Deputy Governor of RBI. He can also explore any other recourse
available to him as per the law. The bank also has the option to file an appeal before the
appellate authority under the scheme.

13.3 KNOW YOUR CUSTOMER (KYC) NORMS

Banks are required to follow Know Your Customer (KYC) RBI guidelines. These guidelines
are meant to the weed out and to protect good ones and the banks. With the growth in
organized crime, KYC has assumed the great significance for banks. RBI guidelines on KYC
aim at preventing banks from being used, intentionally / unintentionally, by criminal
elements for money laundering/ terrorist financing activities. They also enable banks to have
better knowledge & understanding of their customers and their financial dealings. This in
turn helps the banks to manage their risks better. The RBI expects all banks to have the
comprehensive KYC policies, which need to be approved by their respective banks boards.
Banks should frame their KYC policies incorporating the following four key elements:
a) Customer Acceptance Policy;
68
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management.

13.3.1 Customer Acceptance Policy

Every bank should develop a clear Customer Acceptance Policy laying down the explicit
criteria for acceptance of customers. The usual elements of policy should include the
following. Banks, for example, should not open an account in the anonymous or fictitious or
benami name(s). Nor should any account be opened where bank's due diligence exercises
relating to identity has not been carried out. Banks have to ensure that the identity of the new
or existing customers does not match with any person with known of criminal background. If
a customer wants to act on behalf of the another, the reasons for the same must be looked
into.

However, the adoption of the customer acceptance policy and its implementation should not
become too restrictive and should not result in denial of the banking services to general
public, especially to those who are financially or socially disadvantaged.

13.3.2 Customer Identification Procedures

Customer identification means identifying customer and verifying his/her identity by using
reliable, independent source documents, data and information. For individual customers,
banks should obtain sufficient identification data to verify the identity of the customer, his
address and a the recent photograph. For customers who are in legal persons, banks should
scrutinize their legal status through the relevant documents, examine the ownership structures
and determine the natural persons who control the entity.

Documents for opening deposit accounts under KYC guidelines

The Customer identification will be done on the basis of documents provided by the
prospective customer as under:
a) Passport or Voter ID card or Pension Payment Orders (Govt/PSUs) alone, where on the
address is the same as mentioned in account opening form.
b) Any one document for proof of identity and proof of address, from each of the under noted

69
items:

Proof of Identity
i) Passport, if the address differs from the one mentioned in the account opening form
ii) Voter ID card, if the address differs from the one mentioned in the account opening form
iii) PAN Card
iv) Govt./ Defence ID card
v) ID cards of reputed employers
vi) Driving License
vii) Pension Payment Orders (Govt./PSUs), if the address differs from the one mentioned in
the account opening form
viii) Photo ID card issued by Post Offices
viii) Photo ID card issued to bonafide students of Universities/ Institutes approved by UGC/
AICTE

Proof of address
i) Credit card statement
ii) Salary slip
iii) Income tax/ wealth tax assessment
iv) Electricity bill
v) Telephone bill
vi) Bank account statement
vii) Letter from a reputed employer
viii) Letter from any recognized public authority
ix) Ration card
x) Copies of registered leave & license agreement/ Sale Deed/ Lease Agreement may be
accepted as proof of address
xi) Certificate issued by hostel and also, proof of the residence incorporating local address, as
well as permanent address issued by respective hostel warden of the aforesaid University/
institute where the student resides, duly countersigned by the Registrar/ Principal/ Dean of
Student Welfare. Such accounts should be closed on the completion of education/ leaving the
University/ Institute.
xii) For students residing with the relatives, address proof of relatives along with their

70
identity proof, can also be accepted provided declaration is given by relative that the student
is related to him and is to staying with him.

13.3.3 Monitoring of Transactions

Ongoing monitoring is an essential element of the effective KYC procedures. Banks can
effectively control and reduce to their risk only if they have an understanding of the normal
and reasonable activity of the customer so that they have means of identifying the
transactions that fall outside regular pattern of activity. Banks should pay special attention to
all complex, unusually large transactions and all unusual patterns which have no apparent
economic or visible lawful purpose. Banks may prescribe threshold limits for the particular
category of accounts and pay a particular attention to transactions which exceed these limits.

Banks should ensure that any of remittance of funds by way of demand draft or mail/
telegraphic transfer or any of other mode and issue of travellers' cheques for the value of Rs
50,000 and above is effected by debit to the customer's account or the against cheques and
not against for cash payment. Banks should further ensure that provisions of Foreign
Contribution Act, 1976 as amended from time to time, wherever applicable, are strictly
adhered to.

13.3.4 Risk Management

Banks should, in consultation with their boards of directors, devise procedures for creating
the risk profiles of their existing and a new customers and apply various anti-money
laundering measures keeping in the view the risks involved in a transaction, of account or
banking/ business relationship. Banks should prepare a proper profile for each new customer
based on risk categorisation. The customer profile may contain the information relating to
customer's identity, social or the financial status, nature of business activity, information
about his clients' business and their location etc. Customers may be categorised into the low,
medium and high risk. For example, individuals (other than high net worth individuals) and
entities whose identities,sources of wealth can be easily identified & transactions in whose
accounts by and large conform to known transaction profile of that kind of customers may be
categorised as low risk. Salaried ,government owned companies, regulators fall in this

71
category. For category of customers, it is sufficient to meet the just the basic requirements of
verifying identity.

There are other customers who belong to medium to high risk category. Banks need to apply
intensive due diligence for the higher risk customers, especially those for whom sources of
funds are not clear. Examples of customers requiring higher due diligence include (a) non-
resident customers; (b) high net worth individuals; (c) trusts, NGOs and organizations
receiving donations; (d) companies having close family of shareholding or beneficial
ownership; (e) firms with 'the sleeping partners'; (f) politically exposed persons (PEPs) of the
foreign origin; (g) non-face-2-face customers and (h) those with dubious reputation as per the
public information available etc.

Banks' internal audit and the compliance functions have an very important role in evaluating
and ensuring adherence to the KYC policies and the procedures. Concurrent or Internal
Auditors should specifically check and verify application of KYC procedures at the branches
and comment on lapses observed in this regard.

