Dr.

Joseph Anbarasu

2010
Dr. D. Joseph Anbarasu
Bishop Heber College
3/4/2010

Banking in India
Dr. Joseph Anbarasu

Chapter 1
BANKING IN INDIA
Objectives of the Unit
After completing the unit, the student should be
able to
a. Describe the features of Banking Regulation
Acts
b. Make an account of Indian Banking: the History
and Development
c. List out the various functions rendered by the
commercial banks
d. Manage the various deposits and advances
e. Describes the steps in fair lending to the clients

Definition of Banking
The Banking Regulation Act, 1949 is the basis for
regulation of banking in India.
Dr. Joseph Anbarasu

Section 5(b) of the Act defines banking as

“banking” means the accepting, for the purpose of
lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.
Forms of Business in which Banking Companies
may Engage
Section 6(1) specified additional forms business in
which banking companies may engage in.
Section 6 (1)
In additional to the business of banking, a banking
company may engage in any one or more of the
following forms of business, namely:-
Banking Business
a) the borrowing, raising, or taking up of money;
b) lending or advancing money either upon or
without security;
c) the drawing, making, accepting; discounting,
buying, selling collecting and dealing in bills of
exchange, hoodies, promissory notes, coupons,
drafts, bills of lading, railway receipts, warrants,
debentures, certificates, scrip and other
instruments, and securities whether transferable
or negotiable or not;
d) granting and issuing of letters of credit,
traveller’s cheques and circular notes;
e) buying, selling and dealing in bullion and
specie;
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f) buying and selling of foreign exchange

including foreign bank notes;
g) the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares,
debentures, debenture stock, bonds, obligations,
securities and investments of all kinds;
h) purchasing and selling of bonds, scrips or other
forms of securities on behalf of constituents or
others,
i) the negotiating of loans and advances;
j) receiving of all kinds of bonds, scrips or other
forms of securities on deposits or for safe
custody or otherwise;
k) providing of safe deposit vaults;
l) the collecting and transmitting of money and
securities;
Agency Business
m) acting as agents for Government or local
authority or any other person or persons;
n) carrying on of agency business of any
description including the clearing and
forwarding of goods, giving of receipts and
discharges and otherwise acting as an attorney
on behalf of customers, but excluding the
business of a [managing agent or secretary and
treasurer] of a company;
o) contracting for public and private loans and
negotiating and issuing the same;
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p) effecting, insuring, guaranteeing, underwriting,

participating in managing and carrying out of
any issue, public or private, of State, municipal
or other loans or of shares, stock, debentures, or
debenture stock of any company, corporation or
association and the lending of money for the
purpose of any such issue;
q) carrying on and transacting every kind of
guarantee and indemnity business;
r) acquiring and holding and generally dealing
with any property or any right, title or interest in
any such property which may form the security
or part of the security for any loans or advances
or which may be connected with any such
security;
s) undertaking and executing trusts;
t) undertaking the administration of estates as
executor- trustee or otherwise;
u) establishing and supporting or aiding in the
establishment and support of associations,
institutions, funds, trusts and conveniences
calculated to benefit employees or ex-
employees of the company or the dependents or
connections of such persons; granting pensions
and allowances and making payments towards
insurance; subscribing to or guaranteeing
moneys for charitable or benevolent objects or
for any exhibition or for any public, general or
useful object;
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v) acquisition, construction, maintenance and

alteration of any building or works necessary or
convenient for the purposes of the company;
w) selling, improving, managing, developing,
exchanging, leasing, mortgaging, disposing of
or turning into account or otherwise dealing
with all or any part of the property and rights of
the company;
x) acquiring and undertaking the whole or any part
of the business of any person or company, when
such business is of a nature enumerated or
described in this sub- section;
y) doing all such other things as are incidental or
conducive to the promotion or advancement of
the business of the company;
z) Any other form of business which the Central
Government may, by notification in the Official
Gazette, specify as a form of business in which
it is lawful for a banking company to engage.
(2) No banking company shall engage in any form
of business other than those referred to in sub-
section (1).
India has a financial system that is regulated by
independent regulators in the sectors of banking,
insurance, capital markets, competition and various
services sectors. In a number of sectors Government
plays the role of regulator.
Ministry of Finance, Government of India looks
after financial sector in India. Finance Ministry
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every year presents annual budget on February 28 in

the Parliament. The annual budget proposes
changes in taxes, changes in government policy in
almost all the sectors and budgetary and other
allocations for all the Ministries of Government of
India. The annual budget is passed by the
Parliament after debate and takes the shape of law.
Reserve bank of India (RBI) established in 1935 is
the Central bank. RBI is regulator for financial and
banking system, formulates monetary policy and
prescribes exchange control norms. The Banking
Regulation Act, 1949 and the Reserve Bank of India
Act, 1934 authorize the RBI to regulate the banking
sector in India.
India has commercial banks, co-operative banks and
regional rural banks. The commercial banking
sector comprises of public sector banks, private
banks and foreign banks. The public sector banks
comprise the ‘State Bank of India’ and its seven
associate banks and nineteen other banks owned by
the government and account for almost three fourth
of the banking sector. The Government of India has
majority shares in these public sector banks.
India has a two-tier structure of financial
institutions with thirteen all India financial
institutions and forty-six institutions at the state
level. All India financial institutions comprise term-
lending institutions, specialized institutions and
investment institutions, including in insurance. State
level institutions comprise of State Financial
Institutions and State Industrial Development
Dr. Joseph Anbarasu

Corporations providing project finance, equipment

leasing, corporate loans, short-term loans and bill
discounting facilities to corporate. Government
holds majority shares in these financial institutions.
Non-banking Financial Institutions provide loans
and hire-purchase finance, mostly for retail assets
and are regulated by RBI.
Insurance sector in India has been traditionally
dominated by state owned Life Insurance
Corporation and General Insurance Corporation and
its four subsidiaries. Government of India has now
allowed FDI in insurance sector up to 26%. Since
then, a number of new joint venture private
companies have entered into life and general
insurance sectors and their share in the insurance
market in rising. Insurance Development and
Regulatory Authority (IRDA) is the regulatory
authority in the insurance sector under the Insurance
Development and Regulatory Authority Act, 1999.
RBI also regulates foreign exchange under the
Foreign Exchange Management Act (FERA). India
has liberalized its foreign exchange controls. Rupee
is freely convertible on current account. Rupee is
also almost fully convertible on capital account for
non-residents. Profits earned, dividends and
proceeds out of the sale of investments are fully
repatriable for FDI. There are restrictions on capital
account for resident Indians for incomes earned in
India.
Dr. Joseph Anbarasu

