Newsletter 2 16 150718 (1)

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Volume II, Issue 16
Jul 15, 2018
Banker's Helpline
W e e k l y N e w s l e t t e r
I N S I D E T H I S
I S S U E :
BANKING NEWS
India’s economy OVERTAKES France to become
sixth largest in world
India proposes easing local data storage rules for
foreign payment firms
Consumer Inflation Quickens To 5% In June; In-
dustrial Production Slips To 3.2% In May
Buyer's name to be compulsorily printed on De-
mand Drafts
India needs more private banks and only 3-5
PSU banks: Arvind Subramanian
NCLAT upholds MCA's move to freeze assets of
independent directors in PNB fraud case
RBI Cautions On Fiscal Risks Emerging From
States Going To The Polls
NCLAT rejects Liberty House plea to stay resolu-
tion process of Bhushan Power
Is The Government Facing A Cash-Flow Mis-
match... Again?
Farm loan waivers to touch $40 billion by 2019
elections: Report
PNB aims for biggest bank profit after Nirav Modi
fraud
1,000 NPA accounts under scanner in ICICI Bank
probe
LIC-IDBI Bank deal likely to conclude by Septem-
ber
Sebi paper soon on large firms tapping bond
market
Lending to infrastructure sector sees negative
growth in last two fiscals
PSU banks plan to raise over Rs 50k cr in FY19
NHB index points to stable residential property
prices
CBI looks for banking, tax experts to help probe
in multi-crore scams

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ARTICLES ON BANKING
Dealing with changing face of Indian
Banking
The author who is Secretary General of JKBOF
argues that Committees on bank Reforms while
suggesting the solutions for Indian banking sec-
tor have relied on importing solutions from other
regions of globe because these committees usu-
ally consist of people who have earned their de-
grees by studying economies of countries not
more than size of UP or Maharashtra. The solu-
tion lies in dealing with problems in Indian bank-
ing as per our own understanding with due re-
gard to our traditional business practices en-
shrined in our cultural ethos. Read More
Analysing Balance Sheet of Banks
Part2: Analysis of Bank Financial State-
ments with Ratio Analysis & Examples
After explaining the structure of Bank’s Balance
Sheets and how they differ from balance Sheets
of other corporates last week, this week Shri Ras-
walkar is explaining the use of ratios in analyzing
the performance of banks using Top Line ap-
proach. Read More
Population-age ratio and monetary pol-
icy
Using long-panel data for 22 advanced econo-
mies over the period 1870-2016, the authors
find a positive correlation between the share of
dependent population and inflation, while work-
ing-age population share is negatively correlated
with inflation.
Read More
Links to selected Articles on
Banking appearing in Newspa-
pers / magazines this week