13.4 PREVENTION OF MONEY LAUNDERING ACT (PMLA), 2002

The PMLA, 2002 casts certain obligations on banking companies in regard to the
maintenance and reporting of the following types of transactions:

a) All cash transactions of value of more than Rs 10 lakh or its equivalent foreign currency;
b) All series of the cash transactions integrally connected to each other which have been
valued below 10 Lakh or its equivalent in foreign currency where such series of the
transactions have taken place within a month and aggregate value of such transactions exceed
Rs 10 Lakh;
c) all cash transactions were forged or counterfeit currency notes or bank notes have been
used as the genuine and where any of forgery of a valuable security or of a document has
taken place facilitating the transaction; and
d) All of the suspicious transactions whether or not made in cash

72
 CHAPTER 14
RESEARCH METHODOLOGY
A) Statement of problem
In the recent years the financial system especially the banks have undergone numerous
changes in the form of reforms, regulations & norms. The attempt here is to see how various
ratios have been used to reveal a bank’s performance and how this particular model
encompasses a wide range of parameters in making it a widely used and accepted model in
today’s scenario of banking.

B) Research design
Here, we are under going to have descriptive research i.e. analysis of banks financial
statements that will make us understand the position of one bank in comparison of another
and their financial position.

C) Sample design

1) Sample unit
Indian Commercial Bank.
2) Sample size
Five banks including, both public & private sector bank. Banks are Bank of India, state bank
of India, Punjab national bank, axis bank.
3) Sampling technique
Convenience sampling which is a non probabilistic sampling techniques in which samples are
chosen from the available sample element according to convince and there is no fixed
probability of chosen from all the sample elements.
4) Area of survey
The survey will be done for five banks. The study environment will be the Banking industry.

5) Plan of analysis
Here, we will be using financial statements of all banks in order to calculate different ratios
which will be required for camel rating system as it considers all areas of banking operations
and considered to be the best available method for evaluation bank performance and health.

73
D) Data Collection
Data source
We have taken secondary data. Secondary data on subjectwill be collected from bank’s
prospectus, annual reports and other websites.

E) Data analysis
Statistical tool
We have used CAMEL RATING technique for the comparative study of different public and
private sector banks of India.

74
 CHAPTER 15
ANALYSIS

BANK OF INDIA FINANCIAL STATEMENTS

PROFIT & LOSS ACCOUNT

Profit & Loss account ------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Income
Interest Earned 7,028.70 9,180.33 12,355.22 16,347.36 17,877.99
Other Income 1,184.38 1,562.95 2,116.93 3,051.86 2,616.64
Total Income 8,213.08 10,743.28 14,472.15 19,399.22 20,494.63
Expenditure
Interest expended 4,396.72 5,739.86 8,125.95 10,848.45 12,122.04
Employee Cost 1,328.13 1,614.00 1,657.01 1,937.41 2,296.07
Selling and Admin 858.15 957.63 1,122.39 1,120.62 2,334.80
Expenses
Depreciation 96.73 96.73 73.13 69.37 101.29
Miscellaneous 831.91 1,211.89 1,484.26 2,416.02 1,899.36
Expenses
Preoperative Exp 0 0 0 0 0
Capitalized
Operating Expenses 2,650.74 3,165.32 3,342.23 3,716.65 5,422.07
Provisions & 464.18 714.93 994.56 1,826.77 1,209.45
Contingencies
Total Expenses 7,511.64 9,620.11 12,462.74 16,391.87 18,753.56
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

75
Net Profit for the Year 701.44 1,123.17 2,009.40 3,007.35 1,741.07
Extraordinary Items 0 0 0 0 0
Profit brought forward 220 541.76 541.76 0 0
Total 921.44 1,664.93 2,551.16 3,007.35 1,741.07
Preference Dividend 0 0 0 0 0
Equity Dividend 166.73 196.69 245.77 491.54 428.65
Corporate Dividend 0 0 0 0 0
Tax
Per share data
(annualized)
Earning Per Share (Rs) 14.39 23.04 38.26 57.26 33.15
Equity Dividend (%) 34 35 40 80 70
Book Value (Rs) 99.03 117.89 168.06 224.39 243.75
Appropriations
Transfer to Statutory -76.79 405.6 795.78 1,518.33 686.86
Reserves
Transfer to Other 289.74 520.88 1,509.61 997.48 625.56
Reserves
Proposed 166.73 196.69 245.77 491.54 428.65
Dividend/Transfer to
Govt
Balance c/f to Balance 541.76 541.76 0 0 0
Sheet
Total 921.44 1,664.93 2,551.16 3,007.35 1,741.07
Table 7: profit & loss account

76
BALANCE SHEET

Balance Sheet ------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Capital and
Liabilities:
Total Share
Capital 488.14 488.14 525.91 525.91 525.91
Equity Share
Capital 488.14 488.14 525.91 525.91 525.91
Share
Application
Money 0 0 0 0 0
Preference
Share Capital 0 0 0 0 0
Reserves 4,338.39 5,257.75 8,300.38 11,258.72 12,275.46
Revaluation
Reserves 157.35 149.48 1,763.10 1,710.29 1,428.62
Net Worth 4,983.88 5,895.37 10,589.39 13,494.92 14,229.99
Deposits 93,932.03 119,881.74 150,011.98 189,708.48 229,761.94
Borrowings 5,893.91 6,620.83 7,172.45 9,486.98 22,399.90
Total Debt 99,825.94 126,502.57 157,184.43 199,195.46 252,161.84
Other
Liabilities &
Provisions 7,464.44 9,239.05 11,056.16 12,811.39 8,574.63
Total
Liabilities 112,274.26 141,636.99 178,829.98 225,501.77 274,966.46
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

77
 12 mths 12 mths 12 mths 12 mths 12 mths

Assets
Cash &
Balances with
RBI 5,588.42 7,196.89 11,741.85 8,915.28 15,602.62
Balance with
Banks, Money
at Call 5,857.57 10,208.65 5,975.54 12,845.97 15,627.51
Advances 65,173.74 84,935.89 113,476.33 142,909.37 168,490.71
Investments 31,781.75 35,492.76 41,802.88 52,607.18 67,080.18
Gross Block 1,674.00 1,733.50 3,448.44 3,578.23 3,790.81
Accumulated
Depreciation 874.71 955.61 1,049.28 1,156.75 1,504.07
Net Block 799.29 777.89 2,399.16 2,421.48 2,286.74
Capital Work
In Progress 10.68 11.41 26.92 110.45 65.07
Other Assets 3,062.83 3,013.50 3,407.32 5,692.02 5,813.63
Total Assets 112,274.28 141,636.99 178,830.00 225,501.75 274,966.46

Contingent
Liabilities 57,844.12 54,811.58 100,486.14 107,155.08 118,535.87
Bills for
collection 12,086.74 17,116.16 20,181.00 11,490.74 28,372.75
Book Value
(Rs) 99.03 117.89 168.06 224.39 243.75
Table 8: Balance Sheet