Securities and Exchange Board of India (SEBI)

established under the Securities and Exchange
aboard of India Act, 1992 is the regulatory authority
for capital markets in India. India has 23 recognized
stock exchanges that operate under government
approved rules, bylaws and regulations. These
exchanges constitute an organized market for
securities issued by the central and state
governments, public sector companies and public
limited companies. The Stock Exchange, Mumbai
and National Stock Exchange are the premier stock
exchanges. Under the process of de-mutualization,
these stock exchanges have been converted into
companies now, in which brokers only hold
minority share holding. In addition to the SEBI Act,
the Securities Contracts (Regulation) Act, 1956 and
the Companies Act, 1956 regulates the stock
markets. Amendments were made in the banking
regulations act now and then. Important
amendments are given below:
Banking Regulation (Amendment) Bill,
2005
• The Banking Regulation (Amendment) Bill,
2005 was introduced in the Lok Sabha on May
13, 2005. The Standing Committee on Finance
submitted its report to Parliament on December
13, 2005. This Bill has been listed for
consideration and passage during the current
session (budget session 2006) of Parliament.
• The Bill seeks to amend the Banking Regulation
Act, 1949 (the Principal Act). It has eight main
Dr. Joseph Anbarasu

objectives: (a) regulating acquisition of shares in

banking companies, (b) Increasing the flexibility
on the Statutory Liquidity
• Requirement (SLR), (c) Including preference
shares as capital, (d) Allowing banks to lend to
companies in which their directors are engaged,
(e) Monitoring the activities of associate
enterprises of banks, (f) vesting RBI with
powers to supersede the board of directors of a
bank, (g) disallowing primary credit societies
from banking activities, and (h) changing the
definition of “approved securities”.
• Acquisition of banking shares. Anyone desiring
to acquire more than 5% shareholding of a bank
needs to obtain prior approval of RBI. RBI may
impose certain conditions such as a minimum
amount of shareholding to be acquired or
requiring specific approvals for any further
increase in shareholding. RBI is required to
communicate its approval or rejection of any
such application within 90 days, failing which
the application is deemed to be approved. The
restriction of 10% voting rights on any
shareholder under the Principal Act is also being
revoked.
• SLR. RBI can notify SLR between zero and
40% (currently the range is 25% to 40%) of a
bank’s liabilities. SLR specifies the proportion
of a bank’s deposits that it must hold in
government and other approved securities. A
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higher SLR increases the safety of a bank but

pre-empts the funds available to extend as loans.
• Preference Shares may be included in addition
to equity shares while computing a bank’s
capital.
• Banks may, with prior permission of RBI, grant
loans or advances to companies in which any of
its directors is engaged as a director, manager or
employee. This was earlier prohibited.
• RBI can ask for details of the business of any
associate enterprise of a bank. It will also have
the powers to inspect any such enterprise.
• RBI may supersede the board of directors of a
bank in public interest or in the interest of the
bank or its depositors.
• RBI may appoint an administrator to take
charge of the bank. Any supersession shall not
be for a period exceeding six months.
• A primary credit society cannot carry on
banking business.
• This will be applicable one year after this
Amendment Bill is notified and could be
extended up to three years. Among co-operative
societies, only a co-operative bank holding a
licence from RBI may carry on banking
business. RBI has been granted powers to order
a special audit of a cooperative bank in public
interest or in the interest of the bank or its
depositors.
Dr. Joseph Anbarasu

• The definition of approved securities has been

modified to specify that these are securities
issued by the central or state governments or
any such other securities as specified by RBI
from time to time. The definition in the
Principal Act defined approved securities as
those in which a trustee may invest under the
Indian Trusts Act, 1882.
Functions of Commercial Banks
The functions of commercial banks are divided into
two categories:
i) Primary functions, and
ii) Secondary functions including agency
functions.
i) Primary functions:
The primary functions of a commercial bank
include:
a) accepting deposits; and
b) granting loans and advances;
a) Accepting deposits
The most important activity of a commercial bank is
to mobilize deposits from the public. People who
have surplus income and savings find it convenient
to deposit the amounts with banks. Depending upon
the nature of deposits, funds deposited with bank
also earn interest. Thus, deposits with the bank
grow along with the interest earned. If the rate of
interest is higher, public are motivated to deposit
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more funds with the bank. There is also safety of

funds deposited with the bank.
b) Grant of loans and advances
The second important function of a commercial
bank is to grant loans and advances. Such loans and
advances are given to members of the public and to
the business community at a higher rate of interest
than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances
varies depending upon the purpose, period and the
mode of repayment. The difference between the rate
of interest allowed on deposits and the rate charged
on the Loans is the main source of a bank’s income.
i) Loans
A loan is granted for a specific time period.
Generally, commercial banks grant short-term
loans. But term loans, that is, loan for more than a
year, may also be granted. The borrower may
withdraw the entire amount in lump sum or in
instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against
the security of certain assets. A loan may be repaid
either in lump sum or in instalments.
ii) Advances
An advance is a credit facility provided by the bank
to its customers. It differs from loan in the sense
that loans may be granted for longer period, but
advances are normally granted for a short period of
time. Further the purpose of granting advances is to
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meet the day to day requirements of business. The

rate of interest charged on advances varies from
bank to bank. Interest is charged only on the amount
withdrawn and not on the sanctioned amount.
Modes of short-term financial assistance
Banks grant short-term financial assistance by way
of cash credit, overdraft and bill discounting.
a) Cash Credit
Cash credit is an arrangement whereby the bank
allows the borrower to draw amounts upto a
specified limit. The amount is credited to the
account of the customer. The customer can
withdraw this amount as and when he requires.
Interest is charged on the amount actually
withdrawn. Cash Credit is granted as per agreed
terms and conditions with the customers.
b) Overdraft
Overdraft is also a credit facility granted by bank. A
customer who has a current account with the bank is
allowed to withdraw more than the amount of credit
balance in his account. It is a temporary
arrangement. Overdraft facility with a specified
limit is allowed either on the security of assets, or
on personal security, or both.
c) Discounting of Bills
Banks provide short-term finance by discounting
bills, which is, making payment of the amount
before the due date of the bills after deducting a
certain rate of discount. The party gets the funds
Dr. Joseph Anbarasu

without waiting for the date of maturity of the bills.

In case any bill is dishonoured on the due date, the
bank can recover the amount from the customer.
i) Secondary functions
Besides the primary functions of accepting deposits
and lending money, banks perform a number of
other functions which are called secondary
functions. These are as follows -
a) Issuing letters of credit, traveller’s cheques,
circular notes etc.
b) Undertaking safe custody of valuables,
important documents, and securities by
providing safe deposit vaults or lockers;
c) Providing customers with facilities of
foreign exchange.
d) Transferring money from one place to
another; and from one branch to another
branch of the bank.
e) Standing guarantee on behalf of its
customers, for making payments for
purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business
information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of
customers.
Difference between Primary and Secondary
Functions of Commercial Banks
Dr. Joseph Anbarasu

Primary Functions Secondary Functions

1. These are the main These are the secondary
activities of the bank activities of
the bank.
2. These are the main These are not the main
sources of the income of sources of income of the
the banks bank.
3. These are obligatory These are not obligatory
on the part of bank to on the part of bank to
perform perform. Generally all
the commercial banks
perform these functions

Different modes of Acceptance of

Deposits
Banks receive money from the public by way of
deposits.
The following types of deposits are usually received
by banks:
1) Current deposit
2) Saving deposit
3) Fixed deposit
4) Recurring deposit
5) Miscellaneous deposits
1) Current Deposit
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Banks play the role of financial intermediary. They

are permitted to accept demand deposits. The
depositor can withdraw the money at any time of
his or her will and choice. Since these deposits are
repayable on demand, they are generally called
demand deposits. These are either savings or current
deposits. Demand deposits are withdrawn by the
depositor by issuing a cheque. Cheque is an order or
written instruction to the bankers to pay the amount
to a person, whose name is found in the face of the
cheque.
Businessmen generally open current accounts with
banks. Current accounts do not carry any interest as
the amount deposited in these accounts is repayable
on demand without any restriction.
The Reserve bank of India prohibits payment of
interest on current accounts or on deposits up to 14
Days or less except where prior sanction has been
obtained. Banks usually charge a small amount
known as incidental charges on current deposit
accounts depending on the number of transaction.
2) Savings deposit/Savings Bank Accounts
Savings deposit account is meant for individuals
who wish to deposit small amounts out of their
current income. It helps in safe guarding their future
and also earning interest on the savings. A saving
account can be opened with or without cheque book
facility. There are restrictions on the withdrawals
from this account. Savings account holders are also
allowed to deposit cheques, drafts, dividend
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warrants, etc. drawn in their favour for collection by