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INDIA has leapfrogged France to become the
world’s sixth-largest economy in dollar terms, ac-
cording to new figures released by the World
Bank. ndia’s gross domestic product (GDP) has
risen above the European nation’s for the first
time ever, pushing France back down to seventh
place: its GDP reached $2.597 trillion in 2017,
compared with $2.582 trillion for France, accord-
ing to the Bank’s latest data. But while India has
doubled its GDP in 10 years, its GDP per capita
remains much lower than France’s: $1,932.55
compared with $42,567.74. India’s steep ascent
is part of a trend that will see Asian economies
increasingly dominate the top 10 biggest econo-
mies over the next 15 years, leading economists
predict. The International Monetary Fund (IMF)
said in May that growth in Asia’s third largest
economy was expected to grow by 7.4 percent in
2018 and 7.8 percent in 2019.
India’s economy OVERTAKES France to
become sixth largest in world
India proposes easing local data storage
rules for foreign payment firms
India’s finance ministry has proposed relaxing a
directive from the country’s central bank that
would compel global payment firms to store cus-
tomer data only locally, following weeks of in-
tense lobbying by U.S. companies and trade bod-
ies. Easing the proposal would be a relief for firms
including MasterCard, Visa and American Express,
which fear India’s data onshoring move could cost
them millions of dollars and set a precedent for
other major governments to implement similar
rules at a time when there is heightened scrutiny
of how companies globally handle their custom-
ers’ data. Govt. has been aggressively pushing
digital and cashless modes of payment that leave
an electronic trail as part of a campaign to crack
down on the black economy. Foreign payment
companies were caught off guard in April by the
Reserve Bank of India’s (RBI) one-page directive
that said all payments data should, within six
months, be stored only in the country for
“unfettered supervisory access”.
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Retail inflation accelerated to a five-month high
of 5 per cent in June, from 4.87 per cent in the
previous month, official data showed on Thurs-
day. Economists in a poll by news agency Reuters
had expected retail inflation - also known as con-
sumer inflation - at an annual 5.30 per cent. Surg-
ing fuel prices - triggered by a surge in crude oil
prices during the period - and weakness in the ru-
pee against the US dollar led to the increase in
inflation. Inflation remains above Reserve Bank of
India's medium-term target of 4 per cent target
for an eighth month in a row. Thursday's CPI data
cements expectations of a hike in key interest
rates by the central bank as early as August. The
RBI had last month announced a hike in repo rate
- the rate at which it lends to commercial banks -
by 25 basis points, or 0.25 per cent, marking the
first increase in hike in more than four years.
Consumer Inflation Quickens To 5% In
June; Industrial Production Slips To 3.2%
In May
Buyer's name to be compulsorily printed
on Demand Drafts
The Reserve Bank of India (RBI) has made it man-
datory to mention the name of the person on the
front of the demand draft while purchasing it at a
bank branch. At present, the DD form only asks for
the name of the entity or person in whose favour
it is to be prepared. According to the RBI's notifica-
tion, "in order to address the concerns arising out
of the anonymity provided by payments through
demand drafts and its possible misuse for money
laundering, RBI has decided that the name of the
purchaser be incorporated on the face of the de-
mand draft, pay order, bank-er's cheques, etc., by
the issuing bank. These instructions shall take ef-
fect for such instruments issued on or after Sep-
tember 15, 2018." Already, any remittance of
funds by way of demand draft above Rs 50,000
had to be effected by debit to the customer's ac-
count or against cheques and not not against cash
payment. However, mention of name was not re-
quired even there. Now, even for DD above Rs
50,000 the name is required.
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Outgoing Chief Economic Adviser (CEA) Arvind
Subramanian feels that Indian banking sector
should have only a dozon of banks with private
banks more in number than public sector banks.
"India should have just three to five public sec-
tor banks and as many private sector banks,"
Chief Economic Adviser Arvind Subramanian
said in an interview. Speaking about the health
of Indian banking sector, Subramanian said the
country needs more reforms. "We need to do
more. We need to think about how to improve
governance, more private sector participation."
On the relationship between RBI and govern-
ment, he said " by definition, there will be fric-
tion because objectives are different, mandates
are different, sometimes the personalities are
different. If there isn’t some amount of tension
then things are not right. The only thing is how
it’s resolved. It should never be unseemly."
India needs more private banks and only
3-5 PSU banks: Arvind Subramanian
NCLAT upholds MCA's move to freeze as-
sets of independent directors in PNB
The National Company Law Appellate Tribunal
(NCLAT)Thursday upheld the Ministry of Corpo-
rate Affairs' plea to freeze assets of independent
directors of companies belonging to Nirav Modi
and Mehul Choksi, in connection with
the Punjab National Bank fraud case. The inde-
pendent directors had earlier moved the tribu-
nal appealing against the freeze on their assets,
including bank accounts. The directors argued in
court that they were only 'indepen-dent,' and
had no role in the day-to-day operations of the
two companies.
Landmark judgment
This judgement will bring the focus back on in-
dependent directors, who have been booked by
Central Bureau of Investigation in various bank-
ing scams. This judgement, say, observers, may
help strengthen the case of investigation
agencies against independent directors.
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An intention to consolidate finances at the state
level could be derailed for a fourth consecutive
year due to state elections, cautioned the Reserve
Bank of India in its annual report on state fi-
nances. Fiscal pressures across states are already
elevated with states breaching the 3 percent
threshold set under the Fiscal Responsibility and
Budget Management Act for the third consecutive
year in 2017-18. Slippage at the state level, along
with the central government’s decision to push
back the goal of a 3 percent fiscal deficit, will
mean a general government deficit much higher
than the medium-term target, the report said.
The revised estimates for 2017-18, show that the
gross fiscal deficit of states rose to 3.1 percent of
GDP. This was largely due to higher revenue ex-
penditure on farm loan waivers and pay revisions.
At the same time, states’ own taxes declined due
to the implementation of the GST but the com-
pensation failed to keep pace, said the report.
RBI Cautions On Fiscal Risks Emerging
From States Going To The Polls
NCLAT rejects Liberty House plea to stay
resolution process of Bhushan Power
The National Company Law Appellate Tribunal
(NCLAT) today turned down the plea of UK-based
Liberty House to stay the resolution process of
Bhushan Power and Steel. A two-member bench
of the appellate tribunal, headed by Chairman
Justice S J Mukhopadhaya, directed the commit-
tee of creditors (CoC) to go ahead with the reso-
lution process.
At present, the lenders of Bhushan Power and
Steel (BPSL) are in the process of finalising the
bids. Earlier, lenders of BPSL had rejected the
resolution plan submitted by Liberty House citing
delay, following which the UK-based group had
moved the National Company Law Tribunal
(NCLT). The NCLT had on April 23 directed BPSL's
lenders, led by PNB, to consider the bid submit-
ted by Liberty House. This order was later
challenged by Tata Steel another resolu-
tion applicant of BPSL, before NCLAT.
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Four months into the financial year, the central
government appears to be facing a short-term
cash flow mismatch. On Tuesday, the government
raised Rs 20,000 crore via an auction of cash
management bills with a maturity of 70-days, ac-
cording to the auction result notified by the Re-
serve Bank of India. Since the start of this fiscal,
the government has already borrowed four times
using this instrument, which is typically used to
tide over short-term cash flow mismatches.
 On June 4, the government raised Rs 20,000
crore via 21-day CMBs.
 Another Rs 20,000 crore was borrowed on
June 11 with 70-day bills.
 A third tranche of 45-day CMBs was issued on
June 25, raising Rs 25,000 crore.
 The fourth tranche of CMBs was auctioned on
Tuesday, raising Rs 20,000 crore.
Is The Government Facing A Cash-Flow
Mismatch... Again?
Farm loan waivers to touch $40 billion by
2019 elections: Report
Following Karnataka's $5 billion write off, the na-
tion's farm loan waivers will double to $40 billion
(Around Rs 2.8 lakh crore) by the summer 2019
elections, says a Bank of America Merrill Lynch
(BofAML) report. Karnataka Govt. has announced a
mega Rs 34,000 crore farm loan waiver scheme,
capping the agricultural loan to be written off at Rs
2 lakh and added that all defaulted crop loans up to
December 31, 2017, will be written off in the first
phase. According to global financial services major,
the governments of both - Centre and States - are
expected to take proactive steps to quell rural un-
rest in the run up to the 2019 elections. The report
further noted that farm loan waivers, along with
minimum support price (MSP) hikes, will support
rural demand at a time of stress; however, rains are
a swing factor. "If farm loan waivers really amount
to about 1.5 per cent of gross domestic product
(GDP), this should effectively raise farm income by
about 3 per cent a year over FY18-20," the report
said. Moreover, the rise in MSP will raise au-
tumn kharif harvest farm income by 10 per cent
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Punjab National Bank (PNB) is targeting net in-
come of more than ₹5,000 crore ($730 million)
for the three months through 30 September,
boosted by asset sales and bad-loan recoveries,
the people said. Much of the record earnings will
come from a planned sale of PNB’s stake in its
housing finance unit, they added, asking not to
be identified as the information is private. The
124-year-old PNB is trying to regain its financial
health and credibility following the uncovering
of a $2 billion fraud this year. The scam caused it
to slip one spot to become India’s third-largest
state-run bank by assets and analysts, including
those at Goldman Sachs Group Inc., cut profit es-
timates for the lender. PNB will probably report
a loss of ₹2,400 crore for the three months
ended 30 June, according to the average of 11
estimates in a Bloomberg survey. This narrowing
is expected to be led by a drop in bad loans fol-
lowing the sale of bankrupt Bhushan Steel.
PNB aims for biggest bank profit after
Nirav Modi fraud
1,000 NPA accounts under scanner in
ICICI Bank probe
ICICI Bank Ltd is preparing to submit details of
at least 1,000 loan accounts that turned sour
since April 2010 to an independent panel, as
part of a board-instituted probe into alleged
wrongdoings by the lender’s top executives, in-
cluding its off-duty CEO Chanda Kochhar, two
people aware of the development said. The
panel, headed by former Supreme Court judge
B.N. Srikrishna, has started investigating, among
other issues, three of the most serious allega-
tions made by a whistleblower—impropriety in
lending decisions; conflict of interest in loans
made to business groups; and that Kochhar fa-
voured certain borrowers. The findings of the
Srikrishna panel will decide the fate of Kochhar,
who is now on indefinite leave pending the
completion of the investigation. Kochhar, who
became the bank’s CEO on 1 May 2009, will
have to resign if the panel finds that the whis-
tleblower’s allegations are true.
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After getting a go-ahead from regulator Insur-
ance Regulatory and Development Authority of
India (IRDAI), Life Insurance Corporation of India
(LIC) is preparing to complete the 51% acquisi-
tion of debt-ridden IDBI Bank Ltd by the end of
September, people familiar with the matter said.
LIC is conducting due diligence on IDBI Bank, its
assets, debt position and fixed assets, the people
added. Besides, LIC also intends to make an
open offer to minority shareholders of IDBI
Bank. According to the Securities and Exchange
Board of India’s (Sebi) takeover code, an acquirer
has to make an open offer to shareholders of the
target company on acquiring shares or voting
rights of 25% or more.
The board of IRDAI, at its meeting held in Hy-
derabad last month, had permitted LIC to in-
crease its holding from 10.82% to 51% in IDBI
Bank.
LIC-IDBI Bank deal likely to conclude by
September
Sebi paper soon on large firms tapping
bond market
Markets watchdog Securities and Exchange
Board of India (Sebi) will soon come out with a
consultation paper on making it mandatory for
large corporates to meet one-fourth of their fi-
nancing needs from bond markets. The move
follows the Budget 2018 proposal in this regard,
and is aimed at part-funding the huge invest-
ments needed in the infrastructure space, which
is projected at $4 trillion over the next decade,
Sebi chairman Ajay Tyagi said.The move on bond
issuance assumes importance because the bank-
ing sector is faces a spike in bad loans which are
hovering around at 12% of the system now. This
has made banks, especially state-run lenders,
wary of lending to low-rated corporates. “The
bond market has a huge potential to grow,
which will need a robust secondary market. We
will soon come out with a consultation paper
on making it mandatory for large compa-
nies to source a quarter of their financing
needs from the bond market.
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Despite efforts by the government to revive pri-
vate investments, bank credit growth for infra-
structure projects has been in the negative for
two consecutive years, according to data com-
piled by Crisil. “In the last two fiscals, credit
growth to the infra sector slowed down due to
the deterioration in the outlook on credit quality
for entities in the sector, which made banks
averse to lend in the segment,” a Crisil analyst
said. Regulatory issues, delayed environmental
clearances and challenges in land acquisitions
are some of the issues faced by infrastructure
projects. As a result, the share of non-
performing assets (NPAs) in this sector has in-
creased from 16.7 per cent in March 2017 to
22.6 per cent as on March 2018. It pegged gross
NPAs at around Rs. 10.3-lakh crore, a little above
11 per cent of total advances as on March 31,
2018.
Lending to infrastructure sector sees
negative growth in last two fiscals
PSU banks plan to raise over Rs 50k cr in
FY19
Public sector banks are planning to tap the
markets to raise more than Rs 50,000 crore
this fiscal to shore up their capital base for
business growth and meeting regulatory
global risk norms.
Capital is very much required for these banks
as they are saddled with non-performing as-
sets (NPAs) of about Rs 10 lakh crore.Out of 21
public sector banks, 13 have already taken the
approval from their boards or shareholders for
raising capital through the equity market, as
per the data compiled by PTI. The combined
value of the shares sales of these banks is up-
wards of Rs 50,000 crore. Leading the pack is
the Central Bank of India, which has already
got shareholders’ approval for raising Rs 8,000
crore equity capital through various means, in-
cluding a follow-on public offer, rights issue or
a qualified institutional placement (QIP),
to shore up its capital base.
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Residential property prices have largely re-
mained stable in 2017-18, going by NHB Residex,
the country’s official residential property price
index. With residential property prices remaining
stable this is a great time for home buyers to buy
property as the speculative activity, which was
artificially pushing up prices earlier is not there
now, Sriram Kalyanaraman said. Currently, NHB
Residex captures two housing price indices –
HPI@assessment prices for 50 cities – and
HPI@market prices for under-construction prop-
erties for 50 cities. These HPIs track the move-
ment in prices of residential properties on quar-
terly basis, taking financial year 2012-13 as the
base year. The composite HPI@assessment
prices for 50 cities showed an increase of 7.6 per
cent between March 2016 and March 2017; it
remained stable between March 2017 and
March 2018. This index has moved up at a CAGR
of 4.5 per cent over the years.
NHB index points to stable residential
property prices
CBI looks for banking, tax experts to help
probe in multi-crore scams
The Central Bureau of Investigation (CBI), which is
probing the over Rs 13,000 crore Punjab National
Bank scam as well as other financial frauds, has
sought deputation of banking and tax experts from
other ministries with an offer of good monetary in-
centives. According to an official communique sent
by the CBI to finance and other key ministries, the
agency has asked for officers on deputation as an
advisor (banking), senior advisor (foreign trade or
foreign exchange), deputy advisor (foreign trade or
foreign exchange) and senior advisor (taxation).
Those selected will initially be given a short-term
contract with the premier investigation agency, it
said. These posts are to provide technical assis-
tance and expertise in probing cases involving
banking, foreign trade and foreign exchange, taxa-
tion and to supervise the work of other technical
officer working in the agency, the letter routed to
various ministries said. The communique, however,
said the candidates who apply for the post will not
be allowed to withdraw their candidature
subsequently.
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How critical is the popula-
tion-age structure of an
economy to the effective-
ness of monetary policy?
Not very, if one were to go
by the Reserve Bank of In-
dia (RBI), which, in its re-
cent bimonthly monetary policy report, has
identified six key factors that are likely to affect
domestic inflation going forward. These in-
clude crude prices, global financial develop-
ments, household inflationary expectations,
house rent allowance (HRA) revisions, revi-
sions in the minimum support price (MSP), and
good monsoons. However, a recent Bank for
International Settlements paper by Mikael
Juselius and Elod Takats, The Enduring Link Be-
tween Demography And Inflation ((goo.gl/
R63HKw ), offers an interesting counter-
perspective, at least as far as advanced econo-
mies are concerned.
Using long-panel data for 22 advanced econo-
mies over the period 1870-2016, the authors
find a positive correlation between the share
of dependent population and inflation, while
working-age population share is negatively
correlated with inflation. An increase in the
proportion of dependants—by increasing con-
sumption rates and lowering the savings rate—
can be expected to increase inflation, while
the reverse is expected to happen when the
working-age population increases. Moreover,
the degree of inflation tolerance and monetary
policies of any central bank are also a function
of political economy considerations such as
the proportion of youth in the population,
who, as borrowers, may prefer inflation, unlike
the old, who, as savers, may dislike it.
Population-age ratio and mone-
tary policy
Dr Tulsi Jayakumar