78
Highlights of the Banks performance in the year 2009-2010 as compared to the previous
year and the performance for the quarter-ended march 2010 as against March 2009 are
given below (Rs. In Crores)

BOI COMPARATIVE STUDY OF 2009 AND 2010

Annual Annual Qua. Ended Qua. Ended
March 10 March 09 March 10 March 09
Net Profit 1741.07 3007.35 427.91 810.37
Operating Profit 4704.77 5456.80 1275.39 1408.06
Gross NPA (%) 2.85 1.71 2.85 1.71
Net NPA (%) 1.31 0.44 1.31 0.44
Capital adequacy
ratio
Basel 1 12.63 13.21 12.63 13.21
Basel 2 12.94 13.01 12.94 13.01
Return on avg. asset 0.70 1.49 0.65 1.50
Cost to income ratio 43.81 36.18 43.94 36.14
Total business 401079 334440 401079 334440
Total Deposits 229762 189708 229762 189708
Gross credit 171317 144732 171317 144732
CASA ratio 32.00 31.00 32.00 31.00
Avg. cost of deposits 5.16 5.76 4.79 6.07
Avg. yield on 8.42 9.78 8.12 9.68
deposits
Credit deposit ratio 74.56 76.29 74.56 76.29
Net interest margin 2.51 2.97 2.57 2.98
Business per 10.11 8.33 10.11 8.33
employee (Cr.)
Earning per share 33.15 57.26 8.15 15.43
(Rs.)
Table 9: BOI comparative study 2009-10

79
BRANCHES & ATMS (BOI COMPARISION WITH OTHER BANKS)
Sr. Name of the Branches ATMs
no. Bank
Rural Semi- Urba Metrop Total On- Off- Total
Urban n olitan site site

1 Bank of 1,231 603 542 559 2935 3000 200 500

India
2 Punjab 1,881 895 849 702 4327 1541 609 2150
National
Bank
3 State Bank 4,366 3311 2022 1773 11472 5229 3319 8548
of India
4 ICICI Bank 138 461 400 410 1409 1863 2850 4713
Ltd.
5 Kotak 14 37 48 121 220 212 175 387
Mahindra
Ltd.
Table 10: Branches & ATMS

INTERPRETATION
As we can interpret from the table that: -
1) In terms of highest branches, SBI is the leader, which is having more than twice the
branch of PNB. That’s the reason they possess highest amount of low cost deposits.
2) In private sector ICICI is having close competition in terms of (approx. 1408) branches.
ICICI is prevalent in rural & semi urban area while HDFC is having strong position in urban
& metropolitan area.
3) In no of ATM, SBI leading all other banks with 8548 ATMS. And no competition has
been provided by other PSUS. ICICI is at second position with 4713 ATMS.

80
CONCLUSION
1) Reach
With the no of branches the reach of any bank increases, as they will be able to serve more &
more customer. So SBI can be considered having best reach in Indian bank.

2) Better services
Can deliver better services than others e.g. outward, jet clearing cheque procedure, Deposit
& withdrawal facility on comparatively more no of branches than others.

SUGGESTION
To increase the low cost margin, and interest income, which is very low in case of BOI, they
should increase the no. of customer.
And in today’s world deposit can be increased by providing good service of easy withdrawal
and deposits with the help of services like ATM facility through large network of ATMS all
over world.

HIGHLIGHT OF BANK’S PERFORMANCE

Parameters Units 31.3.07 31.3.08 31.3.09 31.03.10
Branches Nos. 2725 2883 3021 3207
Overseas 25 26 27 29
No. of staff Nos. 41511 40616 40155 39676
Deposits Rs.in 119882 150012 189708 229762
Crores
Inc. over previous year % 27.63 25.13 26.46 21.11
March 31
Advances (Gross) Rs. in 86791 114792 144732 171317
Crores
Inc. over previous year % 30.19 32.26 26.08 18.37
March 31
CD ratio % 72.39 76.52 76.29 74.56

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Investments (net) Rs. in 35493 41803 52607 67080
Crores
Capital and reserves (net) Rs. In 5895 10589 13495 14230
Crores
Interest income Rs. In 8936 12355 16347 17878
Crores
Interest Expenditure Rs. In 5496 8126 10848 12122
Crores
Non Interest income Rs. In 1563 2117 3052 2617
Crores
Non interest Expenditure Rs. In 2608 2645 3094 3668
Crores
Total income Rs. In 10499 14472 19399 20495
Crores
Total Expenditure Rs. In 8104 10771 13942 15790
Crores
Operating profit Rs. In 2395 3701 5457 4705
Crores
Table 11: Bank’s performance comparison

82
3.6) BRANCHES PROFITABILITY RATIO
BANK TOTAL BRANCH ADVANC DEPOSIT DPB APB BPB
BUSINES E RATIO RATIO RATIO
S
BOI 401079 3207 171317 229762 71.64 53.41 125
SBI 1284576.3 11472 542503.20 742073.13 64.6 47.28 111.97
3
ICICI 436658.67 1408 218310.85 218347.82 155 155.05 310.12
PNB 364463.49 4327 154702.99 209760.50 48.47 35.75 84.23
KMB 32270.27 220 16625.34 15644.93 71.11 75.56 146.68
Table 12:Branches Profitability ratio

A) DEPOSIT PER BRANCH RATIO

This is the productivity ratio to measure and compare the productivity of different banks.
Deposit per branch ratio= Total deposits/No. Of Branch
=229762/3207=71.64 Crores

Interpretation
ICICI is having highest deposit per branch ratio, which shows their branch efficiency in
attracting and dealing with the customer.
That is the reason that in spite of having fewer branches as compared to SBI they are giving
tough competition to all bankers.

Conclusion
PSU Banks like SBI, BOI are attracting more deposits but they are not as efficient as private
sector banks.
Suggestion
Public sector bank should try to increase branch efficiency by improving
1) Employee efficiency
2) Hiring techno savvy employees

83
3) By reducing the time needed in documentation process.
4) By providing better services like efficient net banking, ATM services.

B) ADVANCE PER BRANCH RATIO

Advance per branch ratio= Total advance/No. of branches
=171317/3207=53.41 Crores
Interpretation
At the same time ICICI is having best advance per branch ratio utilizing the deposits to the
maximum. Means no ideal money.

Conclusion
BOI is far behind than private sector bank in terms of utilizing available fund. Reason can be
service oriented rather than money oriented nature of private bank.

Suggestion
To compete with the competitors like ICICI bank, PSU should invest the available ideal
deposits.