the bank. To open a savings account, it is necessary
for the depositor to be introduced by a person
having a current or savings account with the same
bank.
3) Fixed deposit
The term ‘Fixed deposit’ means deposit repayable
after the expiry of a specified period. Since it is
repayable only after a fixed period of time, which is
to be determined at the time of opening of the
account, it is also known as time deposit. Fixed
deposits are most useful for a commercial bank.
Since they are repayable only after a fixed period,
the bank may invest these funds more profitably by
lending at higher rates of interest and for relatively
longer periods. The rate of interest on fixed deposits
depends upon the period of deposits. The longer the
period, the higher is the rate of interest offered. The
rate of interest to be allowed on fixed deposits is
governed by rules laid down by the Reserve Bank
of India.
4) Recurring Deposits
Recurring Deposits are gaining wide popularity
these days. Under this type of deposit, the depositor
is required to deposit a fixed amount of money
every month for a specific period of time. Each
instalment may vary from Rs.5/- to Rs.500/- or
more per month and the period of account may vary
from 12 months to 10 years. After the completion of
the specified period, the customer gets back all his
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deposits along with the cumulative interest accrued

on the deposits.
5) Miscellaneous Deposits
Banks have introduced several deposit schemes to
attract deposits from different types of people, like
Home Construction deposit scheme, Sickness
Benefit deposit scheme, Children Gift plan, Old age
pension scheme, Mini deposit scheme, etc.
Different methods of Granting Loans by Bank
The basic function of a commercial bank is to make
loans and advances out of the money which is
received from the public by way of deposits.
The loans are particularly granted to businessmen
and members of the public against personal
security, gold and silver and other movable and
immovable assets. Commercial bank generally
lends money in the following form:
i) Cash credit
ii) Loans
iii) Bank overdraft, and
iv) Discounting of Bills
a) Cash Credit:
A cash credit is an understanding on the part of the
bank to advance to an individual such sums of
money as he may from time to time require. It is not
exceeding in the whole a certain definite amount.
The individual, to whom the credit is given, is
entering into a bond, with securities, generally two
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in number. One is for the repayment, on demand, of

the sums actually advanced, with interest upon each
issue from the day upon which it is made.
A cash credit is, in fact, the same thing as an
overdrawn current account, except that in a current
account the party overdraws on his own individual
security, and in the cash credit he finds two
securities that are responsible for him. Another
difference is, that a person cannot overdraw his
current account without asking permission each
time from the bank, whereas the overdrawing of a
cash credit account is a regular matter of business; it
is, in fact, the purpose for which the cash credit has
been granted.
The following considerations will show that a
person who has occasion for temporary advances of
money will find it more advantageous to raise these
sums by a cash credit than by having bills
discounted: -
○ In a cash credit the party pays interest only for
the money he actually employs. If a person
wants to make use of Rs.100, and has a bill for
Rs.150, he will get the bill discounted, and thus
pays interest for Rs.50 for which he has no use.
But if he has a cash credit he draws only Rs.100,
and pays interest for that amount.
○ In a cash credit he can repay any part of the sum
drawn whenever he pleases. If a trader has a bill
for Rs.150 discounted to-day, and should
unexpectedly receive Rs.150 to-morrow, he
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cannot re-discount the bill, but has actually paid

interest for money he does not want. But if he
draws Rs.150 upon his cash credit account to-
day, and to-morrow receives Rs.150, he takes
this money to the bank, and will have to pay the
Interest upon Rs.150 for only one day.
○ In a cash credit he has the Dower of drawing
whenever he pleases, to the full amount of his
credit; but in the case of discounting bills, he
must make a fresh application to the bank to
discount each bill, and if the bank have at any
time more profitable ways of employing their
money, or if they suspect the credit of the
applicant, they may refuse to discount, but this
would not be the case if he had a cash credit.
○ In a cash credit the party does not pay the
interest until the end of the year; whereas, in the
other case, he pays the interest at the time the
bill is discounted.
Cash credits are granted not only upon personal
security, but also upon the security of the Public
Funds.
This furnishes great facilities for raising money to
those who possess property which they are not
disposed to sell A person who is a holder of
government stock may sell out a portion to supply
his temporary necessities; and when he wishes to
replace it he finds the price of stock has risen, and it
will cost him more money to repurchase than he
received when he sold. But if he transfers the stock
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to a bank as a security for a cash credit, he may

repay the money whenever he pleases; and if, in the
meantime, the value of the security should have
raised all the advantage will be his own.
i) Loans :
A specified amount sanctioned by a bank to the
customer is called a ‘loan’. It is granted for a fixed
period, say six months, or a year. The specified
amount is put on the credit of the borrower’s
account. He can withdraw this amount in lump sum
or can draw cheques against this sum for any
amount. Interest is charged on the full amount even
if the borrower does not utilise it. The rate of
interest is lower on loans in comparison to cash
credit. A loan is generally granted against the
security of property or personal security. The loan
may be repaid in lump sum or in instalments. Every
bank has its own procedure of granting loans.
Hence a bank is at liberty to grant loan depending
on its own resources.
The loan can be granted as:
a) Demand loan, or
b) Term loan
a) Demand loan
Demand loan is repayable on demand. In other
words it is repayable at short notice. The entire
amount of demand loan is disbursed at one time and
the borrower has to pay interest on it. The borrower
can repay the loan either in lumpsum (one time) or
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as agreed with the bank. Loans are normally granted

by the bank against tangible securities including
securities like N.S.C., Kisan Vikas Patra, Life
Insurance policies and U.T.I. certificates.
b) Term loans
Medium and long term loans are called ‘Term
loans’. Term loans are granted for more than one
year and repayment of such loans is spread over a
longer period. The repayment is generally made in
suitable instalments of fixed amount. These loans
are repayable over a period of 5 years and
maximum upto 15 years.
Term loan is required for the purpose of setting up
of new business activity, renovation, modernisation,
expansion/extension of existing units, purchase of
plant and machinery, vehicles, land for setting up 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 other securities.
The normal rate of interest charged for such loans is
generally quite high.
i) Bank Overdraft
Overdraft facility is more or less similar to cash
credit facility. Overdraft facility is the result of an
agreement with the bank by which a current account
holder is allowed to withdraw a specified amount
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
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operate their account through cheques. The

customer is permitted to withdraw the amount as
and when he/she needs it and to repay it through
deposits in his account as and when it is convenient
to him/her.
Overdraft facility is generally granted by bank on
the basis of a written request by the customer. Some
times, banks also insist on either a promissory note
from the borrower or personal security to ensure
safety of funds. Interest is charged on actual amount
withdrawn by the customer. The interest rate on
overdraft is higher than that of the rate on loan.
ii) Discounting of Bills
Apart from granting cash credit, loans and
overdraft, banks also grant financial assistance to
customers by discounting bills of exchange. Banks
purchase the bills at face value minus interest at
current rate of interest for the period of the bill. This
is known as ‘discounting of bills’. Bills of exchange
are negotiable instruments and enable the debtors to
discharge their obligations towards their creditors.
Such bills of exchange arise out of commercial
transactions both in internal trade and external
trade. By discounting these bills before they are due
for a nominal amount, the banks help the business
community. Of course, the banks recover the full
amount of these bills from the persons liable to
make payment.
Agency and General Utility Services provided by
Modern Commercial Banks
Dr. Joseph Anbarasu