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The authors dismiss the role of conventional
“endogenous inflation drivers”, especially in-
flationary expectations, in advanced economy
contexts. In recent years, however, managing
inflationary expectations has emerged as a
critical success factor in inflation management
in diverse countries like Japan and India.
Is there something Indian policymakers are
missing? How does India’s large working-age
population, constituting its so-called demo-
graphic dividend, impact monetary policy?
In India, over 2000-2017, working-age popula-
tion has risen. But unlike in the case of devel-
oped economies (as
posited by Juselius
and Takats), the do-
mestic household
saving rate (relative
to consumption) has
fallen instead of ris-
ing.
Despite this, infla-
tion has fallen due
to active inflation
management by the
RBI. This implies
that the pressure on monetary policy has
been considerable. To ease that pressure and
take advantage of the rising working-age
population, job creation and the resultant
generation of net savings is critical.
Employment data for the period January-April
2017 and January-April 2018 (goo.gl/qimRRH)
reveals the challenge that could be posed to
monetary policy by the lack of adequate job
creation. Thus, while the working-age popula-
tion in India grew by 2% in January-April 2018
over January-April 2017, the employment rate
in the working-age group has fallen—albeit
marginally—over the period (from 95.3% to
An increase in the
proportion of depen-
dants, by increasing
consumption rates and
lowering the savings
rate—can be expected
to increase inflation,
while the reverse is
expected to happen
when the working-age
population increases