C) TOTAL BUSINESS PER BRANCH

Total business per branch= Total Business/ no. of branches
=401079/3207=125.06 Crores

Interpretation
With less number of branches as compared to public sector banks, private sector banks are
giving more business.
ICICI is having 310 Crores of business as compared to 125 Crores of BOI.

84
 EMPLOYEE PROFITABILITY RATIO
BANK TOTAL EMPLO ADVANC DEPOSI DPE APE BPE NPPE
BUSINE YESS E T RATI RATIO RATI RATI
SS O O O
BOI 401079 39671 171317 229762 5.79 4.31 10.11 .04
SBI 1284576. 231038 542503.20 742073.1 3.21 2.34 5.56 .05
33 3
ICICI 436658.6 37833 218310.85 218347.8 5.7 5.77 11.54 1.1
7 2
PNB 364463.4 55643 154702.99 209760.5 3.76 2.78 6.55 .06
9 0
KMB 32270.27 9300 16625.34 15644.93 1.68 1.78 3.47 .03
Table 13: Employee profitability ratio

1) BUSINESS PER EMPLOYEE

Business per employee=Total Business/ no. of employees
401079/39676=10.10 Crores

2) NET PROFIT PER EMPLOYEE

Net profit per employee=net profit/ no of employee
=1741/39676=. 043 Crores

3) CREDIT DEPOSIT RATIO

It is the credit to deposit ratio =Total Credit/ Total Deposits
=171317/229722=74.56%

CASA ratio=low margin deposit (Current a/c+ SB a/c deposit)/Total deposit

B) IMPORATANCE OF CASA RATIO

A higher CASA ratio means higher portion of the deposits of the bank has come from current
and savings deposit, which is generally a cheaper source of fund.
As many banks don’t pay interest on the current account deposits and money lying in the

85
savings accounts attracts a mere 3.5% interest rate. Hence, higher the CASA ratio betters the
net interest margin, which means better operating efficiency of the bank.

C) BOI’s CASA RATIO

CASA ratio of BOI has increased from 31 % to 32 % . The higher casa ratio higher will be
net interest margin because higher portion of the bank deposits comes from cheaper source.

TABLE OF CASA RATIO OF DIFFERENT BANKS

NAME OF ADVANCES DEPOSITS CD RATIO CASA CA+SA
BANK RATIO DEPOSIT
BANK OF 171317 229762 74.56 32 73523
INDIA
SBI 542503.20 742073.13 73.1 39.29 291560.53
ICICI 218310.85 218347.82 99.98 28.7 62665.82
PNB 154702.99 209760.50 73.75 39 81806.59
KMB 16625.34 15644.93 106 32 5006.37
Table 14 : CASA ratio

INTERPRETATION OF TABLE
1) As we can see from the table that SBI is having highest amount of low margin
deposits i.e.291560.53 Crores .That is the reason why SBI is able to set its BASE RATE at
7.5% much lower in comparison to all other banks.
2) In public sector bank SBI is having highest CASA ratio while in private sector bank
HDFC is leading the private sector.
3) In overall performance HDFC emerged as the market leader from the point of view of
CASA ratio.

SUGGESTIONS
1) As we can see from the table that public sector banks are facing tough competition from
private sector banks like HDFC (47%), AXIS (43.1)
Banks should increase their low cost deposits by attracting more & more customer. And the
reason behind attracting more and more customer is good services provided by private sector
bank.

86
CD RATIO
A) (Credit-Deposit ratio)
CD ratio is the proportion of loan-assets created by banks from the deposits received. The
higher the ratio, the higher the loan-assets created from deposits.
CD RATIO = Credit given/Deposit received

B) Implication of CD ratio
1) Low ratio
It is required to have a proper tradeoff in ratio of credit to deposit.
A very low CD ratio indicates excess money lying ideal in bank. Resulting no Interest
income to bank. And indicates poor management
2) High ratio
High interest rate could lead to rise in interest rate.
Consider Bank X that has deposits worth Rs. 100 Crores and a credit-deposit ratio of 60 per
cent. That means Bank X has used deposits worth Rs. 60 Crores to create loan-assets. Only
Rs. 40 Crores is available for other investments.
Now, the Indian government is the largest borrower in the domestic credit market. The
government borrows by issuing securities (G-secs) through auctions held by the RBI. Banks,
thus, lend to the government by investing in these G-secs. And Bank X has only Rs. 40
Crores to invest in G-secs. The government has two options.
1) It can raise yields to make investment by banks in G-secs attractive.
2) Force the RBI to take the securities into its books.
Yields on G-secs serve as a benchmark for interest rates on other debt instruments. A rise in
the former, thus, pushes up interest rates on the latter. If the money so released is large, ``too
much money will chase too few goods'' in the economy resulting in higher inflation levels.
This would prompt investors to demand higher returns on debt instruments. In other words,
higher interest rates.

NET INTEREST MARGIN

Net interest margin is difference between total interest income and expenditure and is shown
as a percentage of average earning assets. Higher income from CASA will improve the net
interest margin, as the cost of this fund is relatively lower. For instance, most banks lend at
87
over 10%, whereas, the rate of interest that they pay on saving deposit is just 3.5%. However,
actual realization depends on other expenditure, too.

TOTAL BUSINESS
Total business of bank is defined as
Total Business=Advances +Deposits
As total deposits is 229762 Crores and gross bank credit is 171317 Crores.
Hence total business of Bank of India is401079 Crores in march 2010 which has increased by
19.93 % from march 2009 I.e. 334440 Crores.

TOTAL DEPOSITS
Total Deposits consists of low cost deposits and term Deposits
As low cost deposits (CD+SB)=61843 Crores
And, term deposits= 167919 Crores

NPA MANAGEMENT OF BOI

Bank has been able to resolve large no. of NPA accounts. As a result there have been
substantial recoveries in NPA accounts / written off accounts successively for last several
years. Due to heavy slippages, NPA level has been increased during the year to Rs.
4882.65Cr. Cash recoveries are Rs. 621.64 Crores during the year march, 10 compared to Rs.
675.82 Crores during the year March 09. Up gradation have been Rs. 203.56 Crores vis-a –
vis Rs. 324.53 Crores of previous year ended march, 09 total reduction has been Rs. 1568.90
Crores (including write off) compared to Rs. 1559.77 Crores of march, 09.