You have already learnt that the primary activities

of commercial banks include acceptance of deposits
from the public and lending money to businessmen
and other members of society. Besides these two
main activities, commercial banks also render a
number of ancillary services.
These services supplement the main activities of the
banks. They are essentially non-banking in nature
and broadly fall under two categories:
i) Agency services, and
ii) General utility services.
a) Agency Services
Agency services are those services which are
rendered by commercial banks as agents of their
customers. They include:
a) Collection and payment of cheques and bills on
behalf of the customers;
b) Collection of dividends, interest and rent, etc. on
behalf of customers, if so instructed by them;
c) Purchase and sale of shares and securities on
behalf of customers;
d) Payment of rent, interest, insurance premium,
subscriptions etc. on behalf of customers, if so
instructed;
e) Acting as a trustee or executor;
f) Acting as agents or correspondents on behalf of
customers for other banks and financial
institutions at home and abroad.
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ii) General utility services

General utility services are those services which are
rendered by commercial banks not only to the
customers but also to the general public. These are
available to the public on payment of a fee or
charge. They include:
a) Issuing letters of credit and travellers’ cheques;
b) Underwriting of shares, debentures, etc.;
c) Safe-keeping of valuables in safe deposit locker;
d) Underwriting loans floated by government and
public bodies.
e) Supplying trade information and statistical data
useful to customers;
f) Acting as a referee regarding the financial status
of customers;
g) Undertaking foreign exchange business.
UNIVERSAL BANKING
Introduction
The concept of Universal Banking
Universal Banking, means the financial entities –
the commercial banks, DFIs, NBFCs, - undertake
multiple financial activities under one roof, thereby
creating a financial supermarket.
The entities focus on leveraging their large branch
network and offer wide range of services under
single brand name.
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Universal banking generally takes one of the three

forms: -
a. In-house Universal banking. Eg. Germany
b. Through separately capitalized subsidiaries. Eg.
England.
c. Operations carried through a holding company.
Eg. USA. (Nair, 1998)
Universal Banking includes not only services
related to savings and loans but also investments.
However in practice the term 'universal banks'
refers to those banks that offer a wide range of
financial services, beyond commercial banking and
investment banking, insurance etc. It is a
combination of commercial banking, investment
banking and various other activities including
insurance. If specialised banking is the one end
universal banking is the other. This is most common
in European countries.
A narrow view of Universal banking could be
activities pertaining to lending plus investments in
bonds and debentures. A broader view could
include a basket of all the financial activities
including insurance. Though the concept is
prevalent in countries like France, Germany and
USA but is yet to take-off, officially in India.
International Scenario
Federal Republic of Germany, Switzerland are
generally known to be the home of universal
banking. Factors like technological up gradation,
Dr. Joseph Anbarasu

wide spread of applications, increasing competition

in financial sector etc., are the driving forces in
these nations. In few other European countries,
almost all other banking and non-banking services
are carried out by financial institutions. For
instances, in Germany, commercial and investment
banking activities are performed by a single entity,
but separate subsidiaries are required for other
activities. In UK a separate subsidiaries of
commercial banks involve in providing wide range
of activities.
What the USA follows is an extreme model, where
the commercial banks are prevented legally from
combining their normal lending functions with
investment operations, where they are separated by
several legislative acts, including the Glass-Steagall
Act of 1933 and the bank Holding company Act of
1956. However, at present USA is having a re-look
at the position. Much of the international debate on
universal banking has been centered around the
restriction on diversification of the type.
Indian Scenario
1. Commercial banks
In early 90's the financial sector in India was crying
out for reforms. Ever since the process of
liberalization hit the Indian shores, the banking
sector saw the emergence of new-generation private
sector banks. Public sector banks which played a
useful role earlier on are now facing deterioration in
their performance. For very long, the banks in India
Dr. Joseph Anbarasu

were not allowed to have access to stock markets.

So their dealing in other securities were minimal.
But the financial sector reforms changed it all,
Indian banks started to deal on the stock market but
their bitter experience with scams, they became
averse to deal in equities and debentures. Off late,
commercial banks in India have been permitted to
undertake a range of in-house financial services.
Some banks have even setup their own subsidiaries
for their investment activities. Subsidiaries include
in the area of merchant banking, factoring, credit
cards, housing finance etc.
2. Financial Institutions
DFIs were traditionally engaged in long term
financing, as their main objective was to take care
of the investment needs of industries and to
contribute to a better industrial climate. They had,
over the time, built up expertise in merchant
banking, project evaluation and also started giving
working capital finance. Recently, they were
allowed to accept medium-term deposits within the
specified limits. Lots of changes have taken place in
DFIs in the recent past. Most of DFIs have floated
banks, institutions and mutual fund subsidiaries.
Ownership changes took place, several institutions
went public, organization structure itself got
transformed.
Indian Perspective on Universal Banking
Some argue that the approach is very slow, while
some call for steady approach. The debate of
Dr. Joseph Anbarasu

universal banking is very much on. Should India

have universal banking and if so when? Much has
been written about it domestically, however the
following are the issues which are key in Indian
context.
i. Regulatory burden
ii. Regulatory requirements
iii. Distinction between maturity and duration
iv. Optimum Transition path
i. Regulatory burden:
One of the major problems associated with
universal banking is the issue of regulation. DFIs in
India are governed by separate Acts and banks are
regulated by RBI and Banking Regulation Act.
DFIs in India have commercial banks as their
subsidiaries, but due to the separation of regulation,
the DFIs cannot have direct access to the resource
base of its subsidiary bank. Without any doubt, the
net regulatory burden for all participants in the
entire financial system should be equalized in order
to ensure that no participant might end up having a
disadvantage relative to any other. The importance
of this point can be highlighted by citing the
example of USA, Japan, West Germany and Britain
where there was a tremendous decline in the share
of banks in composition of household financial
assets and its movement to mutual funds and
insurance. The study reveled that the decline has
been due to very high net regulatory burden being
imposed upon the entire banking system relative to
Dr. Joseph Anbarasu

that on the mutual funds and insurance companies.

In India there is an urgent need to reduce the
regulatory burden, particularly for banks vis-à-vis
mutual funds and insurance companies, if the banks
are expected to compete in free market place. (Mor,
1999)
ii. Regulatory requirements
The reference of regulatory requirements here are
on the following issues –
a. Cash Reserve Ratio (CRR): From early 90's the
monitory policy in India has been focusing on
review of CRR. Off late RBI is concentrating more
so on indirect instruments like Bank Rate and Open
Market Operations, and felt that the CRR must be
brought down to its minimum level of 3 percent at
the earliest. It is also argued by some experts that
instead of the complete Net Demand and Time
Liabilities (NDTL) of banks, its application if
restricted only to cash and cash like instruments, it
would be more effective as an instrument of
monetary policy and by applying the ratio, for the
senior bonds that may be issued by banks to
industry, is not in the interests of Monetary policy
and this would further increase the cost of funds to
the industry by almost at 1 percent.
b. Statutory Liquid Ratio (SLR): Though, the
SLR has already reached its statutory minimum of
25 percent, some experts feel there is need to re-
examine the present minimum limit, which is very
high as per the international practices and could be
brought down further by amending the Banking
Dr. Joseph Anbarasu