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94.4%).
Such a marginal decline masks the marked de-
cline in the proportion employed in the
younger 15-24 cohort. Here, the employment
rate has fallen from 79.8% to 72.9% over the
relevant period.
From the monetary management perspective,
however, more worrisome is the decline in la-
bour force participation rate in both the 15-24
age group and in the 65+ age group by 0.5%
and 7.2%, respectively, in this period. The de-
cline in labour force participation rate in the
15-24 age group becomes more pronounced
when compared with the pre-demonetization
period—from 31.7% in January-April 2016 to
23% in January-April 2018.
A decline in the labour force participation rate
in the 15-24 age
group implies a
systematic drop-
ping out of youth
from the job mar-
ket. From a policy
perspective, it is
critical to under-
stand the reasons
for such a phenomenon. One such reason
may be more youth opting to pursue higher
education, which may have a favourable im-
pact on increasing the skilled labour force.
Alternatively, the dropped-out cohort may
comprise those not in employment, education
or training (Neet), with socio-economic rami-
fications for productivity improvements and
social stability in the long run. More impor-
tantly, a rise in the proportion of Neet, with
its low current and future saving potential,
renders the job of monetary policy in control-
ling inflation more difficult.
Similarly, the large decline in labour force par-
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ticipation rates among the elderly reduces
their overall income and increases consump-
tion proportionately, again posing inflationary
challenges.
The ramifications of population-age structure
on monetary policy in the context of emerg-
ing economies have been relatively ignored
by policymakers. Job creation would be an im-
portant mediator variable in this context, pro-
viding one more compelling reason why the
government needs to pay attention to this po-
litical hot potato. Understanding lower labour
force participation rates among the young
and older cohorts, as also creating more pro-
ductive jobs, may hold the key to reaping the
demographic dividend for monetary manage-
ment purposes.
Policymakers need to recognize the genuine
opportunity that our demographic dividend
presents to mitigate inflationary concerns and
reduce the reliance on excessive monetary
management over time.
Tulsi Jayakumar is professor of economics and pro-
gramme head, PGP-FMB, at the S P Jain Institute of
Management and Research, Mumbai.
Originally printed in The Mint dated july 4, 2018. Re-
printed with permission from Author
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Banking in India has been off-
shoot of British banking model
and over a period has devel-
oped into its own contours
having distinct image and
unique problems. These prob-
lems have been studied many
times and solutions have been suggested by
various expert committees at different intervals.
However these committees while suggesting the
solutions for Indian banking sector have relied
on importing solutions from other regions of
globe. However, such measures instead of pro-
viding solutions have complicated the mess pre-
vailing in the sector. This is because such com-
mittees usually consist of people who have
earned their degrees by studying economies of
countries not more than size of Uttar Pradesh or
Maharashtra. So to have an indigenous prag-
matic solution of the problems of banking sec-
tor one has to go deep in understanding the
functioning, structure and deficiencies of bank-
ing sector which is need of the hour. We all may
agree that traditionally in India banking regu-
lates the flow of wealth in the financial system
of the country. Also the Government has been
addressing the vast section of population
through banking by reaching out to their de-
mands of providing capital for furtherance of
their economic objectives or giving an opportu-
nity to earn on their surplus wealth as deposits.
Banking has been coming to rescue of masses
during the crisis periods caused as a result of
various natural calamities like floods, earth
quakes or other vagaries of weather besides
other manmade disasters like conflicts or social
strife. Banking in this country also has remained
a hope for underprivileged/neglected sections
of population who have been given to access to
Dealing with changing face of In-
dian Banking
Riyaz Ahmed Bhat