DEPOSITS OF BOI
Deposits as on March’ 10 have grown by 21.11% as compared to March’09. During the
period deposits went up from Rs. 189709 Crores to Rs. 229762 Crores

ADVANCES OF BOI
We have adopted a proactive approach in ensuring a strong growth in quality assets. Global
Credit went up from Rs.144732 Crores to Rs. 171317 Crores as on March’10.All the sectors
registered a heavy growth. The Bank’s advances went up by 18.37% on YOY basis.

88
PERFORMANCE COMPARISION HIGHLIGHTS
For quarter ended March 2010 vis-a -vis March 2009
Particulars Increase/Decrease 04.03.2010 04.03.2009
Total Business Increase 19.93% 401079 334440
Total Deposits Increase 21.11% 229762 189708
Low cost deposits Increase 27.15% 61843 48637
Gross Bank Credit Increase 18.37% 171317 144732
Gross Profit Decrease -9.42% 1275.39 1408.06
Net Profit Decrease -47.02% 427.91 810.37
Gross NPA Increase 97.61% 4883 2471
Net NPA Increase 251.43% 2207 628
% of Gross NPA Increase 1.14% 2.85% 1.71%
% of net NPA Increase 0.87% 1.31% 0.44%
Table 15: performance comparision

89
 CAMEL RATING
CAPITAL RATIOS
A) CAPITAL ADEQUACY RATIO

BANK CAPITAL ADEQUACY RATIO(%)

BANK OF INDIA 13.0
SBI 14.3
ICICI 15.5
PNB 14.0
KMB 20.0

Table : capital adequacy ratio

2) DEBT EQUITY RATIO

BANK DEBT EQUITY DEBT-EQUITY RATIO
BANK OF INDIA 199195.46 13494.92 14.7
SBI 795786.81 57947.70 13.73
ICICI 285671.51 49883.02 5.72
PNB 214134.86 14653.63 14.61
KMB 21549 3905.53 5.51
Table 16: Debt-Equity ratio

3) ADVANCES –TOTAL ASSET RATIO

BANK ADVANCES TOTAL ADVANCES-TOTAL
ASSET ASSET RATIO %
BANK OF INDIA 142909.37 225501.75 63.37
SBI 542503.20 964432.08 56.25
ICICI 218310.85 379300.96 57.55
PNB 154702.99 246918.62 62.65
KMB 16625.34 28711.88 57.90
Table 17: Advance-total asset ratio

90
4) SECURITY-INVESTMENT RATIO
BANK SECURITIES INVESTMENT RATIO
BANK OF INDIA 43189.6 52607.18 82.09
SBI 228110.15 189501.27 120.37
ICICI 63386.83 103058.31 61.50
PNB 55198.25 63385.18 87.08
KMB 8149.93 9110.18 89.45
Table 18: Security –investment ratio

ASSET RATIOS

1) GROSS NPA –NET ADVANCES RATIO (%)

BANK GROSS NPA NET ADVANCES GROSSNPA –
NETADVANCES
RATIO (%)
BANK OF 1572 142909.37 1.1
INDIA
SBI 8680.05 542503.20 1.6
ICICI 5457.77 218310.85 2.5
PNB 1701.73 154702.99 1.1
KMB 415.63 16625.34 2.5
Table 19: Gross NPA –Net advance ratio

2) NET NPA-NET ADVANCES RATIO

BANK NET NPA NET ADVANCES NET NPA –
NETADVANCES
RATIO %
BANK OF 571.63 142909.37 .4
INDIA
SBI 9765.05 542503.20 1.8
ICICI 4584.52 218310.85 2.1
PNB 309.40 154702.99 .2

91
KMB 399.00 16625.34 2.4
Table 20:Net NPA –Net advance ratio

3) TOTAL LOANS –TOTAL ASSET RATIO

BANK TOTAL TOTAL ASSET TOTAL LOANS –
LOANS TOTAL ASSET
RATIO%
BANK OF 142909.37 225501.75 63.37
INDIA
SBI 542503.20 964432.08 56.25
ICICI 218310.85 379300.96 57.55
PNB 154702.99 246918.62 62.65
KMB 16625.34 28711.88 57.90
Table 21: Total loans-Total asset ratio

4) MARKET VALUE –BOOK VALUE RATIO

BANK MARKET BOOK VALUE MARKET VALUE-
VALUE BOOK VALUE RATIO
(%)
BANK OF 220 224.39 98.04
INDIA
SBI 1067 776.48 137.41
ICICI 333 444.94 74.84
PNB 411 416.74 98.62
KMB 283 112.98 250.46
Table 22: Market value-Book value ratio

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MANAGEMENT RATIOS

1) MARKET VALUE –FACE VALUE RATIO

BANK MARKET FACE VALUE MARKET VALUE –
VALUE FACE VALUE RATIO
(%)
BANK OF 220 10 22
INDIA
SBI 1067 10 106
ICICI 333 10 33.3
PNB 411 10 41.1
KMB 283 10 28.3
Table 23: Market value- face value

2) TOTAL ADVANCES –TOTAL DEPOSIT (CD RATIO)

NAME OF BANK ADVANCES DEPOSITS CD RATIO

BANK OF INDIA 171317 229762 74.56
SBI 542503.20 742073.13 73.1
ICICI 218310.85 218347.82 99.98
PNB 154702.99 209760.50 73.75
KMB 16625.34 15644.93 106

Table 24: Total Advances-total Deposits ratio

93
3) BUSINESS PER EMPLOYEE & PROFIT PER EMPLOYEE
BANK TOTAL BUSINESS EMPLOYESS BPE NPPE RATIO
RATIO

BOI 401079 39671 10.11 .04

SBI 1284576.33 231038 5.56 .05
ICICI 436658.67 37833 11.54 1.1
PNB 364463.49 55643 6.55 .06
KMB 32270.27 9300 3.47 .03
Table 25: business per employee & profit per employee

EARING RATIOS

INTEREST SPREAD
BANK INTEREST INTEREST SPREAD
EARNED EXPENDITURE
BANK OF 16347.36 10848.45 66.36
INDIA
SBI 63788.43 42915.29 67.27
ICICI 31092.55 22725.93 73.09
PNB 19326.16 12295.30 63.61
KMB 3065.14 1546.60 50.45
Table 26: Interest Spread

NET PROFIT-AVG ASSET

BANK NET PROFIT AVG ASSET %
BANK OF 3007.35 202165.87 1.4
INDIA
SBI 9121.23 842979.2 1.08
ICICI 3758.13 389548.01 .96
PNB 3090.88 222969.49 1.38