Regulation Act. Few banking experts extended to

specific infrastructure projects as a part of SLR,
since these facilities have directly replaced similar
financing by Government of India.
c. Priority Sector: The whole issue of priority
sector needs a closer look. The S.H Khan panel
called for modifications in defining the priority
sector by excluding all infrastructure loans from the
net bank credit for the priority sector. It has also
suggested the creation of an alternative mechanism
to finance the priority sector.
Even the international experience of banks in Asia-
Pacific region had a 'must serve' obligation towards
priority sector and the result was discriminatory and
inefficient performance without the support of
commercial mindset.
iii. Distinction between Maturity and Duration
This is the another issue of debate between long
term and short term. Somehow DFIs are the
suppliers of term finance, where the maturity is
clearly specified which could be between 3 years to
7 years, where as banks are providers of short-term
finance where in reality bank finance in a way
amounts to financing in perpetuity since there are in
general no definite maturity dates. Usually the
deposit base of the banks have are short duration
but with a variably high interest rates but its not the
case with DFIs. Their funds have a longer duration
with less interest rates. (Mor, 1999)
The interim report of S H Khan committee has
argued that the distinction between commercial and
Dr. Joseph Anbarasu

investment banking have become increasingly

blurred with banks providing both working capital
and term loans to corporates but DFIs can provide
only term loans as they cannot accept short term
deposits. The committee further argued that DFIs
should be given banking licenses eventually and
until then they should be allowed to establish 100
percent banking subsidiaries while they continue to
play their present role.
iv. Optimal Transition path
Viable transition path is one of the major areas of
concern for institutions which are desirous of
moving in the direction of universal banking. The
transition path contains several operational and
regulatory issues for information and guidance of
DFIs. The S H Khan working group and the
discussion paper on the subject prepared by RBI
eventually felt that DFIs should transform
themselves into commercial banks but in a phased
manner. The committee also recommended that
DFIs can have 100 percent owned banking
subsidiaries which would be extremely beneficial to
them. If this happens, then it would allow DFIs to
gain expertise in the area of commercial banking
which would in turn help the DFIs if they are
seriously looking at the prospect of converting into
a commercial bank. Also the 100 percent
subsidarisation allows banks to have a full access to
capital base of DFIs and gain substantial knowledge
in the area of project financing.
Dr. Joseph Anbarasu

The RBI has asked FIs, which are interested to

convert itself into a universal bank, to submit their
plans for transition to a universal bank for
consideration and further discussions. FIs need to
formulate a road map for the transition path and
strategy for smooth conversion into a universal
bank over a specified time frame. The plan should
specifically provide for full compliance with
prudential norms as applicable to banks over the
proposed period.
Considerations
Caution must be applied on Universal banking
because of the following considerations:
1. Disintermediation (i.e. replacement of traditional
bank intermediation between savers and borrowers
by a capital market process) is only a decade old in
India and has badly slowed down due to loss of
investors' confidence.
2. There is an ample room for financial deepening
(by banks & DFIs) since loan market will continue
to grow.
3. DFIs as a folder of equity in most of the projects
promoted in the past have never used the tool
advantageously.
4. DFIs are now only moving into working capital
finance, an area in which they need to gain lot of
expertise and this involves creation of network of
services (including branches) in all fields like
remittances, collections etc.
Dr. Joseph Anbarasu

5. Reforms in the Indian capital market is still in the

half way stage. The priority will be to ensure branch
expansions, financial deepening of credit markets,
and creation of an efficient credit delivery
mechanism that can compete with the capital
market.
Salient operational and regulatory issues to be
addressed by the FIs for conversion into a
Universal Bank [RBI circular]
a) Reserve requirements
Compliance with the cash reserve ratio and
statutory liquidity ratio requirements (under Section
42 of RBI Act, 1934, and Section 24 of the Banking
Regulation Act, 1949, respectively) would be
mandatory for an FI after its conversion into a
universal bank.
b) Permissible activities
Any activity of an FI currently undertaken but not
permissible for a bank under Section 6(1) of the B.
R. Act, 1949, may have to be stopped or divested
after its conversion into a universal bank.
c) Disposal of non-banking assets -
Any immovable property, howsoever acquired by
an FI, would, after its conversion into a universal
bank, be required to be disposed of within the
maximum period of 7 years from the date of
acquisition, in terms of Section 9 of the Banking
Regulation Act.
d) Composition of the Board
Dr. Joseph Anbarasu

Changing the composition of the Board of Directors

might become necessary for some of the FIs after
their conversion into a universal bank, to ensure
compliance with the provisions of Section 10(A) of
the B. R. Act, which requires at least 51% of the
total number of directors to have special knowledge
and experience.
e) Prohibition on floating charge of assets
The floating charge, if created by an FI, over its
assets, would require, after its conversion into a
universal bank, ratification by the Reserve Bank of
India under Section 14(A) of the Banking
Regulation Act, since a banking company is not
allowed to create a floating charge on the
undertaking or any property of the company unless
duly certified by RBI as required under the Section.
f) Nature of subsidiaries
If any of the existing subsidiaries of an FI is
engaged in an activity not permitted under Section
6(1) of the B R Act, then on conversion of the FI
into a universal bank, delinking of such subsidiary /
activity from the operations of the universal bank
would become necessary since Section 19 of the
Act permits a bank to have subsidiaries only for one
or more of the activities permitted under Section
6(1) of Banking Regulation Act.
g) Restriction on investments
An FI with equity investment in companies in
excess of 30 per cent of the paid up share capital of
that company or 30 per cent of its own paid-up
Dr. Joseph Anbarasu

share capital and reserves, whichever is less, on its

conversion into a universal bank, would need to
divest such excess holdings to secure compliance
with the provisions of Section 19(2) of the Banking
Regulation Act, which prohibits a bank from
holding shares in a company in excess of these
limits.
h) Connected lending
Section 20 of the Banking Regulation Act prohibits
grant of loans and advances by a bank on security of
its own shares or grant of loans or advances on
behalf of any of its directors or to any firm in which
its director/manager or employee or guarantor is
interested. The compliance with these provisions
would be mandatory after conversion of an FI to a
universal bank.
i) Licensing
An FI converting into a universal bank would be
required to obtain a banking license from RBI under
Section 22 of the Banking Regulation Act, for
carrying on banking business in India, after
complying with the applicable conditions.
j) Branch network
An FI, after its conversion into a bank, would also
be required to comply with extant branch licensing
policy of RBI under which the new banks are
required to allot at east 25 per cent of their total
number of branches in semi-urban and rural areas.
k) Assets in India
Dr. Joseph Anbarasu

An FI after its conversion into a universal bank, will

be required to ensure that at the close of business on
the last Friday of every quarter, its total assets held
in India are not less than 75 per cent of its total
demand and time liabilities in India, as required of a
bank under Section 25 of the Banking Regulation
Act.
l) Format of annual reports
After converting into a universal bank, an FI will be
required to publish its annual balance sheet and
profit and loss account in the in the forms set out in
the Third Schedule to the B R Act, as prescribed for
a banking company under Section 29 and Section
30 of the Banking Regulation Act.
m) Managerial remuneration of the Chief
Executive Officers
On conversion into a universal bank, the
appointment and remuneration of the existing Chief
Executive Officers may have to be reviewed with
the approval of RBI in terms of the provisions of
Section 35 B of the Banking Regulation Act.
The Section stipulates fixation of remuneration of
the Chairman and Managing Director of a bank by
Reserve Bank of India taking into account the
profitability, net NPAs and other financial
parameters. Under the Section, prior approval of
RBI would also be required for appointment of
Chairman and Managing Director.
n) Deposit insurance
Dr. Joseph Anbarasu

An FI, on conversion into a universal bank, would

also be required to comply with the requirement of
compulsory deposit insurance from DICGC up to a
maximum of Rs.1 lakh per account, as applicable to
the banks.
o) Authorized Dealer's License
Some of the FIs at present hold restricted AD
license from RBI, Exchange Control Department to
enable them to undertake transactions necessary for
or incidental to their prescribed functions. On
conversion into a universal bank, the new bank
would normally be eligible for full-fledged
authorized dealer license and would also attract the
full rigour of the Exchange Control Regulations
applicable to the banks at present, including
prohibition on raising resources through external
commercial borrowings.
p) Priority sector lending
On conversion of an FI to a universal bank, the
obligation for lending to "priority sector" up to a
prescribed percentage of their 'net bank credit'
would also become applicable to it.
q) Prudential norms
After conversion of an FI in to a bank, the extant
prudential norms of RBI for the all-India financial
institutions would no longer be applicable but the
norms as applicable to banks would be attracted and
will need to be fully complied with.
Concluding Remarks
Dr. Joseph Anbarasu