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much needed capital supply for self employing
or employment generating concerns hence en-
suring economic independence of vast popula-
tion from exploitive unregulated money lender
system. Hence the banking has been an impor-
tant contributor in national economic develop-
ment of the country. Of late, the banking also
has been functioning as a delivery channel for
the Government to implement various pro-
grammes of economic development intended
to alleviate poverty from the country. This in-
cludes the delivery of subsidized credit or en-
couraging developmental agenda of regulated
distribution of credit to various economic sec-
tors. This role of banking has been pivotal and
to strengthen this
role Government
has felt encouraged
to include more ini-
tiatives for delivery
of its services
through banking.
This is because the
efficiency of banking
system in India has
found no parallel in
governance struc-
ture of other Gov-
ernment agencies.
The fragmentation and segmentation of bank-
ing in India has remained a complex structure
to regulate and supervise. The segmentation
includes commercial banks, cooperative and
rural banking structures. Amongst these only
commercial banks can claim of having a pan
India presence catering to every type of clien-
tele in their fold. The new phenomenon in a
post reform period has brought numerous
changes in working of banking in India
wherein the new generation private sector
banks (PvtSBs) have entered the scene with
many expectations. After the initiation of re-
problems have been
studied many times and
solutions have been
suggested by various
expert committees at
different intervals.
However these
committees while
suggesting the solutions
for Indian banking sector
have relied on importing
solutions from other
regions of globe.

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forms in 1990 the new PvtSBs felt that having
an edge over technological intervention and
professionalized work force they can snatch
away the traditional clientele of older players
like PSBs or old Pvt SBs. However after so
much time still the Indian banking space is
covered by PSBs to the tune of 70 percent and
in the remaining share a major chunk of popu-
lation is served by old Pvt SBs and community
based Cop. Banks. To study the Impact of new
pvt sector banking
one has to study
the branch expan-
sion and clientele
segregation in
banking. In this
study, it is found
that these banks have been trying hard,
through aggressive marketing campaigns, to
lure away the selected clientele of other play-
ers. But their success is limited to urban and
semi urban pockets while as they have misera-
bly failed to have an impact on the rural land-
scape. Furthermore the segment wise study
reveals that these banks may have been suc-
cessful in luring the tech savy upper middle
class population by deliverance of efficient
service through technological solutions yet
traditional trader class has remained loyal to
older players of the industry.
This is because that this class has been habit-
ual of enjoying free banking services and is
conscious enough to avoid paying the costs of
banking services provided by these players.
Presently the older players of the Indian bank-
ing are burdened with own set of problems
like increasing Non Performing Assets, ever in-
creasing losses, demand for recaptilising
funds, non introduction of technological solu-
tions resulting in inefficient delivery system
compounded by policy paralysis at higher

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level. However, despite these set of problems
changing face of these players cannot be
wished away or ridiculed. Long before in the
year 2007-2008 under campaign Pragati
(Progress) and Parivartan (Change) the SBI
sent a message to industry watchers that the
Indian Public sector Banking is quite respon-
sive to the changing environment. However
this momentum could not keep pace in other
PSBs. Furthermore it also cannot be under-
mined that Government, as owner of PSBs,
has to enforce changes in its governing struc-
ture so as to provide an ecosystem for encour-
aging a change of face for them.
As we all may concur that banking in itself is a
barometer for performance of economy of a
country and its changing face is dependent on
changing face of economy because the de-
mands of beneficiaries or stake holders of eco-
nomic development dictate the growing
changes of the banking sector. Also the bank-
ing sector always responds to these demands
and hence evolves over a period to keep pace
with expectations of the users of its services.
In present environment the usage of technol-
ogy by the modern banks has reached to
higher level wherein we observe that new
generation PvtSBs are not only moving to us-
age of digital platforms for offering banking
services but are also using artificial intelli-
gence to bring down the transaction costs.
Furthermore the usage of mobile technology
by the population has forced the evolution of
payment banks which are playing important
role in financial inclusion launched by Govern-
ment.
This symbiosis of technological partners and
banks is to cause timely disruptions but is
unlikely to affect long term business strategies
because age old model of banking of accepting
deposits for purpose of lending will remain un-