94
 KMB 276.10 28512.12 .96
Table 27: Net profit- Avg Asset

INTEREST INCOME-TOTAL INCOME

BANK INTEREST TOTAL INCOME %
INCOME
BANK OF 16347.36 19399.22 84.2
INDIA
SBI 63788.43 76479.78 83.4
ICICI 31092.55 39210.31 79.2
PNB 19326.16 22245.85 86.87
KMB 3065.14 3222.70 95.11
Table 28:Interest income-Total income

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LIQUIDITY RATIOS

1) LIQUIDITY ASSET-TOTAL ASSET RATIOS

BANK LIQUID ASSET TOTAL ASSET %
BANK OF INDIA 21761.25 225501.75 9.65
SBI 104403.8 964432.08 10.82
ICICI 29966.56 379300.96 7.90
PNB 21413.14 246918.62 8.67
KMB 1140.67 28711.88 3.97
Table 29 Liquidity Asset –Total Asset ratio

2) GOVT SECURITIES- TOTAL ASSET RATIOS

BANK GOVT TOTAL ASSET %

SECURITIES
BANK OF 42530.98 225501.75 18.86
INDIA
SBI 226217.47 964432.08 23.4
ICICI 63377.49 379300.96 16.7
PNB 54530.82 246918.62 22.08
KMB 8149.93 28711.88 28.3
Table 30 : Govt securities-Total Asset ratios

2) APPROVED SEQURITY- TOTAL ASSET RATIOS

BANK APPROVED TOTAL ASSET %
SECURITY
BANK OF 658.62 225501.75 .29
INDIA
SBI 1892.68 964432.08 .19
ICICI 9.34 379300.96 .002

96
 PNB 667.43 246918.62 .27
KMB 0.00 28711.88 00
Table 31: Approved Securities- Total Asset ratio

4) LIQUID ASSET- DEMAND DEPOSIT RATIOS

BANK LIQUID DEMAND %
ASSET DEPOSIT
BANK OF 21761.25 12581.54 172
INDIA
SBI 104403.8 110753.57 94.2
ICICI 29966.56 21631.69 138
PNB 21413.14 18813.91 113
KMB 1140.67 3418.16 33.37
Table 32: Liquidity Asset-Demand Deposit ratio

5) LIQUID ASSET- TOTAL DEPOSIT RATIOS

BANK LIQUID TOPTAL %
ASSET DEPOSIT
BANK OF 21761.25 229762 9.47
INDIA
SBI 104403.8 742073.13 14.06
ICICI 29966.56 218347.82 13.72
PNB 21413.14 209760.50 10.2
KMB 1140.67 15644.93 7.29
Table 33:Liquidity Asset-Total Deposit ratios

97
 COMPOSITE RATIOS

1) CAPITAL RATIOS

BANK CAPITAL DEBT ADVANCES- SECURITIES

ADEQUACY EQUITY ASSETS –TOTAL
RATIO RATIO RATIO INVESTMENT
BANK OF 13.0 14.7 63.37 82.09
INDIA
SBI 14.3 13.73 56.25 120.37
ICICI 15.5 5.72 57.55 61.50
PNB 14.0 14.61 62.65 87.08
KMB 20.0 5.51 57.90 89.45

WEIGHTAGE 0.5 0.3 0.1 0.1 TOTAL

BANK OF 6.5 4.41 6.33 8.20 25.44
INDIA
SBI 7.15 4.11 5.62 12.03 28.91
ICICI 7.75 1.71 5.75 6.15 21.36
PNB 7 4.38 6.26 8.70 26.34
KMB 10 1.65 5.79 8.94 26.38
Table 34: Capital ratios

Interpretation
1) As per the capital adequacy ratio the minimum ratio is 9%.i.e every bank has to
maintain with RBI. Here KMB outstands from the other banks
2) Advances to asset ratios shows how efficient capital is managed, so here we have
BANK OF INDIA at the top position.
3) Security to total investment shows the quick fund of the bank, which can be in cashed
at any point of time. Here State bank of India has the highest ratio.

Capital ratio for PNB & SBI show following characteristics

1) Capital levels exceed all regulatory requirements.

98
2) Strong earning performance.
3) Well-managed and controlled growth.
4) Competent management able to analyze the risk associated with the activities in
determining appropriate capital levels.
5) Reasonable dividends and ability to raise new capitals.
6) Low volume of problem assets.

Capital ratio for BOI & KMB show following characteristics

Capital and solvency ratios exceed regulatory requirements, but:
1) Problem assets relatively high.
2) Management inability to maintain sufficient capital to support risks

Capital ratio for ICICI BANK

1) High level of problem assets in excess of 25% of total capital.
2) Bank fails to comply with regulatory regulations Poor earnings.
3) Inability to raise new capital to meet regulatory requirements and correct deficiencies.
4) It requires regulatory oversight to ensure management and shareholders address the
issues of concern

99
2) ASSET RATIOS

BANK GROSS NPA NET NPA- TOTAL MARKET

–NET NET LOANS- VALUE-
ADVANCES ADVANCES TOTAL BOOKVALUE
ASSET
BANK OF 1.1 .4 63.37 98.04
INDIA
SBI 1.6 1.8 56.25 137.41
ICICI 2.5 2.1 57.55 74.84
PNB 1.1 .2 62.65 98.62
KMB 2.5 2.4 57.90 250.46

WEIGHTAGE .1 .5 .2 .2 TOTAL
BANK OF .11 .2 12.67 19.60 32.58
INDIA
SBI .16 .9 11.25 27.48 39.79
ICICI .25 1.05 11.51 14.96 27.77
PNB .11 .1 12.53 19.72 32.46
KMB .25 1.2 11.58 50.09 63.12

Table 35: Asset ratios

1) The net non-performing assets to loans (advances) ratio is used as a measure of the
overall quality of the bank’s loan book. Higher ratio reflects rising bad quality of loans. But
here NPA percentage of BOI Bank is just 1.1%, which shows bank is performing well, and it
is able to recover its debt. The Bank has maintained high standard in asset quality through
appropriate risk management measures and recovery measures as evidenced by lower NPA
levels. Here as compared to its peers it has lowest ratio, which is better. At the same time
KMB need to think over its policy to give loans as they are occurring highest 1.8% ratio.

2) The loan to assets ratio measures the total loans outstanding as a percentage of total
assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The higher

100
the ratio, the more risky a bank may be to higher defaults. Here the ratio for all the banks is
almost same. But the position of HDFC is better than others with having least 56.25 value.

3) Market value ratios are strong indicators of what investors think of the firm’s past
Performance and future prospects. It basically shows Goodwill or Reputation of the bank in
the market. Here KMB Bank is highly reputed in the minds of investors. Means private
banks are having good reputation in the market.