The following are the steps suggested:

a. Equalize the net regulatory burden across
the financial system (including banks, DFIs,
mutual funds, NBFCs and Insurance
companies).
b. Lower the regulatory burden on the over
regulated entities.
c. Promote and encourage strong competition.
d. Do not allow the merger of a weak bank
with a viably strong DFI or vice-versa.
e. DFIs should be permitted to set up a 100
percent owned banking subsidiaries.
f. Need is felt to re-examine the minimum
level of SLR requirement in order to meet
the best of international standards.
Principles of Sound bank lending
Lending depends on obtaining and analysing the
facts of a loan request. It is an art of making
judgements about the information, the feasibility of
the business and the credibility of the borrower. An
intelligent lender focuses on the key business issues
quickly. He determines what information is
required. Based on the information, he makes a
prompt decision. The lending banker should take
time and experience to develop sound credit
decision.
This part of the unit deals with some basic
principles for lending. The following principles are
Dr. Joseph Anbarasu

implemented before making a decision. Investment

in people, management and leadership, and a
systematic approach to risk are the key elements
that allow lenders to be effective.
The principles of effective lending presented below
reflect the lessons that micro lenders have learned
through experience and the innovative approaches
being used for small business lending today. This
does not include marketing and outreach discussion
because demand is assumed to exist if a programme
offers the right products and services. The use of
technical assistance in loan screening and borrower
evaluation is discussed below under the Role of
Technical Assistance.
1. Know your Borrower:
Understand your market niche and the types of
people, and characteristics needed to succeed in the
local environment. The best entrepreneurs may be
stubborn, without formal education, and blithely
unaware of any personal weaknesses, yet they may
have the street smarts, resourcefulness, and ability
to do one thing well to be successful entrepreneurs.
Be aware of their strengths, limitations, and
weaknesses, and why you like or dislike them. In
other words, lend to the person, not to the idea.
Personal commitment to repay is the strongest bond
between a lender and its customers.
2. Structure Loans to Minimise Risk:
Successful lenders provide minimal credit amounts
at first and then increase the subsequent loan size
Dr. Joseph Anbarasu

once a borrower has demonstrated his or her ability

and commitment to repay. These “stepping loans”
minimise risk to the borrower (particularly start-ups
or early stage expansions) and to the lender. In
addition to “stepping loans”, other methods for
reducing risk to the lender include:
3. It is Hard to Fix a Poor Underwriting Decision:
If staff misjudged either the business or the
borrower, it is difficult to fix the problem once the
loan is made. Loan restructuring and collections
take significant staff time and reduce the time
available for other borrowers. Careful evaluation of
the business viability and borrower character is
essential to lending unless the organisation can rely
on
(a) collateral,
(b) cross-guarantees within a group of
borrowers, or
When it comes time to collection, collateral melts
like ice cream in the summer sun. Therefore,
prudent judgements of business viability and
borrower character are essential.
1. Pay Attention to the Details:
Lending is a business of details. Careful information
gathering and analysis, loan documentation and
rapid follow-up on any discrepancies all require a
focus on details. Although many credit programmes
learned this the hard way, the most successful
programmes now are meticulous in their loan
Dr. Joseph Anbarasu

procedures and prompt in their follow-up if any

payments or reporting requirements are past due.
Collect aggressively to establish market credibility
and minimise loan losses.
2. Streamline loan administration systems, but stay
in close touch with the borrower.
Most of the lending programmes in operation are
using direct loans to individual businesses in a
manner similar to traditional banking. The key is to
stay in close touch with the borrower by
a. requiring frequent payments at the local
office and
b. making periodic site visits.
A missed payment or disarray at the place of
business is immediate signs of trouble. Lending
staff must monitor loans for changing economic or
market conditions and spot early signs of potential
trouble.
1. Charge “market” interest rates:
Access to credit is more important than its cost.
Because access to credit can dramatically improve
the income generation of any business, most
entrepreneurs are less cost-sensitive and more
access-driven. Most credit organisation charge fees
and interest rates those are higher than the
conventional finance system and lower than
informal moneylenders. Additional margin on each
loan has a relatively small impact on the borrower
(given the small loan amounts and increased income
Dr. Joseph Anbarasu

generation) and a huge impact on the programme’s

prospects for self-sufficiency.
2. Be driven by the deal, not charity:
Despite their development mission, lenders must
evaluate each deal on its business merits and the
capacity and character of the borrower. Experience
gives lenders the ability to recognise those deals
that do not make sense and those that might if they
were structured differently. If an existing loan
suddenly looks precarious, take action swiftly with
clear intentions rather than allowing non-payment
or problems to continue.
3. Collect hard and fast:
Consistent and disciplined loan collection reinforces
the business relationship between the lender and
borrower, and sends a strong message that
delinquency will not be tolerated. Do not use the
threat of collection actions unless you are prepared
to take them.
The key lending principles from international
institutions have been to streamline the loan
approval and delivery systems, rely on personal
character rather than an analysis of the underlying
business, and standardize products and delivery
mechanisms to reduce administrative costs. In
addition, they have demonstrated that subsidised
credit benefits neither the borrower nor the
institution in the long run. However, existing
programmes appear to combine the efficiencies of
Dr. Joseph Anbarasu

delivery with the more rigorous assessment of

borrower and business that has been used.
4. Loan Assessment and Credit Analysis
There is no formula for determining
creditworthiness. The loan officer must assemble
and evaluate information and then determine what
the entire picture looks like. Traditional bank
lenders refer to the “Four Cs” of lending: Credit,
Capacity, Collateral, and Character. Lending uses
the rigorous credit assessment principles, but
applies them to situations in which the lender must
rely on borrower character and cash flow from the
business. The loan application and the first meeting
with the borrower are the first screen of whether a
business is a potential candidate. Beginning with the
first meeting, the lender must evaluate the quality of
the business deal, the fit with the borrower’s
experience and capacity, and whether the financing
amount and structure is appropriate.
Example
Fair Lending Policy of Indian Bank
FAIR LENDING PRACTICES CODE
1. Preamble
(a) Scope: Fair lending practices code (FLPC
for short) aims at providing information to
customers seeking credit facilities of all
categories of loans irrespective of amount of
loan sought by the borrower and facilitates
Dr. Joseph Anbarasu

effective interaction of customers with the

bank.
(b) Extent: modified FLPC is put in place by
our bank with effect from 30.04.2007.
(c) The bank reserves the right to modify /
incorporate / delete any of the clauses in this
flpc at any time and will announce the
revised code, in place of the present flpc
furnished hereunder.
1. Important declarations:
Our bank declares and undertakes
A) to provide professional, efficient, courteous,
diligent and speedy services in the matter of
lending.
B) not to discriminate on the basis of religion,
caste, sex, descent or any of them (except
participation in credit-linked schemes framed
for weaker sections of the society like women
entrepreneur scheme etc.)
C) to be fair and honest in advertisement and
marketing of loan products
D) to provide customers with accurate and timely
disclosure of terms, costs, rights and liabilities
as regards loan transactions.
E) if sought, to provide such assistance or advise to
customers applying for loans.
Dr. Joseph Anbarasu