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changed. There are emerging changes wherein
banks have diversified to compensate reducing
interest incomes with fee based incomes
earned from marketing of third party products
or providing of revenue collection services on
behalf of Government or its agencies. This
changing face of Indian banking is likely to
emerge with new set of complexities and
problems in future for which new set of regu-
lations and supervision will be required.
Presently it is widely concluded that Indian
economy is conglomerate of several regional
economies hence a single regulated uniform
national model is not going to satisfy the re-
quirements of its regulation. In the same way
it is also opined that requirements of Indian
banking users spread over various varied geo-
graphical regions alongwith segmentation in
various groupings and cultures need a com-
partmentalized regulation and supervision.
Under these circumstances the viable option
remains that problems emerging with chang-
ing face of Indian banking are to be dealt as
per our own understanding with due regard to
our traditional business practices enshrined in
our cultural ethos.
(The author is Secretary General Jammu
and Kashmir Bank Officers Forum)
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Analysis of Bank Financial
Statements is done with ref-
erence to following three
broad aspects---
1. Analysis with reference to
the Performance of the
Bank in terms of ‘Top line’.
2. Analysis with reference to
the Performance of the Bank in terms of
‘Bottom Line’.
3. Analysis with reference to the Risk embed-
ded to the Performance.
While doing the Analysis of Bank Financial
Statements among other things technique of
Ratio analysis is also used.
Before making analysis of Bank Balance-Sheet,
it is necessary to understand the Corporate Cul-
ture and Priority which are not mutually exclu-
sive. Corporate culture and priority could be
one of the four types.
Table-5-Corporate culture and priority
In the background of Corporate culture and
Priority, analysis is done in the with reference
to ‘Performance of the Scheduled Commercial
Banks in terms of ‘Top line.’
To begin with the analysis in terms of ‘Top line’
is done with reference to Stages of Business cy-
cle.
Analysing Balance Sheet of Banks
Part2: Analysis of Bank Financial
Statements with Ratio Analysis & Ex-
amples
Mr RB Raswalkar
Corporate culture Corporate priority
Values Driven (Prudent) Emphasis on asset qual-
Earnings Driven Short term gains
Volume Driven /Top Line Market share, Size
Unfocussed No clear priorities

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Table-6- Performance of the Scheduled Com-
mercial Banks -Stage of Business cycle
Analysis of Performance of the Scheduled
Commercial Banks in terms of ‘Top line’during
Business cycles based on the above data---
Banks are prone to business cycles. Banks are-
procyclical.
During growth phase [2006-07 to 2010-11], the
strategy followed was to expand Balance sheet
size & Top line [Deposits and Advances].Banks
used to give one line advertisement in leading
Newspapers on1st
April every year reading-
“Crossed Total business of Rs. 500000 crores or
Rs.800000 crore or Total business marching to-
wards Rs.10, 00000 crore.”
After 2011 with the onset of slowdown fol-
lowed by downturn, the strategy followed was
not of Top line growth but of growth in Bottom
line.
After 2013 Banks’ strategy was shifted
to‘Consolidation’. Thus Central Theme of doing
business for most of the Banks in last 5 years
[particularly after 2013] is “Consolidation &
Capital optimisation” or “Retail Banking &
Digital Banking.”
It indicates major shift in the strategy followed
by the Banks. However, Retail loan portfolio of
the banks continued to grow at around 18 to 20
per cent from 2014-15 onwards even though

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there was deceleration in the total credit
growth of banks.
Advances portfolio-
During the Growth phase there was robust
Credit growth,[20%+] particularly in
The sectors such as Industry within which In-
frastructure sector & Service sector
within which Trade, Commercial estate, Gems
& Jewellery etc. With the onset of slowdown
followed by downturn, the moderation in
credit growth was partly reflective of the
slowdown in real economic activity coupled
with increasing risk aversion by banks. The
overall slowdown in non-food bank credit
mainly emanated from slower growth in
credit to industry, within which credit to infra-
structure and service sector.
During 2015-16 & 2016-17 a period of slow-
down/recession Sectoral deployment of gross
Bank credit recorded following percentage
variation on outstanding basis---
Table-7 Sectoral deployment of gross Bank
credit
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Above statistics show that Retail loan portfo-
lio of the banks continued to grow in double
digits from 2011-12 onwards even though
there was deceleration in the total Credit
growth of banks. During 2016-17 total Credit
growth was 2.78% while Retail Credit grew at
15.1% during the same period. It is notewor-
thy that even in a period of overall slowdown
in Credit growth, Retail Credit maintained its
growth.
Table-8 : Retail Loan Portfolio of Schedule
Commercial Banks
One thought-Though strategy to grow in Re-
tail Credit sounds good in short to medium
term, moot question in the long run is how
much Retail Loan portfolio-how much to
grow in Retail segment?
Deposits-
 Deposits are important part of Lability of
Banks’ Balance-Sheet.[78% to 80% of total
liabilities] Deposit growth during Upturn
was on average 20%. As a part of strategy
of Top line growth up to 2012, there was
tendency on the part of the Banks to take
high cost bulk deposits, which were ma-