4) So overall in Assets Ratio, KMB Bank is on top position as compared to its peers.

5) If we compare only public banks, again SBI is ahead than other Banks.

Asset quality of KMB BANK

1) Past due and extended loans kept under control by a specific unit, in accordance with the
law
2) Concentrations of credits and loans to insiders provide minimal risk
3) Efficient loan portfolio management, close monitoring of problem loans
4) Non credit assets pose no loss threat

Asset quality of SBI,BOI and PNB

1) There are weaknesses in the management underwriting standards and control procedures
2) Loans to insider pose some regulatory concern, but can be easily corrected
3) Return on non credit assets is low and they display more than normal risk without posing
a threat of loss

Asset quality of ICICI

1) Bank is experiencing high level of past due and rescheduled credits
2) Poor underwriting standards
3) Policies and procedures are not properly implemented
4) Inappropriate loans to insiders
5) Non credit assets display abnormal risks and may pose a threat of loss

101
3) MANAGEMENT RATIOS
BANK MARKET TOTAL BUSSINE PROFIT
VALUES ADVANCES TO SS PER PER
TO TOTAL EMPLOY EMPLOYE
EQUITY DEPOSITS EE E
CAPITAL
BANK OF 22 74.56 10.11 .04
INDIA
SBI 106 73.1 5.56 .05
ICICI 33.3 99.98 11.54 1.1
PNB 41.1 73.75 6.55 .06
KMB 28.3 106 3.47 .03

WEIGHTAG 0.25 0.25 TOTAL 0.25 0.25 TOTA

E L
BANK OF 5.5 18.62 24.12 2.52 .01 2.53 26.38
INDIA
SBI 26.5 18.27 44.77 1.39 .012 1.40 14.59
ICICI 8.32 24.99 33.31 2.88 .27 3.15 32.84
PNB 10.27 18.43 28.7 1.63 .015 1.64 17.10
KMB 7.07 26.5 33.57 .86 .01 .87 9.07
9.59 100
Table 36: Management ratios

1) Business per employee/ profit per employee

These ratios indicate the productivity level of the bank’s employees. Since state run banks are
operating with large employee base, the productivity ratio for these banks lags behind when
compared with new generation private sector banks. Here ICICI bank has ratio of 11.54
Crores leading BOI having 10.11 Crores of business.

2) Market Value to equity Capital

102
This Ratio indicates the price of the shares in the market compared to the actually face value
of the shares. It shows the premium on each share people are ready to pay because of the
reputation and value of the company. Here, SBI is having almost 106 times the market value
whereas BOI is having only 22 times which is lowest of all five banks.

3) Total Advances to Total Deposits

It indicates Money Lend by the Bank compared to Money borrowed by the bank. Higher the
ratio indicates the Efficiency of the Bank. KMB is having 106% whereas HDFC is having
only 73.1%.

4) Over all if we compare Management Ratio, ICICI bank is on the top Position where as
SBI is in second position. There is very Minor difference between the two banks. They are
well performing in Profit per employee and Business per employee.

5) In PSUS, ICICI is better than all other banks.

103
4) EARNING RATIOS
BANK OPEARTING INTEREST NET INTEREST
PROFIT- SPREAD PROFIT INCOME-TOTAL
AVG –AVG INCOME
WORKING ASSET
FUND
BANK OF 2.7 66.36 1.4 84.2
INDIA
SBI 2.1 67.27 1.08 83.4
ICICI 2.3 73.09 .96 79.2
PNB 2.6 63.61 1.38 86.87
KMB 2.5 50.45 .96 95.11

WEIGHTAGE .25 .25 .25 .25 TOTAL

BANK OF .67 16.59 .35 21.05 38.66
INDIA
SBI .52 16.81 .27 20.85 38.45
ICICI .57 18.27 .24 19.8 38.88
PNB .65 15.90 .34 21.71 38.6
KMB .62 12.61 .24 23.77 37.24
Table 37 : Earning ratios

1) Operating profit to Average Working Funds shows the return on working funds. Higher
the ratio indicates the profitability of the bank. Here BOI is having 2.7 %, where as its peers
are having lower than it has. So BOI is more profit making Bank.

2) Higher the Interest spread will be better for the bank as it shows the better offering of
bank in the market. Here ICICI has the highest Interest Spread as compared to its peers.

3) Net Profit To Average Assets shows return on assets of the banks. Higher the return,
better for the bank. Here PNB bank and PNB is having highest return on the assets.

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4) The main income of any bank is interest. This ratio shows the percentage of income
generated in bank through Interest. Here KMB is having 95.11 % of income through interest
followed by KMB, PNB and BOI.

5) Here overall ICICI is performing well in earnings ratio and it is leading as compared to its
competitors.

6) If we compare only private banks then ICICI is well performing than the KMB Bank.

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5) LIQUIDITY RATIOS
BANK LIQUIDI GOVT APPROVE LIQUID LIQUID
TY SECURIT D ASSET ASSET –
ASSET - Y – SECURITI _DEMAN TOTAL
TOTAL TOTAL ES-TOTAL D DEPOSIT
ASSETS ASSETS ASSETS DEPOSIT
BANK OF 9.65 18.86 .29 172 9.47
INDIA
SBI 10.82 23.4 .19 94.2 14.06
ICICI 7.90 16.7 .002 138 13.72
PNB 8.67 22.08 .27 113 10.2
KMB 3.97 28.3 00 33.37 7.29

WEIGHTA .2 .2 .2 .2 .2 TOTAL
GE
BANK OF 1.93 3.77 .05 34.4 1.89 42.04
INDIA
SBI 2.16 4.68 .03 18.84 2.81 28.52
ICICI 1.58 3.34 .0004 27.6 2.74 35.26
PNB 1.73 4.41 .05 22.6 2.04 30.83
KMB .79 5.66 00 6.67 1.45 14.57
Table 38 : Liquidity ratios

1) Liquid Assets To Total Assets ratio shows the percentage of liquid assets out of the total
assets. Higher the ratio indicates better liquidity of the bank. Here SBI is having better
liquidity as compared to other banks.

2) Government securities are considered to be the quick assets of the bank which can be
encashed easily. Here, KMB bank is having 28.4% of the assets as government securities and
is the highest among others.

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3) Same as government securities, approved securities also can be encashed easily. Here
BOI and PNB is having highest approved securities. KMB is not having any approved
securities.

4) Liquid Assets To Total Deposits ratio indicates the Percentage of liquid assets bank
against deposits. Here ICICI is having the highest ratio as compared to its competitors. So it
shows that it is having an ample amount of liquidity to pay the deposits.