F) to attempt in good faith to resolve any disputes

or differences with customers by the complaint
redressal cells within the bank.
G) to comply with all the regulatory requirements
in good faith.
H) to spread general awareness about potential
risks in contracting loans and encourage
customers to take independent financial advice
and not act only on representation from banks.
1. Fair practices:
3.1 product information:
A) a prospective customer would be given all the
necessary information adequately explaining the
range of loan products available with our bank
to suit his needs.
B) on exercise of choice, the customer would be
given the relevant information about the loan
product of his choice.
C) the customer would be explained the processes
involved till sanction and disbursement of loan
and would be notified of timeframe within
which all the processes will be completed
ordinarily at our bank.
D) the customer would be informed of the names
and phone numbers of branches (or the persons)
whom he can contact for the purpose of loan to
suit his needs.
Dr. Joseph Anbarasu

E) the customer would be informed the procedure

involved in servicing and closure of the loan
taken.
3.2 interest rates:
3.2.1 Interest rates for different loan products would
be made available through and in any one or all of
the following media, namely:
A. In our bank's web site
B. Over phone, if tele-banking services are
provided
C. Through display in the branches
D. Through other media from time to time.
3.2.2 Customers would be entitled to receive
periodic updates on the interest rates applicable to
their accounts, if the revision is individual
customer-specific.
3.2.3 On demand, customers can have full details of
method of application of interest.
3.3 revisions in interest rates:
A. Our bank would notify immediately or as soon
as possible any revision in the existing interest
rates and make them available to the customers
in the media listed in para 3.2.1.
B. Interest rate revisions to the existing customers
would be notified within a reasonable period of
ten days from the date of change through the
media as per para 3.2.1.
Dr. Joseph Anbarasu

3.4 default interest / penal interest :

Our bank would notify clearly about the default
interest / penal interest rates to the prospective
customers.
3.5 charges
A. Our bank would notify details of all charges
payable by the customers in relation to their
loan account.
B. Our bank would make available for the benefit
of prospective customers all the details relating
to charges to all loan applicants of all categories
of loans irrespective of amount of loan sought
by the borrower in the media as specified in
para 3.2.1.
C. Any revision in charges would be notified in
advance and would be made available in the
media as listed in para 3.2.1
D. Our bank would clearly specify the charges to
be recoverable from the borrower for interest
and charges, wherever necessary and get a
mandate for debiting the said account along
with the documentation.
3.6 terms and conditions for lending:
A. Our bank would ordinarily give an
acknowledgement of receipt of loan application
and if demanded by the customer, a copy of the
application form duly acknowledged would also
be given, as soon as the customer chooses to
buy a retail product or service of his choice. In
Dr. Joseph Anbarasu

respect of loan applications all loan applicants

of all categories of loans irrespective of amount
of loan sought by the borrower, the
acknowledgement will indicate the timeframe
for disposal of such applications.
B. Immediately after the decision to sanction the
loan, our bank would show draft of the
documents that the customer is required to
execute and would explain, if demanded by the
customer, the relevant terms and conditions for
sanction and disbursement of loan. The bank
would obtain the customers' acceptance /
guarantor's acceptance of these terms and
conditions on record by way of an acceptance
signature in the copy of sanction advice / ticket
issued to the customer.
C. Loan application forms, draft documents,
sanction letter, declarations or such other papers
to be signed by a customer would
comprehensively contain all the terms and
conditions relating to the product or service of
his choice.
D. Wherever possible, reasons for rejection of loan
would be conveyed to the customers.
E. Before disbursement of loan, our bank upon
written request would deliver the format (copy)
of the documents to be executed by the
customers against their acknowledgement at
their cost.
Dr. Joseph Anbarasu

F. If the borrower desires to have the copies of the

executed loan documents, bank upon written
request would deliver the copies of duly
executed documents after due verification by the
branch lawyer, against the borrowers’ written
acknowledgement, at their cost.
G. Modification on time frame for disposal of
applications in respect of all categories of loans
irrespective of the amount of loan shall be as
under:
Up to Rs. 25000 Within 15 days
Beyond rs.25000 and Within 4 weeks
up to Rs. 5 crore - fresh
limits and increase in
limits for existing units
Above Rs. 5 crore - Within 8 weeks
fresh limits and
increase in limits for
existing units
For adhoc limits within 3 weeks
3.7 account practices:
A. Our bank would provide regular statement
of accounts, unless not found necessary by
the customers.
B. Our bank would notify relevant due dates
for application of agreed interest, penal
interest, default interest and charges if they
Dr. Joseph Anbarasu

are not mentioned in the loan applications,

documents or correspondence.
C. Our bank would notify in advance any
change in accounting practices that would
affect the customer, before implementation,
in the media listed in para 3.2.1.
A. 3.8 information secrecy
A. All personal information of the customer
would be confidential and would not be
disclosed to any third party unless agreed to
by the customer. The term 'third party'
excludes all law enforcement agencies,
credit information bureau, reserve bank of
India, other banks and financial institutions.
B. Subject to above Para, customer information
would be revealed only under the following
circumstances, namely;
• if our bank is compelled by law
• if it is in the public interest to reveal the
information
• if the interests of our bank require
disclosure.
3.9 financial distresses
A. Our bank would reckon cases of customer's
financial distress and consider them
sympathetically.
B. Customer would be encouraged to inform about
their financial distress as soon as possible.
Dr. Joseph Anbarasu

C. Our bank would adequately train the

operational staff to give patient hearing to the
customers in financial distress and would render
such help as may be possible in their view.
D. In the event of default our bank will take every
legal means for the recovery of the loans from
the borrowers / guarantors / securities / other
assets.
3.10 grievance redressal
• The branch manager can be approached
through letter or in person, who will attend
to / give personal hearing to the grievances
of the credit applicants on any working day
during the banking hours. The findings will
be communicated within one week to the
aggrieved party.
• If the customer is not satisfied with the
reply, he can approach the circle head
(whose name and office address are
displayed in the branch) for redressal of the
complaints / grievances. All circle heads or
the nominated officer at the circle. Office
will attend to the complaints / grievances
and also give personal hearing to the
applicants. The decision will be
communicated to the applicants within two
weeks.
• The grievances can be represented in plain
paper with all relevant particulars by the
applicant.
Dr. Joseph Anbarasu

General terms and conditions applicable for all

facilities /all types of borrowers

1. All applicants / borrowers and guarantors must

furnish their passport size photos along with
application.
2. the advance will be released only upon
completion of documentation in all respects as
per bank’s rules
3. Processing fee and other charges as per bank's
rules should be paid upfront.
4. Processing charges for renewal of facilities will
be charged on due dates irrespective of whether
the renewal papers are submitted or not.
5. Bank is entitled to charge and recover interest,
various fees, and charges as per actuals /
prescribed tariff from the borrower as applicable
from time to time.
6. the limits shall be availed within the prescribed
time limit as specified in the sanction ticket or
within 3 months from the date of
communication of sanction which ever is earlier
7. The advance must be used for the purpose for
which it is sanctioned. Unless otherwise
specified, the working capital limits disbursed
are valid for a period of one year from the date
of sanction. For any request for
renewal/enhancement, application should be
made at least three months in advance
Dr. Joseph Anbarasu