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jorly for short term period around Balance
sheet dates, creating Asset Liability mis-
matches. From 2012-13 during slow down,
Deposit growth tapered down, on average
20% with emphasis on low cost Current
and Saving Deposits and Retail Term De-
posits resulting into reduction in cost of
Deposits and bringing stability to the De-
posits base of the Banks.
 To give stability to Deposits and reduce
cost of deposits, Banks are making efforts
to shed wholesale deposits/bulk deposits
which are of high value and mostly carry
preferential rates. Following information
related to one leading Public sector Bank
indicates the current trend of building up
Retail Term Deposits to give stability to de-
posit base besides cost factor.[we will re-
visit the aspect of cost factor in the next
section in detail]
Table– 9 : Building up Retail Term Deposits-case of
leading Public sector Bank
 Another example is of one Nationalised
Bank in Eastern sector which shed its High
Cost Pref. Rate Deposit in a significant man-
ner with the result share of CASA improved
from 36.98% in March 2014 to 42.05% at
the end of March 2015.
Credit Deposit Ratio CDR-
 Natural extension of the two core functions
of ‘Accepting Deposits & Giving Loans &
Advances’ as discussed above is ‘Credit De-

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posit Ratio’ [CDR]. Credit-deposit ratio is
the proportion of loan-assets created by
banks from the deposits received.CDR is
worked out as Advances/Deposits*100.
Credit is an engine of growth through capi-
tal formation and therefore income, em-
ployment and output. In an economy the
penetration of credit could be measured in
terms of credit deployed against the de-
posit received, technically it is denoted by
C D Ratio. The higher the ratio, the higher
the loan-assets created from deposits and
vice-versa. One related but debatable is-
sue is ‘What is ideal CDR?’ There is noth-
ing like ideal CDR.
 Wide disparities are observed in the level
of CDR across the Regions & Areas. CDR in
metropolitan areas is touching 100% or
more while CDR in Rural areas is at lower
level. There are also Regional imbalances.
Western Region, Central Region, Southern
Region have comparatively higher level of
CDR while Region like North East Region
have less CDR.
 Such Wide disparities in CDR has led to the
argument that Savings mobilized in particu-
lar area, say Rural area, are not fully util-
ized in that area and diverted to Metro or
Urban area. Argument sounds ok, but
Credit absorption capacity of the area is
also critical part of areas’ CDR.
Level of CDR on Bank wide basis depends
upon the following factors-
i. The first and important factor is the level of
Statutory Preemptions. In India, Cash Re-
serve Ratio(CRR) which is at present 4% &
Statuary Liquidity Ratio (SLR) which is at
present 19.5% are two Statutory Preemp-
tion ratios. Since last eight years ratio of In-

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vestments as a percentage to Total Liabili-
ties is ranging between 25% to 28% despite
the fact that SLR rates have come down
from 24% in April 2008 to the present level
of 19.5%. Naturally, it has adverse impact
on CDR, which has come down from 79%
around 2011-12 to 73% as on March 2017.
During the same period year on year Credit
accretions has come down from 23% in
2010-11 to 3% in 2016-17.During the same
period Deposit accretions has come down
from 18% in 2010-11 to 10% in 2016-17.
ii. Second factor is the level of Economic Ac-
tivity. During slowdown/recession, Banks
become Risk averse with the result accre-
tion to Deposit is parked in Govt. securities
and thereby CDR is less. During 2016-17
which is worst year incremental Credit-
Deposit Ratio is hardly 22%.
iii. Third factor is Investment policy of the
Bank. Now Investment function in Banks is
not restricted to statutory compliance &
residual function. Role of Treasury has
moved from service center (liquidity sup-
port & statutory compliance) to profit cen-
ter. Since Banks have become Risk averse,
trend is to park surplus funds in Invest-
ments.
First two factors are Macro factors and the
third factor is Bank specific.
Investment portfolio-After Advances next im-
portant Asset is Investments. For Banks in In-
diaInvestments are sort of residual function &
core function is financial intermediation i.e. to
Accept Deposits &to give Loans & Advances.
Brief note about Investment Function-
Investments are in Approved Securities
(eligible for maintenance of SLR) and Non-

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Approved Securities. Balance Sheet Classifica-
tions of Investments are as under-
 Government Securities
 Other Approved Securities
 Debentures & Bonds
 Shares
 Regional Rural Banks
 Others (incl. CP, CD, MFs, VCFs, SRs etc.)
For the purpose of valuation, Investments are
classified as-
 Held to Maturity (HTM): Acquired by
banks with the intention to hold them up
to maturity and earn steady return by way
of interest.[Banking Book]. Investments in
HTM Category need not be marked to mar-
ket and are carried at acquisition cost.
However, premium if any paid on acquisi-
tion of securities to be amortized over the
residual tenor of the security. Permanent
diminution if any (by virtue of investment
becoming Non-Performing) to be recog-
nized and provided for.
 Held for Trading (HFT): Securities acquired
with a view to take advantage of short
term movement in prices / interest rates
are classified as HFT. Maximum time hori-
zon for holding securities in HFT category is
90 days. If not able to sell the security
within prescribed period of 90 days, secu-
rity to be shifted to Available for Sale cate-
gory which may lead to shifting loss.
 Available for Sale (AFS): Securities not clas-
sified in HTM and HFT categories classified
as AFS.Profit or Loss on sale of Investments
in HFT and AFS are taken to P&L A/C. Secu-
rities in HFT & AFS Category are
marked to market, [M to M] means
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valuation of securities as per market price.
There is inverse relationship between mar-
ket yield and price of a Bond. Higher the
yield, the lower the price of a Bond and
vice versa.
Strategy-During 2015-16 & 2016-17, in the
background of slowdown in Credit growth, In-
vestments were 25% to 26% of total Balance-
sheet size. With the mounting burden of pro-
visioning for NPAs during the past two to
three years, Banks deemed it safer to deploy
accretion to their Deposits in SLR Securities.
Moreover, almost 14 Public Sector Banks are
subjected to ‘Prompt Corrective Action’ im-
pairing lending capacity, which forced Banks
to park accretion to their Deposits in SLR Se-
curities.
A steady decline of Bond yields in the six
quarters between Q4 of 2015-16 and Q2 of FY
2017-18 brought windfall gains to Banks in
trading in Bonds. However on the back of
higher than budgeted fiscal deficit, rise in oil
prices led to surge in bond yields. Surge in
Bond yields resulted in reduction in the price
of a Bond leading to mark to market losses.
The problem of higher Mark to Market provi-
sioning got compounded because of reduc-
tion in SLR requirements to 19.5% of Demand
and Time liabilities. RBI therefore has al-
lowed banks to provide for Mark to Market
[MTM] losses on investments held in Trading
Book category [Available for Sale & Held for
Trading] equally over four quarters keeping in
view the systemic impact of the sharp rise in
G-sec yields.
Recently announced financial results for 2017
-18 of few Banks [both in Public sector & Pri-
vate sector] show that provision for mark to
market [MTM] losses have increased consid-