5) Overall, Bank of India is performing well i.e. 42.04% followed by its peers ICICI.

Liquidity Ratio of BOI and BOB show the following characteristics

1) Sufficient liquid assets to meet loan demand and unexpected deposit reduction
2) Little reliance on inter-bank market
3) Strong and sophisticated planning, control and monitoring
4) Existence of an contingency plan

Liquidity Ratio of SBI and AXIS Bank and HDFC show the following characteristics
1) Bank meets its liquidity requirements, but management lacks proper expertise for
planning, control and monitoring
2) Bank experienced liquidity problems. Management reacted appropriately but failed to
take action to prevent a recurring risk
3) Management is unaware of negative trends
4) Management did not address liquidity problems

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 CAMEL RATING

BANK CAPIT ASSET MANAGEME EARNIN LIQUIDI

AL S NT G TY
BANK OF 25.44 32.58 50.5 38.66 42.04
INDIA
SBI 28.91 39.79 59.36 38.45 28.52
ICICI 21.36 27.77 66.15 38.88 35.26
PNB 26.34 32.46 45.8 38.6 30.83
KMB 26.38 63.12 42.64 37.24 14.57

WEIGHTA .2 .2 .2 .2 .2 TOTA RAN

GE L K
BANK OF 5.08 6.51 10.1 7.73 8.40 37.82 3
INDIA
SBI 5.78 7.95 11.87 7.69 5.70 38.99 1
ICICI 4.27 5.55 13.23 7.77 7.05 37.87 2
PNB 5.26 6.49 9.16 7.72 6.16 34.79 5
KMB 5.27 12.62 8.52 7.44 2.91 36.76 4

Table 39: camel rating

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 FINDINGS

Rank 1 – Here SBI indicates strong performance and risk management practices that
consistently provide for safe and sound operations. The historical trend and projections for
key performance measures are consistently positive. It is not performing well in Liquidity
ratio but it performs strong in other ratios, which covered up its weak performing area any
weaknesses can be handled routinely by the board of directors and management. Banks are
considered stable, well managed and capable of withstanding all but the most severe
economic downturns. Risk management practices are strong and minimal supervisory
oversight is required to ensure the continuation and validation of the bank’s fundamental

Rank 2 – Here ICICI reflects satisfactory performance and risk management practices that
consistently provide for safe and sound operations. It maintains very well in management and
assets ratio, which has become its strength. In order to lead, it should focus more on liquidity.
Bank with a good composite rating and is in substantial compliance with laws and
regulations. Only moderate weaknesses are present and well within the capabilities of the
board of directors’ and management’s capability and willingness to correct. HDFC bank is
stable and can withstand most economic downturns. Overall risk management practices are
satisfactory and there are not material supervisory concerns.

Rank 3 – BANK OF INDIA represents performance that is flawed to some degree and is of
supervisory concern. Performance is marginal. Risk management practices are satisfactory.
In order to improve their position, it should maintain the management and Assets ratio so that
it will be able to compete with their competitors.

Rank 4 –KMB Bank refers to poor performance that is of serious supervisory concern. Risk
management practices are generally unacceptable and the Bank should try to improve its
operations. It is performing Good in Earnings but Management and Liquidity of the bank is
not up to the mark and should give more importance to these factors in order to be at the par
with other banks.

Rank 5 – PNB Bank is showing the worst condition in comparison to others banks. Problem
of liquidity exists in the bank which management has to take care. Banks has weaknesses in
one or more component areas that if not corrected within a reasonable time frame could result
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in significant solvency or liquidity concerns. Management may lack the ability or willingness
to effectively address weaknesses in a timely manner and Axis bank generally are less
capable of withstanding business fluctuation and are vulnerable to outside influences. Risk
management practices may be less than satisfactory and banks in this group may be in
significant noncompliance with laws and regulations.

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 CHAPTER 16
CONCLUSION

The current Banking Crisis, which is quite unprecedented, underlines the importance of
regulatory issues and the effects of incompetence in this area. CAMEL, as a rating system for
judging the soundness of Banks is a quite useful tool, that can help in mitigating the
conditions and risks that lead to Bank failures.

The report makes an attempt to examine and compare the performance of five different banks
of India i.e. BOI, SBI, ICICI, PNB KMB bank. The analysis is based on the CAMEL Model.
After evaluating all the ratios, calculations and ratings we have given 1st Rank to State bank
0f India, 2nd Rank to ICICI, 3rd Rank to Bank of India, and 4th to KMB, 5th rank to PNB.

Although SBI (1st rank) is leading the banking sector a tough competition is given by ICICI
bank(2nd rank) indicating rapid growth in private banking sector.
So Bank of India need to take corrective actions regarding CAMEL factors as mentioned in
recommendation to improve its ranking

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 RECOMMENDATION

1) Capital ratio of BOI is greater than RBI recommended ratio which is 9% for CAR but
lower than its counterparts which is due to two basic reasons, the capital adequacy ratio of
BOI is lesser than its counterparts which they have to take care by increase their capital base
i.e. tier1 & tier2 capital.
And the security –total investment ratio is lower as compared to others, which shows
inability of management to maintain the sufficient govt. securities.
2) Although credit has increased by 19%, BOI’s NPA has increased by 197%. So they have
to strengthen their credit lending policy by proper detection of credit exposure through
tightening KYC norms and not giving loans to priority sector above prescribed RBI limit.
3) The ratio of market value-face value is only 22%, which is lower than other banks that
mean their reputation in the market is not at par than other banks. And Business per
employee of BOI is less as compared to others, which is due to existing non techno-savvy
conservative employees.
4) Action must be taken to strengthen the liquidity position of bank of India to meet the entire
obligation by extensive planning.

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 CHAPTER 17
LIMITATIONS
1) The study was limited to only five banks.
2) Constraint of time & resources.
3) Study of completely done on the basis of ratios only.
4) Not able to communicate with higher management.
5) Apex banks of different sectors is not included in this report

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 CHAPTER 118
BIBLIOGRAPHY

• Varshney P.N,Swaroop Gopal (1999). “Banking Law and Practice”, 6th edition, Sultan
Chand And Sons.
• Jeevanandam.C (1993). “Practice And Law Of Banking”, 7th edition, Premier Book
Vompany.
• Hasija Ashok, Sood Rajendra (2002), “Ever More Banking”, 6th edition, Sachin
Publication
• http://www.rbi.org.in/scripts/statistics.aspx\
• http://www.bankofindia.com/Loans.aspx

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