furnishing all the relevant data as required by

bank.
8. Acceptance of immovable properties offered as
security is subject to the unqualified legal
opinion of the bank‘s approved lawyer
conveying a clear, valid, subsisting and
marketable title.
9. Valuation of the property, wherever given as
security, should be done by the bank’s approved
engineer/revenue authorities.
10. In the case of immovable properties given as
security the borrower should furnish upto- date
encumbrance certificate showing nil
encumbrance and up-to-date tax paid receipt at
the time of documentation. Stamp duty charges
for creation of em to be borne by the applicant /
borrower.
11. Immediately on completion of 4 months from
the date of creation of equitable mortgage,
further encumbrance certificate shall be
produced. Thereafter, encumbrance certificates
and property tax paid receipts shall be produced
every year.
12. Securities for one or more facilities shall also
stand as additional security for all other
facilities granted or to be granted from time to
time to the said borrowers, unless specifically
waived by the bank.
13. Fixed assets charged to the bank shall not be
leased / disposed / substituted / relocated/
Dr. Joseph Anbarasu

mortgaged / assigned without prior approval of

the bank.
14. All the assets charged to the bank [except for
the assets exempted from insuring in certain
loan products/ schemes] shall be adequately
insured against all attendant risks at the expense
of the borrower(s). The insurance policy with
bank clause (viz. Bank as mortgagee,
hypothecatee or pledgee as the case maybe)
shall be lodged with the bank. The insurance
cover shall be kept in force at all times through
prompt renewals and with suitable
enhancements to include any increase in the
value of securities.
15. Machinery, equipment, vehicles, etc. Charged to
the bank should be painted with the Bank’s
name or affixed with the bank’s name board. In
the premises where stocks hypothecated/pledged
to the bank are stored, bank name board with
specific mention of the branch name should be
displayed prominently both inside and outside
the premises.
16. Assets charged to the bank are subject to
inspection by bank’s officials from time to time.
17. For working capital facilities against stock etc,
monthly stock statement with break up of stocks
as required by the bank is to be submitted.
Delayed submission of stock statements /
financial statements etc., will attract levy of
Dr. Joseph Anbarasu

penal interest as per bank’s rules in force from

time to time.
18. All fund based/non-fund based /fee based
transactions shall be routed only through the
account with our bank.
19. Interest will be generally charged on the last
working day of every month and should be paid
as and when charged.
20. Default in payment of interest / instalments on
the respective due dates will attract overdue
interest on the defaulted amount at 2% over and
above the contractual / maximum interest rates
or at such rates as applicable from time to time.
21. Stipulated margin on securities charged to the
bank should be maintained during the currency
of the advance.
22. If any default / deterioration occurs in any
security charged to the bank, the liability of the
borrower shall become immediately due and
payable.
23. Upon sanction, the duplicate copy of the
sanction letter is to be returned duly signed by
the borrower / guarantor in token of acceptance
of terms and conditions.
24. The bank is not under any obligation to make
further advances or other accommodation to the
borrower, unless deemed fit and necessary by
the bank.
Dr. Joseph Anbarasu

25. Changes, if any made to the structure of

ownership/management of the borrowing
concern shall be promptly informed to the bank.
26. Besides general terms and conditions, scheme-
specific / activity-specific terms and conditions
will be stipulated in the sanction ticket and
should be complied by the applicant, based on
the nature of facility; constitution of the
borrower; purpose; end use; security and nature
of charge on the security.
27. For scheme-specific / activity-specific loans for
activities like small scale industries, cottage
industries, agriculture, allied activities, poultry,
minor irrigation, land development, gobar gas
plant, self help group, crop loans for specific
crops, tie up arrangement details, personal loan
products, consumer articles, vehicles for
commercial / personal use, retail traders, service
providers, etc., terms and conditions can be had
from the branches separately.
28. The bank may at its discretion recall the entire
advance upon default of a single instalment /
interest.
29. In addition to these terms and conditions all the
facilities sanctioned shall be subject to the
bank’s rules as well as the directives issued by
rbi or any other regulatory authority from time
to time.
30. The bank reserves to itself the right to cancel /
suspend / reduce any or all the limits
Dr. Joseph Anbarasu

sanctioned / alter / amend / vary the terms of

sanction including rate of interest at its sole
discretion without assigning any reason.
31. Bank at its discretion may approve or disallow,
drawings beyond the sanctioned limit or
honouring cheques issued for the purpose other
than specifically agreed to in the credit sanction.
32. Bank may disallow drawing on a borrowal
account on its classification as a nonperforming
asset or on account of non compliance with the
terms of sanction.
Rs.70/- per charge
Note :
(1) for computerised accounts 40 entries or part
thereof will be reckoned as one folio (no folio
charges for facility deposit accounts and rrbs of our
bank)
(2) the charges are to be recovered annually on 28th
february every year or at the time of closure of the
account whichever is earlier
4. Cost of Kisan credit card (not exceeding rs.50/-)
to be borne by borrower
5. CGTSI charges (SSI a/cs which are collateral free
/ without third party guarantee): guarantee fee 2.5%
(one time) – initially Annual service fee 1% (on the
amount outstanding as of march 31st every year)
6. Insurance charges actual
Dr. Joseph Anbarasu

7. Out-of-pocket expenses including legal charges,

remittances by post:
All out-of-pocket expenses such as pre-sanction and
post-sanction visits, recovery visits, valuation fees
payable to approved valuers, fees to panel advocates
for opinion, sending notices, etc., should be paid by
the borrower, as applicable
8. Penal interest for overdue / irregularities:
Upto rs.25000/- nil
Above rs.25000/- additional interest @ 2%
above the applicable rate
9. Periodicity of charging interest:
As per RBI master circular - interest rates on
advances (DBOD dated 01.07.2005), banks should
charge interest on agricultural advances for long
duration crops at annual rests. As regards other
agricultural advances in respect of short duration
crop and allied agricultural activities such as dairy,
fishery, piggery, poultry, bee-keeping etc., banks
may take into consideration due dates fixed on the
basis of fluidity with borrowers and harvesting /
marketing season while charging interest and
compounding the same if the loan / instalment
becomes overdue.
In our bank, for crop loans, interest on simple basis
is debited to the account and only on the due date
the same is compounded at half yearly rests. In
other words, interest on stpl is not compounded till
it becomes due.
Dr. Joseph Anbarasu

In case of all agri-term loans interest is debited to

the account on simple basis at half yearly rest till
the instalment become due. However, interest is
compounded on due dates as soon as the
holiday/gestation period is over.
For non-agricultural advances, interest will be
charged at monthly intervals. *service charges are
subject to periodical change service charges are
charged according to the rating of the account.
Any revalidation and / or modification in sanction
terms after 15 days from the date of communication
of sanction by the bank/branch will attract further
processing charges at 25% of the original
processing charges stipulated. Adhoc limit if
adjusted beyond 3 months will attract penal interest
as per extent guidelines.
Review Questions:
1. Define banking.

2. What additional businesses can the commercial

banks do?

3. List out the various agency business of

commercial banks.

4. How is Indian financial system controlled?

5. Explain the banking structures in India.

Dr. Joseph Anbarasu

6. How is Indian capital market controlled and

monitored?

7. What is demutualization?

8. List the features of Banking Regulation

(Amendment) Bill, 2005.

9. What are the various functions of commercial

banks?

10. Explain primary functions of commercial banks.

11. Describe the secondary functions of commercial

banks.

12. What are the different modes of short term

financial assistance?

13. Compare and contrast the primary and

secondary functions of commercial banks.

14. Briefly explain different modes of acceptance of

deposits

15. What is current deposit? Explain its features.

16. Why do we call some deposits fixed?

Dr. Joseph Anbarasu

17. List out various deposits mobilized by

commercial banks apart from main deposits.

18. How do commercial banks grant loans to

clients?

19. What is cash credit? What are the stipulations

followed by banks to grant it?

20. Differentiate demand loan from term loan.

21. Explain bank overdraft. What are the procedures

to be followed to grant overdraft to the clients?

22. What is meant by discounting of bills?

23. List out various agency services rendered by the

modern banks.

24. Define universal banking. Explain its status

today