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erably. Take the case of one leading National-
ized Bank.
Case of one leading Nationalized Bank where Provi-
sion for Depreciation on Investment increased in Q-3
& Q-4 of 2017-18
Table 10
Case of another leading Nationalized Bank where
Provision for Depreciation on Investment increased
by 316% during 2017-18 (Quarterly Break up not
available
Table-10
Off-balance Sheet Operations
Off-balance sheet transactions play a signifi-
cant role in hedging the risks associated with
long-term financial assets on banks’ balance
sheets and in improving profitability, espe-
cially in the context of tepid credit growth. Off
-balance sheet Exposures as a percentage to
Balance sheet liabilities are around100% to
150%. Banking group wise such percentage is
varied. During 2016-17, off-balance sheet ac-
tivities expanded across all bank groups. For-
ward exchange contracts (including interest
rate swaps) occupied more than 85 per cent
share in banks’ total off balance sheet opera-
tions. During 2016-17, off-balance sheet li-
abilities stood at 107% to Balance sheet li-
abilities.
Maturity Profile of select Assets and Liabili-
ties-

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Banks face rollover risks with respect to their
short-term liabilities and consequent liquidity
stress. However, during 2016-17, the share of
short-term liabilities came down driven by a
sharp decline in short-term borrowings attrib-
uted to withdrawal of Specified Bank Notes
resulting in larger cash reserves with banks.
There was an increase in loans and advances
of more than five years which pulled up the
share of long-term assets and accordingly, the
proportion of long term assets financed by
short-term liabilities increased over the previ-
ous year. Following are the details of Maturity
Profile of select Assets and Liabilities of
SCBs—

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During 2016-17, against short term liabilities
[up to 1 year] of 46%, short term assets cre-
ated were 28% only and 12% is used to fi-
nance long term assets over 5 years.
Thus short term funds are used to create
long term assets which is now the inherent
feature of Maturity profile of Assets and Li-
abilities of Banks.
Next Week: Analysis with reference to the Perform-
ance of the Banks in terms of ‘Bottom line’
Shri RB Raswalkar is Ex General Manager, Union
Bank of India . He is an M. Com & CAIIB with vast ex-
perience in fields of Risk Management, Compliance,
Audit & Inspection. He was also associated with IBPS
and with Indian Institute of banking & Finance (IIBF)
and various other Banking Training Institutes and
Management Colleges as Visiting Faculty
References
i. RBI Annual Publication “Trend & Progress”& Fi-
nancial Stability Report FSR)
ii. Speeches of RBI Governors & Deputy Governors
[past & present]
iii. Annual Reports of Scheduled Commercial Banks
iv. Presentations of Banks’ Annual Financial Results
by Scheduled Commercial Banks for Analysts &
Investors.
v. Bank Statistics compiled by Shri. K K
Khanna.
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Links to selected Articles on
Banking appearing in Newspa-
pers / magazines this week
Following are the links to our selection of Arti-
cles related to banking which appeared in differ-
ent Newspapers this week. You will require inter-
net access for reading these articles in full.
As 'foreign' economic advisers
leave, a protectionist India re-
turns
The departures of the three economists un-
derline the administration’s rejection of free
trade and open market approaches to policy
in favor of protecting domestic industries and
farmers. Modi’s economic outlook is now a
throwback to India’s inward-looking policies
of earlier years, they said. And it appears simi-
lar to U.S. President Donald Trump’s agenda.
Read More
Wilful defaults: the financial un-
derbelly of the Indian banking
system
Only four economies globally have
higher NPAs than India. These are Portu-
gal, Italy, Ireland, and Greece.
Read More
Divergent numbers pose a ques-
tion: What’s the truth about In-
dia’s economic outlook?
Nikkei India numbers show an expansionary
trend, while CMIE data indicates a continuing
fall in economy. Where lies the truth
Read More

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How top former bankers are taking a
plunge into the finance industry
Financial services has long been institution-
driven due to strict regulations, barring ex-
ceptions like Shriram Transport. But many for-
mer bankers have taken the plunge
Read More
As Modi plans doubling farmers’ income,
here’s reality check; farming not profit-
able for nearly 20 years
Even as the Centre talks about doubling the
income of farmers by 2022, farming in India
has remained largely unproductive for nearly
20 years despite a host of reforms seeing the
light of the day. Read More
China and India at top and bottom in banking
What conclusions should we draw from the con-
trasting fortunes of Chinese and Indian banks,
asks Brian Caplen. Is India doing the hard work
now that China will need to do later? Read More
India's economy is poised for revival in
investment cycle
An amazing aspect of the recent re-
acceleration in India’s economic growth is
that it has occurred despite several significant
headwinds — a monumental transition to the
goods and services tax (GST), massive over-
capitalisation of several industries half a dec-
ade ago, and a crippled banking sector with
rising non-performing assets (NPAs) for the
majority of scheduled commercial banks, es-
pecially public sector banks Read More

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